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Ask How To Segment Your Market

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By | May 26, 2012

Dear Toolkit,

How do I figure out who or what "my market" really is?

Semantically Challenged

Dear S.C.,

My, my...such a short question with such a potentially lengthy answer! Volumes, my dear, have been written on mankind's quest for clarity about market segmentation. One of those treatises is, in fact, included in our very own Small Business Guide.

That worthy tome says that, if the universe of all potential buyers is "the market," then it 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. Or, you might divide them up by family size and find that you sell most of your products to married couples with young children.

Then again, 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. Or 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, some companies will attempt to push on further and find out even more information about their customers' lifestyles, values, life stage, etc.

Before you begin your self-taught seminar in market segmentation, let's define some terms. Here's a truncated glossary of marketing jargon to get you started:

Demographics refers to age, sex, income, education, race, martial status, size of household, geographic location, size of city, and profession.

Psychographics refers to personality and emotionally based behavior linked to purchase choices; for example, whether customers are risk-takers or risk-avoiders, impulsive buyers, etc.

Lifestyle refers to the collective choice of hobbies, recreational pursuits, entertainment, vacations, and other non-work time pursuits

Belief and value systems include religious, political, nationalistic, and cultural beliefs and values.

Life stage refers to chronological benchmarking of people's lives at different ages (e.g., pre-teens, teenagers, empty-nesters, etc.)

How can you find out more about customers? Through market research, of course. Larger companies segment their markets by conducting extensive market research projects, consisting of several rounds of exploratory research. This research is complex and includes customer and product data-gathering, factor and cluster (niche) analysis, and a host of mind-boggling techniques you don't really want me to recite here, including all those psychographics, demographics, yadda, yadda, yadda.

What you want to know is what smaller businesses can do to segment their markets, right?

Well, a small business can do some research with secondary data sources by conducting interviews with key trade buyers, consumers, and end users of their product or service. This kind of qualitative research can be done at no cost at all.

A small business can also conduct their own factor and cluster analysis: by watching key competitors' marketing efforts and, if they look good, copying them; by talking to key buyers about new product introductions; by conducting a needs analysis with potential buyers about products yet to be developed.

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 the many trade association publications which you can find at your local library in Gale's "Encyclopedia of Associations."

And while you're in the library, ask the reference room librarian to point you toward the U.S. Census Bureau's gold mine of useful information, not to mention the host of other government publications, which are also available online.

Small firms can segment markets by geography, distribution, price, packaging, sizes, product life, and other tangible factors in addition to demographics and lifestyle and good old psychographic clustering. And they can engage in the sophisticated research techniques employed by big business, if they enjoy an unlimited budget.

But often the best way to learn about your market segment, in order to become better able to target that niche, is to simply talk to people: the people you serve, the people you'd like to serve, the people who serve you, and even the people you compete with.

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