I am often asked for some simple, basic rationale for using market segmentation. Why is it useful, what will I gain, what types of segmentation are there? Market segmentation offers the following potential benefits to a business:
Better matching of customer needs:
Customer needs differ. Creating separate products for each segment makes sense
Enhanced profits for business:
Customers have different disposable incomes and vary in how sensitive they are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits
Better opportunities for growth:
Market segmentation can build sales. For example, customers can be encouraged to “trade-up” after being sold an introductory, lower-priced product
Retain more customers:
By marketing products that appeal to customers at different stages of their life (“life-cycle”), a business can retain customers who might otherwise switch to competing products and brands.
Target marketing communications:
Businesses need to deliver their marketing message to a relevant customer audience. By segmenting markets, the target customer can be reached more often and at lower cost
Gain share of the market segment:
Through careful segmentation and targeting, businesses can often achieve competitive production and marketing costs and become the preferred choice of customers and distributors In most markets there is one dominant (mass) segment and several smaller (niche) segments… For example, in the confectionery market, a dominant segment would be the plain chocolate bar. Over 90% of the sales in this segment are made by three dominant producers – Cadbury’s, Nestle and Mars. However, there are many small, specialist niche segments (e.g. luxury, organic or fair-trade chocolate). Often for small business owners we are targeting the niche or smaller segments. Niche marketing can be defined as:
Where a business targets a smaller segment of a larger market, where customers have specific needs and wants.
Targeting a product or service at a niche segment has several advantages for a business (particularly a small business):
- Less competition – the firm is a “big fish in a small pond”
- Clear focus – target particular customers (often easier to find and reach too)
- Builds up specialist skill and knowledge = market expertise
- Can often charge a higher price – customers are prepared to pay for expertise
- Profit margins often higher
- Customers tend to be more loyal
Consider the segment you are trying to engage or attract, is it small or mass? Have you defined the segment in the most effective and appropriate manner?
