• Elana Duffy

5 Tips on Market Segmentation


- Frank Luby

An Inc. article this week asked whether Apple could kill the freemium music model when it relaunches Beats Music. It also cited some data and interesting analyses from Venrock’s David Pakman on how much people spend on music.

Think about that phrase for a moment: “how much people spend on music”.

Music spending and music pricing are third rails that I usually grab eagerly with both hands. Instead of letting those sparks fly again, though, I would like to use the phrase “how much people spend on music” and the accompanying data to kick off a brief discussion on a broader topic that matters to anyone trying to build a business: segmentation.

When I worked as a pricing consultant, segmentation was a constant theme. A good segmentation is an indispensable tool for making wise decisions on product and price differentiation. I led a few large, successful projects to define new segments, but I always wanted a simpler, scaled-down approach to help managers get started on the journey to a better or more useful segmentation.

With the benefit of hindsight, here are five tips on segmenting any market.

Tip #1 - Look at distributions, not averages: Simplifying the music data, let’s say the average music buyer spends $150 a year on music. One third of that is for downloads and CDs, the rest for merchandise and concert tickets. But that’s just the average.

Now let’s think about what the distribution of these buyers looks like. One possibility is that you have a significant number of people in that group that never goes to concerts and downloads one or two tracks a year. Their spend is tiny. Likewise, you see a significant number which spends $200 or even $300 or more per year on music. You may also the 80/20 rule in effect, which would mean that 80% of music spending comes from 20% of the “people”. But what if the distribution is even more extreme, say 90/10?

Whether you are in a B2C or B2B market, knowing the distribution of your sales and your customers gives you a much better basis for segmentation and for decision-making.

Tip #2 - Look for homogenous groups: The phrase “how much people spend on music” prompts two questions: who are these “people” and what is the “music”? You don’t need rocket science to know that people who spend money on music do not form one homogenous group.

Call me old school, but I still download music and buy CDs. I have mix tapes from 30 years ago that still play. I have friends in the 18-35 age group who are at the other extreme. For them, “buy music” is cringe-worthy. One of them admits she has never seen a record player in real life. She spends the bulk of her money on concerts, festivals, and merchandise.

Then there is the “music” itself. Country vs. EDM. Oldies vs. alternative rock.

Voila: you have two members of that 20% group that does 80% of the music spending, way above the average, but the two of us could not be more different. Why lump us together? It is impossible to reach us with the same marketing and communication strategy. We are not in the same segment at all, even though we may spend the same amount on music per year, down to the dollar.

Tip #3 - But don’t drown in the data: A blog post this week at the Harvard Business Review had the ominous headline: “Tesco’s Downfall Is a Warning to Data-Driven Retailers”. One broader lesson is that while you may have data which enables you to analyze the buying behavior of your customers to a frightening level of detail, it still might not give you a bigger competitive advantage than “slightly lower prices and a simpler shopping experience.”

A good rule of thumb is the three-adjective rule. If you need more than three adjectives, or three dimensions, to define your initial segments, you may be overthinking and over-engineering the effort. In the B2B world, you might have large vs. small, price buyers vs. value buyers, and high cost-to-serve vs. low cost-to-serve. That’s only eight possible combinations – eight basic segments – and you can draw a lot of insights from something that simple.

Simplicity and practicality will serve you well as you identify your best target segments. Once you know them , you can start to dig deeper and add more dimensions or adjectives. The caveat is that each new sub-segment is worth pursuing only if it makes economic sense: it has a sufficient size, you can reach it with a very focused, unmistakable value proposition, and you have the products or services to provide that value consistently and profitably.

Tip #4 - Segmentation tells you what your target market isn’t: Segmentation is by definition exclusionary. When you look at your distribution of customers and identify a few attractive, reasonably homogenous groups, you have automatically defined customers who are different and less attractive.

It makes sense, given scarce resources, to focus on the attractive groups. You should design your products and services for them, devote your best people to their challenges, and communicate with them closely. That last point is especially dear to me, because it means you have defined your audience, a group which will collectively appreciate and understand your business stories, even if others don’t.

One of the hardest things for a manager to do is stay the course on that approach and say “no”. It is a natural temptation to want to be everything to everyone, to have everyone buy your product, and come up with a rationale for why they would.

Basic segmentation helps you focus; if you pick up other customers along the way it’s a nice bonus.

Pick your targets and stick with them, at least until you get to tip #5.

Tip #5 - Keep your segmentation current: It is worthwhile to revisit your segmentation at least once a year, even if you make no changes. You may detect shifts in the size of your existing segments, and develop hypotheses on why and how you can capitalize on those shifts. You should also check to make sure that your value propositions and supporting communication are still fresh and consistent. They should allow the customers in your target segments or sub-segments to self select, while filtering out less attractive ones. Your customers feel that your message refers to them personally, and in the best case feel as if you have spoken to them one-to-one.

Some markets are very stable. Your segmentation might have a shelf life or three or even four years, with some minor tweaks along the way. Music is a very dynamic market, as recent sales data shows. Does the CD or the download need a new value proposition? What is the best way to profitably serve the segments which once bought them in large numbers?

When you see sales declines of these magnitudes, it could also mean that you have lost a segment entirely, while other customer segments remain robust. After all, real living breathing people are on pace to download over 1 billion tracks and buy 100 million CDs this year, all paid for with someone’s hard-earned money. What segments do these people belong to, and how long will they still see tracks and CDs as one of their best options to enjoy music?

Frank Luby is co-founder and CEO of Present Tense LLC, a communications company dedicated to helping people express their ideas through better business storytelling. To learn more about Present Tense LLC, please visit us at www.presenttensellc.com and follow our regular blogs and posts. You can also follow Frank on Twitter: @FrankLuby

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