Firms are developed for purposes of growth and profitability. Market segments are therefore established. Before establishing a market segment there are three main factors to consider in evaluating the same;
Segment Size and Growth.
Marketers will want to find out whether a potential segment has the right size and its growth characteristics. Large companies prefer segments with large sales volume and often avoid small segments. Small companies in turn avoid large segments because they require huge resources. Segment growth is a desirable characteristic since most companies want growing sales and profits.
Company Objectives and Resources.
A company needs to consider its own objectives and resources in relation to the segment. A segment can only be attractive if it in line with the company’s long run objectives.
Segment Structural Attractiveness.
A segment might have desirable size and growth but lack profit potential. Under this there are factors that determine the long run attractiveness of a market segment;
Threat of intense market rivalry.
A segment is unattractive if it already contains numerous strong and aggressive competitors. This condition will lead to frequent price wars, advertising battles and new product introductions hence making it expensive for the company to compete.
Threat of new entrants
A segment is unattractive if it is likely to attract new competitors who will bring in new capacity, substantial resources and a drive for market share.
Threat to substitute product.
A segment is unattractive when there are actual potential substitute for the product. Substitute products place a limit on the potential price and profit that a segment can add.
Threat of growing bargaining power of buyers.
Buyers will try to force prices down, demand more quality or service and set competitors against each other all at the expense of the sellers’ profitability.
Threat of growing bargaining power of suppliers.
A segment is unattractive if the company suppliers are able to raise prices at will or reduce quantity. The best defense for marketers is to build an excellent relation with suppliers or use multiple supply sources.