Everything you need to know about market segmentation. Market segmentation represents an important recent advance in marketing thinking and strategy.
In earlier years many business firms saw the key to profits to be in the development of a single brand that was mass produced, mass distributed, and mass communicated.
This would lead to the lowest costs and prices and create the largest potential market. The firm would not recognize variations and would try to get everyone in the market to want what it produced.
Market segmentation, the most recent idea for guiding marketing strategy starts not with distinguishing product possibilities, but rather with distinguishing customer groups and needs.
Market segmentation is the subdividing of a market into distinct subsets of customers, where any subset may conceivably be selected as a market target to be reached with a distinct marketing mix.
1. Meaning of Market Segmentation 2. Definitions of Market Segmentation 3. Importance 4. Types 5. Steps 6. Levels 7. Approaches 8. Conditions
9. Factors Influencing 10. Strategic Options 11. Segment Viability 12. Requisites 13. Segmentation Methods and Practical Segmentation 14. Market Segmentation in India 15. Benefits and Limitations.
What is Market Segmentation: Meaning, Definitions, Importance, Types, Levels, Conditions, Benefits and Limitations
- Meaning of Market Segmentation
- Definitions of Market Segmentation
- Importance of Market Segmentation
- Types of Market Segmentation
- Steps in Market Segmentation
- Levels in Market Segmentation
- Approaches to Market Segmentation
- Conditions for Successful Market Segmentation
- Factors Influencing Market Segmentation
- Strategic Options for market Segmentation
- Segment Viability in Market Segmentation
- Requisites for Effective Market Segmentation
- Segmentation Methods and Practical Segmentation in Market Segmentation
- Market Segmentation in India
- Benefits and Limitations of Market Segmentation
What is Market Segmentation – Meaning
The economic theory of pure competition assumes that all buyers are alike and consumer behavior is unidimensional based on the concept of economic man model. The behavioral sciences, on the other hand, have developed multidimensional concept of buyer behavior and indicated that all buyers are different. Marketers recognize 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. A marketing segment is a meaningful buyer group having similar wants. Segmentation is a customer-oriented marketing strategy.
The term segmentation was first coined by Wendell Smith in 1956. His idea was simple enough — split up your customers and treat them differently; you will then be able to present customers with product and services more relevant to their needs. Market segmentation has been defined by Stanton as the process of taking the total heterogeneous market for a product and dividing it into several submarkets or segments, each of which tends to be homogeneous in all significant aspects.
According to Kotler, market segmentation is the subdividing of market into homogeneous subsections of customers, where any subsection may conceivably be selected as a target market to be reached with a distinct marketing mix.
Economic theory of perfect competition is based on the assumption that all buyers are alike and consumer behaviour is one-dimensional, based on the concept of economic man model. On the other hand, behavioural sciences have developed multidimensional concept of buyer behaviour and points out that all buyers are different.
Marketers recognize the importance of heterogeneous demand and hence market segmentation. Instead of trying to compete in an entire market, each company must identify the parts of the market that it can serve best. Sellers have not always practiced this philosophy. Their thinking has passed through three stages.
What is Market Segmentation – Definitions Provided by Scholars: Fredrick Webster, Stanton, W.J. Opines, Philip Kotler, Gary Armstrong and Engel et al
Many scholars have put their views about the segmentation, among them are:
“Market segmentation is a method for achieving maximum response from limited marketing resources by recognising differences in the response characteristics of various parts of the market. It is a strategy of ‘divide and conquer’ that adjusts marketing strategy to inherent differences in buyer behaviour”.
It means that the market for a particular product can be widened with the utilization of limited resources. It is the technique of dividing the whole market into small areas to concentrate and trade on economy. The customer’s response indicates the clues of preferences. Each of the preference is recognised and maximum effort is made to derive full benefits from a particular preference. Therefore, the customers are divided according to their needs and products are supplied to them. Smaller the size, greater will be the control and maximum utilization of the resources.
Stanton. W.J. Opines:
“Market segmentation consists of taking the total heterogeneous market for a product and dividing it into several sub-markets or segments each of which tends to be homogeneous in all significant aspects.”
The views expressed here are that:
i. The total customers group of a product consists of heterogeneous characteristics .i.e., customers have different needs, desires, preferences.
ii. The differences in the customers are identified and all having same characters are made as a segment. Then, that segment of customers becomes homogeneous. There will be many segments for a product and each segment is homogeneous.
iii. The marketing strategies can be devised to keep each of the segments satisfied.
iv. The segment can be fully within the control of marketer.
Philip Kotler and Gary Armstrong have put it as – “The process of classifying customers into groups with different needs, characteristics or behaviour is called market segmentation. A market segment consists of customers who respond in a similar way to a given set of marketing stimuli”.
These scholars say that market segmentation is dividing the whole market for a product into different segments. Such a division may be based on homogeneous characters of customers. Each of the segments can be handled in the way the customers respond. They are supplied with that variety with which they have preference. Therefore, the stimuli for a segment are same. It helps to derive maximum benefit from every segment by avoiding unnecessary spending on such stimuli which are not working in a particular segment. Each segment has homogeneous characteristics.
According to Engel et al, (1972) the concept of segmentation is based upon three propositions:
i. That consumers are different;
ii. That differences in consumers are related to differences in market demand;
iii. That segments of consumers can be isolated within the overall markets;
Therefore, segmentation is based on the basic assumption that a products market consists of different group of customers. Those groups can be separately identified and customers and segments can be made. It helps to develop different marketing programmes for each segment.
Thus, market segmentation is a process of dividing the total market for a product or services into several smaller but internally homogeneous groups. The essence of segmentation is that the members of each group are similar with respect to the factors that influence demand. Success of marketing lies in the ability to handle each segment effectively.
What is Market Segmentation – Importance: Allocation of Marketing Budget, Better Utilisation of Marketing Resources, Fighting Competition Effectively and a Few Others
The key importance of market segmentation can be explained in following ways:
1. Allocation of Marketing Budget:
With the help of market segmentation, it becomes easier for firms to decide upon and adjust the marketing budget according to a particular location or region. Places where sales opportunities are more can be allocated a large part of budget than those where such opportunities are limited.
2. Understanding and Meeting the Needs of Consumers:
With the help of market segmentation, it becomes easier for the marketer to fully understand the needs, behaviour, habits, tastes and expectations of the consumers of different segments so that precise and clear decisions can be taken to harness marketing opportunities.
It is possible to satisfy a variety of customer needs with a limited product range by using different forms, bundles, incentives and promotional activities. For instance, the computer manufacturer Dell, does not organise its website by product groups (desktops, books, servers, printers, etc.), but by customer groups (privates, small businesses, large businesses, public/state organisations).
3. Better Utilisation of Marketing Resources:
Business organisations have to allocate their resources wisely and efficiently. Market segmentation helps the firm to identify the segments where selling possibilities are more and consequently they can allocate more resources to such segments and vice versa.
4. Adjustment of Product and Marketing Appeals:
Market segmentation creates an opportunity to understand the nature of the market. The seller can adjust his thrust to attract the maximum number of customers by various publicity media and appeals.
5. Better Position to Spot Marketing Opportunities:
A fair estimate can be made by the producer about the volume of his sale and the possibilities of furthering his sales. In the region where response of the customers is poor, the strategy of approach can be readjusted as per the push the sales on the basis of marketing research.
6. Fighting Competition Effectively:
The segmentation helps the producers to face the competition of competitors effectively by making a deep study of the products, policies and strategies of competitors in all the segments. This helps in adopting different policies, programmes and strategies for different markets based on rivals’ strategies, policies and programmes.
7. Higher Market Shares:
In contrast to an undifferentiated marketing strategy, segmentation supports the development of niche strategies. Thus, marketing activities can be targeted at highly attractive market segments in the beginning.
Market leadership in selected segments improves the competitive position of the whole organisation in its relationship with suppliers, channel partners and customers. It strengthens the brand and ensures profitability. On that basis, organisations have better chances to increase their market shares in the overall market.
8. Minimising Aggregation Risk:
Segmentation reduces the risk of aggregation, by dividing the market and designing specific marketing mix to each segment, which is defined as the risk of not being able to satisfy customer needs with one marketing mix to all segments. For instance, in case of highly mobile customers, who may not notice ads carefully, the use of personal selling is better marketing tool.
9. Targeted Marketing:
By segmenting markets, organisations can create their own niche products and thus attract additional customer groups. Targeted marketing plans for particular segments allow to individually approach customer groups that otherwise would look out for specialised niche players.
10. Benefits to the Consumers:
As the company produces and supplies products that serve customer’s interest and satisfy their needs and wants, so we can say that the segmentation benefits the customer. Moreover when segmentation attains higher levels of sophistication and perfection, customers and companies can conveniently settle down with each other, as at such stage, they can safely rely on each other’s discrimination.
11. Filling Gaps:
Segmentation helps to find out the unfilled gaps in a market, which can then be satisfied through unique product or promotional offerings.
12. Stimulating Innovation:
It is important to have a communication in a segment-specific way even if product features and brand identity are identical in all market segments. Such a targeted communications allows stressing those criteria that are most relevant for each particular segment (e.g. price versus reliability versus prestige).
What is Market Segmentation – 8 Main Types: Territorial Segmentation, Demographic Segmentation, Socio-Psychological Segmentation and a Few Others
Type # 1. Territorial or Geographic Segmentation:
India can be divided into two distinct regions: rural markets and urban markets. Similarly, Indian market can be divided state-wise and each state may represent a segment. This type of segmentation is very commonly used in allocating the territories to the salesmen.
Type # 2. Demographic Segmentation:
Customers are classified in homogeneous groups under demographic similarities like age, sex, educational level, income, etc. It is believed that persons in the same age groups can be approached by the same type of appeal and publicity media. Income level grouping may be useful as regards ability of the persons to purchase the offered product. Grouping on the sex basis also plays an important part in such segmentation.
Type # 3. Socio-Psychological Segmentation:
Different social classes have different spending behaviour patterns. Social classes have different aggressiveness, submissiveness, degrees of cautiousness and risk taking abilities. These differences determine this type of segmentation.
Type # 4. Need-Oriented Segmentation:
This type of segmentation is done on the basis of needs or benefits a group seeks from the goods.
Type # 5. Volume Segmentation:
It involves segmenting of marketing judging the event, of use such as heavy, medium, light users and those who do not use the product at all. Volume segmentation may further be segmented on the demographic basis.
Type # 6. Qualitative Segmentation:
In this type, emphasis is placed on repeat purchases by the buyers. This is just the extension of the volume segmentation. However, socio-economic characteristics cannot be correlated with heavy or light consumption.
Type # 7. Product Segmentation:
It is directed towards differences among the product that comprise markets. Product segmentation is a less rational approach than market segmentation unless there are great differences among the products involved. Differentiated marketing helps the organization to market products to satisfy market demands and it is more proper to satisfy its customers’ needs.
Type # 8. Lifestyle Segmentation:
It emphasizes segmentation on the basis of the distinctive mode of living, the segments involving questions regarding how they spend their time, the nature of their interests and the basic characteristics like stages in the life-cycle, income, education, etc.
What is Market Segmentation – Steps in Segmenting a Market
The market segmentation is done, in both consumer and business markets, so as to identify marketing opportunities. From the following steps in segmenting a market, it could be noted that steps 5 and 6 are actually marketing activities that follow market segmentation.
1. Select a Market or Product Category for Study:
Define the entire market or product category to be studied. It may be a market in which the firm already competes, a new but related market or product category, or a totally new one. For e.g., Kellogg’s closely examined the snack market before introducing flavoured cornflakes and cornflakes which reduces two kgs. weight just in two weeks.
2. Choose a Basis or Bases for Segmenting the Market:
This step requires managerial insight, creativity, and market knowledge. There are no scientific procedures for selecting segmentation variables. However, a successful segmentation scheme must produce segments that meet the four basic criteria for segmentation.
3. Select Segmentation Descriptors:
After choosing one or more bases, the marketer must select the segmentation descriptors. Descriptors would identify the specific segmentation variables which are required to be used. For example, if a company selects demographics as a basis of segmentation, it may use age, occupation and income as description.
A company that selects usage segmentation needs to decide whether to go after heavy users, nonusers, or light users or if a company wants to go geographically, it may use region, cities, state or climate.
4. Profile and Analyze Segments:
The profile should include the segment size, expected growth, purchase frequency, current brand usage, brand loyalty, long-term sales and profit potential. This information can then be used to rank potential market segments by profit opportunity, risk consistency with organizational mission and objectives, and other factors important to the firm.
5. Select Target Markets:
Selecting a target market is not a part of the segmentation process but, it is the natural outcome. It is a major decision that influences and often directly determines the firm’s marketing mix.
6. Design, Implement, and Maintain Appropriate Marketing Mixes:
The marketing mix has been described as product distribution, promotion, and pricing strategies that tend to bring about mutually satisfying exchange relationships with target markets.
What is Market Segmentation – Levels: Mass Marketing, Segment Marketing, Niche Marketing, Micro Marketing and Local Marketing
Each buyer is potentially a separate market. Ideally, then, a seller might design a separate marketing program for each buyer. However, although some companies attempt to serve buyers individually, many others face larger numbers of smaller buyers and do to find complete segmentation worthwhile.
Instead, they look for broader classes of buyers who differ in their product needs or buying responses. Thus, market segmentation can be carried out at many different levels.
In fact, for most of the twentieth century, major consumer products companies held fast to mass marketing—mass producing, mass distributing, and mass promoting about the same product in about the same way to all consumers. Henry Ford epitomised this marketing strategy when he offered the Model T Ford to all buyers; they could have the car “in any colour as long as it in black.”
Similarly, Coca-Cola at one time produced only one drink for the whole market, helping it would appeal to everyone. The traditional argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can translate into either lower prices or higher margins.
However, many factors now make mass marketing more difficult. No wonder some have claimed that mass marketing is dying. Not surprisingly, many companies are retreating from mass marketing and turning to segmented marketing.
The company tries to isolate broad segments that make up a market and adapts its offers to more closely match the needs of one or more segments. Thus, General Motors has designed specific models for different income and age groups. In fact, it sells models for segments with varied combinations of age and income.
For instance, GM designed its Buick Park Avenue for older, higher-income consumers. Segment marketing offers several benefits over mass marketing. The company can market more efficiently, targeting its products or services, channels, and communications programs toward only consumers that it can serve best.
The company can also market more effectively by fine-tuning its products, prices, and programs to the needs of carefully defined segments. The company may face fewer competitors if fewer competitors are focusing on this market segment.
Niche marketing (or niching) focuses on subgroups within these segments. A niche is a more narrowly defined group, usually identified by dividing a segment into sub segments or by defining a group with a distinctive set of traits who may seek a special combination of benefits.
For example, the utility vehicles segment might include light-duty pickup trucks and sport utility vehicles (SUVs). And the sport utility vehicles sub segment might be further divided into standard SUV (as served by Ford and Chevrolet) and luxury SUV (as served by Lexus) niches.
Whereas segments are fairly large and normally attract several competitors, niches are smaller and normally attract only one or a few competitors.
Niche marketers presumably understand their niches needs so well that their customers willingly pay a price premium. Niching offers smaller companies an opportunity to compete by focusing their limited resources on serving niches that may be unimportant to or overlooked by larger competitors. In many markets today, niches are the norm.
As an advertising agency executive observed, “There will be no market for products that everybody likes a little, only for products that somebody likes a lot.” Other experts assert that companies will have to “niche or be niched.”
Micromarketing is the practice of tailoring products and marketing programs to suit the tests of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Segment and niche marketers tailor their offers and marketing programs to meet the needs of various market segments.
At the same time, however, they do not customise their offers to each individual customer. Thus, segment marketing and niche marketing fall between the extremes of mass marketing and micromarketing.
Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups—cities, neighbourhoods, and even specific stores. Kraft helps supermarket chains identify the specific cheese assortments and shelf positioning that will optimise chees sales in low-income, middle-income, and high-income stores, and in different ethnic communities.
Local marketing has some drawbacks. It can drive up manufacturing and marketing costs by reducing economies of scale. It can also create logistical problems as companies try to meet the varied requirements of different regional and local markets.
A brand’s overall image might be diluted if the product and message vary in different localities. Still, as companies face increasingly fragmented markets, and as new supporting technologies develop, the advantages of local marketing often outweigh the drawbacks.
Local marketing helps a company to market more effectively in the face of pronounced regional and local differences in community demographics and lifestyles. It also meets the needs of the company’s “first-line customers”—retailers—who prefer more fine-tuned product assortments for their neighbourhoods.
What is Market Segmentation – Approaches: People – Oriented Approach and Product – Oriented Approach
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 Approach.
2. Product-oriented Approach.
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.
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.
Marketers are, however, expected to take greater interest in rural markets in a country like India where more than 65 p.c. of population is found in rural areas and since 1980, people in the rural areas also have growing purchasing power.
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. Sex 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.
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.
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.
Religion, Race and Culture: Religion, race and culture are also used as bases for segmentation. They can explain regularities and diversities in human behaviour.
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 reactions to the world about him. 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.
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 (AIOs). 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.
Psychographic research is now being used more frequently in market segmentation studies for four reasons:
a. To find and explain markets and for target market identification.
b. To understand consumer behaviour as markets are people, e.g., brand choice, company loyalty.
c. To formulate marketing strategies for the firm, e.g., positioning new product, improving services, promotion strategies and new distribution methods.
d. 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. 2. Psychographic segmentation studies are very costly demanding even Rs. 15 to 20 lacs for a complete research package.
AIO statements are the heart of the survey. Avoid preconceived notions. Add in other physical and behavioural dimensions. Use also available secondary data.
2. Product-Oriented Approach:
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.
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.
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 users and non-users. 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 promotion devices like media preferences.
b. Benefits Pattern:
Benefits segmentation gives 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, socio-economic characteristics to secure better understanding of each segment and then only we can have appropriate marketing mix for each segment.
c. Brand/Store Loyalty:
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. However, brand/store loyalty is not easy to measure. The exact meaning of brand loyalty itself is not yet clear. People may buy a particular article due to habit or because it has a low price, and not because they have brand loyalty.
What is Market Segmentation – Conditions for Successful Market Segmentation
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:
1. The segment or sub-division must be based on market characteristics which are measurable.
2. The segment, which is identified, must be accessible, i.e., it should be within our reach through means of communication and distribution.
3. The segment, which is already identified and which can be communicated, should respond to the marketing effort.
4. 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, attitude are subjective and non-measurable attributes. Many subjective variables can be inferred only.
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. For instance, our segment indicates that buyers will buy easily as they have low self-esteem.
But a group of buyers with low self-esteem cannot give us a unique segment which can be communicated through a certain promotion and distribution strategy. If we are unable to communicate effectively with our prospective buyers, our efforts of promotion will be worthless.
3. 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?
4. 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.
What is Market Segmentation – Factors Influencing: Competitive Strategy, Types of Product and Market, Life Cycle Stage, Nature of Market and a Few Others
Following are the factors influencing market segmentation:
1. Competitive Strategy:
Segmentation is largely influenced by the competitive strategy of the firm. In highly competitive environments, it is necessary that firms choose to segment the market and focus on target markets in order to achieve success.
2. Size, Objectives and Resources of the Company:
These factors determine to a great extent how the company segments its market. For instance, the Hero Motor Co. will want to sell to the world and so segment on a global scale whilst the local shopkeeper will service a very small catchment are and segment accordingly.
Resources of company also determine the extent of segmentation, as company having moderate resources will have limited segmentation whereas company having substantial resources will have broad segmentation.
3. Competitive Structure of the Industry:
The more competitive the market the more each organisation will look toward differentiating their product so as to gain competitive advantage. The greater the selection on offer the more consumers will demand choice and the greater will be the need for tight segmentation.
4. Type of Product and Market:
Some companies have a simple product portfolio that lends itself to easy segmentation, e.g., bread, potatoes, petrol, industrial cleaning products, whilst others have a more complex product mix making it much harder, e.g., catering and hospitality services, financial services, fashion clothes.
5. Life Cycle Stage:
Life cycle stage of a product also determines segmentation decisions.
6. Nature of Market:
Nature of market affects the segmentation decision. Segmentation strategies differ according to market such as segmentation strategies differ in competitive market from non-competitive market.
What is Market Segmentation – 3 Strategic Options: Concentrated Marketing, Differentiated Marketing and Undifferentiated Marketing
Marketer has three strategic options:
1. Concentrated marketing,
2. Differentiated marketing, market segmentation strategy, and
3. Undifferentiated marketing mass market strategy.
1. 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.
For instance, Volkswagen concentrated on the small car market, when American giant automobile corporations like Ford and General Motors were interested only in big cars. A publishing house may concentrate only on textbooks, say, on business and economics. Rolex Watch Company concentrated only on costly, 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.
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. 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’. 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. 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. As he would face more specialised competition in each segment, he 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 given by rivals who adopted differential marketing, even this big giant today has a broad line of products, multi-sized bottles and now follows differentiated marketing. It has thus found new selling appeals.
Marketing management task is simple for a mass market strategy but under keen competition market segmentation strategy becomes necessary.
What is Market Segmentation – Segment Viability: Size, Identity, Relevance and Access
One customer-oriented reason behind segmentation is that when designing products or services that are narrowly targeted to the needs of one specific segment, it may be possible to offer consumers in that segment the best match to their needs. For instance, the sellers of PCs below the price of $1,000 have started to target the needs of five distinct segments. The first market segment is supposedly the original target for low-priced PCs, or first-time buyers who have a limited amount of money to spend.
The second segment of these buyers is an unlikely crowd populated by knowledgeable buyers purchasing an additional system. The third key segment has just recently started to emerge, and it’s business buyers looking for PCs that will be used for only the most basic functions in their companies by undemanding users. Next is the college market. Not only is this a large market segment, but due to the most recent baby boom, it is a segment that is only going to get larger.
The final segment is the person just starting a home business. As Americans in increasing numbers take to either augmenting their incomes from traditional jobs or replacing them entirely with their own businesses, the number of computers shipped to this market has exploded. In practice, producers usually target segments rather than the overall market because this allows them to concentrate their resources on a limited group of consumers. In this way, the brand can dominate that segment and gain the benefits of segment leader.
Similarly, a segment may become less viable by encroaching competitors from adjoining segments. For example, in a growing number of new sales, customers compare high-end PCs running Microsoft’s Windows NT operating system with Unix workstations from Hewlett-Packard, Silicon Graphics, and Sun Microsystems. Although there are still a few areas where workstations offer users a distinct performance advantage, there are not as many now as there once were, and the areas of overlap have been increasing.
Sun Microsystems recently introduced the Ultra 5 and touted its move to PC-style volume manufacturing. Unix suppliers have been forced to respond to this inclusion. Worse yet, the existing segment may shrink in size or even disappear over time. The makers of panty hose are currently experiencing this unfavorable shift in customer taste – More and more fashionable women say that they like the bare-legged look. Indeed, sheer hosiery sales have declined over 20 percent in the last four years.
In the public sector, greater efficiency may justify such concentration, but in the commercial world, the ultimate objective is to make a profit. To be viable, a segment needs to meet a number of broad criteria.
Is the segment substantial enough to justify attention and will there be enough volume generated to provide an adequate profit? For instance, can multiple producers chasing after one group of consumers all earn a profit? For example, both Gulfstream Aerospace Corp. and Bombardier Inc. are currently chasing after the 950 corporations (e.g., GE and Walt Disney Co.), governments, and individuals (e.g., Bill Cosby) that are likely to buy a large business jet.
These two jet makers will spend a combined $1.2 billion to develop long-range jets for this small market. At $30-$40 million for each plane, many CEOs are wondering if it is justifiable to spend this kind of money to fly nonstop to Asia five or six times a year. Similarly, one must also wonder how 400 to 800 Belgian beers are able to all prosper in a country of only 10 million people!
As segmentation is a process, at least in the short term that is largely under the control of the producer it might be possible to find an increasing number of ever smaller segments that could be targeted separately. In general, however, it is best to choose the fewest number of segments, and hence the largest average size. This allows resources to be concentrated and head-on competition with market leaders avoided.
In part, a viable segment size will be defined in terms of the producer’s cost structures. The car market is heavily segmented, with Ford targeting a wide range of separate segments, but even the smallest of these (sharing the same assembly line as others) has to be worth some tens of thousands of cars a year simply to earn its place on that assembly line. On the other hand, Aston Martin, with its custom hand building, can very effectively target a segment that is worth just a few hundred cars a year.
The segment needs to have unique characteristics that producers and consumers can identify and market research can measure. In the car market there is an identifiable segment for small cars against which Ford targets Escort, and Toyota, it’s Tercel. Within this segment and across the larger car segments as well, there is a segment for high-performance cars. In a high-performance car segment, Chevrolet targets the Corvette brand and Rover uses the otherwise defunct name of MG.
Producers can segment other markets based on the consumer culture. For instance, large companies such as Colgate-Palmolive, Nestle, PepsiCo, and Procter & Gamble are increasing the number of products they offer to the Hispanic market in the United States. The U.S. Hispanic population has increased rapidly in recent years, rising from 6 percent of the population in 1980 to 10 percent in 1995.
Projections from the Bureau of the Census indicate that the trend will continue for the next several years, with even their “lowest series” projecting that Hispanics will account for 12 percent in 2005. With this growth, consumer spending among Hispanics has become an increasingly important segment of the economy. The same phenomenon is occurring in the publishing industry. For example, Simon & Schuster and HarperCollins Publishers are moving into Spanish-language publishing by translating best-sellers into Spanish and publishing the works of Spanish- speaking authors.
The basis for segmentation must be relevant to the important characteristics of the product or service. For example, the type of pet owned is highly relevant in the pet food market, but will rarely be so in the car market.
Although this seems obvious, much marketing is still undertaken (mistakenly) on the basis of overall population characteristics rather than those directly relating to the specific product or service. For example, in many markets the tacit segmentation has been made in terms of socioeconomic class, yet the major car manufacturers’ segmentation of the car market no longer follows these lines.
Finally, the producer must be able to gain access to the segment. If tapping that segment is too difficult, and accordingly too expensive, it clearly will not be viable. For the sake of argument, let us say that there might be a small segment of the general low-priced car market that could be met by a small manufacturer using hand-building techniques. However, if the consumers within the segment were diffused evenly throughout the population, the producer might face difficulties on two levels.
The first would be in obtaining national distribution for the low volumes. Setting up a separate dealership network to provide the maintenance facilities would be almost impossible (even some of the smaller existing manufacturers in the United Kingdom for instance, such as Peugeot and Fiat, have incomplete networks). The second difficulty would be finding the means to deliver the promotional message to these potential buyers.
All of these criteria apply equally to the segmentation available in the nonprofit sector. If they can be met, segmentation is a very effective marketing device. It can allow even the smaller organizations to obtain leading positions in their respective segments (niche marketing) and gain some of the control this offers. It is worth repeating that the most productive bases for segmentation are those that relate to the consumers’ own groupings in the market.
Marketers should not artificially impose producers’ segments. In any case, segmentation is concerned only with dividing customers or prospects (and not products or services) into the segments to which they belong.
What is Market Segmentation – Requisites for Effective Segmentation: Definable, Measurable, Viable, Reachable, Relevant and Intensity in Competition
Following are the requisites for effective segmentation:
This means we must be able to describe the market segment, and for this the key characteristics of the segment should show a degree of homogeneity. This would help the organization in measuring the market size and define boundaries of the segment.
The segment should be measurable. It should be possible to quantify the segment. This would help the organization to know potential consumers in each segment
It should be cost effective and profitable for the marketer. Therefore, the vary basic question to be asked before segmenting is – is the segment large enough and can it produce the required turnover and profit for the organization? This criterion depends on the particular organization. Hence, it is essential that the segments must be assessed in terms of organizational resources and objectives.
There must be a way of reaching the segment both effectively and efficiently. This includes the obvious physical distribution of a product, as well as communicating with customers via media or in a direct way.
The market should form segments on a relevant basis. Proper analysis of the total market and classification are the two important aspects in market segmentation.
6. Intensity in Competition:
Another parameter determining the segment is the intensity in inter- firm rivalry. The higher the intensity or more the competition, the more unattractive the segment will be for the market.
What is Market Segmentation – Segmentation Methods and Practical Segmentation
In order to achieve a genuine consumer-based segmentation, three technical problems need to be addressed:
1. Construct a product space, which is a geometric representation of consumers’ perceptions of products or brands in a category.
2. Obtain a density distribution by positioning consumers’ ideal points in the same space.
3. Construct a model that predicts preferences of consumer groups toward new or modified products.
In practice, segmentation is so very clearly tied to market research programs that it often becomes one element of this aspect of marketing activity.
To discover and use these natural segments requires a number of steps in market research:
1. Background Investigation:
The first stage is conducting the desk research that will best inform the researcher and the marketer of what the most productive segments are likely to be. This essential stage will lead to the hypotheses to be tested, but it must not be the only one used to define the segments. At each stage, the marketer must be prepared to abandon any preconceptions or prejudices, in light of the actual data about the customer’s view of such segments.
2. Qualitative Research:
It is vital that all the characteristics that are important to the consumer be measured and that these be described in terms that are meaningful to him or her. The language used by consumers should be first investigated in focus group discussions. For example, small-car buyers prefer to appear sophisticated. This consumer psychology is apparent in the following focus group discussion between an interviewer and a respondent.
Respondent – I am concerned about fuel economy.
Interviewer – Why do you want to be concerned about fuel economy?
Respondent – Well, I would like to contribute to reducing our country’s dependence on foreign oil.
Interviewer – Your contribution must be very limited.
Respondent – It doesn’t matter. I just wish all the people were educated enough to know energy independence is important to our country.
Recall that focus groups are frequently used to pilot major research projects and are best conducted by psychologists who are trained to recognize the important nuances. This research discovers the dimensions that are important to the consumer (and that are described in their language) from which later strategies will be developed.
3. Quantitative Research:
Based on the dimensions (the key descriptive words) revealed by the qualitative research, quantitative research attempts to measure attitudes toward the brand and competing brands using various scales. This work may also extend to the consumer’s ideal brand. The validity of such idealizations is questionable, because they are artificial conceptualizations that are not easy for the consumer to articulate, and the results can be ambiguous.
In practice, though, the concept of the ideal brand usually appears to work well, especially when the questions are specific, carefully phrased, and mapped on the specific dimensions involved in the positioning exercise.
This critical stage is now almost invariably dependent on the use of considerable computing power to undertake the complex analyses involved. Some form of factor analysis is usually used to separate those variables that are highly correlated, and hence are almost interchangeable in the consumers’ eyes.
For example, in some pioneering research in the 1970s, the “motor noise” of a vacuum cleaner was found to be related to its “cleaning power” as perceived by consumers. This allowed Hoover to reposition its vacuum cleaners as more powerful simply by stressing their powerful sound.
Only when this factor analysis is complete is cluster analysis used to create a specified number of maximally different clusters, or segments, of consumers. The number of such specific clusters should adequately describe the significantly different segments in the market. Each of these consumer clusters is homogeneous within itself, but as different from other clusters as possible. The typical outcome will be a set of prioritized position maps, preferably limited to the five to eight most important dimensions.
Mobil Oil provides an excellent example of consumer segmentation at its gas stations. The company has learned that no more than 20 percent of its customers are price conscious and has begun to emphasize customer service and quality at its gas stations. After all, price competition is what all marketers wish to avoid.
5. Segmentation / Positioning:
The marketer must then pore over position maps to determine exactly what the strategy should be, taking into account the available resources as well as the competitive and consumer positioning on the map. What will the target groups be? What will the chosen segments be? Where will the products or services be repositioned (if needed) to compete most effectively and / or to be most attractive to consumers?
This is probably the most important set of decisions that any marketer makes, and from it most other decisions will emerge naturally. The intellectual effort committed to this process should, therefore, not be underestimated.
Of the thousands of new health and beauty care stock keeping units introduced each year, few ever really hit it big on supermarket shelves, mostly because manufacturers often misjudge consumers’ needs and desires. The product’s name, its promise and actual benefits, and its market positioning must all touch a consumer’s nerve to stimulate the purchase.
For example, Dr. Care Toothpaste was a product that tried to enter the U.S. market from Canada. It was positioned for children and the family, but it was packaged in an aerosol can. Parents were understandably worried by what their young children might do with an aerosol can while unsupervised in the bathroom and shunned Dr. Care.
When Clairol called its new conditioner Small Miracle, it was a major problem for the product. Just about everybody has “bad hair” days. Some have them virtually every day. Consumers move from brand to brand looking for a big miracle. Women had gigantic expectations, and Clairol offered only a small promise.
Small Miracle sought a new position with the claim that it was a once-a-week conditioner that would last through three shampoos. Some consumers felt that they did not get one real benefit, much less three, and that it was indeed a small miracle—one they could hardly notice.
The complexity of this positioning / repositioning process does mean that the marketer and researcher must work closely together. Each must have a sound appreciation of what the other is doing and, most importantly, confidence in the other’s ability to handle the complexities. It is a time- and resource-consuming process that reaps tremendous benefits.
What is Market Segmentation – Market Segmentation in India
The Indian consumer market with its plethora of demographic, psychological, and other strategic variables presents an ideal arena for segmentation to be an attractive, viable, and a potentially profitable strategy. Today, most marketers in India use segmentation models based on demographics, geo-demographics, SEC data, and benefits and usage.
McDonald’s focuses on middle and upper- class families in the Indian market. To attract consumers from lower middle class, it introduced seven rupee offerings (ice creams) to increase footfalls, with the hope of converting the customer so attracted into regular customers for other standard offerings.
McDonald’s also introduced the vegetarian products to target the large population of vegetarians in India who avoid non-vegetarian diet on account of religious and health beliefs. Nescafe launched its own retail outlets, offering various variants of coffee in the north Indian market to develop the taste of the consumers who are habitual tea consumers.
By providing coffee at a low price in an attractive setting it attempted to convert them into consumers of coffee and thus, increase the size of its market. Nescafe targeted the segment not interested in or capable of paying high prices at Barista or CaM Coffee Day outlets. Malls like City Centre and Metropolitan Mall in Gurgaon have introduced cineplexes to attract customer segments, which view shopping as an entertainment these customers seek to combine shopping with entertainment.
In the year 2002, DCM Benetton India repositioned itself from a casual-wear brand to a wardrobe option, and redesigned stores as per its international format. In 2003, it attempted to target a niche audience through its concept stores. Benetton recently launched its pilot ‘Baby-on-Board’ store, which targets mothers-to-be and kids, as well as the ‘Accessories’ and ‘Adults-Only’ store in Gurgaon.
The Baby-on-Board store, which is targeted at young urban upwardly mobile parents, has a product line which includes infant and maternity wear, educational toys, strollers, car seats, fashion wear for moms-to-be, newborn babies and kids up to 12 years of age. The Accessories store, on the other hand, sells luggage, bags, sunglasses, and vanity cases, and the Adults-Only store showcases Benetton’s apparel collection for men and women.
The launch of the concept stores did raise questions on feasibility, considering the nascent stage of the retail industry in India. The company felt that such a strategy would enable it to target a consumer segment that is well-travelled and more aware of international fashion trends. It would also enable the company to offer a more complete product line to different target segments. For this purpose, the company intends to create strategic business units for each line-mothers-to- be and kids, adults, and accessories.
This strategy of concept stores makes sense when there is an opportunity to grow certain segments of the assortment. In some cases, a part of the range may be mature enough to be spun off as a separate brand, with its own speciality format. In the current scenario in India, where so many malls are emerging in the metros and other cities, such a retail segmentation strategy may allow United Colours of Benetton the flexibility to manage its store portfolio more effectively with the right-sized formats in these malls, rather than be constrained by a single large footprint format.
Many retailers, internationally, have limited-line stores in addition to full- line stores. Baby Gap and Gap Kids from Gap is one example of an apparel brand operating multiple formats for different segments. Marks and Spencer also operates food-only stores in the UK in addition to its full-line stores which have both food and non-food lines. This allows it to reach consumers with the food offer, where perhaps the opportunity for the full-line stores is limited.
However, in India, there is a reverse trend of brands moving out of their concept stores to large formats. Madura Garments’ brands Van Heusen, Louis Philippe, and Allen Solly, which have had their concept stores for some time, are now coming together under the Planet Fashion umbrella. Essentially, segmentation strategies are driven by assessment of market potential.
Hence, Benetton’s Baby-on-Board store which is targeted at mothers- to-be and kids is likely to draw footfalls as Indian parents in metros have experienced an increase in their disposable incomes. Besides, there is a rise in philocentric tendencies in Indian families to facilitate a higher spend on specialised products for their children. However, it would be interesting to see whether an exclusive accessories store would make much business sense for the company.
The growth and development of multiplex theatres in Indian represent an interesting experience in segmentation. Though patterned along the ‘shopping mall’ model of the multiplex as developed and prevalent in the West, and sustained by the retail boom unleashed by the economic liberalisation policy of 1991, the Indian multiplex site sports all the features of an up-market turf.
Most multiplexes in India offer a curious mix of parallel, regional, and art cinema along with both domestic and foreign mainstream cinema. This distinguishes them from the multiplexes in the West. The latter operate in more developed markets characterised by deeply entrenched segmentation which extends into film exhibition as well. Multiplexes in the West largely focus on the ‘blockbuster’ films.
Similarly, various single-screen cinemas in India identify themselves with particular types of films, say the Hindi ‘masala and blockbuster, the English, or the porn movie. On the other hand, the multiplexes in India have capitalized on an inclusive tendency to motivate and assemble diverse audiences in terms of their movie preferences. However, they have largely segmented in terms of income and lifestyle categories.
Multiplexes in India have remained an urban, largely middle and upper middle-class leisure pursuit with its highly priced tickets excluding the masses crowded in the lower regions of the income graph. Spatially too, these multiplexes can mostly be spotted in affluent neighbourhoods, within the easy reach and concentration of young audiences. It is quite possible that, in the future, multiplexes may enhance segmentation and result in branded theatres exhibiting particular fare, say the art, mainstream, foreign films, or may be even documentaries.
Recently, segmentation has also caught the fancy of cyber cafe owners in India. This is primarily to take advantage of the 150% growth projected for the sector. Many big, branded players such as HCL Comnet, Mantra Online, Satyam Infoway, etc. have set up chains of branded Internet parlours or cyber cafes.
A key element of their strategy is to find a niche and clearly define their audiences and services. Researches states that the players in India have started segmenting the cyber cafes primarily into two categories- one for utility- oriented customers- the middle and junior level business executives- and the other the experiential kind which will offer allied services for the non-business users.
While Mantra Online is planning to segment its cafes into business and residential categories, a Delhi-based player Netxss is planning to focus on Net-banking. On the other hand, Delhi State Industrial Development Corporation Ltd (DSIDC) is specialising in facilitating e-governance in Delhi through its 16-cyber cafes in the city. It is intended to be used by the customers to pay their electricity and water bills online.
An extremely effective segmentation and targeting experience in India has occurred in case of the petrol retail sector. The petrol retail experience, until recently, was uninviting, with the station being nothing more than a place to tank up, and cash being the preferred payment mode. In recent times, however, the outlets have seen a complete facelift, with new multi-fuel dispensers, better trained attendants, and service elements.
The product offering has widened to include blended fuels, branded fuels, high-octane fuels, lubes, groceries and more. The outlet itself is expanding to include grocery stores, cafes, bank ATMS, internet kiosks, etc., giving the customer more reasons to spend time and money at a location that offers more than just fuel. Credit cards, debit cards, and loyalty cards are also widely accepted.
These changes gave the customer reasons to build preference among the three companies (IOCL, BPCL, and HPCL) and their brands. In this context, BPCL launched PetroBonus, its customer loyalty programme, in September 1999. This enabled data capture of the profile and transactions of about 1.2 million card holders across 43 cities by 2003.
Using data mining on the database thus generated, BPCL started segmenting members by activity level and created targeted communication and offers to activate members, significantly driving up revenues within the existing member base. Data analysis also revealed a segment of members with abnormally high usage.
It turned out that this segment was that of fleet owners who were giving PetroBonus cards to their truck drivers for fuelling up. After understanding the distinct needs of fleet owners, BPCL designed and launched the Smart Fleet programme in early 2001.
Similarly, most players in the retail petrol sector are launching co-branded cards to move towards more niche segments that target lifestyle or special interest groups. This amply demonstrates the realisation among a few recently deregulated sectors of the Indian economy that profitable marketing strategy can evolve from effective segmentation achieved through extensive research.
What is Market Segmentation – Top 5 Benefits and Limitations
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. Marketers are in a better position to locate and compare marketing opportunities. Market can be defined more precisely in terms of customer needs.
2. When customer needs are fully understood, marketers can effectively formulate and implement marketing programmes which will be tuned with the demands of the market.
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 customer demand which is not being met by rivals.
5. 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.
In short, a key idea in search of the best match between market opportunities (representing demand) and company resources (representing supply) is that of market segmentation. It alone can maximise the impact of company strengths and minimise the exposure of its weaknesses.
No market is entirely homogeneous when we accept multidimensional approach to buyer behaviour-economic, demographic, social, cultural and psychological dimensions of buyer behaviour. 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. The number and nature of segments will depend on the purposes and imagination of marketers.
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.
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.
Following are the limitations for market segmentation:
1. The markets examined by them were not heavily segmented as the differences between brands were too insignificant to matter.
2. Markets are not made-up of segments with different wants because buyers of one brand buy other brands as well. This is because the same buyer may buy products in different segments of the market for different family members, or for different occasions or for a change, etc. Hence segmentation does not mean that those within a segment buy only in that segment.
3. Market segmentation can prove to be an expensive process for the producer and the marketer as well. From marketing point of view the marketer has to develop different marketing mixes for different segments. From production point of view, the producer producing in mass quantities is much cheaper than making variety of products.
4. The various brands may be indistinguishable in product form yet differ widely in market share. Therefore, no concept of differentiation among products is required to explain market success.
5. Buyers often choose from a list of acceptable brands. This is the fact that people alternate between the brands of their list, it would be incorrect to take into consideration and believe that a brand can be successfully positioned to appeal to a very narrow segment.