Great Business Ideas: Market segmentation

Great Small Business Ideas to Start: Market segmentation

Market segmentation involves analyzing groups of current and potential customers. It is valuable for understanding the organization and composition of the market, to improve the effectiveness of marketing plans, and to target potential customers.

The idea

A senior marketing colleague once remarked that he wanted to see “all of our customers broken down by age and sex,” until I pointed out that most of them were already. What he meant was he wanted to better understand our customers: who they are and what they valued. This enabled him to match products with customers, as well as informing his thinking about many other issues: from new product development to pricing and distribution. This is the challenge of segmentation.

Many industries and businesses are improving their market segmentation, for example, by using psychographic profiling that divides customers into “groups” according to personal needs, preferences, and lifestyle. Some of the best segmenters are financial service businesses, such as credit card companies, insurers, and banks. The business of lending money is difficult: match the wrong loan or product to the wrong people, and either you miss a sale or they default. There is a vital need to target the right people from the start. This has the great benefit of increasing marketing efficiency.

In practice

  • Segmentation needs to be focused: the larger a segment, the greater the danger that it will lose value.
  • The key to segmentation lies in highlighting differences and specific characteristics: this requires clarity and insight.
  • Segmentation should be as simple as possible, avoiding unnecessary complications and ensuring decisions and views are rational and clearly communicated.
  • Segmentation needs certainty. It is tempting to jump to conclusions or make assumptions about segments based on your own experience, background, or prejudice. However, these can be mistaken and a key element in successful segmentation is analysis: understanding how something is, and why it is that way.
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