Market Segmentation and Price Elasticity of Demand

Market Segmentation and Strategic Advantages

Market segmentation is the process of dividing the market into consumer groups with common characteristics, differentiating them from other groups to apply specific marketing strategies and increase the effectiveness of actions.

Advantages of Market Segmentation

• Focuses on marketing effort.
• Further adaptation of the product to consumer needs.
• Allows for price discrimination.
• Greater communication with customers.
• Facilitates the distribution segment.
• Increased knowledge allows for tackling new markets.

The Price Elasticity of Demand Explained

The price elasticity of demand measures the direct influence of prices on demand. The demand for a good is elastic if the quantity demanded responds significantly to variations in price, and inelastic if the quantity demanded responds very slightly to a price change. If the elasticity is one in absolute terms, this means that a variation in price causes an identical percentage change in quantity demanded.

Classifying Demand by Elasticity

• Elastic Demand: Elasticity > 1
• Unitary Elastic Demand: Elasticity = 1
• Inelastic Demand: Elasticity < 1

Factors Determining Elasticity of Demand

Necessity vs. Luxury Goods

Necessary goods tend to have inelastic demand. Their demand varies little with price movements because people will keep buying that property because they need it. For example, bread is a necessary good and has a very inelastic demand. Although its price rises (within certain limits), the vast majority of families will continue to buy the same amount of bread. By contrast, demand for luxury goods is usually very elastic. As these are not necessary consumer goods, they can be dispensed with at any given time. This determines that their demand reacts strongly to price changes. For example, cruise ships: if the price rises considerably, many people give them up and seek alternative vacation options. In contrast, if the price falls, the demand will soar.

Availability of Substitute Goods

If there are close substitute goods, demand tends to be more elastic, as a price increase will lead consumers to buy many substitute goods. When there are no close substitutes, goods usually have more inelastic demand. For example, milk does not have a close replacement, resulting in an inelastic demand. Although the price rises, people will have no choice but to continue buying milk.