What’s it: Market segmentation is the process of breaking down the consumer population into smaller groups. It aims to capture variations in consumer needs or preferences based on variables such as age, gender, income, family size, ethnic group, occupation, social class, and lifestyle.
Consumers in one segment have similar characteristics (homogeneous). I mean, they have similar needs and preferences. They also have a relatively similar response to the marketing mix.
Instead, the characteristics of consumers between segments are quite different (heterogeneous). Each segment has different needs and preferences. Apart from that, they also respond to marketing approaches differently.
Why market segmentation is important
Wendell Smith introduced the basic technique of segmentation in 1956. It also marked the end of mass marketing.
The main idea is that there are groups of customers who have different wants and needs. So, they need a different product.
This idea contrasts with the previous mainstream of marketing strategy in which manufacturers treat customers the same way. They do not consider variations in needs and preferences. Therefore, they use a mass marketing approach to sell products.
Market segmentation brings about a new era of competition. Since there are many different segments, the largest producer may not necessarily dominate the entire market.
It is possible for a smaller competitor to become dominant in a particular segment. Smaller companies can focus on a niche market and dominate it. Large companies are reluctant to enter this niche because they are unprofitable and having low economies of scale.
Advanced internet, communication technology, computers, big data, data mining, and various multimedia have made it easier for marketers to segment the market. They can identify the right segments and tailor offerings to more specific market segments.
Criteria for a valuable market segment
First is the segment size. The market segment should consist of enough customers to make a profit. And, the segment should not be too large either, which is too expensive and requires constant changes in the marketing mix to serve the segment.
Second, the segment should be prospective for future growth. That way, the company can continue to flow money. For example, when a market segment has reached its maturity phase, exploiting it will not result in a sustainable cash inflow.
Third, the segment must be profitable. The costs of exploiting the segment must be lower than the potential revenue from sales. That way, the segment contributes to the company’s overall profit and value.
Fourth, the market segment must be measurable. Detailed information about customer characteristics should be easily obtained cost-effectively. The information must be accessible to communicate effectively with the selected segment using the marketing mix.
Fifth, customer groups must differ sufficiently between segments in response to the marketing mix. Meanwhile, consumers in one segment must be homogeneous and similarly respond to the marketing mix, making it easier for companies to exploit them.
The sixth is structural attraction. It includes various aspects such as competition intensity, buyers’ bargaining power, and substitutes’ availability. For example, competition intensity affects the company’s profitability and success in exploiting the target segment. When competition is intense, profitability tends to be low, and companies must fight for a superior position.
Stages in market segmentation
The process begins by establishing criteria for segmentation. Then, marketers divide the heterogeneous market into homogeneous subgroups.
After that, the characteristics of these segments are identified and analyzed. Marketers must evaluate a market segment’s attractiveness based on the above criteria, such as size and growth prospects. Also, marketers must consider company resources and capabilities.
The company’s reputation and ability to serve market segments are also other considerations. Does the company have previous experience, skills, and knowledge with similar market segments?
From these considerations, marketers then choose a potentially profitable segment to work on.
Four types of market segmentation
There are various alternatives for segmenting the market. The variables commonly used are geographic, demographic, psychographic, and behavior. Companies can also combine these variables.
Geographic segmentation divides the market based on a particular region’s characteristics, for example, country, city, state, province, suburb, or neighborhood.
For example, people who live in villages and cities have different habits of consuming meat. Urban people usually spend more on meat consumption than rural people.
Demographic segmentation is based on gender, age, income, occupation, education, family size, and ethnicity. The following are the details:
- Gender: men, women.
- Age: children, adolescents, adults, elderly.
- Income and social status: poor, lower middle class, upper-middle-class, mass affluent, global affluent.
- Occupation: self-employed, professional, white-collar, blue-collar.
- Education: primary school, secondary school, undergraduate, postgraduate.
- Family size: 1–2, 3–4, 5+
- Marital status: single, married, divorced, widowed.
- Ethnicity: Asian, African, Aboriginal, Polynesian, Melanesian, Latin American, African-American, etc.
- Religion: Catholic, Protestant, Muslim, Jewish, Buddhist, Hindu, Others
The psychographic segmentation considers lifestyle, cultural attitudes, and psychological types such as attitudes, hobbies, leadership traits, and personality traits.
In this case, marketers classify consumers into market segments according to the behavior they observe. For example, companies can segment the market based on the frequency of purchases. Companies can also classify consumers into light users, medium users, and heavy users.
Other behavioral variables to segment the market are:
- Benefit-sought: quality, economy, level of service, comfort, access.
- User status: first time user, regular user, not user
- Buyer readiness: unconscious, conscious, intention to buy
- Adopters status: innovator, early adopter, early majority, late majority, and laggard.
Benefits of market segmentation
By grouping customers into several smaller segments, marketers can focus on meeting customer needs rather than just focusing on products. This means that consumer needs are the basic idea of product creation.
The next advantage is that segmentation allows marketers to research customer needs at a deeper level. This ultimately leads to better relationships with customers.
Market segmentation is essential for reasons such as:
- Helping companies to better understand target customers. When they identify their market more precisely, they can develop appropriate products and marketing strategies. It increases the chances of marketing success.
- Find a profitable market segment. By breaking down the market into smaller segments, the company can find several business opportunities. Segmentation opens up all kinds of new segments of the market that mass marketers haven’t previously explored. They found a segment that promised high growth and profits.
- Focusing time, effort, cost, and resources. Mass marketing requires significant resources, as the target market is massive. Conversely, segmentation helps companies focus resources on specific segments, namely those that promise high growth and profits. It saves more cost and effort. Not all market segments are prospective and worthy of exploitation.
- Help design the right marketing strategy. Companies target ads to the right people in the right way, rather than targeting all consumers with generic messages. It further increases advertising success. Long story short, with segmentation, companies get a better understanding of customer needs and wants. They can tailor the campaign to the target segment, which is likely to buy the product.
- Better serve customer needs and wants. Companies focus on more specific groups. They offer different packages and incentives to meet specific customer needs and wants. It is similar to the concept of specialization. As companies focus on a specific segment over time, they become increasingly adept at satisfying customers.