In business, it’s easy to bite off more than you can chew. There’s something to be said of possessing this kind of reckless ambition, but ultimately a smarter, more intelligent approach is going to earn you a more rewarding form of recognition. This is what market segmentation is for, which divides the infinite pool of potential clients into smaller, better defined and more manageable groups. The benefits of market segmentation are extensive, as are its objectives. Below you will find all the information you need to understand when to use market segmentation and what you can expect to get out of it. Get even more tactical advice with this five-star business strategy course that teaches you how to win in an unpredictable world.
- The first and most important objective of market segmentation is to produce a commercial advantage. However temporary it may be, this is the ultimate objective.
- Second, to reduce risk. Once a commercial advantage is obtained, marketing decisions become significantly safer and more powerful.
- Third, as the name suggests, to “segment” the market. By doing this, one can apply more specific characterizations to each group, as each group no longer encompasses the entire market.
- Finally, to view each segment in relation to the others to create a strategy “map” of profitability.
Simply put, a commercial advantage is a marketing miracle. Not that they’re rare, just that they’re miraculous in what they do for your marketing strategy and effectiveness. A famous example of when a product created a commercial advantage would be when Apple introduced the first touch-screen smart phone. That is a commercial advantage; the product is truly distinguishable from every other competitor’s.
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I want to be clear on something: “commercial advantage” and “market segmentation” are not the same thing. Market segmentation makes attaining a commercial advantage easier; remember, the former is a means to the latter.
Let’s look at our famous example above, the iPhone. If we fast-forward seven or eight years, we see the release of the iPhone 5C and 5S. These products are remarkably similar, and yet they are marketed completely differently. The 5C is marketed to a young and lively (some critics would say poor) group of people, while the 5S is marketed to the more refined and mature (rich). Both products are marketed to two completely different segments of the market, yet they both serve the exact same purpose (more or less).
Market segmentation, therefore, is when a specific group of consumers (smartphone buyers, or even, iPhone buyers) is divided into smaller groups that share either needs or desires. For help examining and finding the right markets and better understanding your ideal customers, check out this fast-track market research class.
The Benefits Of Market Segmentation
- Benefit #1: More Efficient Advertising
This is the most obvious benefit. If you take a large, unwieldy market and segment it into manageable pieces, advertising is going to be both easier and more effective. When you segment a market, you simultaneously segment marketing options. You can now choose websites, magazines, TV stations, etc. that are tailored to each market. For example, Apple probably does not market the 5C during the O’Reilly Factor. Simply put, segmenting the market makes it easier to advertise to your target audience. Read this blog post on advertising strategies to learn how to promote your product or service.
- Benefit #2: New Segment, New Focus
Not all segments are divided to suit pre-existing products. Much of the time the product is reimagined to fit a new market segment. If a company can spot this segment early, then it can alter its focus for more effective results. In this way, a company’s entire strategy, from designing a new product to creating a marketing objective to complement it, is based on a new segment and new, narrower focus.
Food and beverage companies are almost unanimously focusing on healthy alternatives to pre-existing products. Of course, these companies did not all of a sudden change their minds about what kinds of products they pride themselves on; they merely shifted their focus in the hopes of better returns.
Vital to the success of a new focus is ensuring that the focus is legitimate, lasting and proven to be profitable. Join this Market Research Classroom to learn how to analyze and tap into the most lucrative markets.
- Benefit #3: Concentrated Distribution
When your focus narrows, so do your channels of distribution. It might seem counter-intuitive that when your decrease market size by segmenting it, you are able to increase distribution. Further, how it this possible when you also must decrease the overall number of distribution channels? The idea is that once you figure out the high-density areas of customer interest, you can eliminate ineffective distribution channels and use these new, freed-up resources to pump those outlets that receive the greatest amount of traffic.
Less, but more powerful, distribution channels is a beautiful thing.
- Benefit #4: Precise Branding
Once the market is segmented, you can hit the nail on the head when it comes to branding. Every aspect of your company and its products can be tailored to meet the customers’ demands: design, customer service, price, quality, etc. If you know anything about fashion, you know that a lot of the high-end designers have several brands. Marc Jacobs uses his “Marc Jacobs” brand to sell those who can afford the best; he uses “Marc by Marc Jacobs” to sell to those in the middle, those who want a designer brand but cannot regularly afford the cost; finally, he uses “Jacobs by Marc by Marc Jacobs” (this is getting ridiculous, right?) to sell to just about anyone who desires a designer name. Learn how to brand yourself like Marc Jacobs with this big brand strategy course for small brands.
What’s genius about Mr. Jacobs is that he preserves the pristine quality associated with his name by having just his name represent the highest product line. Not only does he not tarnish his name by releasing a cheaper line under the name “Marc,” he creates competition within his company; fashionistas will see the “Marc Jacobs” line as a status symbol, and therefore must have it. So instead of selling all ranges of quality under one name, Marc Jacobs segments the market and this allows him to have very precise branding.
Get free brand advice from this article on brand visibility and attracting your exact target audience.
- Benefit #5: Increase In Sales
This is the one we’ve all been waiting for. Yes, increases in sales are more than possible with market segmentation, but there is one thing to consider first: you are bound to lose some customers when you narrow your boundaries. It’s inevitable. For this reason, immediate sales may drop. But if you devised an intelligent plan, you will soon boost sales in your target audience thanks to many of the benefits listed above. And once you’ve established yourself as a leader in your segmented market, you will begin stealing customers from the competition. If that’s your objective, you can’t miss this “sales hacking” introduction with advice from CEOs and VPs from Google, Adobe, Salesforce, Hubspot, and others.
Samsung has accomplished just that by beating Apple at its own game; by marketing heavily to young and cool customers, Samsung has taken over the smartphone market (this is what Apple did initially, and in retrospect it never should have adopted an all-encompassing marketing strategy, because pretty much everyone wants to use a product marketed to the young and cool).
- Benefit #6: Customer Retention
Customer retention is accomplished in two ways. First, let’s look at the Marc Jacobs fashion example again. As we know, Mr. Jacobs has segmented the market into three primary categories: affordable, mid-range, and high-end. By so doing, he has created a product for just about anyone. A young professional who is just getting started might be able to purchase one of his affordable items. Down the road, once this professional has attained some degree of success, he or she might opt for the mid-range or high-end option.
This is class movement right before our eyes. Mark Jacobs has a product not only for every person, but for every stage of life (although you are less likely to see someone “fall from grace” and go from buying high-end Marc Jacobs to “Jacobs by Marc by Marc Jacobs”). Not happening.
Second, customer retention is achieved through increasing competitiveness. That is, you are making yourself more competitive by narrowing (a.k.a. increasing) your focus. Brand loyalty directly results from association; DC Shoe company will forever (or just about) be associated with the youth skateboarding/snowboarding movement. Because DC makes quality products, there is no reason for someone to “grow up” and out of the brand; it then becomes associated primarily through sport and quality.
Even if customer retention has never been your forte, you can use this tactical guide to customer development for entrepreneurs to establish, and retain, a commercial advantage through market segmentation.