Market Segmentation: Making it Work in Your World Washington DC

Market segmentation. Is there a more basic and fundamental marketing concept? Slice up your market into nice, neat groups, pick the groups that are most interesting or profitable, put together an offer tailored to the group's needs, and go sell that offer to 'em. There you go — Marketing 101 in one sentence!

There may not be a more intuitively appealing business idea than that of market segmentation and the associated idea of target marketing. We read about the brilliant market segmentation strategies of firms like Target as they adjust the merchandise mix in their stores to serve the specific geographic region in which they are located. Or, go to the Dell computer web-site and you will find different links for home users, small and medium businesses, governments and education, large businesses, . . . Proctor and Gamble makes Tide (in a dizzying number of variations), but also Cheer, Dreft, Era, Gain and Ivory — each with a different market segment in mind. We could keep going, but it is pretty clear that big firms put this concept of market segmentation to work, building brands and offers that fit carefully defined segments.

What about organizations of more modest size — say mid-size feed and grain firms? How does an idea like market segmentation work in a firm that can't spend huge amounts of money on national advertising? How does segmentation work in a firm with a defined geography, one which can't go looking coast to coast for members of its segment of choice? How does it work in a firm that may in fact need to serve many (all?) of the segments in its trade area, simply to generate enough volume to be profitable?

While we truly believe market segmentation to be a powerful idea, we also believe it is an idea that is easier to understand and buy into for a mid-size grain and feed firm than it is to actually implement — "easier to say than to do." Last Spring, Purdue University's Center for Food and Agricultural Business looked into how segmentation was being used (and not being used) by retail crop input dealers. The 20 organizations studied were located across the country, and had annual crop input sales from $15 million to $1 billion. While not feed and grain firms, most of what we found from surveying and interviewing these managers of mid-size agribusiness firms will probably be of interest to you — both to contrast with what you are doing, and as a source of ideas. (If you want a copy of the full study, just send us an e-mail and we will be glad to send you one.)

Gaps: Theory and Practice

Most textbooks and marketing experts are pretty clear on how you "do" market segmentation — you pursue the following "Six steps to an effective segmentation strategy":

1. Identify segments
2. Assess segment attractiveness (including segment profitability)
3. Design seg positioning/value proposition
4. Test (and refine) segment value proposition
5. Communicate and deliver value proposition
6. Evaluate progress with segment

How does the agribusiness world, your world, compare with the classroom? What gaps exist between theory and practice?

In general, most of the firms surveyed believed segmentation was useful and had or could pick out segments in their market. The key gaps in a market segmentation strategy for the group we worked with started with step 2. Interview responses revealed that market segment attractiveness was rarely evaluated on factors such as market access, market growth and competitive intensity. The most common attractiveness measures included some measure of firm profitability or sales volume from serving a particular segment; however, only one agribusiness actually measured segment/customer profitability effectively.

Segment profitability was estimated by most retailers based on the perception that their services generated higher margins than did their products sales. While this perception may be accurate, the managers also expressed they had difficulty tracking some of the costs associated with providing services. This would suggest any measure of profitability tracked could be inaccurate. Common themes from interviews revealed that information systems which could organize and track/assign costs associated with providing services were needed to achieve this refined measure of segment profitability. This process of organizing information and assigning costs to certain activities was considered expensive and time-consuming.

The third step, segment positioning, involves the creation of a tailored offer followed by a product-price positioning strategy for each target market segment. The greatest difficulty study participants found in creating the positioning strategy was developing unique prices for tailored offerings. Firms in this sample perceived there to be a great deal of price transparency in the market, which made it difficult to differentiate prices without jeopardizing customer relationships. This was reinforced during the interviews as the most frequently mentioned over-arching challenge to implementing a market segmentation strategy. In addition, the inability to tailor bundles (product/service/information) to fit individual market segments was an important challenge to making market segmentation work. Without unique offers developed to fit the needs of individual segments, any segmentation strategy will break down.

The fourth step in market segmentation involves testing and refining your tailored value proposition. The idea here is to get customer feedback on the offer before you roll it out to your full market — think of a test market or a focus group. A few of the agribusiness firms actually did perform this step. Of course, since most of the firms did not develop tailored value propositions, they also did not have anything to 'test' with their customers.

The successful execution of a marketing-mix strategy hinges on sales strategy implementation — the fifth step, communicating and delivering the value proposition. Only six firms actually worked at communicating a sales strategy for a new tailored offering to their sales staff, and then reported using some method to ensure its implementation through the staff. As one manager said regarding sales strategy implementation, "we don't have a way to sit down on top of people and say 'you will follow this exactly." That's just not been our style and culture inside the business."

This manager articulated an important challenge reinforced throughout the study: moving market segmentation from the main office into the field is no small task. Training sales persons to both 1) recognize the different segments they are working with and 2) have the discipline to deliver the "right" offer to the segment is a major challenge. It takes an organization with a strong sales management function to get beyond "selling everything to everybody all the time."

The promotion element (nonpersonal communication) of the communication step represented a less important barrier for firms in this study, as nine firms reported delivering a different communication strategy to each of their identified market segments. One retailer made this comment regarding his firm's communication strategy: "I personally think that the communications with growers does not vary as much as you might think per segment. I am always preaching to my sales staff that we need to spend the time where we are getting the dollars."

This retailer illustrates the personal side of the communications strategy, but does not allude to any nonpersonal forms such as direct mail, websites, or other nonpersonal means of communication cited by the retailers of this sample during the telephone interviews. This articulation represents limited access to marketing expertise, which was also rated as an important challenge to successful execution of a market segmentation strategy in the Web-based survey.

Measuring progress with segments was the sixth and final step assessed in these firms' market segmentation strategies. The point here is straightforward: are you achieving your goals with the target segment? And, the only way to answer this question is to measure something. While no firms cited ways in which they specifically measured customer satisfaction within market segments, five firms did report using customer surveys to measure customer satisfaction across the entire firm. This suggests that if retailers had names to identify specific surveys (or some other method of coding), that they would have the ability to group those surveys based upon the customer's market segment. However, most of the firms did not report measuring satisfaction in any way and were therefore said to currently have no way to measure customer satisfaction within segments.

Bridging gaps

What are some ideas for bridging these gaps, and helping a feed and grain organization do a better job of successfully executing a market segmentation strategy? Here are a few:

1. Recognize the realities of the local situation. Sales and marketing capabilities and market areas differ widely firm to firm. While a complex, multi segment structure may make sense at a national level, it may be necessary to use something less refined, but more manageable, at any local level. This may be as simple as segments based on customer size, species or type of production processes employed. It might be something based on buying behaviors such as business buyer, relationship buyer, and economic buyer.
2. Start small. If this is all new to you, start with a single segment. Do some homework on the needs of the segment, develop an offer, work with your sales folks on their approach to the group, think about any needed communications pieces, go after the segment aggressively, and evaluate the response. Then you can decide how far you want to take this and what adjustments in your approach may be needed.
3. Work at evaluating segment profitability. This is a challenging area for many mid-size agribusiness firms (and many very large ones). Getting to profitability information by customer or by segment is no small task given the information systems available to most feed and grain firms. Short of substantial information technology investments (which may be needed long term), spreadsheets, budget-type approaches, or other decision tools may be used to help managers understand how a segmented offering is more profitable than what they are currently doing. For those of you with a farm management background, think "partial budget" and consider a segment an "enterprise."
4. Give serious thought to segmented offers. Look for examples of successful offers and how other firms put together products, services and information in unique ways to fit specific segments. This may be from an agribusiness in a different line of business, a colleague you meet at a trade show, or a firm completely out of agriculture. Work to move beyond a pure menu approach. If you have done your homework on the segment, get key employees involved in thinking this through. If your team were members of the segment, what would THEY find value in? Brainstorming a segment value proposition and offer can be a high-energy and fun activity.
5. Continue to build the expertise of your sales personnel. Unless your sales force is able to clearly communicate the benefits of the segmented offer to the right customer, any segmentation strategy will quickly unwind. In addition to ongoing training, even the organization of the sales force may need to be revisited in an attempt to match the right sales personnel with the right customers. Note that this takes more than doing a half-day training session on segments and needs, then sending the sales force out to do great things. It also takes in-the-field coaching, sharing of best practices among the sales team, reinforcement of positive results, and perhaps even discipline when a salesperson just won't "get with the program."
6. Give thought to how non-personal forms of communication should be used to reach various market segments. Will that group REALLY respond to an advertisement, or perhaps what they really want and need is a regular update on the latest developments in sow nutrition from you, sent via e-mail.
7. Track your progress with your market segments of choice. While customer satisfaction within market segments is generic, specific quantifiable measures such as dairy farmers sold, dairy farmers retained, or new dairy farmers sold (and likely even products/volume/profitability under these general headings) for a specific tailored offering may need to be tracked in order to effectively assess the success of a new tailored offering. You may well need to spend some time working with your revenue and cost data here. But, knowing which segments you can profitability serve — and which ones you can't — is powerful information as you refine your segmentation strategy.

Review

There are few feed and grain managers we come across who don't understand and believe in the power of market segmentation and target marketing. But, far fewer have developed and executed a profitable segmentation strategy. Take a look at our six steps — ask yourself which of these you really perform and which ones you don't. Review our tips for bridging the gaps and "do it right" for at least one segment. We bet when you perform that last step, evaluating the results, you will be glad you did!

Dr. Akridge is Interim Vice Provost for Engagement, and the James and Lois Ackerman Professor of Agricultural Economics, Purdue University. Dr. Foltz is Associate Dean, College of Agricultural and Life Sciences and Professor, Department of Agricultural Economics and Rural Sociology, University of Idaho, Moscow, ID. Mr. Reimer is a Credit Officer Trainee with Northwest Farm Credit Services in Moses Lake, WA and a former graduate research assistant at Purdue University.