Building a Strategic Marketing Plan: Market Segmentation + Identifying a Target MarketWHITE PAPER

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Building a Strategic Marketing Plan: Market Segmentation + Identifying a Target Market

In the process of developing a Strategic Marketing Plan, the subsequent step which follows the identification of strategic business objectives for your brand is market segmentation and identify-ing your target market. This whitepaper will outline these two important processes in the context of a small business brand.

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To begin, lets define these two key processes for the purposes of clarity and differentiation. The content of this whitepaper will be presented in two modules, one for each of the following defini-tions respectively.

Market segmentation is the process of dividing a population of consumers (your “universe” or “total market) into smaller groups.

Identifying your target market is the process where you identify which of these segments are the most attractive for you, i.e. the segments whose needs and wants your business will be best able to sat-isfy. Looking at it another way, these are the customers most likely to appreciate your brand promise.

MODULE ONE: MARKET SEGMENTATION

The steps in the Strategic Market Segmentation process for your small business:

Start with your total market, or “universe”: this is the overall population of potential customers who could potentially have a need for the product or service that your organization provides.

Apply a broad perspective: depending on the nature of your business, your total market could be a B2C (business to consumer) or B2B (business to business) universe. In some cases, there may be elements of both. I’m going to use a fictional ex-ample whose universe contains both B2B and B2C potential.

Toronto Organic Star Catering, (a start-up which provides organic and locally sourced catering services

in the Toronto area) is developing their strategic marketing plan and is beginning their market segmenta-

tion process.

This enterprise starts with a large total universe. Potential customers could include Toronto area busi-nesses of all sizes: (event planners, wedding planners, large corporations) in addition to individual con-

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sumers (for parties, family events, showers, etc.) as well as niche customers (political events, funeral re-ceptions.)

To provide context, we’ll consider that Toronto Organic Star Catering have done their preliminary mar-

keting planning. The brand will operate with two distinct strategic marketing plans: one for the B2B mar-

ket, and one for B2C. For this segmentation exercise, they wish to focus on the business to consumer

market only.

They have also done their homework in developing a UBP and a brand promise. Their unique buying

proposition is their ability to provide fresh, only locally sourced, organic, and/or vegan catering services.

Their brand promise is “Make your event perfect. Naturally.”

Just like your business, our organic catering brand needs to start dividing their universe of possible

customers into segments of potential customers.  There are a number of ways to do this; most organiza-tions will deploy several strategic market segmentation tools or criteria when identifying possible mar-ket segments. Here’s a list of the most frequently used:

1. Geographic target segmentation: identifies the geographic area where your potential customers are. This can be as large as “Global” and as small as a set of specific postal codes. For our fictional catering brand, let’s say that the Greater Toronto Area is the maximum drawing area for potential customers based on the resources of the business. This also fits nicely with their locally sourced food positioning.

2. Demographic target segment: This is the most frequently used tool to identify market segments, and also has the largest number of potential variables.  Defined as the statistical data set of a popula-tion, demographics create a robust “portrait” of the segment. In strategic marketing, common demo-graphic identifiers include:

GenderAge, median ageGeneration (Gen X, Gen Y)Education (highest level attained)

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Marital statusHousehold incomeEthnicityLanguage spoken at homeReligionNumber of childrenEmployed/Unemployed

For Toronto Organic Star Catering, demographic profiling will be most useful with the business to con-

sumer market. More on this later

3. Psychographic target segment: This tool identifies the IAOV for a population: acronym for Inter-ests, Activities, Opinions, and Values. Brands utilizing this seg-mentation tool look for commonalities in the IAOV within the total market and divide it into segments on this basis.   For example, vegetarians and vegans, are individuals who believe in the benefits of a diet that minimizes or avoids animal-based products.

This opinion or value system differs from individuals who eat animal-based products and are therefore a different segment of our brand’s total geographic market (Toronto.)

Toronto Organic Star Catering has identified this psychographic

variable as a key segment of the overall “catering” market in To-

ronto. We can then go back and identify some fictional demo and

geo variables that could describe the “veggie” segment of the mar-

ket.

Gender: 60% female

Generation X predominate (born 1965 to 1979)

University degree or higher level of education achieved

Employed

Newly married or in long-term relationships

Higher than average household income

In addition to the  geographic variable which identifies the segment as residing in the Toronto area.

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Returning to our list of strategic market segmentation tools:

4. Needs based target segment:

Divides the total market for a product, service, or brand into segments based on the unique needs of each group. For example, Nikon cameras may recognize that the total market for one of their products, cam-eras, can be divided based on the needs of the end-user.

Some consumers have a need to take occasional pictures during family events and outings with friends. For Nikon, this segment’s needs may be answered by a compact, simple to use and inexpensive camera that takes mid-to high quality pictures.

Another segment of consumers may need a need to take a large volume of very high quality photos in a professional or semi-professional setting, such as fashion portraits for a modeling agency.  Nikon may answer the needs of this segment with a multiple-feature, high quality camera that forgoes simplicity and compact size and sells at a higher price point.

For Toronto Organic Star Catering, needs segments could be identified as follows:

Needs Segment 1: needs fast, inexpensive or-

ganic or veg catering services for a small last-minute

event. This segment may need immediate service

(24 hour turnaround) and does not require a wide

variety of food options to be available.

Needs Segment 2: needs a large variety com-

pletely vegan food options for a wedding 6 months

from now. This segment may need reassurance that

the quality of the food is optimal and that the presen-

tation will be top-notch.

Other segmentation tools include:

5. Usage segmentation (low, medium, high volume users of a product: example beer.)

6. Lifestyle Segmentation: Similar to psychographic segmentation, this criterion identifies groups of consumers based on their lifestyle choice, example condo dwellers, marathon runners, young profession-als or motorcycle enthusiasts.

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7. Industry Segmentation: (B2B): divides the total market for a product (say, a blast furnace for steel production) by industry: the auto industry, the building industry, and the aerospace industry.)

8. Technology adoption segmentation: (early, joiners, majority, laggards)” This segmentation is popular amongst app developers, mobile marketers, technology brands and brands engaging audiences in the social media space.

Strategic Market Segmentation: the golden rules

Dividing your overall market into segments, even when using the tools out-lined above, is not an ad-hoc exercise: like all strategic marketing concepts, there are some rules that you should follow. Especially relevant for a small business start-up, it is critical to respect these rules as you divide up your uni-verse.

The strategic market segmentation rules:

There must be similarity within the segment: The segment should inclusively demonstrate similar needs and wants, the same profile, same geography, same usage behavior, same industry, etc.

Each segment should be mutually exclusive: Each segment must be different according to the key criteria, such as geography or demographics. If the segments overlap, that overlap represents a segment.

Segments must be quantifiable: you have to be able to count the number or estimated number of customers within the segment.

Segments should be large enough to be profitable: if your segment is too small to be realistically relevant to your business, it’s not really a segment. (Alternatively, it could be a niche segment that you can address through a different marketing mix.)

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MODULE TWO: IDENTIFYING A TARGET MARKET

Identifying a Target Market for your Small Business: 8 Steps to Success

So you’ve identified your potential target mar-ket segments. What’s next? Given that a total potential market (or “universe”) can contain multiple unique customer segments, out task now is to iden-tify which of these segments are most attractive in the context of our business or brand. This process is called Target Market Identification.

Your goal: is to select, from all of the segments you have identified, the segment or segments to-wards which you will direct marketing effort. (Mar-keting effort usually means directing investment, i.e. dollars.)

Choosing your target segment strategically: the 8 steps to success

It’s not always obvious which market segment(s) you should pursue. Here is a list of 8 key steps that will help you choose.

Measure the size of the segment

Measure the degree of need + demand within the segment

Measure the current growth + potential growth of the segment

Determine the age + sustainability of the segment

Review seasonality + elasticity of demand within the segment

Determine how well the segment fits with your brand promise + brand positioning

Observe the number of competitors serving the same segment, + their position relative to your brand

Consider your business resources against the market segment

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Sound complex? Not really. Lets get started:

1. Measure the size of the segment

This is your first step and sets the stage for all other target segment identification considerations. Measuring the number of potential customers who meet the segmentation criteria will help you determine:

a) The feasibility of the segment. If your segment is too small to profitably pursue (even with a niche strategy) then it should not be considered a target segment.

b) The proportional size of the marketing investment ($$$) you wish to direct to the segment. A larger segment (meaning more potential customers) will in most cases require a greater

marketing investment, and vice versa.

Getting back to our familiar example of Toronto Organic Star Catering, who have identified, amongst oth-

ers,  a potential B2C (business to consumer) target segment using geographic, demographic, and psy-

chographic segmentation as follows:

Geographic: Live in the Toronto Area

Demographic:

Gender: 60% female

Generation X predominate (born 1965 to 1979)

University degree or higher level of education achieved

Employed

Newly married or in long-term relationships

Higher than average household income

Psychographic: Vegetarian, vegan, and/or organic food preference and/or locally sourced food prefer-

ence. Potentially higher importance placed on health/diet considerations vs. other segments.

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There are several resources that our catering brand can turn to in order to measure the size of this seg-ment, including:

Statistics Canada, PMB (Print Measurement Bureau) statisticsWikipedia, Google Scholar blogs, and other web resources

Measuring the size of a target market segment is rarely an exact science; for a small to mid-size business owner with potentially limited resources, this may be even more the case.

The important thing is to arrive at a well-researched and comfortably accurate es-timate of the number of potential cus-tomers within this segment, and compare it with the size of other segments identi-fied. Then ask: “Does this segment repre-sent a large enough number of potential cus-tomers to justify investing marketing re-sources?”

Moving ahead with our example, Toronto Star Organic Catering has determined that in most North Ameri-

can cities, approximately 25% of the population is vegetarian or vegan and a recent Foodland On-

tario consumer research paper (fictional) indicates that approximately 15% of consumers in Toronto and

Ottawa attempt to incorporate locally sourced foods as part of their regular grocery shopping.

Our catering brand has determined that inclusive of all geographic, demographic and psychographic crite-

ria considered, the segment size is approximately 200,000 consumers. From a needs-based approach,

the total size of this consumer segment will of course be smaller given that our brand offers catering serv-

ices only.

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2. Measure the degree of need + demand within the segment

Do they want to buy what your selling? It’s a fundamental question for any small business marketer. That said, estimating the demand within a segment can be as easy as asking yourself:

Can your product or service deliver something of value to the segment better than the competition? Are you meeting an unfulfilled need or want of the target segment, or providing them a unique solution in a way that the competition does not?  If the answer is yes, than you have evidence of demand within the segment.

How to measure demand:

For small business owners, there are several ways to esti-mate demand without relying on expensive research and complex statistical analysis (although these are obviously superior if you have the resource dollars.)

Count up the number of competitors you are aware of: businesses do not swarm to serve the needs of tiny, dying markets. Where there is smoke, there is fire.

Google it. Punch your product or service category into the big G and see how many results come up in the Sponsored links section. How relevant are they? Are the organic search results mostly com-mercial enterprises?  Try Google maps to pinpoint competitors in your local geography. Or go old school and open the Yellow Pages and count the number of ads for competitors whose messag-ing and offers speak to the target segment.

Call a competitor. Ask them how business has been.

Visit Facebook pages for competing brands. No fans? hmmm.

Statscan.com and industry Canada websites: provide a wealth of industry specific information, in-cluding revenue trends by category.

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3. Measure the current growth + potential growth of the segment

Is the segment growing? Is it stable? Is it shrinking? If so, at what rate year over year? Look back over a mid-to longer term (5 to 10 year) historical timeline. Consider if Future Shop or Best Buy  had not looked at huge potential growth in the home theatre segment upon the introduction of large-format plasma TV screens? Or conversely, if they had not measured the alarming erosion of consumer demand for the VCR upon the introduction of affordable DVD technology?

Back to our catering brand, Toronto Organic Star Catering who have researched things well:

Geographically: Population in the Greater Toronto Area and the Metropolitan Toronto core has been in-

creasing steadily, year over year, for the past 15 years.

Demographically: The demographic profile of the segment has been relatively stable over the past 10

years, with a notable increase in university completion as the highest level of education attained.

Psychographically: Our catering brand has found that due to changes in consumer preference, there

has been a marked and significant increase in the number of consumers preferring locally sourced and

organic foods, and a slightly less positive trend in the number of consumers who identify as vegetarian or

vegan. The profile of these consumers also dovetails well against the demographic profile of the segment.

Good news for our catering brand!

Remember: Even if the size of the identified target market segment is currently a good fit with your busi-ness infrastructure and marketing mix, you should not assume that this will always be the case and vice versa. The segment may be shrinking down to a niche size that your business has no appe-tite for, or may be expanding beyond your resource capacity to service properly.

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4. Determine the age + sustainability of the segment

Is this segment sustainable? Does this matter to you? Perhaps your business supplies the latest Christ-mas fad toy to Sears Canada. The needs segment for your business, parents of wishful children who want this specific gadget or toy, has most likely been around for about 3 months and will vanish into obliv-ion on December 26. If a stable and sustainable segment is what you seek, for your brand, you will not find it in trend or fad demand segments.

For Toronto Organic Star Catering, whose brand promise is “Make your event perfect. Naturally” the

segment identified above is in the growth stage. It has been in the past 5 years that demand for organic/

locally sourced or vegetarian/veggie food has expanded outside of its niche to the mainstream, particu-

larly amongst younger people.

So is the segment sustainable? Toronto Organic Star Catering wants to devote marketing resources

towards a segment that is sustainable and relatively stable or growing over a 10 year time horizon. It

seems likely that high-level consumer perspective son sustainable living, healthy living, and sustainable

consumption will help bolster demand in our catering company’s brand promise over the long-term.

5. Review seasonality + elasticity of demand within the segment

Similar to sustainability considerations, the seasonality or elasticity of demand within an identified target market segment over a short timeframe (within a year, for example) may in turn impact the timing of in-

vestment in promotional efforts, stock purchasing, pricing or distribution models and logistics.

For Toronto Organic Star Catering, the target

segment under consideration shows seasonal

demand fluctuations as impacted by wedding sea-

son, holiday party season, and stable demand

trends for birthday parties and baby showers.

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6. Determine how well the segment fits with your brand promise + brand positioning

In other words, can you provide value to the segment? Of all of the segments you revealed during the market segmentation process, your brand promise will most likely be a stronger fit with some over others.

If there is little or no alignment, you may want to review or revise your market segmentation process or your brand promise. Or select a different segment that works better with your brand reality.

7. Observe the number of competitors serving the same segment, + their position relative to your brand

For new brands and small business managers, this process if often done by instinct, or may even be the trigger that initiated the business start-up from the outset.

For example: If you are a small bot-tled cola brand, you will need to map out your brand’s competitive space, your marketing mix, and realistic op-portunities against segment Goliaths Coca-Cola and Pepsi, along with pri-vate label brands. Consider Cott. bev-

erages. Despite the appeal of it’s plucky-underdog approach (and not disagreeable profits) it’s a bit like pitting a tricycle against a Harley Davidson.

How to measure this:

List your competitors, and identify their brand promise and UBP.

Consider and itemize (using geographics, demographics, psychographics, etc.) which segment of your overall market each brand serves (or targets) primarily. A good way to do this is reverse en-gineer the messaging within their communications material, which given enough consideration will often reveal their target audience (i.e target segment.)

Consider and itemize any of your competitors secondary target markets.

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Now do the same for your brand (you should have already done this homework before reaching this point in your strategic marketing plan; if you haven’t, please return to GO and do not collect any profits.)

Is there overlap with your segment? If so, to what degree? If many of your direct competitors tar-get the identical segment primarily, you are considering competing in a hyper-competitive seg-ment that may require more resources on your part (or a more dynamic and innovative marketing mix) to extract profits.

For Toronto Organic Star Catering, research in the Toronto area indicates 4 other competitors; particularly

2 catering companies that offer organic and locally sourced food choices primarily for corporate functions

and galas. Almost all the competing caterers in the area offer vegetarian options, however only a few pre-

sent this feature as a prominent benefit that would speak specifically to this segment. More good news

for our catering start-up brand!

From a purely “brand” standpoint, it is also important to measure your brand promise, Unique Buying Proposition, and marketing mix against competitors. This includes a review of the degree  and intensity of promotional noise (i.e. share of voice) your brand will have upon targeting a segment of potential custom-ers.

8. Consider how your business resources will hold up in attracting and retaining the market seg-ment

The target segment you select should be well aligned with your business resources. If not, how much op-erational change would be required to develop a marketing mix and business infrastructure that would best meet this segments needs?

For example, our Toronto area catering company does not have the resources to meet the demand of

many destination weddings; their ability to deliver their brand promise is hindered by the availability of

locally soured produce, vegetarian options, and organic food in, say, the Bahamas.

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Completed all 8 steps? Congratulations, you now have a target market.

The above whitepaper was developed to provide information that may help small business owners im-

prove their business acumen, and as such is accessible for free download and reproduction. The content

therein is not guaranteed to improve the performance of any organization or enterprise. The content is the

intellectual property of cōjent. marketing + communications.

cōjent. marketing + communications.better marketing for your business. cojent7.wordpress.comtwitter.com/cojentmarketingcojent.marketing@gmail.com416.768.6056

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