A Simple Primer to Market Segmentation
Introduction
Market/Customer segmentation divides the overall market for a product into groups of customers with common characteristics.
A better understanding of the product's target audience can be achieved through market segmentation.
Market segmentation helps create more efficient and effective targeted marketing activities.
The Theory of Market Segmentation
Marketing is an instructive business domain that informs and educates the target market about the value and competitive advantage of a company and its products.
The Target Market is the group or groups of customers selected by a company to sell to.
The Overall Market for a product consists of all the customers who share a common need that could be satisfied by the product.
Market Segmentation is the division of the overall market for a product into groups of customers with common characteristics. One or more of these groups will constitute the company's target market for the product.
Market segmentation theory is based on the premise that various customers, who share a common need that could be satisfied by the product, may differ from or be similar in their characteristics and behavior.
The theory maintains that homogeneous customer groups are likely to respond similarly to specific marketing activities.
By identifying and understanding the different customer groups (market segments) within the overall market, marketing activities uniquely targeted at particular customer groups (market segments) are more likely to efficiently and economically induce the sought-after customer behavior and yield the desired results.
Performing Market Segmentation
After identifying and defining the overall market for a product, Market/Customer Segmentation, a two-step process, can occur.
- First Step — Segmenting the Market
- Second Step — Selecting Target Markets
The first step is to segment the market, dividing the overall market into groups (market segments) using one or more factors.
There is an endless list of factors that can be used to divide the market into common groups. Age, gender, income, and lifestyle are typically used segmentation factors for consumer markets.
Industry type, company size, distribution channels, revenue, and sales volume are some of the segmentation factors often applied to divide markets that deal in business-oriented products.
A reasonable approach that fits both consumer and business markets is to progressively segment the overall market by using the geographic, demographic, and technologic segmentation factors in that order.
Suppose the first step in the market segmentation process presents several market segments. In that case, the second step in the market segmentation process is to select the market segment or segments, essentially the target market, which the company can best serve and market to.
An Example of Market Segmentation
A mobile software development company has created a mobile application in the English language for vegetarians.
Disregarding the company's many possible considerations in the decision-making process, the company decides to focus only on the USA and ignore other English-speaking countries (geographic).
The company decides to focus only on female vegetarians (demographic) within the USA.
The mobile application is presently compiled for Apple's iOS mobile operating system that runs on Apple's iPhone smartphones (technologic).
Accordingly, this segmentation exercise has provided a single market segment that can be viewed as "Female vegetarians in the USA who own an Apple iPhone and speak English" — which is now this company's target market.
Conditions and Limitations
Careful note should be made to maintain that market segments are distinct overall market subsets derived from applying the last segmentation criterion.
This means that market segments differ from each other by only one segmentation criterion.
For example, the statement "small (fewer than 10,000 employees) cellular operators in Asia and large (over 10,000 employees) cellular operators in North America" represents two different markets, not two market segments.
This is because the customer groups differ by two segmentation criteria (geography and size).
Conversely, the statement "men under the age of thirty in the USA and men under the age of thirty in Europe" represents two market segments as the customer groups differ by only one segmentation criterion (geography).
Coincidently, small overall markets or small market segments are often referred to as Niche markets.
Summary
The benefits of employing market segmentation are a clearer understanding of the needs and wants of selected customer groups, greater precision in selecting promotional vehicles and techniques, more effective use of marketing dollars, and more effective product positioning.
However, the limitations of market segmentation are that it is a costlier approach than the non-segmented approach. It is challenging to choose the best criteria to segment by. It is also challenging to select the best market segment or segments to work with.