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How to Define and Segment the Target Market
The initial basis to start developing a customer loyalty strategy (CRM) is to have an adequate "Customer Creation" platform. That is, have the processes that allow you to identify potential customers and attract them.
In this article we are going to develop some concepts related to the identification of the potential market and especially the segmentation process of this market through the use of CRM-type systems and databases.
To illustrate this process, we have developed a concept called the “Principle of Sieve and Selection”.
Defining and Segmenting the Target Market: The Sieve Principle and Selection
A sieve works like a strainer. A sieve is simply a mesh of filaments that intersect, leaving square holes. It is important that these squares are all the same size, as this will determine the size of what will go through the hole, also known as the "mesh size".
Its function is select the items i want that pass through the "Luz de Malla". This allows me to leave out those elements that do not pass. I am only interested in those elements that can pass through the "Mesh Light" that I have selected.
I can use a system with sieves of different sizes of "Mesh Light", for the purpose of grouping material of different thickness and separating it.
The Market is all the material I have. The Sieve is the tool that I am going to use to select or filter only those elements that I want to obtain, the rest are of no use to me.
How to reach a Target Market, through the application of a system of "Sieves"
I can use several sieves to make increasingly finer filters, that is to say with smaller and smaller "Mesh Light".
This process allows me to reach a Target marketthrough the application of a system of "Sieves".
Corresponds to the selection of the Filter Criteria that make up my "Light Mesh". These criteria are related to what is known as “Descriptors”. Let's look at some examples of types of descriptors:
Demographic Descriptors (Ages, Gender, Income Level, Occupation, Educational Level, Ethnic Origin)
Geographic Descriptors (Geographical area of influence of potential clients)
Geo-Demographic Descriptors (Definition of demographic descriptors, applied to specific geographic areas)
Psychographic Descriptors (Social Class, Lifestyle, Personality)
Behavior Descriptors (How potential buyers behave in relation to the use and purchase of a certain product or service. What they do with the product or service. Some Examples: Needs of the Potential Buyer, expressed in terms of: Benefits that are to be achieved, Criteria of Choice, Possible uses of the product or service).
When we talk about a descriptor analysis for business markets, we can refer to elements such as:
Demography: Sector, Company Size, Geographical Location
Operating Variables: Applied technology, Frequency of use, Need for use
Purchase Approach: Purchasing Structure, Purchasing Process, Direct Repurchase, Modified Purchasing Habits, New Purchase
Situation Factors: Urgency, Specific application, Purchase sizes, Budgets assigned, Situations of competitive situation.
The Selection Principle
After defining the “Characteristics” of the Sieve Sieve system that we are going to use, you must continue with the process of using the Sieve, passing the material (the elements that make up the market) through this Sieve system.
a clear definition of the Sieve will allow obtaining the group of elements (Target market) that interest me or the use of a system of multiple sieves, will allow obtaining a series of groups of selected material (Segments) differentiated.
We may use marketing techniques to cover segments in which the company wishes to focus and develop specific and differentiated product or service offers.
For this, an identification of Homogeneous Segments with clear differentiation must be made, determining the size and potential of the segment.
The question that arises is How specific can these groups of potential customers be?
4 Types of groups of potential customers:
Normally 4 types of groups can be identified.
Individuals (One to One)
There are many methods in order to carry out a definition and evaluation of potential market segments.
Next we expose one called the Attractiveness Evaluation Mesh vs. Competitive Position of the Company.
This process is made up of 7 steps that we briefly describe below:
1. Definition of the Sieve or Sieve System to be used (we already described it previously)
2. Execute the Screening process to obtain the groups of desired material (Target Market or Potential Segments). In this step you must obtain the nNumber of potential clients according to the generation criteria of each segment. It is also important to calculate the estimated value of the business opportunities that can be presented in this segment.
3. Select the criteria to measure attractiveness and competitive position. In this phase, the Market Attractiveness Factors, that we can classify like this:
3.1. Customer Needs and Behavior
Are there unmet needs?
Are they recognized by potential buyers?
Is there clear evidence that the potential customer wants to use the product or service?
3.2. Current segment size and potential growth
Number of potential clients
Average value per transaction per customer
Number of customers who have not yet purchased the product or service
Projection of growth in the number of customers, transactions or transaction value
Estimated value of the business opportunities that can be presented in each segment
3.3. Macrotrends of Marketing or of each Segment
Are the macro trends presented in this segment favorable for the company? What is the position of the company with respect to these macro trends.
In the second part of this process we proceed to analyze the Competitive Position Factors. These are aimed at carrying out an analysis of how our organization is compared to close competitors in the market. The elements to be evaluated are:
Opportunities to create competitive advantages. Can we differentiate ourselves? Can we achieve outstanding performance in what we do? Is the life cycle stage of our product or service appropriate for the segment? Is it the right time?
Capabilities and resources of the company and competitors. It is important to make an analysis of factors such as: Financial Resources, Human Resources, Technical and Technological Resources, Recognition in the market, Knowledge and Service Capacity
Attractiveness of the Industry in which it competes. This factor is very important and should cover aspects such as the following: Threat of new entrants, Threat of substitutes, Buyer Power, Supplier Power, and Competitive Rivalry.
4. Weight the attractiveness of the segment and the factors of the competitive position of the company to reflect the relative importance of this segment
5. Rate the current position of each potential target market for each factor
6. Project the future position of each market based on expected environmental, customer and competitive trends
7. Evaluate implications of possible future changes for business strategies and resource needs
Technological Tools that can support a correct evaluation and selection of Target Segments
There are many tools that exist on the market to support segmentation processes. The use of databases is the fundamental premise to be able to make use of computer tools that support the process.
Thereforehaving a CRM-type information system can be a first step to build an information base that becomes the heart of the analysis of potential market and target segments.
Through the use of the functionality of CRM systems such as SalesLogix CRM or NetSuite, target groups or segments can be selected based on characteristics (descriptors) previously entered into the databases.
These types of systems are an excellent tool to do segmentation work through indicators such as LTV (Life Time Value) or customer value over time (future projection of the customer's purchasing power) or with models such as RFM (Recency, Frequency and Amount).
In case you want to apply more sophisticated models, it is necessary to use deeper statistical techniques and methods such as data mining (Data Mining). Some of the applicable tools in this field are: KXEN, CART and MARS from Salford Systems, MicroStrategy, SPSS PASW and SAS.
We have briefly developed some concepts related to the identification of our potential market and especially the segmentation process of that market through the use of CRM-type systems and databases.
the tools mentioneds in this note they are extremely professional, however it is not an excuse for a micro-enterprise not to be able to carry out, modest tools through, a definition of the target market and then a segmentation of it.