Market segmentation

Preface

Segmentation is important as buyers have unique needs and wants. In segmenting a market, marketers look for broad classes of buyers who differ in their needs. There is no one right way of segmenting markets. A marketer has several bases available to him/her for the segmentation of markets.

It is the division of a heterogeneous market consisting of buyers with different needs and wants, into homogeneous segments of buyers with similar needs and wants. Therefore, the segments are heterogeneous between (iie. all the segments are different, eg. one segment all males, one segment all females) themselves, but homogeneous within (eg. within the male segment, all buyers are male; within the female segment, all buyers are female).

Market segmentation is the division of a market into distinct groups of buyers who might require different products or marketing mixes (Kotler et al, 1994).

The aim of our paper is to describe what exactly segmentation is, what are segments in the market and how to seegment market.

The goals of our paper are:
1. Present concept of segmentation.
2. To find out what segments are in the market;
3. To ascertain how to segment a market;

The method of our paper is literature analysis.

1. The importance of market segmentation

Market se

egmentation means the analysis of a particular market demand on the basis of its constituent parts, so that sets of buyers can be differentiated. It is an important input to marketing planning because it can be used to formulate company “product-market” objectives, by which the enterprise may:

define its markets;

position ranges of brands and product varieties;

identify gaps which offer significant opportunities for expansion or new product positioning;

Rationalize policies for existing brands, products and mixes.

Market segmentation plays a dual role, namely as a marketing tool, and as a basic input to business planning. Its role in business planning is dealt with in a later chapter.
There are three main reasons for the importance of market segmentation. These are:

market fragmentation, caused by demographic and liifestyle changes, new product and process developments and intense market competition/Some markets, which once had a homogeneous character, have tended to splinter into a variety of consumer groups, each with different tastes and preferences;

The development of retailer power, in which the relative advantage obtained from bulk buying, the use of retailers’ “own brands”, and policy limitations on the range of items stocked have all combined to put the manufacturer or supplier at a disadvantage. At the same time concentration has oc
ccurred amongst retail companies, leaving a small number of very large companies as well as a large number of smaller retailers.

The volume trap, in which markets for commodity type products (like plant-baked bread) may become dominated by suppliers capable of volume production and distribution to retail multiple chains bulk-buying on a centralized basis.

In each case, market segmentation offers an answer to the marketer. For instance, non-standard or value-added lines are now frequently targeted on customer segments which seek to avoid the purchase of standardized products, whether these are foodstuffs, clothes, computers or industrial machinery. Alternatively, production arrangements may be designed to be flexible enough to supply target markets in a large number of relatively small and specialized niches, such as in the market for industrial or aviation control systems.

Technological developments in product design, manufacturing, distribution and retailing have also been essential to meeting these market developments. Technological developments have permitted product differentiation, and made possible more flexible production and supply arrangements. Such changes are needed if the demands of an increasing number of market segments are to be met, especially if they are relatively small in volume and value.

2. Marketing complex

Marketing departments use segmentation so they can target their products mo

ore accurately. It affects each of the 4Ps in their marketing mix:

Product

Price

Promotion

Place

If the product is effectively segmented a company will be able to promote the right product, at the right price and use the right distribution to reach the place where the consumers are.

Now look at the way the 4Ps are used in market segmentation.

Product
Firms have a range of products that will be targeted at different groups or segments. For example, a car manufacturer will often have a range that includes a family model, an executive model and a sports model. Lifestyle segmentation will be used to develop their product line and to target their products.
Price
Price and quality are obviously linked but not everyone can afford to buy the most expensive goods. There is a large range of televisions on the market, for example, each with slightly different features. Within this range of products, there will also be a range of prices to cater for varying disposable incomes.
Promotion
Studying how a product is advertised can reveal its target market. A mobile phone company recently used advertising campaigns that varied for men and women. The male phone was pictured in black and white, and all its features an

nd business applications described. The female phone was in bright colors, and was pictured as a matching accessory to go with a woman’s lipstick and handbag. You may not agree with this stereotyping, but it is a good example of gender segmentation.
Place
A firm needs to know where its target market is. A producer of kosher food needs to identify areas where Jewish people live. The firm would have to consider how best to get its product to these areas. This is an example of cultural segmentation.
3. Segmentation definitions

Market segmentation means THE ANALYSIS OF A PARTICULAR TOTAL DEMAND IN TERMS OF ITS CONSTITUENT PARTS, SO THAT SETS OF BUYERS CAN BE DETERMINED. These sets of buyers should possess anguishing characteristics, so that:
* they may be used as marketing targets against which products are positioned to meet segment customer need;
* A marketing mix appropriate to a particular segment may be selected.

Segmentation starts with the notion that a “global” analysis total market demand needs to be broken down into its component parts. These are likely to be more effective for marketing and operational planning purposes. The mass producer (who may be production, quality or sales orientated) may attempt to supply all, or a substantial part of this total demand and in so doing may consider that he can obtain a price, volume or distribution advantage relative to smaller scale producers. However, this mass producer is then forced to market a product range that is limited to a demand pattern of hypothetical “average consumers”. At the same time he will miss out on segments of the market which in mass production or distribution terms are not thought economic to supply. This strategy has two basic flaws:

It assumes that the profile of the “average consumer” is adequately representative of the majority of buyers within the market. This may mean that a production orientated company is (paradoxically) dependent on the effectiveness of its marketing skills in selling and promotion to sell adequate volumes in the marketplace. Yet in industrial goods markets there may be no such thing as an average consumer; each buyer’s demand pattern and requirement may be different.

A significant proportion of the market may comprise consumers who require non-standard products simply because they are not able or willing to conform to standardized purchasing patterns

Market segmentation, therefore, represents a recognition that people as buyers and consumers differ in their needs, taste family and cultural background, motivation, lifestyle a-attitudes towards products and purchases.

4. Customer/user characteristics

In this case, consumers or users are allocated into different groupings according to the way they may be categorized, thus:
4.1 Consumer markets

Geographic Distribution – for instance, a substantial proportion of total UK demand is concentrated in London and the South East. Geographic segments are also important in rendering manageable a worldwide marketing activity. International marketing activities might be concentrated for example on South East Asian countries that have relatively high per capita income and large concentrations of population in cities such as Singapore, Hong Kong, Manila, Canton or Djakarta.

Demography – in which the population is categorized according to age, sex, socio-economic group, income, housing, family characteristics and stage in family cycle.

Life-Style – the relevant population may be categorized on the basis of distinct patterns of work, leisure, or attitude to consumption of particular goods or services.

For example, an analysis of geographic distribution, demographic and life-style characteristics might be used to segment the market for value-added furnishing products, and determine appropriate distribution channels to be sought.

Personality – which is believed to be significant in the ‘trickle down* process (or diffusion) of new products. In particular, opinion leaders may be important in increasing the level of recognition and acceptance of a new product, or in situations where innovatory behavior is required of the consumer (for example in purchasing a completely new car model as soon as it is launched).

Consumption Rate —consumers may be segmented on the basis of the volume and frequency of purchase. They might, for example, fall into any of the following six categories:-,
USERS NON USERS
Light Convinced non-users
Medium Non-potential accidental users Heavy Potential users.

The objective of marketing strategy towards these six segments would be to maintain and increase the incidence of medium and heavy consumption of the company’s products or brands; and to upgrade the other categories in the company’s favor. For instance, a manufacturer of household detergents might aim to increase the housewife’s use of any one of its proprietary brands, and also persuade her to purchase other company products for other household cleaning, such as washing up or spray polishing.
4.2 Industrial Goods Markets

Geographic Distribution – this is particularly important where personal selling by sales representatives is the main element of the company’s promotional mix. Personal selling is a very expensive activity to maintain, and it may be best suited to relatively concentrated markets, such as in the UK for ceramics or steel manufacture, or those in which buying is carried out on a centralized basis.

Customer Size – the various industrial customers may be grouped according to their size, and potential purchase quantity. The nature of the marketing process may have to vary with customer size; paint manufacturers will for instance have to get themselves onto a list of approved contractors before they can even bid for orders to major customers such as the railways or car manufacturers.

Usage Rate – the supplier may attempt to increase the purchase rate of the customer, so that the customer becomes a heavier user, or may instead try to increase his proportion of the customer’s total order or the product.

Industry Classification – steel marketing is often segmented on this basis, since the UK Standard Industrial Classifications are readily understood and market data is frequently based upon them. Such classifications render the process of categorizing diverse market opportunities more manageable. After all, steel is purchased by every industrial sector in the economy.

5. Product segmentation

This second approach focuses on how consumers or buyers perceive, group together, and differentiate between the available products, brands of services. Products or services may then have to be fitted or positioned according to these perceived market patterns. This segmentation basis can be explained thus:

People may seek the benefits that products provide, rather than the products themselves. Market Research should be able to establish the nature of these benefits.

Consumers may consider the available alternatives from the vantage point of the usage contexts with which they have experience, or the specific applications they are considering. // is the usage requirement which dictates the benefit being sought.

Segmentation based on usage contexts is held to be particularly efficient because it permits product and marketing planning to be based on customer perceptions of what is required of, or desirable in that product. It is not based on the preconceived characteristics of (some possibly arbitrary) category of customer delineated on demographic or income criteria, or media data.

Three examples of Product Segmentation are given below.
5.1) Segmentation by Benefit.

A first variation on this theme will be product segmentation based on customer perceptions of “value for money”. Product segmentation of this sort is visible in clothes retailing, and the distribution of fitted kitchens and bedroom furniture.

A second variation applicable to industrial goods markets will be customer perceptions of operating characteristics, which may carry greater weight than the technical specifications that may form the basis of the supplier’s sales pitch. Buyers of commercial vehicles or heavy trucks, for instance, may prefer to buy products that they know will “feel right” to drivers, and which at the same time are straightforward for their maintenance crews to service.
5.2) Vendor Segmentation

It may be necessary for suppliers in industrial goods markets to sharpen the focus of their own market segmentation policy by studying the specific demands and usage perceptions of the customers of the firms they supply. Thus, not only are own customers in focus, but the demands of the next group of customers “down the line” are part of the segment. This is called Vendor Segmentation.

After all, the supplier’s products are only of benefit to his customer because the “end user” perceives them to be acceptable. This is obviously the case in markets such as civil or electrical engineering, but the principle is widely applicable.
5.3) Contribution Targets

Retail outlets will view the products that they buy from manufacturers or wholesalers as items that should provide the maximum Contribution per unit of limiting factor, which is floor space. The usage context or benefit is simply one in which the total stock type, taken together, should bring in as much Contribution as possible per square meter. Lines that fail to meet minimum Contribution targets are eliminated from the stock range, unless their presence (for instance as loss leaders or long-established lines maintained for customer goodwill purposes) supports the achievement of the overall Contribution objective.
6. Segmentation techniques and product positioning

A market segment may be identified and analyzed using the reasons for demand, whether these reasons are consumer or product orientated. Two examples are given below, thus:

Consumer criteria (UK demand segment for low cost , European travel):
Age range: concentrated between 18 and 30;
Sex: both male and female;
Socio-economic class: A Bl B2 Cl;
Occupation: predominantly full-time student;
Source of finance: parental; casual holiday or part-time earnings;
Special factors: access to discount arrangements; hold student travel cards;
Personality indicators: innovative behavior, tendency to extraversion, high tolerance of low standards of travel and accommodation modes.

Product criteria (UK demand segment for high season air inclusive tour package family holidays):
Principal benefit sought: sunshine, warmth, comfortable accommodation, relaxed atmosphere;
Retail price: (say) between £200 and £500 for one or two weeks, per person;
Duration: 7, 10 or 14 days, with emphasis on departure/return on Fridays, Saturdays or Sundays;
Location and climatic requirements: Mediterranean coast, guaranteed sunshine, warmth;
Mode of transport: air charter flights;
Mode of accommodation: two, three and four star equivalent hotels or self catering apartments. High standards of plumbing, sanitation and hygiene;
Special factors: school summer holiday peak demand; operator reliability and continuity; English spoken by guides and hotel staff; airport security and aircraft safety; access to long term airport car parking.

This process of identification and analysis may be carried out in a number of ways, for instance:

by using intuition based upon an interpretation of existing knowledge of the market;

By using any of the wide array of market research techniques, based on internal sources of information about the market, and field research. The information so obtained may then have to be re-arranged to show segment differences, and again this process of
interpretation may be subjective or objective, depending on how statistically valid the end product must be;

By using an analysis of attribute sets. Attribute sets are analyzed in section 6.1 below
6.1) Attribute Sets

Attribute sets are combinations of individual reasons for demand. Complex statistical multivariate procedures can be used to correlate and group market research data so as to give a statistically accurate identification of :-

the size of segment groups and their similarities;

the differences between the various groupings of attribute sets;

The relationship of these groups to important consumer, market or product/benefit requirements.

These statistical procedures have two components.

The first is Factor Analysis which examines the correlations between variables across the respondents or products surveyed.

The second is Cluster Analysis which seeks correlations between respondents or products across the segmentation variables being used.

Various distributions of attribute sets are possible. But where Cluster Analysis can show the existence of sufficiently large groupings of respondents, or product/ benefit requirements which have similar attribute sets, then these may be used as MARKETING TARGETS, if the benefits of selling into them are likely to exceed the cost.

6.2) Product Positioning and differentiation

The company should then use the segments that it has defined as targets against which products may be positioned. The product range or “mix” (defined in a later chapter) should emphasize those product attributes or differences which are appropriate to the characteristics and requirements of clusters or segments that are seen as most viable in commercial terms. Similarly, an appropriate promotional “mix” may be formulated to provide the most effective communication to, and persuasion of those specific people who make up the segment, or are likely to seek the product or its benefits within the purchase contexts that the analysis has identified.

The product differentiation is a direct means of implementing the marketing concept. People seek the benefits that products provide, rather than the products or brands themselves. Specific products or brands should therefore be differentiated by those combinations of benefits and costs sought by a particular set of potential customers. It may be impracticable and unrealistic in segmentation terms for a company to try to incorporate into one product all the benefits and costs sought by all potential customers. Similarly, it may be highly risky if the product or brand contains only those benefits and costs selected on a subjective basis by the supplier, without reference to the marketplace itself.
7. The validity and viability of market segmentation

In order for the market segmentation process to provide a valid input to company planning for products and markets, it must fulfil two basic requirements. Firstly, can the process identify, describe and measure segments in a useful and meaningful manner? Secondly, can the enterprise provide adequate flows of accounting data so that analysis of costs and revenues associated with segment activities are available for planning and control purposes?

Hence, the four standard tests of segment VALIDITY:

IDENTIFICATION – does the segmentation process discriminate meaningfully between sets of buyers, and does it pick out differences in market demand patterns?

MEASURABILITY – can the main features of each segment be measured and expressed in useful terms?

ACCESSIBILITY – can the enterprise actually direct its marketing effort at a particular segment, both in terms of product/product development, and marketing mix?

VIABILITY – to what degree will the revenue gained from selling into a segment offset the total cost involved?
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