Tag Archives: market segmentation

Grand Business Decision– To Niche Or Not To Niche? A Niche is All About Being Narrow, Not Small…

Business is about targeting a market… it’s about getting the right product to right customers at right time with right message… and for many businesses it’s about identifying a market niche… However, not many people are quite sure what a ‘niche’ is…

According to Val Nelson; it’s that sweet spot where a product or service best satisfies the specific expectations of a specific grouping of customers… It can be a subset of a larger market, or segment of a market, or the market itself… The market niche defines the product or service features aimed at satisfying a specific customer needs, generally consisting of; price, quality, features, demographic elements, such as; education, age, gender…

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The narrower the market focus, the crisper the message and the easier it is to target a market… The broader the target, the mushier the value proposition… and the value of a market becomes more abstract… According to Anna Mar; the balance between market size, acquisition cost and viability are rules of the game. The niche market approach focus on core issues without interference or ambiguity… It’s a narrow market focus (not necessarily a small market) and that provides a minimal viable product or service with barest and most essential touch point… User value, customer wonderment, sometimes even just pure fun is the connection to capture… Find that one customer and you’ve got a great start and a direction to find the next one…

In the article Think Large, Focus Small: Myth of the Niche by Arnold Waldstein writes: Remember when niche used to mean a market too small to matter? Not any longer: The flatter the connected world gets the more relevant and attractive narrow and focus is over broad and general… A niche market approach is not only a valid business strategy, but a potential antidote for a business’– attention deficit disorder (ADD)…

According to Om Malik; 50% of Internet traffic sources are ‘niche’ keyword searches… The more specific the content, the more valid and useful the search results– it’s a basic SEO and SEM truth that plays well… And for a business model, the more contextual and relevant to a market grouping the greater the pay-back…

A sharp focus both deepens and broadens the market, i.e.;  a ‘finer net’ captures more of the higher quality users, rather than a larger sieve that is forever churning looking for meaningful connections…

According to Seth Godin; a business becomes successful one customers at a time… and the more specific that customer connection, the more clarity there is in making that interaction successful… You get farther faster by focusing narrowly… It may seem obvious but whether you have an early product or service for which you haven’t discovered a right customer connection, or at a later stage ‘noodling’ over how to expand faster… a singular passion-point, focus on a single-need, for a customer connection; just works better…

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In the article Niche Business Is All About Narrow, Not Small by Marsha Lindsay writes: The ‘classic’ definition of a niche is– the targeting of a narrowly defined customer group that is seeking a distinctive mix of benefits… usually a small, low-volume, transnational market… and in the opinion of some experts, it’s unsustainable, unscalable… But in contrast, in ‘digital age’, the meaning is very different: According to The Economistthe very definition of a flourishing economy is one rich with niches… and a niche’s size no longer has limitations of magnitude as in the past… In fact, today niches come in many sizes– some are small, but many can be very large…

So rather than equating niche with ‘small’, think ‘narrow’… As in narrowly targeting a group whose self-interest/self-concept is so clear that business can offer something ultra-relevant and vastly different from alternatives… Hence relevance and differentiation can significantly increase growth… which makes-up for narrowness of the target… A focused offering resonates with a target, for which there are few alternatives– it creates predictable revenues, lifetime value, word-of-mouth advocacy… Hence, the old niche stereotype, as just a marginal business opportunity, is an important business model for both large and small enterprises…

In the article To Niche Or Not To Niche by Daniel Priestley writes: It’s a common business fear– getting pigeon-holed and missing out on other opportunities… There are two reasons against being pigeon-holed into a niche: 1.) fear of not attracting enough customers within that niche.. 2.) fear of having limited options outside that niche… However in the real world, focus on niche markets is the pathway to faster growth, greater profitable… Conversely businesses that present themselves as ‘jack-of-all trades’ end-up competing only on price… Hence according to some experts; the lesson is simple– niche then pivot, niche then pivot, niche then pivot…

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In the article Niche Strategies To Compete With Goliaths by Andreas von der Heyd writes: David vs. Goliath legend is alive! At the same time, however, the Goliaths of today´s fierce and highly dynamic business world (think Google, Wal-Mart, Apple, Coca-Cola, Procter & Gamble…) have become much more innovative, agile, and aware of the need to enter attractive niches… While a mass market is about selling to everyone… niche market is about focus on a specific segment of customers, e.g.; gender, age, ethnic groups, occupation, hobbies…  and benefits are; more profit margins, greater customer loyalty…

The Internet is all about niche markets, the Internet is the enabler of specialty, focus markets… and targeted business models… However, a successful focused business is highly vulnerable and it must be agile, flexible… and continuously innovative… The key to focus strategy is the ‘brand’… Building a ‘brand’ through the successful experience of every single customer, one customer at a time… Also these focus businesses must take advantage of gaps in their market, and fill the gaps, and expand the gaps, and create new gaps… while mostly stay true to their customers specific expectations…

Building strong networks and relationship beyond the niche boundaries is critical, while being consistent with customer expectations… it must be part of their DNA… These networks and relationships are anchors of in this business model… it means regular exchanges and collaborations  with other players in the grouping, e.g.; other businesses, universities, research centers… it means share knowledge, information, expertise, skills… learning from each other, and assisting each other…

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Managing in a niche business is a true entrepreneurial challenge… Nowhere else do leaders need to encompass two main and opposed characteristics: Thinking Big and Thinking  Different… Thinking Big means– create, communicate bold direction that inspires results… Think Different means– look around every corners for new, different ways to provide better value and service to customers…

Marketing Authorities and Economists Think Differently: How They View– Market Structure Vs. Market Segmentation…

Market structure: Many companies look to market structure and market segmentation to better understand the composition of markets and to identify and profile groups of people (i.e., potential customers) to grow their business… but is  ‘market structure’ the same as ‘market segmentation’ or do they differ?

Market structure is often defined as interconnected characteristics of a market, such as; relative strength of buyers and sellers, degree of collusion, types of competition, differentiation, barriers of entry… Whereas, market segmentation is defined as process of subdividing, targeting a mostly homogenous market into clearly identifiable segments having similar need, want, characteristic, demand… In segmentation the objective is to design a market mix that precisely matches the expectations of the customers…

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According to Jeanne Grunert; economists and marketing people each define the terms a bit differently: Economists look at the overall market structure with the goal of defining and predicting consumer behavior… Whereas, marketing professionals seek to define the market structure to create competitive strategies as part of their overall marketing plan…

Economists examine market structure to help with decision-making and they seek to analyze broad trends in order to better understand consumer motivation… While marketers also look at trends, but they defer in that economists tend to focus more on the big picture… The economist want to know more about how this information affects large segments of various populations. Whereas, marketing is keen to understand the information, but apply it to their company’s specific marketing strategy…

Economist define market structure according to how an industry– that’s serving a market– is organized, and these structures typically include:

  • Monopolistic competition: Type of imperfect competition such that companies sell products, services… that are not identical with each other, but competitive… they are differentiated from each other by branding, pricing, quality… hence, they are not perfect substitutes…
  • Oligopoly: Market is controlled by small number of companies that together have the majority of market share… Duopoly: Special case of oligopoly with only two controlling the market.
  • Monopsony: Only one buyer in a market…
  • Oligopsony: Many sellers but meet only a few buyers…
  • Monopoly: Only one seller of a product, service…  Natural monopoly: Serves the entire market demand, typically at lower cost than any combination of two or smaller, and more specialized companies…
  • Perfect competition: No barriers to entry, an unlimited number of sellers and buyers, and a perfectly elastic demand curve…

Marketing, in contrast, defines market structure a little differently, when they know that an industry is organized as describe as one of the above restructures, i.e.,  oligopoly, perfect competitive… typically they will dig deeper into industry, searching to better understand other factors, such as; nature of competition, vulnerability, customer behavior, price sensitivity… Understanding the market structure and landscape helps marketers develop relevant and effective marketing strategies… Hence, defining a structure from marketing perspective tends to seek answers to questions, such as:

  • What are the key motivational drivers that determine how, why, what… consumers buy?
  • How do product, service… packaging, features, brand, pricing… and other factors play into the consumer decision to buy?
  • What and where are the opportunities for growth in an industry through major innovation?
  • What are the key market differentiators and competitive factors?
  • Where are the key market opportunities, threats, risks?

Defining market structure isn’t always easy. Definitions remain fluid and subject to change even among various functions-groups within a company…  and it’s common that different companies view the same market structure differently… As may be observed, both marketing and economists confuse the terms; segments and structures, so much so that the line between the two is nearly obliterated. You can have a conversation with some of these people and, at the end, not only will you not know what they are talking about, but you feel completely confused about both subjects…

In the article What Can Economics Learn From Marketing Market Structure Analysis?  by Charles Fischer writes: The concept of market structure is central to both economics and marketing. The problem for economists and marketing professionals is that a meaningful operational definition of market structure is elusive… Each discipline takes a different methodological approach toward the definition… and each has its own strengths, limitations.

Economics is concerned with broad socio-economic,  micro-economic issues, e.g., competitive fairness, predatory pricing… Whereas, marketing is more concerned about the managerial aspects of market structure… Although, each discipline touches on the primary domain of the other, the primary distinction between the two is just a matter of relative emphasis… 

In economics, markets are classified according to the structure of the industry serving the market… Industry structure is categorized on the basis of market structure variables which are believed to determine the extent and characteristics of competition… In the traditional framework, these structural variables are distilled into the following taxonomy of market structures:

  • Perfect Competition: Many sellers of a standardized product, service…
  • Monopolistic Competition: Many sellers of a differentiated product, service…
  • Oligopoly: Few sellers of a standardized or differentiated product, service…
  • Monopoly: Single seller of a product, service… for which there is no close substitute…

These four market structures each represent an abstract (generic) characterization of a type of real market… Market structure is very important because it affects business outcome through its impact on the– motivations, opportunities and decisions of economic players participating in the market… A key element of the economic market structure is product substitutability, which is strategically linked to market definition… however, this also complicated by the fact that consumers have their own perceptions of product substitutability…

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In the article Market Structure Analysis by Steven Struhl writes: Some of the confusion surrounding market structures arises from the fact that two contrasting traditions of– marketing and economics– have embraced it… Comparing and contrasting the marketing vs. economic methods are briefly summarized as:

  • Marketing approach: Basic elements– analyze the relationships among– target markets and segmentation, potential customers, competing brands, risks, opportunities, business strengths and weaknesses, pricing strategy…
  • Economic approach: Basic elements– analyze the trends of buyers and sellers, extent to which products, services… are substitutable, analysis of comparative costs, market barriers to entry, extent of mutual interdependence– extent to which buyers and sellers depend on each other…

One important point that the economists have in common with marketers is that they include demand elasticity and cross-demand elasticity (or words meaning the same thing) in market structures. Also, how economists get to their answers is usually very different from marketing practices, for example; economists can do much of their work without ever talking to an actual person, and some even act as if asking people what they do or think is, in fact, superfluous to understanding what is happening in a marketplace.

This may seem slightly ridiculous, but we should remember that these people win ‘Nobel’ prizes, while humble marketers and market researchers do not, but perhaps they are onto something… The basic consideration in market analyses is reaching a definition of exactly what constitutes the market… Traditionally this is done by focusing on these factors:

  • Degree to which products, services… can substitute for each other, based on consumer perceptions…
  • Extent to which products, services… are intended to serve similar purposes…
  • Impact of products, services… on each other and as measured by elasticity of demand and its effects on each other, as well as cross-elasticity

In typical marketing approaches, it always start with the consumers… but, to reach an overall market structure, the needs of each consumer must be aggregated… This is an aggregated list of each consumer’s– behaviors, perceptions… The  two main aggregation methods are:

  • Behavioral aggregation; (linked to studying market impact)…
  • Subjective aggregation; (linked to the extent to which products, services… can substitute for each other, ratings, opinions, and perceptions)…

Aggregation is problematic: One question often asked is– what happens when aggregation consists of many idiosyncratic consumer opinions; in other words, how do you meaningfully aggregate all the individual consumer choices or opinions when these often reflect great diversity?  Since most marketing authorities do not consider market structures to be the same as market segments, hence finding segments almost always is taken to mean looking for groups that fit these following criteria:

  • Defined product, service… related needs different from those of all other groups…
  • Characterized or identified specific customer– needs, wants…
  • Reachable selectively (or targeted) through communications and marketing efforts…

Different segments of a market, may structure a market differently, since their needs are different… A clear understanding of a market’s structure and segmentation is paramount to understanding it’s– needs, buying processes, preferences, value perceptions, revenue potential… but then, as important, translating these insights into an actionable strategy is precursor to developing a successful business…

Firmographics– Engaging B2B Target Market Segmentation: Matchmaking, Customer Profiling, Finding Market Subtleties…

Firmographics are descriptive attributes of organizations that can be used to aggregate individual organizations into meaningful market segments, for example, industries, non-profits, government entities… Think of demographics as helping organizations group ‘consumers’ by shared characteristics, then picture firmographics as helping businesses characterize ‘customers’ by shared business attributes.

Essentially, firmographics is to business-to-business (B2B) as demographics is to business-to-consumer (B2C). According to Tim Smith; companies use firmographics to define their target market, which enables them to focus resources on organizations that are more likely to be receptive to their individual messages…

In U.S. alone, there are roughly 28 million businesses as of the end of 2012, according to the U.S. Census Bureau. Of these firms, roughly 75% have no employees and have little business activity, leaving only 6 million businesses in the U.S. with meaningful business activity… Firmographics can describe these organizations along many different dimensions and the most commonly used descriptive dimensions include; e.g., industry, location, size, status or structure, performance…

However, ‘Does knowing a business buyer’s revenue size tell you exactly how they manage their budgets or what types of products/services they purchase?’ No. Hence, firmographics alone is hardly adequate when trying to get a deep understanding of markets… If firmographics or demographics are all that you are using in targeting, then you must consider adding other dimensions of information, e.g., psychographics, sociographics, ethnographics… to the mix.

According to Daniel Korten; firmographics is not a one-size-fits-all approach and a go-to-market strategy based on firmographics alone will  have limited impact, e.g.; markets change, technologies change, competitors change, new distribution channels are uncovered…

For effective segmentation consider ‘best practices’: Create profiles and personas–know who’s more likely to buy by understanding current customers. Gather firmographics data and also include; demographics, behavioral… Target specific segments–tighter the fit, the better… Measure frequently–adjust as needed and evolve… Don’t get complicatedkeep it as simple as possible…

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In the article Understanding Core Customer and Building Personas by Christian Vanek writes: Most organizations define ‘most valued customers’ as any customer who has spent a large amount of money with them. If that’s how your organization works, it’s perfectly valid and that’s an easy list to pull, but here are some other factors you might want to consider before you, run off to your finance manager for a lifetime value export from your CRM and base your decisions off that alone. Here are several firmographics and behavioral factors that you might also consider in your analysis:

  • Average purchase size: How much do your customers spend in a single purchase?
  • Lifetime Value: How much money has your customer spent over their entire lifetime?
  • Acquisition Cost: How much was spent to acquire your customers?
  • Support/Retention Cost: What services do your customers use? How frequently do they need support and training? Customers that spend the most might also cost the most!
  • Customer Happiness: How happy are your customers with product, services… If you have a group of happy customers and a group of dramatically unhappy customers, what’s the difference between the two groups?
  • Value/Mission Alignment: What is the North Star for your business? Are you serving the customers you want to? If you are targeting a specific segment of market, but all core customers are in another segment instead, then you are out of alignment. That’s good to know!

Segmentation & Targeting: The ability to create and sustain a meaningful competitive advantage requires a deep knowledge of customer needs and disciplined business process to ensure that the ‘needs’ are effectively addressed. Market segmentation is a strategic process for achieving alignment between product offerings and customer ‘needs’.

Hence, the market segmentation essentials are: Optimize allocation of business resources by targeting high-value customers… Guide product development and customize service offerings to accommodate ‘needs’ of target segments… Increase promotional impact by positioning products, customizing messages to align with segment-specific orientations… But even so, successfully bridging the gap between segmentation principles and successful application is a major challenge for organizations…

Choosing the right approach requires both a clear understanding of organization objectives and intimate familiarity with the methodological options… There are literally hundreds of market-sensitive segmentation frameworks, including blended, tiered (or hierarchical), and multi-faceted segmentations, wide range of statistical techniques…

Segmentation frameworks are designed using several types of basic building blocks, often in combination, for example; demographics and firmographics or institutional characteristics, behavioral, needs and motivations, attitudes and ethos, usage or purchase occasion characteristics…

Market complexity or organizational objectives frequently require multi-dimensional segmentation schemes that draw on combination of variables to properly reflect or illuminate market structure… Hence, successful outcomes require matching a segmentation approach to a set of specific strategic market objectives and market environment…

A particular challenge posed in business market segmentation is the complex decision-making process that tends to drive selection of suppliers-products. Often, within organizations, many individuals are involved in decision-making process, each with different orientations, needs, motivations…

The challenge is to create market segmentation that properly reflects and differentiates between business customers, while simultaneously recognizing the heterogeneity of decision-making drivers that may exist within each organization. The ability to identify complex decision-making processes and mapping these interrelationships, within customer organizations, is a key concern…

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Like so many buzz words in business, ‘segmentation’ is one of those that are interpreted by folks to mean many different things. If the word ‘segmentation’ were blurted out in a room of 20 business people, chances are it would conger up 20 different images of all colors, shapes & sizes…

So, what is segmentation and how can you use it to propel your business? According to Doug Goldstein; customer segmentation is simply the grouping together of customers based on similarities they share with respect to any dimensions you deem relevant to the business. Dimensions could include; customer needs, channel preferences, interest in specific product features, customer profitability– the list goes on… The key is to determine ‘how to segment (or group) customers?’ in a way that will have the biggest impact on your business… Some experts say that ‘goal-directed segmentation’ is the only segmentation worth pursuing. It’s purely a means for achieving business ends…

The only way to answer the question of; ‘how to best segment customers?’ is to first define what your objective is for the segmentation. In other words, you must first define what you want the segmentation ‘to do for your business’… Common segmentation objectives might include; develop new products, create segmented ads and communications, develop differentiated customer servicing and retention strategies, target prospects with greatest profit potential, optimize sales-channel mix… Segmentation can be tricky and complex, and no doubt requires real expertise & experience. Putting in place a flawed segmentation strategy can be far more detrimental to a business than not having one at all…

Segmentation is by no means a cookie-cutter process and when designed the right way– segmentation strategies can provide tremendous returns relative to the default, ‘one-size-fits-all’ approach. No generic description of segmentation can be comprehensive, because of the infinite variety of permutations the concept invites. Just as each company is unique, so its segmentation plan will reflect that diversity– guided by your business imagination. However, there are certain guiding principles that provide a framework for segmentation process:

  • Identify best customers: Apply principles of profiling– firmographics, demographics, psychographics…
  • Identify customer needs and concerns: Identify the– what, why, when, how much…
  • Compare customer needs to strengths: One customer’s perception of value you add may be another’s disincentive to buy; and it’s important to know which is which and for whom.
  • Develop segments based on customer needs: You’re hunting for other current or potential customers who ‘look’ as much as possible like your best core customers, those whose needs best coincide with your strengths – because it is within their ranks that you’re most likely to be able to develop still more loyal, profitable customers…Here’s      where firmographics data comes into play, you may for example, discover that many of them share the same geographical, SIC code, company size, or other characteristics…
  • Grade customers within each segment: Grading is done within a segment, defining various levels of economic value within that segment. It’s a means of estimating the revenue currently and potentially available from that segment, allowing you to identify which groups are not only most responsive to what you have to offer, but can also help you to increase profits – and are therefore really key to the success of your business….
  • Validate segmentation model: Before you take action, you’ll want to validate your conclusions… the segmentation model you’ve devised should, first of all, make intuitive sense based on your marketplace experience …
  • Target resources in proportion to potential return: The reason we are combining targeting, segmentation, and grading is to optimize your ‘market-coverage strategy’.      We want to invest limited resources in inverse proportion to the return expected.      This mindset goes back to the fact that we cannot be all things to all people. Essentially, we are trying to identify best core customers and to add more of the same kind, while solidifying relationships…