Slime cleans House! Importance of Customer Segmentation
My daughter’s school put together an event called “business day” in the school’s gymnasium, and boy was it an event! It reminded me of an open air market in a small beach town where everything on display was for sale! Food, trinkets, clothing, and many other items.
The concept was quite interesting, kids were encouraged to buy products and sell them to visitors of this event. Outside of selling age inappropriate items, the rules were straight forward: kids should sell their hearts out maximizing profits! The school did not charge a fee or percentage which created a free flowing market for those kids with minimal restrictions. I thought to myself, what an amazing learning experience this must be for these young bright minds!
So my daughter resorted to the sound approach of sourcing stationary items (mechanical pencils, pens, funky erasers) and selling them for a 50% – 70% margin which is excellent by many industries standards. Other “merchants” sold gourmet foods, clothing, while one kid in particular focused on niche products: slime in a bucket, slinkys, light wands, and similar novelties.
It was quite a sight and presented a clear case study for Customer segmentation, all you had to do was stand there for 5 minutes and watch for it to become clear!
If you were to take a look across the hall, you will see polarization of “customers” gravitating towards one side of the hall or the other. Adults were clustered around the food and clothing stations while kids were clustered around the slime & novelties table. Every now and then kids would sneak over to the food station to fuel up and then hurry back to the slime table. They made the a stop along the way between the two stations to stock up on pencils, erasers, and pens (stationary). So my daughter leveraged customers’ conversion between food and slime and capitalized on having interesting merchandise to slow them down for a purchase.
I am sure profiting kids, and their parents, did not consciously think about segmentation, nonetheless they applied good common business sense to understand customers and their buying habits. Those kids that didn’t apply the similar logic, left home with most of their merchandise in hand.
This brings us to the topic of this blog which is segmentation and its importance. There is no set method or approach to segmentation, but I like the straight forward approach of Bradford and Duncan in their book Simplified Strategic Planning – 2000, where they look at segmentation based on customers who think and behave in the same way, possible segments include:
- Customer needs & preferences
- Commodity & specialty behavior
- Product type
- Market type
- Customer type or buying channel
They go further in the book to advise against following a standard trade association segmentation because this will inevitably end up in a price war and head-to-head competition…a losing proposition! The idea is that you want to use segmentation and understand your customers to create a new segment where you can rule as king!
Let’s go back to my daughter’s business day, and apply segmentation on Customers needs & preferences and Product type. We would end up with Customers and preferences as follows:
- Adults (parents & teachers) prefer a bargain price for commodities on their shopping list
- Kids prefer a reasonable price for funky gadgets (price is not as sensitive because they got to have it…right!)
The second segment would identify products as:
- Commodities: Gourmet Food, Garments, Stationary, & Similar items
- Specialty or Niche: Slime buckets, slinky, light wands, and similar items
The kid selling slime created a new market segment that attracted customers who were not price sensitive, the kids. Interesting to note that kid made more than 400% margin across their products! In other words, the kid cleaned house with their “slime” strategy leaving other “merchants” in the dust.
Makes sense? I believe so…and we all would say, well this is just common sense. The question is why aren’t organizations doing this effectively? Why do large conglomerates make deadly mistakes of launching lousy products across markets?