Market Segmentation: Why Segment?

The diverse characteristics, needs, interests, and desires that customers have imply that there are only a small number of markets where a single product or service will please all of them.

Markets that consist of clients with different requirements are called markets. In this type of market the only manner to satisfy all the clients is to supply custom made products. This approach is not always practically possible or financially feasible. The alternative is to identifying key groups or segments of prospective buyers within the general market that share specific characteristics and consumer habits into subsets or groups who will respond similarly to a marketing action.

The ideal would be to group the customers or potential customers into perfectly homogeneous groups.

There are a number of significant reasons why companies make an effort to segment their markets carefully. In this article some of these will be defined and discussed.

Reasons for Segmenting Markets

Proper market segmentation offers companies a number of advantages that makes it easier to develop and capitalize on opportunities in the market. One of the main reasons that companies site for segmenting the market is to better match the needs of customers.

As mentioned earlier customer needs can be quite different. By creating separate offers for identified market segments the company can provide customers with a solution that is more focused on satisfying the segment's needs.

Another reason why markets should be segmented is to ensure that customers with different disposable income can be better targeted. As the disposable income in the group is similar their price sensitivity would be similar and they would thus respond in a similar way to price fluctuations. This can be very profitable for a company that correctly employs this strategy.

It is a fact that customer circumstances change over time and this have a direct impact on their needs and thus their buying patterns. By marketing products that appeal to customers at different stages of their individual "life-cycle" of needs, a company can retain customers for a longer duration. Companies that do not segment customers accordingly run the risk of losing customers who needs to switch to competing products and brands to fulfill changing needs.

In addition to changing needs customers that is properly segmented into homogeneous groups can be offered product extensions once they have invested in the base product necessary for the so called expansion product.

Probably the best knows reason for market segmentation is to standardize the marketing message to a standardized market segment customer audience. In cases where the market segment is too diversified there is a strong risk that the key market message will miss a significant portion of the segment making the communication conversion rate low and thus resulting in an expensive campaign that could result in an unprofitable product. By correctly segmenting markets, the targeted customers can be reached more accurately and often at significantly lower cost per sale.

In cases where a company or particular product of a company do not have a significant or major market share, it is unlikely that the profitability would be maximized since this type of company or product brands normally lack the benefit of scale of economies during production as well as marketing.

Careful market segmentation and precise client targeting may result in the company or product achieving a competitive advantage that could lead to it becoming the customers and distributors preferred choice. This benefit is normally utilized by a small company that operated in a competitive market where large companies are present. It is also effectively exploited by large companies introducing a new product into an unfavorable market.

Conclusion

By employing rigorous market segmentation strategies it is often discovered by companies that existing products or services has additional applications that may or may not have been apparent before the segmentation process.

By discovering or defining these new ideas for the use of existing products or services the company may be able to increase its sales significantly by ensuring the individual target markets are approached with the correct product definition that will satisfy their needs. This often leads to an increase in market share and the associated increase in sales and profits.

©Carl Marx