The importance of market segmentation

It was Napoleon who said, “England is a nation of shopkeepers”.  This referred to the expansion of Britain’s mercantile class in the eighteenth century but it is clearly a simplification of the true nature of the British economy and something of a stereotype.

Wellington, in xenophobic mode said, “We have always been, we are, and I hope always shall be, detested in France.

Both these statements lump whole nations into a homogenous mass. Clearly not everyone in England was a shopkeeper and not every Frenchman, even during the Napoleonic wars, hated France. In fact, during that part of history, London was filled with the refugees of the French revolution and the descendants of the Huguenots victims of the oppression of French protestants.

Both Napoleon and Wellington were living at a time when the mass market was developing. It was the start of the mass production of goods and the Industrial revolution. Products went from the artisan to the mass produced.  The mass market was king.

But in the 21st century, the mass market is long dead.  A one size fits all approach is no longer valid in many markets. In today’s markets, to succeed, you need to be aware of the needs and wants of different customer groups.

Some firms create profiles for individual target customers e.g. An architect with three children who plays guitar in a band and enjoys Rugby League.  Such individual profiles often seem bizarre and ridiculous; but they are not designed to represent an actual person but a group of people who may be attracted to a particular product.

Describing profiles of ‘perfect’ customers and of distinct groups of customers helps these companies the clarity and depth of customer focus required to remain relevant.  This process is market segmentation.

There are numerous ways to segment markets, using demographics, lifestyle markers, by income or by psychological markers. Which segmentation tools to use will depend on:

  • The sophistication of the market
  • The level and nature of competition in the target market
  • The stage of market development
  • The strategic sophistication of your organisation
  • Your ability to implement strategies and tactics.

Most consumers no longer want standardised mass-produced items.  Many firms now embrace mass customisation. For example Mini offer thousands of vehicle variants and both Nike and Brompton Bicycles allow consumers to customise their footwear or bikes. Increasingly people desire something special to meet their self-actualisation needs. Much of this desire is driven by internet shopping and the development of cross-border, continental markets.

People want the products they buy to reinforce their internal idea of their own identity.  Increasingly people do not want to buy a product, they want to buy an experience.  They focus not only on the product but the ‘halo’ around it e.g. customer service, how goods are packaged etc.

People want to separate themselves from ‘the herd’.

We also live in a time of mature markets. This has led to increased competition as firms compete for each others customers.  Markets offer increased opportunities for consumers to switch suppliers.  The demise of Nokia is a fine example of switching as what was seen as a large loyal customer base switched to the perceived better offers from Apple and Samsung.

We are experiencing markets where the supply side of the graph is becoming as chaotic as the demand side.

This is why market segmentation, the targeting of consumer groups in terms of similarity of need,  is critical.  You need to identify homogenous sub-sets of customers. You need to know if the selected group can be classed as a target market. You need to know if you have the resources and ability to develop a distinct marketing mix to serve that group.

The use of segmentation tools to target market groups improves you market penetration. Segmentation can improve volume sales.  Segmentation allows you to leverage higher prices improving profit margins. Such improvements can pay of the additional costs of a diversified market position.

Market segmentation creates a compromise between bespoke production (individualisation) and mass marketing. It is a process critical to strategic success and long-term survival of businesses.  It is also an on-going process to reflect changes in consumer attitude and taste.