Who is your target audience? The typical answer to this question is either a demographic group such as “millennials”, or an entire category such as “coffee drinkers”. Both sound ambitious but they are not useful.
For a small company, trying to compete in a huge market can be a fatal mistake. This is why most startups choose to lead in their niche before expanding into adjacent markets.
Targeting is ultimately a resource allocation problem. Which group of potential customers should you invest in attracting, given your business goals and time horizon?
On the spectrum between targeting a single person vs. an entire population, it is your job to find a sweet spot where the target is small enough so that you can win, and big enough that it makes sense to win.
Segmentation is a useful marketing tool that can help with that. The word “segmenting” means dividing something into parts. You can manage complexity and gain clarity by dividing a potential market it into smaller, manageable portions.
Just like a surgeon, the most important decision you need to make before you cut, is where to cut. Take “coffee drinkers” for example. How do you divide the that market? You could do it by:
- Demographics: lives in Singapore, in their mid-thirties, married with no kids
- Attitudes: likes lattes, prefers single-origin, believes third-wave coffee is better for the environment
- Behaviours: drinks 2 cups per day, spends $50 per month, occasionally buys beans for grinding at home
Let’s say you picked “age” and “marital status”. Do single adults consume coffee any differently than married couples? Does age play a role in coffee consumption? Can you imagine developing a strategy for young singles?
The best segments are those that accurately describe customer behaviour, and those that you can actually reach and influence. Great segments are homogenous: all members in the segment behave in predictably similar ways. They also don’t have overlaps with other segments.
This is why “millenials” is terrible as a segment. Having been born in a certain time period does not tell us anything about how they behave (well, maybe except affinity for avocado on toast).
A great example of segmentation is Steve Job’s infamous four quadrant grid. He clearly divides the market using why people use computers and the form factor they prefer.
When you are segmenting your market, ask yourself these questions:
- Do these segments help to describe how customers behave?
- Are these segments homogenous within themselves?
- Are there overlap between segments?
- Do these segments sound natural?
- Can you recognise customers or competitors in each segment?
Consider your market research. Use the insights from qualitative research to figure out your segmentation criteria, and your quantitative research to size and value each segment.
Segmentation is part of customer research. It is a useful tool to understand the landscape and customers in a market. It is an exercise to elevate your view and see the big picture, before you can make the decision on where to zoom in and focus.