In today's era of "mass entrepreneurship and innovation", entrepreneurship has become a dream in the hearts of many people. However, small start-ups cannot go head-to-head with large companies, so one of the most important keywords for finding entrepreneurial opportunities is market segmentation. It can be said that market segmentation is the golden key to finding market opportunities.
1 Why Market Segmentation?
Market segmentation stems from a simple fact: people are different. No single product from any company can meet the needs of everyone in the market. This has given many start-ups new market opportunities.
For example, in today's Chinese beverage market, Nongfu Spring, Wahaha, Wang Laoji, Coca-Cola, PepsiCo, etc. are all large companies, and they have a large market share. However, in recent years, a brand that was just founded in 2016 has appeared on the market like a dark horse and has been warmly welcomed by many consumers.
This brand is Genki Forest. So, what exactly is the secret to the success of Genki Forest? In fact, it is very simple, in China 20 years ago or even 30 years ago, there was almost no obesity problem, and it was not at all like so many people who love fitness, run marathons, go to the Gobi to hike, climb snowy mountains, etc. Now that China's economy has grown to more than $10,000 per capita, China is in an era of pursuing health, and one of the biggest concerns of many Chinese, especially young people in first- and second-tier developed cities, is obesity: obviously, obesity will appear to be in poor shape, and will lead to all kinds of unhealth, and will affect everyone's attractiveness in areas such as social and marriage. Genki Forest's success lies in its identification of a whole new market segment www.yuanwze.cn: young people who care about their body and pursue health. Then, Genki Forest launched beverages that met their needs for this target market, and its slogan "zero sugar, zero fat, zero calories" was also well-known in first- and second-tier cities, thus successfully carving out its own territory in the beverage market and developing rapidly.
From 2018 to 2020, the sales of Genki Forest grew rapidly, with increases of 300%, 200% and 309% respectively. In 2020, Genki Forest achieved annual sales of 2.9 billion yuan. In 2021, Genki Forest's annual sales soared to 7.3 billion yuan, and its valuation reached 15 billion US dollars. Of course, compared with Wahaha, which has annual sales of 46.9 billion yuan, and Nongfu Spring, which has annual sales of 24 billion yuan, the scale of the Yuanqi Forest is much smaller. However, this is how startups succeed. If Genki Forest wants to compete head-on with large companies such as Wahaha and Nongfu Spring in the mass market of mineral water, I am afraid it will be difficult to find opportunities.
Let's take the car rental market in the United States as an example. Hertz is the number one business car brand in the U.S. market, and Avis is the No. 2 business car brand in the U.S. market, founded in 1918 and 1946, respectively. Since the main customers of business car rental are business people traveling for business, they are not very sensitive to price, but the requirements for service and convenience are relatively high, so these two brands usually occupy the best location in the United States major airports (for example, directly opposite the exit of the airport arrival hall) to set up car rental service points, many times they provide cars parked in the airport parking building, customers pick up and return the car is not only convenient, but also save time. Outside of the business rental segment, there is the personal and family segment. For the individual and household segments, customers pay for themselves rather than reimbursed by the company, so customers are more price-sensitive, but have lower requirements for service and convenience. As a result, Hertz and Avis have a sub-brand, Dollar (meaning dollar) and Budget (meaning budget), respectively, to serve the travel and family markets.
As you can tell from the brand names Dollar and Budget, this is aimed at the individual and family segments looking to save money. As a result, Dollar Car Rental and Budget Car Rental are very low-priced, but their rental points are usually located in more remote places, and they need to take a free bus for 5~15 minutes to arrive.
After the business rental market has been taken over by Hertz and Avis, and the individual/family rental market has been taken over by Dollar and Budget, is there still a chance for the car rental market in the United States? The answer is yes. Whether it's business car rental brands Hertz and Avis, or personal/family car rental brands Dollar and Budget, they all serve the needs of off-site car rentals, so they all have their service outlets at the airport. It is in this context that Enterprise Car Rental USA has opted for a whole new niche – local car rental. When will locals need a car rental?
Enterprise's answer: when consumers need their own cars to be repaired. Most people have experienced that their car has broken down or been involved in a car accident that requires repair, which usually takes several days or a week or two. In most parts of the United States, because every household has a car and public transportation is not developed, when consumers need to repair their own cars, they need to rent a car for daily transportation in order to work and live normally. Therefore, Enterprise has set up its service outlets in car 4S shops or repair shops. Don't underestimate the need for local car rental, isn't it incredible that Enterprise Car Rental, founded in 1957, has become the largest car rental brand in North America after decades of development?
After the occupation of the off-site car rental market (for business or tourism) and the local car rental market (for maintenance), are there still opportunities in the car rental market in the United States? The answer remains yes. Whether it's business car rental brands Hertz and Avis, personal/family car rental brands Dollar and Budget, or local car rental brand Enterprise, they are all long-term rentals with a minimum of 24 hours. However, there are some consumers who only need a car rental for as little as a few hours, such as college student couples who need to date. American college students generally live on or near campus, and if college couples need to date for a few hours, such as going to a romantic dinner or watching a movie, they don't want to take a taxi, after all, couples definitely don't like the taxi driver's "light bulb."
Moreover, the above-mentioned brands that provide car rental services at airports or garages cannot meet their needs, not only the rental length does not meet the needs, but also the service outlets do not meet the needs. It is in this context that the American car rental company Zipcar was born in 2000, mainly around the university and in the city center (there are also some young people in the city center who do not have a car who have the same needs), the length of car rental can be calculated by the hour, the result is warmly welcomed by customers such as college students and young people in the city.
Hertz, Avis, Dollar, Budget, Enterprise and Zipcar, these companies all have the same physical products (cars), but they provide different services based on the different needs of customers (business car rental, individual or family travel car rental, local repair car rental, local short-term car rental), thus becoming the leader in their respective market segments, which is the power of market segmentation. It's no exaggeration to say that market segmentation is the golden key to finding new market opportunities. At the same time, these cases also show once again that marketing should focus on customer needs, not products.
2 How to do market segmentation?
Market segmentation is so important, so how exactly should market segmentation be carried out? Next, I will introduce you to several specific methods of market segmentation.
(1) Geographical subdivision
Geographic segmentation is the most natural way to segment the market. Due to language and cultural differences, there are naturally huge differences between domestic and foreign markets. MTV, the world's largest music television network, uses geographic regions to subdivide, with different independent international channels and different content in different countries and regions. MTV has 10 24-hour music TV channels in Asia, including MTV Chinese (China), MTV Southeast Asia, MTV India, MTV Korea, MTV Philippines, MTV Indonesia and MTV Thailand.
Even within the same country, geographical segmentation is required. Due to the vast size of China, there are also huge differences between markets in different regions such as Northeast, North, Northwest, South China, Central China, East China, Southwest China, etc. Take the restaurant industry, for example. Peking duck is very popular in Beijing, but when you come to Guangzhou, it may not be as popular as Shunde roast goose. In Chengdu, roast duck and roast goose may not be in demand, because the local most popular is always hot pot.
(2) Population segmentation
Demographic factors include age, gender, income, occupation, education, religion, race, ethnicity, household size, family life cycle, etc. These factors are all commonly used and very effective methods of market segmentation.
Take age, for example. In the shampoo market, the global daily chemical giant Procter & Gamble occupies the largest market share. Procter & Gamble has many shampoo brands such as Piaorou, Pantene, and Haifis. So, is there a market opportunity for other companies? Global pharmaceutical giant Johnson & Johnson has found a whole new market segment - the infant market. Because Procter & Gamble's Piaorou, Pantene, Haifis and other brands are shampoo products for adults, not for babies and young children. Therefore, Johnson & Johnson chose the infant market segment as the target market, and cross-border launched the famous Johnson & Johnson "tearless formula" infant shampoo.
The reason why it is called "tear-free formula" is because many parents find that children like to move around when washing their children's hair, shampoo foam is easy to enter the eyes and cause crying, they will feel that the chemical composition of adult shampoo may be more irritating to children's eyes. Therefore, as soon as Johnson & Johnson's "Tear-Free Formula" baby shampoo was launched, it was immediately warmly welcomed by parents around the world. Johnson & Johnson has also become the absolute leader in the infant shampoo segment, with a very large market share worldwide.
Let's take the number of households as an example. In the automotive market, the market is usually segmented into economy cars and luxury cars based on revenue, or sedans and SUVs (sport utility vehicles) based on vehicle type. However, under each sub-category, it can be further subdivided to better meet the needs of some consumers. For example, in 2016, China introduced a comprehensive "two-child policy." This results in a significant number of families with a total size of 6 people: mom and dad, two children, grandparents (or grandparents).
Most cars only have 5 seats, which does not meet the needs of a family of 6 people. Therefore, Dodge Coolway launched a large seven-seat SUV in the Chinese market and advertised "add 'two' without increasing the price", emphasizing that compared with ordinary five-seat SUVs, Dodge Coolway large seven-seat SUVs have added two comfortable third-row seats, making it possible for the whole family to travel and enjoy the joy of family. In 2021, China launched the "three-child policy", and we can make a similar assumption, that is, the total size of some families will be 7 people: parents, three children, grandparents (or grandparents). Therefore, more and more families will need to buy seven-seater cars, and the market demand for seven-seater cars will increase.
Similarly, the size of the family is an important segmentation factor in the real estate market, as real estate developers need to decide what type of home or apartment should be developed. In the one-child era, most families only needed two bedrooms or a maximum of three bedrooms. However, in the "two-child" or "three-child" era, more families will need four-bedroom units or even more rooms.
Among the demographic factors, the three factors of income, education and occupation can be used to determine a person's social class more accurately. However, if you can choose only one of the three factors of income, education, and occupation, which one can best determine a person's social class? The correct answer is occupation. Because income cannot be reversed into a career (a person earns 1 million yuan a year, do you know what his job is), but a career may be more accurate to launch income (how much a surgeon or a university professor earns in a year, relatively easy to launch). Education also can't reverse the introduction of careers (do you know what a bachelor's job is), but careers may more accurately launch education (a surgeon, at least a bachelor's degree is required; A university professor, at least a graduate degree is required).
(3) Psychological segmentation
Compared to geographical and demographic factors, psychological factors are a more advanced method of segmentation. Psychological factors include lifestyle, personality, purchase motivation, value orientation, etc. The previously mentioned Genki Forest is segmented by lifestyle – those who care about their body and pursue a healthy lifestyle are the target customers of Genki Forest.
For another example, Giant Group and Wuliangye Company once cooperated to launch a wine - golden wine. The slogan of Golden Wine is "Give to elders, Golden Wine". Obviously, golden wine is subdivided by purchase motive. Therefore, the target customers of Golden Wine are young people who have left their hometowns to work in first- and second-tier cities, and these people often need to bring gifts when they return to their hometowns to visit their parents and other elders and relatives every Spring Festival.
(4) Behavioral segmentation
Behavioral factors are also a more advanced segmentation method than geographical and demographic factors. After all, behavior is the embodiment of attitude, so behavioral segmentation tends to be very accurate. For example, since the pandemic in 2020, cycling has become popular again. If you're a premium bike seller but don't have much advertising budget, where do you go to advertise? Perhaps, putting advertising flyers in the basket of shared bicycles will be a more accurate method. In fact, it's a behavioral breakdown — those who ride shared bikes ride regularly. Therefore, it is entirely possible to persuade them to buy a premium bike of their own.
After understanding the above four different market segmentation methods, let's do a market segmentation exercise together. Let's say you're a sneaker brand and now have 4 potential customers: a 20-year-old college student, a 20-year-old female college student, a 40-year-old middle-aged man (who is a business executive), and a 40-year-old middle-aged woman (who is also a corporate executive). If you need to segment these 4 leads into two markets, how would you segment them? By age, or by gender? Or is it broken down by occupation?
When I asked this question in an entrepreneurship class at Tsinghua University, there were quite a few students who answered by age and by gender. Usually, more students answer the breakdown by age, because they feel that the segmentation by age also coincides exactly with the segmentation by occupation and income, which is more accurate. However, every time after listening to the answers of the entire class, I would tell them that whether it was broken down by age, gender, or occupation, it was not very accurate.
Next, let me tell you additional information about these 4 potential customers: the 20-year-old male college student exercises almost every day (playing basketball, soccer, running, etc. on the school playground), the 20-year-old female college student hardly exercises (indeed, she does not need this at all, because her body is at the best stage of her life), and the 40-year-old middle-aged man hardly exercises (although he has begun to be overweight and has a noticeable big belly, but due to his busy career, he travels around the country almost every week and is a "trapeze man" , there is no time to exercise at all), the 40-year-old middle-aged lady exercises almost every day (after giving birth, her figure is significantly less than when she was in her 20s, so she now attaches great importance to sports, spending a lot of money on fitness cards, and hiring expensive personal trainers, practicing yoga, swimming, etc. in the gym every day, and often doing strength training and running). Now that you know the additional information about these 4 leads, how do you segment your market now?
When I added this information in Tsinghua's entrepreneurship class, all the students changed their original answers, thinking that the 20-year-old male college student who exercises every day and the 40-year-old middle-aged woman should be regarded as customers in the same market segment, and the 20-year-old female college student and the 40-year-old middle-aged man who hardly exercise should be regarded as customers in another market segment. It can be seen that it is more accurate to use behavior for market segmentation than for market segmentation by population.
In fact, the success of Nike, a well-known sports brand, has a lot to do with its market segmentation with hobbies and behaviors. In 1964, Stanford graduate Phil Knight founded Le Cordon Bleu, the predecessor of Nike (which launched the Nike brand in 1972 and later changed its name to Nike). At the time, Germany's Adidas was already a global sporting goods giant, while Le Cordon Bleu Sports was just a start-up. However, since Phil Knight himself was an athlete, he understood the needs of athletes for sports shoes more deeply, and created the famous pyramid market segmentation model with behavioral segmentation: the tip of the pyramid is professional athletes, who have the greatest demand for sports shoes and the highest requirements, but the proportion of professional athletes in the population is small; In the middle of the pyramid are amateur sports enthusiasts, who have a greater demand for sports shoes and higher requirements, and their preferences are influenced by professional athletes; The base of the pyramid is mass consumers, who have little demand for sneakers and are not very demanding, but this part of the population is the most numerous.
As a result, Nike specializes in manufacturing sneakers for professional athletes to wear, and through these athletes to influence amateur sports enthusiasts and mass consumers. Nike's marketing strategy quickly became successful, and by 1980, Nike had beaten Adidas to become the leader in the American sneaker market. From a start-up to an industry giant, Nike took just over 10 years. To this day, Nike still maintains its position as the leader of the global sports shoe industry. As of November 25, 2022, Nike's market capitalization has reached US$165.8 billion.
(5) Industry segmentation
If it is a B2B business, it is often possible to segment the market by the industry in which the customer is located. Many IT (information technology) companies that provide solutions such as IBM will divide customers into financial industry, telecommunications industry, education industry, medical industry, manufacturing, service industry and other market segments, and provide different IT solutions for customers in different industries. Construction engineering enterprises such as China Railway First Bureau will also subdivide customers into different industries such as road and bridge transportation, real estate, and subways.
3 How to choose a target market?
After performing market segmentation, companies can select one or more segments as their target market.
For example, airlines are generally divided into two types: traditional full-service airlines and low-cost carriers. For traditional full-service airlines, the target market includes a variety of different passengers - wealthy, high-level business passengers (large business executives traveling on business, can be reimbursed), ordinary business passengers (can be reimbursed for business trips), economy passengers (ordinary families or individuals traveling privately, etc., cannot be reimbursed), etc.), and airlines will provide these passengers with corresponding different classes - first class, business class, super economy class, economy class. For low-cost airlines, the target market is only one type of passenger – economy passengers, and they correspondingly offer only one class of service – economy class.
In the global aviation industry, Southwest Airlines is known as the industry benchmark. Headquartered in Dallas, Texas, Southwest Airlines is the number one airline in the United States and the world's leading airline in terms of passenger capacity, although it only operates domestic routes in the United States, and it has the most cities in the United States market. Compared with other competitors in the United States, Southwest Airlines is known for its "discount routes" and is the originator of the world's low-cost airlines.
In 1973, however, Southwest Airlines was a small company in the U.S. market. Southwest's chosen target market for itself was budget passengers, so Southwest wisely avoided head-to-head confrontation with major U.S. airlines and found a different way to capture a low-cost market that U.S. airlines disdained to strive for, but with great potential.
Because Southwest focuses on economy passengers, it offers prices that are far lower than those of its competitors. Southwest Airlines was able to do this because of low-cost and efficient operations: Southwest Airlines only has economy class seats on its aircraft, only one Boeing 737 aircraft to save maintenance, training and labor costs (a single aircraft provides convenience for pilots to pick up the plane at any time), meals are not provided on board, and the aircraft greatly improves operational efficiency, and so on. For example, to save time, Southwest Airlines tickets don't have to be seated, and passengers sit as close as they would on a bus, so boarding is fast. All this is done to reduce costs and increase efficiency, after all, efficiency is very important for airlines - planes only make money when they are in the sky. Indeed, Southwest spends the longest time in the air per aircraft per day. All in all, Southwest Airlines went to great lengths to reduce costs, and the end result was that its airfares could compete with the prices of long-distance buses, thereby gaining the loyalty of budget passengers.
Unlike the major traditional full-service airlines in the United States whose main routes are hub airports, Southwest Airlines also avoids major US airlines in the choice of routes, mainly operating second-tier airports in the United States, and implementing a point-to-point direct route network. In contrast, if flying between second-tier cities in the United States, the major traditional airlines in the United States have no advantages, not only high prices, but also need to go to the hub airport to transfer flights, resulting in longer times. Southwest Airlines has no stops and connections due to all direct flights, reducing flight delays and overall travel time. At these second-tier airports, the transit time of aircraft is also much less than that of first-tier airports, which is equivalent to improving aircraft utilization. Moreover, Southwest Airlines flies very intensively. In general, if you miss a Southwest flight, you can take its next flight an hour later. Such high-frequency flights facilitate office workers who travel through U.S. cities every day, and more importantly, the unit cost reduction on this basis is what Southwest Airlines pursues.
After decades of rapid expansion and development, Southwest Airlines, a low-cost carrier, eventually grew to become the largest airline in the United States. After 9/11 in 2001, almost all U.S. airlines were in trouble, but Southwest was the only exception. In 2005, when overcapacity and unprecedented fuel prices cost the entire U.S. airline industry $10 billion, Delta Air Lines and Northwest filed for bankruptcy protection, but Southwest remained profitable. From 1973 to 2019, before the pandemic, Southwest Airlines maintained annual profitability, making it the only company in the U.S. civil aviation industry that has been able to remain profitable for 46 consecutive years, setting a record for the U.S. civil aviation industry.