Evaluating Market Segment

To effectively evaluate different market segments, it is necessary to systematically review two issues: the market attractiveness of the competing segments and the organisation’s comparative ability to address the needs of that segment. There are several criteria that can be used to judge the attractiveness of a market segment.

When assessing market attractiveness, the features of a market will affect any evaluation.

Segment Size

A large segment will have greater sales potential. This will make it more attractive, but it may also offer the potential of gaining economies of scale because of the larger volumes involved. Large segments, with their potentially larger sales, can justify the higher investments that may be necessary for organisations wishing to operate within them. However, large segments may not always be the most attractive. Large segments can be more competitive as their very size will attract other companies into them. Smaller organisations may not have the resources to address a large market and therefore may find smaller segments more right for their attention.

Segment’s Rate of Growth (measured in terms of real revenue growth after inflation)

Segments that are growing are normally seen as being more attractive than segments where growth has peaked or even begun to decline. Segments in growth are having a longer-term potential and therefore justify any investment necessary. These segments are likely to be more competitive as other companies also recognise their potential.

Segment’s Profitability

What is the total profitability of the segment? If you are already working in this segment, it is not your organisation’s profitability alone that should be reviewed. In order that all segments are evaluated on a consistent basis, it is the profitability of all companies operating in the segment that should be calculated. This will have to be an estimate based on analysing competitors’ activities.

Customers’ Price Sensitivity

Segments where consumers have low price sensitivity are likely to be more attractive, as higher profit-margins can be gained. Consumers will be more concerned about quality and service rather than price alone. Price sensitive segments are more susceptible to price competition, which leads to lower margins.

Stage of Industry Life Cycle

Entering a segment that is in the initial stages of an industry’s life cycle offer the advantages of potentially high-growth in the future. In the initial stages, there are also likely to be less competitors. However, the initial stages of the industry life cycle are characterised by the need for high investment in new plant, promotional activities and securing distribution channels. This occurs at a time when there may only be modest sales revenue. There will be a drain on cash into the new area of business that the company must be able to fund. Businesses that are more interested in cash generation or profits in the short term may consider mature markets more favourable. These markets are likely to need a more modest level of investment.

Predictability

The potential value of a market will be easier to predict if it is less prone to disturbance and the possibility of discontinuities. In the long term, a predictable market is likely to be more practical.

Pattern of Demand

The attractiveness of a segment is affected by any seasonal or other cyclical demand patterns it faces. A significant percentage of sales in the gift and card market take place at Christmas in western countries. An organisation must be able to withstand the cashflow implications of this skewed demand. The same problem occurs in other industry sectors such as travel and tourism.

Potential for Substitution

In any market, there is the potential for novel solutions to be developed that will address consumers’ needs. An organisation should review markets to establish whether new innovations could be used in the segment. Where substitutions are likely, an organisation may decide not to enter on the basis that it makes the segment less attractive. If, however, the organisation can deliver that innovative approach, it may make the segment a prime target as the company has the skills to change the nature of competition to their advantage.

Strategic Alignment of Assets and Competencies (Targeting)

The critical stage in the segmentation process is matching the capability of the organisation to attractive market segment opportunities. At an operational level, managements analyse organisational assets and competencies to identify the skills and resources available to build low-cost or differentiated positions. Where these assets or competencies currently (or with development) could surpass the competition, they form the basis for creating a specific competitive position in a target market.

Company capability should always be judged compared to the competition. Overall, the organisation must establish whether entering a particular segment is consistent with its long-term aims and objectives. If not then no matter how tempting, entering the segment should be resisted. It will only divert company resources and management time away from the core goals of the enterprise.

Once the key areas of a company’s capabilities have been identified, they can be aligned with the attractive market segments already identified. An organisation should enter segments that allow it to exploit current assets and competencies or will allow potential capabilities to develop into strengths.