Principles of Market Segmentation - American Marketing Association

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Principles of Market Segmentation

By William D. Neal
William D. Neal is Founder and Senior Executive Officer of SDR Inc., a professional services and consulting firm specializing in advanced marketing research methods, prodedures and technologies.

	1. Introduction

For most business firms, locating and specifically targeting unique market segments is both a reality and a necessity in today's competitive marketplace. In North America, for example, the assumptions of the mass market no longer hold true for most businesses and product categories.

Creative market segmentation strategies often afford the business organization a strategic advantage over its competition. Foreign firms often enter a domestic market by segmenting the market, uncovering an underserved niche, and then concentrating their marketing and financial resources into that niche.

What is Market Segmentation?

In order to be a true market segment, the people or organizations in each segment must respond differently to variations in the marketing mix compared with those in other segments. This implies that for any classification scheme to qualify as market segmentation, the segments must exhibit these behavioral response differences.

In their 1978 book Research for Marketing Decisions, Paul Green and Donald Tull set four basic criteria for market segmentation:

The segments must exist in the environment (and not be a figment of the researcher's imagination),
The segments must be identifiable (repeatedly and consistently),
The segments must be reasonably stable over time, and
One must be able to efficiently reach segments (through specifically targeted distribution and communication initiatives).

Market Segmentation and Strategic Planning

A market segmentation strategy requires a major commitment by the organization. A firm adopts either a mass-market strategy or a market segmentation strategy. There is no in-between.

Senior management must be involved, and a strategic decision is required to effectively segment a market. The firm's marketing organization must be able to execute alternative marketing strategies and vary pricing, promotion, and/or distribution systems.

Also, R&D must be able to execute product variations, and manufacturing must be able to produce those variations. Finance must be able to report costs, profits, and margins by market segment, and marketing research must be able to monitor and measure customer response and provide feedback to the organization by market segment.

Typically, the firm will develop market segments for each product category and/or broad geographic market. Next it will discern its current and proposed positions within each of those segments and select its target markets on the basis of the opportunities that exist in each segment.

At that point, the firm sets initial forecasts of the market demand for each segment. Then, the firm will typically fine-tune its marketing mix to achieve optimal positioning and penetration in each selected target market.

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Table of Contents

1.	Introduction
2.	Methods for Market Segmentation
3.	Post Hoc Segmentation Studies
4.	Recent Developments in Segmentation
5.	Final Considerations