Too many start-ups run around thinking that their market is "over a billion dollars and growing." They have convinced themselves, and possibly investors, that all they need to do is capture just one or two percent of such a huge market in order to be successful. Big mistake. The best example is e-commerce. All of the major research companies state that it will soon be worth a trillion dollars. How many companies out there are targeting the e-commerce market? Too many. Out of the trillion dollars, how much is going toward music, books, clothes, etc.? You must know your exact market – from top to bottom. In order to do so, you must segment the "billion dollar market" into the specific sector that will buy your product. Today’s Enable will show you how.
Why Segment the Market?
The first reason why you must segment your market is so that you can identify the particular targets that can be addressed profitably. You must also learn which segments can be efficiently reached via your marketing efforts.
In addition, by having a definite segment in mind, you can effectively aim and efficiently execute your marketing activities to get the highest possible sales and profits. If you do not establish your specific target market, you will waste valuable time and marketing dollars on people who are not interested in your product or service.
Some Segmentation Variables
There are four major segmentation variables in the consumer market:
- Geographic
- Demographic
- Psychographic
- Behavioral
Geographic segmentation does exactly what it says – it divides the particular market geographically. For example, country, state, region, etc.
Demographic segmentation divides a population based on the following variables:
- Age – the wants and needs of different generations – Generation X, Y and others
- Sex – buying patterns and gender usage
- Income – the ability to make the purchase
- Marital status – family needs or not
- Family life cycle – just starting out, lots of rug rats, kids moved out, etc
- Education/Occupation – how sophisticated is the particular consumer?
Psychographic segmentation divides the market by psychological differences. This includes life style activities, interests and options. It also involves personality – conservative, risk-taking, status-seeking, compulsive, ambitious, etc.
Behavioral segmentation divides the market by purchase behaviors. Most e-commerce companies are trying to use specialized software and client server models to learn of these behaviors. Other methods they are using include having you fill out questionnaires, and "databasing" your purchases.
Behavioral segmentation includes usage, purchase occasion, brand loyalty and the responsiveness to price and promotion.
Market Segment Evaluation Criteria
You need not only to select the right group of the above variables, but also to decide how many to use. The correct number of useful variables will identify the most accessible and receptive market – not the most specific. For example, you could say that the target segment for buying art online would be art majors. But, the ability to target just art majors with effective advertising is limited and its usefulness would be uncertain.
You should use the following criteria to evaluate possible marketing segments:
- Measurability – can you identify the segment? Can you quantify its size?
- Accessibility – Can you reach the segment? How?
- Substantiality – Is the segment large enough to bother with? Is it mature, growing or shrinking?
- Profitability – Are there enough potential profits to make targeting it worthwhile?
- Competition – Are your competitors in this segment or moving into it?
- Effectiveness – Does your company have the capabilities to adequately service this segment?
- Defendability – Can you defend yourself against a competitor’s attack?
Vertical Portals for Example
As a way of summarizing the need to segment your market, lets look at vertical portals. When the Internet started out, Internet companies were not really segmenting their markets. They were going after everyone and everything. Today, vertical portals have stepped in and targeted only a small segment of a particular market – but are providing this segment with exactly what they need. You can too – by properly segmenting your market – from the earliest possible stage.
Published by Israel's Business Arena on February 15, 2000