Good morning to all of you. San Salvador is windy and sunny today. The Volvo Ocean Race seven teams have exited the Doldrums. The leading teams should reach the equator today, and pick up the trade winds again within two or three days. The leading team at this moment is Dongfeng.

Dashboard Race Screenshot. Dongfeng team is leading the teams at this moment.

Today I will continue with the first topic:  Why to segment markets? And in my next blog post, I will cover the second topic: Bases for segmentation and the 4 main categories to identify and segment consumer markets: Behavioristic, geographic, demographic and psychographic.

I also hope to reach the Equator today by finishing these themes.

Why to segment markets?

Segmentation is more than color, tastes and flavor variations. It is the possibility to convert a single product into different ones in order to meet effectively the needs of the entire market. A price ratio of 1:10 from the lowest to the highest-priced offer in a segmented market is common.

1. Better Matching of Customer needs:

Different segments to better matching customer needs.

Since the customer needs differ, creating separate offers for each segment provides better solutions. For example, if an airline treated all passengers alike, business people may be unhappy with the level of service provided for the economy class passenger. The same applies to students.  Traveling students do not care about the business class features at all (you wish to save every penny in order to travel to more cities for example), and in consequence, they may be unhappy about paying a higher price. Developing separate segments and brands for each group allows a higher level of satisfaction for both segments: the business class and the students (economy class).

2. Enhanced Profits:

iPhone X is not for everyone.

Customers differ in their price sensitivities and, by segmenting the market, the marketer and pricing specialist can raise average prices and substantially enhance profits. Experience shows that in most markets it is very difficult to raise prices to all customers by 5%. However, it is often very easy to raise prices to some customers by 10% or more. This is a strategy that Apple has introduced with the iPhone X.  The iPhone X is not for all anymore. Not everyone will be able to pay it at a price starting from $999.00 + taxes. Apple is introducing the “segmentation” concept in order to elevate features and prices and compete differently with the rest of smartphone participants. Price increases and profit margin enhancement are invariable best achieved via a segmentation strategy. Many Chinese “low price” production-oriented businesses fail to see this and have disrupted the world economies by forgetting to apply the “segmentation strategy” pricing by diversifying their product offer.

3. Enhanced Opportunities for Growth:

American Express has 19 credit cards for different segments of clients.

Segmentation can build sales growth. For example, let’s see the credit cards industry.  Initially, in the 1970s credit cards operated in a largely undifferentiated market. Then at that time, American Express launched its Gold Card with a membership fee of £100 sterling pounds, double that of its standard Green Card. Subsequently, it added a Platinum Card with a £300 membership fee. Amex substantially increased its profits by trading up its more affluent customers into higher –margin products. Today, 50 years later after the company started this strategy,  American Express has 19 consumer different type of credit cards, segmented into several groups: No annual Fee-cards, Travel Cards, Cashback cards, No foreign transaction-fee cards. And the current annual fees vary from Zero-No annual Fee up to $550 dollars per year. In addition, AMEX serves the small & medium business, merchant and corporate segments with many other products such as corporate purchasing cards, international payments, etc.

In summary, segmentation can also build profit growth by allowing the company to trade up customers for higher-margin products.

4. Retention of Customers:

As the person´s circumstances change with age, family, and income, his or her buying patterns change. For example, in the car market, and individual´s first car is usually small, low priced one, adventurous and easy going; then when the person marries and has kids, a bigger car is needed. If he or she is successful in career terms, this may be followed by an expensive, status car. Finally, in retirement stage of life, the individual may downsize again. By offering products appropriately segmented to each family life cycle stage, the company can retain customers who would otherwise switch to other brands or other style-cars.

When I marry Alex Guillermo Lozano Artolachipi, our “just married” picture will look like this one.

That is the case of JEEP. Jeep has two big segment groups of products: the standard and limited edition. Jeep offers 8 type of Models: Grand Cherokee, Grand Cherokee SRT, Cherokee, Wrangler, Wrangler Unlimited, Patriot, Compass, and Renegade. When you are single and have experienced to drive in a Jeep Wrangler  (US$23,995 basic price), it is almost impossible to let it go. Probably when you marry and your economic conditions improve for the better,  you will switch to a bigger model such as Grand Cherokee ($51,000 basic price) or a more affordable model as Jeep Compass ($27,600 basic price), but sooner or later, in your retirement years, it may be possible you will like to return to a Jeep Wrangler again. As a Jeep owner you are part of an adventurous group of people, “you know what you want & are happy to go & get it. You are kind & generous, willing to help your fellows at the drop of a hat, nothing is too much for you. You have a wonderful personality & a great number of friends, anyone you are not friends with, is just people you haven’t yet met”. Now you can understand why I am so in love with Alex Guillermo Lozano Artolachipi. I met him driving his Jeep Wrangler Sport, 16 years ago!

5. Targeted Communications:

It is very difficult for a company to deliver a clear message to a general-broad undifferentiated market.  Effective communications require a  demonstration that an offer will meet the relevant needs of the potential buyer. This is much easier to achieve if the marketer is targeting a homogeneous market segment. Watch the following video of the same Jeep product from above, but this time the Parson Family video message targets a different segment of clients.

6. Stimulation of Innovation:

Innovation is killed when the company pursues an undifferentiated marketing strategy. Different needs and different prices are reduced to the lowest common denominator.  Industries are killed by following undifferentiated strategies because every industry competitor starts to compete based on low prices and not by offering diversity. When the market is segmented, new profit opportunities appear. And where there are more profits, there are more possibilities for re-investment in innovation, and there is more cash flow potential to hire innovation strategists inside the companies.

I would like to close this writing with this beautiful advertising from Jeep 4×4 day 2017: “Whatever you do today, do it right, because today was made for adventure!”… Cheers!!!

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Published by eleonoraescalantestrategy

Corporate Strategy Artist, San Salvador, El Salvador View all posts by eleonoraescalantestrategy