Good market segmentation brings together customers that buy the same way and get value from a product or service offering the same way. It ensures optimized use of an organization’s resources through targeting customer segments that derive value from the offering in a way that is in alignment with the organization’s objectives of maximizing revenue, profit or margin at a reasonable cost to serve. Market segmentation is the foundation of value-based pricing. In value-based pricing, the goal is to capture a fair share of the differentiated value of an offering relative to the customer’s next best competitive alternative.
Who is the customer and why should they buy
If you are finding it difficult to segment your market, chances are you don't understand how your offer is different from the alternatives or, worst case, you have an undifferentiated offering. That is, you are not creating value for the customer whether economic (e.g. a software that improves employee efficiency, saving time and money) or emotional (e.g. a software with high uptime/low risk of crashing, providing peace of mind) that they could not otherwise get from the competitive alternatives that are available in the market.
Ask yourself - who is your target customer? If the answer is everyone, or you cannot group your customers based on similar needs, your offering does not have a value proposition that resonates strongly with any particular group of customers, and they do not have a compelling reason to buy. It is difficult to maximize revenue, profit or margin if you are creating only some value for customers in a very large pool. A small stone in a big lake makes a tiny splash.
Differentiated value allows an organization to divide the market into distinct subgroups that derive value in a way that is different from other groups. Target groups of customers are selected from within the identified segments. These targets align with the organization’s unique capabilities as well as overall goals of revenue, margin or profit maximization. Segmenting the market based on differentiated value and similar buying process also makes it easier to communicate and effectively market the value proposition for each target segment.
An offering vs an experience
Often times when organizations find themselves with an undifferentiated or commoditized offering, they resort to price competition, undercutting the competitors’ price. Focusing only on creating a pricing advantage in the customer’s mind is a not a sustainable strategy. It triggers a race to the bottom which only the low-cost provider can win. Engaging in a price war with zero differentiation will only result in putting a downward pressure on the overall market. So in the hopes of creating a bigger slice for themselves, these organizations risk making the pie smaller for the entire market. In the end, no one wins.
It is important to remember that from the customer’s perspective, a product or service is never just an assortment of features. Customers care about what benefit said features are creating for them. So within a commoditized market, one can focus on creating differentiated value for the specific customer segments through providing value-added services that create better customer experiences.
To re-position an undifferentiated offering and create perceived differentiation through customer experiences, there needs to be a robust marketing strategy that focuses on communicating the emotional value of the offering in the customer’s mind, making it easy to connect the brand to the product or service experience.
Ask the right questions
In the long-term, to maintain competitive advantage an organization must create differentiated value through addressing the unmet needs of the existing market or choosing to serve a currently unaddressed market. While it may seem like reinventing the wheel, this can be highly effective and starts with asking the right questions, focusing on the benefits sought by the customer. This takes discipline.
While trying to create differentiation, organizations can make the mistake of creating an offering with new features that they think will create differentiated value, and then trying to segment the market to force a product-customer fit. Instead, it is far more effective to:
research the existing and potential markets to uncover unmet needs and benefits sought
segment the market by customers who have similar unmet needs and who would derive value the same way
refine the segments by identifying customers who buy in the same way (have a similar buying process)
target segments whose unmet needs can be best addressed by leveraging the organization’s unique capabilities
create a differentiated offering with the right features that best address those specific needs and create economic or emotional value for the customer
And of course capture a fair share of the value created through value-based pricing!
Don’t get trapped within your biases
The hardest part about having an undifferentiated offering is acknowledging that this is indeed so. It is easy to get trapped within confirmation biases, and pour marketing resources into an offering that is simply meeting minimum market expectations - this is not a sustainable long-term strategy. It is better to channel those resources into developing an offering with a strong value proposition that resonates with the right audience. So break out of organizational inertia and get segmenting!