Segmenting the Market
Market segmentation is the process of splitting up your market sector into different slices (segments). This process enables a business to better target its products and services to more significant and relevant customers.
A market segment that has a high Compound Annual Growth Rate (CAGR) is more profitable than selling into those with a lower CAGR. For example, spending £5k on marketing costs in a market growing at 30% per year will bring a higher return on investment than spending the same marketing costs on a market only growing at 5% per year.
You should, therefore, choose the highest growth rate market segments that are applicable to your business.
By gaining an understanding of your market and the segments you serve, you will be in a better position to specifically target your products or services to customers seeking varying benefits. This approach also enables you to retain customers who may be tempted to switch to competing companies. On a side note: you should be well aware and be able to communicate how your product or service is different from your competitors.
One advantage of segmenting the market is that it allows you to identify and target customers that are less price sensitive, providing you with an opportunity to raise average prices, leading to increased profits.
Once you have successfully segmented your market, you can then better define who your target audience is. Importantly, this helps to ensure that the marketing message delivered is relevant and significant to that particular audience. This will allow you to reach that target audience more often and at a lower cost.
In summary, clearly defining your market segments will lead to:
A better matching of customers needs
Opportunities for growth
Retaining more customers
Focused marketing communications
How this works in a practical sense
In the following video below you will see an example of a plastic moulding injection company looking to segment their industry and find new sectors and segments that they could sell in to.
The video first shows the user discovering that the growth rate for the plastic moulding injection industry is at 6%. The video then shows a second search where the user searches for a market report to see how the industry is segmented. One of the segments shown is ‘medical’.
A third search is then made to see what medical sectors exist and whether any of those would be applicable to plastic moulding injection services. One of the results shown is ‘medical devices’. This would seem to be applicable.
A fourth search is then conducted to segment the medical devices sector further, to see what types of 'medical devices` there are. This reveals ‘sterilization equipment’ as being one segment of the medical devices market.
A fifth and final search is then conducted to find the growth rate of the ‘sterilization equipment’ market and to discover whether it is a market worth pursuing. The search reveals that it is growing at around 7.5%, which is faster than the average plastic injection moulding market which was only 6%.
This research would suggest that the company is already serving a segment of the market that is lower than that of the sterilization equipment segment(7.5%) because the industry average is only 6%.
If the company had conducted a customer/sales data analysis, then they would know what the slowest-growing market is and could compare to this new 7.5% growing market. They could then re-focus their efforts from serving this existing slow market to serving the faster-growing sterilization equipment market. In which they should see an increase in sales and growth per market spend.