The market is the place where the product reaches its customers. It is therefore through purchases in the market that customers can express their needs from which we can identify the mandatory properties of the product that we use to define the functional unit.
Geographical Boundaries
The geographical boundaries of the market or the geographic segmentation of a market can be determined by differences in:
- natural geography (climate, landscape, transport distances, etc.);
- regulation or administration (competition and market transparency regulation, product legislative requirements, product standards, taxes, subsidies);
- consumer culture.
Geographical segments can be identified and documented by the lack of imports of the product beyond the geographical boundary.
Temporal Boundaries
The temporal segmentation of markets is common for service products (e.g., peak and off-peak hours in electricity consumption, peak hours in traffic and telecommunications, seasons in the tourism sector). For physical goods, markets are generally segmented temporally only when there is a lack of adequate supply or storage capacity, due to the nature of the product (e.g., food products), or due to immature or unstable markets (e.g., some recycled materials). This temporal segmentation should be distinguished from the fact that markets generally develop over time, governed by fashion and technology developments, and that both geographical and temporal segmentation as well as customer segmentation can therefore change over time.
Market Segments
Customer segments are generally defined in terms of requirements based on clearly distinct functions, i.e., based on the needs that products satisfy rather than on the physical products themselves. Therefore, each geographic market is typically divided into a series of customer segments. Very similar products can meet different needs and therefore serve different markets. And very different products can meet the same need (= have the same mandatory properties), thus competing in the same market. Differences in customer needs can be based on differences in buying situation, usage situation, customer scale, age, gender, education, status, "culture," attitudes, etc.
For practical relevance, customer segments must be of a size to provide adequate revenue to support a separate product line. In addition, the customer segment must be clearly distinct and with minimal overlap, so that all products intended for a segment are considered substitutable by customers of that segment. Finally, there should be a low likelihood that a product intended for another segment is substitutable, implying that product substitution from one segment to another can be neglected.
Niche Markets
Market segments can be further divided into market niches. A market niche is a smaller subcategory of a market segment, where some customers only consider niche products as interchangeable. A well-known example of a niche market is the organic food products market, but niche markets are found in all product categories. The difference between a segment and a niche is that while most customers in a segment will allow substitution between niche products, niche customers will not. Niche products target a narrower group of consumers within a segment, for whom specific product properties are mandatory.
Next lesson - In-depth analysis "Definition of alternative products"
