Tuesday, March 28, 2006

Segmentation's benefits

While a simplistic view of segmentation could be viewed as “selfish” as stated in Seth Godin's blog entry on segmentation, there’s much more to segmentation than simply efficient targeting schemes. As Seth states, “You do it by creating something worth talking about!” In order to do that, you need to understand what makes customers tick even if they can’t articulate it themselves. If you look at the benefits of market segmentation (paraphrased from a Segmentation presentation given by Mohan Sawhney – a noted Kellogg prof), many of these don’t strike me as selfish. Rather, they provide a framework to understand customers and then reach them while avoiding what Professor Sawhney calls “wastage”. Said another way, it’s avoiding pestering people with marketing that isn’t something they’d be interested in – that doesn’t sound selfish to me.

Customer focus: Customers have different needs and priorities, so you cannot please everybody with the same offering. Segmentation allows firms to be more costumer-focused by responding differently to different customers

Profitability: Not all customers are equally valuable. Segmentation allows firms to focus their resources and marketing programs to identify, attract, develop and retain the most valuable customers.

Competition: Segmentation helps firms to identify customers that are most “vulnerable” to competition and customers that are most “winnable” from competition.

Differentiation: Segmented offerings are more differentiated and therefore less commoditized; the basis for comparison shifts away from price to value.

Productivity: Segmentation reduces “wastage” in marketing communications spending by allowing the right messages to be sent through the right channels to the right customers at the right time.

For the early stage businesses I've worked with and observed, segmentation can be an effective tool to avoid wasting precious resources trying to serve a market that doesn't value their offering.

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