From all my years in research and consulting, I think I’ve learned a thing or two about marketing worth sharing. Enduring fundamentals, mostly yet often overlooked. So, this year, I’m sharing some for your consideration. I hope they’re helpful.
This week’s thought: It’s all about targeting, not segmentation.
Segmentation has become controversial again. While most marketers view segmentation as the foundation of effective marketing, a growing number believe it needs to be reined in. Some feel it has outlived its usefulness. A few believe it was always mistaken.
However, I think this entire debate misses the point because what makes marketing effective is targeting, not segmentation. The two ideas have become conflated—the former is an element of strategy; the latter is a sort of tactic or tool.
Those who feel segmentation is past its use-by date point to the supply chain snarls following COVID as the turning point. It was hard enough getting one variety to market, much less several. So, companies shrunk varieties, even brands, of foods, beverages, toys, furniture, HBAs, household goods, and more. (Alas, my favorite soft drink, Tab, disappeared during this downsizing.) As a share of general merchandise, new products now account for less than half of what they did before the pandemic.
Fewer varieties mean demand is more aggregated, thus less segmented. Yet, despite this, consumer spending and marketing effectiveness are as strong as ever. Leading critics to question the value of all the segmentation that has now been cast off.
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Some company leaders have been talking as if this world of less variety is here to stay. Macy’s CEO explained its post-COVID simplification by saying, “The consumer today does not want an endless aisle.” Newell’s CEO echoed this sentiment: “I don’t think any consumer would have noticed we went from 200 to 150” Yankee Candles.
There seems to be little payoff for limitless variety and personalization. For one thing, operational execution is complex. Even in our digital, data-rich age, marketers have struggled to deliver affordable and compelling one-to-one personalized experiences and offerings. For another thing, the consumer appeal of obscure varieties is doubtful. Research has found no support for the long tail theory popularized by tech writer Chris Anderson.
It took the pandemic to lay bare the problematic economics of micro-segmentation, but when it did, the wheel turned.
Skinnying down feels like walking away from segmentation. But that’s not the case. The answer to too much variety is not too little. We are not headed back to Henry Ford’s Model T maxim—any color as long as it’s black. Retailers also cut SKU’s after the financial crisis, most notably Walmart. Two years into it, Walmart reversed course, realizing it had cut too close to the bone.
Skinnying down is a return to what’s really important—targeting. Marketing is not about segmentation per se. If it takes multiple options for every consumer to find a good fit, then segmentation is needed for proper marketing. But if one option is a good fit for everybody, then no segmentation is needed, and that’s proper marketing. One is often plenty.
The measure of success is targeting, not the psychological or needs-state coherence of segments. Which is to say that many times, marketers rely on the statistical fit of segmentation solutions rather than the targeting fit of offerings to determine marketing strategy.
Segmentation arose from pioneering work in the first half of the 20th century by Wroe Alderson, the all-but-forgotten founding father of marketing science. Attitude segmentation, more specifically, was developed by Russ Haley at Grey in the early sixties. These ideas became consensus thinking through Northwestern professor Philip Kotler’s highly influential Marketing Management textbook, first published in 1967, which for decades has instructed aspiring business leaders that segmentation is the fundamental strategic building block of proper marketing.
Not without dissent, though. Larry Gibson, research head at General Mills for two decades, long argued that segmentation was an inefficient heuristic construct, not an actual market feature. In other words, just a tool for executing targeting. Gibson felt that the “radical heterogeneity” of preferences made choice modeling a better analytic tool for targeting.
Other dissent centered on the necessity of segmentation to deliver above-average returns. A seldom recognized yet critical implication of segmentation theory is that the financial viability of a segmentation approach requires higher returns among targeted segments.
Dividing the market into segments walls off certain segments from consideration and attention—they are ignored in favor of higher prospect segments. This narrows the universe of opportunity for a brand, and in this smaller market, a brand must grow more strongly in order to make up the foregone potential of the rest of the market.
In other words, if targeted segments are not more responsive or more loyal, what’s the point? A brand can get the same results without segmentation. And the greater responsiveness or loyalty can’t be just a little bit higher. It must be a lot higher—high enough to more than make up for the lost sales to non-targeted segments and high enough to cover the additional costs of segmented media buys.
These sorts of questions spawned an outpouring of business theorists who preached the higher returns of highly segmented marketing, like Tom Peters with his focus on service, and Seth Godin with his focus on permission, and Don Peppers and Martha Rogers with their focus on personalization. These views were widely accepted during the eighties and nineties until a more exacting scrutiny of segmentation was articulated around the turn of the century by Byron Sharp, director of the Ehrenberg-Bass Institute.
In 2005, Sharp published How Brands Grow, in which he pounced on the one-to-one objective of loyalty by showing that growth comes from more, not more loyal, customers. According to Sharp’s account, the narrowing of market potential inherent to segmentation makes no sense—higher returns among targeted segments are a mirage, and cutting a brand off from potential customers in non-targeted segments is self-defeating.
In 2018, Sharp published a textbook of his own that teaches mass marketing, not segmentation. Because says Sharp, segmentation is constrictive, thus “anti-scale and…anti-growth.”
Sharp’s critiques in combination with pandemic-driven simplification make it seem as if a post-segmentation era is at hand. Hold your horses.
It’s not about segmentation. It’s about targeting. It’s never about segmenting or not. It’s about better or worse targeting. If segmentation is what it takes, then there’s no debate. And vice versa.
Note that targeting is really a matter of finance, not marketing. The business objective is the bottom line, so the best target is the most profitable. This is not identical to the segmentation purpose of a perfect fit. The business objective is the most profit, and that might mean—indeed, usually means—merely a good enough fit.
The only justification for taking a segmented approach for customer fit is that it is the most profitable strategy for targeting. If the most profitable targeting strategy is not to segment, then segmentation is a distraction. Sharp would argue that this is what happened during the heyday of loyalty pundits (albeit his financial metric is topline rather than profit).
The value of Sharp’s critique lies in the reminder to focus on targeting, rather than segmentation. And when we do, we see that Sharp draws the wrong conclusion about marketing. Because he, too, lets segmentation get in the way of his thinking about targeting.
There is nothing ‘mass’ in marketing any longer. The marketplace has fractured. Difference and division abound: Demographics. Localism. Gender. Race. Ethnicity. Family structure. Living arrangements. Income. Social media. Politics. Generations. Even work-from-home.
The prerequisite for mass marketing is finding “bigger commonalities,” as Sharp puts it. The related psychological principle is that people want to belong and share allegiance with something bigger, not be divided into smaller, often warring, camps. But this is precisely the problem. In a marketplace of increasingly radical heterogeneity (echoing Gibson), looking for persuasive and attractive commonalities is quixotic. Increasingly, belonging is found, even if paradoxically, in smaller groups.
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What the future demands is a diversity of targeting. Even segmentation can fall short in this regard. More often than not, segmentation work is done to identify the single target with the most potential and deliver only against that one target, rather than finding ways to appeal to multiple targets at once. Which is an ironic hitch in the whole approach—it is embracing an analytics of difference in order to practice a marketing of singularity. Which is precisely what mass marketing is—a marketing of singularity. In today’s fractured marketplace, singularity is a defect, and a defect common to both sides of the segmentation debate. So, each side of the segmentation debate winds up with a type of targeting unsuited for the future.
Brands need to master master granularity, not try to traffic in commonalities that aren’t there. Getting big has always required amassing customers of many sorts. Segmentation has tended to overlook this, but critics have oversimplified the solution.
Brands get big with a quilt that stitches together diverse, dissimilar customers, each with a unique connection to a brand, even though they may have little in common with other customers. Big brands do not gloss over differences or mash up consumers into a force-fit of uniformity. Rather, they double down on making distinctive connections. This is exactly what makes marketing hard. But getting started is easy—it’s all about targeting, not segmentation.
Contributed to Branding Strategy Insider By Walker Smith, Chief Knowledge Officer, Brand & Marketing at Kantar
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