How do I know if I've got the right market segmentation scheme for my business?

How do I know if I've got the right market segmentation scheme for my business?

Market segmentation is a very subjective process. There really is no "right" or wrong segmentation scheme. There are probably 3-4 segmentation schemes that can work for any business - the real question is which will be most useful and productive?

There are two tests I apply to segmentation schemes:

Is it useful for analysis?
By this I mean, does it reveal differences between segments? If all segments look the same (have same needs, preferences, threats, growth rates, profit levels and competitors), then the scheme will not help you see the differences between segments. With all segments looking the same, there is no basis for putting more resources into one rather than another. Without the ability to discriminate between segments, there is no basis for selecting a focus and the strategy tends to devolve into a "we have to do it all" strategy, which is inappropriate for any company that has time or money constraints.

Is it helpful for making decisions?
A segmentation scheme should break out along lines that can be used to make decisions for a business. For a maker of mechanical fasteners, it would not be too helpful to segment by nuts, bolts and washers, since these items will tend to be sold as a set. It is not likely that we would say, let's really focus on the bolts and exit the nuts and washer segment. Such a business might find it better to segment by customer type (retail hardware stores, OEM, industrial wholesale) or by material type (brass, steel, stainless steel).

A segmentation scheme will work best if it breaks the business into chunks that the participants can easily address if we should do more or less of that activity. This will help managers figure out what should be the focus for the business.

One further point, market segmentation schemes are not set in stone. While you prefer not to have them change from year to year, then can be changed if they are not productive for the team. This can happen in the first year or two of strategic planning as you try to figure out what is best for your business. It can also happen after many years of planning either "reinvigorate" a planning process or to adapt to a change in the environment. Selecting a new segmentation scheme will give different (not necessarily "better") information about your business and may lead to new insights that improves your strategy.

How do you get Simplified Strategic Planning going in a very small company where there are not even five people who should be on the planning team?

Strategic planning can be done by one person alone, however it will be much better if there are several people who are familiar with the business to offer input and help set the direction. For very small companies, an owner can often use trusted outside advisors to assist in this. Board members, carefully selected "friends" of the company, peer groups (other non-competitive business owners) and professionals (accountants, academics, or consultants) can be useful.

When using outsiders to act as team members or advisors it is important to carefully define their role and scope of involvement before inviting them to participate. It is also a good idea to limit the number of outsiders to avoid creating a situation where outsiders "hijack" the company and set a direction that is at odds with what the owner has in mind. A process which includes outsiders will work best if the business owner has a fairly clear idea of where he wants to take the business and then uses the outsiders as sounding board to critique his proposals and offer alternatives, rather than throwing things open for outsiders to propose any possible direction for the business. .

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