Market segmentation helps Product Mangers quantify and define the market opportunity when developing new products.
Market segmentation is one of the basics of Product Management but there are many Product Managers that blindly embark on the product development journey without completing this activity.
Before developing any new product, Product Managers should determine which market their new product is targetting and the size of that market. Without these 2 inputs, the business case is flaky. Of course once it has been determined that the market size can sufficiently support the new product, it’s also important to determine if that market has a need for your product and the presence of competitors in that market.
So how do we go about segmenting the market?
Market segmentation at its most basic level refers to the categorisation of a market with similar characteristics and behaviours. A market can be categorised by geography so that we only develop a product for a particular country, a state or a region within that country. Some companies such as AUSTAR (an Australian Subscription TV company) for example, create products that are suitable for citizens of a geographic region. In this case, AUSTAR services regional and rural Australia only. Quantifying the market based on geography is also simple using basic information from the Australian Bureau of Statistics.
Demographic segmentation is common. Gender, age, educational levels are some demographic inputs that can be used to segment your market. You may choose to use a combination of these inputs. For example, your product may be pitched at women aged 22 to 28 years of age in full time employment with an annual income of $50K or more per annum. Demographic segmentation is almost always used when strategising but it may not provide the detail that is required to create differentiation in your product.
Pyschographic segmentation sub-divides the market based on customer values, attitudes and lifestyle. To apply this type of market segmentation, you may decide to create a statement or use an image that best represents your customer. For example, you may say that your product is targetted at consumers that “are busy travellers demanding up to date news regardless of cost”. This can subsequently be qualified through research asking consumers if they agree or disagree with the statement.
Behavioural segmentation is based on consumer actions. For example, you may segment the market for an Internet product based on consumer Internet usage habits. Once you have determined that you want to target consumers that use the Internet in a particular way, you may choose to develop a specific product based on that habit. This method of segmentation is potentially the most useful to identify common customer needs and will ultimately lead to products that best address those needs .
Once you have determined your market segment using some of the methods above, you should describe which market you selected and explain the rational supporting why these segments should be pursued.