How to Evaluate Market Segments
Before looking at how to evaluate market segments, let us have an overview of what market segments imply. Evaluating and choosing the right market segment helps in boosting a company’s market share.
What are market segments?
Market segments are the people that are being grouped together for the purpose of marketing. In other words, they are groups of people that share similar characteristics. Corporations and their marketing teams make use of different criteria to develop a target market for their products and services. Each segment is approached differently by marketing professionals. However, this is done only when there is a full understanding of the target consumers’ needs, lifestyles, demographics, and personalities.
With this, we can say that a market segment is a category of customers having similar likes and dislikes in an otherwise homogeneous market. Such customers can be individuals, families, businesses, organizations, or a blend of several types.
The responses of market segments to marketing strategies, plans, and promotions can be predictable. It is for this reason that marketers make use of market segmentation in the course of deciding on a target market. As the name implies, market segmentation is the process in which marketers separate markets into sub-groups on the basis of the fact that their members share common characteristics.
Three characteristics must be present for the most basic criteria of a market segment to be met. These characteristics are;
- Homogeneity among the common needs of the segment.
- There has to be a distinctive element that makes the segment unique from other groups.
- A common reaction or a similar and somewhat predictable response to marketing has to be present.
Companies that have an understanding of market segments are proven to be effective marketers while they earn a greater return on their investments.
Market segmentation is an important marketing technique that helps the marketer reach each group of potential customers with an approach that is appealing to them. Marketers evaluate each segment to ensure that the company does not waste resources on segments that will not buy the brand or products. It is expedient to match the characteristics of the marketing segment to the qualities of the company’s product and the abilities of the company to achieve its sales performance and objectives.
Market segmentation variables and characteristics
- Segmentation
- Possible criteria
- Choosing criteria
- Marketing to chosen segments
Marketing plans include the specification of a target market and the identification of one or more market segments that the company can service in a profitable way. A company’s marketing strategy makes use of criteria that are relevant to the product it is selling to determine the market segments that best match the product characteristics. Ideally, the market segment members need the company’s products and are willing to pay the set price.
Segmentation
For a company to determine market segments, it is critical for it to identify a market that is accessible to it and then divide it into groups. When markets are accessible, it means that a company can reach them at a reasonable cost. For a retail location that sells cheap items, the accessible market is those that live close to the store. For a wealth management business, it is important to have access to people that have disposable income. It is on this note that a company can divide its accessible market into segments in accordance with common characteristics of the members of the market. The criteria being used have to be related to the products and services the company wants to sell.
Possible criteria
Any of the common criteria that are characteristics of the members of the accessible members can be used for segmentation. The possible criteria types are demographic, demographic, behavioral or type of product use, and benefits. Geographic criteria include the distance from the store or segmentation by country or state. Demographic segmentation has to do with characteristics such as age, gender, or education. Behavioral or type of product use has to do with the manner in which the members use the product, that is how they use them and whether they consider it essential or not. Benefits include price and perception of value. It is important to consider all the possible criteria.
Choosing criteria
Not every possible criterion is useful for a marketing plan. For example, if a company’s strategy is to sell based on a low price, the type of use criteria may not be relevant. It is important for the size of a segment to be large enough to be profitable, unique enough to be recognizable, and stable enough to form a target segment for a company’s long-term marketing plan. The chosen segments must respond to the marketing plan strategy. If the strategy is delivering high value and a high level of service, then it is necessary to choose high-income segments that can afford to pay a correspondingly high price.
Marketing to chosen segments
It is critical for a company’s market segmentation to correspond with the marketing strategy of its marketing plan. If the plan is to focus on one segment, then the company has to select the segment whose members will find the product profile the most attractive. If the company plans to market to multiple segments, then it will have to develop multiple marketing approaches.
How to evaluate market segments
- Determine whether there are enough members in the segment.
- Measure the segment’s interest in your product and their ability to buy.
- Determine whether to reach the identified segment.
- Determine whether your new market segment consumes your existing market segment’s targets.
- Establish a clear line of product distribution to the new segment.
Many factors are relevant to a given small business or brand and they separate market segments. It is expedient for a company to evaluate market segments before it starts marketing campaigns or initiatives. This is to ensure that the efforts put in are worthwhile. The process of evaluation starts with identification and ends with the practical distribution of the message and product.
Determine whether there are enough members in the segment
The first step in evaluating market segments is to determine whether enough members are in place to make it a viable and worthwhile target for the business. If a firm has identified the perfect group for its product and service, it will as well check the number of members in that segment. This will determine whether to move on or not. The latest census data and internal customer surveys should be used to obtain the relevant information. Based on these findings, a count should then be made.
Measure the segment’s interest in your product and their ability to buy
The second step in evaluating market segments is for the company to measure the segment’s interest in its product as well as the ability to buy based on income level. If the target market has sufficient income to buy the product but has no interest in doing so, then going after it should be avoided.
If the interest is present but there are no funds to purchase the product, going after that segment should be avoided as well. It is important to gauge the consumer income by region through the use of an online real estate value estimator or an online salary funder. This will give the company a good idea of the market segment to go after. It is harder to discern purchasing habits and this will require either direct surveys or actual purchase receipts or credit card transaction records. They are both sold /routinely for the purpose of marketing, however, the costs can be prohibitive, especially for small businesses.
Determine whether to reach the identified segment
After identifying a market segment, the next thing is for the company to determine whether it can be reached on a regular basis using the limited resources of its business. For instance, if a large proportion of the target audience lives miles away, the company can determine whether its flyer distributors can get to the area on a regular basis.
If the company uses local newspaper advertisements, it is important to make sure that the region is within the normal distribution area if not the marketing will miss its target.
The same principle applies to TV spots on local cable networks, radio spots with limited signal range, and a host of other marketing methods that do not have infinite reach. If the identified segment seems promising but is located in an area that would make marketing distribution too costly or difficult to be worthwhile, the company will have to reconsider its approach. The first step, in this case, is to find new ways to reach that audience. If it does not work at all, then that segment needs to be reconsidered.
Determine whether your new market segment consumes your existing market segment’s targets
The next step for a company to take is to determine whether its new marketing segment consumes or cannibalizes its existing segment’s target before moving ahead with any campaigns. Each segment should be reviewed for overlap, and if any is found, it should be eliminated. It is counterproductive and inefficient for a company to invest a whole new set of funds and initiatives into an effort that has already been addressed by an existing campaign. This can bring about a confusing marketing message. Therefore, each group should be targeted individually in order to avoid redundancy and waste.
Establish a clear line of product distribution to the new segment
Finally, a clear line of product distribution should be established for the new segment. In this case, making arrangements for more than one outlet for each segment to maximize exposure and certainty about the message getting out is the best. Undertaking a targeted marketing campaign is of no use if there is no way to service the market once the orders come in. The company should be realistic about its reach and capabilities as a business. It should also make sure that the task is achievable before going after the segment.
Factors to consider in evaluating market segments
- Market potential
- Sales potential
- Competition
Market potential
It is important for a marketer to consider a segment’s marketing potential and evaluate it by taking a look at the number of potential customers in the segment. The number of people in the segment that need the product being offered and their income should be taken into consideration. It is the market participants that will buy such a product. The total number of participants multiplied by their purchases forms the total market. A market participant has to be in need of the product, be able to pay the price of the product, and want to buy the product. It is expedient to evaluate how many of such people are in each segment as this allows the company to gauge the potential market.
Sales potential
The sales potential implies the potential market segment share that the company expects to achieve. This can be estimated based on the performance in other markets. A company can as well build up its share by asking how much of its product it expects an average customer of a segment to buy, then multiplying it by the total number of customers. The result derived from this evaluation is helpful as it gives the company an idea of how valuable each segment is.
Competition
A key factor to consider in evaluating each segment is its competitive situation. if the total sales of existing suppliers are less than the market potential, then the company can achieve sales without having to take business away from its competitors. If the sales of competitors are close to the market potential, then any sales made by the company will result in fewer sales for them. This implies that the company will have to lower its prices or spend more money on promotions in order to achieve its sales potential. This in turn makes the segment less valuable for the company.
Cost
There are markets that cost a lot of money to service. This has an effect on the value of the segment. If there is a need to physically deliver large items over long distances, then the freight costs will be high and the resulting prices may put the product out of the customer’s income range. If the promotional cost required to reach a particular segment is too high in relation to the expected sales, then the value of the segment is too low. Evaluations should identify the segments that will be the most valuable for the company.
Patterns of target market selection
- Single-segment targeting/concentration
- Selective segment specialization
- Market specialization
- Product specialization
- Full coverage
There are basically five patterns of target market selection that a company may consider. The process of manipulating the marketing mix when it comes to product differentiation, methods of communication, and other marketing variables refer to as market targeting or target marketing. Market segmentation is not the same as market targeting as market segmentation is introductory to targeting.
It is through segmentation that a company divides the market into several segments. However, it is not necessary for all of them to form the target market. The target markets are being selected out of the segments that are being formed.
Once a marketer has evaluated the different market segments for their size, growth, and attractiveness and found out that they are compatible with the company’s resources and objectives, the next step is to go ahead with selecting the market segments. Let us look at the five patterns of selecting a target market after evaluation.
Single Segment targeting/concentration
In this pattern, the marketer prefers to go for a single segment. For example, a company makes use of this strategy when it produces a typical product for a single type of market as a plasma television. Companies like Allahabad Law Agency (only law books) and BPB publications (only Computer books) are real-life examples. The company may adopt this strategy if its position in the market is strong, if it has greater knowledge about the specific needs of the segment, if it has a specified reputation, and if it has a probable leadership position.
Selective segment specialization
This pattern is also known as multistage coverage because the company seeks to capture different segments. The company selects a number of segments of which each is attractive, potential, and appropriate. Little or no synergy among the segments may be in place but the advantage of this strategy is that a firm can diversify its risks.
In the above example, if the company produces plasma television as well as Walkman, the two different types of products are certainly for two different types of markets. In this case, we can cite it as an example of a selective segment specialization strategy. Until the beginning of the 1990s, Bata shoes were mostly in the popular segment. It then turned itself into a premium segment while it still retained the appeal of the popular segment. The taking of select segments of the shoe market was unable to help Bata to gain full control of the market. After 1995, it returned again to the popular segment.
Market specialization
Under the market specialization, the company takes up a particular market segment for the supply of all relevant products to the target group. Still, in our example, the company can implement a market specialization strategy by producing different varieties of home appliances such as television, washing machine, refrigerator, and micro oven for middle-class people. Here, the selected segment is the middle class and the firm is specialized in that market only.
Product specialization
Product specialization takes place when a company sells certain products to several different types of potential customers. In our example, if the company produces only a particular type of gizmo like a toaster that all types of people consume, then we can say that the company is making use of the product specialization strategy. This strategy or pattern promises a strong recognition of customers within the product areas. Super Precision Components make supplies of small nuts and screws for use in the military, industry, and daily use.
Full coverage
A full-coverage pattern is in place when the company attempts to serve all groups of customers with all the products they might be in need of. It is only large firms that can undertake this strategy. This can be done in two ways;
- Undifferentiated marketing or convergence
- Differentiated marketing or divergence
Undifferentiated marketing or convergence
In this case, the company ignores the differences in market segments and goes after the entire market with one market offer. It focuses on the basic needs of the buyer than on the differences among buyers.
Differentiated marketing or divergence
Here, the company operates in many market segments and designs different programs for each segment. This method creates more total sales than undifferentiated marketing. However, the costs will increase such as product modification costs, manufacturing costs, administrative costs, inventory costs, and promotion costs.
As both sales and costs increase, it becomes difficult to ascertain the profitability of this strategy. It is important for companies to take caution with regard to over-segmenting the market. If this happens, then the company will have to seek counter-segmentation to broaden its customer base. Large companies can go for full market coverage.
Using the example above, the company can use the full coverage strategy if it has all sorts of electric appliance products for different types of people.
