The Challenge of Segmentation

Segmentation is a difficult thing to wrangle sometimes. When internet-based sales starting picking up steam ten years ago, people weren’t sure how to respond, though the thought process really shouldn’t have been much different than for catalog sales. The main difference is that the catalog was now online and accessible to anyone who was interested.

What the internet, and catalogs for that matter, gives you is another channel for selling to customers, even if the audience is different. Thus is the challenge of segmentation. The essential question is this: what do you offer to sell people, where and at what price? OK, maybe it’s three questions. Regardless, there are four basic ways to segment your offering:

  1. Selling the same brand, with the same features and pricing, through different channels—You offer the same thing online or in a catalog that you do at retail for the same price.
  2. Selling the same brand, with differing features and pricing, but through the same channel—Your retail offerings for the same brand are priced differently, based on the features.
  3. Selling the same brand, with differing features and/or pricing, through different channels—What you offer online is exclusive to the channel and different than what you sell at retail, even for the same brand and similar product.
  4. Selling the same product, with the same features, different pricing and brand names, through the same channels—You offer the same product with the same features and through the same channel (online or catalog or retail) but under different brand names.

What’s going to work best for you depends on the product you sell, the channels available to you and your customers and how effectively you can manage the process. A major concern will be how the channels (or brands from option 4) compete with each other and cannibalize sales. Sometimes, none of these options make sense as there is only one way to sell your particular product.

But make no assumptions. Explore the options. Do some tests. See what makes the most sense. And most importantly, sell to your customers where they are, at the price they expect to find and with the features and benefits that deliver on your brand promise.

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Baggage Options

Well, we knew the time was coming when airlines would start charging us for darn near everything. Now they’re going to charge us for the first bag we check. Forget the fact that most travelers will attempt to cram everything into a carry-on bag too big to fit in any overhead compartment. I’m surprised, though, that no one has taken a more novel approach to the pricing.

One approach might be to charge people a flat airfare up to a specified total weight that includes the person traveling and his associated baggage. For every pound over that weight, the passenger is charged extra. That, however, may be viewed as discrimination.

A different method of pricing, however, could involve a bit of hedging. For instance, let’s say I book a flight today for a trip next month. I know that the trip will last three days. In all likelihood, I will check a bag. If I claim at the time I book it, charge me at that time. If I wait until I show up at the airport, then charge me a higher rate. This helps airlines determine ahead of time what their true cost of the flight will be. Additionally, they could set a limit to what they will accept on the flight in terms of weight, cutting people off when they reach that number. Anyone missing the cutoff will have to have their luggage arrive on another flight or through some other means.

Which brings me to another concept that likely will revive: shipping your luggage separately to arrive at your destination. Most people won’t want to plan that far ahead, but it can be highly efficient.

Sure, it would help if the airlines had a better economic model. And yes, the price of gas doesn’t help. But instead of just doing what everyone else is, be novel in your strategy, containing your costs, driving revenue and serving customers.

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Categorically Speaking

Marketers love to speak in terms of categories related to their particular brand—premium, super-premium, ultra-premium, giga-premium, you get the picture. From the consumer’s viewpoint, however, brands get considered a bit differently.

Think about the various things you buy (where there is some choice involved). What you actually purchase is based on how it fits into one of the following categories:

  • Strict loyalty—”I’ll only buy computers from Dell” or “A Honda is the only thing I’ll drive”
  • Consideration set—while the consumer may not be strictly loyal, your brand is in a select group whose purchase or use depends on the mood
  • Convenience set—people buy it because it’s easy due to location, availability, ease of transaction, etc.
  • Price set—you are the best price on the shelf (this time)
  • Ignorance—the customer really doesn’t know any better

Chances are, you’re in more than one of these categories. And that is perfectly fine, as long as you use it to your advantage. And do use it to your advantage. Talk to your customers in those terms. Create your customer service to reinforce it.

Make it work for you.

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The Choices We Make

I know that I am exactly where I am because of certain choices I have made. Some of those I can trace back nearly 20 years. Certainly others’ choices have factored into it. But how I chose to respond, behave and act put me on one path or another.

The same is true for your brand. Its success or failure is based on certain choices you have made when facing a variety of decisions. And if we could all accurately predict the future, selecting one option over the other would be that much easier.

Maybe you don’t need a crystal ball, however, to make a good guess at where your decisions will lead. Sometimes, it just takes a little bit of extra thinking and analysis. For example, when Apple suddenly dropped the price of the iPhone by $200 just a few months after its launch, the company should have easily predicted that those who had purchased one of the gadgets would feel like they’d been duped. Instead, they waited for their customers to complain loudly before responding.

Think about all of the choices you can make about your brand:

  • Price changes
  • New products or extensions
  • Product deletions
  • Packaging modifications
  • Component changes
  • Re-formulations
  • Cost-cutting measures

Before you select an option, play it out with some people. Use a whiteboard. Get feedback. Consider what the various reactions would be from your customers, competitors, suppliers, ultimate consumers, employees. Do you like what those reactions will most probably be? Are they right for the long-term health of the brand?

The more consideration you give to the choices you make, the better those choices will be.

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Mixed Messages

Jenny Craig’s change in marketing message has been good. Instead of focusing on people reaching some sort of ideal weight or size, they have taken a page from SlimFast, encouraging customers to reach a goal that is appropriate for them. They use messages like “a size healthier” to get the point across. Valerie Bertinelli proclaims that she is now “size surfer girl”, which apparently pleases her, even if she isn’t “size Gidget”.

Bravo! More self-empowering products and services need to take the same stance. Let’s spend less time talking in terms of absolutes, comparing ourselves to ideals.

Wait a minute. What’s that at the end of those commercials? A price promotion to “lose 20 pounds for $20 (plus the cost of food)”?

Why send that mixed message? You spend most of your 30-second spot talking about how it’s all about getting to a size or weight that is good for the individual. Then you end it by saying that to do so, that same person has to lose at least 20 pounds. Huh?

If you want to run an introductory price, then go right ahead. I urge you to do so. But make it consistent with your message. Have potential customers “get started now for $20 (plus the cost of food).”

Unless it really is about those 20 pounds, in which case you need to change your message back.

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How Do You Handle Pricing?

I was talking to the contractor redoing two of our bathrooms yesterday, and he was sharing some stories about clients who weren’t paying him for the work he did. In some cases, they didn’t want to pay the extra costs incurred because of changes they themselves made. In other cases, they simply didn’t pay what they agreed to pay in the first place.

The odd part about this is that his bid for these jobs usually was the highest. But for a reason you probably wouldn’t expect. He priced himself high so that he didn’t have to keep going back to his customers with add-ons. It also allowed him to throw extra things without charging for them.

So I started thinking back to when I purchased my most recent laptop. It started with a basic price. By the time I went through the process of deciding what to include, the actual cost was about 2.5 times the original cost. I remember having mixed emotions about that. On the one hand, I was happy to be able to customize the machine to be pretty much what I wanted. On the other hand, I was disappointed that my ultimate cost was so much higher than what was originally advertised.

How do you handle pricing? Do you start with a base price then add as people customize? Or do you offer a higher price that allows for people to customize, to a point, within that price point?

I’m not convinced that there is a single answer. It’s going to depend on what your customers want and expect. In other words, if they are most likely to customize much of the product, it might make more sense to offer a single price that takes that into account. If, instead, they are more likely to take the product as is, then it makes perfect sense to charge for add-ons and changes.

Think about your pricing and your products. Do you have opportunities to modify your pricing to better reflect how customers purchase from you? What can you do to your products to get you to the pricing that is going to work best for you and your customers?

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Establishing Priority Markets and Putting Them to Work

Yesterday, I discussed how you should prioritize your markets or segments with 12 different levels, each with some combination of volume, profit and potential. You could easily consider these as A, B, C and D targets such that:

  • A includes high profit and high potential accounts or customers
  • Bs are low profit but high potential markets
  • C accounts are high profit yet low potential
  • Ds have both low profit and low potential

Assessing which target market, audience or segment belongs where can be elusive. To find where a brand fits, you’ll need to conduct an audit. There are key things you will want to learn:

  • How appropriate is your identified target?
  • What changes do you need to make to the brand or with the product?
  • How well does the brand fit among competitors prices, your own costs and consumer demand?
  • How do you allocate resources for the brand and is that allocation appropriate?

Answering these questions, though, only gets you as far as the priority list. That’s when the additional work begins:

  • What activity, directly related to the brand, can you change? This includes, but is not limited to, product modifications, manufacturing changes, line extensions and promotional adjustments (brand image or identity changes, price moves, new or modified advertising campaigns, PR efforts, etc.).
  • Do you have the capacity and resources to affect the desired changes? Do you have the people, money, time or any other resources available to implement the changes?
  • How do you expect the consumer to respond to your changes? Will an image advertising campaign meet your needs? Will your target market respond better to a grassroots campaign? Will you get more “bang for your buck” through a public relations push through the trade?
  • Who else in your vertical market (staff, intermediaries, suppliers, distributors, retailers) do you need on board to execute key parts of your plan? Are they capable of executing appropriately? If they aren’t part of the plan now, can you integrate them in some way? How else can you use your vertical market to make the plan more effective?
  • Does the capacity exist to support the changes? Can you and your suppliers, distributors and retailers handle an increase in production and sales?

You need to do this (or similar) evaluation at least annually. Getting a handle on how your brand fits in the marketplace, then prioritizing how to focus your efforts will give you more confidence and a greater probability of success in driving your brand.

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