Market segmentation is the process by which firms identify the different portions of the market, according to how they respond to different products and features. This is a vital part of markets, because the marketing concept requires companies to both understand and satisfy their customers’ needs better than the competition. As such, by segmenting a market it is possible to identify those groups of customers with similar needs, and specifically target them with products that fulfil said needs.
The opposite of market segmentation is mass marketing, whereby companies treat a market as being homogenous, in other words everyone has the same needs and wants. As a result, companies simply a marketing mix designed to appeal to the entire market. This allows significant economies of scale in terms of mass production and communication, and can be very effective for dominant products such as Coca Cola or Nike, who can appeal to a large section of a market. However, in general customer needs and wants will be different depending on customers’ ages, socio economic grouping, gender and other factors, hence mass marketing will not appeal to all customers.
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As such a firm which used a pure mass marketing strategy would be unlikely to serve any single customer group as well as possible. Therefore, there would be the potential for other companies to enter the market and target their products at specific niches, thus stealing customers from the incumbent firm. This happened to Sainsbury’s supermarket in the 1990s: Tesco entered the market with a range of option targeted at the richer (Tesco Finest) and poorer end (Tesco Value) ends of the market, hence taking many customers from Sainsbury’s.
In order to effectively segment a market, the various segments must have certain characteristics. Firstly, they need to be easily identifiable, with the attributes which differentiate them from other segments being easy to identify and measure. They also need to be accessible, through viable communication and distribution channels that are strongly associated with the segment. A segment should also be large enough that a company can make a profit from serving them, and relatively stable to allow the marketing time to work. Finally, they need to be unique, and respond differently to different marketing approaches. If they do not respond differently to another segment, then they are effectively part of the same segment. As such, market segmentation aims to provide groups of people which are as similar as possible, but as different as possible from other segments.
The main criteria for segmentation are geographic factors, demographic factors, psychographic factors and behavioural factors. For example, the Apple iPhone was initially targeted at young, affluent people who desired the latest technology, tend to expect their technological devices to perform many functions, and lived in developed western nations. This was seen as being the market that would most welcome the iPhone, and would make Apple the most profits.