That is why you should not focus your marketing strictly on the market as a whole, but rather take individual measures for individual customer groups. Market segmentation helps you to do this by identifying subgroups within the overall market that you can then target with your marketing.
Market segmentation aims to divide the entire heterogeneous market into homogeneous subgroups which can then be selectively targeted. The segments can be formed using different criteria, but should always be designed in a way that the customers within a segment show similar reactions to marketing measures.
The scientific definition of market segmentation comes from Hermann Freter:
“Market segmentation is […] the division of the overall market into sub-segments which are internally homogeneous but heterogeneous with respect to their market reaction, as well as the targeting of one or more of these market segments.”
Just like market segmentation, customer segmentation also aims to classify customer groups. The difference is that customer segmentation uses only the company’s own customer base as a basis, whereas market segmentation considers the entire market, i.e., current and potential customers. Customer segmentation consequently helps to identify particularly high-revenue customers, while market segmentation also goes beyond this.
Market segmentation serves several purposes and can provide you with diverse information that will not only help you align your marketing strategy, but also optimize your products and services.
The following functions of market segmentation will be useful to you:
To conduct a productive segmentation, certain requirements should be met. These not only ensure that the results are utilizable, but also that the market segmentation does not end up costing more than it yields. Make sure you have the following basics in place before you start segmenting:
Connection to marketing measures – the criteria of your market segmentation should have a connection to your marketing tools.
Generally, you should keep in mind that the choice of the “right” criteria always depends on your individual situation. The question of the right characteristics can therefore not be answered in a general way. The following overview lists the various possible criteria and their advantages. Use them to peel the ideal customers out of the entire market. This helps you to find a suitable segmentation strategy to identify types of customers and consumers or buyer groups:
Market segments can also be determined for the B2B sphere. Here, you should proceed in two steps by first segmenting the markets at the macro level and looking at characteristics at the international level. The second step is micro-segmentation, where you go down to the individual level and segment contact persons.
To find out which number of segments is optimal for you, first consider the two extremes. No segmentation would mean that the entire market would be approached in the same way. On the other hand, maximum segmentation would mean that every single customer would be targeted individually.
In order to find the sweet spot, i.e. the most efficient range, we consider the graphs for segmentation costs as well as for segmentation revenue with increasing number of segments. The point where these two curves are widest apart marks the point with the optimal number of segments.
Market segmentation is an important tool and forms the basis for your marketing activities. It helps you identify the different target groups in your market, how lucrative they are and how they differ in terms of their reactions to marketing activities.
When performing segmentation, you should keep in mind that this is a fundamental decision, so you should choose criteria that will remain stable and relevant in the long term. Also the segmentation itself should not cost more than it brings in.
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