What is Market Segmentation?
Market segmentation involves categorising potential buyers into distinct groups or segments based on factors like demographics, geography, behaviour, or psychographics. This facilitates a deeper understanding of these groups for more effective marketing strategies.
Key points:
- Market segmentation aims to pinpoint specific consumer groups for customised product offerings and branding.
- Segmentation methods include geographic, demographic, and behavioural criteria.
- It assists companies in mitigating risks by identifying promising products and optimising marketing approaches.
- By reducing risk and enhancing product marketing and delivery strategies, companies can allocate resources more efficiently.
- Market segmentation may expand a company’s demographic reach and uncover previously overlooked product or service opportunities.
How Market Segmentation Works
Companies often employ three criteria to distinguish various market segments:
- Homogeneity, indicating common needs shared within a segment.
- Distinction, highlighting uniqueness compared to other groups.
- Reaction, denoting a similar response to market stimuli.
For instance, consider an athletic footwear company that segments its market into basketball players and long-distance runners. These distinct groups exhibit contrasting reactions to advertising campaigns tailored to their specific needs. Understanding these segments enables the company to align its branding effectively.
Market segmentation extends from market research, aiming to pinpoint specific consumer groups for customised product offerings and branding. The primary goal is risk minimisation by identifying products with optimal market penetration potential and devising efficient delivery strategies. This optimisation enables the company to enhance overall efficiency by directing resources toward endeavours with the highest return on investment (ROI).
Fact: Market segmentation allows a company to optimise its overall efficiency by allocating its limited resources to initiatives that generate the greatest return on investment (ROI).
Types of Market Segmentation
There are often four main types of market segmentation. However, one of these types can often be further divided into individual and organisational segments. Hence, below are five commonly recognised types of market segmentation.
Demographic
Demographic segmentation stands out as a straightforward and widely used method in market segmentation. It entails dividing the market based on customer demographics such as age, income, gender, race, education, or occupation. This strategy operates under the assumption that individuals sharing similar demographics will exhibit similar needs.
For instance, the market segmentation analysis for a new video game console might unveil that its primary users are often young males with disposable income.
Firmographic
Firmographic segmentation mirrors the concept of demographic segmentation but focuses on organisations rather than individuals. This approach examines factors such as a company’s employee count, customer base, office locations, or annual revenue.
For instance, a corporate software provider might tailor its offerings differently when targeting a multinational corporation, offering a diverse and customisable suite, compared to approaching smaller companies with a simpler, fixed-fee product.
Geographic
Geographic segmentation falls within the broader category of demographic segmentation. It involves clustering customers based on their physical location, operating under the premise that individuals within the same geographic area often share similar needs. This tactic is particularly beneficial for larger companies aiming to extend their reach into various branches, offices, or regions.
For instance, a clothing retailer might opt to showcase more rain gear in its stores located in the Pacific Northwest, recognising the region’s climate demands, while offering different assortments in its outlets in the Southwest.
Behavioural
Behavioural segmentation heavily relies on market data, consumer behaviours, and decision-making patterns. This method categorises consumers according to their past interactions with markets and products, operating under the assumption that previous spending habits serve as indicators of future purchasing behaviour, although these habits might evolve over time or in response to external factors such as global events.
For instance, millennials often show a preference for craft beer, while older generations tend to lean towards national brands.
Psychographic
Psychographic segmentation, often the most challenging method, aims to categorise consumers according to their lifestyle, personality, opinions, and interests. This can be challenging due to:
- the potential for these traits to change easily and
- the lack of readily available objective data.
Nonetheless, this approach can yield the most robust market segment results as it groups individuals based on intrinsic motivators rather than external data points.
For instance, a fitness apparel company might target individuals based on their interest in participating in or watching a range of sports.
Fact: Less prominent instances of segmentation types encompass factors such as volume (indicating the amount a consumer spends), use-related (reflecting customer loyalty), or other customer attributes (such as innovation inclination or risk preference).
Figuring Out your Market Segment
There isn’t a universally accepted method for conducting market segmentation. Companies often navigate their market segmentation journey by considering the following questions to identify their market segments.
Stage 1: Establishing Expectations/Objectives
- What purpose or goal does market segmentation serve?
- What insights does the company aim to gain from market segmentation?
- Does the company hold any expectations regarding the potential market segments?
Stage 2: Identifying Customer Segments
- To which segments are the company’s competitors catering?
- What pertinent and accessible publicly available information is applicable to our market?
- What specific data do we intend to gather, and what methodologies can we employ to obtain it?
- Among the five types of market segments, which ones do we aim to utilise for segmentation?
Stage 3: Assessing Potential Segments
- What potential risks exist regarding the representativeness of our data concerning the true market segments?
- What factors warrant selecting one customer type over another for targeting?
- What are the enduring consequences of favouring one market segment over another in the long run?
- What constitutes the company’s ideal customer profile, and which segments align most closely with this “ideal customer”?
Stage 4: Creating Segment Strategy
- In what manner can the company validate its assumptions through a trial in a sample test market?
- What criteria characterise a triumphant marketing segment strategy?
- By what means can the company gauge the effectiveness of the strategy?
Stage 5: Launching and Monitoring
- Who are the primary stakeholders who can offer feedback following the unveiling of the market segmentation strategy?
- What obstacles to implementation are present, and what strategies can be employed to surmount them?
- How should the internal communication regarding the launch of the marketing campaign be structured?
Benefits of Market Segmentation
Implementing marketing segmentation requires dedication and resources. Nevertheless, effective marketing segmentation campaigns have the potential to enhance a company’s long-term profitability and vitality. Various advantages of market segmentation encompass:
- Enhanced resource efficiency. Marketing segmentation enables management to concentrate on particular demographics or customer groups, rather than attempting to promote products across the entire market. This focused, precise approach often incurs lower costs compared to broader outreach methods.
- Reinforced brand image. Market segmentation compels management to deliberate on how they wish to be perceived by specific groups. Once the market segment is identified, management must carefully consider the message to convey. By targeting a specific audience, a company’s branding and messaging become more deliberate, potentially leading to better customer experiences.
- Increased potential for brand loyalty. Marketing segmentation creates opportunities for consumers to establish enduring relationships with a company. Personalised marketing approaches may resonate with customers, fostering feelings of inclusion, community, and belonging. Moreover, market segmentation enhances the likelihood of attracting the right clients who align with the company’s product line and demographic.
- Heightened market differentiation. Market segmentation empowers a company to articulate precise messages to the market and competitors. This facilitates product differentiation by explicitly communicating how the company distinguishes itself from competitors. Rather than employing a broad marketing approach, management crafts a distinct image that is more likely to be memorable and impactful.
- Improved targeted digital advertising. Marketing segmentation enables companies to execute more effective targeted advertising strategies. This includes directing marketing efforts towards specific age groups, locations, or habits via social media platforms.
Limitations of Market Segmentation
The benefits mentioned above come with accompanying drawbacks. Here are several disadvantages to contemplate when contemplating the implementation of market segmentation strategies.
- Elevated initial marketing expenditures. Marketing segmentation aims for long-term efficiency. However, companies often need to invest resources upfront to acquire the insights, data, and research into their customer base and broader markets necessary to achieve this efficiency.
- Increased complexity of product lines. Market segmentation breaks down a large market into more specific, manageable segments. However, this approach poses the risk of complicating product lines excessively, leading to a fragmented product assortment overly focused on catering to specific market segments. Consequently, instead of presenting a unified product line, a company’s marketing mix may become overly intricate, resulting in inconsistent communication of its overall brand.
- Heightened risk of misjudgments. Market segmentation operates on the assumption that individuals within similar demographics share common needs. However, this assumption may not always hold true. By grouping a population together based on shared traits, a company may inadvertently misidentify the needs, values, or motivations of individuals within that population.
- Increased reliance on accurate data. The effectiveness of market segmentation hinges on the quality of the underlying data supporting the conclusions drawn. This necessitates careful consideration of the sources used to gather data. Moreover, companies must remain vigilant of changing trends and shifts in market segments since previous studies.
Examples of Market Segmentation
Market segmentation manifests in the everyday products, marketing strategies, and advertisements people encounter regularly. Automobile manufacturers excel at precisely identifying market segments and developing products and advertising campaigns customised for each segment.
Cereal producers actively target three or four market segments concurrently, promoting traditional brands to older consumers, health-conscious brands to those prioritising wellness, and cultivating brand loyalty among younger consumers by associating their products with popular children’s movie themes.
Similarly, a sports shoe manufacturer may delineate several market segments encompassing elite athletes, frequent gym attendees, fashion-conscious women, and middle-aged men seeking quality and comfort. In each scenario, the manufacturer’s marketing acumen regarding each segment empowers it to develop and promote products with heightened appeal more effectively than attempting to appeal to broader demographics.
DISCLAIMER: This article is for informational purposes only and does not replace official business advice. AVANTE PARTNERS has no relationships with any market research company or organisation mentioned.