Strategic Segmentation

Most people are familiar with the concept of market segmentation, dividing the market for a company or product into various buckets that can then be further analyzed and understood. In consumer products the market is often segmented based on demographic factors such as age, income, education level, gender, ethnicity, or other distinguishing factors. In business-to-business markets, segmentation is often done based on factors like size of customer, end market, distribution channels, region, or other identifying traits. Market segmentation in this fashion is all well and good. It allows the supplier to examine various portions or segments of the market to identify trends or performance issues such as variability in market growth, market penetration, market share, profitability, etc. The information learned from these sorts of market segmentation studies can provide evidence for adjusting sales and marketing efforts, distribution programs, product offerings, and many other things.

There is another type of segmentation, often referred to as strategic segmentation, which is more valuable than simply slicing up the market to understand trends in various portions of the market. Strategic segmentation is the process of identifying the particular group of customers whose buying needs most closely match the value offering of the supplier. The purpose for strategic segmentation is to identify the characteristics of the segment to then make it easier for the organization to focus its efforts on the segment that is more likely to appropriately value the organization and its offering.

Identifying the means to segment strategically is not always easy. Buyers generally don’t post their buying needs on their website or on a sign on their front lawn. Sometimes this segment can be identified by their existing suppliers when there are competitors that provide a very similar value offering. Otherwise, the process of strategic segmentation requires developing an understanding of the characteristics of customers that correlate with that group that values the organization’s product offering.

For large and diverse markets, strategic segmentation is critically important. Understanding performance measures such as market share, brand recognition, or customer satisfaction in the strategic segment is generally more important than overall measures for a large market. Understanding the growth or changing needs of the strategic segment is more important than the growth or changing needs of an overall market.

The bottom line regarding segmentation is to not settle for some easy way to do market segmentation but rather do the work required to understand the strategic segmentation of the market. Focusing the organization’s efforts on the right segment brings a greater return.

Does your organization understand what defines your target or strategic segment?

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