Market segmentation is a powerful tool when used as part of a company’s strategic planning process. It allows a company to survey its marketplace and identify those market niches where it has the greatest chance of success. Once these segments are identified and targeted, a company can use the information to guide its development, focus its sales and marketing efforts and increase its profitability.

While it sounds easy, it isn’t. Integrating market analysis into a company’s business operation effectively takes time, careful planning and quite a bit of hard work. Label Products & Design (LP&D), a medium-sized printing company in Green Bay, Wis., provides a good illustration of what is involved in the process and the type of benefits that can be realized as a result.

Over the last six years, Label Products & Design has used effective market segmentation to establish itself as a top regional supplier of premium pressure sensitive labels. A solid understanding of its customers’ needs and expectation and its own competitive strengths have allowed LP&D to differentiate itself from its competition and increase profit margins each year.

While this approach seems fairly elementary, few, if any, of Label Products & Design’s competitors have been able to duplicate it. None have been able to match LP&D’s earnings growth during that period. While the support of a strong parent company and a well developed customer focus gives the company a clear competitive edge, market segmentation has been a key element in Label Products & Design’s success.

Label Products and Design got its start in 1963 when its two founders bought a printing press and set up a small shop. When it was acquired by Journal Communications Inc. in 1990, LP&D had grown into a successful regional printing operation.

However, it was still being run like a small business. LP&D’s organizational structure was extremely simple and planning was done on the fly. The owners made most of the decisions themselves and the plant printed virtually everything that came through the door.

Sales yes, direction no
When Dick Gasper joined Label Products & Design as vice president/general manager in 1993, the company was changing rapidly. But without a strategic plan, it did not have a clear sense of where it was going. While sales had increased more than $3 million between 1990 and 1992, earnings had grown only $152,289 during the same period.

One of Gasper’s main goals was to increase LP&D’s profitability. That was a challenge given the nature of the pressure sensitive label market. Barriers to entry are low and, as a result, there is heavy competition for work. While it had few large competitors, LP&D was competing with hundreds of small print shops in its primary market. As a result, the profit margin on most jobs was slim.

“To be able to increase our profitability, we needed a better understanding of our market and our customers,” Gasper says. “The Pareto Principle says that 80 percent of a company’s earnings come from 20 percent of its customers. We needed to identify those accounts and find out what made them so profitable.”

I was brought in to help with market segmentation during Label Products & Design’s initial strategic planning sessions in 1993. We started with basic segmentation strategies like size of customer (Fortune 500 vs. small companies) and geographic location (by city, by state).

While this yielded some results, we felt we needed to go further. We began by grouping all of the plant’s customers by quality of relationship, profitability and other key factors. Then we tried to determine what the members of each group had in common.

It became clear that the labels ordered by Label Products & Design’s least profitable accounts were simple and easy to produce. In most cases, price was the determining factor when choosing a label supplier. On the other hand, the company’s best customers ordered complex labels that required skill to produce.

Therefore, label complexity was another way to segment Label Products & Design’s market. Because it could handle complicated label jobs better than most of its competitors, LP&D had an advantage when competing for those jobs. There were fewer suppliers in that market and the perceived value of the products was high. As a result, customers were willing to pay more for complex labels.

Targeting the sales efforts
“We used that insight to shape our strategic plan,” Gasper says. “We targeted our sales efforts on accounts with complex label requirements and stopped calling on clients who used only simple labels. This allowed us to use our sales force more effectively.

“However, if one of our accounts also needed simple labels, we would take the order for those as well. This strengthened our relationship with the client and helped keep our competitors away from our target accounts,” Gasper says. “Our sales representatives produced a much higher average margin because their accounts were more profitable.

“Segmenting our market allowed us to capitalize on one of our core strengths as a company,” Gasper notes. “By concentrating on the most profitable section of our label market, we were able to raise our average margin significantly.”

To learn more about its customers and validate our initial market analysis, we distributed a customer satisfaction survey shortly after strategic planning. The surveys were coded to identify responses from customers with simple, medium and complex label requirements.

One of the survey questions was, “What is the overall value of the products and services, compared to the price, that you receive from Label Products & Design?” When the results were tabulated, the response to that question from customers with simple label requirements was very low. This segment of the label market was obviously driven by price.

On the other hand, the response rate from clients with complex label requirements was one of the highest on the survey. Obviously, these customers placed a high value on the quality and service they received from Label Products & Design.

“Our first survey indicated that we were under-priced on very complex label jobs,” Gasper says. “As a result, we were able to implement price increases in that segment of our market without losing any major accounts or market share.”

While market segmentation played a key role in Label Products & Design’s development, it was only one element in the company’s success. As soon as Dick Gasper joined LP&D, he started building a customer-focused culture supported by reliable survey data. Using his experience as a consultant and business executive, he implemented a strategic planning process that guides capital investment. He invested in employee training and development and established a continuous improvement program that is still going strong today.
 

A plan for everyone
One of the absolute keys to the success of an overall business strategy is effective implementation. Dick Gasper insisted that Label Products & Design’s strategic plan be shared and discussed with every employee. This encouraged buy-in and helped employees stay focused on making the plan a reality. Now president of NorthStar Print Group, LP&D’s parent company, Gasper shares NorthStar’s corporate strategic plan with the company’s employees every year.

In today’s complex marketplace, the days of the generic “one size fits all” approach are over. It is critically important to be able to identify and define those market segments where you have the greatest opportunities to succeed. However, market analysis and segmentation is not enough. As Label Products & Design demonstrates, the segmentation process has to be integrated into a company’s strategic development process to be truly effective.

“Strategic planning establishes a vision of where you want to go,” Gasper says. “Market segmentation supports that vision by helping you understand what you do better than your competitors and showing you where you can use those strengths to your best advantage. Together they help establish a strong strategic direction for your company.”

Howard Hyden is president of The Center for Customer Focus, an organization that specializes in helping companies become more customer-focused. He can be reached at 719-527-0003.