Market segmentation is about describing and dividing people. Imagine you can find all
of the people who could potentially benefit from your product and you ushered them all
into a giant room. Once in the giant room, you could divide them up into different
groups depending on some set of characteristics. Well, metaphorically speaking, that’s
what market segmentation does. It seeks to identify the people who may have want or
need for your product, then divides them into groups so that we may serve them more
efficiently and profitably.
Defining terminology
Before describing the process of market segmentation and issues involved with that
process, we should begin with some basic terminology in order to avoid confusion later.
We begin with the term “market.” To professionals in other business disciplines, the
word market often refers to a place where business of some kind takes place: i.e., a
supermarket, flea market, or stock market. To marketers, the term market means
something else. In our discipline, markets are people, plain and simple. But to be in a
particular market, people must meet two qualifications. First, they must share some
common want or need; and second, they must possess the ability to satisfy that need.
The term market is a very general term; to be useful in our discussion of segmentation,
we must make the term more specific. Therefore, consider a second important term,
“product market.” Product markets are simply people with a want or need for the
benefits offered by products in a particular product category, and the ability to satisfy
those wants or needs. In the following section, we’ll address in some detail what a
product category is. For now, simply assume it’s a group of related products. So, when
we refer to the “blue jeans market,” we do not mean the stores that sell blue jeans.
Instead, we refer to the people who have a want or need for the benefits offered by blue
jeans and the ability to satisfy that need.
Now, common sense tells us that many types of people have wants or needs for the
benefits offered by blue jeans. Some people, perhaps young people, wear blue jeans
because they seek to project a particular image or because they seek to be like (or
different from) other groups of people. Other groups may desire blue jeans because of
their durability. These people may be blue collar workers who need jeans for jobs in
construction, agriculture, manufacturing, etc. Based on this reasoning, a third important
term comes to mind: “market segment.” Market segments are subgroups of the product
market who share characteristics other than their need for the product category.
Finally, a given blue jeans manufacturer or retailer may examine the different segments
who have a want or a need for blue jeans and decide to direct their resources to serving
some or all of those groups. The market segments that a company decides to serve with
their marketing efforts are referred to as “target markets.”
Why Segment Markets?
Bear in mind that just because a firm identifies a particular segment does not mean they
must select that segment as a target. The firm may find any number of reasons why a
segment may not hold the potential to be worth the effort and resources to target with
marketing efforts. For example, the firm may decide that a certain segment is too small
to be worth the effort; the resulting sales from that segment would not justify the
resources to pursue them. Or the firm may feel that members of a segment desire a
certain set of benefits that the firm is not adept enough a delivering. Or it could be that
an identified segment happens to be fiercely loyal to a competitive brand, and winning
them away may be too costly or impractical.
Whatever the reason, firms often decide to overlook groups of people when selecting
target markets. These decisions are meant to increase the efficiency with which a firm
can serve its customers as well as the profitability of serving them. By excluding groups
of people who are less likely to buy a firm’s brand, the firm has additional resources to
focus on groups with the greatest potential to become customers. Indeed, segmentation is
so effective at helping businesses more wisely spend their resources that some
economists consider segmentation to the be the single most valuable tool marketing has
to offer the economy and our society.
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