Elements of a Successful Business Plan:

Market Segmentation
Table of Contents

Introduction

Overview of Market Segmentation

B2B and B2C Markets

Process of Market Segmentation

Form Customers into Segments

Develop a Market-Product Grid

Select Target Market

Implement Go-to-Market Plan

Conclusion

About Lazarus Research Group

Introduction
In our series “Elements of a Successful Business Plan” we
are sharing ideas for business planning. Common ele-
ments included in a successful business plan are competi-
tive analysis, value proposition, pricing structure and mar-
ket segmentation. This paper, “Market Segmentation”,
focuses on how to develop market segmentation and how
it can help companies better understand their customers.
Market segmentation is an essential tool for recognizing
and responding to the needs of prospective customers.
Key topics to consider when determining if market seg-
mentation is right for your company include:
• Is my company able to segment more than one
product?
• Will my pricing strategy change based on seg-
mentation?
• Are there differences in my Business-to-Business
and Business-to-Consumer segments?
• Will segmentation affect my product
promotions?
• Will segmentation provide a competitive
advantage for my company?
1
Overview of Market Segmentation
Due to a large and demanding marketplace, it is often
difficult and expensive to be able to know what all
customers want and need. Customers have different
demands for the products they seek and because of this
they react differently to the marketing actions used by
marketers in regards to price, product, promotion and
distribution. This makes it challenging for marketers to
reach out and address the demands of all customers. In
order to eliminate this problem, segmentation divides
customers into groups based on their similarities.
Segmenting markets gives your company the opportu-
nity to reach different markets, establish target markets,
specifically address and respond better to customer
needs, develop a focused marketing plan, reduce
competition and increase sales and profit through
customer retention.
Benefits of Market Segmentation
Market segmentation can produce significant benefits
for your company. Some of the benefits that market
segmentation can generate are:
• Better understanding of customers
• Products designed to meet the needs of the
market
• Effective and cost-efficient marketing strategies
• Accurate positioning
• Competitive analysis
• Competitive position
• Focused marketing efforts
• Reduction of competition
• Establish a niche
• Become overall more efficient and effective
B2B and B2C Markets
To successfully utilize market segmentation, you must
acknowledge and understand the differences that exist
between business-to-business (B2B) and business-to-
consumer market segmentation (B2C). B2B involves a
company selling its products and/or services to another
company. Whereas, B2C involves a company selling its
products and/or services to a consumer.
There are key differences that exist between B2B and
B2C markets. Among them is the number of customers
each market serves. B2C markets tend to serve a larger
customer base whereas B2B markets tend to serve a
smaller customer base comprised of companies. B2B mar-
kets have longer buying processes which requires the
involvement and influence of multiple people when mak-
ing a purchasing decision for a company. B2C markets
tend to make their purchases based on their own per-
sonal decisions, sometimes influenced by family and/or
friends. B2B markets are more likely to result in a higher
cost of sales for their purchases than B2C. B2B markets
also are more favored to possess a higher level of lifetime
value to a company continuing their service. Figure 1
summarizes the key differences.
The main focus for B2B market segmentation is to deter-
mine groups of companies who share common needs and
have similar purchasing behaviors. Likewise, the main
focus for B2C market segmentation is to combine like-
minded people who are seeking similar benefits in a prod-
uct.
By understanding the differences that exist between B2B
and B2C markets, you will be able to effectively establish
your market segmentation. This will in turn, help to im-
prove your company’s competitive position by better serv-
ing the needs of your customers.
Figure 1 - Key Differences in B2B and B2C markets
B2B B2C
Who Businesses Individuals
Number of Small Large
Customers Served
Amount of Large Small
Influence
Purchasing Long Short
Process
Cost of Sale High Low
2
Process of Market Segmentation
Common to both the B2B and B2C markets is a market-
place composed of a heterogeneous population of pro-
spective customers. The process of market segmentation
involves breaking down the heterogeneous population of
customers and combining them into subgroups called
segments. These segments are by customers that share
similar criteria such as common needs, purchasing behav-
ior and desired benefits in products. Marketers are able to
focus their marketing actions specifically on these smaller,
homogeneous segments. The similarities of these seg-
ments enable customers to more easily relate and re-
spond to products and marketing action. Marketing ac-
tions can vary with modifications made to the price, pro-
motion, distribution and product.
Market segmentation creates links between marketers
and customers by understanding who they are and what
they want. By connecting and communicating customers’
common needs to specific marketing actions, marketers
are able to accurately respond to and meet customers
desires. By acknowledging this linkage, your company is
able to successfully reach out to different segments, an-
swer their needs and create effective marketing plans.
This knowledge and understanding of customers allows
your company to determine which product serves to best
accommodate their needs and gives your company a
competitive advantage.
The underlying objective of market segmentation is for
your company to fully know and understand your custom-
ers and ultimately retain their loyalty. Grouping them to-
gether according to their similarities, allows marketers the
opportunity to win over their purchasing decisions by us-
ing strategic marketing plans geared towards them. By
effectively segmenting markets, your company can focus
and utilize its marketing resources to reach out and meet
the demands of your customers.
Figure 2 - Process of Market Segmentation
Steps for Market
Segmentation
• Form prospective buyers
Determine into segments Implement
Similarities •Develop a market-product Marketing
Between grid Plan
Customer •Select target markets
•Take marketing actions to
reach target markets
When to Segment Markets
Market segmentation is considered when companies are
looking to increase their sales, profits, and/or return on
investment (ROI). Segmentation should be applied only if
there can be a positive ROI. Segmentation is also used by
companies seeking to organize and centralize their cus-
tomer base. Other reasons for considering market seg-
mentation may involve when considering opening a new
business, determining a marketing budget, designing a
new product, repositioning products or analyzing the
competition.
3
Methods of Segmentation
There are two methods that best describe how compa-
nies can enter products into the marketplace through
segmentation. The method, one product and multiple
segments focuses on the introduction of one product
into two or more segments. The second method, multi-
ple products and multiple segments involves the devel-
opment of different products which are all aimed and
introduced towards different segments.
The one product and multiple segments method places
one product into different segments by variations in
marketing actions such as promotions or distribution.
This method is beneficial because it eliminates the high
costs of researching, developing and producing addi-
tional versions of a product. An example of one product
and multiple segments would be Apple’s iPod which was
produced and targeted towards different demographic
segments including male and females, different age
levels and different income levels. The iPod was also
targeted towards different geographic segments where
the product had variations in price and features.
The multiple products and multiple segments method
requires higher costs due to a more extensive research
process, the creation and production of multiple prod-
ucts and the need to implement different marketing
actions to each of the segments. Although this method
involves higher costs, it can be beneficial if you are bet-
ter able to meet and serve the needs of your custom-
ers. This method must also add to your sales revenue
and profits and not reduce the quality or increase the
price of your product. An example of multiple products
and multiple segments would be HP’s different types of
computers including laptops, desktops and servers all
targeted towards different market segments including
students, homeowners and businesses.
Both methods of market segmentation involve different
costs, tools and applications to carry out. Commonly,
companies utilize both methods within their product
line. In order to maximize market segmentation, you
must select the method that best applies and serves to
benefit your company’s objectives and goals while at
the same time works to increase sales, profits and ROI.
Form Customers into Segments
After deciding what method to use for market segmen-
tation, the next step involves forming prospective cus-
tomers into segments. The central purpose of market
segmentation is to understand prospective customers in
order to win over their purchasing decision. In an effort
to better understand your customers, you must deter-
mine who they are and what they value. This will allow
your company to customize and direct your products
and services to meet the needs of your customers. Your
company will be able to place your customers into accu-
rate segments by meeting specific requirements, decid-
ing on an approach, defining segments by categories of
need and classification.
4
Requirements for Segmentation
There are specific requirements needed for your company
to create accurate market segmentation. These require-
ments include:
• Homogeneity within the segment
• Heterogeneity between segments
• Measurable and identifiable segments
• Accessible and actionable segments
• The segment is large enough to be profitable
Homogeneity within the segment ensures that customers
are grouped together according to similarities, common
needs and desired benefits. If executed correctly, this will
lead to customers responding in similar ways to market-
ing pertaining to price, product, promotion and distribu-
tion. This allows marketers to select a target market that
will best respond to a marketing plan focused on a prod-
uct or service.
Heterogeneity between segments enables marketers to
visibly see the differences that exist between segments.
Different segments respond differently to marketing ac-
tions. This knowledge provides marketers with the neces-
sary information for selecting the best target market to
focus the marketing plan. This also allows marketers to
focus other marketing actions towards different seg-
ments, concentrating on what each segment responds to
best.
Measurable and identifiable segments allow marketers to
obtain accurate results from their segments. These char-
acteristics must be evident in making decisions based on
segments in order to provide information regarding the
segments size and purchasing power.
Accessible and actionable segments ensure marketing
actions are concentrated on a specific segment and are
able to effectively reach the segment through a means of
communication.
A segment must be large enough to be profitable for seg-
mentation to be beneficial. If a segment is too small, it
may produce inaccurate results or result in a loss of
profit.
These specific requirements are essential in determining if
market segmentation is right for your company. These
requirements need to be met to enhance performance
and ensure accurate results.
Approaches for Segmentation
In order to begin organizing and developing your custom-
ers into segments, you must select an approach for which
to gather your customer information. There are two ap-
proaches to gather customer information in developing
your market segmentation strategy: a priori and post hoc.
A priori involves grouping customers into segments by
means of general, known information. This approach is
the most commonly used and does not require market
research in developing segments. Examples of segments
developed by the a priori approach would be segmenting
by national and regional customers, existing and new
customers or large and small customers.
The post hoc approach involves performing market re-
search in order to determine specific classifications for
segments. Research tools and techniques such as factor
and cluster analysis are used to generate and analyze
information in defining and placing specific customers into
segments. Examples of segments developed by the post
hoc approach would be segmenting by data and results of
a cluster analysis.
5
Categories of Need
In addition to selecting an approach for developing seg-
ments, your product must meet categories of need for
B2B and B2C markets. There are different needs for both
markets but addressing them is essential in the develop-
ment of your segments.
For B2B markets, the categories of need are based on
strategic, operational and functional needs. Strategic
need focuses on how well your product serves a prospec-
tive company’s mission and objectives. Operational need
looks at how your product affects the operating policies
and procedures of a company. Functional need shows
how your product meets a specific function within a com-
pany.
For B2C markets, the categories of need are based on
social esteem or pleasure and functional. Social esteem or
pleasure need looks at how your product fulfills an emo-
tional desire for customers. Functional need refers to the
ability of your product to meet a useful requirement for
customers. Refer to Figure 3 for the different categories
of need for B2B and B2C markets.
After understanding the different needs for each market,
you must determine what need your company hopes to
achieve with your product or service and decide which
segment will most likely experience that need with their
purchasing behavior.
Figure 3 - B2B and B2C Categories of Need
Figure 3 - B2B and B2C Categories of Need
Strategic
Social Esteem
B2
ets
or Pleasure
CM
a rk
ark
BM
Operational
ets
B2
Functional
Ways to Classify Segments
Figure 4 - B2B and B2C Classifications
After establishing the needs that your company will meet
for your customers, it is then necessary to classify your Business-to-Business Business-to-Consumer
customer segments according to their characteristics. Markets Markets
These characteristics represent the similarities among
customers that help to form your segments and will lead Firmographic Revenue, Demographic Age, Gender,
Number of Nationality,
to selecting your target markets. employees, Family Size,
Industry, Income,
The main variables for classifying segments are based on Status in Occupation,
geographic, demographic, psychographic and behavioral. Industry Education,
Religion,
Defining these variables are specific classifications repre- Socioeco-
senting the different characteristics of customers. For nomic Status
example, within demographics customers can be classi-
fied according to their age, gender or income level. Fig- Geographic City, State, Geographic Region,
ure 4 illustrates the classifications according to each vari- County, Country size,
Region, Climate,
able for B2B and B2C markets.
Metropolitan or Population
Rural Growth Rate
These classifications break-down customer attributes location,
making it easier to take a large customer base and form Population
density
them into smaller, more specific segments according to
their similarities. These classifications help your company
to organize your customers and clearly define your seg- Psychographic Attitudes Psychographic Personality,
toward your Values,
ments in order to decide where to best focus your mar- product, Attitude,
keting efforts. Willingness to Lifestyle,
pay Opinions

Behavioral Benefit sought, Behavioral Benefit

Brand loyalty, Sought,
Experience Product
with your Usage Rate,
products, Brand
Experience Loyalty,
with your Product End
company, Use,
Usage Readiness-to-
Patterns, Buy Stage,
Order Size Decision-
Making Unit,
Price
Sensitivity

6
Develop a Market-Product Grid

Once segments have been classified, a market-product
grid is developed to illustrate the different segments. A
market-product grid associates segments according to the
products, services or potential marketing actions. The
grid examines how different segments respond to these
different products, services or marketing actions. Infor-
mation generated from the grid provides an estimation of
potential market size and the necessary marketing actions
needed to reach the market. With this information, you
can accurately select a target market and strategically
focus your marketing plan accordingly. By organizing seg-
ments and determining the products and services that
best meet their needs, your company will establish a
competitive advantage and at the same time increase
revenues and profits.
The market-product grid contains products that your
company offers which are formed into categories relevant
to customers who purchase the products. Rows in the
grid indicate classifications of segments, while columns
represent products, services or marketing actions offered
by your company. Each cell in the grid illustrates the esti-
mated market size for a product, service or marketing
action.
The information generated from a market-product grid
gives marketers the ability to see firsthand how differ-
ent segments respond to different products, services or
marketing actions. Using this knowledge, marketers are
able to then select the target market that best responds
and focus their marketing efforts.
In Figure 5, Apple’s segmentation strategy is repre-
sented illustrating how Apple used the multiple products
and multiple segments method to segment its Macintosh
computers. Apple acknowledged that their different
products meet the needs of several different markets.
In order to accomplish this demand, Apple targeted the
Macintosh computers at specific market segments. Ap-
ple was able to recognize its opportunities and redirect
its marketing efforts because of the market-product
grid.

Figure 5 - Apple’s Segmentation Strategy

Apple’s Segmentation Strategy (as of 2006)

Market Products

Power Macintosh Powerbook

Sector Segment G5 G4
iMAC XServe G5

Consumer/
Home Household 9

Students 9
Kindergarten
- 12th grade
Faculty/ Administration 9 9 9
Education
Students 9 9 9
College and
University
Faculty/ Administration 9 9 9

Small Business Owners/ Employees 9 9 9

Commercial Manager/ Clerical 9 9 9

Large Business
Technical 9 9 9
Derived from Berkowitz, Kerin, Hartley, and Rudelius. Marketing. 4th ed. Boston: Irwin, 1994. 248.

7
Select a Target Market Implement Go-To-Market Plan

Your market-product grid sets the stage for selecting your
target market. Analyzing the information produced by the
grid can allow your company to identify which markets
respond best to your products. This information creates
the foundation for defining customers’ needs, behaviors,
trends, as well as introducing possible dangers such as
competitors. Selecting your target market is an important
part of market segmentation process. You need to accu-
rately and selectively choose the target market which will
respond best to your product and will allow you to
achieve your company’s objectives.
Other helpful criteria to consider when selecting a target
market is summarized in Figure 6.
Figure 6 - Criteria for Selecting a Target Market
The size of the Does your company want to focus its product or marketing
market action toward a small or large market?
Expected Is your company striving to attain a segment that will
growth greatly increase sales in the future or remain steady?
Where is the segments position in the marketplace in
Competitive relation to current competitors’ position and the expected
Position future competition?
How easily, accessible and receiving is the segment is to
Cost of reaching
the segment
the product, service or marketing action? Is the segment
more difficult or expensive to reach?
Compatibility How does the segment respond to the product or market-
with objectives ing action in carrying out the company’s objective and
and resources goals for profitability?
After your target market has been selected, the final step
in the market segmentation process involves developing a
go-to-market plan to successfully reach the target mar-
ket. The market-product grid has generated the informa-
tion regarding which segment responds best to your
product offering. Selecting this target market ensures an
accurate response to your go-to-market plan.
Through segmentation, your promotional efforts are tar-
geted to address and benefit the interests and desires of
your customers. Your go-to-market plan should be fo-
cused on specifically responding to your customers and
personalizing promotions to meet their needs. It is impor-
tant to realize that any valuable marketing plan will need
to be continuously adapted and modified in order to meet
changing consumer demands. Frequent research and ad-
justments are needed to guarantee success in reaching
your segment.
Directing your go-to-market plan towards a target market
enables better penetration of the market. Successful com-
pletion of the go-to-market plan focused on a target mar-
ket segment will turn prospective customers into valued
customers, winning over their purchasing decisions and
gaining their retention.

Using this criteria for reference, your company must se-

lect the target market for which your product meets their
needs. The target market will lay the foundation for your
marketing plan. It should best represent your goals, abili-
ties and strengths in order to successfully carry out your
marketing plan.

8
Conclusion About Lazarus Research Group

Common elements of a successful business plan include Lazarus Research Group are professional consultants
competitive analysis, value proposition, a pricing struc- who deliver customized market research and business
ture, and market segmentation. Our paper “Market Seg- development services.
mentation” provides companies with the knowledge of
making more efficient and effective use of their marketing Companies we have worked with include:
resources and tools. Market segmentation enables com-
panies to become more understanding and knowledge- • Compaq
able of their customers’ needs. Marketers are able to de- • HP
velop strategic marketing plans based on this information • Lucent Technologies
which is directly geared towards a target market. By un- • NCR
derstanding customers, your company can become more • Oracle
responsive and better adapt to changing customer needs. • Xerox

Lazarus Research Group can conduct the necessary

research to perform market segmentation for your com-
pany in determining your target market and successfully
implementing a focused go-to-market plan.

9
 Lazarus Research Group
707 Miamisburg-Centerville Rd, #228
Dayton, OH 45459

Phone: (937) 291-1851

Fax: (937) 291-1944

www.lazresearch.com

Copyright 2006 Lazarus Research Group