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If the universe of all potential buyers is your "market," then the market can be divided up into sections or "segments" based on any number of factors. For example, you might divide up your customers by age group and find that you sell most of your products to people aged 18 to 34. You might divide them up by family size and find that you sell most of your products to married couples with young children. You might divide them up by economic status and find that you sell most products to people with an annual income of about $50,000 to $100,000. You might divide them up by geographic location and find that you sell most of your products to people living within two specific zip codes.
Many small businesses stop there, thinking they have enough information to be able to identify and communicate with their most likely customers. However, larger companies will attempt to push on further and find out even more information about their customers' lifestyles, values, life stage, etc.
How can you find out more about your customers? Through market research, of course.
Larger companies segment their markets by conducting extensive market research projects, consisting of several rounds of exploratory research:
- Customer and product data collection: Researchers gather data from users of similar products on:
- number and timing of brand purchases
- reasons for purchases
- consumers' attitudes about various product attributes
- importance of the product to the lifestyle of consumer
- category user information (demographics, psychographics, media habits, etc.)
- Factor and cluster analysis: Researchers analyze the data collected in (1) to find correlations between product purchases and other factors, as a basis for identifying actionable consumer target "clusters." Clusters are defined as "niche markets," where there are identifiable numbers of buyers or users who share the same characteristics and who thus can be reached by adept advertising and promotion.
- Cluster identification and importance ranking: Researchers then determine:
- whether clusters are large and viable enough to spend marketing funds on them
- whether potential marketing niche clusters fit strategic company objectives; i.e., does marketing to this group fit your existing image and long-term goals
What can smaller companies do to segment their markets?
- Smaller companies can research secondary data sources and conduct individual interviews with key trade buyers and consumers or end users of their products and services (qualitative research). Often qualitative research can be accomplished for free or little expense.
- Smaller companies can also conduct informal factor and cluster analysis by:
- watching key competitors' marketing efforts and copying them
- talking to key trade buyers about new product introductions
- conducting needs analyses from qualitative research with individuals and groups
- In many cases, smaller companies have access to the same databases as large companies for estimating the sizes of market segment clusters and their importance. Some low-cost sources of external secondary data include:
- trade and association publications and experts
- basic research publications
- external measurement services (large market research firms include ACNielsen, Burke, and Information Resources, Inc. (IRI))
- government publications
- Smaller companies can segment markets by geography, distribution, price, packaging, sizes, product life, and other tangible factors in addition to demographics and lifestyle and psychographic clustering.