Introduction
We’ve been on a bit of a roll recently with our blog posts on segmentation. We’ve written about what is market segmentation and why do you need it, we’ve given you some practical hints and tips on how to conduct market segmentation research, and we’ve helped you to make the most of your segmentation output in three ways to maximise your investment in market segmentation research.
In this latest article, we explore how to prioritise market segments in the way that will be best suited to your business.
Why is market segmentation research important right now?
The main purpose of market segmentation is to enable an organisation to understand its target markets more closely – and to be able to target them more effectively.
However, both the pandemic and the cost-of-living crisis have caused significant changes in the way we think, feel and behave, meaning that many pre-pandemic segmentation models are now increasingly out-of-date.
Coupled with this is the fact that market segmentation research typically has a shelf-life of about five years, and whilst many organisations have been aware of the need to refresh their models, they have opted not to do so during what has been a prolonged period of turbulence for customers.
As a result, we are currently receiving even more consumer and b2b segmentation enquiries than usual, from companies seeking to play ‘catch-up’ in terms of their target market understanding.
For some, this provides a real opportunity to challenge the way that they have prioritised and addressed individual segments, as they seek to increase both efficiency and profitability.
But what are the different ways in which segment prioritisation can be considered?
Seven ways to prioritise market segments
Size
This sounds obvious – the larger the segment, the more potential customers you can reach, and the more revenue you can generate – so you should choose the segment that has the greatest market size.
But there may be more to it than that. The biggest segment by size may have other drawbacks such as being overserved by competitors or being a key target for another of your products that you may end up cannibalising. There may be a sweet spot – a segment that is not the biggest but is still big enough to be profitable.
You can also run into problems if the segment is too big, meaning that it might be too broadly defined and not particularly homogeneous. This should have been resolved in the customer segmentation analysis by your market research partner – if a segment is too big it may benefit from being broken up into two smaller segments.
Growth potential
You also need to consider whether your segment is likely to grow or decline over time. It helps to look at trends and ask, “how is the market clustering?”.
For example, if you have conducted a psychographic segmentation around food preferences and choices, you need to be aware of the trend towards reducing meat consumption – a drop of 17% in the decade to 2021. This should help you decide how to prioritise your target market between the ‘Unapologetic Carnivores’ segment and the ‘Tentative Vegan Trialers’ – there may still be many more meat eaters than vegans, but interest in plant-based foods is growing fast.
Competition
If your market is crowded, you could gain competitive advantage by prioritising segments that are less well-served by competitors. Segmentation studies can reveal opportunities for ways to serve a new target consumer; instead of competing with numerous other brands, you could prioritise a more niche target market with less competition.
Profitability
What does the opportunity look like for each segment? Some might have high volumes, but low profits – while others might have small volumes but high profits. You need to consider cost of acquisition, profit margins, and lifetime value to get a full picture of profitability.
However, the segment that is most profitable in the short term may still not be a good bet if it detracts from overall strategy, brand purpose or long-term goals. To use the plant-based foods example again, if your business makes vegan foods, then pivoting to sell profitable steaks to Unapologetic Carnivores would not be a good choice.
Fit with strategy
On that last point, it may be easy to rule out some segments straight away as the needs and behaviours of the target consumer are completely unaligned with your overall business strategy. For example, you could spend a lot of time and effort trying to educate Unapologetic Carnivores about the value of plant-based food. But why bother when you know that your business is built around offering meat-free alternatives and there are other segments who are already ‘vegan curious’?
Fit with capabilities
Similarly, if you are set up to make beanburgers it may not be sensible to target a segment that is suspicious of any food that doesn’t contain meat. There may be an opportunity in that segment, but it isn’t for you.
Reach
One of the most important considerations when prioritising a segment is can you actually reach them? Segments need to be well defined and, usually, differentiated by some key demographics to enable you to buy the right media to reach your target consumer. Otherwise you could find that your segmentation is very interesting and stimulates ideas but isn’t actionable.
Which way works best?
The reality is not that you need to choose one of the above seven ways to prioritise but that the right answer involves looking at all seven and then making a judgment. One way to formalise this is to assign a score to each segment for each of the ways listed then tot up which comes out top. This isn’t fool proof – you will still need to apply judgement – but this is certainly something that your market research partner can help you with. If you want to find out more about how to apply segmentation and prioritise different segments.
Moving forward
For more information about market segmentation and how it could benefit your business, please contact Brandspeak at enquiries@brandspeak.co.uk