Segmentation, targeting and positioning: choosing whom to serve

The marketing concept says a business succeeds by serving customers' needs. Segmentation, targeting and positioning (STP) is how it chooses which customers and which needs. It is the bridge between a business strategy and a communications plan.

• Origin Wendell Smith set out market segmentation as a strategy in the Journal of Marketing in July 1956, as the alternative to product differentiation¹.
• The process Kotler's textbooks describe four steps: segment the market, choose target segments, decide how to differentiate, and position the offer in customers' minds^2, 3.
• The debate the Ehrenberg-Bass Institute's evidence says brands grow by reaching all buyers of the category, light buyers included^5, 13; Mark Ritson argues that targeting and mass marketing each have their job⁹. Read both before choosing.
• The hand-off the position you choose becomes the umbrella of the message house.

Tools for this piece: the STP worksheet and the positioning statement.

Smith's 1956 article, "Product Differentiation and Market Segmentation as Alternative Marketing Strategies", started from the observation that neither supply nor demand is uniform. A company can respond in two ways: bend demand to fit what it makes, through product differentiation and promotion, or bend what it makes to fit distinct groups of demand. Smith called the second market segmentation, and the article is credited with articulating it in detail for the first time¹.

Segmentation then drifted. In "Rediscovering Market Segmentation" (Harvard Business Review, February 2006), Daniel Yankelovich, who introduced non-demographic segmentation in the same journal in 1964, and David Meer argued that psychographic segmentation had become almost exclusively an advertising tool, used to populate commercials with characters viewers identify with, rather than a way to decide what to make, where to sell it and what to charge⁴. Their remedy was to tie segmentation to a specific business decision, and to define segments by what people do and are likely to do⁴. That remedy is the rule of this piece.

The first two steps choose the customers; the last two decide the value. Communications usually inherit the result, which is why a plan that skips STP ends up with a message aimed at "everyone aged 25 to 54".

Kotler and Armstrong group the usual ways of dividing a consumer market into four, and add separate variables for business markets²:

Behavioural bases tie most directly to a decision, because they describe what people do and why. The Ehrenberg-Bass Institute's category entry points, the needs, occasions and situations in which buyers think of a category, are a behavioural lens that also feeds creative work directly⁷. Demographics are often the easiest way to reach a segment once it has been found by need or behaviour. A persona is a portrait of a segment for the team, not a segment in itself.

A segment is useful only if it passes five tests, which Kotler and Armstrong call the requirements for effective segmentation²:

• Measurable you can size it and its buying power.
• Accessible you can reach and serve it.
• Substantial it is large or profitable enough to be worth a tailored programme.
• Differentiable it responds differently to the mix than other segments do.
• Actionable you can design a programme that attracts and serves it.

Then compare the survivors on three dimensions: the segment's size and growth, its structural attractiveness (competitors, substitutes, the power of buyers and suppliers), and the fit with the company's objectives and resources². A large, growing segment that the company cannot serve better than an incumbent is a trap, not a target.

Kotler and Armstrong place targeting strategies on this range, from treating the market as one to tailoring for local areas or individuals^2, 3. The choice depends on the company's resources, how variable the product is, its life-cycle stage and what competitors do. A start-up with one product and a small budget often begins concentrated; a category leader often runs a differentiated portfolio with mass brand communications on top.

In an integrated plan the strategy shows up differently in each discipline. Under a differentiated strategy, product, price and offers change by segment, sales and CRM programmes are built per segment, and the brand campaign may still run across all of them. Under a concentrated strategy the media plan can be narrower, because the segment is the market: a specialist business-to-business supplier may find that trade press, events and account-based selling reach most of its buyers. Write the chosen strategy into the brief, so that every discipline knows which parts of the mix vary by segment and which stay the same. See the hub for B2B and SaaS.

Few questions in marketing are argued as hard as this one, and the arguments are better than the slogans.

The Ehrenberg-Bass position. Byron Sharp's How Brands Grow (Oxford University Press, 2010) draws on decades of buying data to argue that brands grow mainly by increasing penetration, which means reaching the many light buyers of a category, not by deepening loyalty among a few^5, 13. The institute rejects the reading that it is against all targeting: it says it advocates "smart targeting", prefers broadly appealing communications that nudge the whole market over copy aimed at narrow segments, and notes that buyers are loyal, but to a repertoire of brands⁶. Sharp has described his "sophisticated mass marketing" as understanding the heterogeneity in a market and catering only for the differences that matter⁸. How Brands Grow Part 2, written with Jenni Romaniuk, extends the work, including to business-to-business markets¹¹.

The Ritson position. Mark Ritson debated Sharp at the Festival of Marketing in 2017, arguing that targeting has many legitimate uses, from serving loyal buyers to entering new segments⁸. In Marketing Week he has argued that the answer is both: long-term brand building aimed at the whole market, alongside short-term activation aimed at specific groups, drawing on Les Binet and Peter Field's work on the balance between the two⁹. He has also called the wholesale dismissal of segmentation and targeting "nonsense"¹⁰.

What it means in practice. The two positions agree on more than they disagree. Neither recommends aiming brand communications at a narrow segment and ignoring everyone else; both accept that offers, products and channels can be tailored. A working reconciliation: segment to understand, target to decide the offer and the activation, and reach broadly with the brand. Planners can put that split into the budget with the brand-and-activation logic in budgeting for IMC.

Positioning is the last step of STP and the first of the communications plan. Kevin Lane Keller, Brian Sternthal and Alice Tybout argued in Harvard Business Review (2002) that a position needs a frame of reference, points of parity and compelling points of difference, not difference alone¹². The positioning piece in this track takes that apart; here, the hand-off matters:

• The target segment becomes the audience line of the brief and of the brand platform.
• The frame of reference tells every channel what category to compete in.
• The point of difference becomes the roof of the message house; the parity points and reasons to believe become pillars and proof.

Write the position as a positioning statement, then build the house with the message house template.

A worked example (illustrative). A specialty coffee roaster sells to independent cafés, to offices and to people who brew at home. The decision is where to put next year's growth budget. Segmenting by behaviour (who buys, for which occasion, how often), the three groups pass the five tests: each can be sized from sales and trade data, reached through distinct channels, and responds to different offers. Evaluation shows cafés are a slow-growing segment where the roaster is already strong, offices are growing but crowded, and home brewers are growing and fit its expertise. The roaster chooses a differentiated strategy: a wholesale offer for cafés, a subscription offer for home brewers. Its brand communications, though, are aimed at coffee buyers in general, with category entry points such as "the first coffee of the morning" and "a gift for someone who likes coffee"⁷; the targeting happens in the offers, the CRM and the trade programme. See CRM and loyalty and the hub for brand managers.

Common mistakes:

• Segments nobody can find A psychographic segment that no media plan, retailer or sales team can reach fails the accessibility test².
• Segmentation for the advertising only Yankelovich and Meer's warning: if the segments change no product, price or channel decision, they are decoration⁴.
• Confusing the target with the audience The target segment decides the offer; the media audience for brand building is usually wider^6, 9.

• Smith's 1956 article, via Oxford's summary¹, and Yankelovich and Meer in Harvard Business Review⁴.
• Kotler and Armstrong, Principles of Marketing², and Kotler and Keller, Marketing Management³.
• Sharp, How Brands Grow⁵, Romaniuk and Sharp, How Brands Grow Part 2¹¹, and the Ehrenberg-Bass Institute on its critics, on measurement and on growth^6, 7, 13.
• Ritson in Marketing Week^9, 10 and the account of the 2017 debate⁸.
• Keller, Sternthal and Tybout on positioning¹².
• In the glossary: segmentation, targeting, category entry points and positioning.