In this article we will discuss about market segmentation! Learn about:- 1. Meaning of Market Segmentation 2. Concept of Market Segmentation 3. Features 4. Application 5. Process 6. Levels 7. Approaches 10. Development 11. Formation 12. Parameters for Formation 13. Criteria 14. Targeting Market Segments 15. Segmentation of Industrial Market 16. Selection of Target Market Segment and Other Details. Also learn about: 1. Market Segmentation Examples 3. Importance Of Market Segmentation 4. Bases Of Market Segmentation 5. Market Segmentation Definition And Examples 6. Market Segmentation Process 7. Examples Of Market Segmentation Companies
Market Segmentation: Definition, Concept, Process, Levels, Development, Strategies & Benefits
- Meaning of Market Segmentation
- Concept of Market Segmentation
- Features of Market Segmentation
- Applying Market Segmentation
- The Market-Segmentation Process
- Levels of Segmentation
- Approaches to Market Segmentation
- Developing Market Segments
- Forming Market Segments- Methodological Approaches
- Parameters for Forming Market Segments
- Criteria for Market Segments
- Targeting Market Segments
- Segmentation of Industrial Market
- Selection of Target Market Segment
- Market Segmentation Strategies (Market Targeting Strategies)
- Segmentation Success Criteria
- Benefits of Market Segmentation
1. Meaning and Definition of Market Segmentation:
Market segmentation is the means by which a company seeks to gain a differential advantage over its competitors. A methodology is required to achieve market segmentation.
Markets usually fall into natural groups or segments which contain customers who exhibit broadly similar needs. These segments form separate markets in them and can often be of considerable size. Taken to its extreme, each individual consumer is a unique market segment, for all people differ in their requirements.
However, it is clearly uneconomical to make unique products for the needs of individuals, except in the most exceptional of circumstances. Consequently, products are made to appeal to groups of customers who share approximately the same needs.
The universally accepted criteria of what constitutes a viable market segment are as follows:
(i) Segments should be of an adequate size to provide the company with the desired ROI.
(ii) The members of each segment should share a high degree of similarity in their requirements, yet be distinct from the rest of the market.
(iii) The criteria for describing segments must be relevant to the purchase situation.
(iv) Segments must be reachable.
While these criteria may seem obvious, market segmentation is one of the most difficult marketing concepts to put into practice. Yet, without effective segmentation, the company is susceptible to the ‘me too’ condition, where it offers the potential customer much the same product as any other company, which is likely to be the lowest priced article. This can be ruinous to profits, unless the company happens to have lower costs, and hence higher margins, than its competitors.
There are basically three stages to market segmentation, all of which have to be completed if any progress is to be made. In the first stage, the company takes a detailed look at the way its market operates and identifies how customer decisions are made about competing products or services. Successful segmentation is based on a detailed understanding of decision-makers and their requirements.
The second stage is essentially a manifestation of the way customers actually behave in the market place and consists of answering the question, ‘Who is buying what?’ The third stage seeks to resolve the issue of ‘Why do they buy what they buy?’ and then to search for market segments based on this analysis of identified needs.
2. Concept of Market Segmentation:
Market segmentation describes the division of a market into homogeneous groups that will respond differently to promotions, communications, advertising and other marketing mix variables. A different marketing mix can target each group, or ‘segment’, because the segments are created to minimize inherent differences between respondents within each segment and maximize differences between each segment.
Market segmentation was first described in the 1950s, when product differentiation was the primary marketing strategy used. In the 1970s and 1980s, market segmentation began to take off as a means of expanding sales and obtaining competitive advantages. In the 1990s, target or direct marketers used many sophisticated techniques, including market segmentation, to reach potential buyers with the most customized offering possible.
Market segmentation is one of the prerequisites for planning marketing activities for any product. Segmenting, targeting and positioning (STP) are the three basic components of strategic marketing in the modern times. Segmentation of market is a process of identifying the agglomeration of buyers, their wants, purchasing power, geographical locations, their buying attitudes and behavior to facilitate the targeting and positioning of the products.
It is essential to identify the segmentation variables and developing profiles of the resulting segmentation for making decisions for marketing planning. Broadly, it can be stated that the market segments are the large groups within the market while a niche is a more narrowly defined group seeking for additional marketing benefits. There are many bases for segmenting the consumer markets.
The territorial segmentation is done in terms of region such as countries, continents or subcontinents and the habitat identification is made as villages, towns, cities and metros spread geographically according to the size of the population. In the demographic category of segmentation the density of population, composition of population, family size, occupational distribution, level of education and population categories in terms of religion and other sects are considered.
The psychographic variables of market segmentation consist of nationality of the consumers, their race like Black, White, Aryans, Dravidians, Buddhists, etc. The social class of the consumers, viz., forward, backward or aboriginal class, is also used as a variable of market segmentation.
Besides above variables, the value and lifestyle (VaLs) of the consumers and their personality also provide rich information for segmenting the consumer markets. In the behavioral variable category, apart from other variables, the personal preferences make substantial impact in identifying the consumer segments for the products.
The personal preference can be categorizes in the following three patterns:
i. Homogeneous preferences for the products or brands.
ii. Diffused preferences showing greater variations for the brands across the regions.
iii. Clustered preferences indicating localized preferences of the consumers for the brands available.
Conducting exploratory interviews and focus group analysis in order to gain the consumer insights on motivation, attitudes and behavior one can collect the information on the above listed variables for the market segmentation. The data may be collected through the structured questionnaire comprising broadly the issues related to consumer behavior, brand awareness and brand rating, product usage patterns, product-mix behavior, demographic and psychographic variables.
The factor analysis may be applied to the data collected to find out highly correlated variable and through the cluster analysis specified number of different segment can be identified. Each identified cluster then be profiled in terms of distinguished variables used in the analysis. The market segmentation procedure must be applied periodically as the consumer segments keep changing due to external influences and personal preferences.
The procedure for segmenting industrial markets is different than the consumer markets. However, the selected industrial market can be further segmented for the consumer goods.
The type of the industry, its size and location constitutes the physical variables required for segmenting the industrial markets. The type of existing technology in use, future prospects, production capabilities, the target group of customers for the products of the industry and the policy of transportation, warehousing and inventory may be the operational variables used in determining the industrial marketing segments.
Besides these, it is also essential for the market planner to know what is the purchase policy of the industry does any lobbying of suppliers exist, the extent of relationship retained between buyer and seller over a period of time and the criteria followed for purchasing the goods and services like quality, price, etc.
Instantaneously market segments may be identified if there prevails urgency in buying the goods and services, large volume of order of the listed products of request to cater specific tailor-made order, legal impositions of certain goods and services, newly emerged users or as a requirement of substitute of complementary product for the business or industry’s use.
Above all, the risk factors in penetrating into such market segment, brand loyalty among the users, etc., are also important variables to make sense in the decision-making for segmenting the market for industrial customers.
In a given operational area for the company, the market for the consumer goods and services can be segmented in five different forms as detailed under:
i. One product in one market – micro consumer segmentation;
ii. Different products in different markets – diffused segmentation;
iii. All products in one market – specialized market segmentation;
iv. One product in all the markets – product specialized market segmentation; and
v. All products in all markets – absolute market segmentation or total coverage.
The targeting and product positioning activities for effective planning and implementation of marketing plans should follow marketing segmentation. There are many good reasons for dividing a market into smaller segments.
The primary reasons are as under:
i. Performing easier marketing activities. It is easier to address the needs of smaller groups of customers, particularly if they have many characteristics in common (e.g., seek the same benefits, same age, gender, etc.).
ii. Finding marketing niches for products and services. Identify under-served or un-served markets. Using ‘niche marketing’, segmentation can allow a new company or new product to target less contested buyers and help a mature product seek new buyers.
iii. More efficient use of marketing resources by focusing on the best segments for offering – product, price, promotion, and place (distribution). Segmentation can help to avoid sending the wrong message or sending your message to the wrong people.
The market segmentation should be considered any time when there are significant, measurable differences in the selected market.
(1) Market consists of individuals and groups of people/institutions and corporate bodies — their needs, their resources, their buying habits, and their preferences differ.
Marketers recognise the importance of heterogeneous demand. Hence, they are keenly interested in sub-dividing or segmenting the market, i.e., each segment can be a group of people with similar or homogeneous demand and the enterprise can offer tailor-made marketing mix for each market segment or subdivision.
Market segmentation gives formal recognition to the fact that wants and desires of consumers are diverse and we can formulate a specific market offering to specific category or segment of the market so that supply will have best correlation with demand. Varied and complex buyer behaviour is the root cause of market segmentation.
(2) Market segmentation is a method for achieving maximum market response from limited marketing resources by recognising differences in the response characteristics of various parts of the market. In a sense, market segmentation is the strategy of ‘divide and conquer’, i.e., dividing markets in order to conquer them.
Marketing strategy is adjusted to inherent differences in buyer behaviour. For different groups of customers i.e., market segments, we have different sets of marketing strategies. Segmentation strategy is an answer to the question,
“To whom should we sell our products, and what should we sell them?” It is a strategic choice concerned with “doing the right things” as opposed to tactical choice, “doing things right”.
(3) Market segmentation enables the marketers to give better attention to the selection of customers and offer an appropriate marketing-mix for each chosen segment, or a group of buyers having homogeneous demand. Each sub-division or segment can be selected as a market target to be reached with a distinct marketing-mix.
(4) The identification of customer demand is the main premise of market segmentation. Through market segmentation sellers try to identify those who are most likely to buy their goods and services. This customer-orientation makes marketing segmentation an important pillar of the marketing concept and the modern marketing process. With the rising cost of production, distribution and promotion, precise market segmentation has assumed considerable importance in marketing management.
A marketer has to combine his knowledge of segmentation with positioning and marketing strategy concepts. The marketer has further to determine which subsets contain prospects and which of these are the most attractive to target. Once marketers have identified the best segments, they have a variety of ways to apply to market segmentation.
Companies can choose to market to all of the target segments, to some of the target segments, or to just one. No matter which market segmentation strategy they use, marketers follow up by selecting a unique position in every market segment they select.
A market segment consists of a large identifiable group within a market. A firm recognises that buyers differ in their wants, purchasing habits, buying attitudes, etc. For example, an Instant Shelter Company may identify six broad segments- Hotels, Open air restaurants, Clubs, Resorts, Temporary markets and Government agencies.
The consumers of a particular segment are assumed to be quite similar in their wants and needs. In the above example, some segments want big-sized instant shelters and others small-sized shelters. The firm can create high/low quality products and services as per the requirement of the various segments.
Segmenting helps in designing the marketing-mix as per the requirements of customers. Segmentation brings benefits not only to the firm but also to the customers. A manufacturer of DVD players wishes to identify his target market segments Suppose he has distribution and after-sales service facilities only in the eastern part of the country.
Further, he thinks that families in the high income group are most likely to be his customers.
Market segmentation is a conceptual/analytic process critical for developing/implementing effective market strategies. In a three-step market-segmentation process — segmentation, targeting, positioning (STP) — the firm first groups actual/potential customers in a market into various market segments.
The firm then chooses which segments to target for effort. Then, the firm must position offers in each target segment and develop market-segment strategy. When the market-segment strategy is set, the firm designs, then implements, a suitable market offer.
By executing the market segmentation process well, the firm:
i. Secures better insight into the market, customers, competitors, company, complementers — particularly, customer needs; planning assumptions are stronger.
ii. More effectively identify market opportunities.
iii. Develops a clearer focus on market strategy by targeting specific market segments.
iv. Identifies opportunities to customize offers for target segments.
v. Designs better offers — product, promotion, distribution, price.
vi. Secures superior differential advantage; greater customer satisfaction, loyalty.
vii. Uses resources more efficiently; earns higher profits.
The fundamental premise underlying market segmentation. In any broadly defined market, customer need profiles are heterogeneous (different). Customers have different needs/different priorities of needs. They seek different benefits/values based on these differing need profiles.
The segmentation task is to divide the market into several discrete groups of customers, each with relatively homogeneous (similar) need profiles. These customer need profiles differ segment by segment; an individual customer falls into one, but only one, segment.
Market segmentation is often a compromise. At one extreme, the firm develops one strategy, one positioning, one offer for the entire market — mass marketing. This one-size-fits-all approach is the most efficient, lowest-cost way to address a broad market. But customer need profiles are typically heterogeneous, so many customers would be unsatisfied. At the other extreme, the firm develops a unique/specialized offer for each customer.
Such customization ensures a good match between customer needs and firm offers. But firms rarely earn sufficient revenues to offset development/ implementation costs. Market segmentation operates between these extremes. The firm targets one or more segments, develops specific strategies, positionings, offers to satisfy needs of customers in those segments.
6. Levels of Segmentation:
There are different levels of segmentation are given below:
i. Segment Marketing:
Marketers divide the target market into different segments on the basis of homogeneous needs. Although it is evident that no two customers are alike, these customers are segmented on the basis of a broad similarity with regard to some attributes such as tastes, preferences, etc. The marketer then has to provide flexible solutions to the segment. Sometimes, marketers target more than one segment when it is not economically feasible to design products and services for individual segments.
However, the focus of segmenting the market will be on providing enhanced service to the customers by offering customized products that will satisfy the needs and wants of customers in that particular segment to a large extent. Segmentation is also sometimes identifying, capturing and retaining potential new markets. For example, ITC has entered in ready to wear market with wills life style. Tata entered in gold jewelry market with brand Tanishq, segment marketing is helpful in diversification of business.
ii. Individual Marketing:
Individual marketing is the high level of segmentation in which marketers focus on individual customers. In fact, almost all the business-to-business marketing is individual marketing. These days, most companies are approaching individuals through e-mails to promote their products and services. All big companies wants to know their customers, they want to build long term relationship with their customers. In service sector especially in banking, insurance, advertising individual marketing plays an important role.
iii. Niche Marketing:
Niche marketing can be defined as the marketer’s effort to position their product or service in smaller markets that have similar attributes and have been neglected by other marketers. These smaller market segments should also be profitable. The market segment when further divided into sub-segments to identify and cater to the unsatisfied needs of a small group is called a niche. Generally, a niche is a small segment of the market that has some specific unsatisfied needs. The fundamental difference between a segment and a niche is that a segment is usually a broader marketplace where many competitors operate.
iv. Local Marketing:
Most marketers who have a global presence tend to offer customized products to suit the local markets. Consumer wants and expectations highly depend on their environmental attributes including customs and culture. In a country like India where customs varies from one state to another it is vital to know about local market demand and to design their products as per their expectations. The prominence of local marketing has become so dominant that even if a product proves to be successful at the national or global level, it may fail utterly at the local level because of unmatched local tastes and preferences.
There are many ways to group customers in segmenting the market.
Broadly speaking, we have two main approaches to identify market segments:
(1) People-oriented market segmentation, and
(2) Product-oriented market segmentation.
1. People-Oriented Approach:
It is also called ‘customer personal characteristic approach’. We can classify the customers by many customer dimensions such as geographic location, demography, socio-economic characteristics, and psychographic characteristics. These are variables and they are independent of any product or service and the particular situation encountered by the buyer in making buying decisions.
We try to find out the type of customer who will buy our products. Example- The group consisting of landlords, rich farmers, owners of rice/dhal/groundnut mills, agricultural traders, merchants and educated rural youth are the target customers for two wheelers and entry level/mid-segment cars in rural market.
Geographic location is the usual and popular basis for market segmentation. Distinction between urban and rural markets is still of great importance in India. Now, we have further distinction between the behaviour of city families and that of suburban families. We know that urban population is better educated, with higher incomes and shows greater mobility.
Rural population has less education, lower income and it is not so mobile. Urban people are willing to buy new and novel things. Rural people are not innovators to that extent. Marketers are interested more in city and suburban population as we have highly concentrated population in metropolitan areas. The consumer needs and responses vary geographically and the market could be divided into entities such as State, District, Taluka, and Village.
Demography is the study of population. Demographical characteristics are sex, age, marital status, number and age of children, place of residence and mobility of a household. Socio-economic characteristics are income, education, occupation, family life-cycle, social class, religion and culture.
In the case of frequently bought consumer goods, e.g., tea, coffee, toothpaste, soap, detergents, etc., we use these demographic and socio-economic variables in segmenting the markets.
(a) Gender and Age:
Male-female buying behaviour shows remarkable differences. Roles of men and women are also considered while segmenting the markets. The recent interest with children, the teenage and youth market clearly demonstrates the importance of age as the variable characteristic in market segmentation. Pattern of expenditure also shows differences in different age groups. Examples- (a) Toys and chocolates are aimed at children and (b) Pepsi (soft drink) is targeting younger generation.
(b) Family Life-Cycle:
Family life-cycle is a complex variable and is defined in terms of age, marital status, age of housewife and present age of children. Buying behaviour changes with the stage of the family life-cycle. Investigations have proved that the family life-cycle exercises definite influence on consumer behaviour with reference to purchase of durable as well as non-durable goods.
Market for your products might be limited to one or a few of the various family life-cycles. Example- Dual income family would prefer labour-saving devices like washing machines, rice cookers, grinders and mixers, etc. They may also pamper children with costly garments, games, etc.
(c) Social Class:
Consumers may differ from one another, with regard to possession of scarce and valued things such as money, knowledge, or skills. The concept of social class is used to describe these differences. Social class is also a complex variable. It is based on income, occupation, education, and place of residence.
Social classes are relatively permanent homogeneous divisions in our society and each social class indicates similar life styles, values, interests and behaviours. Broadly speaking, we have at least three social classes — upper class, middle class, and lower class in every society.
(d) Religion, Race and Culture:
Religion, race and culture are also used as bases for segmentation. They can explain regularities and diversities in human behaviour. For example, there is a large population of vegetarians in our country and anchor has come out with vegetarian toothpaste for this segment of the population.
Food habits, religious practices, how we spend our money in day to day activities are influenced by caste and culture.
Demographic and socio-economic characteristics are important variables in segmentation. They are widely used to give a broad picture of market segmentation. They influence buyer behaviour indirectly. They have an impact on buyer behaviour and buyer decision only through psychological factors such as motives, attitudes, perceptions, preferences, etc. Hence, they are relatively weak predictors of buyer behaviour particularly in the highly complicated and sophisticated markets in developed countries since 1970. The behavioural sciences can throw additional insight on the causes of buyer behaviour and at present psychological variables are considered as important determinants of buyer behaviour along with demographic and socio-economic characteristics.
Personality is the individual’s consistent responses to his environment. Personality tests attempt to measure such characteristics as dominance, aggressiveness, objectivity, achievement, motivation, etc., which may influence buyer behaviour. Personality variables are closer to explain the reasons why people buy than demographic and socio-economic variables.
However, the predictive power of personality variables regarding buyer behaviour can be increased by considering them with life-style variables. Example- Lipstick users are young out-going beauty-conscious women.
(b) Life Styles:
Life-style concept is also considered as another important variable determining buyer behaviour. Life style reflects the overall manner in which persons live and spend time and money. It is behavioural concept enabling us to grasp and predict buyer behaviour. Life-style concept has interdisciplinary approach as it involves sociology, culture, psychology and demography.
Life-style concept as a basis for segmentation is quite reasonable and desirable. Life-style can be measured by the products the person consumes and by the person’s activities, interests, opinions, and values (AlOs). Despite the progress made in personality-based segmentation, life-style factors (AIO) are more important to marketers to know consumer state-of-mind to piece together the total market puzzle.
Life-style factors include fun and enjoyment, security, accomplishment, self-respect, etc. Life-style segmentation is used for selling cars, cosmetics, expensive watches, furniture etc. Examples: Reid and Taylor suiting for the elite class, Jewellery watches for status and snob value.
Psychographic research is now being used more frequently in market segmentation studies for four reasons:
(1) To find and explain markets and for target market identification,
(2) To understand consumer behaviour as markets are people, e.g., brand choice, company loyalty,
(3) To formulate marketing strategies for the firm, e.g., positioning new product, improving services, promotional strategies, new distribution methods, and
(4) To minimise risk of product failure by incorporating psychographics into your product testing and R & D programme.
There are two shortcomings the marketer must be aware of while using psychographics:
(1) Data collection and analysis can be problematic because survey instrument may have many questions, and
(2) Psychographic segmentation studies are very costly, demanding event 20 to 30 lakhs for a complete research package.
It is also called ‘customer response approach’. The customer response or buyer behaviour may be considered in relation to product benefits, product usage, store patronage, and brand loyalty. We are interested in the differences of buyer behaviour and we want to know why consumers buy a certain product. Buyer behaviour involves psychological factors such as buying motives, attitudes, perceptions and preferences. Example- Bullet motor cycle is considered as sturdy vehicle (product benefits) and creates a ‘Macho Image.’
Under the people-oriented approach, we are interested in finding out the probable type of the customer who will buy our products. The knowledge of personal characteristics of consumers points out who are our buyers, where do they live and how they think. However, we want to know also why consumers buy a product and their response or behaviour towards a product or a store selling the products or brands.
Hence, we must find out the bases of segmentation reflecting buyer behaviour. These may be: benefits expected, usage response, loyalty response — brand loyalty and store patronage. Let us describe these bases briefly.
(a) Use Pattern:
The use of the total consumption of a family unit for a given product may act as a basis of segmentation. A buyer may be classified as heavy, medium, light user or non-user. Marketer is usually interested in heavy users. If heavy users can be identified, the marketing effort can be concentrated on this segment of the market.
Usage information can be combined with other characteristics of heavy users such as age, income level, family life- cycle stage and education level in order to secure relationship between heavy users and promotional devices like media preferences. Example- Air Deccan came out with a very low air fare to attract non fliers like rail passengers.
(b) Benefits Pattern:
Benefits segmentation lays emphasis on wants and desires of consumers. Benefits sought by consumers are the basic reason for the very existence of the market segment. It is obvious that people buy a product primarily to secure expected benefits. Customer satisfaction directly depends upon product benefits, e.g., economy, performance, style, durability, status, product appearance, taste, flavour, etc.
First, consumers are grouped on the basis of benefits they expect and then, each segment may be analysed on the basis of demographic, socioeconomic characteristics to secure better understanding of each segment and then only we can have appropriate marketing-mix for each segment. Example- Babool toothpaste is for price-conscious consumers.
(c) Brand/Store Loyalty:
Brand loyalty means that a satisfied customer continues to use a brand even when competing products unavailable. In the case of store loyalty, the consumers buy from the same shop. The reasons may be courteous service, credit facilities, home-delivery against telephonic orders and availability of a variety of products in the shop.
Customer loyalty may be used as a basis for market segmentation. Loyalty segmentation enables marketer to tailor the promotional content and product appeal to retain the loyal customers, to attract new customers from rival brands or to convert non-loyal into loyal buyers. Example- In rural areas, shop loyalty is high since shop keeper extends credit to his customers.
The attitudes, perceptions, values, beliefs, intentions, and preferences are the constituents of predisposition, indicating the customer’s state of mind, predisposing the customer to behave in a particular way towards a product, brand, dealer, advertising media, and the company.
Segmentation studies based on buying motives, attitudes, perceptions, and preferences give much better results regarding buyer behaviour than those obtained from demographic, socioeconomic variables or determinants. However, the use of these psychological variables in market segmentation is not quite simple and straight-forward.
Psychological factors are not measurable attributes. Age, sex, usage, income can be measured objectively, but personality traits, life-styles, motives, attitudes, values, and beliefs have to be inferred as they are subjective phenomena and cannot be objectively measured.
Customers’ perception of various products and their preferences for various brands within a product line can offer reliable basis for market segmentation, but they are complex and multidimensional and require IT support. In a computerised economy, multi-dimensional approach to complex and dynamic buyer behaviour may have immense practical utility.
The firm can approach the market-segmentation process from two directions- customer needs first, candidate descriptor (segmentation) variables first. The firm can also use qualitative or quantitative approaches.
Customer Needs First:
The firm identifies differing customer need profiles, then uses these profiles to form groups. Customers within each group have relatively homogeneous (similar) need profiles, but the various groups have heterogeneous (different) need profiles. The second task is to select descriptor variables that identify these groups.
Candidate Descriptor (Segmentation) Variables First:
The firm uses candidate descriptor variables to construct customer groups. The second task requires searching for homogeneous (similar) need profiles within each group; heterogeneous (different) need profiles across groups. If the firm cannot find good need profiles — similarity within groups, differences across groups — it tries again with different descriptors.
Geography and demography are popular categories. Example- MTV frequently uses country/geography when tailoring customer offers- 38 separate nationally focused channels — MTV India, MTV Indonesia.
Forming groups using geographic/demographic variables is relatively easy, but the resulting groups may not be good market segments. Behavioral, socio-psychological variables are often more effective.
The main problem of starting with candidate descriptor variables is that customer groups may not have distinct need profiles — descriptor variables do not produce segments at all! The marketer must repeat the process with other descriptor variable(s).
Assigning customers to market segments formed from behavioral/socio-psychological variables may be difficult. Generally, segmentation approaches starting with customer needs are preferable.
Approaches fall into two main categories:
The segmentation task is highly judgmental, requiring significant conceptual skill. Raw material is creative insight, typically gained from marketing research, CRM systems.
ii. Quantitative (Data Crunching):
Large-scale market-segmentation studies use extensive customer survey data/sophisticated multivariate statistical techniques.
Cluster analysis approaches include the following steps:
i. Develop many statements (variables) about customer needs.
ii. Develop questions (variables) for identifying customers.
iii. Administer statements/questions to a random sample of current/potential customers.
iv. Analyze customer need responses by cluster analysis. Choose the number of clusters (segments) that form the best grouping of customer needs.
v. Examine each customer cluster (segment) for identifying characteristics.
The fundamental segmentation task is linking each segment s need profile to appropriate descriptor variables. If segmentation is done well, each segment has a well-defined need profile, and is easily described by descriptor variables.
10. Parameters for Forming Market Segments:
There are many ways of forming market segments. In order to form the market segment a company may choose to position its products in a small segment and experiencing the performance of the product in the selected segment may tend to expand its operations to larger market areas. This process of market segmentation is defined as mosaic modeling.
On the contrary a company may choose breaking the large markets into small ones or forming niche for convenience of the logistics, product positioning, services response and performance. The market niche conforms for positioning the products with unique sales proposition in order to capture a targeted consumer segment. Market segmentation is also necessary for pulling together consumers of similar behavior for meaningful business dimensions.
Market segmentation will also help in conducting effectively the promotion programs for the products and consumer goods by splitting the sales and marketing operations. It is necessary to identify the market to be segmented and the approach of segmentation for effective consumer response.
The following parameters need to be analyzed for forming consumer segments:
i. Response differences
ii. Accessible segments
iii. Actionable groups
iv. Cost-benefit implications
v. Stability of the segment over time
vi. Homogenous consumer groups
vii. Market information availability
viii. Perceptual mapping
ix. Cluster response
There are many factors that influence the decision-making in targeting the customers in selected market segments. The stage of the product in the life cycle, extent of preference diversities, competitive advantages and market attractiveness are the major factors that influence the market targeting decisions.
Besides, the industry structure, capabilities and resources of marketing organization and consumer behavior analysis are also used as tools for decision-making to determine the target markets. It is necessary to develop alternative decision models in business operations.
The contemporary development and market segmentations show the market driven strategic approach. In this process the segments are formed considering the value opportunities to serve the satisfaction of the consumers. The segments need to be selected considering the serving capabilities of the company in order to match the product and consumer segment.
The market driven strategy to form the market segment is required for effective positioning of products and services in geographic, demographic, psycho graphic, behavioral and organizational market environments. The segmentation capabilities of an organization may be determined by its strengths in the fields of logistics, distribution and services network.
Perceptual mapping is one of the important tools for segmenting the markets in reference to the products or brands that are perceived to be close together in the behavior of the consumers. Perceptual maps are derived from the customer data measuring the similarities of the product preferences and attributes thereof.
The market segmentation through perceptual mapping approach can be done adopting the following steps:
i. Select product market area to be segmented.
ii. Identify which brands compete in the market.
iii. Collect buyer’s perception about the current brands.
iv. Analyze data to cluster one or more composite attribute dimensions, independent of each other.
v. Map the attributes of consumers in reference to special and temporal data.
vi. Plot consumer’s preferences and locate sub groups, if any.
vii. Evaluate the mapping results.
viii. Interpret the results of market segmentation and product positioning.
The multidimensional scaling programs do not name the dimensions of perceptual maps. The additional information needs to be supported to find critical dimensions and locate them on maps. Generally, the dimensions for perceptual maps are obtained by asking the customers to rank their priorities and describe the benefits that are associated with products and brands.
Perceptual map dimensions have major significance in the preparations of marketing plans. Such segmentation exercise is useful to strengthen the product positioning strategies and identifying new market segments of small and large extents. It is important to add information on personal preferences while labeling the dimensions on the perceptual map.
Each customer or customer segment can be represented on the map by pointing the ideal product of individual customer. The ideal points indicate where there are adequate prospects for new products and such ideal points may be evolved from a preference data. The customers can be formed into groups by cluster analysis using information on the brands and individual preference points.
11. Criteria for Market Segments:
The market-segmentation-process task is to identify good segments — the firm can target one or more of these segments with a reasonable chance of success.
So far, we focused on two important segmentation criteria:
Customers in different segments have different need profiles. Accordingly, they should respond differently to market offers.
The firm can identify customers by using descriptor (segmentation) variables.
Good market segments satisfy four additional criteria:
The firm can reach the segment via communications/distribution channels, using appropriate/cost-effective approaches.
ii. Appropriate Size:
Generally, large firms prefer large segments to justify efforts/costs. Small firms prefer small segments; they avoid large/powerful competitors.
The firm can measure important characteristics — segment size, growth.
Customers stay in the segment for a reasonable time period. But marketers must be clear- Market segments are not real, correct/incorrect, unchanging. Customers do not have market-segment membership stamped on their foreheads! Market segments derive from appropriate data collection, analysis, creative insight. They help the firm direct resources to those parts of the market where success is likely.
The firm never has sufficient resources/capabilities to address all segments in a market; it must decide where to place efforts. Some segments receive greater effort/resources; some segments receive little or none. Effective targeting better addresses customer needs, minimizes competition. The firm should implement the Principle of Selectivity and Concentration.
Carefully choose targets for effort.
Concentrate resources on those targets.
Example- International document and package delivery firm DHL used successive approaches in targeting three customer need segments:
i. Ad hoc — small irregular shippers/occasional buyers.
ii. Regular — high-volume shippers not requiring supply-chain solutions.
iii. Advantage — shippers requiring a supply-chain solution.
The Advantage segment was attractive- Required DHL supply-chain solutions; offered high revenue/ profit potential; good partnership possibilities. DHL selected 10 industry segments where it could offer industry-specific knowledge, solutions. DHL focused effort on specific firms in those industries.
This approach helps the firm decide which market segments to target.
For each candidate segment, the firm must answer two questions:
i. How attractive is this segment?
ii. Does the firm have business strengths to win in this segment?
Using the market attractiveness/business strengths framework requires careful attention to two sets of criteria:
i. Market-Segment Attractiveness:
Factors that make market segments attractive differ from firm to firm. For an individual business, factors chosen should remain constant over the planning horizon, but may differ from business to business.
ii. Business Strengths:
What any competitor would need to be successful in the segment. Business strengths required to win differ from market segment to market segmentThe market-segment-attractiveness/business- strengths analysis is a useful tool to create a one-time snapshot. Both market segments and firm strengths evolve; hence, the firm should update periodically.
Industrial market can be segmented using many of the variables employed in consumer market segmentation. Demographic variables are the most important basis for market segmentation. They are followed by operating variables and personal characteristics.
The following factors should be borne in mind to segment industrial market:
1. Demographic Factors:
Demographic factors to be considered are-
(a) The type of industries to which goods are to be sold.
(b) The geographical location, area to be covered.
(c) Size of the Company — large, medium and small, based on sales volumes, market share, etc.
A tyre manufacturing company has broadly four categories of industrial buyers i.e., Car/ Aircraft/Heavy vehicle/Tractor manufacturers and the manufacturing plants may be located in different states.
2. Operating Factors:
Operating factors would include the following-
(a) User or non-user status i.e., Heavy users, medium and light users and non-users.
(b) Customers requirements-Whether to focus on customers who require a package of services or only a few services.
3. Purchase Policies:
Purchase policies do play an important role in segmenting business markets. Examples- a Company may follow highly centralised or decentralised purchase decisions. Under decentralised setup, each branch office, manufacturing plant would directly place orders and may even settle the bills. The marketer has to communicate with each office/manufacturing unit.
Some buyers are highly quality-conscious and will not compromise on quality. The marketer has to develop superior quality products to serve such customers. A marketer may have developed strong relationship with key executives in the purchase department and he may like to deal with such friendly buyers/companies.
4. Situational Factors:
The marketer has to consider the following-
(a) Whether to focus on large or small orders.
(b) To serve buyers who give advance orders or buyers who need quick supplies at short notice or both.
5. Personal Factors:
Personal factors to be considered are-
(a) Buyers who are risk-taking or risk avoiding.
(b) Buyers whose ethical values matches with that of the marketer or buyers who show loyalty towards suppliers based on past performance.
It is evident from the above discussions that industrial buyers do not focus on one variable but follow multi-attribute segmentation.
14. Selection of Target Market Segment:
A target market consists of a set of buyers who share common needs (and characteristics) that the firm decides to serve. Firms can target very broadly (i.e., undifferentiated marketing) and very narrowly (i.e., micromarketing) or somewhere in between (i.e., differentiated or concentrated marketing).
The concept of market segmentation identifies three strategic options of marketing, viz., concentrated marketing, differentiated marketing and undifferentiated marketing.
These are discussed below:
1. Concentrated Marketing or Niche Marketing:
It is concerned with “focusing all available resources on one segment with in the total market”. It is an attempt to match what the firm can do best with a market niche devoid of strong competitors, a strategy of differential advantage. It means one marketing mix, a rather narrow product line and some unique competence, which is the basis for the firm’s competitive advantage in a chosen segment.
Concentrated marketing takes a variety of forms, e.g., high fashion boutiques and design-oriented house-ware shops. Such marketing has been followed by Ford, Rolls Royce, Rolex watches, and glass manufacturing units. Johnson and Johnson’s strategy for infant market (e.g., baby talcum-powder etc.) is a good example of concentrated marketing.
The chief advantage of concentration is that an organisation can become a specialist in the needs of its chosen market segment. This enables it to save costs through large runs of a small number of products and it also tends to have a positive impact on advertising and distribution.
This type of marketing results in a quasi-monopoly position. Highly satisfied customers develop strong loyalties towards the firm and its product. This might ensure continued favour for the firm’s new product in the chosen market niche. But, its main problem is that “it is an all-the-eggs-in-one-basket” strategy.
As customer preferences evolve, there is risk of decreasing effectiveness without offsetting growth opportunities in other segments. Further, if a company concentrates on one market segment and neglects the other segments, it might prove counter productive if demand in the concentrated market falls. Again, if demand slackens suddenly, or if competition seriously begins to adversely affect the market share, such a company is likely to suffer more.
2. Differentiated Marketing:
It attempts to appeal to the entire market by designing different products and marketing programmes for different segments of the market. By so doing marketers hope to achieve additional sales and increased customer identification with brand or company name.
This type of marketing is followed by most medium and large sized firms doing business in many markets with a broad product line. For example, Hindustan Uniliver Ltd., manufactures and sells bathing soap under different brands, such as Lux, Lux-supreme, Lifebuoy, Rexona, Saral, Pears, Lyril, etc. Usha Fan Co. markets fans under three different names Usha Prima, Usha Delux and Usha Continental.
Such marketing usually involves some differentiation among products and brands as well as in pricing, promotion and distribution. Such marketing is often the characteristic of affluent markets, and consumers’ needs and wants are so precisely defined that new type of marketing (fragmented marketing) has developed. Under this situation, markets become more and more segmented and subdivided to such an extent that segments are no longer economically viable.
3. Undifferentiated Marketing:
It treats the entire market as its target by competing successfully using the same marketing mix. Such marketing is resorted to when it is found that there are some products which have a broad-based appeal and hence there is no need for their segmentation. It is also known as mass marketing.
Such marketing proves weak in every segment because there is specialised competition in each segment. Coca-Cola, Pepsi-Cola, Thumbs-up, Sprint, etc. are instances on the point.
Selecting a Strategy:
The choice of target marketing strategy would depend upon such factors as competitor’s strategies, company strength and weakness, the size of the market and of individual segments, and the availability of distribution channels and promotional media as required to implement the chosen strategy.
Kotrba gives five factors that help determine the selection of the strategy – Company resources, product homogeneity, product age, market homogeneity, and competition. All these need to be considered before making a decision.
A firm should identify the most potential and convenient segment of the total market and make effective use of the marketing-mix to achieve the marketing objectives.
Marketer has three strategic options:
(1) Undifferentiated marketing (Mass market strategy),
(2) Differentiated marketing, (Market segmentation strategy), and
(3) Concentrated marketing (Target Marketing).
1. Undifferentiated Marketing:
Marketer may not prefer the idea of market segmentation and differentiated marketing. In that case, we will have one marketing-mix for several market segments. The advantage is that there is potential savings on production and marketing costs. As the company would face more specialised competition in each segment, it would have a relatively weak position in all segments.
For many years Coca-Cola Company followed such a strategy — one brand, one product, one bottle, for one big market. But due to competition from rivals, who adopted differential marketing, even this big giant today has a broad line of products, multisized bottles and now follows differentiated marketing. It has, thus, found new selling appeals. Examples- Undifferentiated, mass marketing of namkeens, biscuits and local soft drinks.
2. Differentiated Marketing:
An organisation, under differentiated marketing strategy, enters many marketing segments but has a unique marketing-mix appropriate for each segment. It wants to do business successfully in several segments. Example- Hindustan Lever has one brand of bath soap for each market segment.
An automobile company, e.g., General Motors, offers a car for every ‘purpose, purse and personality’. Indian Railways offer second class, first class and AC class accommodation. Each of these classes is targeted at specific segment of the travellers. Such a marketing strategy offers higher sales, and higher customer satisfaction.
The firm can develop brand preference and repeat sales. However, differentiated marketing has one disadvantage viz., higher production and higher marketing costs. Hence, increasing market segmentation for the buyer’s favour can reach a point of diminishing returns, i.e., additional sales increase may be lower than additional cost increase.
3. Concentrated Marketing:
A firm may decide to concentrate all available resources on one chosen segment within the total market. It selects a market area where there is no strong competition and it can do best in that area. If it succeeds in matching its resources with customer demand, it may enjoy an element of monopoly in that area. The market niche is free from competition.
Strong loyalties are developed as customers are highly pleased with its products. Industrialists, rich businessmen, high profile corporate managers are target customers for expensive cars like BMW, Mercedes and Audi. A publishing house may concentrate only on textbooks, say, on business and economics. Rolex Watch Company concentrated only on quality and high-priced watches.
In concentrated markets we have only one marketing mix. The product line is limited. The firm has some unique competitive advantage. However, it is an ‘all-the-eggs-in-one-basket’ strategy. It demands innovation in order to ensure customer patronage continuously. Smaller firms can compete successfully against much bigger firms by entering the niche ignored by the bigger rivals. This is also known as “Niche Marketing.”
Multiple segmentation strategies i.e., targeting of two or more market segments, using a different marketing mix for each segment, can be used if there are measurable customer differences in preferences, the segments have accessibility and enough potential demand. Since a company can rarely cover an entire market, it aims at selecting a few market segments most suited for its products.
The conditions essential for successful market segmentation are:
(a) The segment or sub-division must be based on market characteristics which are measurable.
(b) The segment, which is identified, must be accessible, i.e., it should be within our reach through means of communication and distribution.
(c) The segment, which is already identified and which can be communicated, should respond to the marketing effort.
(d) The segment, after fulfilling the first three criteria, must be worthwhile while cultivating and exploiting it. Unless the size of the segment is large enough, the marketing effort cannot yield rich dividends.
Demographic and socio-economic characteristics are objective and measurable but personality, life-styles and psychological factors governing buyer behaviour such as motivation, perception and attitude are subjective and non-measurable attributes. Many subjective variables can only be inferred.
But in reality, these non-measurable factors alone can answer the question- Why buyers buy? To that extent we cannot precisely measure the size of our market segment. We can approximately identify members of the segment on the basis of some common characteristics or behaviour pattern. Obtaining data is not easy when the segment is defined in terms of benefit or behavioural characteristics.
Even if the segment is identified, it should be within our reach through suitable means of communication and distribution. In other words, organisation must be able to focus its marketing efforts on the chosen segment. Segments must be accessible in two senses. First, firms must be able to make them aware of products or services. Second, they must get these products to them through the distribution system at a reasonable cost.
(c) Market Responsiveness:
The identified segment must respond favourably to our marketing efforts. For example, a segment is determined on the basis of normal reaction of members to price change, i.e., rise in the price will reduce demand and vice versa. Accordingly our marketing-mix offers a lower price. But the members of the segment are not interested in price.
They are interested in quality and service and they are ready to pay higher price, if they can get better quality and service. Under such circumstances, they will not respond to our marketing effort. The relevant question is- What are the real buying motives and buying habits in the segment under analysis?
(d) Effective Demand:
The segment may respond favourably. But it must have sufficient buying power (willingness plus ability to pay). The marketing effort must be worthwhile. Hence, it must have sufficient demand prospects and it must be profitable enough. Number of buyers may be small but their buying power must be adequate.
Needs plus purchasing power create effective demand. A segment must possess effective demand. Marketers should develop segmentation strategies only for substantial segments. Ability to measure the intensity of need and the strength of purchasing power supporting the need can indicate potential of a segment.
The main advantage of market segmentation lies in a better understanding of the consumer needs and behaviour so that a marketer can plan accordingly. Market segmentation reflects reality in marketing situation. Consumers have different needs and preferences. Hence, in reality, market demand is heterogeneous and not homogeneous.
When differences in customer needs are analysed, the analysis may reveal that certain customer needs are not being met and the marketer can exploit such a marketing opportunity and fill these needs. This can yield profits and prospects for growth. Segmentation ensures higher customer satisfaction and improves effectiveness of the marketing programme. Segmentation strategy is a customer- oriented philosophy.
It offers the following specific benefits:
1. When customer needs are fully understood, marketers can effectively formulate and implement marketing programmes, which will be in tune with the demands of the market.
2. Marketers are in a better position to locate and compare marketing opportunities. Market can be defined more precisely in terms of customer needs.
3. Marketers can make finer adjustments in their products and marketing communications. They can use rifle approach instead of shotgun approach.
4. Competitive strengths and weaknesses can be assessed effectively and marketers can avoid fierce competition and use resources more profitably by catering to customer demand which is not being met by rivals.
5. Potential customers differ in size, rate of usage, needs and wants, ability to pay, willingness to pay, willingness to innovate and many other characteristics. They have different values and attitudes. They have varied preferences. Each heterogeneous market can be divided or partitioned into a set of smaller, more homogeneous segments or groups of customers to arrive at an appropriate marketing-mix.
6. Segmentation leads to a more effective utilisation of marketing resources because customer is the focus of marketing effort and only target markets are served. We can have precise marketing objectives. Marketing programme is tailored exactly in accordance with the needs of specific market segment, and product, price and promotion can have best coordination.
7. Market segmentation helps matching of market opportunities to corporate resources and enables the enterprise to give successful competition in the market. Products are tailored to the precise known needs of a segment.
8. Market segmentation enhances marketing efficiency by offering specific pricing, promotion and distribution as per differing response features of each segment. Thus, we have tailored marketing strategies (product, pricing, promotion, and distribution) to the unique needs of all segments. The segmentation enables the enterprise to follow differentiated marketing.
Benefits of Segmentation to Marketers:
a. Customer Satisfaction:
Market segmentation enables the marketer to customize its products and services as per the needs and wants of its target market; thereby serving its customers in a better way leading to increased chances of customer satisfaction.
b. Market segmentation enables the companies in maintaining good relationship with the customers.
c. Achieve Competitive Advantage:
Market Segmentation enables the marketer in understanding its competitors in a better way. Thorough study of market segments helps the marketer to understand the extent to which the customers are satisfied or not satisfied with its competitor’s products and services and thereby formulate its marketing strategies in order to gain competitive advantage in the markets.
d. Meeting Customers’ Needs:
Through segmentation study, the marketer can effectively position its brands in the marketer in order to meet the customer’s needs effectively after assessing the opportunities prevailing in the market.
e. Identify Potential New Buyers for the Product:
Through market segmentation, the marketer can identify the potential buyers for its product and persuade them to purchase the products through appropriate sales promotion and advertising campaigns.
f. Market segmentation helps in targeted communication about the product.
g. Market segmentation helps in retaining the existing customers and attracting new ones
h. Differentiating Two or More Brands of the Same Company:
Market segmentation strategies enables the bigger organizations to position their different brands appropriately so that they would not overlap each other and eat each other’s market share thereby reducing their market share.
i. Identify Gaps in the Market:
Through market segmentation, the marketer can identify the segments which are not properly served by other marketers and thereby open new opportunity for the marketer to offer appropriate products which can satisfy the requirements of the new markets thereby increasing company’s sales.
j. Better Targeting and Positioning of the Product:
Market segmentation enables the marketers to differentiate one customer group from the other; and thereby helps to decide on the market segment that the company wants to target.
k. Market segmentation helps to reduce cost/expenses on various marketing activities and thus increases market share of the company thereby resulting into higher profits.