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SEGMENTATION

A business model to gain a competitive advantage by targeting customer groups

Companies have always recognised differences in their customers and targeted them accordingly. In the first instance goods were sold on a local or regional basis. When mass marketing began in the early 1900s, advertising agencies began to see the advantages of targeting different respondents.

It wasn’t until 1956 when Wendell R. Smith wrote an article entitled Product Differentiation And Market Segmentation As Alternative Marketing Strategies that segmentation as we know it today was born. 

Satisfying people’s needs and making a profit along the way is the purpose of marketing. However, people’s needs differ and therefore satisfying them may require different approaches. Identifying needs and recognising differences between groups of customers is the role of the marketer. Different groups of customers are segments. Segmentation is therefore at the heart of marketing.

A common segmentation approach is based on demographics (in the case of consumer companies) or firmographics (in the case of business to business companies). A demographic segmentation is characterised by the physical attributes of the marketplace – age, gender, marital status, family composition (in the case of consumers), and size of company, industry vertical, geographical location (in the case of businesses).

A further sophistication may be to classify customers into those who are identified as strategic to the future of the business, those who are important and therefore key and those who are smaller and can be considered more of a transactional typology.

These demographic segmentations are perfectly reasonable and may suffice. However, they do not offer a sustainable competitive advantage that competitors find difficult to copy. Nor do they address what customers and potential customers want. A more challenging segmentation is one based on behaviour or needs. Certainly large companies may be of strategic value to a business but some want a low cost offer, stripped bare of all services, while others are demanding in every way. If both are treated the same, one or both will feel unfulfilled and be vulnerable to the charms of the competition.

It can be helpful to think of segmentation as a process that begins with simple classifications such as firmographics/demographics and, with experience, moves to groupings based on behaviour and needs.

Grouping companies together to better meet their needs is not easy. It requires good intelligence on consumers – their demographics, their behaviour, their psychographics and their needs. However, a segmentation based on customer needs and behaviour is important in making a company marketing orientated. It also is a strategy that is hard for competitors to copy so it gives a competitive advantage.

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