Courtesy of the American Heritage Dictionary, a problem is defined as "a question to be considered, solved, or answered; a situation, matter, or person that presents perplexity or difficulty; a misgiving, objection, or complaint." It follows naturally that the bigger, more perplexing the question, the more irritating, more painful the situation, the more valuable the answer or solution. Breakthrough new products and services—the Apple iPods and iTunes, the Fedex overnight deliveries, the 3M Post-it notes of their respective industries—offer a solution which produces results which go far beyond conventional measures of sales, profits, even brand equity. They come from business picking up the scent of opportunity emanating from the nasty thorns in the sides of customers and prospects.

Now we don't think we'd find too many folks who'd disagree that most of the new products and services firms roll out today are (to be kind) not exactly of the breakthrough variety. A big reason behind the glut of fusty new offerings (and lackluster results) is the failure to distinguish addressing a buyer's needs/wants/desires/interests from solving a buyer's problem. In any industry, buyers are going to have any number of needs/wants/desires/interests, but here's the rub: it's only a problem, a situation presenting difficulty, a thorn in the side of a customer or prospect, etc., etc., if currently available products, services, and brands either aren't addressing these needs/wants/desires/interests or doing so inadequately. From a business perspectives, solving a problem is only a money-making venture for a company if enough buyers have the same problem in common along with the willingness and ability to pay for a solution that the company can provide effectively and efficiently.

Too often the only "problem" many new products seem to solve is plugging a hole in a company's own portfolio. A case in point is organic versions of pretty much any food product on the market today.

Some consumers take issue with buying apples, oranges, and carrots grown with the help of pesticides; cookies and crackers made with synthetic ingredients and chemical additives; and milk expressed from cows treated with growth hormones and antibiotics. These folks can and do pay more for fruit, vegetables, snacks, milk, and a myriad of other items that are free of pesticides and chemicals.

And where there's smoke, there's fire. Out come a slew of new brands and products offering a pesticide-/chemical-/synthetic-free solution in different categories. When people have a problem getting access to these products, Whole Foods, Trader Joes, and others arrive on the scene, with a grocery store concept to solve the access problem. The organic food industry explodes, reaching $14 billion in sales with 17%-20% percent annual growth. Conventional food manufacturers take a look at their paltry 2%-3% percent annual growth rate and the likes of Campbell's, Heinz, Kellogg's, Kraft, and Unilever, to name just a few, begin rolling out new organic versions of their stable of products. Sadly, "organics fail to yield cash crop for food giants," as proclaimed in the headline of a recent Advertising Age article.

The failure of organic versions of conventional brands isn't the result of a fad fizzling out; rather it's a classic case of companies launching solutions where no pressing problem for a large, growing group of profitable customers exists. If company management at the traditionally non-organic food companies had asked buyers if they wanted, say, an organic version of their favorite spaghetti sauce, we're sure some would have said yes. Had the company also asked the folks who said yes, "OK, you say you want it, are you having a hard time getting it (i.e., do you have a problem)?" A smaller number might have said yes—not everyone has access to a Whole Foods or wants to make a trip to another store to buy organic. Had the company next asked this now much smaller group, would you pay 10% more for an organic version? The number of positive responses would likely get cut again. Remember, organics represent a pittance—less than 3%—of total food sales not for a lack of products, but because there just aren't enough people who have a problem and/or would pay for a solution to it. "Most of my consumers couldn't care less [about organic food]," commented one Midwest grocery executive to Ad Age.

Whether you're talking about an organic version of a conventional spaghetti sauce; a lemon, lime, or vanilla flavor of a popular soda; designer clothing at a big-box retailer known for the lowest prices on laundry detergent; a free-checking service from a bank; a hand-held music player; or a fiber-optic version of a household telephone service, the magnitude of success is directly related to the magnitude of the problem solved. New products and services of the breakthrough, highly profitable variety are about more than just filling holes in a product line-up; they address real buyer problems.

For more about launching successful new products and services, read Market New Products Successfully, a book by Kevin Clancy and Peter Krieg, Chairman and CEO and President and COO respectively of Copernicus.

Segmentation has become the marketing topic du jour. Where companies once remained mum on the subject, now they are actively touting their new market segmentations. Even Wal-Mart, the very embodiment of a mass marketer, has announced its intentions to segment the market and focus on specific groups. To date, Wal-Mart has tried to be "all things to all people," explained Eduardo Castro-Wright, the retailer's CEO. Problem is, "you end up under-serving everyone because you don't have an offering that is specific to that customer segment." According to a recent Economist Business Intelligence Unit and Marakon Associates study of senior executives of large companies, 59% had conducted a major market segmentation exercise within the past 2 years.

Peel away the onion a bit and you find that beneath the greater attention and excitement, there's quite a bit of frustration. The Economist/Marakon study also found that just 14% of senior executives who'd done a segmentation study said they derived any real value from it. Dan Yankelovich, the father of market segmentation, recently complained in the Harvard Business Review, that most market segmentations have become, "the marketing equivalent of central-casting." By this he means that clients and their agencies spend a great deal of time giving the segments names and cutting out pictures of people from magazines to paste into collages. The collages supposedly embody the look and personality of the people who populate a segment and, therefore, should guide the selection of talent for the creative work.

Why are so many so unhappy? We turned to Copernicus' resident segmentation and targeting strategy expert Henry Gamse, Senior Vice President of Statistical and Modeling Services, for answers. Henry designs and supervises the data analysis for virtually all large-scale quantitative studies done as part of Copernicus consulting engagements. He also leads the segmentation audits the firm does to assess the approach a client currently uses as a first-step to improving the performance of marketing programs.

Here's what he had to say:

Copernicus Mzine: Why do you think segmentation and targeting has recently become such a hot topic?

Gamse: A good segmentation provides a company with clear direction on which group represents the best target—one which has a high economic value to a company and can be easily identified in the population or in customer databases. If a segmentation meets these requirements, it will pay for itself many times over, and this is what is causing the big buzz about segmentation.

Copernicus Mzine: Publicly marketers seem very positive about the potential of segmentation and targeting to improve the effectiveness of their marketing programs, but privately there's a great deal of dissatisfaction with outcomes of segmentation exercises. Why do you think this is? Is there a common complaint you hear from marketers about their market segmentation efforts?

Gamse: Most segmentations done today leave out the "targeting" part. One company called us recently to complain about the outcome of a segmentation project it had just done with another firm. "It yielded some interesting groups that were different attitudinally," he explained, "but we didn't find a segment we could target efficiently; one which is especially open to our brand, and spends a lot in the category, and has needs which we can understand and address."

It's this lack of actionability which drives marketers crazy and renders many segmentation reports—which are usually gargantuan print-outs housed in colorful three-ring binders—little more than expensive doorstops.

Copernicus Mzine: Any particular approaches that seem to be the current crowd favorite? What are their pros and cons?

Gamse: Occasion segmentations are in demand. Here, the consumption situation, not the consumer, is the unit of analysis, and great attention is focused on the time, place, and reason for the purchase decision. This provides invaluable guidance for tailoring the client's products and messaging strategies to fit common usage situations. A product typology segmentation is another newer approach and is particularly useful for retail outlets, restaurants, and hotel chains. Segments are formed based on characteristics of the establishment, such as square footage, layout, product mix, age of the property, surrounding neighborhood, etc. The resulting segments help guide marketing strategy for specific outlet types within a larger chain.

The segmentation types we come across most frequently, however, are "attitudinal"—where groups are defined by opinions, values, or lifestyles—and "needs/benefits"—where groups are defined by category/product needs or desired benefits. These popular approaches are superficially appealing, but when you get down to it, they are not particularly revealing. While the resulting groups may be quite different in terms of attitudes or product needs, they are practically identical on buying behavior, brand preference, and most importantly, receptivity to a company's brand, and profitability to that brand. What's more, it's impossible to differentiate between the media exposure patterns of one group versus another or find the segments in databases. When all is said and done, the segmentation is not actionable because there is no clear target.

Copernicus Mzine: What are the key attributes of successful segmentations—those that have led to a marketing strategy that significantly grows sales and profits?

Gamse: It's important to think about a successful segmentation as the result of a "process," rather than merely the outcome of some approach to dividing up the market. A process that leads to a successful segmentation starts by gathering representatives from all the branches of the organization who will be using the segmentation, and talk about how everyone plans to use it. This upfront work will make it far more likely that the segmentation will address as many collective needs as possible and make it infinitely easier for the organization as a whole to implement it.

The kind of segmentation that forms the foundation of a great marketing strategy is one that provides a detailed, well-balanced picture of the buyers in different groups. In other words, it tells you more about them than just their gender or age, their attitudes, or their needs—it tells you all these things and more. The groups should also be very different in terms of their economic value to a firm and in their media habits. The process that leads to this kind of segmentation involves testing hundreds of diverse variables including needs, psychographics, demographics, behaviors, media preferences, and more to sort out which are most predictive of heavy spending in the client's category, openness to the firm's brand, and other profit-related criteria. It should use the most predictive variables as the basis of segmentation.

Copernicus Mzine: Is there any category or industry where doing a market segmentation is just not possible?

Gamse: Probably not. I think any market for any product can be segmented. In certain rare instances, however, an unconventional approach will work better.

For example, in the pharmaceutical industry, doctors are making the prescription choices for the end-users, the patients. In this case, the physician becomes the unit of analysis and patient attitudes are much less important. A company could use the physician's assessment of the patient's characteristics, such as duration and intensity of the disease, patient's symptoms, age and weight of patient, physician's reasons for prescribing, etc., as inputs into what we call a Market Structure Analysis. For your readers with a research bent, rather than applying a conventional methodology such as a cluster analysis, we group buyers—or in the case of the pharmaceutical industry, sufferers—using a "hierarchical tree structure," which is a variation of a CHAID analysis.

Copernicus Mzine: If you had the ear of every CEO and CMO around the world for five minutes, what would you say to them about segmentation and targeting?

Gamse: Everyone is familiar with the term "segmentation," but the difference between a good segmentation and a run-of-the-mill segmentation is night and day! A successful segmentation is more than merely interesting; it is actionable. At the very least, it must clearly identify a target segment which is high in economic value, or better yet, profitability to your brand, and has a distinct set of needs which can be addressed and marketed to.

The vast majority of segmentations on which we are brought in for a "post mortem" do not have a good measure of profitability built into the methodology. I find it incredible (and scary) how many consulting and research firms claim to produce the "financially optimal segmentation", yet they're using only a set of attitudes, or demographics, as inputs with no prior thought, testing, or screening to see if they actually predict profitability. Their claim that these simple, untested inputs produce the financially optimal solution is either incredibly naïve or outright quackery. A few of the attitudes or demographics may be predictive of economic value, but most are not.

As the ultimate decision maker for your company, you must evaluate the competitive proposals carefully and choose a consulting or research partner wisely; it could be one of the most important decisions in your career. The right choice will positively impact your company's future for years to come, while the wrong choice will result in a quickly-discarded waste of resources, gathering dust on a shelf.

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For more insightful marketing discoveries, visit http://www.copernicusmarketing.com/discover/index.htm

Have a hot discovery for our next release? Contact us at ami.bowen@copernicusmarketing.com

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Small Giants: Companies That Choose To Be Great Instead of Big
By Bo Burlingham (Portfolio Hardcover, December 2005)

We very often wonder what the business landscape would look like without the onus of pleasing Wall Street weighing heavily on the shoulders of senior executives. What would drive decision-making if boosting earnings and share price weren't of primary concern? Bo Burlingham, an editor-at-large at Inc. Magazine, obviously had similar questions and set-out to interview, analyze, and profile 14 privately-held companies which he dubs "Small Giants" for the presence they command in their industries and communities. He specifically looked for commonalities that have helped them consistently grow profits, such as how the founding mission and vision, as opposed to pure profit motive, continues to drive management choices.

Market New Products Successfully Using Simulated Test Marketing Technology
By Kevin Clancy and Peter C. Krieg (Lexington Books, October 2005)

Innovation remains an arduous and painful process for many companies, doing untold damage to brands, profitability, and careers. Some have used line extensions to mitigate risk, but all too often they have ended up extending the core brand into oblivion. Others have used test markets to help gauge opinion before a national rollout, only to have competitors snatch ideas and undermine results. Given the problems with conventional approaches, it's not surprising that 90% of new products and services fail.

Enter Market New Products Successfully, the definitive guidebook for using simulated test marketing (STM), a technology that can help companies dramatically improve the odds of introducing a successful new product or service. The book examines why STM is important, what the differences are between the major systems, how to do a simulation, and what insights it offers a marketing plan. Every marketer wants to improve the financial outcome of the innovation process and Market New Products Successfully shows how marketing science tools can make this possible.

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In 2001, Copernicus released the finding of its first-of-its-kind study of brand commoditization, defined as the process of turning a once-great brand into an undifferentiated commodity where price becomes the primary purchase consideration. Though success stories of commodities being turned into brands à la Starbucks and Aquafina more often than not got the spotlight, Copernicus found that none of the 51 product and service categories ranging from credit cards to bookstores, from shampoo to insurance, were becoming more differentiated over time. In fact, 90% are declining in differentiation, with banks, bookstores, bottled water, credit cards, discount stores, and fast food restaurants leading the pack in terms of brand similarity.

At the time, the study raised serious questions about the billions spent on marketing and branding every year which appeared to have been all for not and how to reverse the trend. Copernicus Chairman and CEO Kevin Clancy warned, "If companies want to increase their margins—maybe even survive—they must learn how to develop value-add brands that set them apart from the competition in their customers' minds."

The original study was done in the waning days of the dot-com boom, not exactly the greatest days in marketing history, and several companies have since taken great strides, at least on paper, to make their brands different. We wondered if and how the results of the 2001 study had changed, and recently completed a new analysis of consumer perceptions of leading brands. We'll share our findings in our next edition.

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