Market segmentation process

From CEOpedia | Management online

Market segmentation is the process of describing and separating huge homogeneous market into group of smaller segments, which are having corresponding needs, wants or attributes. This process is an essential part of business strategy (Päivi Kannisto 2016, p. 174). Strategy of market segmentation is able to help companies acknowledge more informations about their customers for example needs and preferences. Thanks to that, enterprise can create different methods for choosed segments in order to enhance customer's satisfaction and intensify income (Jiapeng Liu et al. 2018, p. 1).Other definition of market segmentation is that it is a strategy of choosing, which products should be made from a group of already existing or possible products (Xu Xu 2013, p. 1).

Process of market segmantation

Market segmentation process consist of following tasks:

  • General definition of segmented market,
  • Formulating needs of potential customers,
  • Defining segments by creating combinations of needs that are fulfilled,
  • Making detailed characteristic of segments,
  • Defining relative size of segments.

Main streams

Actual methods of market segmentation can be divided into two main streams (Jiapeng Liu et al. 2018, p. 1):

  • the priori approaches,
  • the post-hoc approaches.

In the priori approach companies had to choose the type and the total number of segments beforehand, based on their knowledge or speculation determinants that are connected with customers, products or services. On the other hand, the post-hoc approach implement the decision bessed of analyzed market data.

Methods of market segmentation

There are few methods of market segmentation (Diana L.Huerta-Muñoz 2017, p. 76):

  1. Descriptive market segmentation methods (k-means; hierarchical clustering; p-median clustering; case based reasoning and self-organizing map).
  2. Predictive market segmentation methods (clusterwise regression methods; clusterwise logistic and mixture regression methods).
  3. Multi-objective market segmentation methods (multi-staged approach; transformation approach; modification of traditional descriptive clustering and predictive clusterwise methods).

Market segmentation criteria

Some criteria for market segmentation:

  • Demographic - age, gender, education, marital status, religious beliefs.
  • Geographic - location (city, suburbs, village), climate, population, political system.
  • Economic - profession, earnings, assets.
  • Socio-psychographic - lifestyle, social class, personality.
  • Conditions - type of shopping place, frequency/time/scale of shopping.
  • Patterns - loyalty, frequency of use.
  • Benefits - product knowledge, customer's predisposition.

Examples of Market segmentation process

  • Geographical segmentation: The process of dividing the market by geographic criteria such as countries, states, cities, or neighborhoods (Kotler & Keller, 2016). For example, a company such as McDonald's may choose to target certain areas in a certain region based on the cultural preferences of the population in that area.
  • Demographic segmentation: The process of dividing the market based on demographic criteria such as age, gender, education level, income, occupation, and marital status (Kotler & Keller, 2016). For example, a company may target a younger demographic in order to sell its products, as they are more likely to be interested in the company's offerings.
  • Psychographic segmentation: The process of dividing the market based on psychological or lifestyle criteria such as personality, values, attitudes, interests, and lifestyles (Kotler & Keller, 2016). For example, a company may target a certain lifestyle group, such as health conscious individuals, in order to better market its products.
  • Behavioural segmentation: The process of dividing the market based on customers' behaviour such as usage rate, brand loyalty, and benefits sought (Kotler & Keller, 2016). For example, a company may target customers who are loyal to its brand in order to increase customer loyalty and sales.
  • Benefit segmentation: The process of dividing the market based on the benefits which customers seek from a product or service (Kotler & Keller, 2016). For example, a company may target customers who seek convenience and speed in order to better market its products.

Advantages of Market segmentation process

Market segmentation can bring many advantages for companies. They are:

  • Increased sales: By segmenting the market, companies can identify the exact needs of customers and can provide them with the right products, which may result in increased sales.
  • Improved customer satisfaction: By segmenting the market, companies can identify the exact needs of customers and can provide them with the right products and services, which may result in improved customer satisfaction.
  • Reduced costs: By segmenting the market, companies can identify the exact needs of customers and can provide them with the right products and services, which may result in reduced costs.
  • Increased efficiency: By segmenting the market, companies can identify the exact needs of customers and can provide them with the right products and services, which may result in increased efficiency.
  • Better targeting: By segmenting the market, companies can identify the exact needs of customers and can target them more accurately, which may result in increased sales.

Limitations of Market segmentation process

One of the limitations of the market segmentation process is that it can be costly to research and identify the different segments of the market. *It can be expensive to conduct market research and analysis, in order to accurately identify the different segments of the market and their needs and preferences. Another limitation is that it can be difficult to accurately measure the size of the different segments. *It can be difficult to measure the size of the different segments, as the number of customers in each segment can vary drastically from one region to another. Additionally, segmenting the market can limit the potential reach of the company’s products or services. *If the company focuses too much on targeting a specific market segment, it can limit the potential reach of its products or services, as it may not be able to capture the attention of customers outside of the targeted segment. Finally, segmenting the market may lead to the company overlooking potential customers. *Segmenting the market may lead the company to overlook potential customers who may have different needs and preferences, which could lead to missed opportunities for the company.

Other approaches related to Market segmentation process

  • Product differentiation - It is a process of creating and developing special characteristics that sets products apart from the competition. It is important to consider the needs of the target market and the preferences of potential customers when creating product differentiation (Xu Xu 2013, p. 4).
  • Positioning - It is the process of positioning a product in the market in order to make it attractive to customers by creating a clear image of the product in the mind of customers. It is essential to consider the product’s features, the target market and the competition in the market (Xu Xu 2013, p. 4).
  • Brand segmentation - It is the process of dividing a brand into different segments according to the needs and preferences of the target customers. It is important to consider the brand’s characteristics, the target market and the competition in the market (Xu Xu 2013, p. 4).

In summary, market segmentation is a process of dividing a market into smaller segments according to the needs and preferences of the target customers. Other approaches related to market segmentation process are product differentiation, positioning and brand segmentation. All these approaches are essential for creating an effective marketing strategy and for making the product attractive to the target customers.


Market segmentation process — recommended articles
Selection of target markets — Segment of the market — Analysis of customer — Segmentation and targeting — Importance of market segmentation — Customer needs — Differentiated marketing strategy — Incremental sales — Beachhead market

References

Author: Olga Marmuszewska

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