SMEs need to think about market segmentation as much as the big players do

August 2018

With much of my work these days being for SMEs rather than carrying out project-based contracts for very large companies (a conscience decision driven by a desire to stay sane in the latter part of my career), a fairly consistent pattern I see is a lack of understanding and therefore lack of approach to market segmentation.

Let’s firstly be clear on what market segmentation is: It’s basically about dividing your whole market into smaller chunks, with each chunk representing a group of existing and/or potential customers with similar characteristics. The value of doing this is that you can then decide which segment/s to target and this based on a criteria (perhaps which is easiest to reach, most profitable etc.) rather than, potentially, wasting time and money on going after the whole market. You then position your offer to each of those segments in an appropriate way. What I’ve outlined here is essentially the widely used model of ‘segmentation, targeting and positioning’ (STP).

For large companies and where a proper marketing team is employed, market segmentation will be the norm and often with a significant level of sophistication applied. For example, it may include factors such age, gender, location, motivation (for the purchase), product preferences, level of affluence and personal interests.

The criteria used in segmentation by large companies will come from a number of sources, with these including market research and detailed sales analysis – and perhaps taken from a CRM system.

For SMEs though and given typically less resource and of course, by definition, a smaller scale of business, then the approach can be simpler (though should still be as scientific as possible – so if you have a CRM system then use it). As a basis to get you moving, I’m going to use an example of a fish smoking business I did some work for a few years back:

· They traded in both B2C and B2B markets, so we separated these out.

· For B2B, the customers were largely independent restaurants, hotels and retail outlets (e.g. delis) buying smoked salmon. We made hotels and restaurants one segment as no great difference in approach needed (both buying unbranded product in bulk), but made retail a separate segment because the product needed to be branded and therefore was also being marketed to consumers by my client (e.g. from their website to say where it could be bought).

· Large scale grocery retail was also technically a market segment, though even ahead of the targeting exercise we excluded it because of the relatively small size of the production operation (no point going after a segment if you don’t have the scale to service it). The same was also true of large hotel and restaurant chains.

· For B2C, they traded both online and through a small shop bolted on to their production facility, with this right on a popular tourist route in the Highlands. Here we separated out tourists from a broad segment of other consumers, though it then got interesting because attracting tourists to the shop to buy something was relatively easy for a one-off purchase, but there was also the opportunity to then get them to buy online at a later date – even if they were overseas visitors – if we were able to get their details at the time of the sale. And when this strategy worked, they were no longer in the tourist segment but joined the broader group of consumers.

· We also split that broader segment of consumers into two, with the dividing line basically determined by a) frequent purchasers, and b) regular but infrequent – e.g. always bought a side of smoked salmon at Christmas but at no other time.

This fairly basic and easy segmentation exercise then provided the basis for deciding which to target and what relative level of effort each would get, then how to position the offer in a relevant way to each segment. And that will be the subject of next month’s blog.