A Complete Guide to Market Segmentation
In this article, we analyse the topic of market segmentation. We start with 1) what is market segmentation, and continue then 2) types of market segmentation, 3) steps of market segmentation, and 4) conclusion.
WHAT IS MARKET SEGMENTATION?
The term segmentation indicates a process in which a large unit is divided or bifurcated into a variety of smaller units which have somewhat related or similar characteristics. When the complete market establishment is divided into smaller subsets constituting consumers who bear similar preference, demand, and taste, the concept is known as market segmentation. In other words, market segmentation divides the market into like-minded individuals with similar interests.
Why do we need market segmentation?
There are five primary reasons why firms go for market segmentation. They are:
- Competitive Advantage: Through segmentation of the market, competitive advantage is added to the service or product. In short, the firm is specializing in an area which enables it to be more accurate and respond faster by reacting according to the opportunities available. For instance, Unisys has adopted a kind of market segmentation where the staff and customers think alike – food service specialists cater to the package goods industry while bankers trade with bankers.
- New Market Identification: By segmenting the market, new market niches, which are not always obvious, come to the surface and become visible to the marketer. These new markets might be very small and specific, existing in very few locations.
- Cost Cutting: If firms reach the marketplace for a particular and relevant segment through careful selection, obviously the costs would come down. This applied to all marketing endeavors, including telephone and direct mail marketing. In the long runs, the firm is able to save on production and associated costs related to marketing such as paper, printing, time, people and so on.
- Reduction of Credit Risks: Through market segmentation, organizations can handle credit in an efficient manner through eliminating those customers or markets which cause credit issues. In turn, cancelations and bad debt ratios can be reduced considerably. On the other hand, those with a good credit rating as per the firm’s analysis can be rendered extended credit terms. In short, the consumers, markets, and overall business can be efficiently managed.
- Streamlining of Lists: Through elimination of suspects having a lower chance of purchasing from you at present or in the near future, and focusing on the major prospects who are the impending customers, the rewards of your marketing efforts would be greater and profit higher. Moreover, the opportunity for continual relationships also arrives at a faster pace.
Factors affecting Market Segmentation
Market segmentation is affected by a range of factors. However, the factors can be broadly classified into four basic categories.
- Appropriate segment identification;
- Measurability of the effective size of the segment;
- How much accessible the segment is with the help of promotional efforts;
- The appropriateness of the segment with respect to the resources and policies of the company.
TYPES OF MARKET SEGMENTATION
Approaches to market segmentation
Practically speaking, market segmentation has two major approaches. If there is access to adequate database information and market research, organizations can go for the statistical technique called cluster analysis. Or else, the organizations may categorize the market on the basis of their understanding and knowledge, utilizing what is commonly called the segmentation tree.
Criteria for market segmentation
The market can be broadly segmented according to the following criteria.
- Gender: The requirement for this segmentation arises from the fact that men and women have different preferences and interests. The marketing strategy for men would not work for women. This gender oriented segmentation is most important for industries such as jewelry, footwear, cosmetics, and apparels.
- Age Group: Another effective way of market segmentation is on the basis of the target market’s age group. The marketing strategies and products for kids would be different from those of teenagers, which would again be different from adults or aged people.
- Up to 10 years – Prams, baby food, nappies, toys;
- From 10 to 20 years – School bags, books, apparels, toys;
- 20 years and beyond – apparels, magazines, anti-ageing products, cosmetics, and so on.
- Income: This criterion is based on the monthly earnings of individuals. Broadly, there are three groups, namely, high-income, middle-income, and low-income. Thus, stores which target the high-income group would have different range of products and different marketing strategies compared to stores that serve the low-income group.
- Marital Status: Division is accordance with the marital status is most appropriate for travel agencies. Holiday packages for married couples would be different from that for bachelors.
- Occupation: One of the bases of segmentation is whether the target market is working or not. It goes without saying that preferences of professionals would be different from preferences of college goers within the same product category.
For a market segment to be ideal, the following things need to be considered:
- It should be an adequately large segment.
- The segment must be measurable.
- The segment should have stability and exist over a period of time.
- The marketing activities should enable you to reach prospective customers
- There should be a cost-effective way for conversion of prospects to buyers.
- In a segment, customers should prefer similar product qualities.
- In different segments, customers should prefer different product qualities.
- Marketing actions should have some effect on target consumers.
- For a particular segment, there must be adequate supporting data for devising a targeted sales approach.
The Major types of segmentation
With good knowledge of the types of segmentation, it would be easier for the organizations to strive towards the business goals. Here are the major ways in which a market can be segmented.
Demographics: Race, gender, income or age are great ways to differentiate your customer base. In this type of segmentation, you may go for your consumers’ actual ages or concentrate on things like the product’s life cycle. When customers are grouped on the basis of demographics, you can be more specific in directing your strategies.
Lifestyle: This is somewhat related to demographics but concentrates more on the fact that families and people have diverse service and product needs throughout their entire life. Life style segment can have endless number of subdivisions, such as dividing households into single parents, seniors or married with children or the type of residence, like a townhouse, apartment or single family home. By defining interests and activities according to lifestyle, it becomes more convenient to develop services and products.
Geographical Location: Location is a very effective tool in market segmentation. The markets can be broken up into local, regional, national or global, depending upon the services offered. Different regions might have different product requirements. For instance, parts of a country which always rain will have more requirements for umbrellas and raincoats that for outdoor pools and solar panels.
Services or Products: The crux of this type of segmentation is to be as specific as possible so that you can reach out to specific groups of people and make them your customers. A broad category often becomes difficult to convert, so it is advisable to go for specific niches. For instance, you may consider a category as broad as auto repair and make specific niches such as brake distributors your target.
Industry: Take the case of the agriculture industry; you may include everything to customized family farms to massive food producers. The products can be further segmented to organics, meat, dairy and the like. It is easier to define the market and track developments if you are specific enough.
Profession: Customers can be divided on the basis of their profession, and specific segments can also be created within a certain profession. For example, in case of healthcare, there can be various segments like hospital administrators, nurses, doctors and so on. Again, lawyers can be segmented depending upon the particular branch of law, such as taxes, civil litigation, real estate, etc. This type of segmentation allows more focus on the value proposition.
Interest: It might seem insignificant given all the other types of segmentation, but there are people who have exclusive hobbies such as grooming pets, collecting coins, and so on. Although this is a very small niche, if you can connect to these customers, they can become your long-term market.
STEPS OF MARKET SEGMENTATION
Market segmentation is a systematic process involving a series of steps. Below is a discussion of the five major steps of market segmentation.
Step 1: Distinct segments for key accounts and small accounts
Every business has its customer segment. Even within the same business, all customers are not the same and hence should be treated accordingly. Companies, especially those catering to other businesses (B2B) possess key accounts, and these should be treated exclusively.
According to the 80/20 principle applicable to any business, 80% of the turnover is accounted for by 20% of the customers. So, focus should be laid on these large or key accounts, on which the future of the business depends on. It is best when these customers are treated as individuals, with products or services designed to exactly meet their needs.
On the other hand, the 80%, although dominating the customer populations, are comparatively smaller accounts. The treatment for these customers should not be similar to that of the key accounts. Since this bulk of customers can constitute a plethora of accounts, a separate segmentation is needed. If proper segmentation is not there, then this 80% of the customer population will either be treated like special accounts, consuming unwanted resources or be considered as all the same, leading to unsuitable offers. In short, segmentation allows grouping of customers with same needs, thereby enabling efficient service with limited resources.
Step 2: Perform Market Segmentation
A demographic or firmographic segmentation
For a company catering to consumers, demographic segmentation is the most advisable option. Again, a company catering to other companies should go for firmographic segmentation, wherein companies with similar physical attributes are grouped together. These attributes may include the region of operation, the industry these companies belong to, and the like. Such firmographic or demographic segmentation is of immense significance in order to understand the needs of the consumers or the companies.
A company selling PTFE tubes should be well-versed with the fact that the requirement for the medical industry is not the same as a requirement for the electrical industry. This kind of segmentation is very useful in fulfilling the demands of the target market.
The possibility of a need-based segmentation
Segmentation based on the industry might have a couple of disadvantages. First, differences may not always exist on the basis of the industry. A seller of accountancy software will hardly find any difference between selling his product to a food company and selling it to a steel manufacturer. Secondly, almost all business will tend to do this kind of segmentation; as a result there is no competitive advantage.
Keeping these things in mind, the requirement for need-based segmentation arises, wherein identification and satisfaction of the needs of the customers is the basis.
Needs are not simple to recognize, so you need market research for finding out the same. Market researchers are capable of devising questions which ask people various aspects of their requirements. If it is a question of individual needs, users are asked their expectations from a product while, in case of company needs, a group of people is asked what they would like to have from their suppliers. Both at the individual level and at the company level, the needs must be addressed for the business to flourish.
One major problem in identification of needs is that they frequently change depending upon various factors. But need-based segmentation is the best way companies can orient themselves to fulfill customer requirements.
Behavioral segmentation for unrecognized needs
When identification of needs becomes difficult, behavioral segmentation comes to the rescue in order to arrive at the hidden needs. For instance, certain customers prefer long-term relationship with an organization or brand while other might switch from one brand to another to avail discount deals. Given such behavioral aspects, behavioral segmentation is a potential option.
Simpler needs of customers
It is true that purchasing decisions are not as sophisticated as we think. People decide based on certain simple criteria such as quality products, high-end service, low prices, reputation of the organization or brand, and so on. Through general communication, the importance of these different criteria for the customers can be found out.
Step 3: Cluster Analysis for customers with diverse needs
Once survey answers are obtained; cluster analysis is done using a statistical analysis tool, in order to group the respondents who have similar answers. Around one to five clusters are obtained, so that the supplier’s efficiency is maximized through meeting the market needs with minimal number of offers. New customers are also placed within the clusters as and when necessary. The questions are repeated with existing customers every six months to one year so that changing needs can be identified.
Step 4: Coding of existing and prospective customers
It is best for a business to record customer details in the form of a spreadsheet, either within an effective customer relationship management system or simply an excel file. As the segmentation is being carried out, each customer must be placed against a definite segment within the spreadsheet. The spreadsheet may be prepared based on various parameters such as answers to survey questions. It may then be used to group customers for communications like mailers as well as to evaluate sales and profitability. In other words, good segmentation should lead to a profitable business, wherein the spreadsheet acts as a control mechanism.
Step 5: Implementation of Market Segmentation
Setting up a market segmentation based on the behavior and needs of the customers is not an end in itself – you need to implement the segmentation. Every segment has a distinct offering, more technically known as the CVP or Customer Value Proposition. It must be proved to the customers that the claims related to the CVP are true and what they are expecting would be realized.
Next, the sales force should understand the reason behind the segmentation and its benefits so that they work successfully towards fulfillment of customer needs. In fact, the sales force should understand that the lowest price is not the only thing that draws customers.
On the whole, there is no right or wrong route to segment a market. It depends a lot on the business domain and also the creativity of the business owner. In fact, you may create numerous market segments, but it is advisable to keep the number of segments reasonable low for effective market penetration. In business, you always need to keep track of the latest development and changing needs of the target market, which would enable you to create your own segments to suit the business scenario in which you are operating.
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