Show Me the Money: Market Segmentation

“I’d like to explain how a winning marketing strategy will make you richer." 

Having published nearly 50 books, sold more than half a million copies, and worked with directors in hundreds of companies, Professor Malcolm McDonald is passionate about sharing his knowledge, insight and experience with business leaders.

In the second of our series on market planning and strategy, Malcolm addresses the fundamentals.

The Role of Directors

I work mainly at director level in companies and we can always tell when the company is either in serious financial trouble or will eventually get into serious financial trouble. It really is very straight forward.

I ask them two simple questions:

1. What are your key target markets in order of priority?

2. In each, what are your organisation’s sources of differential advantage?

The first question is nearly always answered by the directors wittering on about their PRODUCTS!!!

Remember IBM in the 1980s, who nearly went bankrupt because they defined their market as ‘mainframes’? Then there was Kodak, who defined their market as films and cameras. Nokia defined their market as phones. Even today, there are publishers who define their market as books, when the reality is that, for example, business book publishers are in the business knowledge promulgation market. Books are only one way of satisfying the need for knowledge about business.

You will understand by now that the second part of the question asked of boards of directors cannot possibly be answered.

The graveyard of corporate deaths over the past twenty years indicates that this is not some weird, academic, theoretical notion. Today, all products and services are excellent – in the sense that they all work perfectly well, so having a good product will no longer deliver you the riches that you desire. No, today the only way to get rich is to differentiate yourself in a way that appeals to your customers. A big part of this appeal to customers is MONEY. If a customer knows that dealing with you will make them richer, they will deal with you. It really is that simple. The problem is, they need to know how they will be richer and it is your job to demonstrate this to them.

Any company can only survive today by targeting its key target markets, understanding what they need and by meeting these needs better than some other organisation offering something similar.

The Benefits of Financially-Quantified Value Propositions

Having spent some time defining your market in terms of needs, not products, carry out a detailed SWOT on each segment. Then categorise the segments according to the potential of each for you to grow your profits. From here, Malcolm recommends focusing on one or two of the most promising segments and developing ‘financially quantified value propositions’ that will create advantage.

Financially quantified value propositions will help you increase profitable sales for a number of reasons. Only 5% of companies have financially quantified Value Propositions (McKinsey) and developing them will differentiate your company.

Therefore, even if you DON'T have any differentiation, the very act of financially quantifying the benefits, even if they are standard benefits, will give you an advantage over your competitors.

Experience shows you will close more deals (typically an additional 2% to 10%); it will help you reduce discounting by 20% to 30%; it will help you make marketing campaigns more productive; and you’ll enjoy improved customer relationships and referrals from satisfied customers.

Today, 90% of the buying cycle is carried out by buyers before speaking to suppliers such is the power of the internet. We can easily research an entire marketplace in minutes. Buyers don’t need someone to connect them with products anymore: they need honest advice about how to grow their business profitably and they can easily tell when someone is just trying to sell them products. In short, they want to be engaged, surprised and, above all, know that they will be more profitable by dealing with you.

There is, however, a world of difference between merely helping your customer avoid disadvantage and creating advantage for your customer.

Creating Advantage

Most products and services fulfill functions that customers need, in the sense that they can’t do without them. For example, a restaurant needs tables and chairs, an airline needs planes, an office needs computing capability and so on. The problem, however, is that such organisations always have a choice of suppliers and since most products today work perfectly well, they will in the main buy on price, unless a supplier can prove that they will create advantage for them.

I have already explained that it is possible to succeed by financially quantifying standard benefits when other competitors don’t, but this is unlikely to lead to sustainable success. The process of creating advantage for the customer, however, will lead to sustainable success.

To achieve this requires quite a lot of work, but the end result will make it extremely worthwhile. For example, study the following carefully:

  • The pressures on the customer from their competitors and from industry developments
  • The customer’s annual report and accounts
  • The customer’s processes, from inbound logistics right through to after sales service

By doing this, you will always discover ways in which you can help your customer to add value, such as increasing their sales, or by reducing or avoiding costs. Price is only ever an issue in the absence of quantified value. It is the supplier’s job to quantify the value, not the customer’s.

6 Ways to Develop a Winning Strategy:

  • Define your market in terms of needs not products. Know how it works from end to end.
  • At decision points, do proper needs-based segmentation.
  • Carry out a detailed SWOT analysis on each segment.
  • Categorise the resulting segments according to the potential of each of you to grow your profits over the next 3-5 years, and according to your relative strength in each compared with your competitors.
  • Focus on one or two of the best segments from point 4 above. Develop financially quantified value propositions that create advantage for them.
  • Remember the 80/20 rule. Set only a few priorities, involve your team, and don’t try to be all things to all people.

 

How can you find out more?

You could read Malcolm McDonald on Marketing Planning: understanding marketing plans and strategy (Kogan Page, 2016). It’s Malcolm’s latest book, written especially for SMEs and it covers in a very practical way all the material from Malcolm’s LEAD™ masterclass.

This blog was first written as an article in Issue 2 of the award-winning QuoLux™ business publication, Leading: a Meeting of Inquiring Minds, by Professor Malcolm McDonald, a world authority on market plans and segmentation.

 

We were delighted to welcome back Malcolm last week as one of our guest Masterclass speakers on our LEAD™ program, delivering his presentation on How to Boost Sales & Profits to Create Winning Strategies. If you'd like to hear from Malcolm and join our next LEAD program that starts in November 2022, please get in touch here.

 

 

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