Market Segmentation and Product Differentiation

In order for a business to be effective and have an edge against its competitors, it must have a clear idea of what customers to target and where, what the business will offer them and how it will sell the product. This marketing strategy consists of several exercises that must be done before a company can bring a product to market. Used hand-in-hand, market segmentation and product differentiation strategies -- key components of a marketing strategy -- offer a tremendous advantage to a business and can yield positive revenue results.

Market segmentation is a great source of competitive advantage, effectively zeroing in on a target market. Businesses group potential customers based on similarities that they share with respect to relevant dimensions, such as customer needs, channel preferences, product features or customer profitability. Market segmentation allows businesses to take a segment of consumers and group them based on similarities they all share with respect to the attributes that define a marketing strategy.

A business can use market segmentation to its advantage by knowing the basis to segment customers, such as targeting potential customers with the greatest profit potential. The potential customers that fit this demographic for a business become a market segment. A business can have more than one market segment for a product, and each market segment is part of the overall marketing strategy. These targeted segments can lead to significantly improved marketing effectiveness.

Product differentiation is the strategy of highlighting a product’s features and attributes so as to distinguish it from competitors and from other product offerings. There are many ways that a product can differentiate itself, such as innovation, marketing and distribution. The overall goal of a product differentiation strategy is to make a product more attractive to a particular target segment. Focusing on the inherit differences of a product should lead potential customers to consider it unique and therefore valuable. A business communicates these differences through its advertising, which is the selling proposition.

Focusing on product differences reduces direct competition. When companies categorize a product as different, competition may be based not on price, but on non-price factors such as design and functionality. Customers in a target segment have a lower sensitivity to these non-price factors, and, as a result, the product differentiation strategy becomes an effective tool for a business.