Market Segmentation is Broken

It’s hard to argue that our market segmentation methods are working

• New products fail at the stunning rate of between 40% and 90%

• Less than 3% of P&G’s new product introductions exceed first-year sales of $50 million

• Only 10% to 30% of the 30,000 packaged goods launched annually remain on store shelves just 12 months later

2“Why Most Product Launches Fail”, by Joan Schneider and Julie Hall, HBR April 2011“Eager Sellers and Stony Buyers”, by John T. Gourville, HBR June 2006

So what’s the problem?

• Have market researchers lost a step?

• Have consumers become too difficult to understand?

• Is launch execution simply not what it used to be?

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Product and customer based segmentation methods are solving the wrong problems

The problem with using products as the fundamental unit of analysis

5“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

People don’t want to buy

They want..

A clean floor

To pull an all-nighter

A 4pm snack to hold them over until dinner

These same marketers..

• Segment their markets by product and price point rather than by the type of job

• Measure their market share by product

• Benchmark the features and functions of their products rather than the features and functions of the jobs they’re doing

6“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

They then set to work offering more features and functions

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Reality: They improve products in ways that are irrelevant to their customers’ needs

Models that use customers as the fundamental unit of analysis suffer similar problems

8“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

Increasing milk shake sales at a leading fast food chain

• Profiled the demographic and psychographic characteristics of frequent milk shake drinkers

• Asked those who fit profile whether making the shakes thicker, more chocolaty, chunkier or cheaper would increase satisfaction

• Modified their milk shakes based on feedback

• Their sales didn’t increase

9“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

The company hired a new researcher to try the exercise again

A better way to think about market segmentation

• Customers just need to get things done

• When they have a job to do, they hire products to help them do it

• Companies have two fundamental roles to play:– Understand the important jobs that customers need help with– Design products that are precisely targeted to doing those jobs

• When customers find themselves needing to get a specific job done, they look for purpose brands to help them do it

11“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

• Jobs, rather than products or customers, should be the fundamental unit of analysis for any effective segmentation model

The new researcher went to work

• Spent a full day in one of the company’s restaurants trying to understand the jobs that milk shakes were hired to do

• Chronicled:– When milk shakes were bought– What other products they were purchased with– Whether customers were alone or in groups– Whether the shakes were consumed in store or taken to go

• Asked customers directly why they purchased their milk shakes

12“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

Key findings

• 40% of all milk shakes purchased in the early morning

• These customers were alone

• They didn’t buy anything else

• They drank their milk shakes in their cars

• Remaining 60% of milk shakes purchased at other times of day

• Customers were typically parents with children

• They purchased full meals w/ with their shakes

• They ate their meals in the restaurant

13“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

Insight

• Job #1– Make long commutes

more interesting– Alleviate hunger until

lunch time

• Job #2– Placate unruly

children– Feel like a loving

parent

14“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

This insight helps to explain the problem with customer based market segmentation models

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Output: One-size-fits-none solution

“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

Optimizing milk shakes for each job

Began by understanding the constraints of Job #1

• Needed something to last most of their commute

• Needed something to alleviate hunger until lunch time

• They were in a hurry and wanted to avoid lines

• Wearing work clothes (Can’t afford to make a mess)

• One free hand to work with

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Understand the other products that were competing to do Job #1

Substitutes

• Bagel

• Bagel w/ cream cheese or jam

• Banana

• Doughnuts

Drawbacks

• Too dry

• Sticky fingers/ steering wheel/ clothes

• Didn’t last long enough

• Hunger returns before noon

18“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

Potential improvements for Job #1

• Make shakes even thicker so they last longer

• Add fruit or other toppings to create additional anticipation

• Make self-serve dispensing machines and sell prepaid swipe cards so customers can avoid breakfast lines

19“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

The new researcher identified potential improvements for Job #2 as well

Key observation

• Parents finish their meals and wait impatiently while children struggled to suck the thick shakes up through the thin straws

Potential solution

• Wider straws for children’s milk shakes

20“Marketing Malpractice: The Cause and the Cure”, by Clayton Christensen, Scott Cook and Taddy Hall, HBR December 2005

Jobs-based market segmentation generates additional benefits as well

• Often expands the size of a market– Ex. Milk shake market is clearly smaller than morning commuter snack

market which includes bagels, bananas, doughnuts and milk shakes

• Makes it easier for customers to find right products

• Helps define the potential improvements that will be most relevant to the jobs that people need to get done

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Summary

• New products are failing at the stunning rate of between 40-90%

• Primary reason is that product and customer based market segmentation models are improving products in ways that are irrelevant to their customers’ needs

• Better way to think about market segmentation is to make jobs the fundamental unit of analysis

• The purpose brands that emerge create greater opportunities for differentiation, premium pricing and future growth

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