Market segmentation is a marketing jargon used in the context of segmentation or division of the market by the companies, under market segmentation a company divides different market according to different variables like age, salary, geographical location, weather, culture and so on. For example an air conditioner manufacturing company will divide the market according to weather in different areas of the country, same is the case with ice cream manufacturers as they will benefit from selling their ice creams in areas where temperatures are high than those areas where temperatures are low. In order to understand the concept of market segmentation better let’s look at some of the advantages and disadvantages of market segmentation –
Advantages of Market Segmentation
- The first and foremost advantage of market segmentation is that it results in better company performance as the company which has divided the market into smaller segments is likely to have a more focused strategy with regard to sales to that market segment than other company which has not divided the market into segments. Consider the example of mobiles if suppose a mobile manufacturer produces only one type of mobile which is costly and targeted only for rich people and another mobile manufacturer produces different types of mobiles like low cost mobile targeted at students and rural area, high cost mobile targeted for rich, mobile with good camera targeted at young people and so on. In this case naturally mobile company which has divided the market into different segments will perform better than the company which manufacture only 1 type of mobile.
- Another advantage of market segmentation is that helps the company in expanding its market, consider the above example if the mobile maker does not segment its market for low income group then it will not think of going into rural markets as rural areas have lower income as compared to urban areas. Hence it due to market segmentation that mobile manufacturer will have the whole rural population for expansion of its business as compared to another manufacturer which is producing only high cost mobiles.
- Market segmentation not only helps in market expansion but it is also a key driver for customer retention because a segmented market provides company enough opportunities for making the strategy of retaining its customers of a particular market segment. For example if a computer manufacturer is selling computers to different markets, and if it wants to retain students segment then it can devise the strategy where it offers free internet access for 1 year to students purchasing computers from them, or if wants to retain business class then it may offer free printer or scanner with computers so that they do not go anywhere.
Disadvantages of Market Segmentation
- The first and foremost disadvantage of market segmentation is about the wrong selection of a segment, so if the company chooses wrong market segment which is too small or irrelevant for the business of the company then the company will not be able to sell its product. For example if a mutual fund selects old age people for marketing of mutual funds then naturally it will fail as old age people tend to avoid risky investments and they prefer fixed income options like fixed deposits and government securities.
- Another disadvantage of market segmentation is that it involves additional expenditure on the part of the company in the form of advertising, so in the above example a mobile manufacturer has to incur additional advertisement expenses for advertising mobile for young people apart from normal advertising expenses and if the benefit due to market segmentation is not there then the whole exercise of doing the market segmentation will be futile and wasteful expenditure.
- Another limitation of market segmentation is that if the company venture into that market segment where there is stiff competition and saturation in that particular market segment then it can lead to loss for the company because if a company goes into a market that is already full in terms of competitors and there is no scope for growth then it will be fatal decision for the company.
As one can see from the above that market segmentation has benefits as well as limitations and a company before deciding about segmenting its market should look first its product range, financial position, competition, consumer taste and so on.