Market segmentation

Markets generally fall into two broad types, namely consumer markets and business markets. A consumer market consists of individuals or households who purchase goods for private consumption and do not intend to resell those goods for a profit. A business market consists of individuals or organisations who purchase goods for one of three main purposes; (a) for resale; (b) for use in producing other goods or services and; (c) for general use in daily business operations. Approaches to segmentation will vary depending on whether the total available market (TAM) is a consumer market or a business market.

Market segmentation is the process of dividing a total available market, using one of a number of key bases for segmenting such as demographic, geographic, psychographic, behavioural or needs-based segments. For example, a demographic segmentation of the adult male population might yield the segments, Men 18-24; Men 25-39, Men 40-59 and Men 60+. Whereas a psychographic segmentation might yield segments such as Young Singles, Traditional Families, Socially Awares and Conservatives. Identifying consumer demand and opportunity within these segments should assist the marketer to identify the most profitable segments.

Although there are many different ways to segment a market, the most common bases used in practice are:

• Geographic – Residential address, location, climate, region.
• Demographic/socioeconomic segmentation – Gender, age, income, occupation, socio-economic status, educational-level, family status, marital status, ethnic group, religious affiliation.
• Psychographic – Attitudes, values, beliefs, interests and lifestyles.
• Behavioral – usage occasion, degree of loyalty, user status, purchase-readiness
• Needs-based segmentation – relationship between the customer's needs for specific features and product or service benefits

During the market segmentation process, the marketing analyst will have developed detailed profiles for each segment formed. This profile typically describes the similarities between consumers within each segment and the differences between consumers across each of the segments. The primary use of the segment profile is to assess the extent to which a firm's offerings meet the needs of different segments. A profile will include all such information as is relevant for the product or service and may include basic demographic descriptors, purchasing habits, disposition to spend, benefits-sought, brand preferences, loyalty behavior, usage frequency and any other information deemed relevant to the subject at hand.

The segment profile assists in the decision-making process and has a number of specific benefits:

• assists to determine those segments that are most attractive to the business
• provides quantitative data about segments for a more objective assessment of segment attractiveness
• assists in tailoring the product or service offering to the needs of various segments
• provides basic information to assist with targeting
• allocating the firm's resources effectively

After profiling all the market segments formed during the segmentation process, detailed market analysis is carried out to identify one or more segments that are worthy of further investigation. Additional research may be undertaken at this juncture to ascertain which segments require detailed analysis with the potential to become target segments.