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A Modern Guide to Product Segmentation

Darren Gilbert
by Darren Gilbert on Nov 14, 2018 4:54:41 PM

Product Segmentation

If you're looking for ways to grow your market share, there are many options available to you. One, you could focus on strengthening your relationship with your customers. That shows you care about them. Two, you could provide shoppers with experiences they can’t find elsewhere. That ensures they’ll return. Or, you could spend your time and money on product segmentation.

While the first two strategies listed above will result in more shoppers entering your stores, it’s the third that will ensure they become customers. That’s because in retail, where differentiation and variety are critical components for retail longevity, investing in product segmentation will allow you to meet the product needs and wants of your various customers.

There is also the point that it allows you to get one up on your competition.

What is Product Segmentation

What is product segmentation?

As mentioned above, product segmentation goes a long way to helping you to differentiate yourself from your nearest rival. We’ll explain how shortly. But first, what is it exactly?

In a nutshell, product segmentation refers to the grouping of products that have similar characteristics or attributes and serve a similar market. Put even simpler; it’s an opportunity for you to identify and satisfy the needs of multiple customers who have similar but different requirements within a given market.

Here’s an example to illustrate that further.

Let’s say that you’re a retailer who specialises in paint, hardware and gardening, and so you range a variety of product categories catering specifically to anyone interested in completing DIY projects. A customer visits your store as they are currently remodelling their garden. As part of that job, they’re looking to install stepping stones and need a suitable mix.

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Within your Building Materials category, you might stock concrete mix, builder’s mix and plastering mix amongst other combinations. All of these products have a similar purpose, and so you’d usually segment them together.

In the case of the above customer, they might want to use a concrete mix because it contains stones and provides a stronger result. Meanwhile, another customer who is also looking to install stepping stones, but inside, could choose the builder’s mix as they want a smoother finish.

Regardless of which product each customer chooses, what you should notice is that instead of only meeting the product needs of one customer, you can offer the right product to two. That also means that if both customers think about undertaking a future DIY project, they’ll know you have the products they need.

Is Product Segmentation Worth It

Is product segmentation worth the time and effort?

As you will have read above, product segmentation allows you to cater to multiple customers with different product needs within one category simultaneously. That alone should be a satisfactory answer to the question around whether it’s worth your time and effort.

That said, there is more detail to uncover. In the context of this piece, the detail we’re referring to has to do with its goal and purpose. And there is a good reason for unpacking each. Understanding both allows you to recognise the real value.

First up, it's purpose.

Product Segmentation helps you to streamline your product offerings to a specific target market, which allows you to be more profitable. At the same time, by offering options to more people, you’re able to distribute the risk of selling high-cost products across different target markets.

With DotActiv Enterprise, you can create product assortments that drive profitability across all of your stores

Let’s return to the example of the Building Materials category.

Within the category, you won’t stock one type of concrete mix or builder’s mix because that will limit your ability to increase your sales. It will also show shoppers that you either don’t or won’t cater to their needs. Of course, you do need to be strategic in your approach. You can’t stock everything. Instead, you should look to range various options that meet the individual requirements of your different customers.

One example would be to stock a product that is cheaper (but still has the same or similar value) for your price sensitive customers. Or, stock a product that is fit for multiple purposes.

It’s worth understanding why your customers buy as well as their buying habits if you’re unsure of where to begin.

As for the goal, that should be plain to see: it is to sell a high number of products to more people at lower marginal production costs. More than that, by segmenting your products, it empowers you with the knowledge needed to make better business decisions.

That’s because as you monitor the sales for any grouping, you can evaluate the profitability of individual items within the product family to identify opportunities. These opportunities could include spotting gaps that you need to fill to increase your bottom line and knowing which products are poor performers so that you can discontinue them.

Product Segmentation Factors

What factors influence product segmentation (and where can it go wrong)?

By now, there shouldn't be any doubt about why it's worth investing in product segmentation. But that doesn’t mean that there aren’t any factors that can influence how you approach it.

Recognising and understanding these factors can go a long way to helping you to meet the needs of your various customers.

Factors that influence your approach

In this instance, there are generally two factors that will affect how you approach product segmentation. Both present themselves as questions.

Firstly, what is the product? Secondly, who is the target market?

Let’s again use the retailer example that we’ve used above - you specialise in paint, hardware and gardening. But this time, let’s focus on a different product that caters to DIY projects - wheelbarrows. Looking at such a product, answering the first question is straightforward.

For such a product, you’d look at its size; it’s colour; the materials used to make it and possibly the brand. Are your customers going to make cement in the wheelbarrow? Then it should be deep and wide and made of metal. If they are only going to use the wheelbarrow to transport items, it would be shallow and wide and could be made of plastic or wood. These features all determine classification, which will help you to analyse your market, which determines the product ranging decisions you’ll ultimately make.

As for the second question - who is the target market, it can play a role in determining what products you stock. If the majority of shoppers are not builders but rather landscapers, for example, the chances are good that you will sell more products that are fit for the specific needs of a horticulturist.

That doesn’t mean you shouldn’t stock wheelbarrows for those customers who plan on starting a building project at home. You need to consider the economies of scale here - it’s far easier (and more profitable) for you to stock five different types of one wheelbarrow, all with multiple uses than it is to stock one type as this spreads your risk.

When product segmentation goes wrong

Of course, that doesn’t mean you can’t make a mistake.

Fortunately, it’s easy to pinpoint why you’d fail. That’s because it’s usually down to one reason, which you could break into two halves. It happens if you don’t spend enough time studying your retail data and if you don’t understand your target market.

Let’s say, for example, that you sell consumer electronics and appliances. And your buyer for the Photography department for some reason decides they want to set you up as a Destination store for DSLR equipment. You would thus stock every known lens and accessory and camera on the market. However, what could likely end up happening is that it could damage the category in your business. You might even end up with dead stock.

That’s because, in reality, you would never be the store of choice for DSLR’s. You’d be better off treating your DSLR’s as an image-enhancing sub-category of your Camera category as most professional or amateur photographers would visit a specialist store. Also, a professional would have their connections and know where to go for the best equipment.

Alongside that is the failure to study and understand your target market. It happens when you assume that all of your customers are the same.

The result is that you offer one or two products that can meet most of the needs of the majority of your customers. It’s a scattergun approach to assortment planning and it’s a surefire approach to displeasing shoppers. Also, by failing to understand their product needs and wants, you could find yourself not only targeting the wrong audience but also pricing yourself out of the market.

Conclusion

If you want to get serious about offering the right product assortment to your target market, it’s time to consider investing in specialised assortment planning software. Besides helping you to select the right products, it will help you to place them correctly on the shelf to drive increased profitability. Visit our online store here for more information or click below for a free demo.

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