What’s it: A market segment is parts of a market where consumers share a similar need or want. Individuals in one segment have similar characteristics, including in responding to the marketing mix. However, they are quite heterogeneous with individuals in different segments.
Reasons market segmentation is important
Segmentation is essential because it forms the basis of differentiated marketing. Companies use several variables to identify and describe consumer buying behavior, such as income, lifestyle, value, and location.
Because customizing a different marketing mix for each segment is expensive, companies often only target specific segments. Then, they develop a strategy and marketing mix accordingly.
Market segmentation is for targeted marketing. That’s a contrast to mass marketing. Under mass marketing, companies ignore differences in needs or tastes between individuals. They use a single marketing mix for all consumers in the market.
Conversely, by segmenting the market, companies aim to focus their marketing efforts to better satisfy customers.
Some reasons why segmenting the market is important:
First, minimizing risk. The company can determine which product has the best chance of being sold. By segmenting the market, companies gain more in-depth knowledge of consumer profiles. They then develop effective marketing strategies, including product design, pricing, and product promotion.
Second, higher customer acceptance. Companies use customer knowledge to adjust their marketing mix. Thus, their offerings are more in line with the tastes of consumers in the target segment. As a result, it should have a lower risk of rejection.
Third, focus on resources. Companies can focus their marketing and sourcing efforts more effectively. They design the right product, price, venue, and promotional mix for the target segment. It further increases cost-effectiveness while increasing sales, market share, and profits.
With more focus, the company also designs an appropriate competitive strategy. If successful, they will achieve a high market share and secure long-term customers by increasing their loyalty.
Fourth, encouraging innovation. The company studies the characteristics of customers in the targeted segment. That generates more ideas about what they have to offer and how they should offer it.
A better understanding of customers motivates them to develop innovative products. They then determine the best way to produce the product.
Fifth, find market opportunities. Market segmentation is also useful for identifying new business opportunities. The company may discover a potential niche market where existing products do not yet serve it.
Good market segment criteria
Not all market segments are worth tackling. Some may not be large enough to generate sales. Others are too large and exceed the resources and capabilities of the company.
Several criteria make a market segment attractive.
First, the segment size must be large enough to generate a profit. The target segment may not be as large as the mass market but is not small enough to generate adequate sales volume.
The large size of the market segment allows the company to take advantage of cost savings. For example, by selling more products, firms can lower costs through higher economies of scale.
Second, the individuals in a segment must be homogeneous. They have similar characteristics, such as tastes, preferences, lifestyle, or interests.
Homogeneity also applies to consumer response to the company’s marketing mix. Thus, marketing efforts and results are more predictable.
Third, individuals between segments must be heterogeneous, both in terms of their characteristics and responses to the marketing mix. It makes one segment unique from another segment. Thus, companies can focus their marketing efforts on targeted segments.
Fourth, the segment has high growth prospects. Growth is important for sustainable profit. A growing market can continue to flow money into the company.
Fifth, segments must be measurable. Exploiting markets requires resources and costs. Thus, ensuring the market responds effectively to its marketing mix is essential to minimize costs and generate profits.
Sixth, segments have structural appeal. Aspects such as competition, buyers’ bargaining power, and availability of substitutes affect firms’ profitability and competitiveness. Therefore, companies should consider them when selecting target segments.
Types of market segments
Many ways are to segment a market. Three frequently used variables are:
After segmenting the market, the company selects target segments based on previous criteria and designs a marketing mix accordingly.
Under demographic segmentation, the company divides the population into smaller subgroups based on demographic characteristics such as:
- Family status
- Family size
- Socioeconomic status
This approach assumes, consumers with the same demographic profile will exhibit similar buying patterns, motivations, interests, and lifestyles. Therefore, we expect them to have similar product preferences.
Take social status, for example. Wealth and income symbolize a person’s social status. With high purchasing power, the rich will have a different consumption pattern from the lower class.
Rich people love to collect luxury goods. Meanwhile, the lower class prefers cheaper goods, especially to meet their daily needs. Thus, luxury car companies, for example, would target the wealthy segment instead of wasting resources targeting consumers who would not be interested in their products.
Geographic segmentation divides markets according to geographic criteria such as:
- Postal code
Geographic segmentation considers consumers’ physical location, including the natural environment and the climate they live in. Some items may be suitable in certain areas but not in others. For example, drinking alcohol is prohibited in Muslim countries but not in other countries.
Under psychographic segmentation, the company divides the market based on personality, values, interests, lifestyle, and attitudes. A commonly used framework is Values, Attitudes, and Lifestyles (VALS), which combine psychological and demographic characteristics to explain consumer behavior.
For example, environmentally conscious consumers will be selective in buying products. They only ask for environmentally friendly products. They avoid other products because they think their consumption is equivalent to damaging the environment.
Likewise, you may also have a higher interest in organic food than your friends. You think maintaining health starts with what we eat.