“Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments”
The Process of Market Segmentation:
Mainly there are three steps involve in market segmentation.
Identifying Target Markets:
First, it is necessary to define the markets the organization is in, or wishes to be in, and how these divide into segments of customers with similar needs. The choice of markets will be influenced by the corporate objectives as well as the asset base. Information will be collected about the markets, such as the markets' size and growth, with estimates for the future.
Understanding the Value required by Target Market:
Once each market has been defined, it is necessary to understand what value the customers within each of the segments it divides into are looking for. This value is most simply thought of as the benefits gained from the product or service, but it can also encompass the value to the customer of surrounding services such as maintenance or information. This step also encompasses what the customer is prepared to give in exchange, in terms of price and other criteria, such as loyalty. This step of "Understand value required" also includes predicting the value which will be required in the future.
Understanding Competitor Value Positioning:
'Understand competitor value positioning' refers to the process of establishing how well the organization and its competitors currently deliver the value that the customers seek. Again it involves looking into the future to predict how competitors might improve, clearly a factor in planning how the organization is to respond.
From these three processes, the relative attractiveness of the different markets and, within each of them, their different segments can be evaluated. One tool of relevance here is Porter's five forces model (1985), showing the forces which shape industry competition and hence the attractiveness of a given market, or of a given segment. The output will be some form of analysis, and one way of summing up much of the key information is in a portfolio matrix. Such a matrix provides a sensible basis for prioritization amongst the many possible product/ segment combinations which the organization could address.
Levels and Basis of Market Segmentation
The following is a brief review of the "predetermined" approaches frequently used in market segmentation.
Products and services
The problem with segmenting markets according only to the products or services offered, or the technology type, is that in most markets, many different types of customers buy or use the same products or services. For example, if a mail company organizes itself around express packages, or around mail sorting, it is unlikely that the company will ever get to understand fully the real and different needs of, say, universities, banks, advertising companies, direct mail houses, manufacturing companies, retailers and so on. However, by understanding which particular features of the product or service appeal to different customers, along with features associated with all the other aspects of a purchase, such as the channel, we have a route for understanding the motivations behind the choices that are made. This is because it is through these features that customers seek to attain the benefits they are looking for. Once this is understood, the needs- based propositions required for different segments can be developed.
Demographics
Variables such as sex, age, lifestyle and so on, when used to define segments, are by implication claiming, for example, that every 30-35-year-old will respond to the same proposition.
Just reflect for a moment on the students in my years at school; would I expect them all to be wearing the same clothes, taking the same types of holidays, pursuing the same interests and driving the same cars? When someone wakes up on their birthday, do they become a stereotype associated with that age? For administrative convenience i would like the answer to be "yes", but the answer is "no". In business-to-business markets, customers are frequently segmented around business classification lines, which implies that all the companies in a particular sector, such as financial services, have exactly the same requirements and will respond to a single proposition. This approach could well be ignoring one or more of the following:
Different divisions and departments existing behind the business descriptor may have different applications for the product or service you supply. For example, would the mail company mentioned earlier find that the advertising and promotions department has the same requirements and specifications for mail services as the sales ledger department?
The requirements of, say, advertising and promotions departments may well be the same regardless of business type;
Even within a single division of a company, there may well be different applications for the product or service you supply which, in turn, may have different specifications attached to them;
Segmentation along business classification lines assumes all the companies within the classification employ identical people with identical values. Businesses, of course, don't buy anything; it's their employees we have to sell to!
