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Market segmentation: basic strategies to identify segments and select a target market

Published in: Blog / January, 30 2012

As people and communities grow more diverse, it becomes risky for an organization to offer the same marketing mix to such different consumers. Market segmentation provides businesses with the possibility of customizing a unique set of elements known as the 4P’s (product, price, place, and promotion) for specific target markets. Therefore, it allows them to satisfy their customers’ needs in a more effective way; through a value proposition that is potentially superior to that of any other competitor. Market segmentation refers then to the process of defining and breaking down a wide market into clearly identifiable and homogeneous groups of consumers with similar characteristics, wants, and needs.

Few organizations are big enough to satisfy the needs of an entire market. Most companies are forced to split the total demand into several segments and select only those that they are best equipped to handle.

Market segmentation can help businesses of all kinds and sizes to make better decisions.

 

Experts suggest that a market segment should be:

  • Easily and clearly identifiable
  • Measurable
  • Accessible by promotion, communication and distribution channels
  • Different in its response to a marketing mix
  • Stable (not changing too quickly)
  • Appropriate for the company’s policies and resources
  • Substantial enough to be profitable

The basis for segmentation is a factor that varies among the groups of a certain market, but is consistent within each group. All markets can be broken down in different ways, and although many of the bases used to segment a consumer market can also be applied to businesses and organizations, the sheer nature of these eventually leads to other specific segmentation bases. The following is a comparative chart of the criteria or basic strategies to segment both market types:

Consumer market

Business market

Type of segmentation

Variables

Type of segmentation

Variables

Geographic

Region, climate, population density, and population growth rate

Geographic

Location, customer concentration, regional industrial growth rate, and international macroeconomic factors

Demographic

Age, gender, ethnicity, nationality, education, occupation, religion, income, and family status

Customer type

Size of the organization, its industry and position in the value chain

Psychographic

Values, attitudes, opinions, interests, activities, and lifestyles

Buyer behavior

Loyalty to suppliers, usage patterns, and order size

Behavioral

Usage rate and patterns, price sensitivity, brand loyalty, and pursuit of benefits

 

The identified segments are profiled and the attractiveness of each one must be evaluated before choosing a target market. However, a question that stands after selecting the criteria to break down the market is: what methodologies are followed to build up a segment in the first place?

There are rigorous analytic techniques used to organize consumers into groups with related needs, wants, and attitudes. With these, the size and potential market of each segment can be determined, along with the positioning and the appeal that will be used to cover it. For example, a K-Means Cluster Analysis attempts to identify relatively similar groups of interviewees based on selected characteristics using an algorithm capable of handling large amounts of people. Essentially, this method tries to separate n observations into k clusters, and each observation belongs to the cluster with the closest mean.

A very well-known industry in which this sort of analysis is frequently used is the mobile telecommunications industry, where competition is becoming stronger around the globe. Customers are demanding a higher quality at a lower price, and carriers’ profits and average revenue per user are facing tremendous challenges. In this case, the aim of clustering is to categorize prospective customers into unique groups for distinctive contact strategies and new offerings, by managing billing system data and information. This data, along with call records, describe customer utilization and spending behavior, allowing operators to approach customers in a more effective way. China Mobile Limited, the largest mobile carrier in the world with over 600 million subscribers, is well known for using this analytic technique.

Apart from playing a major role in developing new marketing efforts to attract new customers, market segmentation can also help a business to discover ways to reinforce existing customer loyalty. For instance, a firm may request some kind of feedback through questions specifically addressed to a certain group with the purpose of obtaining practical suggestions on how to make a product better. The customer will then know that the company is truly aware and the bonds between them will grow stronger.

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