page_title: Market segmentation
section_title: Identifying the market to be segmented
hierarchical_section_title: Market segmentation / Identifying the market to be segmented
caption_attribution_description: English: created by self in Excel using data freely available at Google docs
context_page_description: Market segmentation is the activity of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers based on some type of shared characteristics.
  In dividing or segmenting markets, researchers typically look for common characteristics such as shared needs, common interests, similar lifestyles or even similar demographic profiles. The overall aim of segmentation is to identify high yield segments – that is, those segments that are likely to be the most profitable or that have growth potential – so that these can be selected for special attention. Many different ways to segment a market have been identified. Business-to-business sellers might segment the market into different types of businesses or countries. While business-to-consumer sellers might segment the market into demographic segments, lifestyle segments, behavioural segments or any other meaningful segment.
  Market segmentation assumes that different market segments require different marketing programs – that is, different offers, prices, promotion, distribution or some combination of marketing variables.
context_section_description: The market for a given product or service known as the market potential or the total addressable market (TAM). Given that this is the market to be segmented, the market analyst should begin by identifying the size of the potential market. For existing products and services, estimating the size and value of the market potential is relatively straightforward. However, estimating the market potential can be very challenging when a product or service is totally new to the market and no historical data on which to base forecasts exists.
  A basic approach is to first assess the size of the broad population, then estimate the percentage likely to use the product or service and finally to estimate the revenue potential.
  Another approach is to use historical analogy. For example, the manufacturer of HDTV might assume that the number of consumers willing to adopt high definition TV will be similar to the adoption rate for Color TV. To support this type of analysis, data for household penetration of TV, Radio, PCs, and other communications technologies is readily available from government statistics departments. Finding useful analogies can be challenging because every market is unique. However, analogous product adoption and growth rates can provide the analyst with benchmark estimates, and can be used to cross-validate other methods that might be used to forecast sales or market size.
  A more robust technique for estimating the market potential is known as the Bass diffusion model, the equation for which follows:
  N(t) – N(t−1) = [p + qN(t−1)/m] × [m – N(t−1)]
  Where:
  N(t)= the number of adopters in the current time period, (t)
  N(t−1)= the number of adopters in the previous time period, (t-1)
  p = the coefficient of innovation
  q = the coefficient of imitation (the social contagion influence)
  m = an estimate of the number of eventual adopters
  The major challenge with the Bass model is estimating the parameters for p and q. However, the Bass model has been so widely used in empirical studies that the values of p and q for more than 50 consumer and industrial categories have been determined and are widely published in tables. The average value for p is 0.037 and for q is 0.327.
caption: To estimate market size, a marketer might evaluate the adoption and growth rates of comparable technologies (historical analogy method).
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