Monday, 26 January 2015

The Illusion of Marketing Segmentation

One of the things that Insight Analysts are expected to produce from the data are useful customer segments. The conventional wisdom is this:

Customer segments are differentiated by the customers’ different requirements for your product. The value proposition for any product or service is different in different market segments, and the price strategy must reflect that difference. Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to specific customer segments, in order to capture the additional value created for these segments.
Publishers have been doing this since Gutenberg. It makes sense for cultural production: books, music, paintings, wallpaper, paint colours, rugs, furniture, plate design, perfume, clothes, pens, watches and so on. But for domestic water? How do you vary “clean water”? The logistics of water supply mean that we all get the same water.

And just how different can a telephone service really be? It’s all the same copper and fibre, and no matter what price plan you’re on, you’re going through the same switches. Those price plans are there to smooth the usage out. Data services can be made faster or slower, but not telephone calls. Are Hertz “segmenting” when they offer you a range of cars from a Ford Fiesta to a Mercedes E-class? Insofar as a car is a cultural object, yes they are, but the service you get, from online reservation to them checking it for damage and petrol tank fullness on return is the same.

Airlines don’t segment their customers when they provide First, Business and Economy: they segment their cabins and hope there are enough people willing to pay those prices. If they researched their customers, they would hear overwhelmingly that we all want 36 inches or more leg-room, no middle seats, no reclining seats, and either no children under about 18 outside a special sound-proofed part of the cabin. Like hell airlines are going to do any of that. 

The truth is that in most cases you can’t "tailor your product, packaging, delivery options, marketing message and your pricing structure to specific customer segments”. A supermarket can’t identify who will take home delivery of groceries until it offers it, and offer it at a sensible price and under sensible terms. The most it can do is conduct some interviews and surveys, and everyone knows the problems with those. 

An airline can’t identify who will pay for flexible return or more legroom: it can only offer it and see. Or conduct those same dubious surveys. A bank, however, can make a good guess about who it is prepared to lend money to. A supermarket can make a good guess about who might be tempted by an offer of a discount on Pampers. Because unlike the airline, who don’t have a clue about their passengers' disposable income, a bank does. And so do supermarkets, at least for some of their customers.

But companies with access to really good MI are few and far between. Banks. Insurance companies. Supermarkets (includes Amazon). Two out of three of those industries are basically commodities. And strictly, so are retailers. (Think carefully: the shopping experience is the same, whether you buy the branded or the Value Range, fresh baked or sliced white - you’re pushing the same trolley round the same aisles and standing in the same queues. Supermarkets provide a commodity service: what they sell sometimes isn’t.)

It’s not customers who drive segments, it’s producers and providers who take the risk of creating them. A company can create a product no-one wants (I’m looking at you, Sinclair C5), and it can create a product everyone thought they wanted until they got it and then they realised it wasn’t that great (hello, Kindle), and there will be those (hiya Steve Jobs) who say it can create a product that no-one knew they wanted until it was there, but I’m not so sure. I think every product has a fore-runner of some kind. The theatre has spun off the cinema, radio, TV, videotape and DVD. All come from the same desire to have dramatic entertainment.

And those companies will have absolutely no idea who will take up the products - unless the company has a strong cultural image (take a bow Apple). That’s how Burberry got themselves into a mess a while back.

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