Sunday, September 22, 2013

The Process of Market Segmentation

As most companies cannot compete in an entire market, they usually break down it down into smaller markets. This process of market segmentation affords the opportunity to focus selling products in one, or a few, defined areas. It helps to create focus and effective use of marketing resources to maximize return on investment. Effectiveness is seen as dollars spent and dollars earned. 

As companies gain resources and knowledge, they begin to use market research to develop complex and effective marketing strategies. The process of evaluating a market segment helps in developing strategies that further create efficiency in target marketing (Kutkut, 2012). Target marketing is the chosen focal point of the products/services, advertisements, and related efforts.  As the skill level of managers rises, so does the success of reaching and influencing the target market. 

There are generally four levels of market segmentation that include (Finch, 2012):

Mass Marketing: The firm makes no effort to break up a market and instead puts energy into all of it. Only certain products that have wide appeal (i.e. cars) do well with this approach. 

Market Segmentation: The process of breaking down the market into segments. This works well with products that have specific appeal to certain groups (i.e. camping equipment). In many cases, these are larger market segments. 

Niche Marketing: Narrowly defined group that many large companies have a hard time marketing (i.e. hobby farm heirloom seeds). This includes the selling of products in smaller groups and in very specific venues. 

Customized Marketing: This is the smallest market segmentation whereby individual concerns are taken into account (i.e. yahts and houses). Generally, these are big-ticket items and focused on maximizing returns on individual products. 

A company can segment the market in many ways. This may include geography, psychological profiles, behavioral profiles, industry, previous spending habits, etc…  These segments rely on research and analysis that further helps the company find ways to reach those customers most motivated to purchase their products. As competition becomes fierce companies may offer sales, discounts and promotions to enhance customer motivation. 

Once researchers have determined the nature and scope of a segment they need to determine how profitable that segment will be and whether or not it will sustain the growth needs of the organizations. Companies that seek to maintain a competitive edge continually seek to develop new and exciting products/services that create “buzz” while seeding markets for the future.  It is a process of finding and exploiting opportunities.

As organizations become more global, the market segments can become large and complex. Companies that sell international products and services should take into account the cultural values of new target markets (Agarwal, 2010). Failure to consider the perspective of other cultures can lead to costly mistakes that can wipe away sunk costs and investments. These human elements and soft skills become mixed into the marketing strategy.

At its root, marketing is a process of communication while marketing strategy is the process the company uses to communicate the value of products and services. Market segmentation affords the opportunity to better match communication to customer needs. To do this well requires the ability to research and understand the characteristics of a company’s most profitable customers. It is a process that if done well can help an organization reach new heights or cause it to shrink into oblivion. 

 Agarawal, J. Malhortra, N. and Bolton, R. (2010). A cross-national and cross-cultural approach to global market segmentation: an application using consumers perceived service quality. Journal of International Marketing, 18 (3). 

Finch, J. (2012). Managerial marketing. San Diego, CA: Bridgepoint Education, Inc.

Kutkut, N. (2012). Formal and informal target market selection in new ventures: a factor analysis. Journal of Academic Business & Economics, 12 (1).

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