Precision Targeting with Market Segmentation
Market segmentation is a phrase that gets tossed around a lot, but rarely explained.
On the surface, it seems fairly easy to understand. A market, at least the way that I’m using it, refers to a broad industry category. A market segment is a subsection of that market.
But identifying markets and market segments, and getting the people in your organization to think about and refer to them in the same way, takes a little bit of work.
And while it may seem like I’m splitting hairs here—because I’m sure you have a general idea of what these terms mean—it’s worth putting them under a microscope momentarily, because the rigor it takes to define these terms for everyone on your team can provide a substantial unlock in your organization.
As an agency positioned around a specific market, I’ve had to wrestle with these definitions quite a bit over the last dozen years or so.
Is construction a market? Is manufacturing? What about heavy construction? Or light construction? Or industrial construction? How about heavy haul? Or specialized transportation? What about crane and rigging? Is that a market or a market segment? And if it’s a market segment, is it a segment of construction, or heavy construction, or industrial construction, or none of them?
You can see how quickly the exercise can spiral.
But if we take a step back from defining the market and market segment from the company’s point of view, and instead focus on the customer, things quickly become much clearer.
And marketing—and sales— become much, much easier.
Finding Homogeneous Groups
In his book Disciplined Entrepreneurship: 24 Steps to a Successful Startup, MIT Sloan School of Management professor and serial entrepreneur Bill Aulet defines a market segment as a group of potential customers that share three fundamental characteristics:
- They buy the same product.
- They buy it in the same way (i.e., same use case, value proposition, channel).
- There is word of mouth of some sort between them; that is to say, that they significantly influence each other.
What matters about Aulet’s definition is that it’s hyper-specific to finding homogenous groups of buyers—a bottom-up approach, rather than a top-down approach, like I was doing with Thrive.
Think about it like this:
Valvoline sells motor oil (the product) to automobile drivers (the market). But not all drivers operate the same class of car. So if Valvoline defined their market as “drivers,” it would be overly broad and impossible to effectively target. The solution is to segment the market.
Let’s say that Valvoline decided they would segment the market by differentiating between all-electric vehicles and gas-powered vehicles. They could then say they sell motor oil to gas-powered-vehicle owners (the market segment).
However, if we’re using Aulet’s definition of market segment—same product, bought the same way, with word of mouth between customers—we see that even gas-powered-vehicle owners isn’t really correct.
First, both a Maserati and a Prius are gas-powered vehicles, but the motor oil you put in a Maserati is different than the motor oil you put in a Prius. And even if it was the same, those two car owners aren’t buying their motor oil the same way.
Second, a Prius owner might buy their motor oil as part of an oil change they get at Jiffy Lube, whereas the Maserati owner is going to purchase it through the dealer as part of their service package.
Finally, there’s also no word of mouth between the two groups. Maserati owners talk to other Maserati owners, because they share an affinity for a luxury brand that signals a certain status, and they congregate in the same places, like online Maserati forums, luxury car shows, and car clubs.
Prius owners, on the other hand, don’t often find themselves together. When they do, it’s probably not intentional.
The reason these differences matter is because finding homogenous groups of people to market to makes the job of your sales team, and your marketing team, a whole lot easier.
It also makes product- and service-line expansion easier too, since you now have a specific group of people to design your products and services for.
Focus, Focus, and Focus More
So if gas-powered vehicle owners isn’t the right market segment, then what’s a better one?
To answer this question, it’s helpful to develop a broad customer persona and then begin narrowing it down by adding constraints.
Gas-powered-luxury-vehicle owners begins to get even more specific, but Maserati Quattroporte owners aged 40-55 in major metropolitan areas of Florida and Southern California meets Aulet’s definition of market segment perfectly.
These two geographic areas work well because they have established luxury car cultures, a large volume of high-performance car buyers, and similar warm climates.
They would all purchase the same product (a high-performance synthetic blend oil formulated for Maserati engines), buy it in the same way (through Maserati dealerships or high-end auto service centers), and have significant influence on each other through luxury car clubs, social events, and online forums.
By targeting this specific segment, Valvoline could tailor its product development, packaging, distribution, and marketing efforts with laser-like precision.
They might create specially formulated oil that meets Maserati’s exacting specifications, design premium packaging that appeals to luxury car owners, and develop marketing campaigns that resonate with the values and lifestyles of Maserati enthusiasts.
A focused approach like this would allow Valvoline to establish a strong foothold in the luxury car market, gather valuable feedback, and build a reputation that can later be leveraged to expand into other high-end vehicle segments.
It’s a far cry from the broad market of “gas-powered vehicle drivers,” and illustrates the power of what detailed market segmentation can do.
A Strategic Forcing Function
The process of segmenting a market using Aulet’s definition forces you to think intentionally and thoughtfully about who your customer really is.
It allows you to understand the specific needs, behaviors, and influences of a tightly defined group, which means your approach to serving and solving problems for that group can become orders-of-magnitude better.
Even if you’ve been in business for years, revisiting your market segmentation through Aulet’s lens can reveal new opportunities or help you refine your existing strategies.
It’s one more tool you can use in your quest for continuous improvement, and a proven way to level up your sales and marketing efforts in a real and measurable way.
