Market segmentation is the process of partitioning markets into groups of potential customers with similar needs or characteristics who are likely to exhibit similar purchase behaviour. 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. Need 4. Objectives 5. Reasons 6. Selection of a Market Segment 7. Importance 8. Approaches 9. Process
10. Bases 11. Levels 12. Essentials of Effective Market Segmentation 13. Methods 14. Factors Influencing 15. Strategies 16. Criteria for Selecting 17. Advantages and Limitations.
Market Segmentation: Meaning, Definitions, Need, Objectives, Importance, Approaches, Methods, Advantages and Limitations
Market Segmentation – Meaning
Segmentation or subdivision of the market is based upon the modern marketing concept i.e., market-oriented strategy and philosophy. Segmentation gives special emphasis on the demand side of the market. It is more rational and more precise adjustment of the product and marketing effort is tuned with consumer needs and requirements.
To compete successfully in today’s volatile and competitive business markets, mass marketing is no longer a viable option for most companies. Marketers must attack niche markets that exhibit unique needs and wants.
Market segmentation is the process of partitioning markets into groups of potential customers with similar needs or characteristics who are likely to exhibit similar purchase behaviour.
Marketing segmentation is a method for achieving maximum market response from limited marketing resources by recognizing differences in response characteristics of various parts of the market. In a sense, market segmentation is the strategy of “divide and rule”, i.e., dividing in order to conquer them.
For different groups of customers companies have different sets of marketing strategies. Segmentation strategy is an answer to the question “To whom shall we sell our products and what should we sell them?” It is strategic choice concerned with “doing the right things” as opposed to tactical choice, “doing things right.”
Segmentation of market is meant by distributing the market of any product in several blocks and sub-markets or sub-divisions. It is done commensurations with the uniform nature, quality, necessities and choice of the customers. A group/section of customers is very first recognised as per their different choices and necessities and then the market can be divided in the sets of consumers.
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.
As competition intensified, prices dropped and sellers earnings declines. Sellers did not have much control over price because of the similarity of their products. At this stage, some sellers began to recognize the potential value of product differentiation — that is, the introduction of differential features, quality, style, or image in their brands as a basis for commanding a premium.
This led to a proliferation of sizes, models, options, and other characteristics. It is important to recognize, however, that the product variations were not based on an analysis of natural market segments.
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.
The power of this concept is that in an age of intense competition for the mass market, individual sellers may prosper through developing offers for specific market segments whose needs are imperfectly satisfied by the mass-market offerings.
Market Segmentation – Definitions
Following are the cardinal definitions of markets segmentation:
According to Philip Kotler – “Market segmentation is the sub-dividing of a market into homogeneous subsets of customers, where any subset may be a distinct marketing mix.”
In the words of William J. Stanton – “Marketing 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.”
As per A. Robert – “Market segmentation is the strategy of dividing markets in order to conquer them.”
According to American Marketing Association – “Market segmentation refers to dividing the heterogeneous markets into smaller customer divisions having certain homogeneous characteristics that can be satisfied by the firm.”
As per Rustam S. Davar – “Markets may be classified in several ways depending on the customer characteristics. Customers may be grouped on the basis of how they use a product or service. This grouping of customers can also be broken up in terms of age, sex, income level, education or geographically in terms of sales territories. This grouping of buyers or segmenting the market is described as – “Market Segmentation.”
According to Cundiff and Still – “Market segments are grouping of consumers according to such characteristics as income, age, degree of urbanization, race or ethnic classification, geographic location or education.”
According to Professor William Stanton “Marketing 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”.
Segmentation has also been defined as “Divisions of a market into sub-groups, with similar motivations”.
Another accepted definition of Segmentation is “Segmentation means nothing more than dividing a market or a consumer base, into pieces and understanding the dynamics of each category”.
Thus, market segmentation is basically a method of achieving maximum market response by dividing the market into various groups on the basis of certain common characteristic, common need, desire, common response etc. In a sense it is a strategy of ‘divide and conquer’ i.e., divide the market in order to conquer the demand.
Market Segmentation – Need
Segmentation is the primary means used by companies to focus their energies and activities toward things that they can do well and profitably. The company matches its strengths and its offering to the group of customers most likely to respond to it.
By selecting and concentrating on some segments to the exclusion of other segments the marketing mix can be tailored to fit those customers who most likely want to buy more of the things that a company has for sale.
A good segmentation strategy will allow a company to develop one or more marketing mixes that are both Effective and Efficient. Effective in that they result in sales, efficient in that the sales are highly profitable – high revenue/cost ratio.
Thus, the overall objective of using a market segmentation strategy is to improve your company’s competitive position and better serve the needs of your customers. Some specific objectives may include increased sales, improved market share and enhanced image.
i. All the individuals differ in terms of their needs and wants. Market segmentation enables the marketers to bring together all the individuals with similar choices and interests on a common platform.
ii. Marketers have understood that in present era, they cannot cater to needs of all the buyers in the market as the consumers are huge in number and reflects wide variety in their needs and wants; and at the same time, the companies have limited scope in order to fulfill the requirements of all these consumers in the market. Thus, market segmentation helps the marketers to overcome these constraints and carry out their business effectively.
iii. At present times, a generalized product cannot satisfy customers of all the segments due to the fact that the customers are becoming more and more particular about their needs and preferences. Market segmentation enables the marketer to categorize and customize its products as per the needs, preferences, and paying capacity of customers.
iv. Market segmentation helps the marketers to formulate a unique selling proposition (USP) about its products in order to have a competitive advantage over its competitors in terms of product features, pricing, packaging, promoting, distributing, and/or providing superior service.
v. Market segmentation helps the smaller companies; who do not have all the resources to fulfill the requirements of huge markets, to carry out their business efficiently by categorizing the markets to be served on the basis of the scope of their business; and then positioning its offerings only in that particular segments.
vi. Market segmentation helps the marketers to adopt specific marketing strategies according to the needs of the target audience and thus adopt more focused approach in order to satisfy the customer’s requirements. This also includes formulating appropriate distribution and promotional strategies according to the tastes of the customers of a particular market segment.
vii. Market segmentation influences the buying decision of the consumers and usually guides the consumers in terms of what to buy and what not to buy. Eg. the males while purchasing the fairness creams will opt to buy the creams prepared especially for men rather than going for those prepared for women.
viii. Market segmentation helps the organizations to target the right product to the right customers at the right time.
ix. Market segmentation helps the marketers to know and understand their customers better.
Segmentation enables the marketers to reach a wider audience and effective promotion of their products. It helps the organizations to concentrate their hard work on the target audience and get suitable results. Thus, market segmentation helps the marketer, to serve its target market in the best and most profitable manner.
Market Segmentation – 5 Important Objectives
The ultimate objective of market segmentation is to find out the variation in the consumers of different market. Actually, we find that the appeals, strategies and tactics are not equally appropriate for all segments. The segmentation reflects reality in the market situation and identifies the consumers’ behaviour which makes the process of exploiting the opportunities pro-active or profitable.
In a very precise form, we find the following objectives of market segmentation:
1. To Prepare Appropriate Marketing Programmes:
It is essential for every marketer to prepare appropriate marketing programmes and for this purpose, sub-division of buyers on the basis of nature, quality and class in undertaken. It helps to find out the varied and complex buyer behaviour failing which marketing programmes cannot be appropriate. Thus, the purpose of market segmentation is to divide the consumers or buyers into various groups or segments. As the wants and desires of consumers are diverse, we cannot do it without subdividing them in the background of different variables.
2. To Trace out the Taste and Buying Habits:
The market segmentation is also undertaken with the purpose of locating the taste, temperament and buying habits of the different groups or segments. The behavioural scientists believe that all buyers are different. They appear keenly interested in segmenting the markets as the significant differences in market behaviour between the various segments of the society cannot be ruled out. In this background the formulation of marketing policies or programmes or tactics for all segments become urgent.
3. To Find out or Locate the New Market:
The market segmentation is also done with the purpose of locating new market. The group wise or segment wise studies of buyers’ taste, temperament, living habits and so on help a marketer, particularly while reaching new market. A marketer is required to adopt all practices which help to locate the availability of buyers in a particular region, group or segment.
4. To Study the Purchase Potentiality:
The marketing programme cannot be pro-active unless and until we have detailed information regarding the marketing goals. The marketing segmentation helps to furnish concrete information regarding the purchasing potentiality, as it studies the buying habits of almost all the groups.
5. To Make the Market Customer-Oriented:
In addition to the aforesaid objectives, market segmentation is also undertaken with the purpose of making the market customer- oriented. In a virtual sense, market segmentation is a customer-oriented philosophy. The identification of customer demand and further formulation of appropriate strategies are the important premises of market segmentation. Thus, it would not be wrong to conclude that market segmentation is carried on with the ultimate purpose of getting or preparing a customer-oriented market.
Market Segmentation – Reasons
Segmentation is the basis for developing targeted and effective marketing plans. Furthermore, analysis of market segments enables decisions about intensity of marketing activities in particular segments. A segment-orientated marketing approach generally offers a range of advantages for both, businesses and customers.
1. Facilitates Proper Choice of Target Marketing:
Segmentation helps the marketers to distinguish one customer group from another within a given market and thereby enables him to decide which segment should form his target market.
2. Higher Profits:
It is often difficult to increase prices for the whole market. Nevertheless, it is possible to develop premium segments in which customers accept a higher price level. Such segments could be distinguished from the mass market by features like additional services, exclusive points of sale, product variations and the like. A typical segment-based price variation is by region.
The generally higher price level in big cities is evidence for this. When differentiating prices by segments, organizations have to take care that there is no chance for cannibalization between high-priced products with high margins and budget offers in different segments. This risk is the higher, the less distinguished the segments are.
3. Facilitates Tapping of the Market, Adapting the Offer to the Target:
Segmentation also enables the marketer to crystallize the needs of target buyers. It also helps him to generate an accurate prediction of the likely responses from each segment of the target buyer. Moreover, when buyers are handled after careful segmentation, the responses for each segment will be homogeneous. This in turn, will help the marketer develop marketing offer/programmers that most suited to each groups. He can achieve specialization that is required in product, distribution, promotion and pricing for matching the particular customer group and develop offers and appeals for the segmented group.
Example of ford – Ford has gained useful insights through segmentation and adapted its offer to suit the Indian target market. For the Indian segment Ford made some changes in its cars in comparison to their European version.
Modifications such as:
(a) Higher ground clearance to make the car compatible to the rougher road surface in India.
(b) Stiffer rear springs to enable negotiating the ubiquitous potholes on Indian roads.
(c) Changes in cooling requirement, with greater airflow to the rear.
(d) Higher resistance to dust.
(e) Compatibility of engine with the quality of fuel available in India.
(f) Location of horn buttons on the steering wheel. As Indian motorists use horn far more frequently than the Europeans where the horn is located on the lever.
4. Stimulating Innovation:
An undifferentiated marketing strategy that targets at all customers in the total market necessarily reduces customers’ preferences to the smallest common basis. Segmentations provide information about smaller units in the total market that share particular needs. Only the identification of these needs enables a planned development of new or improved products that better meet the wishes of these customer groups.
If a product meets and exceeds a customer’s expectations by adding superior value, the customers normally is willing to pay a higher price for that product. Thus, profit margins and profitability of the innovating organizations increase.
5. Makes the Marketing Effort More Efficient and Economic:
Segmentation ensures that the marketing effort is concentrated on well-defined and carefully chosen segments. After all, the resources of any firm are limited and no firm can normally afford to attack and tap the entire market without any delimitation whatsoever. It would benefit the firm if the efforts were concentrated on segments that are more profitable and productive ones.
Segmentation also helps the marketer assess as to what extend existing offer from competitors match the needs of different customer segments. The marketer can thus identify the relatively less satisfied segments and succeed by concentrating on them and satisfying their needs.
6. Benefits the Customer as Well:
Segmentation brings benefits not only to the marketer, but to the customer as well. When segmentation attains higher levels of sophistication and perfection, customers and companies can conveniently settle down with each other, as at such a stage, they can safely rely on each other’s discrimination. The firm can anticipate the wants of the customers and the customers can anticipate the capabilities of the firm.
7. Sustainable Customer Relationships in All Phases of Customer Life Cycle:
Customers change their preferences and patterns of behaviour over time. Organizations that serve different segments along a customer’s life cycle can guide their customers from stage to stage by always offering them a special solution for their particular needs.
For example, many car manufacturers offer a product range that caters for the needs of all phases of a customer life cycle – first car for early teens, fun-car for young professionals, family car for young families, etc. Skin care cosmetics brands often offer special series for babies, teens, normal skin, and elder skin.
8. Targeted Communication:
It is necessary to communicate in a segment-specific way even if product features and brand identity are identical in all market segments. Such a targeted communication allows stressing those criteria that are most relevant for each particular segment (e.g., price vs. reliability vs. prestige).
9. 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 organization in its relationship with suppliers, channel partners and customers.
It strengthens the brand and ensures profitability. On that basis, organizations have better chances to increase their market shares in the overall market.
Market Segmentation – Selection of a Market Segment
Selection of a particular market segment is more of a managerial decision which has to take into account a number of factors, such as the company’s capability to satisfy the needs of the segment, the company’s long-term objectives, and the company’s interest in certain types of customers. But the segmentation exercise itself follows a certain process.
While evaluating different segments, the following factors may be taken into account – (i) market potential, (ii) accessibility, and (iii) profitability.
The market potential should be of sufficient size to lend economies of scale. The market should be accessible physically and through the media if the consumers are to be reached effectively above all, it should be profitable for the company to cater to the selected segment.
Companies have a number of alternative methods to market their products. At one extreme, every product can be made to the specific needs of individual customers. We see this system in tailoring, where clothes are stitched to the specific styles and sizes of individual clients. Many industrial products, such as heat exchangers, cooling towers, etc., are designed according to the specifications of the users.
Even in the case of cars, a customer could sit in front of a computer and design a car of his specifications (air-conditioning, color, seating arrangement, interiors, stereo, etc.) and get it delivered at his residence wherever it may be. This is the most ideal situation for a company to be in.
At the other extreme, companies adopt mass merchandising. In China, during the cultural revolution, all textile mills in the country produced clothes of the same quality, color and style; males and females alike wore the same dress, called the Mao suit! This method, however, seems more appropriate, and profitable, for selling pins and clips. Some of the spare parts used for automobiles can be made to certain specifications and sold as unbranded economy items. Standardization offers tremendous cost advantages but has its limitations.
The market segmentation approach follows the middle path. In this approach marketers group customers having similar needs and preferences and then develop strategies to meet the needs of selected target segments. This is a sure-fire approach where the product is tailor-made to specific needs, but of a group of target customers. At the same time, it is a cost-effective approach in comparison to catering to individual specifications.
Which strategy is better—shotgun or rifle? Management literature, founded on sound logic, may suggest that unless you know where you want to go, any road will lead you there. However, there are situations where the shotgun approach may also work. Consider the war between Hindustan Lever and Godrej Soaps in the premium toilet soaps market.
Hindustan Lever has been carefully analyzing the market and positioning its products in different slots to appeal to different groups of customers. But Godrej has been firing its salvos left, right and centre with launches like Crowning Glory, Marvel, Cinthol Lime, and so on.
The strategy is to launch a product without much research and then correct the product positioning or qualities based on market feedback. Godrej has been quite successful in the premium soaps market with its shotgun approach.
However, in the case of cigarettes, even well thought out new product launches have met with failure. On the other hand if a cigarette is launched without a clear understanding of the target market it is sure to fail.
Here are some guidelines for choosing the right strategy:
1. In a stagnant market, like that of cigarettes, the shotgun strategy will not work.
2. If brand loyalty is relatively high, as in the case of toothpaste, it is better to follow the rifle strategy.
3. If the entry and exit barriers are low, as in the case of premium soaps, the shotgun strategy may be useful.
4. In a shortage situation there is no need for any strategy as whatever you produce will have to be bought by the people.
5. If your competitor is street-smart he will put your findings into action before you can even research and formulate your strategy. Therefore, safeguard your findings and be quick to formulate your strategy.
As we know, the premium soaps market is growing steadily. There are no entry or exit barriers, and customers are known to switch brands. It is no wonder that Godrej has been successful with the shotgun approach. Hence, in such a market, there is a place for every strategy.
Market Segmentation – Importance
Market segmentation is based on customer orientation. The market segmentation enables the company to reach the consumers more efficiently and effectively.
1. Efficiency in Delivering Customer Satisfaction:
Market segmentation gives importance to varied needs of customers. Through market segmentation it becomes easier to identify the exact needs of the customer and create customised product and services for the group. The variety consumer needs can be satisfied with a limited product range by adding different unique features to the product. For example a company offers a range of particular health drinks with some different unique features to cater the need of different age groups.
2. Separate Marketing Strategies for Different Group:
Market segmentation calls for use of separate marketing mix strategies for each segment. A single mix for all customers is not applicable in modern marketing. So market segmentation enables to develop a separate marketing mix to cater to the needs of each segment. The product, pricing, promotional and distribution activities for the firm must be as per the needs of the targeted market segment.
3. Market Expansion:
Market segmentation helps in geographic expansion of the market easily. A product catering to the need of a people of a particular location can be made available to people residing in other location too. Segmenting the markets creates further opportunities for business growth.
4. Exploring Marketing Opportunities:
Consumer’s likings, preferences and need changes rapidly due to different personal and environmental factors. Every day the consumers expect to get more satisfaction from the product than before. Thus a new segment is developed offering the marketers a new opportunity to meet the demand of the new segment.
5. Helps in Increasing Sales and Profit:
Market segmentation is focused approach where the marker focuses on the needs of the particular segment and provides maximum satisfaction be offering specialised products to the targeted group. Target marketing and positioning also creates new potential customers for whom new products and services are created. Companies can create better products and hence maximise their potential profit. This helps in increasing sales volume and profitability.
6. Helps in Analysis and Controlling:
The efficiency of marketing efforts for each segment can be analysed. It helps the marketer to identify the most profitable segment and put more efforts and concentration on that rather than wasting time on the unprofitable one. It also helps the marketer to identify the less satisfied segment and to focus on them for further improvement. This helps in maintenance and expansion of market share.
Market Segmentation – 2 Main Approaches
There are two approaches in market segmentation:
1. Consumer Characteristics Approach.
2. Consumer Response Approach.
i. Geographic Location and Mobility:
Geographic location is the usual and popular basis for market segmentation. Regional differences in consumer taste are well known. The seller distinguishes carefully the buying behaviour of urban and rural people, urban and suburban consumers in India. Thus small retailer may distinguish between nearby and distant customer.
Marketers are expected to take greater interest in rural markets in India, because more than 65% of population of India lives in rural areas and villages. A regional manufacturing company may have segments in terms of zone like North-South-East and West. A national manufacturer might have district cities and town, etc.
ii. Demographic Segmentation:
The second basis of market segmentation is identification of buyers group according to selected demography characteristics. Demography is the study of population in terms of its size, density and distribution. The demographical characteristics are determined on the basis of age, marital status, number and age of children, place of residence and mobility of a household.
iii. Socio-Economic Segmentation:
Socio-economic characteristics are important variables in market segmentation. They influence buyers’ behaviour indirectly. Socio-economic characteristics are income, education, occupation, family life cycle, social class, religion and culture.
iv. Psychographic Characteristics:
Psychographic variables represent personality, life style of consumers. Personality variables are dominance, aggressiveness, objectivity, achievement, motivation and the like. Psychographic characteristics approach is a recent development in relation to marketing.
The consumer response includes benefit, usage, loyalty and occasion.
The following are the responses of the consumers regarding market segmentation:
i. Benefit Response:
Customers are sub-divided into specific interest groups in relation to various benefits that buyer wants to enjoy from purchasing a product. These benefits differ from product to product. The customer needs these benefits in the aspects of efficiency, prestige, durability, taste, flavour, etc. and economy or resale value. For instance, the automobile customer considers the fuel efficiency, quality, status and resale value. Benefits segmentation gives emphasis on wants and desires of consumers.
ii. Usage Response:
The use of total consumption of a family unit for a given product may act as a basis of segmentation. A customer may be classified as heavy, medium, light, users and non-users of the product or services. Sometimes classification is done like users-non-users and potential users. Naturally, the marketer gives attention on heavy customers. Potential users are those who do not use the product, who are not barred from its use for any functional, cultural and economic reason.
iii. Loyalty Response:
Customer loyalty may be used as a basis of market segmentation. It works on the fact that the consumers can differentiate between the two products. They create a product preference scale. 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 buyer.
Though every seller has consumers who are most loyal, moderately loyal and fickle minded. There is no guarantee that the most loyal customer is heaviest users. Further, brand loyalty cannot be measured easily, because it depends on the availability of competing products.
iv. Occasion Response:
The Marketer uses this response to determine the situations which produce optimal consumption pattern for a given product. Occasion response is highly considered at the time of designing the marketing mix. For instance, inexpensive broiler chicken for daily dinner is fine but it is not appropriate for entertaining a guests. Only cost indigenous “Vinci’s chicken” can be offered for reception of guests in dinner to suit the occasion.
Another example can be given regarding bath and toilet soap. For guests sometimes brand is also different. Once the marketer has the sound understanding of markets to be approached, intelligent decision about product, price, promotion and place can be made.
Market Segmentation – 3 Major Steps involved in the Process of Market Segmentation
The process of segmenting the market is not an easy exercise and involves several steps. There are different bases on which segmentation is done and this complicates the process further.
The process of market segmentation involves three major steps:
1. Identifying customer segments;
2. Selecting customer segments; and
3. Testing the segments for relevance.
We shall now discuss these steps in detail:
The first step in the process of market segmentation is to identify the customer segments using any of the basis discussed under ‘basis for segmentation’. Customers can be identified on the basis of geographies, demographics, psychographics, or behaviourist characteristics. The marketer should determine the basis for segmentation based on the area of business. For example, if the marketer is in the business of financial service, he can opt for demographics or behaviouristic characteristics (benefits) as a basis for segmentation. In this case, using geographies might not be a very good option.
Identifying customer segments helps the marketers in designing, promoting, delivering or pricing the service for each-segment. It basically helps them in identifying the marketing-mix for each segment. For example, when a financial services firm segments the market based on income and benefits and realises that more and more middle-class families are opting for mutual funds as an investment option, it can plan to cater to this segment by entering the mutual fund market.
Each segment may have different preferences – while some may be price-oriented, others may be quality or brand-oriented. Therefore-marketers should find the existing similarities in the purchasing patterns of the target segments.
The second step involves analysing the segments identified in the first step on the basis of their size, growth potential, profitability and the purchasing power. Estimating each segment on the above bases will help marketers select and invest in segments that can fetch the best results for the company. For instance, a segment that might not be very profitable then, but has great potential to fetch profits in the future, could be chosen by a marketer who is not looking for immediate returns, but wants to earn good profits in the long-term.
This is the final stage in the segmentation process and involves developing the profiles of the customer segments identified in the first step and analysed for profit and growth potential in the second step. It includes developing products or services and their marketing-mix that match the user profiles. For example, the financial services firm targeting the middle-income group should design mutual funds based on equity or debt, to suit the needs of the target customer segment.
Market Segmentation – Bases of Segmentation
Anything that can serve to divide customers into distinguishable groups can be a base for segmentation. Not all bases are equally good. For a base of segmentation to be EFFECTIVE it must provide division of the market into segments which are –
i. Actionable – can do something in regard to the group
ii. Measurable – we can find out how many customers there are in it, where they are, and how much they have to spend on our offering.
iii. Accessible – the segment can be reached and served.
iv. Substantial – the segment represents true demand – wants backed by purchasing power.
The segments must be formed based on something about customers that relates to their purchasing behaviour.
There is a large array of possible segmentation bases.
Some of these are briefly described below:
Consumers can be grouped on the basis of characteristics such as age or household composition. This is easy to do and it is easy to reach such segments with media. But age and other demographics are only loosely related to behaviour.
ii. Socioeconomic Characteristics:
Similarly, characteristics such as income, occupation and education can be used to derive segments that are easy to reach. Such segments are indicators (although not perfect) of behaviour such as – lifestyle, price sensitivity, and brand preference.
iii. Product Usage:
Potential to use the firm’s product is a behaviourally based segmentation basis. Potential could be determined by administering questions about disposition to use (such as – awareness, used in the past, would consider using) in a survey and respondents grouped accordingly. The problem is then how to reach the most attractive segments.
This is done either by using a large-scale single source survey (such as – ACNielsen Panorama) that asks consumers about product disposition and media usage or by relating product disposition to demographics. Both approaches are usually imperfect as behavior is rarely strongly correlated with demographics or media usage.
Personality, attitudes, opinions, and life styles are often used as segmentation bases. These characteristics have some relationship to behaviour and provide insight into how to communicate with chosen segments.
Generation, or cohort, refers to the people born in the same period of time. For example, the Baby Boomer generation can be defined as those people born between 1946 and 1955. Such cohorts share much in common. Not only are they of a similar age but they experienced similar economic, cultural, and political influences in formative years. Thus, generation is probably a better segmentation basis then age and just as easy to reach.
There are two reasons why people who live in the same area may share similar characteristics. First, some areas have more expensive properties than others and so people with similar socioeconomic characteristics may cluster together. Second, they have similar transport and shopping options. It is easy to reach particular areas by using local newspapers, cinema, outdoor, and selective direct mail but mass media is less effective.
There are several commercial geo-demographic segmentation schemes available, that combine demographics and geography as a segmentation basis. This approach aims to identify groups of small geographic areas that have similar demographic profiles. These tend to suffer from the fallacy of averages. Some areas may be genuinely relatively homogenous that many are not and this can be very misleading.
viii. Benefits Sought:
Some people are price sensitive, others seek quality or service. Some people are brand loyal, while others frequently switch brands. It is possible to group consumers on the basis of these factors. Note that price/quality sensitivity can vary by category. Some people are very concerned about the quality of the food they eat but will buy cheap laundry detergent.
Others will feed themselves any rubbish but are fastidious about cleanliness. This is a very powerful basis for segmentation but it is not easy to buy media on this basis. These segments can be reached by the message (self-selection) but this is not necessarily cost effective.
Market Segmentation – 5 Major Levels
Because buyers have unique needs and wants, 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 as follows:
Companies have not always practiced target marketing. 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. For example, the world’s mass markets have slowly splintered into a profusion of smaller segments.
Today, marketers find it very hard to create a single product or program that appeals to all of these diverse groups. The proliferation of advertising media and distribution channels has also made it difficult to practice “one size fits all” marketing.
No wonder some have claimed that mass marketing is dying. Not surprisingly, many companies are retreating from mass marketing and turning to segmented marketing.
A company that practices segment marketing recognizes that buyers differ in their needs, perceptions, and buying behaviours. 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 well.
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.
Market segments are normally large identifiable groups within a market—for example, luxury car buyers, performance car buyers, utility car buyers, and economy car buyers. 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.”
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 customize their offers to each individual customer. Thus, segment marketing and niche marketing fall between the extremes of mass marketing and micromarketing.
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.
Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups—cities, neighbourhood, and even specific stores. Kraft helps supermarket chains identify the specific cheese assortments and shelf positioning that will optimize 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 neighbourhood.
Market Segmentation – Essentials of Effective Market Segmentation
In order to arrive at an accurate segmentation of the market what is required is good quantitative and qualitative information about the product as well as the market.
However the following are the logical steps that should be followed in order to effectively segment the market:
1. Assess the difference between one customer group and others in terms of their needs and their likely responses to the products offered by the company.
2. Find out what are the factors that influence in grouping certain customers into a particular segment.
3. After studying the above aspects, group the customers into certain segments.
4. Study and confirm that certain marketing programmes and marketing mixes can be formulated for different segments.
5. Find out which segments would accept the product/services of the company and can be considered as natural targets of the company.
6. Estimate the likely purchases of the products of the company by each segment.
7. Select those segment which offer higher potential and which would be suitable to the product/services offered by the company.
Market Segmentation – Methods
As the nature and characteristics of every buyer is always different than that of others, the market therefore, can be divided in two segments on the basis of such differentiation as under –
1. Every Buyer a Separate Market
2. Framing Broad Classes of Buyers.
1. Every Buyer a Separate Market:
Under this mode of market segmentation, market of a product can be divided in segments proportionate to its buyers. It is assumed that every buyer in himself is a market because of different necessities and choices of each and every customer. It is an ideal mode of market segmentation as the seller can chalk-out the best programme matching with the necessities and choices of every buyer.
However, it is impractical and tough to implement successfully as it is impossible to make separate market segments for all buyers of a single item. It is therefore, successfully implemented there where very few customers are found for a particular item. In an industry of Aircraft or aeroplane industry, customers at lesser number are founds Hence, a separate market segment can be made for every customer.
2. Framing Broad Classes of Buyers:
It is tough for a seller to study each and every customer personally. Hence, the sellers’ often exercise the mode of making wide segment or sets for the buyers. A particular kind of buyers under this mode is kept in a market segment which is considered separate from that of other segments.
For example, when the seller comes to know that the buyers of different age groups are different in their choice for the product, he can divide his market on the basis of age i.e., children, teenager, young and adult irrespective of difference in income, religion, province etc. If any seller divides the customers in men, women and children i.e., on sex basis, three segments of market will be made. Irrespective of caste, age etc., and the men will be kept under the men segment, the women irrespective of their caste, group and age, under the women segment.
Similarly, all children will be kept in children segment irrespective of their class, religion and community.
Market Segmentation – Factors Influencing Segmentation
1. Size, Objectives and Resources of the Company:
The size of the company and the resources available will dictate to a great extent how it segments its market. For example, the Ford Motor Co. will want to sell to the world and so segment on a global scale whilst the local hairdresser will service a very small catchment area 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.
2. Type of Product and Market:
Some companies have a simple product portfolio that lends itself to easy segmentation, for example, bread, potatoes, petrol, industrial cleaning products, whilst others have a more complex product mix making it much harder, for example, catering and hospitality services, financial services, fashion clothes.
3. Competitive Structure of the Industry:
In the main the more competitive the market, the more each organization will look towards 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. An example of this might be the change that has happened with the traditional English pub.
Competition and the need to attract more customers have led to the theme pub offering an ever greater choice of food and real ales. In the past a pub might have offered a choice of two different beers and a salad sandwich or a sausage roll. Now many pubs offer a choice of over 20 different beers and food as diverse as Italian, Thai, French and American to be eaten as a snack, at lunch time or as a full three or four course dinner fan at prices that match their targeted customer’s expectations.
4. Nature of Market:
Nature of market also influences the segmentation decision. Segmentation strategies differ according to market such as segmentation strategies differ in competitive market from non – competitive market.
5. Life Cycle Stage:
Lifecycle stage of a product also affects segmentation decisions.
6. Competitive Strategy of Firm:
Competitive strategy of a firm also has an influence on segmentation.
Organizations that choose to segment the consumers and focus on target markets are more successful in highly competitive environments.
Market Segmentation – Top 3 Strategies
Once a firm understands its markets and the appropriate bases for segmenting those markets, it must choose an approach or a strategy for selecting its target.
There are three different market segmentation strategies such as:
1. The undifferentiated strategy,
2. The concentration strategy, and
3. Multisegment strategy.
In the undifferentiated (or total market) approach, a company develops a single marketing mix and directs it at the entire market for a particular product. A company using undifferentiated strategy assumes that all consumers have similar needs for a specific kind of product. Homogenous market or demand is so diffused that it is not worthwhile to differentiate, try to make demand more homogeneous.
Single marketing mix consists of:
i. 1 Pricing strategy
ii. 1 Promotional program aimed at everybody
iii. 1 Type of product with little / no variation.
iv. 1 Distribution system aimed at entire market.
The elements of the marketing mix do not change for different consumers; all elements are developed for all consumers. Example include – Staple foods, sugar and salt and farm produce.
Undifferentiated approach is popular when large scale production began. Not so popular now-a-days due to competition, improved marketing research capabilities, and total production and marketing costs can be reduced by segmentation.
When an organization directs its marketing efforts toward a single market segment through a single marketing mix, it is using a concentration approach.
i. It allows a firm to specialize.
ii. Can focus all energies on satisfying one group’s needs
iii. A firm with limited resources can compete with larger organizations.
i. Puts all eggs in one basket.
ii. Small shift in the population or consumer tastes can greatly effect the firm.
iii. May have trouble expanding into new markets (especially up-markets). For example, Haggar having problems finding someone to license their name for womens apparel, even though women purchase 70% Hagger clothes for men.
The objective of undifferentiated strategy is not to maximize sales, but it is to increase efficiency, attracting a large portion of one section while controlling costs.
3. Multi-Segment Strategy:
An organization using the multi-segment strategy directs its marketing efforts at two or more segments by developing a marketing mix for each segment. A firm may use the multisegment strategy after successful using the concentration strategy on one market segment and expanding to other segments.
i. Shift excess production capacity.
ii. Can achieve same market coverage as with mass marketing.
iii. Price differentials among different brands can be maintained.
iv. Consumers in each segment may be willing to pay a premium for the tailor-made product.
v. Less risk, not relying on one market.
i. Demands a greater number of production processes.
ii. Costs and resources and increased marketing costs through selling through different channels and promoting more brands etc.
iii. Must be careful to maintain the product distinctiveness in each consumer group and guard its overall image.
Market Segmentation – Criteria for Selecting a Market Segment
Another aspect is the criteria for effective targeting of market segments. The marketers will have to select one or more segments to target with an appropriate marketing mix.
For a segment to be viable, it must have the following characteristics:
To facilitate division of the market in various segments based on certain common characteristics relevant to a particular product or service, the marketers must be in a position to identify these characteristics. It is easy to identify certain segmentation variables because they are easily visible or observable. These are demographics such as age, sex, marital status, education and occupation.
This information about demographic variables can be obtained either through observation or through research (by using questionnaires). Similarly, geographic segmentation (region, city size, density of area and climate) can easily be identified as they are observable or through mapping.
But there are certain characteristics which are not easily identifiable. These could be a part of the psychographics, like benefits sought or lifestyle. And it is such intangible consumer behaviour characteristics which will help the marketers, to use, as a base for market segmentation.
Another important characteristic is to ascertain the degree of measurability of the size and purchasing power of the segments. The marketer must be able to determine the size of the market that is to find out how many people are there in the segment and where they are located.
The marketer must be able to measure the sales potential of the particular segment and also be able to determine the extent of influence of the marketing mix elements on the particular segment. For instance, a restaurant may want to improve upon the F&B services offered by it.
The size of the customers will include regular customers as well as occasional customers, the latter may eat and drink (especially the youngsters) to rebel against their parents. A knowledge of such consumer behaviours, though difficult to measure will be useful to the marketer.
The extent to which the market segments can be reached and served is another area of concern. The consumers must be accessible or available to the marketers. For instance, say a company which sells ‘skin care products’, may find that heavy users of its brand are teenagers and young women, who are frequent visitors at fast-food centres and beauty parlours.
But unless the firm is able to get more information on places or store preferences and exposure to various media’s it will be difficult to reach this consumer segment. Because once the firm has found a medium that reaches their consumers, it can communicate with it’s target segment effectively. Marketers try to reach their consumers through “differentiated marketing for differentiated consumer profiles”.
Another matter of concern for the marketer is the extent to which the segments are large enough and worthy of investment. For a market segment to the worthwhile, it must have a large number of people with specific needs and interests. The size of the large segment must be big enough to be economically viable.
The size of the market is not the only indicator of the economic worthiness of the segment. It is also necessary to undertake consumer research methodology to determine whether the consumers are dissatisfied or only partly satisfied with the existing products and whether they are willing to pay for the firm’s product.
The target segment should be a large homogeneous group worth focusing with a tailored marketing programme. For instance, a company may observe that ‘retired persons’ prefer to have a rocking chair. But going by the problem faced of space availability in houses, the size of the market is shrinking in nature. In this case, the particular segment will not be substantial to make it a market.
Marketers would like to target consumers whose behaviours can be predicted. The marketers want to be sure of the stability of the consumers in terms of their demographic and psychological characteristics and wants and needs which are likely to grow faster over a period of time. Marketers would like to avoid ‘fads’ which may disappear one day because it is unpredictable in terms of durability.
A few years ago, the travel industry noticed that when the ‘airfares’ were reduced (especially with the entry of the low cost airlines) many middle class customer were exposed to a taste of international travel for leisure. Today, when economic recession has had a negative impact on the travel plans of most persons, the industry is attempting at segmenting the market by offering special product service offerings to niche market segment. This is aimed at out bound tourists who are moving beyond the popular all family group tours.
Travel companies are now offering segmented (customised) holiday offerings for men and women separately. For instance, Kesari Travels (Mumbai) has ‘My Fair Lady’ offering trips for the woman who would like to let her hair down in the company of other women. They have built up a community around its ‘My Fair Lady’ travellers. The woman customers are offered a Club Card, with discounts from Card associate companies such as Tanishq, VLCC. They also keep the link alive through get-togethers organised periodically. The offerings include trips to a variety of domestic and international destinations.
Market Segmentation – Advantages and Limitations
The main advantage of market segmentation lies in better understanding consumer needs and behaviour so that a marketer can plan accordingly.
(i) Understand Potential Customers.
(ii) Pay proper attention to particular areas.
(iii) Formulate Marketing programmes for different segments and evaluate the results whether successful or not.
(iv) Select channels of Distribution.
(v) Understand Competition and face it successfully.
(vi) Use Marketing resources efficiently that is using more resources.
(vii) Advertise products and launch sales programmes.
(viii) Design Marketing Mix-Product, Price, Place and Promotion, and
(ix) Increase in sales volume by meeting needs of different segments as per multiple demand elasticities.
(i) It is not always possible to precisely define market segments.
(ii) It may not be advantageous for a company to concentrate only on one particular segment because catering a wide market is more profitable.
(iii) Differentiated market segmentation entails incurring heavy expenditure on initiating production programmes, effecting quality improvements, updating of technology etc.
(iv) It is time-taking process.
Some Other Limitations of Market Segmentation:
1. 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.
2. Buyers often choose from a repertoire or a list of acceptable brands. Given the fact that people alternate between the brands of their list, it would be incorrect to presume and believe that a brand can be successfully positioned to appeal to a very narrow segment.
3. The various brands may be indistinguishable in product form yet differ widely in market share. Hence, no concept of differentiation among products is needed to explain market success.
4. The markets examined by them were not heavily segmented as the differences between brands were too insignificant to matter.
5. Market segmentation can be an expensive process for both the producer and the marketer. 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.