Identifying key segments

Identifying key segments reveals which combinations of offering and customer group generate the sales, profit and future potential that matter most. It is the first discipline in knowing where the business truly competes.

When to use it

Use segmentation whenever strategy is being developed or refreshed. Without it, market research, competitor analysis and capability investment may be aimed at an economically marginal part of the business.

Origins

Businesses have always distinguished among types of buyers, but Wendell R. Smith gave market segmentation a central place in modern marketing theory in the mid-nineteen-fifties. He argued that heterogeneous demand could be divided into meaningful groups and served with more precise offers. Later practice expanded the idea from demographic groupings to needs, behaviour, profitability and value.

What it is

A business segment is a specific product or service sold to a specific customer group. The central questions are simple: which segments do we serve, which create profit today and which could create it in the future?

Sales alone can mislead. One segment may be large but costly to acquire, serve or retain; another may be smaller but produce stronger margins. Strategy should concentrate leadership attention on the segments that contribute—or could credibly contribute—the majority of business value. Spending disproportionate effort on a segment responsible for only 1 per cent of operating profit is difficult to justify unless its future potential or strategic role is material. In many businesses, a small set of segments contributes 80 per cent or more of the result.

How to use it