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MARKETING CONFEDERATIONEUROPEAN

EMC

Market Segmentation - still the bedrock of commercial success

Professor Malcolm McDonaldEmeritus Professor at Cranfield School of Management and a Professor at Warwick, Henley, Aston, Bradford Business Schools and the Sino-British College USST Shanghai.

About the EMC Academic Group

EMC Academic Group Article 2

The European Marketing Confederation (EMC) is the organisation responsible for the bringing together marketing, sales and communication associations across Europe.

The aim of the EMC is to share best practice as well as promote and develop marketing, sales and communication as a fundamental business process.

The EMC’s Academic Group was created to provide practising marketers with access to simple and straightforward academic marketing research, which could be used to enhance their own marketing strategies.

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Each month EMC member associations publish articles summarising the key aspects of each piece of research they have analysed, so that practising marketers can choose to implement changes within their own organisations based on informed research.

We’d like to thank the latest contributor to this edition.

Until 2003, Professor McDonald was Professor of Marketing and Deputy Director of Cranfield University School of Management, with special responsibility for E-Business. He is a graduate in English Language and Literature from Oxford University, in Business Studies from Bradford University Management Centre, and has a PhD from Cranfield University.

He has a PhD from Bradford University and from the Plekhanov University of Economics in Moscow. He spent a number of years in industry working for Canada Dry as Marketing and Sales Director of until the end of 2012, and spent seven years as Chairman of Brand Finance plc.

He spends much of his time working with the operating boards of the world’s biggest multinational companies, such as IBM, Xerox, BP and the like, in most countries in the world, including Japan, USA, Europe, South America, ASEAN and Australasia.

He has written 44 books, including the best seller “Marketing Plans; how to prepare them; how to use them”, which has sold over half a million copies worldwide. Hundreds of his papers have been published.

Contributor to this edition

Professor Malcolm McDonaldEmeritus Professor at Cranfield School of Management and a Professor at Warwick, Henley, Aston, Bradford Business Schools and the Sino-British College USST Shanghai.


Apart from market segmentation, his current interests centre around the measurement of the financial impact of marketing expenditure and global best practice key account management. He is also Visiting Professor at Henley, Warwick, Aston and Bradford Business Schools.

In 2006 he was listed in the UK’s Top Ten Business Consultants by the Times.

Selected publications:• Marketing Due Diligence: Reconnecting Strategy

to Share Price; Malcolm McDonald, Keith Ward and Brian Smith

• Marketing plans: how to prepare them how to use them; Malcolm McDonald and Hugh Wilson

• Market Segmentation: How to do it, how to profit from it; Malcolm McDonald and Ian Dunbar

• Marketing: A complete guide in pictures; Malcolm McDonald and Peter Morris

• Marketing Plans for Service Businesses: a complete guide; Malcolm McDonald and Adrian Payne

• Key Account Plans: The Practitioners Guide to Profitable Planning; Malcolm McDonald and Lynette Ryals

• Key Account Management: the definitive guide; Malcolm McDonald and Diana Woodburn

• Creating Powerful Brands; Malcolm McDonald and Leslie de Chernatony

Contributor to this edition


The purpose of this paper is to dispel some of the popular myths surrounding market segmentation and to explain why needs-based segmentation is still the main route to commercial success - especially in light of the phenomenal advancements in marketing technology.

The most common objective of modern commercial organisations is the sustainable creation of shareholder value.

This can be achieved only by providing shareholders with a total return, from capital growth and dividend yield that exceeds their risk-adjusted required rate of return for this particular investment.

In today’s highly competitive environment, the major sources of shareholder value

creation are the intangible marketing assets of the business, such as brands, customer relationships and channels of distribution (the 70 per cent of the company’s value that does not appear on the traditional balance sheet according to Figure 1 below).

Consequently, the critical future marketing strategies of a company, which indicate how these assets are to be developed, maintained and exploited, are the role of properly-trained marketing specialists, not someone playing around with technology.

So a changed approach is necessary, which entails getting back to basics and this represents a major opportunity for the marketing community.



100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

55

18

27

42

22

26

17

35

47

29

24

49

31

17

52

32

15

52

42

54

21

3

71

7

28

75

15

9

76

USA

Undisclosed value Disclosed intangible assets (including good will)

Source: Brand Finance Plc – Ranked by tangible net asset

Tangible net assets

GBR FR GER CAN AUS CHN HK BRA JPN

2

ASSET BREAKDOWN FOR THE TOP 10 COUNTRIES BY ENTREPRISE VALUE



ENTERPRISE VALUE AND PROFITABLE GROWTHThere are 4 core ways a company can increase enterprise value

Invest in projects that earn> cost of capital

Reduce assets in activitiesthat earn < cost of capital

Increase profits from capitalinvestments

Reduce the firm’s cost of capital

ENTERPRISE VALUE AND PROFITABLE GROWTH– CFOs rightly demand value-creating plans, but are often unclear about how the plans

submitted do this– The goal is to maximise the financial value of market/customer relationship – the sum total

of revenues minus the directly attributable costs now and in the future

Market/customerselection criteria

– Understanding the cost to serve different market/customer groups

– Reducing expenditure on markets/customers that earn less than the cost of capital involved

Growing profits from the existing market/customer

portfolio

– Reducing risk– Increasing close rates and

accelerating sales cycles affect net free cash flows

Figure 2 shows how enterprise value is created.

Figure 3 sets out the role of marketing in this process.



The role of segmentation in creating shareholder value added (SVA)From the figures overleaf, it can be seen that market/customer selection is key to the whole process of marketing segmentation.

The only way that SVA can be achieved is by making offers to market segments that utilise the entire organisational asset base effectively, and which take account of the needs of all stakeholder groups.

Over 40 years of research into the link between long run financial success and marketing strategies reveal the following:

Excellent strategies✓ Understand markets in depth ✓ Target needs-based segments ✓ Make a specific offer to each segment ✓ Have clear differentiation, positioning and

branding ✓ Levereage strengths and minimise

weaknesses ✓ Anticipate the future

Weak strategies✓ Always talk about products✓ Target product categories✓ Make similar offers to all segments✓ Have no differetiation, poor positioning

and branding✓ Do not understand their strengths and

weaknesses✓ Plan using historical data

The first point above is key to understanding the crucial role of segmentation, because today all products are excellent, so profitable differentiation

is unlikely to come from an organisation’s products.

It is much more likely to come from the way it relates to its markets and customers through the process of segmentation.

Indeed, a Harvard Business Review article claimed that 90% of 30,000 new product launches in America failed because of inadequate market segmentation (Christensen C et al 2005).

Market segmentation is one of the most fundamental concepts of marketing and is the key to successful business performance.

It’s fairly obviously that there is no such thing as an average customer or consumer – it’s a bit like saying my head is in the oven and my feet are in the fridge, so on average I am quite comfortable!

Let’s also get rid of the nonsensical myths about market segmentation, such as the a priori nonsense about socio economics, demographics, geo demographics and the like.

Socio economic classifications such as A, B, C1, C2, D and E are useful generic descriptions, but in themselves they can only be useful at a very general level.

For example, the Archbishop of Canterbury and Boy George are both As because of their spending power, but their behaviour is almost certainly very different.



Likewise, demographics such as young women between the ages of 18 and 24 can only ever be useful as a very high and general indication of patterns of behaviour, because it is clear that not all 18 to 24 year olds behave the same.

In a similar way, geo demographic classifications such as ACORN, which stands for a classification of regional neighbourhoods, whilst useful for indicating likely very general patterns of spending power, do not reveal the absurd assumption that everyone in one street drives the same car, reads the same newspapers, eats the same food and so on.

Then there is the misguided school that clings to the outmoded and disproven

notion of segmentation based on volume purchased.

Brief history of market segmentation The author of this brief article did a catholic review of scholarly research into the history of market segmentation ( Jenkins and McDonald 1997) in which 36 references were cited.

The father of market segmentation is widely considered to be Wendell Smith (1956) who proposed market segmentation as an alternative to product differentiation.

Yet it wasn’t until Wind’s (1978) review of the state of market segmentation that the topic went to the top of the agenda of researchers and practitioners.

His plea was for new segmentation bases and data analysis techniques, and was in favour of putting market segmentation at the heart of strategic decision making. In 2009, a whole issue of the Journal of Marketing Management was devoted to market segmentation, and for those readers wanting an updated literature review, see Bailey (2009) in that issue.

They confirm that most of the work over the intervening years has been primarily around what segmentation bases to use, such as size of purchase, customer characteristics, product attributes, benefits sought, service quality, buying behaviour and, more recently, propensity to switch

suppliers, with much of this work being biased towards fast moving consumer goods rather than to business and services.

In 2002 Coviello and a host of others, with the advent of relationship marketing and customer relationship management, proposed one-to-one as a successor to market segmentation, although Wilson (2002) found that most CRM projects fail because of poor segmentation. Rigby (2002) summed this up succinctly by saying that trying to implement CRM without segmentation is like “trying to build a house without engineering measures or an architecture plan”.

Given the amount of academic scholarships and attempts at implementation in the world of practice over the 54 years since Wendell Smith first raised the consciousness of the community to the importance of market segmentation, it is surprising that so little progress has been made.

Yankelovich’s paper in 2006 also reported the widespread failure of segmentation initiatives. This matches the author’s own research over a 35 year period. His analysis of 3,000 marketing plans revealed that only 300 contained proper needs based segmentation – i.e. 90% didn’t.

The author of this paper, having been Marketing Director of a major fast-moving consumer goods company and having worked on practical segmentation with senior teams from leading global multinationals down to SMEs for 40 years, finds much of the academic debate referred



to above somewhat arrogant and inward-looking.

The justification for saying this, is that anyone who says “we segment markets by ....” is totally missing the point.

Any market, once correctly defined in terms of needs rather than products, consists of 100 per cent of what is bought, how it is used and why it is bought and used in these ways.

The role of any supplier is to understand these behavioural patterns and to discover their rationale, rather than trying to impose some predetermined segmentation methodology onto the market.

A propos the issue of whether new channels, new media, new technology and

the subsequent changing behaviours has made traditional segmentation obsolete, the answer is a resounding “No”.It is not the purpose of this paper to spell out the correct processes for carrying out proper needs-based segmentation.

Rather, it is to reinforce for a new generation of marketers the fact that rarely is any kind of marketing effective without it and that it has become even more important with the advent of new technology.

For example, most so-called digital strategies are ineffective because the company does not have a robust marketing strategy that spells out what the target markets are, how they are segmented and what the value proposition is for each key target market.



Suffice it to say that any organisation that embarks on any segmentation path other than needs-based segmentation is doomed to waste an awful lot of time and money

For readers who want a detailed explanation of the correct methodology for carrying out correct, needs-based segmentation, please refer to “Market Segmentation: how to do it; how to profit from it “ by McDonald M and Dunbar I, Wiley 2012.

The full references for this article are: Jenkins M, McDonald M ( 1997 ). Market segmentation: organisational archetypes and a research agenda. European Journal of Marketing, vol 31, no 1 ( pp 17-30 )

Smith W ( 1956 ) Product differentiation and market segmentation as alternative marketing strategies, Journal of Marketing, vol 21, July,( pp 3-8 )

Wind Y ( 1978 ) Issues and advances in segmentation research. Journal of Marketing Research, vol 15 ( pp 317-337 )

Bailey c,Baines P, Wilson H and Clark M, Segmentation and customer Insight in cotemporary services marketing practice: why grouping customers is no longer enough. Journal of Marketing Management, vol 25 nos 3-4 ( p228-251 )

Coviello N (2002 ) Brodie R,Danacher P andJohnston W How firms relate to their markets: an emoirical iexamination of contemporary marketing practice Journal of Marketing, vol 66, no 3 ( pp33-46 )

Rigby d, Reicheld F, Scheffer P Avoid the four pitfalls of CRM. Harvard Business Review vol 80 no 2 ( pp 101-109 )Wilson H, Daniel e,and McDonald M ( 2002 ) Factors for success in relationship marketing. Journal of Marketing Management, vol 18, no ½ ( pp 199-218 )

Christensen C,Cook S and Hall T ( 2005 ) Marketing malpractice: the cause and the cure. Harvard Business Review vol 83 no 12 December, ( pp 74-83 )

Yankelovitch D ( 2006 ) Rediscovering market segmentation Harvard Business Review vol 84 no 6 February ( pp 122-131)

Mcdonald M and Dunbar ( 2007 ) Market Segmentation: how to do it; how to profit from it. 2nd edition Butterworth-Heinemann, Oxford. McKinsey “Where the big changes are happening in sales and what they mean”McKinsey Digital Advantage, CMO Network July 26th 2016.



Contact us

We hope that you enjoy reading this edition. If you have any questions about the issues raised in this paper, please don‘t hesitate to contact us.

Finland Finnish Marketing Association (MARK)Germany German Marketing Organisation (DMV)Greece The Hellenic Institute of Marketing (HIM)Ireland Marketing Institute of Ireland (MII)Lithuania Lithuanian Marketing Association (LiMA)Russia High School of Marketing, Business

Developments and Economics (HSE Moscow)Switzerland Swiss Marketing (SM)The Netherlands Nederlands Instituut voor Marketing (NIMA)United Kingdom The Chartered Institute of Marketing (CIM)

European Marketing Confederation (EMC)Square du Meeûs 35De Meeussquare 351000 BruxellesTel; 00 32 2 7421 [email protected]: @infoeumarketing

2017 The European Marketing Confederation. All rights reserved. The European Marketing Confederation is the umbrella organisation for marketing, sales and communication associations in Europe. Operating since the 1960s, our Brussels headquarters was established in 1993. Our mission is the promotion and the development of marketing as the fundamental business process leading to economic growth and prosperity and the improvement of the competitive position of Europe’s trade, commerce and industry. We deliver our mission by defining standards for marketing education and training in Europe, with qualifications that are comparable and recognized across borders, supporting the science and practice of sales marketing and communication and providing a unique source of information, studies and best practice. Articles produced by the Academic Group of the European Marketing Confederation (EMC). Copyright © 2017. All rights reserved. Editor: Hannah McGivern

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Market Segmentation - still the bedrock of commercial successc.ymcdn.com/sites/mii.ie/resource/resmgr/reports/pdf/emc-october... · Market Segmentation ... Have clear differentiation,