Conducting a Market Segmentation

As you have seen, there are many different ways a company can segment its market, and the optimal method varies from one product to another. Good market segmentation starts by identifying the total market for the product: all the individuals who might conceivably need a product and have the means to purchase it. The total market for accounting software, say, is different from the total market for Lego building sets or the total market for chewing gum. 

The next step is to identify marketing goals you want to achieve with the segmentation strategy. Do you want to generate awareness and sales in a local community that has never heard of your company? Do you want to get occasional customers to buy your product regularly? Do you want loyal supporters to dig deeper into their pockets and spend more of their money on your goods or services? Your segmentation approach should offer the best fit for your specific marketing goals.

Your marketing goals point you toward the segmentation criteria that will be most useful to achieve your marketing objectives. For example, if your goal is to build loyalty or increase frequency of purchase, behavioral segmentation is important to consider. If your goal is to broaden your customer base within a given region, geographic segmentation may be useful.

As you identify segmentation criteria that will help you understand the total market and meet your marketing goals, you’ll develop the basis for your segmentation approach. Next, you conduct research to collect segmentation data. Analyzing the market data can tell you whether your segmentation approach makes sense and where you may need to adjust the criteria to yield useful, valid market-segment data.

After conducting research and analysis of segmentation data, you should be able to diagram and profile different segments within your total market. A typical segmentation diagram could look like this:

Evaluating Your Segmentation Approach

An ideal market segment meets all of the following conditions:

• It’s possible to measure. If you can’t measure it, you can’t collect data to know who the segment is or how to reach them.
• It’s profitable. Segments must have the resources to purchase the product and be large enough to earn a profit for the company; otherwise they aren’t worth pursuing.
• It’s stable. Segments need to stick around long enough for you to execute your marketing plan.
• It’s reachable. It must be possible for marketers to reach potential customers via the organization’s promotion and distribution channel(s).
• It’s internally homogeneous. Potential customers in the same segment must prefer the same product qualities and exhibit similar characteristics that are pertinent to the segmentation approach.
• It’s externally heterogeneous. Potential customers from different segments have different product quality preferences and characteristics that affect their purchasing decisions.
• It’s responsive. Segments should respond consistently to a given market stimulus or marketing mix. If they do not, then marketing efforts directed at them will not be well spent.
• It’s cost-effective. Worthwhile market segments can be reached by marketing activities in a cost-effective manner. If too expensive to reach, then serving this segment will negatively impact profits.
• It helps determine the marketing mix. Ideally, when you have identified a market segment, you’ll have insight into ways of shaping the combination of product, promotion, price, and place to fit that segment’s needs.

If your segmentation approach fails to meet any of these conditions, you should go back to the drawing board to refine it. If any one of these factors is not in place, your market segmentation may actually undermine the effectiveness of your marketing and business. But with all these factors in place, market segmentation will point you toward the most promising customer groups in your target market.

For example, if you’re trying to launch a print services company in a large city, targeting “all business owners” isn’t cost effective, and the individuals within this group are actually quite different. That means that no single marketing mix will be effective with everyone in this segment. Instead, you would be better served by researching types of businesses (by industry, size, etc.), geographic locations, and other relevant factors to help you identify and target logical segments with shared characteristics.

Keep in mind that market segmentation is an ongoing activity that needs periodic evaluation to ensure that the approach still makes sense. Since markets are dynamic and people and products change over time, the basis for segmentation must also evolve.

Selecting Target Segments

Once an actionable segmentation approach is in place, marketing organizations typically follow one of two major segmentation strategies: a concentration strategy or a multisegment strategy.

Rolex focuses on a single market segment—those who want a luxury watch—and is thus a prime example of the concentration strategy of market segmentation.

In the concentration strategy, a company chooses to focus its marketing efforts on only one market segment. Only one marketing mix is developed: the combination of product offerings, promotional communications, distribution, and pricing targeted to that single market segment. The primary advantage of this strategy is that it enables the organization to analyze the needs and wants of only one segment and then focus all its efforts on that segment. The primary disadvantage of concentration is that if demand in the segment declines, the organization’s sales and financial position will also decline.

In the multisegment strategy, a company focuses its marketing efforts on two or more distinct market segments. The organization develops a distinct marketing mix for each segment. Then they develop marketing programs tailored to each of these segments. This strategy is advantageous because it may increase total sales with more marketing programs targeting more customers. The disadvantage is the higher costs, which stem from the need for multiple marketing programs that may include segment-specific product differentiation, promotions and communication, distribution/delivery channels, and pricing.

How do you choose?

Selecting the target segments boils down the following questions, which connect to the “ideal segment” conditions listed above:

• Whose needs can you best satisfy?
• Who will be the most profitable customers?
• Can you reach and serve each target segment effectively?
• Are the segments large and profitable enough to support your business?
• Do you have the resources available to effectively reach and serve each target segment?

As you answer these questions with regard to the different market segments you have defined, you will confirm which segments are most likely to be good targets for your product(s). These segments become your target market—the object of your targeting strategy, marketing mix, and marketing activities.