Market segmentation is the science of dividing an overall market into customer subsets or segments, whose in segment sharing similar characteristics and needs.
Segmentation typically involves significant market research and can thus be costly. It is practiced especially in major companies with highly differentiated product lines or serving large markets. The small business tends to discover the segment it serves best by the trial and error of dealing with customers and stocking products more and more suitable to its particular clientele.
Segmentation lies somewhere near the middle of a continuum of marketing strategies that range from mass marketing—in which a single product is offered to all customers in a market—to one-to-one marketing—in which a different product is specifically designed for each individual customer (e.g., plastic surgery). Most businesses realize that since no two people are exactly alike, it is unlikely that they will be able to please all customers in a market with a single product. They also realize that it is rarely feasible to create a distinct product for every customer. Instead, most businesses attempt to improve their odds of attracting a significant base of customers by dividing the overall market into segments, then trying to match their product and marketing mix more closely to the needs of one or more segments. A number of customer characteristics, known as segmentation bases, can be used to define market segments. Some commonly used bases include age, gender, income, geographical area, and buying behavior.
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Although mass marketing (also known as market aggregation or undifferentiated marketing) cannot fully satisfy every customer in a market, many companies still employ this strategy. It is commonly used in the marketing of standardized goods and services—including sugar, gasoline, rubber bands, or dry cleaning services—when large numbers of people have similar needs and they perceive the product or service as largely the same regardless of the provider. Mass marketing offers some advantages to businesses, such as reduced production and marketing costs. Due to the efficiency of large production runs and a single marketing program, businesses that mass market their goods or services may be able to provide consumers with more value for their money.
Some producers of mass market goods employ a marketing strategy known as product differentiation to make their offering seem distinct from that of competitors, even though the products are largely the same. For example, a producer of bath towels might embroider its brand name on its towels and sell them only through upscale department stores as a form of product differentiation.
Consumers might tend to perceive these towels as somehow better than other brands, and thus worthy of a premium price. But changing consumer perceptions in this way can be very expensive in terms of promotion and packaging. A product differentiation strategy is most likely to be effective when consumers care about the product and there are identifiable differences between brands.
Despite the cost advantages mass marketing offers to businesses, this strategy has drawbacks. A single product offering cannot fully satisfy the diverse needs of all consumers in a market, and consumers with unsatisfied needs expose businesses to challenges by competitors who are able to identify and fulfill consumer needs more precisely. In fact, markets for new products typically begin with one competitor offering a single product, then gradually splinter into segments as competitors enter the market with products and marketing messages targeted at groups of consumers the original producer may have missed. These new competitors are able to enter a market ostensibly controlled by an established competitor because they can identify and meet the needs of unsatisfied customer segments. In recent times, the proliferation of computerized customer databases has worked to drive marketing toward ever-more-narrowly focused market segments.
Applying a market segmentation strategy is most effective when an overall market consists of many smaller segments whose members have certain characteristics or needs in common. Through segmentation, businesses can divide such a market into several homogeneous groups and develop a separate product and marketing program to more exactly fit the needs of one or more segments.
Though this approach can provide significant benefits to consumers and a profitable sales volume (rather than a maximum sales volume) to businesses, it can be costly to implement. For example, identifying homogeneous market segments requires significant amounts of market research, which can be expensive. Also, businesses may experience a rise in production costs as they forfeit the efficiency of mass production in favor of smaller production runs that meet the needs of a subset of the market.
Finally, a company may find that sales of a product developed for one segment encroach upon the sales of another product intended for another segment.
Nonetheless, market segmentation is vital to success in many industries where consumers have diverse and specific needs, such as homebuilding, furniture upholstery, and tailoring.
In order successfully to implement a market segmentation strategy, a business must employ market research techniques to find patterns of similarity among customer preferences in a market. Ideally, customer preferences will fall into distinct clusters based upon identifiable population characteristics. This means that if customer requirements were plotted on a graph using certain characteristics, or segmentation bases, along the axes, the points would tend to form clusters.
In marketing jargon, customer segments must be measurable by clear characteristics; they must be large enough to constitute a market; reaching them should be predictably easy (they all watch American Idol, for example, or subscribe to one of four magazines); they must be predictably responsive to marketing; the segment must be stable over time and not a one-time aggregation.
Determining how to segment a market is one of the most important questions a marketer must face. Creative and effective market segmentation can lead to the development of popular new products; unsuccessful segmentation can consume a lot of dollars and yield nothing. There are three main types of segmentation bases for businesses to consider—descriptive, behavioral, and benefit bases—each of which breaks down into numerous potential customer traits.
Descriptive bases for market segmentation include a variety of factors that describe the demographic and geographic situations of the customers in a market. They are the most commonly used segmentation bases because they are easy to measure, and because they often serve as strong indicators of consumer needs and preferences.
Some of the demographic variables that are used as descriptive bases in market segmentation might include age, gender, religion, income, and family size, while some of the geographic variables might include region of the country, climate, and population of the surrounding area.
Behavioral bases for market segmentation are generally more difficult to measure than descriptive bases, but they are often considered to be more powerful determinants of consumer purchases. They include those underlying factors that help motivate consumers to make certain buying decisions, such as personality, lifestyle, and social class. Behavioral bases also include factors that are directly related to consumer purchases of certain goods, such as their degree of brand loyalty, the rate at which they use the product and need to replace it, and their readiness to buy at a particular time.
Businesses that segment a market based on benefits hope to identify the primary benefit that consumers seek in buying a certain product, then supply a product that provides that benefit. This segmentation approach is based upon the idea that market segments exist primarily because consumers seek different benefits from products, rather than because of various other differences between consumers.
One potential pitfall to this approach is that consumers do not always know or cannot always identify a single benefit that influences them to make a purchase decision. Many marketers use a combination of bases that seem most appropriate when segmenting a market. Using a single variable is undoubtedly easier, but it often turns out to be less precise.
The Segmentation Process
The process itself begins with narrowing the universe to be studied into a specific market now served by the company and obtaining basic information on competing products or services now on offer. Once this step has been completed, variables to be used are identified, reviewed, and tested. At the most basic level such variables, for example, might involve income and demographic characteristics of the consumers.
With these preparations completed, actual market research is organized to collect and to analyze data on the selected broad body of consumers. Analysis of the data will begin to cluster the consumers into distinct groupings based on the variables. Additional analysis, possibly involving more research, will next be conducted to develop detailed profiles of each segment already identified.
If the right variables were chosen at the outset and the market research was competently done, the resulting groupings will have characteristics distinct enough, and documented well enough, to permit the company to select one or more segments which will be easiest or more profitable to serve. The company’s own strategy will play a role. Its aim, for example, may be use its capacity more fully and the company will therefore select a segment which will purchase the largest volume; alternative the company’s aim may be low production levels with high profits, leading to a focus on another segment.
The last stage of the segmentation process will be the development of product and marketing plans based on the segment(s) most closely matching the company’s “ideal” situation.
In general, customers are willing to pay a premium for a product that meets their needs more specifically than does a competing product. Thus marketers who successfully segment the overall market and adapt their products to the needs of one or more smaller segments stand to gain in terms of increased profit margins and reduced competitive pressures. Small businesses, in particular, may find market segmentation to be a key in enabling them to compete with larger firms. Many management consulting firms offer assistance with market segmentation to small businesses. But the potential gains offered by market segmentation must be measured against the costs, which—in addition to the market research required to segment a market—may include increased production and marketing expenses.