The purpose of market segmentation is to allow your marketing plan to focus on the sub segments that are “most likely” to purchase your goods or services, thus delivering the highest return on your investment. It divides up a market to identify trends in it; the analysis is used to create a profile of the target market/s:
- industry segments and sub segments are identified using SIC codes, company size, employment codes, etc.
- which segments to address and how best to address them may be determined and could include recommendations on optimum offering for each area
- using advanced statistical analysis, profiles of customer clusters may be developed by grouping together individuals with similar needs/differences by geographical region, country or industry type.
An overview of the market should be conducted – primarily via secondary research – in order to identify key sub sectors within industry segments; for each sub segment identify:
- the leading vendor(s)
- the market size and potential
- the target audience.
There are various ways of segmenting a market according to the level of precision you require and the type of data and analysis available about your customers. In finding different market segments it is important to keep in mind that the objective is to effectively use the segments. Important questions are therefore:
- how are you going to place customers into each group?
- how are you going to target and track each group?
- do you have specific segment sales managers?
The type of segmentation you use will depend on a lot of factors, including the cost not only of conducting the research, but also of implementing the solution and the business impact. Consequently, ideally for each segment /sub segment you want to know what the economic value and the economic potential for each group is and have some idea as to whether this is increasing or falling.
Consequently most quantitative segmentation studies are detailed and complex but they provide statistically more robust and therefore more accurate data. For some types of segmentation, segments based on personas for example can be identified via qualitative approaches. It really depends on the type of segmentation.
Typically a business wants to minimise the number of segments it has, as each costs money to target properly. With small numbers of big segments, a good researcher will be able to evaluate these groups with a programme of qualitative research. This will not gather economic data, but it enables deeper insight into each group and, if monitored over time, provides core information about how segments change and develop.
Broadly, the advantages of segmentation can be:
- more efficient use of marketing resources/budgets
- the opportunity to gain competitive advantage in a particular segment or sub segment (for example with different pricing – see Business Advantage’s ‘6 Steps to Better Pricing Decisions’ white paper and ‘How to Research Pricing Decisions’ PowerPoint)
- product or service can be modified to match customer requirements.
The purpose of segmenting a market is to allow your marketing plan to focus on the sub segments that have the greatest need for your product or service and are therefore “most likely” to purchase your goods or services, thus delivering the highest return on your investment.