Market segmentation is the process of dividing a broad consumer market into sub-groups of consumers based on some type of shared characteristics.
The purpose of segmentation is to identify high yield segments so they can become target markets.
In the car wash industry, a common approach used to segment markets is to look for similar demographic profiles. The output of such profiles is a score of how closely the demographic profile for a specific area matches the ideal profile. This provides insight as to the viability of the market.
Companies have used any number of criteria to create demographic profiles for identifying target markets for their products and services. This includes, but is not limited to, population, income, age, gender, race, marital status, education, employment, home ownership, dwelling type, crime rates, and cost of living.
For example, income is important because it provides a measure of prosperity. The census provides several “incomes” to consider including average personal income ($63,214), median income ($44,225), and average household income per capita ($33,700). The latter is preferred because it allows for the comparison of standard of living and wealth of different populations.
Conversely, the cost of living (COL) is the cost of maintaining a certain standard of living. The COL index allows for a comparison of how much it costs to live in one place as opposed to another and indicates how far someone’s money will go in different areas.
Homeownership is also important. Generally speaking, homeowners tend to have higher incomes, are more likely to be families as opposed to individuals, and have higher school attainment. Moreover, families tend to have two cars.
Growth vectors for population and jobs can also be included to provide a measure of the market’s sustainability. Data to construct a profile can be obtained from census reports, consumer surveys (e.g., ICA), and online calculators (COL).
There are also commercial services that can provide an assessment of the overall livability of an area in the form of a grade. The grade takes into account several key factors of a location including quality of schools, crime rates, housing trends, employment statistics, and access to amenities.
Shown below, for illustrative purposes, is an example of a demographic profile for a conveyor car wash similar to the one I use.
Individual score is obtained by dividing the actual value by critical value (times 100). Overall score is obtained by averaging the sum of scores.
According to the guidance used to develop such models, we would apply the 80/20 principal to interpret the results. Here, a score of more than 80 would indicate a viable market.
If 80 or lower, we would then draw attention to the individual factors that are considered weak and determine if there are any practical ways to overcome the weakness.
Another benefit of demographic profiles is they can be used to help validate sales forecasting models. For example, we would not expect a weak demographic profile to be accompanied with a robustsales forecast or vise versa.