Segmentation, targeting, positioning

Segmentation, targeting and positioning

Why read this? : We go through the key steps in the segmentation, targeting and positioning process. Learn how to find and go after the most attractive segments and set your brand up for success. Read this to learn how segmentation, targeting and positioning helps you win more customers and build stronger brands.

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Brand development - segmentation, targeting and positioning

Segmentation, targeting and positioning is the third step in the brand development process.

It comes after the market research you do to analyse your market, and defining your brand goal, including your vision and purpose.

At this stage, you start to define HOW you’re going to take on the market and achieve your goal. Who you’re going to go after, and how you’ll influence them to choose you.

You decide where to focus your attention. Which specific opportunities you’ll go after. And how you’ll set up your brand to achieve its goal.

Segmentation, targeting and positioning is the process which helps you make these choices. You go from speculating about what you could do to deciding what you will do. This then drives your brand identity and marketing plan.

Why do segmentation, targeting and positioning?

Like the famous quote, you can’t please all of the people all of the time. In every category there’s always different types of customers. These differences affect how you market your brand.

For example, customers of different ages, or living in different parts of the country. Customers who consume the product in different ways or at different times. And customers with different needs and wants which drive their preferences.

Grouping customers together based on shared attributes (segmentation) helps you develop more relevant solutions. Specific products and services, brand activation and customer experiences designed with their needs in mind.

Customers mostly choose the product most relevant to their needs, rather than generic products designed to appeal to everyone. So, it’s easier to persuade a customer to buy your product when it’s designed for their specific need.

Segmentation helps you manage resources

But it’s not just increasing your chances of a sale. It’s also about helping you manage your resources more efficiently and effectively. No one has an infinite marketing budget. So you have to carefully plan how much to spend on areas like product development, advertising and price promotions.

Segmenting a market means you can focus your resources on specific groups, rather than spread them over the whole market. This almost always delivers a stronger ROI, and boosts your profit and loss. There’s less wasted investment because you choose NOT to spend money against segments who’ll deliver the lowest return.

So why you do segmentation, targeting and positioning is to sell more to the right type of customer, and spend less doing so. Now, let’s look at how it’s done.

The segmentation, targeting and positioning process

The process of segmentation, targeting and positioning is well documented in marketing textbooks, notably Marketing Management by Philip Kotler. (see our branding lessons article for more on Kotler).

You start with the whole market, and end with a clear view on how you’ll approach it by doing these 3 steps :-

Segmentation : divide the total market into manageable segments.
Targeting : identify which groups to target based on their attractiveness.
Positioning : decide where and how to position your brand to meet the target’s needs.

Segmentation

As we said earlier, customers aren’t all the same in any category. They’ll have different needs. Segmentation helps you identify these differences For example, differences in what customers looks like, what they do, and how they make decisions. The aim is to group customers together into segments who share similarities across one or more of these variables. Segments have to be easy to identify, and distinctly different from other segments.

You carry out market research, specifically segmentation research to work out which customer variables most influence the buying decision. You’d normally do this by hiring a market research company (generally one able to do both qualitative and quantitative research).

There are 3 main types of segmentation variable, which can be used on their own or combined together :-

demographics.
occasions.
needs or attitudes.

Demographics

Demographic information is information based on the statistical study of a population.

Think about demographics as the type of data captured by governments and census-type surveys.

Common examples would include age, gender, ethnic origin, income levels, education and family situation.

This is the simplest way to segment because it’s based on how people are. And that’s easy for most people to get.

It’s a good place to start with segmentation, especially for smaller and newer businesses.

Advantages of demographic segmentation

The major advantage of demographic segmentation is it clearly and visibly defines the segment. You can easily picture and point to a demographic segment like “men under 30” or “families in Sydney with teenage children”.

Demographic groups are often used in media planning. Media agencies can match the audience data they get from media sellers to your segments. They’ll know certain types of people watch certain TV shows, pass certain locations or visit certain websites. They match the available spaces to find the best places to reach your segment.

That’s why, for example, you see premium car advertising in drama shows as these attract more upmarket audiences. And it’s why you see beer adverts during sporting events, because more men than women drink beer and more men than women watch sports. Look at where and when advertising appears, and you can often tell which type of segment the advertiser is going after.

Disadvantages of demographic segmentation

However, demographics alone can be an overly broad way of grouping customers together. And it may not always be an accurate predictor of behaviour.

Let’s say you’re a beer brand manager. Your product is a premium-priced and craft-brewed beer. You might decide your ideal segment is “men under 30 in Sydney” . But is that too broad?

For example, do all men under 30 in Sydney like craft beer? Do they all go to the same type of bars? Can they all afford to pay a premium price? Do they all have similar taste preferences? Will they all like the same type of packaging?

As the answer to these is likely to be “no”, you soon see the limits of demographic segmentation. Don’t get us wrong, it has its uses. But unless it’s all you have, you usually need a deeper level of understanding of when, where and why customers think, feel and do the things they do.

Occasions

This is a segmentation based on behaviour. It’s usually also linked to times and / or locations. Rather than being based on how people are, it’s based on what they do, and where and when they do it.

How much of a product do people consume? When do they consume it? How often do they consume it? Where do they consume it? These are some of the common questions in an occasion based segmentation.

For example, an occasion-based segmentation for a restaurant could look at different booking behaviours.

So customers who prefer to book online with an app versus those who prefer to call versus those who just show up.

For a manufacturer, an occasion-based segmentation could be based on how people respond to price discount activity like vouchers or coupons. You focus your offers on people who’ll switch if the price is right. And not on those who always stay loyal to the same brand.

When occasions are time-based, that could be time of day or day of the week. For example, people eating out for lunch during the week will be different from those eating out on a weekend night.

In some categories, the segments might be based on the stage in the customer journey. Women in pregnancy vs women who’ve already had a baby, for example.

With occasion-based segmentation, the focus is more on the situation than the person. There’s pros and cons to this versus demographic segmentation.

Occasion-based segmentation better at predicting choice

Occasion-based segmentation is usually a better predictor of brand choice than demographics because it’s based on actual measured behaviour.

And that behaviour gives a richer picture of how products might be consumed.

But also more of a challenge to find segments

It can be more of a challenge though to find the customers who sit behind an occasion-based segmentation.

Time-based examples are a little easier. You can target advertising to the right time of day or day of the week to hit the right audience.

But behavioural identification is more of a challenge. How do you identify which customers buy at which times, or go for promotions for example? In these cases, you generally need to capture data about these behaviours as they happen. And then use these as insights into future customer activities.

Needs or attitudes

This type of segmentation tries to get more into the minds of customers and their decision-making.

It takes a more psychological and behavioural science led view of how customers choose products and services.

It aims to identify needs, attitudes and motivations as to why customers act and choose the way they do.

Are they safety conscious or risk-takers? Are they driven by indulgence of healthiness? Do they see convenience or value as more important?

Research agencies love this type of research.

It often results in the creation of customer personas to describe each segment. “Anxious Anne”. “Lonesome Lukas”, “Risky Rachel” and so on. These paint a picture of each segment and show their underlying motivations.

This can help make the messages in your communications more relevant and meaningful.

However, they’re not helpful for media planning, as you can’t really buy media against their factors.

You usually need to invest in qualitative research to find out what these needs are. And then you do quantitative research to work out the size of the different needs-based segments. This can be a fairly expensive and time-consuming research project.

Combining segmentation types

In an ideal world, you’d combine all 3 types of segmentation. You take the best bits from each. The simplicity of demographics. The behaviour driven nature of occasions. And the psychological insight from needs based segmentation.

But in reality, it’s rare you’d have access to all 3 types of segmentation data.

If you’re new to segmentation, it’s usually best to start with demographics. It’s the simplest approach. You add occasion and needs-based segmentation when you’re more confident about how you understand your audience.

The easiest way to think about segmentation is to imagine your whole audience as like a giant pizza or cake. You’re essentially trying to split the whole into wedges or segments which are easier for you to manage.

You don’t eat everything in one go.

In fact, let’s stick with the pizza theme, and imagine our business was a pizza shop.

Our customer segmentation might be people who like pineapple on pizza, people who don’t like pineapple on pizza and people who just don’t like pizza.

This is an occasion-based behavioural way of segmenting the market as it’s based on what they do. (eat pizza with pineapple, eat pizza but not with pineapple, don’t eat pizza).

What really matters here though, is that with this understanding, you can start to review what you offer and identify which segment is going to be the most attractive.

You’d then obviously choose to NOT do any activity for the other segments. This review of the segments and the choice of which is the most attractive is called targeting. In this step you identify your target audience.

Customer segment persona / profiles

As you collect information about the segments, and start to focus in on which ones you’ll target, you also need to think about how you’ll organise what you know about each segment.

In common with the customer experience process, it’s common to create customer segment profiles for each segment you’ll cover.

These are collated summaries of the key facts about the segment. You use them to have a single collective customer view which helps deliver consistent brand activation.

(Check out our separate article on customer segment profiles for more on this topic).

Targeting

There are many different ways to identify which segment(s) will be the most attractive for your business.

The simplest way is where you can allocate a sales value to each group. And even if you don’t have a specific sales value for the segment, you should be able to at least quantify the number of people in each segment.

But bear in mind, that the biggest segments are often the most competitive.

Your competitors have the same overall market you do. The bigger the segment, the more competitors it attracts.

The competitiveness of each segment can be another variable you can consider when evaluating the attractiveness of a segment. If there is a dominant competitor against a specific segment, it will take you more time and resources to dislodge that competitor. It is worth looking at less competitive segments, even if they may be smaller overall.

Other targeting variables

There are other variables to consider. What about price for example? Is one segment more prepared to pay a premium than another segment? What about easiness of access to the customer? Can you actually find the customer?

You can even look at more strategic views of market attractiveness. Porter’s five forces for example, looks at the following market attractiveness considerations. It looks at the threat of …

Segment competition – strong players in the segment make segments less attractive.
New entrants – where it is easy / likely that new competitors will go after the segment, those segments are less attractive.
Substitutes – if the segment has other products that can easily substitute in to meet the need, the segment is less attractive.
Buyers – if the buyers in this segment have increasing power, it’s less attractive.
Suppliers – of the suppliers in this segment have increasing power, it’s less attractive.

Role of target market choice

Targeting is really about the connection between your audience and your brand identity. You have to decide where your brand has the best chance to win, based on the fit with the segment, and your competitive strategy. It’s also about the decision on where NOT to play. So that you can focus your resources on the most likely segments to choose your products.

So if your products have more technology features than competitors, go for the segment which likes to focus on tech features rather than say price or image. If your product focusses on sustainability for example, avoid the segment that values convenience.

Chances are you’ll have somewhere around 6-8 segments to choose from. Unless your business has a portfolio of products, you should use market attractiveness to identify the top one or two segments to focus on. This choice is usually made by capturing data about the segments and using it to calculate an attractiveness ‘score’ for each segment.

How to calculate segment attractiveness scores

In many businesses, the attractiveness of segments can be calculated using available data. These variable are usually found via secondary research. Government statistics, observed behaviour and online sources can be rich sources of data to measure segments against.

With this data, you then make decisions about the relative importance of each variable and give a weighting percentage to each variable. This really depends on your overall business goal.

This weighting is usually captured in a table or graph format where the initial data is plugged in and then weighted scores are calculated based on the data inputs.

There are 7 steps to get to segment attractiveness scores :-

Step 1 - Identify variables to evaluate segments

So, here you identify the variables you plan to use to measure how attractive the market is.

This could be the relative size of the market or the profitability in the market for example. The important point is that they need to be quantifiable measures, where you have access to the actual data.

Note, that your choice of variables can be more than the three we have picked in this template. But we’d recommend no more than seven to keep the model relatively simple to use.

Step 2 - Identify weighting across variables

Here, you decide how important each variable is to your final choice.

It may be that you assume all variables are equal, but it really depends on your goals.

If your end goal was related to total sales, you might give more weight to size of market.

If your end goal was profit margin though, you might decide that profitability deserved more weight.

The important point to note here though is that the total of all the weights needs to add up to 100. In effect, you are allocating 100 ‘points’ to each variable.

Step 3 - Identify segments to evaluate

Here you plug in each segment you want to evaluate and start to populate the scores for each variable for that segment.

Step 4 - Add up the total size of the variable

In order to create a weighted score, you need to add up each segments score (horizontally in this table) to get a “total” size for that variable.

Step 5 - Calculate the weighted score

This weighted score looks like the most complicated calculation. But if you did steps 1 – 4, the numbers are already plugged in to the table.

You need to take the segment variable size divided by the total variable size and then multiply it by the weighting for that variable. That gives you the weighted score for that segment – variable combination.

Step 6 - Repeat for each segment

Once you have completed one row of scores, the logic applies throughout the rest of the table.

You follow the same calculation process as in Step 5 pulling the correct segment size, total variable size and weighting numbers to calculate each segment – variable score.

Step 7 - Calculate the segment total score

Do this by adding up each of its scores by variable. You can now compare the total (attractiveness) score for each segment.

Using the market attractiveness model

To use the market attractiveness model, you gather the relevant data and plug it into the spreadsheet.

It gives you a relative attractiveness score for each segment. Check out our separate market attractiveness article for a worked through example.

The model gives you a fact-based view on which segments are more attractive to target than others.

There may however also be some subjective influences on your decision.

For an example of this, check out our article on Six Hats creative thinking which walks though how a business might build other factors into its targeting decision.

While we won’t cover the topics here, we also recommend you check out the Boston Consultancy Group BCG matrix, and the GE McKinsey matrix models.

These are more complex models, but follow the same basic logic process we’ve covered in this guide.

Positioning

The final segmentation, targeting and positioning part of the process is then to work on how to ‘position’ your product. This position is how you want consumers to perceive your product in relation to other products on the market. The term was originally conceived by Ries and Trout in their seminal book Positioning at the end of the 1960s.

The positioning statement is usually a crafted statement based on a standard template. You fill in the blanks relative to your brand. This positioning statement then rolls into the creation of your brand identity.

The positioning statement generally has 5 components :-

1. TO (Target Audience) 2. BRAND (Your Brand) 3. IS THE BRAND OF (Category Frame of Reference) 4. THAT DELIVERS (Benefit – Functional / Emotional ) 5. DUE TO (Reason to believe and Reason Why).

Target audience is the segment you have chosen to focus on based on its attractiveness. And your brand, well, that’s clearly self-evident.

But the other elements do need more of an explanation.

Frame of Reference

The Frame of Reference is defined by how customers group similar products for which your brand is a substitute.

It sets the stage on which to compete.

It clarifies what a brand “is” and therefore, must be inherently familiar to consumers.

The Frame of Reference should be as large as possible. But if it’s too large, it may lose its distinctiveness.

And if it’s too small, it may provide familiarity but represent insignificant volume or growth potential.

So if you make chocolate bars for example, a ‘narrow’ frame of reference could be other chocolate bars.

A mid-size frame of reference could be snacks.

And a broad frame of reference could be all food.

If you choose a narrow frame of reference, this can help your business focus on very specific target groups. But you may only have a limited number of consumers who look for that very specific definition of the category.

If you go very broad with your definition, this will give you more potential consumers, but a much broader range of competitors and a less specific and less clear definition of the need.

Example Frame of reference - Pizza Shop

Let’s look at an example using the pizza shop from earlier.

A narrow definition might be to only look at other pizza shops in the specific area where the shop is based.

But as much of the pizza business is about delivery, a broader definition would be pizza delivery services delivering to a wider geographic area.

This brings in more ‘national’ brands like Pizza Hut and Domino’s and also delivery services like Menulog and DoorDash.

And with the broadest definition, you could define the market as all evening meals in Sydney. This brings in a wider range of options from other cuisines to home cooking.

It can take some experimenting to find the ideal definition of your category for your business as it depends on the context of your business.

But it’s an important term as it not only sits in the positioning statement, it helps define your product range, your innovation choices and your communication plan among other things.

The Point of difference

The final part of the positioning statement is the point of difference.

This is the distinct element of your brand that will make the difference for the target audience.

It’s made up of the benefit tied to the justification system for the benefit – the Reason Why and the Reason to Believe.

The benefit and benefit ladder

The benefit is what connects the customer to your brand. It is what they want or need from the category that your brand can offer in a unique, differentiated and superior way to any of your competitors.

To identify the benefit, you can use a tool like the Benefit Ladder. This tool is useful because the benefit can be viewed from multiple levels. It could be related to an attribute or feature of the product itself or it could be related to a functional or emotional benefit that the customer receives. (see our branding lessons article for more on emotional benefits).

Each of these different levels connects with a higher or lower level benefit. If you start at the lowest “product feature” level so that as you go “up” the ladder, each benefit is delivered “so that” the level above can be delivered until you reach the highest level emotional benefit. And if you start the other way round at the top of the ladder, each higher level benefit is delivered “because” the benefit below it has been delivered.

If you build each level of benefit correctly, you can move up and down the ladder and link each rung together with a “so that” or a “because“. Let’s use our pizza shop as an example again.

Example benefit ladder - Pizza shop

The product feature could be that our shop delivers pineapple topped pizzas.

The functional benefit of this feature then might be that this product satisfies hunger cravings.

We deliver pineapple topped pizzas “so that” hunger is satisfied.

The functional benefit to the customer might then be that they don’t have to cook for themselves if they order a pizza from us.

Hunger is satisfied (by ordering a pizza from us) “so that” the customer doesn’t have to cook for themselves.

But the emotional benefit might be they get to spend more time with their family. Which is delivered by the benefit of not having to cook for yourself.

All of these are perfectly valid features and benefits. But consider how your advertising might look if you decided the key benefit was satisfies hunger versus spending more time with family.Though these benefits are connected on the ladder, the message and way you communicate each would look different. This choice of benefit to focus on is a key part of the market planning process and the segmentation, targeting and positioning process.

The top rung of the benefit ladder should stay relatively consistent.

Emotional benefits go deeper psychologically. They tend to be stronger and more consistent over time. Think buying a car that will keep your family safe (e.g. Volvo). Or buying alcohol to celebrate a special occasion (e.g. Krug champagne).

If you’ve a portfolio of products and run multiple campaigns, the lower level benefits can be different even if the overall emotional benefit stays the same.

The Reason Why and Reason to Believe

The final part of the positioning statement is the Reason Why and the Reason to Believe.

These elements justify and validate your brand benefit. They show why the customer should believe your benefit.

Reason Why

Reason’s why are communications elements that explain the product. They help the customer understand the message of the benefit.

The Reason Why might relate to ingredients.

For example, take health and beauty products like shampoo, skin care and make-up. These often contain ingredients with specific benefits. When the Reason Why is ingredient based, it’s usually where the brand has a unique ingredient that differentiates it from competitors.

The Reason Why may relate to sourcing.

For example, think about wine from a specific region or country. If your brand is located somewhere that adds an extra and relevant benefit for the customer, this can be a real competitive advantage. In some categories, sourcing has become so important, that the name is legally protected. e.g. champagne can only come from the Champagne region of France and Feta cheese can only come from Greece.

The Reason Why may relate to how a product is made.

Think about whiskies aged for 10 years+ or that use a certain type of still. These process driven Reason’s Why are common in premium products as they’re often built around quality and attention to detail that customers will pay more for.

And finally, the Reason Why may relate to mode of action – what a product actually does. This is common with products which claim health benefits. e.g. yoghurts or infant formulas which contain prebiotics and / or probiotics and claiming to benefit the immune system.

Check for relevance with market research

When you decide on the Reason Why, it’s important to ensure it’s relevant to the need or benefit the customer is looking for. You should do some market research to identify which Reason Why will be strongest for your target audience.

Reason to Believe

The second half of the justification system is the Reason to Believe. It’s the evidence or validation of why the Reason Why should be believed.

This could relate to clinical or scientific evidence behind the Reason Why. Or it could be your product was the first to include or make a specific ingredient or benefit. This helps you “claim” the credit for the Reason Why.

It could also be that external and impartial experts, thought leaders or influencers endorse and support your message.

You have to take care about picking credible experts. Some people claim to be experts when they aren’t. Done well though, it’s a powerful way to validate your message with an independent endorsement.

Finally, it may be that your brand has some sort of legitimacy based on history. Maybe your brand has been doing the same thing for such a long time it’s recognised as a leader in its field? Maybe a past event has stuck in people’s minds and that helps back up your core message?

Sometimes it could just be down to the fact that your brand found a relevant connection to consumers long ago and has managed to retain and build on that.

Positioning statement recap

So, while the positioning statement may seem like one sentence, you can see that it is actually a carefully constructed statement with many choices. As a reminder it follows this structure.

With our fictitious pizza shop, you can then see that we have a target audience – pineapple pizza lovers, our brand is the name of our company and the frame of reference is pizza shops delivering to the Eastern Suburbs.

Our benefit is a functional one (tastiest) which is backed up by a Reason Why around sourcing (the world’s finest pineapples) and a Reason to Believe that these ingredients (pineapples) have been endorsed by the World Pineapple Organisation. So, we end up with this positioning statement.

To pineapple pizza lovers, the Sydney Pineapple Pizza Company is the pizza shop delivering to the Eastern Suburbs that delivers the tastiest pineapple pizzas due to sourcing the world’s finest pineapples as proven by the World Pineapple Organisation.

See our how to use positioning in e-Commerce article for more on using positioning.

Conclusion - segmentation, targeting and positioning

Segmentation, targeting, positioning is a key marketing process to make business choices about how your brand will operate in the market. It helps you identify segments and evaluate their attractiveness to deliver against your goals. It then helps you craft a positioning statement that sets the direction for how you’ll achieve those goals.

Three-Brains and brand strategy

Need help building your brand strategy? Confused by the amount of information and the many claims of agencies who say they can solve all your problems? Before you’ve even told them what the problems are?

We have many years of experience as marketers building successful brands. We offer coaching and consulting services to listen to your marketing challenges and get you to successful and pragmatic answers quickly. Contact us to find out how we can help you.

Segmentation, targeting and positioning

Segmentation, targeting and positioning

Ready to test your knowledge?

Brand development - segmentation, targeting and positioning

Why do segmentation, targeting and positioning?

Segmentation helps you manage resources

The segmentation, targeting and positioning process

Segmentation

Demographics

Advantages of demographic segmentation

Disadvantages of demographic segmentation

Occasions

Occasion-based segmentation better at predicting choice

But also more of a challenge to find segments

Needs or attitudes

Combining segmentation types

Customer segment persona / profiles

Targeting

Other targeting variables

Role of target market choice

How to calculate segment attractiveness scores

Step 1 - Identify variables to evaluate segments

Step 2 - Identify weighting across variables

Step 3 - Identify segments to evaluate

Step 4 - Add up the total size of the variable

Step 5 - Calculate the weighted score

Step 6 - Repeat for each segment

Step 7 - Calculate the segment total score

Using the market attractiveness model

Positioning

Frame of Reference

Example Frame of reference - Pizza Shop

The Point of difference

The benefit and benefit ladder

Example benefit ladder - Pizza shop

The Reason Why and Reason to Believe

Reason Why

Check for relevance with market research

Reason to Believe

Positioning statement recap

Conclusion - segmentation, targeting and positioning

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