Strategy & profitability

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.

Marketing planning

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 strategic marketing planning process

The key stages can be summarized as follows:

  1. Goal setting (the strategic context)
    • mission statement;
    • corporate objectives.
  2. Compiling a situation review
    • marketing audit (in which segmentation is a key element);
    • SWOT analyses (Strengths, Weaknesses, Opportunities, Threats);
    • key assumptions.
  3. Strategy formulation
    • marketing objectives and strategies;
    • estimate of expected results;
    • identification of alternatives.
  4. Resource allocation and monitoring
    • set budgets;
    • first year action programme: measurement, control and review.

This is captured in the following diagram:

Strategic marketing planning - 10 steps

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

The benefits of marketing planning

In an increasingly complex, competitive and evolving business environment a marketing plan is essential and generates the following benefits (McDonald):

  • better co-ordination of and increased confidence in business activities;
  • identification of expected developments;
  • increased organizational preparedness to change and explore new markets;
  • minimization of non-rational responses to the unexpected;
  • reduction of conflicts about where the company should be going;
  • improved communications and a common framework for decision-making;
  • management is encouraged to think ahead systematically;
  • available resources can be better matched to opportunities;
  • provides a framework for the continuing review and monitoring of operations;
  • a systematic approach to strategy formulation leads to a higher return on investment and real competitive advantage.

Profitability analysis

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.