Market segmentation is the science of dividing an overall market into key customer subsets, or segments, whose members share similar characteristics and needs. Because it involves significant market research, market segmentation can be costly. But it is particularly important for small businesses, which often lack the resources to target large aggregate markets or to maintain a wide range of differentiated products for varied markets. Market segmentation allows a small business to develop a product and a marketing mix that fit a relatively homogenous part of the total market. By focusing its resources on a specific customer base in this way, a small business may be able to carve out a market niche that it can serve better than its larger competitors.
Market 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-toone marketing—in which a different product is specifically designed for each individual customer in a market. 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.
Though 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 several 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 to successfully 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 characteristics of the population. 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.
To be pursued by a marketer, according to Alexander Hiam and Charles D. Schewe in The Portable MBA in Marketing, the customer segments should be:1) identifiable and measurable; 2) large enough to be profitable; 3) reached effectively (for example, its members must tend to view the same television programs, read the same publications, or shop in the same places); 4) responsive to marketing; and 5) stable and not expected to change quickly. A company might elect to serve a single market segment or attempt to meet the needs of several segments.
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, but unsuccessful segmentation can cost a great deal of money and still not yield the desired results. There are three main types of segmentation bases for businesses to consider—descriptive bases, behavioral bases, 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 situation 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.
Hiam and Schewe have identified six steps that companies should take in the market segmentation process. The first step is to determine the boundaries of the market. In completing this step, a marketer should use a formal business plan to develop a broad definition of their business, and then consider the offerings of both direct and indirect competitors to gain information about the basic needs of consumers in the market. The second step in the process is to decide which variables to use in segmenting the market. Many companies fall into the trap of collecting data on as many variables as possible and then attempting to sort through it later to draw meaningful conclusions. Instead, Hiam and Schewe recommend that marketers use their knowledge of the market to select a few relevant variables in advance. This approach is generally less expensive and will likely provide more useful results.
The third step in the market segmentation process is actually collecting and analyzing data, which involves applying market research tools. The goal in analyzing the data is to identify market segments that are internally homogeneous, yet are distinctly heterogeneous with respect to other segments. The fourth step is to develop a detailed profile of each market segment, which involves selecting those variables that are most closely related to consumers' actual buying behavior.
The fifth step in the market segmentation process is to decide which segment or segments to serve. In targeting a particular segment, a marketer should look for opportunities (i.e., customers with unsatisfied wants and needs) that provide a good match for the organization and its resources. It is important that the marketer consider not only the size and potential profitability of a market segment, but also whether the company's skills, technologies, and objectives would enable it to meet the needs of that segment better than its competitors. The sixth and final step is to develop a product and marketing plan that will appeal to the selected market segment. This involves identifying the product attributes that are most important to consumers in the segment, and developing a marketing strategy that will attract their attention. In fact, market segmentation can be usefully applied during the earliest stages of product design, when a company first identifies who its target customer will be in terms of demographic, geographic, and behavioral characteristics.
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.
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