Before we look at benefits and limitations, first let us look at some of the reasons for segmentation:
- Segmentation helps a company to exploit its market better by selecting market niches (suitable segments) that are compatible with its resources
- Segmentation helps in focusing strategies more sharply on target groups
- Segmentation is more likely to result in instilling customer `loyalty’ since the firm’s offering is better matched to those in the segment.
Market segmentation allows following benefits:
1. Focus on Customer Needs
In segmentation the groups are divided based on the similar needs of the customer, the business can focus on the needs more accurately. Focusing on the needs helps the business to develop the products according to the needs of the consumer. This leads to consumer satisfaction and which enhances the reputation and bottom line of the business.
2. New Products/Categories
Segmentation leads business to explore new product categories and identification of new marketing opportunities. It has been observed that researches often reveal unexplored segments. Without proper segmentation such a market would have remained untapped for many years.
3. Proper allocation of resources
Business can allocate its resources based on the market segments which it has identified based on the need and future growth of the segments. Budget of a business can be determined or based on the segments. For instance, an organization can allocate a high resource for a big and growing segment then for a small segment.
4. Precise Market Definition
Segmentation helps businesses understand the needs and requirements of the consumers. It helps them understand, what a consumer buys and what he does not buy. In other words it helps business to understand how a market works and how to meet the changing market demands.
5. Assessment of Competition
Segmentation helps business assess not only the strength and weaknesses of their own but also of the competitor and develop and target their products to the consumers accordingly by segmenting the market. For instance, product A from competitor might appear very dominating in segment A, but Product B might not be so dominating in segment B. Firms have to target segment B with their products instead of wasting their resources and money on segment A.
Segmentation also has its limitations as it needs to be implemented in the proper manner. As segmentation is one of the most important process in the marketing plan or for your business, you need to know what pitfalls lie ahead if you go wrong with your target market segment
1. Small Segments
The segment which is chosen should be of proper size, if one errs and the segment is too small then you won’t have the desired turnover which will affect the margins and feasibility of the business.
2. Cost to Business
Segmentation goes against the old school of business, to produce products on large scale to achieve economies of scale i.e. cheaper products in larger quantities. In segmentation as we are segmenting the market into smaller groups and the products are also produced in smaller quantities to cater to these groups, there is a risk of cost of production going up.
3. Proper Study
One needs to interpret the study results correctly before interpreting, just because a consumer wants a new soap, does not mean we launch a new soap. One needs to study the market for existing brands of soap first. Getting into a segment already saturated will mean higher costs and lesser profit margins.
Segmentation increases the dependence of business on a small group of consumers. A luxury car manufacturer depends on wealthy buyers who are comfortable with spending more on a car than it costs to purchase a basic vehicle.