Oxford College of Marketing

Needs-based Market Segmentation – the unchanging bedrock of successful strategy

By Emeritus Professor Malcolm McDonald

There is a widely held belief that new media and changing patterns of behaviours have made traditional market segmentation irrelevant.  They haven’t, nor will they in future.  These are feeble excuses from lazy and incompetent marketing departments, who fail to use the tried and tested process of needs-based market segmentation to understand these new consumer behaviour patterns.  Given the current fearsome economic circumstances, this is one of the biggest challenges and opportunities we face if we are to survive in a fast-changing world.

A Harvard Business Review article by Christensen in December 2005 reported that the reason for a 90 per cent failure rate of 30,000 new products was poor market segmentation.  In February 2006, also in an HBR article, Yankelovich reported on the widespread failure of market segmentation initiatives.

The reasons aren’t hard to pinpoint.  A whole edition of the Journal of Marketing Management in 2009 was devoted to market segmentation, discussing issues such as what segmentation bases to use, such as size of purchase, customer characteristics, product attributes, benefits sought, service quality, psychographics and, more recently, with the advent of relationship marketing, one-to-one.  Such debates always have been largely irrelevant and ‘production-orientated’.  For example, it is clearly nonsense to segment on the basis of socio-economics demographics, geodemographics and the like.  Other than at a very high level of aggregation, not all As behave the same, Nor do all 18-24 year old women, nor does everyone in a specific geographical area.

The justification for saying this is that anyone who says “We segment markets by …..” is totally missing the point.  First any market has to be correctly defined in terms of needs, the very opposite of “we’re in the pensions market”, as a pension is only one of many ways of satisfying the needs for retirement income.  Remember what happened to IBM then they defined their market as mainframes and Gestetner who defined their market as duplicators.  The history of commerce is replete with failed companies who defined their market in terms of what they sold rather than the needs to be satisfied.

Secondly, any market consists of 100 per cent of what is bought, where it is bought, how it is bought, who buys it, how it is used and why it is bought and used in these ways.

Needs-based market segmentation, as spelled out in detail in Market Segmentation: how to do it; how to profit from it”, is a simple step-by-step process, which space doesn’t allow to be spelled out here.  Suffice to say that the correct methodology for segmenting markets has always been to understand the many different actual purchase combinations that take place in a market, as shown in Figure. 1.  The resulting micro segments are all actual purchase behaviours and there are usually as many as 40 of these in any market, but since most companies can only deal effectively with up to 10, a simple clustering routine is used to bring together those micro segments that share approximately the same needs – ie. Segments,

Figure 1 – Micro Segments

A simplified example of the end result of this process is shown in table 1 for the toothpaste market.  Figure 2 shows the end result of the process for purchasers of IT and IS products.  Particularly in relation to Figure 2, it can easily be appreciated how products, services and communication channels and messages must vary in accordance with the needs and profile of each segment.  Competitors without such a segmented approach are of necessity ‘marmalading’ their offer over the average IT buyer and just cannot understand why this major global supplier is so successful and why they don’t have to compete on price.

Table 1 – Segments in the market for toothpaste

Note: ‘C1’, ‘C2’ and so on appearing in the demographic profiles of each segment represent socio-economic groups which were in use in the UK until 2001, now replaced by eight analytic classes numbered from 1 through to 8. ‘Signal’ and ‘Mentadent P’ are trade marks of Lever Fabergé; ‘Macleans’ and ‘Aquafresh’ are trade marks of GlaxoSmithKline; ‘Ultra

Figure 2 – Understand the different category buyers

A propos the issue of whether new channels, new media (such as i-tunes, You Tube, etc.) and subsequent changing behaviours has made traditional segmentation irrelevant, the resounding answer is ‘NO’.

In Figures 3 and 4, the buying process (listed in the left hand column and the actual behaviours of just two of ten segments of a global travel company in respect of their use of media such as the internet, interactive TV etc. for each stage are shown.

Even a cursory glance at this would show that, unless these different actual behaviours by segment were known by this travel company, the offers made to their customers and their communication strategies would be hopelessly misplaced. 

Figure 3 – The Sunworshippers

Figure 4 – John and Mary Lively

The Times letter shown in Figure 5 is a hilarious explanation of what goes wrong when needs-based segmentation isn’t carried out and is a classic example of why most communications, especially direct mail, miss the mark completely.

Figure 5 – Relevant

Finally, the link between shareholder value creation and excellent marketing has been firmly established during 50 years of research.  Table 2, taken from Brian Smith’s 2003 Cranfield PhD, shows this link.  It also shows on the right what gurus like Philip Kotler and others consider to be worldclass marketing.

The order is important and justifies my belief that without proper market segmentation, all strategies fail in the long run.

2011 will officially mark the next marketing decade, yet , we’ve reached a round year, urging us to question what  the upcoming marketing challenges and more importantly, what the next decades’ marketing imperatives will be .  The past ten  years have been refocusing   marketing around the imperatives of accountability and  creating shareholder value. Doyle was always reminding us about the growth imperative.  Internet and technology have dramatically changed  the way information and products are consumed and distributed. Social networks have doubled the challenge of targeting efficiently in an increasingly atomized world and a continuously fragmentizing traditional media.  Marketing practice is constantly challenged and marketers obliged to stay alert to the never ending shifts and changes.  What will be the next decades  marketing imperatives?  Some  thoughts to share, very personal and  obviously not exhaustive. 

The Nuanced Analysis Imperative

In my opinion, an even more nuanced approach will be prerequisite for 2010 as market trends  are contradictory and various market segments are behaving so differently from  place to place. Markets are no longer as predictable, nor are the statistics and data, even if they abound. For example, declining spending levels in mature economies are the main recession effect. Yet,  growing consumption and increasing spending power are tracked in India, where FMCG sales  among this audience were  set to grow by 23%, durables up by 15%  and telecoms by 13%.  Anti consumerism and self indulgence splash  with the same intensity, at the same time but in various corners of the world. While Germans declare war to consumerism by opening  up  shops with  free  staff and  volunteering vendors, self indulgence acs as an enabler for  increasing  spend on personal care products in India, an almost inappropriate driver in the past.  

A nuanced , sensible analysis in  marketing data would be essential.

The Relevant  Data Imperative  

Starting with 2010, every marketer will be confronted with ten  times more data and ten  times less relevant information. Open source data , the use of social media for marketing reasons, the technology now offering a larger scope for gathering and  storing behavioral data set new challenges for marketers to set , design and develop reliable marketing information architecture, select meaningful and accurate date, choose and discern  among  information producers and disseminators.

Governmental statistics and prognosis are trusted as a reliable source of information. Yet, more than 4 million Romanians working abroad still appear in the Romanian statistics. A good reason  to start redesigning the growth strategy of many retail businesses.  So for example the Romanian police quote declining crime levels as a metric of performance. However this may in part be due to the fact that some of the criminal fraternity may well be living and operating in other European countries but officially they are still included in Romanian records.

The Accurate  Diagnosis Imperative

Into  an informal yet very   meaningful and idea rich conversation, Professor Denis Wilcox was describing public relations as “a sensible tracking of issues”. We were debating the contemporary PR challenges of correctly assessing communication problems and opportunities and PR accountability.  The professor was talking of strategic PR that indeed works as a management function focusing on diagnosis as main role.  Marketing would be much more a sensible and continuous tracking of business issues as well.  What does actually happens? To what extent does it impact on us?? What would be the consequences?

The Smart Growth Imperative

The first two imperatives  seem quite redundant. As also mentioned at the beginning my favourite marketing imperatives as stated by Doyle in 2004 is the growth imperative. Yet , the growth imperative is the cause of most of the business failures in the Romanian market where I work . Lots of  companies have imagined that is enough to produce or trade some products, perform an aggressive growth strategy and the success would follow. That proved very sadly wrong. 

Accelerated growth, lack of relevant data regarding the market potential and genuine market potential, the skin-deep analysis of the macroeconomic data has led many Romanian companies into an over  enthusiastic  regard towards the potential growth which after 2005 ended close to  bankruptcy.

Intelligent  growth based on sound analysis would be essential for survival. Growth is an imperative but  without smart marketing it can be a deadly trap.

The Quantifiable Social Media Imperative

Social media has finally won the battle and  over 80% of the major US companies are already using it and are including social media actions within their marketing mix. The focus will move towards  accountability as well.  The next decade might actually account for a genuine victory and the use of social media, which is seen as fashionable at the moment, but is still limited in the ability to deliver results.

The Strategic and Accountable CSR Imperative

CSR , far from a passing fad, has become the new evangelist and a must have in each organization.  Yet, for many companies struggling to survive recession it  is and will be considered a fad. Companies must now  be accountable to their employees, shareholders and stakeholders and  thus do something for society as well. CSR will  be  for those who can afford it. Those who can , might actually  find out they will be able to do more. Coca Cola has made  significant accountable  savings by adopting a responsible and sustainable procurement policy.

In the next decade CSR  will be accountable and strategic or not exist at all. CSR has become in short time so fashionable that everyone thinks they can wear it like a hat. The next years will show that CSR will be a too large a hat. Tricky, thorny or simply full of opportunities, CSR  will be a must-deal-with issue for every company, never mind the size.

The next marketing decade will certainly bring us many unanticipated surprises and iy is impossible to predict shifts and trends . The rate and pace of change in  the last ten years can only allow us to anticipate the rhythm. The only certain thing for marketers is that it will be definitely ten times more complicated.

Oana Sav

Marketing Consultant

More Marketing Solutions

oana@marketingsolutions.ro
www.marketingsolutions.ro

From Giorgio Burlini http://www.oxlearn.com

If the past is any guide for the future I will expect:

• A pedagogical new study on how generation “Y” is far more intelligent than the rest of us. By far.
• A new guide on how to make money while lying on a beach. But not if you stand up.
• The 3754 habits of highly successful people. Having a rich father will do anyway.
• A blog telling me if I do not blog my business is doomed.
• A tweet telling me if I do not tweet my blogs my business is doomed.
• A post in Ecademy, telling me if I don’t post my tweets about my blogs in Ecademy, my business is doomed.
• The “little known secrets” on how to trade the forex, automatically, with no effort and no risks. It will only cost me £199 of support material.
• A Power Networker asking if is really convenient to upgrade to Blackstar.
• A Blackstar asking if is really convenient to downgrade to Power Networker.
• A video, about how to link my Facebook status, to my Linkedin status, about my Twitter status, on my FriendFeed status, about my mental status.
• Announcing the new iPhone killer, the new Google killer and the new Office killer. Is it  called common sense?
• A book called ” I don’t know you, I don’t like you, I don’t want to follow you. But for …x sake sell me that  product!”
• A new secret Apple product. The iScam. Basically does nothing for you, but is so cool, you must have it. Now!
• A marketing tip, about marketing tips, on how to market your tips. If you feel tipsy….and how will be yours 2010?

Buon Anno a tutti!

Firstly, I don’t apologise for another Beatles reference, it’s a la mode au blogosphere.

Anyway, I’ve recently been asked to do an hour of training on networking at our company. Lots of other people have been asked to do similar on various topics. I find it overly simplistic that the person responsible has taken this formulaic approach:

Board say they want cheap training = internal training = ask different departments over lunchtime on various topics

Training in professional services companies is an interesting debate. Maybe it’s because I’m none to bright but when I look at Porter’s value chain in textbooks in never quite does it for me in the context I work in. People aren’t in there and people are what make our business. After the recession (I am an optimist), we can’t just go to the job centre and recruit 100 more transport planners so we have to think about the people we have, the people we want and the kind of people who’ll make the company great. Marketing is all about understanding your clients and delivering them what they want. In our industry, that’s people and the culture they imbibe, problem solvers, those who’ll go out of their way to look at something slightly differently to get you the result you need. I have great difficulty when these people, their professional development and the organisation’s culture aren’t at the heart of the business. It’s our USP, when these issues aren’t central; all I can do is attempt to make a silk purse out of a sow’s ear.

I think Porter’s value chain puts HR as an administrative function, which is fine, when it is. However, for professional services I believe they should be a far more proactive department. I would like to see HR linking into these to find the right people to build teams which we’ve highlighted as key sectors, to develop those people as individuals and encourages CPD through the promotion system and therefore, nurture a culture of innovation and intelligence. So, going back to Porters value chain, it’s tempting to plonk professional development and organisational culture alongside the primary activities. However, I think it’s more fundamental than that. It’s part of the process, the primary activities build logically on the one before but professional development impact on each of these activities. So my suggestion, if I might be so bold, is to amend the value chain a little. My extra bits are in red, just so we’re clear.

So, this is pretty but what does it mean coming back to my original irk over simplistic training? It means that we have to think through recruitment and professional development internally which deliver the sort of people who want to work for our company, staff who feel motivated to stay with the company and ultimately have in place project teams our clients want to pay cold hard cash for. We’ll then have a company culture which people aspire to work in. That’s the kind of objective I’d like to see our board setting.

Maybe when I’m 64.

The Tyranny of forecasts and budgets and the consequences
By Professor Malcolm McDonald – Academic Advisor to Oxford College of Marketing

John Perton of Boston College said “The good thing about not having a strategy is that failure comes as a complete surprise and is not preceded by a long period of worry and depression”  It is amazing to us how many major organisations go under because they have little more than sales forecasts and budgets for 1 year only and how surprised they are when their customers abandon them in favour of another supplier who has taken the trouble to work out a longer term strategy for understanding and really meeting their needs.

Don’t be fooled into thinking those words from John Perton about lack of strategy and failure represent just an academic trying to score points by being clever, as hundreds of companies all over the world have found out to their cost.  Indeed, up to 1990, every UK Company with the highest return on investment either went bankrupt or got into serious trouble.  Neither did the best performing companies in sectors up to 2000 fare much better, with the likes of Marks & Spencer, ICI, GEC et al either going out of business or systematically destroying shareholder funds (for evidence see Tables 1 and 2 below). Some of these companies have since partially recovered, such as M & S, BT and BA. Some have been acquired and are now profitable, but the lessons to be learned in the historical context of those decades are still highly relevant for companies enjoying high growth in the 21st century.

 Before going into further detail about the paramount importance of having a strategic plan for markets covering a period of up to 3 years, however, let us dismiss once and for all the mind-bogglingly puerile belief that all the directors and senior managers need to do is to write down some numbers that become targets and eventually, budgets.

Apart from the fact that Mickey Mouse or Donald Duck could do this without any training, it only ever works in growth markets with little competition.  For example, research into the banking sector in the UK, threw up the following interesting observation:

“In this Company, value creation was merely a matter of protecting market share and managing costs”.

The data show that the company’s business model is in effect a ‘money printing’ machine, therefore the challenge for strategists lies in how they can act as responsible stewards of a resilient business model.”

Cranfield Doctoral Thesis, 2005

There are, however, always consequences of such behaviour.  It is interesting to note that, of Tom Peters’ original 43 so-called ‘excellent companies’ in 1982, very few survived because of a fixation with excellent tactics at the expense of strategy (Richard T. Pascale “Managing on the Edge” Simon and Schuster, 1990)

Take for example the hypothetical example of InterTech given in Figures 1.3 and 1.4.  (Based on a real example, but disguised for reasons of confidentiality).  Table 1.3 shows the kind of information typically discussed at board meetings, most of which is based on forecasts and budgets.

A glance at Table 1.4, however, shows that on every market – based dimension, the company is losing ground dramatically and is likely to suffer serious consequences the moment the market stops growing.

It is also interesting to note that the profit and loss accounts that occupy so much time at typical board meetings usually have a devisory one line for revenue and a substantial number of lines for costs, with variances from forecast taking up much of the directors’ time and energy.  Rarely are the issues thrown up in Figure 1.3 discussed, yet these are the variable that actually CAUSE the revenue referred to above.

Here are some recent quotes from well – known sources:

“Improvements in a short-term financial measure such as economic profit can be achieved through postponing capital investments, reducing marketing and training expenditures, or by divesting assets, each of which may have a positive effect on near term performance but could adversely affect long term value creation performance.  Nevertheless, when incentivised with bonuses to ‘manage for the measure’ this is exactly what many managers will do irrespective of the consequences on shareholder value”. 

(Simon Court, Market Leader, 2002). (Why Value Based Management goes wrong. 

• 90% of USA and European firms think budgets are cumbersome and unreliable, providing neither predictability nor control.
• They are backward-looking and inflexible.  Instead of focussing managers ’time on the customers, the real source of income, they focus their attention on satisfying the boss; that is, the budget becomes the purpose.
• Cheating is endemic in all budget regimes.  The result is fear, inefficiency, sub-optimisation and waste.
• In companies like Enron, the pressure to make the numbers was so great that managers didn’t just doctor a few numbers, they broke the law.
• People with targets and jobs dependent on meeting them will probably meet the targets, even if they have to destroy the enterprise to do it. 

 Simon Caulkin.  “Escape from the Budget Straightjacket” Management Today, January 2005. P.47-49.

Before the 2008 banking crash, a major bank was criticised for its contribution to personal debt of £1 trillion in the UK.

Employees were set tough targets for selling loans and double their low salaries, which encouraged customer abuse and left many borrowers facing ruin.

Banks were no longer there to help customers find the most suitable solution.

“We have a target-driven culture that staff must hit targets”

A major bank 10th May 2005

Many economic commentators have also remarked on the destructive nature of targets set by the government for public services such as the police, the health service, social services and so on.

For example, the impact of the government’s financial incentives for adoptions has caused genuine fear in society that children are being unjustifiably removed from their natural parents in order to meet targets which earn a financial reward from the government.  There is a growing chorus of protest about this cruel distortion of values such targets are having on innocent victims.

As recently as September 2007 the national press reported that the Justice Secretary is reviewing the “perverse financial incentive” to remove children from their birth parents”.  An MP (Mr Lamb, Lib Dem MP for Norforlk North) said “It ought not to be a factor that taking children into adoption means the social services bringing in money from the government” (Sunday Times 16th September 2007).

The police are yet another example which attracts daily criticism from both the popular and more cerebral press.  With targets for arrests and with careers and promotion dependent on meeting them, many police officers are ignoring their real duty to society by avoiding serious crimes and ticking their target boxes with petty and insubstantial crimes.

Indeed, a policeman who has resigned has said openly on his web site on 18th September 2007. “An obsession with targets and box ticking mean we get exactly the same points for cautioning a girl for pulling another girl’s hair as we get for a robbery”.

Finally, it is well known that the British National Health Service change definitions of illness and accidents to meet their queue reduction quotas, often with a devastating impact on those patients affected.

The common thread running through these and countless other examples is that the “customer, whether it be society or consumers, no longer become the focus of those organisations who should be meeting their needs.  The majority of professional people such as the police, doctors, nurses, government officers and so on continuously complain about and decry the way their skills are being subverted by the culture of targets and long to put the customer back at the centre of their working lives.

Finally, one last comment about the tyranny of annual forecasts and budgets:

“Leadereship is burdened with passive resistance and corporate gaming in the traditional annual planning model.  They drive behaviours that cause inappropriate behaviours.

Many have personal bonuses based on fixed annual targets and static measures”.

“Forecasting processes frustrate the ‘right’ behaviours and drive the ‘wrong’ ones.  The desire for HQ control often drives inappropriate and suboptimal behaviour.

Doug Ross, Strategy Magazine, March 2007

(Summary of research into the planning behaviour of 1000 participants internationally)

Consider also the often puerile and backward-looking process by which quantitative objectives are set.

Take the following hypothetical example, shown in figure 1

From Figure 1 it can be seen that in the current year, this company achieved a 15 per cent increase in sales revenue over the previous year.  But, being optimistic, the chief executive set a so called “stretch” target of plus 20 per cent for next year, giving a target of 9.6 million which, if achieved, would satisfy the budget holder.

However, consider for a moment a different and more professional way of setting an objective for next year.  If the market addressed were a growing market, a strategic objective might be “To be market leader in three years time”.  In order to achieve such an objective, the chief marketing officer would need an assessment of market size in three years time – say 100 million.  Market leadership in this particular market would be, say 25 per cent.   So, representing this in Figure 2 and extrapolating backwards from this target, would give a target of 15 million next year, not the backwards looking historical target of 20 per cent (9.6 million).

Every single element of this company’s resources including R and D, HR, IT and so on would be totally different if the current budget had been 15 million as opposed to the backwards-looking 9.6 million.  Consider also where, in a typical tactically-orientated company, the 8 million on which the original forecast was based came from.  The answer, of course, is the company’s own data base.

Yet it has been consistently shown over the past fifty years that sales people sell the products they find easiest to sell, often at the maximum discount, to the customers who treat them nicest.  Such sales go into the database of course. 

Consider also the kind of knee-jerk, macho management-by-objective targets that are often set by senior managers without considering the unintended consequences.  A classic example of this is the desire to cut costs by reducing working capital, such as inventory.  If the logistics manager is paid a bonus to make such reductions, then these reductions will be made.  So the poor unfortunate customer asking for one hundred widgets and two hundred didgets, on being told they can only have fifty of each, decides to go to a more accommodating supplier.  The consequence of the lost sale is lost in the system, because the logistics manager has achieved the objectives set and so has the finance director.  But the database on which the next year’s forecast is made is impervious to all this and in most cases is merely a reflection of the organisation’s own stupidity!

Even the great Unilever, when losing market share to Proctor and Gamble, realised that their forecasting and budgeting system was holding them back and, in a presentation in 2006 to a research club at Cranfield, a senior financial manager said:

“We used to spend £½ billion out of a £50 billion turnover just on budgeting.

All it led to was setting the lowest sales/profit target (and under no circumstances exceed it) and the highest marketing budget (and under no circumstances underspend it).

The consequence was appallingly bad behaviour on the part of everybody.

We :

·         Were boxed in by too many targets

·         defined “success” in the wrong way

·         were too inward and backward looking

·         set the wrong performance targets

Our previous negotiation of budgets was a bit like allocating planes, tanks, etc. across the army by giving each division one aeroplane and one tank each, rather than putting the resources where they could be the most effective.  Unilever’s planning system was in some ways similar to communist Russia’s old system – i.e.  50 many bricks, etc.  But NEVER have any left over.  That’s why you would frequently find buried bricks, buried bulldozers and the like! 

Unilever’s new system is more about helping people win than holding them to account.  Now, when you meet people, you can’t tell what function they’re from, because they are just talking about the customer and the business”.