Market segmentation is the process of dividing groups of consumers based on their purchasing behavior and reaction to promotions and communications from the company. Each segment should differ in these behaviors but within the segment, members should be homogeneous.
Implementing segmentation has many benefits to a company. After segmenting the market, a customer needs and wants can be identified more effectively, communication with these customers improves, opportunities for growth and innovation are created and profits and market share increase.
1. Better Satisfy Customer Needs and Wants
Through segmentation, a company can match customers’ needs and wants. Since all customers have differing needs, they must be handled in different ways. Segmentation enables identification of the different customer segments and their preferences. Then, a solution can be customized for each segment using the company’s products or services. As customers grow older, their preferences and buying behaviors change. By identifying these changes, solutions can be provided to customers throughout their ‘life cycle’ by adopting the product or service to the segment’s needs. This is a great way to retain customers as they change their behaviors over time.
IBM recently changed their segmentation scheme in order to identify key groups to target with their ThinkPad laptops. The new scheme brought their number of segments down to 8 from 96. This allowed IBM to identify the most likely users of ThinkPad and to drop some segments from their current advertising and to stop trying to attract others who are unlikely to purchase a ThinkPad. For example, the “Price Shopper” segment was ignored because IBM was known for its premium product. IBM would be wasting resources trying to get these “Price Shoppers” to purchase (John Lynch, The Fuqua School of Business at Duke University).
2. Better Communication
A marketing message needs to be targeted to specific customer segments for it to be effective. Since customers have different needs and wants, solutions to each segment need to be communicated separately. Mass marketing causes some target customers to miss the intended message. Also, too much money is spent on advertising to customers who will never purchase the product. Through segmentation, customers can be reached with a specific marketing message that is designed to solve their individual problems, which is less costly for the company.
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