What Is Market Segmentation?
Market segmentation refers to the categorization of homogeneous groups of prospective buyers who share similar characteristics and consumption behavior. Whether these groups share common needs or respond similarly to a specific marketing efforts, companies must ensure that a process is in place to segment prospective buyers accordingly in an effort to meet consumer demands.
Why Is Market Segmentation Important?
Nowadays, companies must be customer-focused to remain competitive in the dynamic business environment. To do so requires an organization to segment its markets in an effort to respond more effectively and efficiently to consumer desires. The goal is to group people, or organizations, in a market according to their characteristics and consumption behavior in order to create the most effective marketing mix for profitability purposes.
When To Segment Your Market?
Never attempt to segment your market when estimated expenses are greater than the expected increase in sales and revenue. Do your research and calculations first prior to determining if it’s worthwhile to segment your market. Here are some examples to consider:
- One Product and Multiple Segments
- Multiple Products and Multiple Segments
- Mass customization (Segments of One).
One Product & Multiple Segments
Rather than create new products constantly, organizations could choose to sell only a single good that’s offered in two or more market segments. By doing so, businesses would avoid the additional costs pertaining to the development and production of new goods (i.e. R&D, engineering, advertising, etc.). In this instance, it would be worthwhile for the company to segment their markets in an effort to look for new sales opportunities with the same product offering, especially if the firm lacks the resources to constantly create new products or services.
Multiple Products & Multiple Segments
As the name infers, organizations must conduct market segmentation when offering multiple products aimed at multiple markets. A perfect example of this is Nike, a conglomerate in the sports-wear industry offering different styles of apparel to multiple end-users. Organizations could also use the “two-tier” marketing approach where similar products or services are sold at low and high-end stores, thus entering multiple market segments. Just look at Gap versus Old Navy – Gap is considered the high-end version of clothing compared to Old Navy. Although this approach is more costly, many believe it’s worthwhile because its more customer-focused and serves the wants, needs, and desires of target markets more effectively. So if you own a business that offers multiple goods, it would behoove you to segment your markets to deliver the right goods, to the right places, and at the right time.
Mass Customization (Segment of One)
With the rapid advances of technologies, including the Internet, organizations now have the opportunity for mass customization of products. Two prime examples of organizations utilizing this approach include VistaPrint and CustomInk. VistaPrint allows clients to customize products, such as business cards, to their own liking. Whereas CustomInk allows customers to basically print anything they want on T-Shirts, sweaters, hats, etc. By providing clients with options to tailor goods unique to their liking, these organizations improve customer relationship management (CRM) and their bottom-line in parallel.
What Are The Steps To Market Segmentation?
Overall, there’s 5 key steps that serves as the foundation to effective market segmentation:
- Identify market wants, needs, and desires.
- Group potential buyers into segments.
- Group products or services to be sold into categories.
- Determine the size of the target market(s).
- Finalize on target markets and take the appropriate actions to reach those groups by executing your marketing programs.
In the end, a fine line exist between market segmentation and product differentiation. Companies must find an ideal balance between both to be successful and profitable. By adhering to the guidelines listed above, organizations could define and focus on their targets; segment their markets; optimize marketing mixes; create new markets.
As Philip Kotler wisely stated, “good companies will meet needs; great companies will create markets.” With this in mind, I hope that this post provided you with winning strategies to build a great company capable of reaching new markets.