The whole market consists customers with different preferences. Each group of consumers has different needs and wants to be satisfied. Market segmentation helps to discover people with similar characteristics.
Modern markets are not homogeneous. There are many markets that exist to meet the needs and wants of car drivers, students and investors.
The market can therefore be divided into different parts because one group of consumers often wants something completely different from other groups.
What is market segmentation?
Market segmentation is the process of splitting the market into different segments.
When dividing the whole market into different segments, each segment represents a part of the whole market. Each segment consists of different types of customers which represent distinct subgroups.
Hence, market segmentation is the process of identifying different segments within a market and offering different products to them depending on different preferences.
What is a market segment?
Market segment is a distinct group of customers with similar characteristics, a sub-group of the market with common needs and wants.
Each part of the market is known as a market segment.
Why businesses do market segmentation?
Business organizations segment their markets for many various reasons.
But, the most important is that thanks to dividing the market into different market segments, it is way easier to analyze which group of customers is likely to buy a product and then target that particular group.
Let’s take a look more reasons why companies do market segmentation:
- Better understanding of customers. A better marketing strategy can be set with more comprehensive understanding of the needs and wants of various customer groups. This will eliminate wasting resources on targeting wrong people with wrong products.
- Higher sales. Selling goods and services to new market segments will enlarge the number of potential customers. The firm will be able to sell more products and earn more profit.
- New growth opportunities. Market segmentation done effectively by a marketing manager can help the business organization identify new opportunities for business growth both in the current markets as well as in the new markets.
- Supports product differentiation. The more information the company has about each particular market segment, the better it can differentiate its goods and services to attract customers with new or improved products.
The process of market segmentation, targeting and positioning
Market segmentation involves aggregating prospective buyers into groups that have common needs and will respond similarly to the marketing actions.
Therefore, start with identifying market needs. There are benefits in terms of specific up-to-date product features, controlling expenses, meeting quality expectation leading to savings in time and convenience.
STEP 1: Market Segmentation:
1. Identify bases for segmenting the market.
2. Develop segment profiles (consumer profiles).
Criteria for market segmentation include:
- Potential for increased profit and Return on Investment (ROI).
- Similarity of needs of potential buyers within a segment.
- Difference of needs of buyers across segments.
- Feasibility of marketing action to reach a segment.
- Simplicity and cost of assigning potential buyers to segments.
STEP 2: Market Targeting:
3. Develop measures of segment attractiveness.
4. Select target segment(s).
The groups that result from the market segmentation process are called market segments, a relatively homogeneous collection of prospective buyers.
STEP 3: Market Positioning:
5. Develop product positioning for target segment(s) based on Price vs. Quality.
6. Develop a Marketing Mix for each segment in terms of Product, Price, Place and Promotion.
Advantages of market segmentation
Whichever way to segment a market is chosen to divide the entire market into smaller groups, separating consumers into different groups has both benefits and drawbacks many
Advantages of market segmentation include the following aspects:
- Purposeful products. After defining the target market(s) very precisely, the business can design, test and manufacture products to meet the specific needs and wants in each market segment. Giving customers exactly what they want is going to increase sales.
- Improves competitiveness of small businesses. Small businesses are not able to compete with larger firms in the whole market due to limited resources. Thanks to market segmentation, smaller businesses will now be able to compete in one or two segments only (in a niche market).
- Helps to identify new customers. Market segmentation will help to identify gaps in the market. These are groups of those customers whose needs and wants have not been satisfied in the past. This will enable the firm to find new customers in niche markets leading to increased sales revenue.
- Saves resources. When marketing strategies are better planned and prepared, this enables to firm the target each market segment more accurately. Differentiated market strategies will focus on different market segments which will lead to reduction of wasting resources. Market segmentation will help to avoid trying to sell a product that nobody wants to buy as well as duplication of scarce resources.
- Allows to charge higher prices. By dividing the same market into different segments, it allows to charge different prices to different segments for similar service. For example, charging adults higher prices for cinema tickets than children when both watch the same movie. The price discrimination strategy can be used to increase sales revenue and profit.
Disadvantages of market segmentation
Disadvantages of market segmentation include the following aspects:
- High costs. Extensive market research is required for conducting appropriate market segmentation. This will increase the firm’s expenses. Also, researching and developing several new products to sell into different target markets will make the productions costs higher.
- Complicated promotion. When the firm uses differentiated marketing having different Marketing Mixes for different market segments, spending on promotion will be much higher. In addition, the business will not be able to fully utilize marketing economies of scale because it will not be able to use the same advertising campaign for targeting different market segments.
- Complex production. Producing many different types of products for different market segments is a complicated task. In addition, raw materials and inventory-holding costs will be much greater than in the business which is producing only one undifferentiated product.
- Excessive specialization. Targeting only very narrow market segment is risky for any business. An overly-specializing firm operates in a very limited market with limited number of customers and possibly poor growth prospects. If one or two customers decide to change their shopping preferences, this can negatively impact the business, or even threaten future existence of the whole firm.
When is market segmentation successful?
In order to determine whether market segmentation works or not, marketing managers often use the acronym DAMAS. It uses the following criteria to judge markets segments:
✅ (D) Distinct. Unique segments different from one another which will respond to different Marketing Mixes for each segment.
✅ (A) Actionable. Each market segment will be willing and able to buy the suitable products provided by the firm.
✅ (M) Measurable. Market segments are quantifiable when it comes to their size, purchasing power in volume and value as well as growth potential.
✅ (A) Accessible. The firm is able to distribute products to customers in every segment in a cost-effective and efficient way.
✅ (S) Substantial. Each of the segments target by the business must have a decent enough size to make an impact on the firm’s Profit and Loss Account (P&L Account).
It is of course possible for a business organization not to effectively carry out market segmentation. The reason for it is that successful markets segmentation must lead to having a clear picture of the consumers in the target market that the business is aiming to sell its products to.
Uses of market segmentation help to sell more products as specific problems are solved. And, it increases profits.
