Once market segments are identified, the key issue is to determine which opportunities should be pursued and how marketing investments should be allocated across segments. This is the strategic market segmentation decision; and it will, to a large extent, determine the long term competitive posture of the firm in a given market.
The strategic evaluation of market segments is a complex undertaking that requires consideration of a broad range of issues. For example, profitability is only one component of competitive advantage in the short run. On the other hand, competitive advantage will determine long term profitability. Competitive advantage consequently dominates profitability as a strategic objective in market segmentation.
The major criteria of relevance in evaluating the relative attractiveness of different market segments are listed in Table below along with examples of which factors to consider. It is important to note that these criteria are not always independent of one another. For example, the more intense the competition in a given segment, the more difficult it will be to penetrate and the lower is its profitability level.
Table: Segment Attractiveness Criteria
Criteria Examples of Considerations
Size Minimum and maximum limits
Growth Relative importance of segments in future
Suitability Coherence with company’s strengths
Competition Open, disaggregated or concentrated
Penetrability Competitive market gaps
Profitability Entry costs, margin levels, return on investments
Protectability Special competence required, barriers to entry
other segments Synergy, cost interactions, image transfers
Risk Economic political technological weather supplier
Marketing research can be of substantial help with reference to all the various criteria. As to the size and growth criteria, it may be possible to obtain critical data from a variety of secondary sources, including such syndicated commercial services as the A C Nielsen Retail Index Services, National Purchase Diary Inc. (NPD), and selling Areas Marketing, Inc., (SAMI); various census and registration data; individual project reports; and a variety of computerized databanks.
In the question of suitability, the firm is concerned with its strengths relative to those of competitors and the needs of the market. Thus, the same segment can be more or less attractive for different firms depending on such factors as their research and development (R&D) capabilities; coverage of different channels of distribution; their image; advertising and personal selling skills; and their financial resources. Clearly marketing research is necessary to provide information on the company’s new product success versus that of leading competitors; percent of outlets stocking; the company’s and brand’s image; and the comparative ratings accorded the company’s advertising and selling efforts.
In dealing with the competitive criteria, the company needs to evaluate the strengths of individual competitors in the market and its ability to sustain competition against different firms. One way of doing so is to study market share trends by segment in an effort to determine how individual firms reacted and with what success to various actions (e.g. price reductions and introduction of new products) taken by competitors.
Some segments are more attractive than others because they are easier to penetrate. Segment penetrability depends heavily on the existence of competitive market gaps that the firm can exploit. Such gaps may include the low awareness or trial rates of existing brands, the dissatisfaction of customers with existing brands, lack of services or high process, or poor distribution. Marketing research is obviously needed to provide information on the above.
The relative profitability of different market segments is affected by number of elements (over and beyond size and growth) such as entry costs, intensity of competition, scale effects, and level and stability of margins. By highlighting buyer requirements and profiling the actions of competitors marketing research can make an important contribution.
Protect ability has to do with the firm’s ability to attain and defend a desired position in a given market segment. The more the segment requires special competencies not readily available to present and potential competitors, the easier it is to defend a position. Marketing research is needed to determine what competencies are most needed by each segment. Interaction with other segments (synergy) and risk measures derive from the information gathered in connection with the other criteria and hence depend heavily upon marketing research.