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Insight Paper Insight paper Market segmentation a-pm.co.uk SG-IN-20-03 The Association of Product Management is a professional membership body that helps you manage your professional development. We produce and maintain a wide range of best- practice guides, tools and templates for our members to use. In this insight paper, we’re going to look at market segmentation: 1. Introduction to segmentation. 2. Objectives of segmentation. 3. Needs-based or message-based. 4. Types of segmentation in B2B. 5. And B2C. 6. An example of a matrix. 7. Success measures per segment. 8. Summary 1. Introduction to market segmentation Market segmentation is one of the key accountabilities of a product manager. The starting point for effective market segmentation is to understand the value of segmentation to product organisations. As product managers, we need to be able to make sense of our markets in order the build the right thing at the right time and the right price. Effective segmentation defines our markets, brings clarity, enables good quality insight and analysis and facilitates proactive, timely, data- driven decisions. Poor segmentation limits our understanding of our markets and leads to reactive and emotional decision-making. In summary, market segmentation helps us make better decisions. a-pm.co.uk 1 SG-IN-20-03 2. Objectives of segmentation 1. Selection 2. Clarity 3. Understanding 4. Design 5. Positioning 6. Marketing 7. Selling 8. Measuring Let’s have a closer look at each: 1. Selection: The first and most important factor is that we cannot be all things to all people. If we try to be, we will end up being nothing to nobody. Our product is not appropriate for everyone and we need to acknowledge that and decide who it is for. It’s tempting to try and be all thing to all people and to sell/market our product as widely as possible. In product marketing, this is called the “spray and pray” approach and it’s not very effective! 2. Clarity: Our entire market can often be quite complex, so by slicing and dicing it, we can simplify it. This means that sometimes we need to be creative in order to bring the clarity we need. The analogy of the London Underground map works well here: If you drew the London Underground exactly as it is, it would be really difficult to navigate. The map itself is not accurate, but the way it is drawn brings clarity to a complex web of underground tunnels. Market segmentation is the same: It brings clarity to a complex ecosystem of markets and helps us navigate them. 3. Understanding: Once we have segmented appropriately, we can start to research and analyse our segments. We define, refine and quantify the market problem in each segment. We gain a deep understanding of their world and the political, economic, social and technical influences in their lives. Only then can we really understand their problems and build a-pm.co.uk 2 SG-IN-20-03 solutions that overcome those problems. There are tools and templates on our website to help you do the analysis. 4. Design: Exceptional product design involves a deep understanding of our markets. In B2B we need to define, refine and quantify the problem we’re solving. In B2C we need to estimate and confirm what wants/needs/desires/aspirations we’re fulfilling and what that’s worth to our customers. The golden rule is that product defines WHAT to build. Engineering decides HOW to build it. 5. Positioning: We also need to know who else competes in that market and how they’re positioned. If you sell into many segments, different segments may have different competitors. What are we going to do or say to position our product against the competition? Where are better or different and why? What’s our USP and why should they buy from us? 6. Marketing: What to say, who to say it to, when to say it… Clarity of message, accuracy of target, timing of delivery… This takes patience and skill and a good product marketing stakeholder to work with you! The golden rule here is that product defines WHAT to say. Sales and marketing decide HOW to say it. 7. Selling: Different markets need to be approached in different ways with different styles. In a global market, use your local teams’ knowledge to learn about your markets. Consult with them, listen to their feedback, build strong internal relationships to help you connect with and understand your external markets. 8. Measuring: What is the total addressable market (TAM) in every segment? What’s your product’s penetration percentage (actual or target)? What revenue is that driving? At what margin? Obsessive measuring is needed for data-driven decisions based on robust market insight and analysis. a-pm.co.uk 3 SG-IN-20-03 2. Basis of segmentation Needs-based: Often different segments need different product variants. For example, think of the range of models available from any one car manufacturer, designed to meet a range of transport needs and budgets across a multi-brand business (for example the Volkswagen Group). Or think of financial services regulations and compliance versus pharmaceutical regulations and compliance. The product itself probably needs some tweaking to cover different segment needs. This is needs-based segmentation. Message-based: Sometimes the same product is appropriate for all segments, but they need to hear something different. For example, a smart phone may be released as a single model, but the marketing messages for a teenager are very different to the marketing messages for a professional. This is message-based segmentation. 3. Most common types of segmentation in B2B Geography: Even if different customers across the world use the same product, we still need to identify which geographies they’re in and define these. Channels to market are likely to be different. Support materials and interfaces may be in different languages. Regulations are likely to be different. Plus, a whole host of other things… a-pm.co.uk 4 SG-IN-20-03 Verticals: Medical. Pharma. FS. Tech. Retail. Government. Education. Manufacturing. How different do they get? They need segmenting and analysing independently from each other. Size: There are lots of ways to measure size – SME, MLE, Corporate, Enterprise – the important thing is that the label is defined by a constant measure (number of employees, users, transaction volumes, office locations…). Ultimately, how you engage with each differs. For example, a higher cost of sale for Corporates and Enterprise with F2F sales teams is OK but a low cost of sale with a focus on marketing and self-serve is key for SME in order to retain margins. 4. Most common types of segmentation in B2C Geography As with B2B, channels to market may be different. Support materials and interfaces may be in different languages. Regulations are likely to be different. Plus, a whole host of other things… Demographics Are you fulfilling a basic need at a basic price? Is price and value-for-money the primary decision factor? Or are you appealing to a more discerning customer with a luxury product that is reassuringly expensive? Or is your target market more mature and conservative in their buying decisions and is age limiting their choices? Offering a free bungee-jumping holiday experience to a group of pensioners may not be a great incentive! Psychographics Can you group your prospects by beliefs, attitudes, values, interests, lifestyle? For example, if you have an eco-product, psychographic traits may overrule traditional demographic factors. a-pm.co.uk 5 SG-IN-20-03 5. Example of a segmentation matrix If you slice and dice your market into geography, vertical and size, you may need several spread sheets to cover the three-dimensional element. The example here is high-level for simplicity and could be used for aggregated reporting, but behind the scenes you may need to break this down into multiple geographies to get the granularity you need. a-pm.co.uk 6 SG-IN-20-03 6. Setting targets and measuring success For each of your segments, there are four key commercial success measures or targets. Total TAM % penetration market Total addressable market (TAM) Sales £ revenue % margin forecast TAM It’s important that we differentiate between the total market and the total addressable market. The TAM is the total number of customers that could buy your product if there were no other options in the market and this usually a much lower number than you might think! Try and measure TAM in absolute numbers (eg customer numbers or transaction numbers) rather than revenue, as revenue estimates fluctuate. Penetration • For actual figures: What percentage of that TAM do you own? • For forecasting: What percentage are you targeting? Revenue: • Actuals: How much revenue is this segment generating? • Forecast: How much revenue is forecast based on the sales targets? Margin: • What is the profit margin in this segment? a-pm.co.uk 7 SG-IN-20-03 These four measures are invaluable in our decision-making. Let’s say our budget has been cut and we need to decide between two different product enhancements that are needed for two different segments. The first segment is at 80% penetration on a 30% margin. The revenue is excellent and overall profits are high. However, we are unlikely to win more than 80% of that segment and we don’t currently have any retention issues. The second segment is at 20% penetration but on a 50% margin. The growth opportunity in this segment is much higher and margins are healthier. On this occasion, the second segment should be prioritised.
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