3 Key Reasons to Use Market Segmentation as a Strategic Tool

March 19, 2017

Man pointing

Have you ever wondered why every company, according to their homepage, is “a leader in abc” or “one of the biggest xyz suppliers”? The secret lies in how the company defines its market — which is typically small and niche, allowing them to be the biggest or the leader. However, segmenting the market is a crucial task, not just a nice-to-have for introducing yourself in a snippet on your company homepage.

There are three main reasons to use market segmentation as a strategic tool:

1. You identify your natural spaces and potential white spots in the market

Once you have segmented the market, you can identify your sweet spots. Determine the segments where you’re the leader and are highly competitive — segments that you have to defend against the competition. Here you should always stay ahead with an offering that sets you apart from your followers. Market segmentation can also help you by revealing white spots — attractive market segments where a market segment leader does not yet exist. These will present potential growth opportunities in the future. Evaluate your current products to see if they fit to these segments or if slight adjustments will lead to success.

2. You have a better overview of your competitors’ strengths and weaknesses and can prevent price wars

It’s important to know the leading competitor, the significance of your competitive strengths and the segments where they’d have the greatest impact. If through price cuts you start attacking a market segment where your competitive strength is low, it’s very likely you’ll end up in a price war. You should first focus on improving the value of your products or services. There’s a reason why your competitor is the leader, and not you. Maybe it’s their product quality, customer relationship, service, or something else. Work on that before even thinking about lowering your price. Another benefit of knowing the market segment leaders is that you can identify niche players who are very strong in a particular segment. In that case, it might make sense to think about M&A in order to close potential product gaps.

3. You can decide on the right action for each market segment

One of the best outcomes of market segmentation is that you know where and even more importantly where not to compete. This is one of the toughest decisions to be made in a management meeting. For some reason, being active in all fields and telling the client that you can do it all is a popular approach. But saying no will help your company to focus on your strengths and to target them where there’s money to be made. Don’t waste time on a market segment with low market attractiveness or potential profits that wouldn’t justify the effort involved in developing a compelling product. Another example is very low market attractiveness in a segment where your product or service is still highly competitive. This might indicate a disrupted or soon to be disrupted segment, and you shouldn’t focus on it too much in the future.

Here’s a valuable example of market segmentation:

 

Comstrat

 

So, how is it done?

Step 1: Think about how to segment your market in two dimensions. These dimensions can strongly differ depending on your company. Some use products and industries, others use countries and applications etc. Typically, countries in fact represent a third dimension, meaning you need to create an industry product map for every country.

Step 2: Assess the market attractiveness and your competitive strengths and identify the market leader for each segment. The best way to do this is to use data. If there’s no data available, getting an expert opinion is the next best solution.

Step 3: Analyse the situation and derive actions. For each segment you have to decide on your next move: grow, stabilize or withdraw.