How to Segment a Market Based on Product Differentiation

Differentiated products can stand out from others based on price, quality, packaging or features.

Market segmentation is the science and art of breaking a large consumer market into smaller, strictly defined segments. Product differentiation involves adding characteristics to a product to make it stand out from other products in the same category. Marketers can define market segments based on the traits of differentiated products, or they can differentiate their products based on their target market's needs and preferences. Understanding how to define a market segment in terms of the differentiated products that will appeal to them is a must for niche entrepreneurs.

Instructions

1. Define how your products' differentiated features appeal to a specific demographic segment. Consider the full range of demographic traits, including age, gender, ethnicity and social status to define your segment as thoroughly as possible. "American children age 3 through 6," is an example of a demographic market definition.

2. Take any relevant geographic considerations into account. Geographic considerations do not often carry much weight when considering the appeal of differentiated products, but certain products are undeniably more appealing to consumers in different parts of the world. Consider a golf bag with a built-in mister, for example. This differentiated product would be much more popular with golfers in areas like Arizona and New Mexico than it would in areas like New Hampshire or Scotland.

3. Define how your products resonate with specific psychographic segments. Psychographic characteristics define the way in which consumers think about themselves, others and the world around them. Differentiation can strike a chord in psychographics more than other segmentation variables in some instances. Consider luxury goods, for example, which differentiate themselves based on product and service quality. Luxury goods appeal to a specific market segment that view themselves as "upper class," using purchase decisions to define themselves and display their wealth to others.

4. Understand the way in which your products activate behavioristic tendencies in consumers. Consumer behavioristics is the study of the way in which consumers act when presented with shopping decisions. Some consumers prefer to research purchase decisions on their own before entering a store, for example, while others are more susceptible to pressure from salespeople. Differentiated products can include a "wow factor" that takes advantage of a specific segment's tendency to buy on impulse, or others may include product features that require careful consideration before making a purchase. Both appeal to specific target markets.

5. Bring all of the various segmentation factors together to define a single market segment. Include demographic, geographic, behavioristic and psychographic traits in your definition to narrow the segment as much as possible.

   An example of a market segment using these variables could be, "Middle-income construction contractors who view themselves as savvy shoppers and search around for solid product warranties before buying tools." This market could be an ideal target for a new line of power tools featuring an innovative product-replacement program.

References

• NetMBA: Market Segmentation
• Center for Business Planning: Market Segmentation