What is Market Segmentation and Why is it Important for Your Business?

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By: Site Engineer, Staff

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The relevance of market segmentation to an entrepreneur is to enable him to understand the nature of products to make, the price, the channels of distribution and the promotional strategies to use to reach most effectively the consumers.

This article, therefore, seeks to show the entrepreneur on the importance and effectiveness of the market segmentation. The entrepreneur should know that as a small-scale business owner with limited resources, he would be able to effectively compete more in one or two sub-markets than taking on the total market. His efforts will be noticed and felt in a small segment of the market than the total market.

This idea of the market segmentation will also show the entrepreneur, more specifically on designing and making products that would match the market demands, determining what promotional appeals will suit his business, channeling money and effort to the most profitable markets, choosing intelligently advertising media and setting promotions at prime time peak periods.

How to Segment the Market

Market segmentation is an attempt to subdivide the overall market into small groups of potential customers who share some common need or characteristics.

The four most common bases for segmenting the consumer market are:

  • Demographic,
  • Geographic,
  • Behavioristic, and
  • Psychographic.

1. Category: Demographic

Segmentation Variables: Age, sex, buying power, occupation, education, race and nationality, family life cycle, etc.

2. Category: Geographic

Segmentation Variables: Global regions, nations, national regions, states, local governments, cities, neighborhoods, climate, terrain, population, density, etc.

3. Category: Behavioristic

Segmentation Variable: Among of usage, type of usage, brand loyalty, the benefit sought, etc.

4. Category: Psychographic

Segmentation Variables: Social class, personality, lifestyle, etc.

Demographic Segmentation

For many products, considerations such as the buyer’s age, sex, income, occupation, or education are most useful to market segmentation. Such factors are the subject of demographics or the statistical analysis of the population. The cosmetics industry lends itself to this form of segmentation, since sex, age, and income all influence a consumer’s purchases of skin care and beauty products.

For example: Here the entrepreneur produces to suit a certain group of his consumers; walking sticks for old people, baby pomades or soaps for children, certain creams for ladies and expensive goods for rich people or cheaper goods for low-income group, etc.

Geographic Segmentation

This is the process of categorization of customers according to their geographic location. Potential customers in different locations often have social needs or taste. When those sorts of differences are important, it makes sense to use geographic segmentation.

For example, it is wise for the entrepreneurs making raincoats and umbrellas to be based down at the region where they experience more rainfall than in the region where rainfall is less. So it is very imperative that the entrepreneur is abreast with all these strategies.

Behavioristic Segmentation

This is the categorization of customers according to their relationship with products or response to product characteristics. This is another way of segmenting a market to classify customers on the basis of their knowledge of attitude toward, use of, or response to products or product characteristics.

Imagine that you are in the hotel business. You might classify potential customers according to when and why they stay in hotels, making a distinction between travelers and vacationers.

You could then tailor your services and promotion for one group or the other. The business traveler might be attracted by adverts in the daily newspapers, and the tourist might respond to adverts in people soft magazines.

You could also think in terms of the benefits your customers might seek. Some travelers, for example, might be interested in price, others in status, service location, or dependability. You could gear your hotel marketing plan to appeal to each group.

Measurement of the extent to which a product is used provides another behavioristic approach to segmenting both consumer and industrial markets.

With this approach, a company divides its market into:

  • Non-users,
  • Former users,
  • Potential users,
  • Occasional users, and
  • Frequent users.

As a rule of thumb, marketers expect 80% of a product’s sales to come from 20% of the customers who are frequent users. By focusing on these customers, the company gets more “bang for its marketing buck.”

Another approach is to classify potential customers according to whether they use your product or your competitor’s product.

  • This enables you to develop a marketing approach aimed at your competitor’s product.
  • This will also enable you to develop a marketing approach aimed at your competitor’s possible weakness.

Always use your area(s) of comparative advantage against your competitors.

Psychographic Segmentation

This is the classification of customers on the basis of their psychological makeup. Psychographics is relatively a new specialty that not only characterizes consumers in terms of psychological make-up, but also their social roles, activities, attitudes, interests, opinions, and lifestyles. The psychographic analysis focuses on why people behave the way they do.

In segmenting a market psychologically, you would examine a person’s brand preferences, favorite radio and TV programmes, reading habits, values, and self-concept.

Marketing Alternative Entrepreneur can Use

The market segmentation process helps a company identify which target customers to serve and how to appeal to them.

There are basically four alternative approaches to target marketing:

1. Undifferentiated

This is a marketing programme that offers a single standard product to all consumers. When a company engages in undifferentiated marketing, it does not sub-divide the market at all. Rather, it concludes that all of the buyers have similar wants and can be served with the same standardized product. This approach is commonly used with basic products such as sugar, salt, and gasoline, which are physically and chemically identical regardless of whom produces them.

Undifferentiated marketing has one big advantage: It enables a company to minimize its productions and marketing costs. With only one basic product to manufacture and promote, the firm achieves economies of scale. However, firms that follow this approach are vulnerable to competitors who use a more targeted approach.

2. Concentrated

This is a marketing programme aimed at a single market segment. All of the organization’s efforts are directed toward satisfying the specific needs of the target customer group. Carnival cruise, according to Wayne (1988:1), typifies those companies that have made their mark using a concentrated marketing approach. Until carnival came along, most cruises were designed for the wealthy. But carnival saw an opportunity to sell cruise vacations to the common man and woman. The firm’s formula was to offer all-inclusive air-and-sea packages priced about 20 percent below the competition and to schedule relative causal four-day and seven-day cruises that were more compatible with the average person’s budget and vacation schedule. The strategy has enabled carnival to achieve a dominant position in the cruise industry.

For all its attractions, the concentrated strategy has several disadvantages. The organization’s sales are limited by the size of the segment, and business tends to fluctuate according to the changing tastes and fortunes of a particular customer group. Furthermore, the organization has all of its eggs in one basket; if competitors move in, sales can plummet.

3. Differentiated

This is the marketing programme aimed at several different market segments, each of which receives a different marketing mix. With a differentiated marketing approach, the organization avoids some of the problems associated with concentrated marketing. Instead of focusing on a single segment, the firm selects several target customer groups and then varies the elements of the marketing mix to appeal specifically to each segment.

Differentiated marketing is probably the most popular segmentation approach, particularly for consumer products. However, it requires substantial resources, since the organization incurs additional costs in tailoring its products, prices, promotional efforts, and distribution arrangements for each segment.

4. Customized

This is a marketing programme in which each individual customer is treated as a separate segment. Companies that use a customized marketing approach view each customer as a separate segment and tailor the marketing mix to that individual’s specific requirements. This approach is necessary for certain types of industrial markets where the product cannot be standardized.

For example, civil engineering firms must design each bridge, road, or sewer system to meet the specific requirements of the customer. This approach is also used for many consumer services such as interior design, home repairs, and custom tailoring.

Difference Between Product Differentiation And Market Segmentation

In simplest terms, product differentiation is concerned with the bending of demand to the will of supply while market segmentation is based upon developments on the demand side of the market and represents a rational and more precise adjustment of product and marketing effort to consumer or user requirements.

The major difference between product differentiation and market segmentation is that why product differentiation is concerned with the bending of demand to the will of supply the market segmentation is based on the development on the demand side of the market to consumer or user requirement.

Another clear basic difference is between selling what you can make (differentiation) and making what you can sell (segmentation).

 

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