Chapter 3 – Market Sizing and Segmentation

Estimated Reading Time: 17 minutes

There is a common sin that marketers frequently commit.  In their rush to build a web site or create an attractive logo, they forget something very important: Who is the buyer?   These marketers are firing without aiming.  They are being tactical and not strategic.  Sometimes they are simply shooting to make it seem as if they are doing something.

To build an effective marketing plan, you need to understand who will be buying your product.  This means, among other things, that you need to calculate how big the potential market is for your product or service, and how much of that market will be contested by your competitors.  And, if you are really good, you will learn not just who those buyers are, but why they purchase the goods and services they do.

Market Segmentation

A market is a place where trade takes place. Markets are dependent on two major participants – buyers and sellers.  Market segmentation is what the name suggests – understanding the overall potential market for your product, and determining which subsets, or segments, of that market are most likely to buy from you.

In this chapter, we cover both business-to-business (B2B) and business-to-consumer (B2C) markets.   Some businesses only sell to other businesses, while some sell only to consumers – individuals who buy product or services for personal use.   Some, like Dell, sell to consumers and to other businesses.  Businesses and consumers are both buyers, and once they have purchased, both become customers.

Market segmentation varies somewhat depending on whether you are selling to B2C or B2B. Regardless, most of the core concepts are the same.  You will just be segmenting using different criteria.

For B2B markets, there are three fundamental characteristics of the customer that your company should know:  location, company size, and industry. Let’s take a closer look at each one.

Location – Where is the  company located?  Most commonly, marketers perform this segmentation at the country level.  For smaller businesses with less reach or for certain types of products or services, however, segmentation can be performed on the level of a state, a province, or even a city.   In some cases, segmentation considers whether the target company is located in a major metropolitan area, a suburb, an exurb, or a rural area, although this level of segmentation is more common for B2C markets

Company size – Is the company a small business, a mid-sized business, or a large enterprise?   This information is valuable because it helps the seller determine whether (1) its products meet the target company’s needs and (2) the target company can afford them.   Although definitions of these three segments vary, the most common breakdown is:

• Small businesses have fewer than 100 employees;
• Mid-sized businesses have 101-1000 employees;
• Enterprises have more than 1000 employees.

Some marketers divide one or more of these categories into sub-segments.  For example, the small office/home office (SOHO) segment is a small business with less than ten employees..  Other marketers add segments; for example, large enterprises for companies with more than 5000 employees.  (FYI: All of the Forbes Global 2000 fall within this sub-segment.)  Which system you adopt depends on the nature of your organization, its products and/or services, and its goals and strategies.  The most basic rule is to use segments that make sense for your business.

Industry – Different industries have different needs, and knowing which industries are fits for your products and services is a critical aspect of segmentation.  You can obtain lists of industries — and sub-industries — from a number of sources.  The most common source is the Standard Industrial Classification (SIC) code. The U.S. Government created the SIC codes in 1937 to establish a standard system that all federal agencies and departments would use to classify industries.  All SIC codes consist of four digits.   For example, the industry SIC code for Metal Mining is 1000.  Within this industry are numerous sub-industries, such as Gold and Silver Ores (1040) and Miscellaneous Metal Ores (1090).

In 1997, a new six-digit system called the North American Industry Classification System (NAICS) was introduced.  NAICS was jointly developed by the United States, Canada, and Mexico to facilitate trade among these nations following the creation of NAFTA.  NAICS codes have largely replaced SIC codes, although most people still refer to the codes as SIC codes.  The codes for Gold Mining and Silver Mining are broken out in NAICS, 212221 and 212222 respectively.

For B2C markets, marketers typically employ a different set of characteristics.  Because these marketers are targeting people and not companies, they need to adopt a more granular and more “human” approach to segmenting.  To accomplish this task, they focus on four sets of characteristics: geographic, demographic, psychographic, and behavioral.

Geographic – This segment largely parallels “location” in business-to-business marketing.  In the case of consumers, however, the marketer might place greater emphas on whether a person lives in an urban, a suburban, an exurban, or a rural area.  Marketers of some products and services (e.g., bathing suits, snowmobiles, ignition block warmers) may also be interested in climate.

Demographic – There is a whole list of characteristics that you will likely want to know about your buyer, including age, gender, marital status, education, occupation, income, ethnicity, and religion.  In the case of age, for example, marketers have identified different cohorts, ranging from Baby Boomers (born in the baby boom between 1946 and 1964) to Generation X (the disaffected and directionless generation that followed) to the Millennials (aka Generation Y; they grew up with digital technology).  In some cases, marketers create segments by combining two or more demographic characteristics.  A well-known example is DINKS (dual-income, no kids).  With two incomes and no child-related expenses, DINKS represent  a vital market segment for luxury products such as international travel and two-seater luxury sports cars.

Psychographic –Psychographic segmentation groups customers according to their lifestyle.  Basic psychographic characteristics include activities, interests, opinions, attitudes, and values.  The tool that marketers most frequently use to create psychographic profiles is the Activity Interest Opinion (AIO) survey, which is sometimes called a “lifestyle survey.”   Significantly, critics charge — with some justification — that psychographic segmentation can come across as marketing hocus pocus.  The fact remains, however, that identifying and understanding psychographic characteristics are essential if you want to understand your buyers’ behaviors.   A seminal lifestyle survey in the early 1970s by Joseph Plummer found that male users of bank credit cards saw themselves as modern, risk taking and upwardly mobile.  Plummer encouraged banks to promote these aspects of their cards while also using marketing to change traditional concepts of money and the perceived limitations of the typical conservative lifestyle to bring on new customers[1].  Credit card companies took this to heart and we have all seen credit card usage move from the occasional large or “emergency” purchase to the everyday purchase in our lifetime.  Table 1 summarizes the most common elements of AIO surveys.[2]  Marketers can create questions that probe various elements to look for new insights or test hypothesis.

Activities	Interests	Opinions
Work	Family	Themselves
Hobbies	Home	Social issues
Social events	Job	Politics
Vacation	Community	Business
Entertainment	Recreation	Economics
Club membership	Fashion	Education
Community	Food	Products
Shopping	Media	Future
Sports	Achievements	Culture

  Table 1: Elements of Activities Interests Opinions (AIO) Surveys

Behavioral – This segmentation is based on actual customer behavior toward products.  Behavioral segmentation focuses on a few fundamental factors, including, but not limited to:

• Brand loyalty,
• Whether the customer is a first-time or repeat buyer,
• The benefits the customer is seeking,
• Holidays or events that affect purchases,
• The customer’s readiness to buy.

 Behavioral segmentation is most closely related to the product itself, and it is a fairly straightforward approach to segmenting.  Consider, for example, repeat buyers with high brand loyalty.  No matter where they are or what they believe, they are a highly desirable market segment.

Market Sizing

Clearly, identifying the viable markets and market segments for your products and/or services is essential to your company’s success.  Regardless of the markets in which you operate, however, it is essential that you have an accurate knowledge of their size.

It’s probably safe to assume that everyone wants to do business in a large and fast-growing market.  However, it is possible to make money in a niche or a nascent market.  You can also be successful if you introduce a revolutionary product that is just the tonic for customers who are fleeing a declining market.  The point is, you can make money in all types of markets.

How can you determine how large your target market is?   There are several standard metrics you can use to measure markets.

Total Available Market (TAM) – This is the total size of the market.  It is also referred to as total addressable market.

Served Available Market (SAM) – Also known as served addressable market, the SAM is the total size of the market that is currently being served, or sold to.  It is a portion of the TAM, and therefore it is always smaller.  For example, according to the research firm IDC, 659.8 million smartphones were shipped in 2012, up 33.5% from the 494.2 million units shipped in 2011[3].  Assuming all of these are sold, then the SAM is 659.8 million, plus the smartphones previously sold, minus the number taken out of service.  A big number, but nothing compared with a potential TAM in the billions if every adult in the world owned one.

Share of Market (SOM) – More commonly referred to as market share, this is the percentage of the market that a given company owns.

Market Growth – This is the rate by which the TAM is growing.  It is typically calculated on an annual basis and expressed as compound annual growth rate (CAGR), pronounced “ka-grr.”

You can obtain many of these numbers from analysts who follow your industry or product.  If you are selling something new, you may need to extrapolate or combine research to create an approximation, or “comp,” of your market.

A bit of advice to those of you who create marketing plans: Never walk into the boardroom with only the TAM.  From personal experience, we can tell you this is one of the fastest ways to get thrown out of said boardroom.   You need to understand the market dynamics – what your competitors are doing, price pressures, the strength of your brand –  better than that.  Also, never say the following: “This market is so big, if we got capture only 1 percent of it, we’d all be rich.”  We know more than one venture capitalist who stops listening to your pitch at that point.  No one goes into business to get a 1 percent share, and presenting this argument suggests that you don’t have a very sound strategy.

An accurate knowledge of market size is critical to understanding the dynamics of a market – current or new – and assessing whether there is room for growth.  Good markets are typically large and have a gap between the TAM and the SAM.  This gap represents sales opportunity for your business.   Opportunity also arises when the vendor with the largest SOM is vulnerable and your company feels it can take away market share based on an advantage in your product, price, or distribution.  Another strategy for stealing market share is aggressive promotion.  One of the best examples of this strategy is the market share gained by online insurance companies such as GEICO and Progressive.  With essentially the same product, offered for a bit less via direct sales as opposed to agents, aggressive promotion via television advertising enabled these companies to dramatically increase their market share.   As of 2011, GEICO is the third largest auto insurance provider in the United States, and is growing at 7 percent, while the CAGR for the overall auto insurance market is only 1 percent[4].   GEICO is stealing market share.

The best way to size markets is to perform both a top-down and a bottom-up analysis.  Find analysts’ reports that provide the TAM, growth rate, and market share, if they are available.  . Then, balance that top-down approach with your own bottoms-up calculations based on your price, manufacturing capacity, and sales reach.

The Buyer Persona

Thus far we have established that to create a successful marketing campaign, you need to become familiar with both the composition and the size of your market.  Knowing your market, however, is not the same as knowing your buyers.  It is one thing to know which country buyers live in, which industry they operate in – even their age.   But, what does that tell you about what they think and what motivates them to buy.

In B2B scenarios, marketers are guilty of targeting companies and departments within companies without truly understanding who the actual buyers are. Even when B2B marketers know the titles of their target customers, what else do they really know about them?  How do these customers view products such as yours? How do they buy?  Do they even have the authority to buy?   Are there any other obstacles in the way?

In B2C marketing, knowing the age, gender, and home town of your buyer tells you only so much.  Even knowing their interests may be enough to segment them adequately.  For example, consider all the female twentysomethings in your area who like to read.  Beyond this single common characteristic, they could be completely different individuals.  If you are trying to sell them an “ereader” like Amazon’s Kindle, knowing what they read, how often they read, and if they travel would be very useful.  High-income voracious readers looking to lighten their load on business trips would be a good persona to target.

How can marketers acquire a better understanding of  prospective buyers and their behaviors?  One effective strategy is to create a composite profile, or archetype, known as the buyer persona.  The buyer persona clarifies who the buyers really are, what motivates them, how they think and talk, and what issues they face in their jobs for B2B and everyday lives for B2C.  Marketing that takes these factors into account will be more effective.

The best way to start the process for a B2B market – assuming you are working for an established business with existing customers – is to interview a few salespeople to find out whom they typically sell to.  If you sell via retail to consumers, then you may need to talk to the sales associates on the floor.  If you are a new company, or if you are bringing out a new product with a different buyer, you will need to make some assumptions based on your knowledge of the market.  You can also analyze competing or similar products to obtain insight into the behaviors of the people who purchase them.  In each scenario you are looking to identify the profile that most often buys your product.  Knowing more about these individuals will make your marketing more effective in many ways – buying the right lists, creating meaningful tools, speaking their language, and teaching new sales-people the traits of their prospective customers.

Interviews are critical to developing a good buyer persona.  Actually speaking with the buyers can uncover insights that would never come to light otherwise.  Yet, many marketers never take this step.  Why not?  One obvious reason is that contacting real buyers is a difficult and challenging task.  You need to find buyers who are willing to talk as well as sales reps who are comfortable allowing their marketing people speak directly to their customers.  Another challenge is the potential embarrassment associated with asking questions that the buyer assumes you should know. (So, why did you buy our product?)  You need to make a concerted effort to overcome these challenges. Rest assured, the results are worth it.

One vital rule in conducting effective interviews is to make certain that you are speaking to the actual buyer.  This might sound obvious, but not all sales reps know who these individuals are.  Especially at larger accounts where salesperson may be in charge of the relationship for their company, they may deal only with the top person, and this person may not be the decision-making buyer.

Interviews should be conducted by the marketing team, without the sales rep present (if possible).   You don’t want a sales rep jumping in and answering questions you put to the buyer.  Interviewing buyers over the phone and face to face are both fine.   It is always better, however, to have a dedicated note taker present so that the interviewer can focus on developing rapport with the buyers.  Here are some sample questions for B2B buyers, organized by theme:

Role and Responsibility

–        What is your role?  What responsibilities do you have?

–        What department are you in?  What does your reporting structure look like?

–        What is the biggest challenge to getting your job done?

Key Initiatives and Objectives

–        What are your key initiatives?  How do they relate to your business?

–        What are the major hurdles to accomplishing them?

–        How does your organization measure success?

Buying Process and Decision Criteria

–        What made you decide to buy a product like ours?  What factors drove that decision?

–        Take me back to the day you decided to start looking for products like ours.  When was that, and how did it happen?

–        What was it that finally convinced you to buy our product?

–        Who else got involved in the decision and why?

Wildcards

–        If you could change one thing about your job, what would it be?

–        How do you think your role compares with those of your peers?

–        What advice would you give to college graduates looking to land a job like yours?

The questions you ask can take any form you think will give you the background and insight you are looking for.  You will likely not get through all of them in an interview.  Asking open-ended questions and listening carefully are essential to getting beyond merely courteous answers.  After you have conducted half a dozen interviews, you probably will have accumulated enough material to build a profile.  How many interviews you conduct, and if you segment by market or geography, are decisions you will need to make based on the nature of your business.

The buyer persona should be compiled into a short document that other members the sales and marketing teams can reference.  Content – insights – is more important than format, but a good B2B persona should contain the following:

• Profile – a brief description of the person – what the person’s title or role is, whom he or she reports to, typical career path, age range, and other useful details.  Some people choose to name their personas for easy reference and to get to “know” them as a person.  In our experience we have found that this strategy more often than not causes cynicism on the part of those outside the process.
• Role and Responsibility – what is this person’s job, and what is he or she responsible for?  Understanding this completely, even in areas that don’t directly pertain to your product, can offer critical insights.  For example, might a nurse make a recommendation to a doctor on a new piece of equipment, unofficially, and have some influence?
• Career Aspirations – who does this person want to be when he or she grows up?  Perhaps your product can help this person get there.  This can be the most powerful insight you gain from the interview.
• Purchasing Process – where does this person find information about products like yours (you should be advertising there), and how does he or she buy products like yours (make sure you have the right channel)?
• Blockers – what makes this person’s job difficult (time in the day, people, process), and what rivalries might exist with others?  It is amazing what you will find out, and removing these blockers with your product or process can help ramp your revenue.

Buying Center

In B2B sales, there is rarely just one person – or persona – involved in the buying process.  The buying center is a formalization of that concept.  Many people with different roles and priorities participate in purchasing decisions. Unlike consumer buying, where the consumer, either alone or with assistance or influence from acknowledged opinion leaders, makes his or her own purchase decisions, in business buying a group often determines which products or services the business purchases.

A typical business buying center includes a variety of participants:

• Initiators – people who begin the purchase process by defining a need.  These individuals are sometimes called the “champions,” and they serve as coaches to the sales team throughout the process
• Decision makers – people who make the final decisions
• Gatekeepers – people who control the flow of information and access to individuals in an organization
• Influencers – people who have input into the purchase decision
• Purchasing agent – the person who actually creates the purchase order
• Budget owner – the person whose budget is paying for the purchase; there can be multiple owners if several departments are funding the purchase
•  Users – people who ultimately use the product or service

In many situations, people play more than one role in business purchasing decisions. Depending on an organization’s structure and the importance of the decision being made, a buying center can include few or many layers of management.  Sometimes, buying centers are formal committees created to make a purchase decision.  Some members of a buying center will participate throughout the decision-making process, whereas others will be involved only briefly.   Technical staff may evaluate potential products for purchase and influence the decision, but then leave the actual purchase to the decision makers, budget owner and purchasing agent.

Every company has a different buying process and therefore a different buying center.  But, eventually, a pattern will emerge.  Ensuring that your marketing efforts take into account all of the players in the buying center is very important.  For example, ads may need to reach not only users but also budget owners.  As another example, your sales team may need to have different conversations with different members of the buying center.  In general, the fewer the people in the buying center, the faster the sales cycle.  Aligning your product so that the decision maker, budget owner, and user are the same can also be a very effective strategy.   The CEO might be the initiator, decision maker, budget owner and user of a new private jet.

Case Study

A 2005 article in the Washington Post revealed that the consumer electronics firm Best Buy had jumped on the buyer persona bandwagon[5].  In an effort to increase retail sales, Best Buy had profiled its customers and then used this information to identify four customer archetypes.  The company also decided that there were certain unprofitable customer types whom they would stop reaching out to.

So, meet Buzz, Barry, Ray, and Jill, Best Buy’s four personas:

• Buzz (the young tech enthusiast)
• Barry (the wealthy professional man)
• Ray (the family man)
• Jill (a soccer-mom type who is the primary shopper for the family but usually avoids electronics stores)

What makes Best Buy’s program interesting is how far the company took the concept.  Not only did the company tailor its marketing efforts and advertising to appeal to the four personas, the company also modified its store design and sales training to take Buzz, Barry, Ray, and Jill into account.  Here’s what they did.

The first step was to redesign, or reconfigure, each store to appeal to one or more of the personas.  For brevity, we’ll focus on what they did to appeal to Jill.

Best Buy analyzed local demographics and store purchase histories to determine which of the four personas would be the best customers for that location.  Stores where Jill would be the target customer showed “The Incredibles” and “Sponge Bob Square Pants” on the display televisions to appeal to the children Jill brought with her.  They also turned the background music down a notch and included Jill’s favorites like James Taylor and Mariah Carey.  In addition, they set up nooks to look like dorms or recreation rooms where Jill and the children could play with the latest high-tech gadgets at their leisure. Finally, the stores placed a higher concentration of kitchen appliances on the floor.

In addition to modifying the store design, these stores assigned a specialized sales staff, known as personal shopping associates, to assist Jill.  These assistants wore pastels instead of the royal blue shirts that other salespeople in the store sported. They were stationed at an island in the center of the store that was decorated with fake purple flowers and stuffed animals. The personal shopping associates are trained to understand Jill – that she shops for electronics only a few times a year, but she spends a lot of money when she does.  Because the Jill persona typically does not understand electronics well or does not have all the details, the associates ask basic questions and then provide recommendations.

This creative strategy produced immediate results.  In one of the pilot stores, less than a year after the redesign was rolled out in October 2005, Jills increased their spending by 30 percent.  This increased spending helped boost the store’s revenue to what is expected to be $75 million to $80 million in the year, up from around $50 million a year before the redesign.  In addition, it helped push customer loyalty rating of the store to among the top five in the country.

Nationwide, such “customer-centric” stores experienced an 8.4 percent increase in sales in the second quarter, compared with the same period in the previous year.  Stores designed for the other three personas showed similar gains.

Learning More

• The Buyer Persona Manifesto, Adele Revella, eBook www.buyerpersona.com