Marketing Strategy and Segmentation: 5 Cs, STP, and 4 Ps

Marketing (core idea)

Marketing creates value. Business value = innovation + customers who value it. Intrinsic value does not equal business value

Two main principles of marketing

1) Value Creation (create real value for customers) and 2) Differential Advantage (create that value better than the competition)

Value Creation

Creating real value for customers (principle #1 of marketing)

Differential Advantage

Creating value for customers better than the competition does (principle #2 of marketing)

Marketing value creation process (3 steps)

1) Analyze the situation with the 5 Cs, 2) Build strategy and action plan with STP, 3) Implement and evaluate with the 4 Ps

5 Cs

Customers, Company, Competitors, Collaborators, Context

Customers (5 Cs)

The target audience for your product or service. Key focus = their NEEDS

Customer Needs

The benefits the customer expects to receive from a company's offering

Customer Profile

Observable characteristics of customers (demographics, hobbies, location, communities, behaviors)

Company (5 Cs)

The business itself and its ability to meet customer needs (profile, goals, resources). Key focus = RESOURCES

Competitors (5 Cs)

Any other entity trying to fulfill similar needs for customers. Key focus = their VULNERABILITIES

Collaborators (5 Cs)

External organizations that help the company deliver value to customers (suppliers and partners). Key focus = COMMON GOALS

Suppliers

Collaborators that provide the raw materials, components, or products a business needs to operate and deliver value

Partners

Collaborators that work with a company to enhance value to customers through collaborations, joint ventures, or strategic alliances

Context (5 Cs)

The broader environment the business operates in (physical, economic, sociocultural, technological, regulatory). Key focus = BROADER ENVIRONMENT

5 Cs key word pairs

Customers = Needs, Company = Resources, Competitors = Vulnerabilities, Collaborators = Common Goals, Context = Broader Environment

Tidal (example)

Failed by ignoring the 5 Cs. Weak exclusive content, no value for collaborators, buggy app (company), cheaper competitors (Spotify, Apple Music), context shifting to AI and personalization. Ended with about 0.5% share

Why monitor the 5 Cs constantly

Any C can change at any time due to the company, competitors, customers, collaborators, or outside forces. "The market is a jungle. Adapt or die"

Sustainable Competitive Advantage

Requires constantly monitoring the 5 Cs and adapting, since what worked yesterday might not work tomorrow

STP

Segmentation, Targeting, Positioning (deciding where to play and how to win)

Segmentation question

What are all the different groups of customers I could create value for?

Targeting question

Which group of customers am I going to focus on creating value for?

Positioning question

How will I create value for them, what should my offering include or exclude, and how do I communicate its distinct value versus competitors?

4 Ps (Marketing Mix)

Product, Price, Place, Promotion (how you implement the strategy)

Product (4 Ps)

What features would this customer value?

Price (4 Ps)

What is this customer willing to pay?

Place (4 Ps)

Where or how does this customer want to buy?

Promotion (4 Ps)

What message will resonate with this customer?

Segmentation

Subdividing a market so that any subset could be selected as a marketing target and reached with a distinct marketing mix

Two steps of segmentation

1) Identify groups of people or organizations with shared needs and characteristics, 2) Aggregate (combine) these groups into larger segments based on their interest in the product's utility

Benefits of segmentation to the firm

Find unmet needs and market gaps, better product design, find most valuable customers (higher CLV), find growth, more efficient marketing, predict growth and purchase rates. Result = INCREASED PROFIT

Benefits of segmentation to the customer

More resonant products, more relevant promotions, personalized interactions, more efficient choice process. Result = HIGHER SATISFACTION

Customer -> Segment -> Product approach

Find a segment not being served well, then design a product that gives them specific, differentiated value (customer-centric, e.g. Peloton, OXO)

Product -> Segment -> Customer approach

Create a product idea first, then look for a segment to sell it to. Riskier because the product may not fit a real need

Product-Market Fit

How well an offering meets the needs of its target customers. Built from the bottom up = Target Customers -> Unmet Needs -> Value Proposition and Positioning -> Features -> UX. Customer-centric marketing increases the chance of high fit

Segmentation and the marketing mix

Segmentation directly influences all 4 Ps

"Marketers don't create segments"

They uncover them

A Priori Segmentation

Segmenting the market BEFORE developing your marketing mix (find a segment with unmet needs, then build the product and mix for them)

Post-Hoc Segmentation

Segmenting your CURRENT customer base to find distinct segments you could create more value for or grow

Pedialyte (example)

Post-hoc segmentation. Found hungover adults using a product made for sick kids. Adults went from about 1/3 of sales (2015) to almost half (2018)

LEGO AFOLs (example)

Post-hoc segmentation found Adult Fans of LEGO. Adults get more complex sets, higher prices, adult themes. Adults vs. kids is a GOOD demographic split because it ties to real differences in value

LEGO Boys vs. Girls (example)

A BAD demographic split (LEGO Friends). In 2021 LEGO dropped gender labels and now segments by kids' interests and "passion points." Sales grew 12% in 2022

Common segmentation variables

Geographic, Demographic, Psychographic, Behavioral

Geographic variables

Country, region, city, urban vs. rural, climate

Demographic variables

Age, income, gender, generation, marital status, family size, occupation, education, ethnicity, religion

Psychographic variables

Lifestyle, personality, activities, interests, opinions, political affiliation

Behavioral variables

Usage rate, loyalty, product knowledge, involvement, purchase occasion, buying stage

Profile-based variables (demographic, geographic, etc.)

Useful DESCRIPTORS of segments, but usually NOT a good way to form segments or define a target customer

Problems with demographic-only segmentation

Misses a lot of purchase-relevant differences, can lead to cringey or offensive stereotyping, and can needlessly exclude interested customers of other demographics

Generational labels (Gen Z, Millennials)

Per Philip Cohen, generation boundaries have no research basis and generation descriptors are stereotypes with "astrology-level vagueness"

Value-Based Segmentation

Segmenting by what customers want, need, or value (Step 1), then describing that segment with demographic and behavioral traits (Step 2). The "Do this" approach

Stereotype-Based Segmentation

Starting with a demographic group (Step 1) and then assuming what that group likes (Step 2). The "Not this" approach

Tide example (value-based)

"Sell Tide to people who want to solve tough laundry problems" is better than "sell Tide to moms"

Road Warriors (luggage example)

Value-based segment = digital nomads who need luggage that lets them work well during frequent short work trips. Then described as 25-40, mid-to-high income, frequent travelers, urban, tech lovers

Nike Cruzrone (example)

Instead of "a sneaker for old people," a value-based segment = people who want shoes that make them feel like athletes even if they can't move how they want (older people, injured, disabled athletes, new runners, slower runners)

Firmographics

The B2B version of demographics. Role-based, size-based, geographic, and industry-based variables

B2B value-based segmentation example

"Companies that value safety and compliance" is better than "manufacturing companies" or "small to medium companies"

When demographics ARE useful

As descriptors to find and reach segments, for targeting, for advertising and media selection, and when they strongly correlate with what customers value

Steps to uncover segments

Qualitative research -> Identify key themes -> Quantitative research -> Interpret results and segment

Qualitative research methods

Focus groups, in-depth interviews, ethnographies, journey mapping, observation

Quantitative research for segmentation

Surveys based on qualitative insights, then segments formed through statistical clustering and logic

Cluster Analysis

Algorithms that group objects to 1) minimize differences within groups and 2) maximize differences between groups. Key decisions = which variables to include and how to interpret clusters

User-Based Segmentation

User -> Value (what types of customers would buy or use this?)

Benefit-Based Segmentation

Benefit -> User -> Value (what are the different benefits of this product?)

Occasion-Based Segmentation

Occasion -> Value (when do people buy or use this product?)

Mixing segmentation methods

User, benefit, and occasion methods are not mutually exclusive. You can mix, layer, and embed them (e.g. user-based segments within an occasion-based segment)

"Right" number of segments depends on

Distinct (well separated), Minimal degrees of freedom (tight, similar segments), and Managerial relevance (does splitting them change business actions and raise sales or prices enough to cover higher costs)

Mass Marketing (segmentation spectrum)

Most cost-efficient but least effective (economies of scale)

Customized / Individual Marketing (segmentation spectrum)

Least cost-efficient but most effective

Segment naming tip

If you can't think of a short name for a segment, it may not be well defined

Useful Segments (6 criteria)

Identifiable, Substantial, Differentiable, Actionable, Reachable, Stable

Identifiable

You can find the segment in the market

Substantial

The segment is big enough to be cost effective to serve

Differentiable

Needs between segments are clearly distinct

Actionable

You can develop offerings around the segment's needs and values

Reachable

You can contact and market to the segment

Stable

The segment's needs are relatively static

MECE

Mutually Exclusive, Collectively Exhaustive. What firms want segments to be, though in practice segments are fuzzy, overlapping, and change over time

Proper segmentation process

1) Understand the benefits customers seek, 2) Categorize the market on those variables (qual, quant, or both), 3) Label each segment by the value it seeks, 4) Describe each segment with observable variables

Strategic Targeting

Deciding which segments to serve and which to ignore (WHO you will create value for)

Tactical Targeting

Finding effective, cost-efficient ways to reach target customers (HOW you will reach them)

Target choice and the marketing mix

The choice of target segment shapes positioning and the entire marketing mix

Impossible Foods (targeting example)

Targeted meat eaters (flexitarians) who want to cut back, not vegetarians. Product mimics meat, sold in the meat aisle and fast-food chains, premium price

Four approaches to targeting (narrow to broad)

Individualized, Niche, Multi-Target (Differentiated), Undifferentiated (Mass Marketing)

Individualized Targeting

Hyper-personalized strategies for small groups or individuals (e.g. Amazon and Netflix recommendations)

Niche Marketing

Focus on a single, specialized segment within a broader market that has unique needs. "The riches are in the niches"

Niche Marketing pros

Less competition (big fish in small pond), clear focus, build specialist skill and credibility, often higher prices and margins, customers potentially more loyal

Niche Marketing cons

No economies of scale, over-dependence on one product or market, attracts competition if successful, vulnerable to market changes (all eggs in one basket)

Bevel (niche example)

Shaving and grooming products for men with coarse or curly hair, a group (30-40% of men) that mainstream brands did not serve

Crunchyroll (niche example)

Legal anime streaming. A "gigantic niche" of about 800 million fans outside Japan and China

Multi-Target (Differentiated) Marketing

Tailored offerings for different market segments (e.g. Tide versions for stains, color, scent, gentleness)

Multi-Target Marketing pros

More market coverage, customized solutions, diversified risk, advantage over one-size-fits-all, higher growth potential

Multi-Target Marketing cons

Higher costs, more complex operations, brand dilution risk, cannibalization risk, overextension of resources

Undifferentiated (Mass) Marketing

Broad appeal, one-size-fits-all offering aimed at the largest part of the market

Mass Marketing pros

Widest reach, high sales volume potential, cost-efficient (economies of scale), simpler operations

Mass Marketing cons

Can't meet every segment's needs, less added value, usually lower prices, high competition, hard to build loyalty

Why not target everyone?

By creating value for one segment, your offering becomes less attractive to others. A "mass market" is really just a bunch of niche markets

Toothpaste segments (example)

Worriers (health), Sociables (whitening), Sensories (taste and feel), Generalists (nothing special)

Niche to Multi-Target strategy

"Serve one community, serve them well, then move onto other communities" (e.g. Under Armour football base layer, OXO grips for people with arthritis then everyone)

Choosing a target segment (3 areas)

Segment characteristics (monetary value, strategic value, reachability), Company fit (can we win, can we meet their needs, will it alienate current customers), Competitive advantage (can we serve them better than competitors)