Market segmentation pertains to the division of a set of consumers into persons with similar needs and wants. Market segmentation allows for a better allocation of a firm's finite resources. Due to limited resources, a firm must make choices in servicing specific groups of consumers. With growing diversity in the tastes of modern consumers, firms are taking note of the benefit of servicing a multiplicity of new markets.
Market segmentation can be defined in terms of the STP acronym, meaning Segment, Target and Position.
Benefits of Segmentation
While there may be theoretically 'ideal' market segments, in reality, every organization engaged in a market will develop different ways of imagining market segments, and create product differentiation strategies to exploit these segments. The market segmentation and corresponding product differentiation strategy can give a firm a temporary commercial advantage. Most market segmentations are the techniques used to attract the right customer.
In essence, the marketing objectives of segmentation analysis are:
- To reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed
- To increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment's characteristics
Market segmentation is a twofold process that includes:
- Identifying and classifying people into homogeneous groupings, called segments
- Determining which of these segments are viable target markets.
The Segmented Market
The premise of segmenting the market theorizes that people and/or organizations can be most effectively approached by recognizing their differences and adjusting accordingly. By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer.
While product differentiation is an effective strategy to distinguish a brand from competitors', it also differentiates one product from another. For example, a company such as Franco-American Spaghetti has differentiated its basic product by offering various sizes, flavors, and shapes. The objective is to sell more product, to more people, more often. The problem is not competition; the problem is the acknowledgment that people within markets are different and that successful marketers must respond to these differences.
Choosing a Target Market from within a Defined Segment
While it is relatively easy to identify segments of consumers, most firms do not have the capabilities or the need to effectively market their product to all of the segments that can be identified. Rather, one or more target markets (segments) must be selected. A company selects its target market because it exhibits the strongest affinity to a particular product or brand. It is in essence the most likely to buy the product.
While the market is initially reduced to its smallest homogeneous components (perhaps a single individual), business in practice requires the marketer to find common dimensions that will allow him to view these individuals as larger, profitable segments.