How does market segmentation help companies

Market segmentation - success factor in strategy work

For the selection of the appropriate criteria in individual cases (less is often more), some central requirements have been established in practice:

  • Measurable: The characteristics of the criteria used for segmentation must be able to be determined with a reasonable amount of effort.
  • Substantial: The market segment must be sufficiently large in terms of its size and sales / earnings potential to justify separate processing from an economic point of view.
  • Separable: The segments must be different enough.
  • Feasible: The segment must be effectively accessible and operable. It must therefore be possible to address the individual segments separately through targeted market development and to derive advantages from them.

What is the correct number of segments?

Often, the combination of the different criteria alone would result in an enormous number of segments. Too much subdivision of the market would result in it being split up into small packages that can no longer be processed effectively. It is therefore often advisable to condense the segments formed in the first step again. This can be done in several iterations. There is not the “right” number of segments. In practice in family businesses, however, it has been shown that with a number of more than 10 to 12 segments, the processing effort increases disproportionately and at the same time the gain in information content decreases significantly.

Therefore a number of up to 10 segments seems appropriate and manageable for strategy development. Because what happens to these segments in the next steps?

Use of segmentation in strategy development

The segments are basically used in the entire strategy development process. Because for each of the segments (but not only for these!) Separate strategic considerations are made.

First, the segments should be described in a structured manner in segment profiles:

  • Size and potential of the segment
  • Main customers and main competitors
  • Customers' needs and factors that determine their purchase
  • Range of services
  • Challenges and opportunities
  • competitive advantages
  • Positioning and cornerstones for market cultivation

On this basis, segment strategies can be developed that are used again for active market cultivation. Gaps in a company's “segment portfolio” can also be identified. In this way, new segments can be assessed as strategically relevant and then specifically processed.

Conclusion

Overall, a clean market segmentation forms the central basis for customer orientation and differentiation. It becomes the starting point and foundation for focused, growth-oriented and profitable corporate development. Because from the segmentation and the information obtained with it, it is possible to deduce which competencies a company must have in the future in order to achieve clear competitive advantages in competitive markets. Segmentation should therefore be approached pragmatically, but it should play an essential role in every strategy development process.