Benefits & Limitation of Segmentation

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A business should only design an advertising campaign for separate market segments when it can identify unique groups of customers who have different priorities. If a farm sells a generic product, such as a potato, segmentation might not be very useful. Processing the potatoes into french fries and baked potatoes might allow the farm to use segmentation if customers have different dining preferences.

Cost

  • Segmentation can raise the costs of the business. The original competitive advantage of one auto manufacturer, according to the London Business School, was that a single model of car is cheaper to produce in large quantities than many custom car models. If the business wants to compete primarily on the cost of its product, segmentation may not be the right decision.

Dependence

  • Segmentation can make a business depend on a single group of customers. A luxury car manufacturer depends on wealthy buyers who are comfortable with spending more on a car than it costs to purchase a basic vehicle. If a poor economy convinces luxury car buyers to switch to cheaper vehicles, the luxury car company may have problems producing cheaper vehicles for less wealthy buyers.

Markup

  • Segmentation can increase the company's revenue by allowing it to collect a higher markup from customers who can afford higher prices. A hotel chain may segment its hotels into budget motels that cost $50 a night, and higher price luxury suites for business travelers that cost $250 a night. The hotel chain has to be careful with its marketing campaign, because a value product may damage the company's brand, according to the University of Delaware.

Media

  • Segmentation depends on the company's ability to use the media to reach customers in a desired segment, according to the University of Delaware. If a clothing store wants to create a segmentation strategy to target university students, it needs a selective method, such as purchasing ads in a college newspaper, that specifically attracts the university students, so it doesn't waste money advertising to residents who are not likely to purchase clothing designed for university students.

Fallback

  • Segmentation is often a strategy that a company tries after other marketing campaigns fail, according to Northwestern University. A segment, such as university students in a city, has less money available than all of the residents of the city can spend. The business focuses its advertising on a target segment because customers in other market segments are less profitable.

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