In general, customers are willing to pay a premium for a product that meets their needs more specifically than does a competing product. Thus marketers who successfully carry out market segmentation and adapt their products to the needs of one or more smaller segments stand to gain in terms of increased profit margins and reduced competitive pressures. There are several important reasons why market segmentation needs to be done carefully. Some of the reasons are outlined below.
Better matching of customer needs – Customer needs differ. Creating separate offers for each segment makes sense and provides customers with a better solution.
Enhanced profits for business – Customers have different disposable income. They are, therefore, different in how sensitive they are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits.
Better opportunities for growth – Market segmentation can build sales. For example, customers can be encouraged to “trade-up” after being introduced to a particular product with an introductory, lower-priced product
Retain more customers – Customer circumstances change, for example they grow older, form families, change jobs or get promoted, change their buying patterns. By marketing products that appeal to customers at different stages of their life (“life-cycle”), a business can retain customers who might otherwise switch to competing products and brands
(1) the key customers are missed and
(2) the cost of communicating to customers becomes too high / unprofitable. By segmenting markets, the target customer can be reached more often and at lower cost
Gain share of the market segment – Unless a business has a strong or leading share of a market, it is unlikely to be maximizing its profitability. Minor brands suffer from lack of scale economies in production and marketing, pressures from distributors and limited space on the shelves.