The size and differential needs of the purchasing public, hundreds of millions of people in the United States alone, make it difficult for any one company to serve everyone. Market segmentation aims to define a specific subset of the purchasing public that aligns well with the services or products a business offers. Businesses often analyze demographics to perform market segmentation, although psychographic factors, geographic differences and even behavioral variances can indicate viable market segments.
Importance of Market Segmentation and Targeting to Reduce Costs
The old standby of mass marketing in an attempt to capture with widest possible cross-section of consumers produces mixed results and runs up enormous costs. Market segmentation, by contrast, limits the field of customers and allows a business to direct financial resources into specific communication channels that reach out directly to consumers in that market segment. A company that makes precision machining tools would waste money marketing placing ads in general interest magazines, as the average consumer has no use for precision machining equipment. Magazines aimed at machinists and machine shops represent a far smaller investment compared with mass marketing and speak directly to the company’s desired customer base.
Improves Product Development
Focusing in on a specific market segment allows a business to tailor existing products and services to meet the particular needs of those customers. Segmentation also allows the business to design future products and services to address the exact needs of the target market. A spa that caters to professionals, for example, might institute expanded evening hours to accommodate the demanding schedules working professionals often face. Consumers in the market segment also can provide input for proposed products, through focus groups or surveys, to help a business determine if the product provides value to them.
Break Into New Markets
Market segmentation can help a business identify underserved markets, which provide a golden opportunity for a business to establish itself as first in the market. Businesses that first offer a product or service to a market tend to control a commanding market share even when competitors move in. For example, a pizza place that offers delivery service to an area that could not get delivery before stands a good chance of remaining the go-to pizza delivery place for residents in that area.
Improved Business Focus
One of the key benefits of market segmentation is that it encourages the business to focus, as trying to serve too many markets or provide too many products dilutes the business brand. If a restaurant tries to offer food ranging from burgers and takeout Chinese to high-end Italian cuisine, it fails to capture any single market and loses its ability to differentiate itself. Catering to a narrowly defined market means the business must narrowly define its offerings to suit those customers. The restaurant that serves only high-end Italian food to dine-in customers attracts a market segment that seeks a specific product and experience while allowing the business to improve its core competencies.
- Michael Blann/Digital Vision/Getty Images