There are two fundamental strategies a company can take to market its products and services. A company can try to sell to everyone (e.g., mass-marketing) or it can focus its efforts on target segments (e.g., segmentation-marketing). In most cases, mass-marketing is expensive and ineffective. For this reason, a market segmentation study is usually a key component in a company's overall strategic plan. A well designed market segmentation study will identify groups of people who are "most likely" to purchase a particular product or service.
Armed with this knowledge, a company can focus its product development, advertising, and selling resources in a way to maximize sales and profitability.
Market segmentation can be conducted a priori or post hoc. An a priori market segmentation model is not derived from any customer data. Rather it is a model that is based on a widely known variable or classification scheme. An a priori segmentation model for business products could be based on industry, number of employees, revenues or geographic location, for example. A consumer-based a priori segmentation model could be based on education, age, income or gender, for example. The advantage of an a priori segmentation model is that it can be developed quickly and inexpensively. The main drawback is that a priori models are in general only marginally better than mass marketing. They can provide few insights into how best to refine a product marketing strategy. A post hoc segmentation model, on the other hand, is empirically derived from data collected in a market research survey
. Segmentation models can be derived from a variety of input or "basis" variables. Some examples of basis variables include, benefits sought, product attribute preferences, values, product usage, brand preference, and price sensitivity. The goal of the segmentation analysis is to identify groups of respondents who provide similar answers to the basis questions. Two popular analytical techniques for accomplishing this goal include cluster analysis and CHAID (CHi-squared Automatic Interaction Detection).
Four Components of a Successful Market Segmentation Study:
- The segments must actually exist in the market,
- The segments must be reproducible on a consistent basis (meaning they are identifiable)
- The segments should be reasonably stable over time, and
- The segments must be reachable (so that the results are actionable).
Segmentation studies typically involve lengthy surveys and large sample sizes. The surveys tend to be long because in addition to all of the basis questions that will be used to develop the segmentation model, the survey must also include a number of "descriptive" questions. Typical descriptive questions include demographic questions. Descriptive questions are used to target the segments. A successful segmentation study typically requires considerable up-front planning and back-end analysis. The potential reward is a model of the market that not only identifies groups of customers that represent the greatest opportunity, but also identifies their distinct needs, wants, and behavior so that a company knows how to target and reach these prospects.
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