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Finding Customers: Market Segmentation

CDFS-1253-94

Small Business Series

Nancy H. Bull
Gregory R. Passewitz

A key factor to success in today's market place is finding subtle differences to give the business a marketing edge. A business that targets specialty markets will promote its products more effectively than a business aiming at the "average" customer. What makes the business unique? How can these unique features be promoted to "targeted" customers?

Undifferentiated Marketing

Some businesses treat the market as a whole, focusing on what is common to the needs of customers, rather than on what is different. Often called undifferentiated marketing, this technique relies on mass advertising and is implemented on the basis of cost savings to the business. Undifferentiated marketing is successful when the competition is scarce or the product has mass appeal.

Differentiated Marketing

Differentiated marketing builds greater loyalty and repeat purchasing by considering customer needs and wants. Differentiated marketing creates more total sales with a concentrated marketing effort in selected areas. Concentrated or target marketing gains market position with specialized market segments. Target marketing of products or services reduces the cost of production, distribution, and promotion. With differentiated marketing, there is the risk of the market going sour or a competitor entering the same market.

Market Segments

Marketing opportunities increase when customer groups with varying needs and wants are recognized. Markets can be segmented or targeted on a variety of factors including age, gender, location, geographic factors, demographic characteristics, family life cycle, desire for relaxation or time pressures. Segments or target markets should be accessible to the business and large enough to provide a solid customer base. A business must analyze the needs and wants of different market segments before determining its niche.

Market segmentation is dividing a larger market into submarkets based upon different needs or product preferences. A key factor in competitive success is focusing on little differences that give a marketing edge and are important to customers. Market segmentation matches consumer differences with potential or actual buying behavior. It may prove more profitable to develop smaller market segments into a target segment.

Profile Customers

Analyze market segments. Where do customers differ? Is it geographic area, demographic characteristics, social class, stage in family life cycle, personality, self-image or benefits sought (such as convenience, time saving, independence from chores or buying behavior)?

Also, consider frequency or regularity of purchase, amount of purchase, brand loyalty, attitudes toward the product or brand, use of cash, check or credit card, or customer's desire for personal friendship with business personnel.

Use a customer profile form to identify potential target markets (see sample form on page 3). A customer profile form might ask age (18-24, 25-35, 36-49, 50-65, over 65), approximate income (less than $20,000, $20,000-$29,999, $30,000-$44,999, more than $45,000), gender (female-male), occupation (clerical, professional, retired, not employed) how the customer learned about the business (newspaper, direct mail, word of mouth, chance), children at home (under 6 years, 6-12, 13-18, over 18), in college, in military, married, employed outside the home and sports enthusiasts. Ask questions important to your business interests. Try to identify types of customers and the benefits they need and want.

Profile of Industry

What does the product or service industry look like? Is the trend toward growth or decline? What other businesses are in the industry? If the new business is in the entertainment field, what related businesses exist? Search the reference section of the local library for information on industry trends, including sales figures, size of firms and number of employees.

Who is the Competition?

Identify and evaluate the competition, their number, size, location, strengths and weaknesses. How will the business overcome competitors' strengths and take advantage of their weaknesses?

In most cases, seek a market segment not being well served that shows potential for growth. Remember, many factors influence actual sales volume, including economic conditions and advertising effort. Develop alternative markets, such as additional market segments, or a wider distribution area.

Constantly review marketing strategies to determine if the customer needs are being met, and analyze sales trends, customer comments, number of returns, requests for unavailable merchandise, repeat customers, customer surveys, etc. Decide whether to offer new products, seek new markets or further penetrate current markets.

Segmenting Markets

One way to segment markets is by product or service benefit sought by the customer. What benefits are customers seeking? Quality? Low price? Convenience? Identify the benefits customers want and create the product or service to meet the need. Direct marketing efforts toward increasing customer awareness of those benefits. Sometimes it is difficult to accurately estimate the size of the customer group. Some customers are interested in two or three benefits, not just a single one. Knowing customers needs and wants is basic to successful marketing.

Markets can be divided by customer use of products or services, such as: nonusers, ex-users, potential users, first-time users and regular users of a product. Other markets may be segmented by usage rate. Are customers light, medium or heavy users of the product or service? Heavy users may constitute a small portion of the market but a major percentage of sales volume. Each target group requires a separate marketing plan. One marketing effort will probably not cover all the bases. Potential users and regular users require different types of marketing efforts.

At any point in time customers are in various stages of readiness for a product or service. Some are unaware of the product, some aware, some informed, some interested, some desirous and some intend to purchase. The customer's stage of readiness makes a significant difference in designing a marketing program.

Factors that influence the potential for future markets include changes in:

Market Strategy

Market strategy is defined as an action plan for influencing customer choices and obtaining a market share. Market strategy should entice customers to buy the product or service. Market strategy encompasses customer perception of the relationship between price and quality. Is the quality of the product or service worth the price? Is the price too low for the quality the customer desires? Is the price higher than the customer's perception of quality? Market research identifies the price and quality relationship customers perceive to be important. Remember, customer perception is the bottom line.

Market strategy also includes the distribution channels for the product, pricing and terms of sale, promotion and advertising plan, marketing budgets, inventory selection and management, visual merchandising, customer relations and an evaluation of the marketing strategy.

The marketing plan provides information on what the market will be (retail, wholesale) and what specific customer groups will be targeted, what will be sold, where it will be sold, and how wide the area of distribution will be.

Ideally, market segments with a potential for high sales, profits, growth and a minimum of competition are the most attractive.

A Word of Caution

Price is a function of both cost and marketing. Price should be determined in relation to fixed and variable cost and should reflect a profit. Profit is the reason to be in business! For more information on determining price, refer to Home Business Fact Sheet, Pricing, CDFS-1326. Price is also a function of marketing. What the customer perceives to be a just price may not be sufficient to cover the costs of the business. Be sure to consider both functions of price before determining what price to charge.

Summary

Target marketing or market segmentation based on customer needs and wants can increase profits. Target marketing identifies customer groups and the reasons they purchase. Market segmentation helps a business be more responsive to changing customer needs. An overall marketing plan or strategy visually shows how all aspects of a marketing effort work together. Remember, the ultimate goal of any business is to sell the product or service.

Customer Profile Form

Use the customer profile form shown below as an example only. Develop your own customer profile based on the type of business you operate. Think carefully about what you would like to know about your customers. How will you use the information you collect? What will it tell you about customers or potential customers? What else would be helpful to know? Do you want to know if customers buy particular products similar to yours or which compliment the purchase of your product? Do you think that customers who live a certain lifestyle such as people who ski or take vacations are more likely to buy your product? Are people who own certain appliances more likely to buy your product? Spend time watching customers in settings similar to your business setting. How do they act? What questions are asked? What do they purchase? Then, develop your customer profile to learn more about who are your potential customers. Use the information learned to make decisions concerning store location, hours of operation, choice of advertising to reach your target market.

Age ____18-24, ____25-35, ____36-49, ____50-65, ____over 65

Approximate Income _____less than $20,000, _____$20,000-$29,999, _____$30,000-$39,999, _____more than $45,000

Gender ____female, ____male

Occupation _____clerical, _____professional, _____retired, _____not employed

How the customer learned of the business _____newspaper, _____direct mail, _____word of mouth, _____chance

Children _____children at home _____children in college _____children in military

_____under 6 years _____6-12 _____13-18 _____over 18

Employment _____employed away from home, _____employed at home

Sports _____sports enthusiast

References

Haas, R.W. and Wotruba, T.R. (1983). Marketing Management: Concepts, Practice and Cases. Pleno, Texas: Business Publications, Inc.

Kotler, P. (1976) Marketing Management (3rd. Ed.). New Jersey: Prentice Hall.

Taking Care of Business Newsletter. Coop. Ext. Service, Kansas State University, Manhattan, Kansas.

Business Sense, NDSU Extension Service. March 1988.


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Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.

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