A Market Segmentation is Essential to the Success of a Retailer!

An accurate understanding of the market area where a new retail location will be based is key to the success of the venture. Traditionally retailers would collect a core set of demographic variables as criteria for understanding a particular market or site.  The key variables are: income, age, population, traffic counts and depending on the market area ethnicity.  Retailers set minimum thresholds for each variable in order to filter through potential opportunities. In fact, a number of retailers and developers still use this approach today to validate markets.

To better understand a more complete picture of a market area, i.e., who lives in a particular city or trade area, a market segmentation system brings a more robust understanding by combining a suite of variables together to categorize people into distinct groups.  People would generally be categorized under 10 main groupings, with Most Affluent being the first group and Least Affluent the 10^th group.  Within each group there would be sub-groups which could see the U.S. population broken down into some 70+ distinct classifications.  The power of the market segmentation  system is that it measures, quantifies and assigns people to a geographic point of reference on a map that describes not only how many people can be found in a group but more importantly the buying patterns or behaviors of people.  “Melting” a series of demographic variables together to create a classification allows retailers to more precisely measure a market’s size, and target specific potential customers.

The use and evolution of a market segmentation system is widely endorsed and used extensively across North America, most parts of Western Europe, and portions of Asia-Pacific (Australia, Japan).  In emerging markets of South America and Asia, countries have created a segmentation classification based on an Alpha system.  An “A” category reflects a high degree of affluence while an “E” category reflects a poor segment.  Retailers in North America have had to adapt to understanding their potential client base in emerging markets as the ability to segment a population in comparison to the U.S. or the U.K. is at the present time not comparable.

Use of a segmentation system is not limited to bricks and mortar retailers.  Consumer Goods companies rely heavily on understanding customer buying behaviors, and how much money people have to spend on goods and services.  With the advent of on-line shopping, internet based retailers use the same tools to sell their books, clothes and travel packages.

Segmenting a market based on a suite of variables is much more powerful than the traditional filtering or benchmark approach to analyzing a markets worth.

-George Anderson

Based in Toronto, Ontario, George Anderson is Vice President of Market Analytics for NAI Global, and works closely with retailers and financial institutions using geodemographic analyses to identify and evaluate markets for expansion around the globe.