Market segmentation is one of the most powerful strategies a company can use to improve profit margins and ultimately gain market share. And when markets are flat or declining and differentiation is at a premium, creative segmentation strategy can mean the difference between survival and road-kill.Â
What is it?
Market segmentation is essentially leveraging whatever differentiates you from competitors to target a distinct market segment with common customer attributes. If successful, the benefits are higher profit margins and, in some cases, market share and revenue growth. Â
According to Bill Davidow, venture capitalist (VC), former Intel marketing and sales VP, and author of Marketing High Technology, “Segmentation lets Davids slay Goliaths.”
Geoffrey Moore, VC and author of Crossing the Chasm, calls it niche marketing, but it’s essentially the same thing: “Trying to cross the chasm without taking a niche market approach is like trying to start a fire without kindling.”
Here’s a flexible and scalable 3-step process for developing a market segmentation strategy that I’ve used with companies big and small:
Market Segmentation 1 - 2 - 3
- Develop an objective picture of the marketplace with an internal (executives, key employees) and external (customers, analysts) audit. Do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis based on the audit. Â
- Get a bunch of smart and insightful people in a room and brainstorm market opportunities that match your company’s unique DNA or differentiation. If your products or services have an intrinsic value proposition and there’s a market segment that needs them, they’ll find each other. Â
- Coalesce on the characteristics of the market segment and key strategies for targeting, growing, and dominating the segment. Develop specific strategies and tactics for specific customer or application niches, like planting seeds for grassroots support and growth. Â
Real-world examples
Apple CEO Steve Jobs is a master of market segmentation. In the 80s, he targeted the Mac at niche segments education, graphic design, and publishing. In the 90s, Jobs used ease-of-use and Internet connectivity, right out of the box, plus unique design, to differentiate from complex, beige box PCs. The iPhone strategy was similar.Â
Volkswagen leveraged the unique Beetle design as a beachhead from which it grew to become one of the biggest auto makers in the world.Â
Dell was originally a segmentation strategy, although I doubt that Michael Dell knew it at the time. Dell has since leveraged its direct sales, custom-design niche into an empire.Â
Starbucks was initially a niche strategy that became mainstream. Now Peets and others are targeting Starbucks in much the same way.Â
Texas Instruments side-stepped Intel’s dominance in microprocessors by focusing its DSP architecture on the communications market, specifically cell phones.  Â
Sun targeted niche applications with what was, at the time, an open system architecture. Ironically, its expensive, vertically integrated architecture is now viewed as proprietary. Â
Then there’s BMW, Dr. Pepper, Snapple, Whole Foods, Harley Davidson, the list goes on and on. Some were more successful than others.
What are your thoughts on business survival strategies for today’s extraordinarily challenging economic and market conditions?Â
