ON TARGET MARKETS AND SEGMENTATION Joe Morrison

TARGET MARKETS In a recent Marketing Strategy and Plan course that I’ve taken at IE Business School, eight of nine case studies included considerations related to target markets or segmentation. It’s funny; as the course began I was “on board” with the use of target market and segmentation strategies. As the course went on I found that old suspicions reawakened: No doubt about it, sometimes selecting a target market is an artificial act by the marketer. Not always, to be sure. Identifying a target market was key in the case of Polyphonic HMI: Mixing Music and Math.1 Here’s the breakdown: A small firm is trying to sell an algorithmic technology predicting the likelihood of a song becoming a hit single. Our class identified three possible target markets: Sell this product to record companies to use as a filter to identify singles for airplay, to independent producers needing to tweak songs before recording a master, or to bands wanting to boost chances of success before sending out their demos. For HMI, the target market selection approach made sense: One target market had to be identified and pursued exclusively, since pricing strategies in one (so for example, charging high fees to record companies) would completely undermine the possibility of operating in another (charging lots of low fees to bands). Pursuing both markets would have been a disaster for HMI, since executives would ask simple questions: Why exactly are you charging us thousands and bands peanuts? In addition, HMI was a small firm with limited marketing resources, so again we find the target market approach appropriate, because it can help you focus in on a specific target and narrow down marketing efforts appropriately. But marketers don’t always have the luxury of working with senior managers to take a top-down, look before you leap approach before a product is introduced. In addition, marketers don’t get to work in situations frequently where they will choose one target market and the rest are mutually exclusive, as in the HMI case. Usually marketers have a plethora of potential markets and customers—and since the firm’s goal is often to sell as much as possible, sticking too close to a defined target market is something the marketer may find restrictive. Take the case of Brita water filters. While deciding on the most relevant benefit to promote in advertising—better tasting or healthier water— in theory, the firm then could have considered which of those benefits was relevant to various population demographics and their purchasing power. It’s a good thing it didn’t do this in a restrictive sense and skew the product too close to an age group. That’s because in the late 90s they sold that product to everyone, from kids away at college who somehow managed to keep their jugs of water clean to aging baby boomers who ended up noticing a taste difference.

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In another B School marketing case, Colgate Max Fresh, Global Brand Roll Out2 the firm’s choice of a target market rang hollow. I was struck by how artificial the Colgate Palmolive target market of “adults 18-34, with a female skew” seemed for an innovative toothpaste that the firm wanted to roll out. Even if you can make the intuitive leap that women may be more influential in buying toothpaste for their families, or maybe that younger women might be more willing to buy a premium-priced toothpaste in order to feel more attractive (neither of which point was in the case), the target market was a stretch. Had Colgate Palmolive stuck too closely to its target market approach, it would have left money on the table. After all, when it comes to toothpaste, who cares what the target market is? It turns out that one buyer of Max Fresh is my marketing professor, who isn’t a younger woman but a middle-aged man who happened to really enjoy the toothpaste after he started teaching this case. It’s those delicious little flavor crystals, he tells me. I’m sure Colgate Palmolive is just fine with the fact that he’s buying the stuff and not in their target market. So in a sense, all this discussion of target markets and segmentation in marketing literature and journals can be a bit more theoretical and disconnected from actual practice: As a marketer, one possible definition of your job is to increase product sales, and to some marketers working frantically to produce results wherever they can, the target market approach may feel like it actually limits their options as opposed to traditional mass marketing. So maybe what’s needed when we discuss target marketing is a four-step practice that I’m calling adjacency. Adjacency just adds a step to the target marketing process, that of ensuring transferability and growth. First select the target market (or markets) that best fit your product or that you identify as attractive. Second, ensure that your marketing approach appeals to this target market appropriately: Sell in a place that reaches the target market, ensure that pricing is appropriate and that communications and PR campaigns resonate with them. But then third, ensure that these marketing choices are transferable—that they don’t alienate other possible segments. That’s because the last step from this core of the target market strategy you push and expand outward, so you aren’t just selling to the target market but adjacent ones. I’m sure that in the case of Brita and Max Fresh this is what the firms did, even if unconsciously, despite what they internally identified as target markets. I’ve used this adjacency approach recently while working on a team’s business plan for a fleet of healthy vending machines. As we researched the business, we dug up various data supporting our concept: Women tend to make healthier food choices than men; women tend to work in the service industry. So our strategy for the all-important point-of-sale was to place machines in corporate headquarters with a lot of employees in order to foster efficiency, but more importantly, use these machines as an advertising channel. We would drape them in a trendy pea-soup green. While our colors and logo were environmentally sensitive and something you might see on the front of a chick-lit novel, we didn’t push ideas too far, and say, go pink: We kept our marketing

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transferable. That’s because we knew who was standing right next to the people in our target market of women: Men working in the service industry, who were hungry but didn’t want to buy anything extremely girly. Simple stuff. We started with women as a target market and moved outward. CUSTOMER SEGMENTATION Despite the attempt to bring focus to the process by identifying target markets, often firms end up selling products to those outside it. Although counter-examples exist, usually this is a good thing. Imagine, then, the likely situation that some automotive buyers of the BMW Z3 roadster were outside the car’s target market of (1) men and women over 40 wanting “that roadster I’ve been dreaming of all my life;” and (2) “Generation Xers interested in unique image statements.”3 Who knows, maybe the car became something of a toy for rich early 20-year-old girls in Orange County. While outside the Z3’s defined target market, having more wealthy people purchase the car probably wouldn’t be a huge problem for BMW. What might be a problem is ensuring that BMW knew about these customers existence. Let’s imagine for a moment, that the BMW Z3 actually did take off amongst the wealthy twentysomethings of the world. How could BMW know who was purchasing their products, why they were doing so, and then ensure subsequent appropriate marketing strategies to that segment? This kind of issue creates another need for segmentation beyond its use in identifying a target market, and one that’s probably more common and realistic in the life of the marketer: That of having marketing intelligence, ensuring that marketers have some kind of idea as to who is buying your product, in what quantity, and how to deal with their common needs and wants of such segments in order to stimulate further sales. This one’s difficult. As marketers for a consumer-oriented financial services firm, our team sat around and talked about segmenting the customer base wistfully, as something we really should get around to one day. Then we’d laugh and get back to work. This isn’t because we were careless, but because customer segmentation is remarkably difficult. First, there are too many ways to segment the base, with a variety of data available—age, sex, income, product mix, profitability, loyalty, number of branch visits, geography—at one’s disposal. Second, the act of segmentation itself takes up too much time, especially first off when you design the process. Finally, there’s the most important question related to segmentation: Now that we’ve done it, but is this stuff just nice to know? Almost certainly not: Now that you have the data, action is required. Ideally marketers would change tactics as new, unexpected patterns start to be recognized across segments and ensure that the new segments can be incorporated into the marketing mix. Of course, this can be difficult: Many promotional channels don’t incorporate changes easily, much less offer the capability of tailoring messages to individual segments. Instead, the value in segmenting the customer base may have less to do with a marketing action than an overall result. Consider segmentation based on profitability;

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the one factor that’s common to nearly all businesses operating regardless of their industry or environment, it might be one of the most neglected. This is where I’d be looking: Evaluate migration patterns among the customer base, identify how customers move from a lower-profit segment to a higher-profit one—what product purchases get them there, what makes their profitability increase—and then eventually try to amplify things appropriately in marketing or sales channels in order to work on one particular segment and move members from that segment into a higher-profit one. Profit is nearly universal, but two or more variables could be besides profitability, depending on the firm. Then again, maybe not. I remember in my past time as a marketer, I reviewed for purchase a product called P$YCLE NE4, a customer segmentation software which can be purchased as an add-on for bank’s marketing analytics. It was a nightmare: The product split a financial institution’s customer base into 13 different major segments and 53 smaller ones. The disconnect in marketing, then, isn’t just between theory and practice, but sometimes tools and practice, because for the ordinary marketer working with a limited budget and time working for a smaller financial institution, adopting this product is an exercise in insanity. Keeping customer segmentation limited to profitability instinctively seems too simple, and it’s tempting and common to throw in more goodies in the analysis. It’s a slippery slope; do too much and relevance and actionability may be affected. As marketer Daryl Travis puts it, “segmentation for segmentation’s sake accomplishes very little. Far too often, however, that’s exactly what we see.”5

4 http://www.claritas.com/collateral/segmentation/financial-market-segmentation_f1055v3.pdf

5 http://chiefmarketer.com/crm_loop/emotional_segmentation_0925/