Segmentation

Chapter III – Segmentation, Positioning and the Marketing Mix

The following figure describes the main steps in market segmentation, targeting, positioning and planning.

Market segmentation

Market = Customer with similar needs.

Because those customers are not homogeneous (differ in the benefits wanted, the amount they are able or willing to pay, the media they see and the quantities they buy…), we segment the market and propose a tailored offering.

Market segment = Customer group within the market that have the same characteristics.

Segmentation increases profit opportunities.

Market segmentation is a spur to innovation by revealing hidden profit opportunities that can be won by better meeting the needs of specific high-value customer groups.

Core Segmentation: an Illustration

The same principle applies for any business. A price ratio of 1:10 from the lowest- to the highest-priced offer in a segmented market is common.

Reasons to segment markets

* Better matching of customer needs

* Enhanced profits: very difficult to raise prices to all customers by 5%. Very easy to raise price to some customers by 10%.

* Enhanced opportunities for growth: trade up customers to higher margin products. Example: Mercedes-Benz see their low-price offers as entry-level brand from which customers will be encouraged to move on to the premium ones, carrying higher margins.

* Retention of customer: Buying patterns change during lifetime. Ex: Cars (small car at 20, big car at 40). By offering different car, a company keep their customers.

* Targeted communications: Much easier to delivered the right message to a group of customer sharing the same characteristics.

* Stimulation of innovation: Segmentation More Profit More investment

* Market segment share: better to have 50 per cent of a €1 million market segment than 1 per cent of a €100 million market. Segmentation offers the opportunity for smaller firms to compete with major...