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Why Do Firms Segment Markets?

Why is Market Segmentation Important to Marketers?

Market segmentation is a foundational component of any marketing program. Professional marketers will focus upon defined target markets, which are identified through an effective and analytical market segmentation process.

Market segmentation is the first main step in the overall STP process = where S stands for Segmentation, T stands for Targeting, and P stands for Positioning.

As you can see, market segmentation is designed to help guide the marketer to select attractive target markets and then design their overall top level marketing strategy with their positioning for their brand/product.

Market Segmentation is Strategic

Market segmentation is NOT just an analytical process. It is an important component of marketing strategy. This is because the two main elements of marketing strategy can be simplified as:

1. Where to compete?
2. How to compete?

The market segmentation process, combined with target market selection, answer the first question for a firm of = where to compete? And then the brand’s/product’s positioning strategy will answer the second question of = how to compete?

Market Segmentation Needs to be Innovative, not Generic

Market segmentation enables the firm to identify relevant and insightful market segments for the purposes of identifying target markets that have been defined differently, as opposed to their competitors.

A firm could adopt a “generic market segmentation” approach, such as age segments, but this is unlikely to lead to a competitive advantage. As marketers, we are seeking to understand the market in deeper and more innovative ways that our competitors.

If our company and our competitors all defined our target markets in the exact same manner, over time we would form the same view of their needs, and end up competing “head-to-head”. This is not ideal, as differentiation is a necessity in marketing success.

By changing the way we review the market and having an innovative approach to market segmentation, we are more likely to uncover market insights and define our target markets in an unique manner. This will lead to a competitive advantage through our understanding of the marketplace.

It will also result in us having a more innovative marketing strategy, which is more likely to lead to long-term market success.

Reasons to Use Market Segmentation

The main reasons why firms should use market segmentation include:

1 = an analysis of the market, by drilling down to a variety of different market segmentation approaches, will lead to a greater understanding of the market dynamics and a greater understanding of customer needs.

2 = by taking our time with the market segmentation process and looking at the market in innovative ways, we are likely to identify and define our target markets uniquely, as opposed to our generic competitors, leading to a competitive advantage because we have a better insight of the market and its consumers.

3 = as intended, and effective market segmentation SHOULD result in a better selection of attractive target market/s that fit to that our firm’s strategy, capabilities and resources.

4 = also as intended, effective market segmentation SHOULD result in a better design of our marketing program and our overall positioning, as we have a better understanding of the market and have a unique approach to segmentation and targeting.

5 = based upon the various above points, through better understanding, better target market selection, and better design of our marketing – all these elements will lead to improved profitability and competitive strength for our firm.

6 = we are more likely to identify gaps and opportunities in the marketplace, by being able to target neglected or underserved market segments – leading to effective long-term and profitable growth.

7 = it should give us improved insight into the marketing strategies being implemented by our competitors, as we should be able to uncover (reverse engineer to some extent) how competitors view the market and what their key target markets are – resulting in a competitive advantage to us due to our enhanced competitor knowledge.

8 = a clear market segmentation process, combined with clear target market selection and associated positioning and marketing mix – will all lead to improved utilization of our marketing resources and budget, resulting in improved marketing return on investment.

9 = a flow-on benefit of the above point is that the marketer will be more precise (and cost effective) in their major marketing investments, such as new product development and major campaigns – primarily because they have a strong understanding of the market and consumer needs.

10 = the marketer is more likely to build a more sustainable and profitable brand because the brand is clearly focused as the marketer understands who IS and who ISN’T in their target market – leading to greater connection and engagement and long-term brand advocates.

Market Segmentation is a Step in the Process 

As you can see, many of the reasons that marketers will use market segmentation are outcomes of the market segmentation process.

In other words, market segmentation is an insightful and analytical tool and process that provides highly valuable information and knowledge to the marketer, which they in turn use for improved market understanding, improved target market selection, innovative marketing strategies, and overall competitive advantage = and improved profits and long-term business success!

Quick Summary Table of Why Businesses Use Market Segmentation

Please use the links for further information.

Reasons why market segmentation is used	Rationale/discussion
Target markets	Obviously the main reason is to help identify potential target markets
Market understanding	Splitting the overall market into smaller groups helps managers have a much greater understanding of the marketplace, as they gain knowledge of differing consumer needs within the same market
Marketing mix	It is then easier to develop a marketing mix is based upon the needs of a precise market
Competitive position	It can be easier to compete against existing firms by focusing upon a smaller, more defined, group of consumers
New opportunities	Creative approaches to market segmentation may generate new opportunities
Avoid mass-marketing	In today’s environment, it is generally quite difficult to be successful as a mass-marketer
More offerings	Firms are better able to position multiple products in the same overall market by defining and understanding multiple segments
Niche marketing	Some firms find success as niche marketers (pursuing very narrowly defined segments) and this specialized approach becomes their basis of their competition advantage