Market segmentation is not an end in itself, it's what you do with the segments that really counts. Make segmentation the basis of your strategic marketing plan.
Segmentation can only be regarded as successful if you use the insights it has given you in your sales and marketing activities.
Marketing planning is a logical sequence of steps which enables you to set strategic planning objectives for your selected segments and formulate the appropriate sales and marketing activities in order to achieve these objectives. In essence it is a process for determining what your company can become and how it can achieve that goal.
The key stages can be summarized as follows:
This is captured in the following diagram:
A structured approach to developing the appropriate sales and marketing activities can be found in McDonald, M. and Wilson, H. Marketing Plans: How to prepare them, how to use them
In an increasingly complex, competitive and evolving business environment a marketing plan is essential and generates the following benefits (McDonald):
A crucial element in determining which customers to target is the ability of the company to generate profit from them, both in the short term and over the long term. Profitability analysis by product or service is usually much more readily to hand than profitability analysis by customers, but it is the customer that generates the revenue and for whom the company incurs costs.
Recent customer profitability analysis has produced some startling results for the companies for whom it was carried out: it is generally assumed that 20 per cent of the customers produce 80 per cent of the revenue, but when 20 per cent generate 200 per cent of the profit this clearly means that there are numerous customers costing the company dearly and, in turn, reducing shareholder value.
Other projects have also found that it is not necessarily the largest customers that generate the greatest profits; in some instances they even generate losses. The bulk discounts the larger customers often demand and the service levels they require can seriously erode a supplier's margins. But, it can also be the case that the volumes larger customers account for are essential for the overall profitability of the operation due to the impact this has on the cost per unit.
Profitability analysis is a crucial stage in determining which customers you should be targeting and is therefore an important element to your segmentation project.