Mind you – getting to that endpoint is not always straightforward. It's made easier by the process of progressive segmentation. For although market segmentation is the breaking down of a large market into a number of smaller, more homogeneous ones, that is the reverse of the process that leads to the need for segmentation. In their formative period, all markets are small and homogeneous.
When Gottlieb Daimler produced the first automobile powered by an internal combustion engine or when Will Kellogg developed cornflakes and started his own company in 1906, the number of segments in the automobile market and the breakfast cereal market numbered just one. Now the combined number of individual market segments in these two markets would run into hundreds as companies try to match their products to more and more specific consumer needs.
So in recommending the process of progressive segmentation what one is doing is replicating the manner in which the market has grown over the years. The following segmentation of the 4X4 automobile market illustrates the process of progressive segmentation.
The 4X4 market over the last decade or so has been one of the few growth segments in an otherwise mature market for automobiles. The segment was originally formed by a single product – the Land Rover. Now we have the short wheel base light-weight Suzuki Sx4 at one end of the spectrum and the Ferrari FF at the other. The only thing these two cars have in common is that the drive is to all four wheels – and yet the development of both can be traced back to the Land Rover.
Eight segments of the 4×4 market have been identified. The progression from one segment to eight segments goes like this.
Step 1 – Take the whole market and divide it into two or three broad divisions – in this example body shape has been used but it could have been high and normal ground clearance.
Step 2 – Ask yourself – do all customers within each of these two segments have the same needs? If the answer is no, go to the next level of segmentation. So the 4X4 saloon segment is divided into two – those customers who want a car with superior on-road performance and those who want the safety and traction benefits of 4X4 in a saloon which also has some off-road ability.
This latter group wants 4X4 ability to assist them in getting to their destination – a ski resort, perhaps. But it's the destination not the journey that's the main focus. Cars built for the road performance market range from the Subaru WRX to a Lamborghini. For owners of these cars, it's the journey rather than the destination.
The Traditional 4X4 segment has spawned three sub-segments but only one of these has escaped further segmentation. Segment 3 is the modern equivalent of where it all started and had the 4×4 market not fragmented the way it has, the total market would have been limited to this sector, still dominated by the short wheel base Toyota Land Cruiser and the Land Rover Defender.
The on-road / off-road utility market has split into two. Segment 4 in genealogical terms is the offspring of Segment 3. Big and tough and loved by the army of gray nomads, these 4×4's can be seen towing a caravan or a camper trailer on the bitumen and then tackling the roughest tracks that the outback can offer .
Segment 5 is a fusion of the traditional 4×4 shape with the iconic Australian ute. Loved by tradesman for their carrying and towing capacity, they are GST free and relatively inexpensive and fitted with a dual cab, can take friends and family to places where a ute would never venture. Very macho in character, with voice-overs in TV ads that are instantly associated with meat pies and VB, I have yet to see one driven by a woman.
But the marketers could see a further gap in the market for another type of 4×4 although I doubt even the most prescient of them could foresee the demand for what is now known as the SUV – Sports Utility Vehicle. It's not one segment though because buyers of SUV's have different needs that "their" SUV must meet.
Step 3 – The SUV market is split into three sub-segments. Let's look at the two smaller segments first. Segment 6 appears to be in decline. When it first split off from Segment 4, it was epitomised by the Toyota Rav 4 – a small, lightweight 4×4 that could be found at any surf beach with a couple of boards on the racks. However as is the norm for the automotive industry, the Rav 4 and its competitors grew in overall dimensions so it might now be considered as a sub-segment of Segment 8.
Segment 7 used to be the preserve of the Range Rover which, at the time of its introduction, provided users with a unique combination of luxury, off-road and on-road performance. You probably wouldn't see it towing a caravan but a horse float was a sure bet. The Range Rover started this segment but over the years it has been joined by rivals from Mercedes, BMW, Lexus, Audi and Porsche. Who would have thought that the humble Land Rover, launched in 1948, would be the progenitor of such stylish, sophisticated and high performance vehicles?
Step 4 – As Segment 4 grew, it became apparent that such vehicles were really too extreme for where they spent the great majority of their life on bitumen, in suburbia, delivering the kids to and from school. They were too big, too thirsty and too expensive. What many consumers needed was a less rugged, more stylish 4×4, bigger than those available in Segment 6 and far less expensive than those in Segment 7. And so the Sports Utility Vehicle (SUV) was born. Is the SUV market one segment? I'm sure it isn't. It's progressively fragmenting into a number of sub-segments as consumers become ever more specific in their needs.
The ability to segment your market is essential to strategic planning these days and the technique of progressive segmentation can help you do it. Starting with a single segment, the process works just as well for an accounting practice as it does for an orchardist. It enables you to:
- Redesign your total product offering – By asking yourself – how does this segment differ from another that I service – you can better tailor your product to customer needs. And by product I mean not just the core product or service but its positioning, its service elements, the degree of customization, its pricing, its distribution, its performance warranties, the type and amount of after-sales service etc. The match between what a market segment wants and what you provide has to be a much closer match these days. Near enough is no longer good enough.
- Identify emerging new segments – Unless you segment your market, you may miss the birth of new segments. Markets are forever fragmenting – breaking up as customers seek different benefits or different combinations of benefits or different weighting of benefits. Take retirement planning. If I was a financial adviser, I would be keeping very close watch on how the needs of my client base were changing and how one big segment was breaking into several smaller ones. Sometimes "boutique" segments become mainstream ones. In other cases they remain small and are not of sufficient size to attract the industry's bigger players – but they may be big enough for you.
- Customize your marketing mix – It is becoming unlikely unlikely that one marketing mix will "fit" each market segment just as it is that you service only one segment. I have a theory that a business is like a table. It needs at least three legs to remain stable. Three legs equals three segments equals three different marketing mixes. On the other hand you might have a business resembling a centipede. It's grown so many legs that you cannot nurture them all. What started off as one market – to service the IT needs of home businesses – has fragmented into software, hardware, repairs, websites, assembly, trouble-shooting, tutoring and so the list goes on. Maybe there is a good reason why the largest four-legged animal is a million times bigger than the largest centipede?