Driving Growth and Innovation through Strategic Segmentation*

Learning from various textbooks and world's marketing gurus, one can deduce that marketing's basic mission is to create a value proposition that (1) matches with the targeted group of customers, and (2) is viably different from competitors. If a marketer does this right, the gurus say, then the product will surely take off and create sustainable profits. The statements above may sound very good and make a lot of logical sense ? in fact we can say that it widely acceptable.

But if we look at everyday's corporate world, we often see that there is a big disconnect between what CEOs expect and what marketers deliver. Most CEOs today, facing intensifying competition and more demanding/sophisticated customers, are turning their attention to top-line growth and innovation in their attempts to create meaningful and sustainable differentiation relative to their competitors. Surely, the approach to create differentiation is widely understood ? i.e., using the segmentation-targeting-positioning (STP) approach. Put simply, STP is the process of dividing up the market into homogeneous groups of customers who respond similarly to particular offerings, which then serve as a base to create relevant and distinctive positioning to the target customers. And I bet that most marketing and brand managers understand this very well and are highly proficient in how it should be conducted. Despite all this, most CEOs are still not satisfied with what their marketing department has produced. CEOs complain that marketers are still too tactical in nature, by relying heavily on marketing mix (Product, Price, Place, Promotion), which cannot create true differentiation that are sustainable and avoid ?commoditization? through competitors' imitation.

So where's the source of disconnect here? One key source of this disconnect is in the way CEOs and marketers view segmentation. While CEOs look at ?strategic? segments, marketers still look at ?market? segments. Let me illustrate the difference between the two by first explaining ?market? segmentation as usually practiced by marketers, and then explain what ?strategic? segmentation really is.

Conceptually, marketers begin by identifying market segments, then selecting the appropriate segments to target and finally positioning the company's offer within the targeted segments using the marketing mix. Of course, in practice, this is a messier process. My colleagues from MarkPlus Research told me that there are two approaches used in market segmentation. The first approach is called a priori, which groups the customers based on ?Identifier Variables? such as demographics, socioeconomic factors, psychographic factors ? essentially categorizing the customers by knowing their profile before determining what they want. The second approach, called post hoc , starts by using response variables (such as to divide the market on the basis of how customers behave or respond to particular offering, and then hope that the resulting segments differ in terms of customer profiles. While the first approach focuses on ?who they are?, the second approach focuses on ?what they want?. In practice, marketers often use both approach to fine tune their understanding of the markets. Based on the segmentation study, marketers then decide which segments to target based on criteria like segment size, segment growth, the firm's relative competitive advantage, etc. Finally, positioning and unique selling proposition (USP) is developed to fit with the segments' profiles and needs. As an example, marketers in the cellular telecommunication company may find several market segments, such as ?Feature Maniacs?, ?Wannabes? and ?Bargain Hunters?, each of which has different profiles and needs for cellular services. They will then develop pre-paid and/or post-paid packages with different positioning, features, pricing schemes. Marketers in the company will also design appropriate channel access and promotion efforts to convey the intended positioning of each package.

So, what's wrong with the practice above? And why are CEOs still not satisfied? Nothing is wrong. What's described above are the correct and widely accepted ways for conducting proper STP in the marketing arena. But still, it doesn't address concerns or agenda of CEOs, who need to drive top-line growth profitably. CEOs wish that marketers can think of ?strategic segments?, in addition to ?market segments?.

What is strategic segmentation? Strategic segments are those segments that require distinct ?value networks? or often a completely ?different business model?, rather than just tweaking or adjusting different sets of ?marketing mix? proposition. ?Strategic segmentation? also often requires viewing of the market that is broader than the currently served markets by considering indirect competitors as well as product substitutes. This is much like Professor Chan Kim's view point in his famous ?Blue Ocean Strategy? book.

The emergence of low-cost-carrier (LCC) such as Southwest, Air Asia and the likes are clear example of viewing the market using strategic segmentation. The airline industry was predominated by major airline companies like American Airlines, British Airways, Singapore Airlines, etc., which offers full customer service and high prices, targeted to everyone, but mainly focus their attention to business travelers, which are the most profitable group of customers. Business travelers, who mostly do not pay by themselves, demands flexible schedule, higher and higher levels of service while not paying so much attention on price. Yet, the LCC pioneers, such as Southwest, see different strategic segments emerging. Looking at the current customers, they see that leisure travelers and self-paying entrepreneurs are not particularly happy with the flag carriers' offerings. In addition, they also see that in the broader definition of the market, there are bus and/or railroad customers, who were prevented from riding airplane because of high prices. The low-cost airline see these opportunities and offered a business model to serve these new strategic segments. Since then they have entirely shaken the industry's rule of the game and produce innovation. Relative to the flag carriers, they create a differentiation that is very deep and sustainable by creating an entirely new ?value network? (from purchasing practices, efficient operations, innovative marketing, non-traditional distribution, etc.), rather than just tweaking marketing mix elements. Do you see the difference now?

In summary, to impress their CEOs, marketers can take a more strategic role by looking and studying ?strategic segments? and help them create deep, game-changing differentiation strategy. In fact, marketers should also lead in the development of the appropriate ?value network? elements for the new emerging strategic segments. These kinds of efforts will help the company find its ?blue ocean? and drive profitable top-line growth that is demanded by today's ever-competitive business landscape.

*www.markplusinc.com