The Importance of Market Segmentation
Since 2015, BioInformatics LLC has been collecting valuable end-user data on the markets for Real-Time PCR, Cell-Based Assays and CRISPR/Cas9 Products & Services. While companies often measure brand performance overall, it is important to remember that perceptions of your brand can vary widely across different market segments. We have just published a complimentary report comparing top companies brand performances in the three very different markets we have been closely monitoring. When you download the report, you’ll see how perceptions of the same brand can vary depending on the market segments we were surveying. Maybe that’s not too much of a surprise but it made me think about our approach to market segmentation.
Companies routinely search for opportunities that are represented by customers with unmet needs. Unfortunately, not all potential customers are alike because they have different needs or wish to have their needs met in different ways. Generally speaking, a company’s competitive advantage and profit margins can’t be maintained for long if it simply meets customer needs in the same way as other suppliers. Thus, market segmentation is used to identify areas where differentiation is possible and to effectively demonstrate that the company’s products are distinctly superior to those of competitors for a specific group of customers. Market segmentation is equally useful in identifying areas the company should avoid. In an effort to uncover opportunities for differentiation, market segmentation is used to support product development by identifying unmet needs that could be satisfied in a specific way. In addition, segmentation has evolved to support more effective pricing, channel and marketing communications strategies.
Differentiation in the life sciences is most often based on a product’s performance based on attributes such as speed, volume of throughput or purity. A supplier’s quest for differentiation, however, is likely to be more successful when differentiation is stressed not only in performance specifications, but also throughout the entire customer experience, including how prospects become aware of the product. Targeted marketing communications emphasize certain advantages in a way that appeals to specific groups and engenders a perception of the supplier’s uniqueness.
Segmentation is most effective when a market possesses significant and measurable differences. The market must be large enough to warrant segmentation otherwise the marketing costs of targeting small groups outweigh the benefits. The differences that exist between segments must be quantifiable and confirmed through in-depth market research.
Segments must not only differ on demographic, geographic and psychographic characteristics, they must also differ on the benefits sought from the product.
If all customers need and expect exactly the same benefits from a company’s product, there is no reason to practice market segmentation. The same holds true for a company offering a product of universal appeal to all life scientists. However, such a situation rarely exists in the life sciences and virtually all companies can benefit from market segmentation.
First-time market segmentation efforts often fail because companies begin with the whole market and then attempt to define it in terms of one or two simplistic demographic characteristics. While advertising agencies and sales managers often welcome such an approach, actual customer behavior, is usually too complex to be predicted by simplistic classifications. Other dimensions, particularly when segmentation is used to support marketing communications, must be considered.
There are two broad categories of information used in market segmentation — classification variables and descriptor variables.
Classification variables are the most easily understood because they are generally observable. Some commonly used classification variables in the life sciences include:
- Demographic variables — Area of research, job position, organization type, etc.
- Geographic variables — City, state, zip code, country, region, etc.
- Psychographic variables — Attitudes, leadership traits, magazines read, conferences attended, etc.
- Behavioral variables — Brand loyalty, benefits sought, purchasing patterns, etc.
Descriptor variables, on the other hand, are used to describe each segment and separate one group from another. Unlike classification variables which are relatively easy to understand, descriptor variables are more intangible in that they are decided upon by the company in a highly subjective manner and are used to form a “composite” of what constitutes a likely customer. While classification variables can be used as a descriptor, a true descriptor variable seeks to understand how the differences between segments can be used to identify the most promising opportunities. For example, a company may have a product designed to help meet a specific need for molecular biologists. “Molecular biology” is a classification variable that by itself does not describe the many differences within the field. In this example, several descriptor variables that might prove useful to a marketing manager would be “extracting DNA” from “human tissue samples.” Descriptor variables usually can only be developed after in-depth, primary source market research. Identifying descriptor variables is what enables a company to translate the knowledge gained through segmentation into an actionable plan.
Many segmentation efforts are initiated but subsequently abandoned because key managers were not involved in the process and are unaware of how it was carried out. It is critical for decision makers throughout the company to be involved in the process because decisions about segmentation have far-reaching consequences for how a company does business — from the way products are conceived and developed to the organization of sales forces to the content and placement of print advertising. The experience and knowledge within the company must be harnessed to speculate about what the segments of a given market might be and what can be done to succeed in each. Properly conducted quantitative and qualitative research will subsequently validate or refute management’s preconceptions. Very often, the “conventional wisdom” and assumptions about customer needs within a company are revealed to be outdated and new ways to support, inform, and influence and customers are discovered.