ON TARGET MARKETS AND SEGMENTATION

Joe Morrison

TARGET MARKETS
In a recent Marketing Strategy and Plan course that I’ve taken at IE Business School,
eight of nine case studies included considerations related to target markets or
segmentation. It’s funny; as the course began I was “on board” with the use of target
market and segmentation strategies. As the course went on I found that old suspicions
reawakened: No doubt about it, sometimes selecting a target market is an artificial act
by the marketer.

Not always, to be sure. Identifying a target market was key in the case of Polyphonic
HMI: Mixing Music and Math.1 Here’s the breakdown: A small firm is trying to sell an
algorithmic technology predicting the likelihood of a song becoming a hit single. Our
class identified three possible target markets: Sell this product to record companies to
use as a filter to identify singles for airplay, to independent producers needing to tweak
songs before recording a master, or to bands wanting to boost chances of success
before sending out their demos.

For HMI, the target market selection approach made sense: One target market had to
be identified and pursued exclusively, since pricing strategies in one (so for example,
charging high fees to record companies) would completely undermine the possibility of
operating in another (charging lots of low fees to bands). Pursuing both markets would
have been a disaster for HMI, since executives would ask simple questions: Why
exactly are you charging us thousands and bands peanuts? In addition, HMI was a
small firm with limited marketing resources, so again we find the target market approach
appropriate, because it can help you focus in on a specific target and narrow down
marketing efforts appropriately.

But marketers don’t always have the luxury of working with senior managers to take a
top-down, look before you leap approach before a product is introduced. In addition,
marketers don’t get to work in situations frequently where they will choose one target
market and the rest are mutually exclusive, as in the HMI case. Usually marketers have
a plethora of potential markets and customers—and since the firm’s goal is often to sell
as much as possible, sticking too close to a defined target market is something the
marketer may find restrictive.

Take the case of Brita water filters. While deciding on the most relevant benefit to
promote in advertising—better tasting or healthier water— in theory, the firm then could
have considered which of those benefits was relevant to various population
demographics and their purchasing power. It’s a good thing it didn’t do this in a
restrictive sense and skew the product too close to an age group. That’s because in the
late 90s they sold that product to everyone, from kids away at college who somehow
managed to keep their jugs of water clean to aging baby boomers who ended up
noticing a taste difference.
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HBS 9-506-009
In another B School marketing case, Colgate Max Fresh, Global Brand Roll Out2 the
firm’s choice of a target market rang hollow. I was struck by how artificial the Colgate
Palmolive target market of “adults 18-34, with a female skew” seemed for an innovative
toothpaste that the firm wanted to roll out. Even if you can make the intuitive leap that
women may be more influential in buying toothpaste for their families, or maybe that
younger women might be more willing to buy a premium-priced toothpaste in order to
feel more attractive (neither of which point was in the case), the target market was a
stretch. Had Colgate Palmolive stuck too closely to its target market approach, it would
have left money on the table. After all, when it comes to toothpaste, who cares what the
target market is? It turns out that one buyer of Max Fresh is my marketing professor,
who isn’t a younger woman but a middle-aged man who happened to really enjoy the
toothpaste after he started teaching this case. It’s those delicious little flavor crystals, he
tells me. I’m sure Colgate Palmolive is just fine with the fact that he’s buying the stuff
and not in their target market.

So in a sense, all this discussion of target markets and segmentation in marketing

literature and journals can be a bit more theoretical and disconnected from actual
practice: As a marketer, one possible definition of your job is to increase product sales,
and to some marketers working frantically to produce results wherever they can, the
target market approach may feel like it actually limits their options as opposed to
traditional mass marketing. So maybe what’s needed when we discuss target marketing
is a four-step practice that I’m calling adjacency.

Adjacency just adds a step to the target marketing process, that of ensuring
transferability and growth. First select the target market (or markets) that best fit your
product or that you identify as attractive. Second, ensure that your marketing approach
appeals to this target market appropriately: Sell in a place that reaches the target
market, ensure that pricing is appropriate and that communications and PR campaigns
resonate with them. But then third, ensure that these marketing choices are
transferable—that they don’t alienate other possible segments. That’s because the last
step from this core of the target market strategy you push and expand outward, so you
aren’t just selling to the target market but adjacent ones. I’m sure that in the case of
Brita and Max Fresh this is what the firms did, even if unconsciously, despite what they
internally identified as target markets.

I’ve used this adjacency approach recently while working on a team’s business plan for
a fleet of healthy vending machines. As we researched the business, we dug up various
data supporting our concept: Women tend to make healthier food choices than men;
women tend to work in the service industry. So our strategy for the all-important point-
of-sale was to place machines in corporate headquarters with a lot of employees in
order to foster efficiency, but more importantly, use these machines as an advertising
channel. We would drape them in a trendy pea-soup green. While our colors and logo
were environmentally sensitive and something you might see on the front of a chick-lit
novel, we didn’t push ideas too far, and say, go pink: We kept our marketing
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transferable. That’s because we knew who was standing right next to the people in our
target market of women: Men working in the service industry, who were hungry but
didn’t want to buy anything extremely girly. Simple stuff. We started with women as a
target market and moved outward.

CUSTOMER SEGMENTATION
Despite the attempt to bring focus to the process by identifying target markets, often
firms end up selling products to those outside it. Although counter-examples exist,
usually this is a good thing. Imagine, then, the likely situation that some automotive
buyers of the BMW Z3 roadster were outside the car’s target market of (1) men and
women over 40 wanting “that roadster I’ve been dreaming of all my life;” and (2)
“Generation Xers interested in unique image statements.”3 Who knows, maybe the car
became something of a toy for rich early 20-year-old girls in Orange County. While
outside the Z3’s defined target market, having more wealthy people purchase the car
probably wouldn’t be a huge problem for BMW.

What might be a problem is ensuring that BMW knew about these customers existence.
Let’s imagine for a moment, that the BMW Z3 actually did take off amongst the wealthy
twentysomethings of the world. How could BMW know who was purchasing their
products, why they were doing so, and then ensure subsequent appropriate marketing
strategies to that segment? This kind of issue creates another need for segmentation
beyond its use in identifying a target market, and one that’s probably more common and
realistic in the life of the marketer: That of having marketing intelligence, ensuring that
marketers have some kind of idea as to who is buying your product, in what quantity,
and how to deal with their common needs and wants of such segments in order to
stimulate further sales.

This one’s difficult. As marketers for a consumer-oriented financial services firm, our
team sat around and talked about segmenting the customer base wistfully, as
something we really should get around to one day. Then we’d laugh and get back to
work. This isn’t because we were careless, but because customer segmentation is
remarkably difficult. First, there are too many ways to segment the base, with a variety
of data available—age, sex, income, product mix, profitability, loyalty, number of branch
visits, geography—at one’s disposal. Second, the act of segmentation itself takes up too
much time, especially first off when you design the process. Finally, there’s the most
important question related to segmentation: Now that we’ve done it, but is this stuff just
nice to know? Almost certainly not: Now that you have the data, action is required.
Ideally marketers would change tactics as new, unexpected patterns start to be
recognized across segments and ensure that the new segments can be incorporated
into the marketing mix. Of course, this can be difficult: Many promotional channels don’t
incorporate changes easily, much less offer the capability of tailoring messages to
individual segments.

Instead, the value in segmenting the customer base may have less to do with a
marketing action than an overall result. Consider segmentation based on profitability;
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HBS N9-597-002: Launching the BMW Z3 Roadster
the one factor that’s common to nearly all businesses operating regardless of their
industry or environment, it might be one of the most neglected. This is where I’d be
looking: Evaluate migration patterns among the customer base, identify how customers
move from a lower-profit segment to a higher-profit one—what product purchases get
them there, what makes their profitability increase—and then eventually try to amplify
things appropriately in marketing or sales channels in order to work on one particular
segment and move members from that segment into a higher-profit one. Profit is nearly
universal, but two or more variables could be besides profitability, depending on the
firm.

Then again, maybe not. I remember in my past time as a marketer, I reviewed for
purchase a product called P$YCLE NE4, a customer segmentation software which can
be purchased as an add-on for bank’s marketing analytics. It was a nightmare: The
product split a financial institution’s customer base into 13 different major segments and
53 smaller ones. The disconnect in marketing, then, isn’t just between theory and
practice, but sometimes tools and practice, because for the ordinary marketer working
with a limited budget and time working for a smaller financial institution, adopting this
product is an exercise in insanity. Keeping customer segmentation limited to profitability
instinctively seems too simple, and it’s tempting and common to throw in more goodies
in the analysis. It’s a slippery slope; do too much and relevance and actionability may
be affected. As marketer Daryl Travis puts it, “segmentation for segmentation’s sake
accomplishes very little. Far too often, however, that’s exactly what we see.” 5

4
http://www.claritas.com/collateral/segmentation/financial-market-segmentation_f1055v3.pdf
5
http://chiefmarketer.com/crm_loop/emotional_segmentation_0925/