Top 5 Reasons to Segment

Photo by Sharlene Jackson from Stock.Xchng

By Jennifer Maine, Emerging Leader

Market segmentation is the process of dividing groups of consumers based on their purchasing behavior and reaction to promotions and communications from the company.  Each segment should differ in these behaviors but within the segment, members should be homogeneous.

Implementing segmentation has many benefits to a company.  After segmenting the market, a customer needs and wants can be identified more effectively, communication with these customers improves, opportunities for growth and innovation are created and profits and market share increase.

1. Better Satisfy Customer Needs and Wants
Through segmentation, a company can match customers’ needs and wants.  Since all customers have differing needs, they must be handled in different ways.  Segmentation enables identification of the different customer segments and their preferences.  Then, a solution can be customized for each segment using the company’s products or services.  As customers grow older, their preferences and buying behaviors change.  By identifying these changes, solutions can be provided to customers throughout their ‘life cycle’ by adopting the product or service to the segment’s needs.  This is a great way to retain customers as they change their behaviors over time.

IBM recently changed their segmentation scheme in order to identify key groups to target with their ThinkPad laptops.  The new scheme brought their number of segments down to 8 from 96.  This allowed IBM to identify the most likely users of ThinkPad and to drop some segments from their current advertising and to stop trying to attract others who are unlikely to purchase a ThinkPad.  For example, the “Price Shopper” segment was ignored because IBM was known for its premium product.  IBM would be wasting resources trying to get these “Price Shoppers” to purchase (John Lynch, The Fuqua School of Business at Duke University).

2. Better Communication
A marketing message needs to be targeted to specific customer segments for it to be effective.  Since customers have different needs and wants, solutions to each segment need to be communicated separately.  Mass marketing causes some target customers to miss the intended message.  Also, too much money is spent on advertising to customers who will never purchase the product.  Through segmentation, customers can be reached with a specific marketing message that is designed to solve their individual problems, which is less costly for the company.

3. Opportunity for Growth
Segmentation enables identification of potential customers who wouldn’t normally buy a product. By segmenting the market, a company can create its own ‘niche’ and attract customers who normally would look to alternative sources for a solution to their problem.  If these unique problems are identified, companies can adjust their product offering to provide a solution.  Also, segmentation can increase sales as customers are introduced to new versions and upgrades of their current product.  If they try out a product with a lower price point and like the product, they can upgrade to a more premium version.

Although IBM chose to stop focusing on a few of the 8 segments, they could better serve the key segments that are more likely to purchase a ThinkPad.  Previously, IBM had been trying to make their product attractive to everyone, but by choosing to narrow their target and include features attractive to these segments, customers who previously purchased a competing product may now consider a ThinkPad.

4. Increased Innovation
With segmentation, smaller segments in the market that have similar needs and wants can be identified. Although these segments may not be traditional customers, identifying new needs can stimulate innovative ideas to solve new problems.  With newly developed products and services to meet these needs, problems, premium prices can be charged and the advantage in the market can be sustained.

After IBM identified the segments it wanted to target, they determined which features to incorporate into their product based on the preferences of the segments.  By limiting their focus to a few key segments, IBM added new features to the product.

5. Higher Profits/Market Share
Consumers have different price sensitivities so by segmenting the market, different prices can be charged to extract the most consumer surplus.  In doing this, profits are increased. Since segmentation supports niche strategies, highly attractive segments can be indentified and market leadership can be achieved.  A competitive position results from this position in the market.  Relationships are improved and the brand is strengthened.  Also, competitive production and decreased marketing costs are associated with segmentation.  Due to all of these factors, profitability increases.

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