Despite all the research that goes into targeting new products, most still fail. Malcolm McDonald looks at why market segmentation is still so often done wrongly, and offers some pointers on how to get it right.
Why so much segmentation is rubbish
A whole issue of The Journal of Marketing Management was recently devoted to a review of market segmentation. The conclusion was very clear: after 70 years of marketing, it is still done badly. Indeed, in a recent Harvard Business Review article it was claimed that in the US, 85% of 30,000 new product launches failed because of poor market segmentation.
“Boy George and the Pope are both ‘A’s in terms of socioeconomic status, but they don’t behave the same”
The reasons are not difficult to explain. Anyone who says that they segment according to socioeconomics, geodemographics, psychographics or the like is guilty of the worst kind of a-priori production orientation. Boy George and the Pope are both ‘A’s in terms of socioeconomic status, but they don’t behave the same. Nor do all women between the ages of 18 and 24, nor does everyone in my street, and so on. These segments are only useful at a very high level of aggregation – they do not explain behaviour.
There is also a widely held belief that new media and changing patterns of behaviour have made traditional market segmentation irrelevant. They haven’t, nor will they in future. These are the excuses of lazy and incompetent marketing departments who fail to use the tried and tested process of needs-based market segmentation to understand these new consumer behaviour patterns.
Once we’ve defined the market in terms of needs rather than products, we need to describe the flow of goods and services from suppliers through to end use. Wherever important decision-making junctions appear, it is here that segmentation has to take place. Then we must understand what people buy, where they buy it, how they buy it and of course why they behave in this particular way. This will usually reveal at least 20 to 30 micro-segments – too many of course – so a simple clustering will reduce this to seven or eight. All that remains is to describe who populates these segments, which is where factors like socioeconomics and demographics come into play.
We now have some proper needs-based segments, so our CRM system will work. We can even deal with customers in a personalised manner.
But looking to product attributes, service quality, size of purchase and so on as a basis for segmentation is just wrong. They explain why much market research in the world is a waste of time and why I have to spend so much of my life travelling around the world correcting mega-expensive consultant-based segmentation assignments that turn out to be as useful as a bird of prey with a squint, producing loads of non-actionable and confusing data.
As for the question of whether new channels, new media and resultant changing behaviours have made traditional segmentation irrelevant, the answer is a resounding no.
A letter to The Times gave a great example of what goes wrong when needs-based segmentation isn’t carried out. A reader in Surrey had received a leaflet telling him he could save over £200 on his car insurance. But the small print revealed that “all price-saving comparisons included in this leaflet are based on a 44-year-old female living in the Darlington area, with comprehensive cover but zero no-claims discount, driving 12,999 miles per year in a 2002 Rover 25 1.4”. “If she would like to get in touch with me,” the reader offered, “I will pass the leaflet on to her.”
This is a classic example of why most communications, especially direct mail, miss the mark completely. Any marketing manager who says that they had a 3% response to a direct mail campaign is saying that they have annoyed 97% of their customers.
I know that most of my learned and experienced colleagues, on both sides of the Atlantic, will share my own frustration that after so many years most companies and even many academics still have not understood that needs-based segmentation lies at the heart of successful strategies. Any market, b2b or b2c, consists of 100% of what is sold and bought. Our task is to get into that market and understand what these different patterns of actual behaviour are. This is the essence of successful market segmentation.
Malcolm McDonald (until recently Professor of Marketing and Deputy Director, Cranfield University School of Management) has written a chapter on market segmentation for The Marketing Century, published by Wiley on 10 March to mark the centenary of the Chartered Institute of Marketing. The book is available from the CIM at a special price of £12.50.