Major Levels of Market Segmentation and

Bases for Segmenting Consumer and

Business Markets
This discusses Three Major levels of market segmentation
and bases for segmenting consumer and business markets.
Definition:
“Market segmentation is the process of splitting customers, or potential customers, in a market
into different groups, or segments”
The Process of Market Segmentation:
Mainly there are three steps involve in market segmentation.
Identifying Target Markets:
First, it is necessary to define the markets the organization is in, or wishes to be in, and how
these divide into segments of customers with similar needs. The choice of markets will be
influenced by the corporate objectives as well as the asset base. Information will be collected
about the markets, such as the markets’ size and growth, with estimates for the future.
Understanding the Value required by Target Market:
Once each market has been defined, it is necessary to understand what value the customers
within each of the segments it divides into are looking for. This value is most simply thought of
as the benefits gained from the product or service, but it can also encompass the value to the
customer of surrounding services such as maintenance or information. This step also
encompasses what the customer is prepared to give in exchange, in terms of price and other
criteria, such as loyalty. This step of “Understand value required” also includes predicting the
value which will be required in the future.
Understanding Competitor Value Positioning:
‘Understand competitor value positioning’ refers to the process of establishing how well the
organization and its competitors currently deliver the value that the customers seek. Again it
involves looking into the future to predict how competitors might improve, clearly a factor in
planning how the organization is to respond.
From these three processes, the relative attractiveness of the different markets and, within each
of them, their different segments can be evaluated. One tool of relevance here is Porter’s five
forces model (1985), showing the forces which shape industry competition and hence the
attractiveness of a given market, or of a given segment. The output will be some form of
analysis, and one way of summing up much of the key information is in a portfolio matrix. Such
a matrix provides a sensible basis for prioritization amongst the many possible product/ segment
combinations which the organization could address.

Levels and Basis of Market Segmentation

The following is a brief review of the “predetermined” approaches frequently used in market
segmentation.
Products and services
The problem with segmenting markets according only to the products or services offered, or the
technology type, is that in most markets, many different types of customers buy or use the same
products or services. For example, if a mail company organizes itself around express packages,
or around mail sorting, it is unlikely that the company will ever get to understand fully the real
and different needs of, say, universities, banks, advertising companies, direct mail houses,
manufacturing companies, retailers and so on. However, by understanding which particular
features of the product or service appeal to different customers, along with features associated
with all the other aspects of a purchase, such as the channel, we have a route for understanding
the motivations behind the choices that are made. This is because it is through these features that
customers seek to attain the benefits they are looking for. Once this is understood, the needs-
based propositions required for different segments can be developed.
Demographics
Variables such as sex, age, lifestyle and so on, when used to define segments, are by implication
claiming, for example, that every 30-35-year-old will respond to the same proposition.
Just reflect for a moment on the students in my years at school; would I expect them all to be
wearing the same clothes, taking the same types of holidays, pursuing the same interests and
driving the same cars? When someone wakes up on their birthday, do they become a stereotype
associated with that age? For administrative convenience i would like the answer to be “yes”, but
the answer is “no”. In business-to-business markets, customers are frequently segmented around
business classification lines, which implies that all the companies in a particular sector, such as
financial services, have exactly the same requirements and will respond to a single proposition.
This approach could well be ignoring one or more of the following:
• Different divisions and departments existing behind the business descriptor may have
different applications for the product or service you supply. For example, would the mail
 company mentioned earlier find that the advertising and promotions department has the
same requirements and specifications for mail services as the sales ledger department?
• The requirements of, say, advertising and promotions departments may well be the same
regardless of business type;
• Even within a single division of a company, there may well be different applications for
the product or service you supply which, in turn, may have different specifications
attached to them;
• Segmentation along business classification lines assumes all the companies within the
classification employ identical people with identical values. Businesses, of course, don’t
buy anything; it’s their employees we have to sell to!
Although demographics on their own cannot define a segment because they do not define the
proposition a segment requires, they have an important role to play in a segmentation project.
This background information about customers can be used to identify the particular profiling
characteristics associated with the customers found in each segment. In other words,
demographics helps identify who is found in each segment which, in turn, will help you
determine how to reach them.
Geography
Rather like demographics, segments based on geographic areas, however tightly defined, assume
that everyone in a predetermined area can be expected to react to a particular offer in exactly the
same way. Even at the postcode level this does not appear to work; simply if we look along our
own street. Has everyone got the same furniture, do they buy from the same shops, eat the same
food? Once again, however, although geographic areas on their own cannot define the
propositions required by segments and, therefore, cannot define segments, they, too, have a
useful role to play in a segmentation project. This particular type of background information
about customers can be used to identify the most likely locations the customers in each of the
segments may be found and, therefore, further help you determine how to reach them. A further
consideration with respect to “geography” is its use in international market segmentation.
Channel
Routes to market are becoming more sophisticated and complex, and are also becoming an
increasingly important component of many winning customer propositions. Channels in
themselves, however, do not define segments as they are simply the means by which customers
and companies connect with each other. It is only when you understand the motives behind the
channel choices made by customers that the channel component of a needs-based proposition can
be developed. However, even if channel does not feature as a key component of a winning
proposition, it is, along with demographics and geography, background information about
customers that should be tracked during a segmentation project. It could well be that some
segments can be associated with particular routes to market; therefore it is the channel(s) they
use that provides the means for reaching them with their specific proposition.
Psychographics
Here we have another customer insight that can contribute to a segmentation project but, on its
own, cannot define the entirety of a winning customer proposition. However, by identifying
internal drivers of customer behavior that can be associated with specific segments,
psychographics can help define the most appropriate promotional stance to take. This not only
provides the means of catching the attention of target groups in an ever cluttered world of
communication, it can also provide the means by which you isolate and reach particular
segments.

Levels of Market Segmentation

Market segmentation represents an effort to increase a company''s targeting precision It can be carried
out at four levels segments, niches, local areas, and individuals

Market segmentation represents an effort to increase a company''s targeting precision. It can be carried
out at four levels: segments, niches, local areas, and individuals. Before we discuss these levels,
however, we need to say a word about mass marketing.

MASS MARKETING. In mass marketing, the seller engages in the mass production, mass distribution,
and mass promotion of one product for all buyers. Henry Ford epitomized this marketing strategy when he
offered the Model-T Ford to all buyers; they could have the car "in any color as long as it is black." Coca-
Cola also practiced mass marketing for many years when it sold only one size Coke in a 6.5-ounce bottle.

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
critics point to the increasing splintering of the market, which makes mass marketing more difficult.
According to Regis McKenna:

[Consumer]. . . have more ways to shop: at giant malls, specialty shops, and superstores; through mail-
order catalogs, home shopping networks, and virtual stores on the Internet. And they are bombarded with
messages pitched through a growing number of channels: broadcast and narrow-cast television, radio,
on-line computer networks, the Internet, telephone services such as fax and telemarketing, and niche
magazines and other print media.
The proliferation of advertising media and distribution channels is making 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 micromarketing at one of four levels.

SEGMENT MARKETING. A market segment consists of a large identifiable group within a market. A
company that practices segment marketing recognizes that buyers differ in their wants, purchasing power,
geographical locations, buying attitudes, and buying habits. At the same time, though, the company is not
willing to customize its offer/communication bundle to each individual customer. The company instead
tries to isolate some broad segments that make up a market. For example, an auto company may identify
four broad segments: car buyers seeking basic transportation, those seeking high performance, those
seeking luxury, and those seeking safety.

Thus segmentation is a midpoint between mass marketing and individual marketing. The consumers
belonging to a segment are assumed to be quite similar in their wants and needs. Yet they are not
identical. Some segment members will want additional features and benefits not included in the offer,
while others would gladly give up something that they don''t want very much. For example, Ritz-Carlton
Hotels target affluent guests and provide many amenities and a lower price. Thus segment marketing is
not as precise as individual marketing but is much more precise than mass marketing.

Segment marketing offers several benefits over mass marketing. The company can create a more fine-
tuned product/service offer and price it appropriately for the target audience. The choice of distribution
channels and communications channels becomes much easier. And the company may face fewer
competitors if fewer competitors are focusing on this market segment.

NICHE MARKETING. Market segments are normally large identifiable groups within a market?for
example, nonsmokers, occasional smokers, regular smokers, and heavy smokers. A niche is a more
narrowly defined group, typically a small market whose needs are not being well served. Marketers
usually identify niches by dividing a segment into subsegments or by defining a group with a distinctive
set of traits who may seek a special combination of benefits. For example, the sema, and heavy smokers
with emphysema who are overweight.

While segments are fairly large and thus normally attract several competitors, niches are fairly small and
normally attract only one or a few competitors. Niches typically attract smaller companies. Larger
companies, such as IBM, whose lose pieces of their market to nichers; Dalgic labeled this confrontation
as "guerrillas against gorillas." As a defense, some larger companies have turned to niche marketing,
which has required more decentralization and some changes in the way they do business. For example,
Johnson & Johnson consists of 170 affiliates (business units), most of which pursue niche markets.

Niche marketers presumably understand their niches'' needs so well that their customers willingly pay a
price premium. For example, Ferrari gets a high price for its cars because its loyal buyers feel that no
other automobile comes close to offering the product-service-membership benefit bundle that Ferrari
does.

An attractive niche is characterized as follows: The customers in the niche have a distinct and complete
set of needs; they will pay a premium to the firm best satisfying their needs; the "nicher" has the required
skills to serve the niche in a superior fashion; the nicher gains certain economies through specialization;
the niche is not likely to attract other competitor or the nicher can depend on itself; and the niche has
sufficient size, profit, and growth potential.

An advertising agency executive wrote: "There will be no market for products that everybody likes a little,
only for products that somebody likes a lot." A chemical company executive predicted that chemical
companies that succeed in the future will be those that can identify niches and specialize their chemicals
to serve each niche''s needs. According to Linneman and Stanton, niche-pickers will find riches in niches
and companies will have to niche or be niched. Blattberg and Deighton claim that "niches too small to be
served profitably today will become viable as marketing efficiency improves." In many markets today,
niches are the norm.

LOCAL MARKETING. Target marketing is increasingly taking on the character of regional and local
marketing, with marketing programs being tailored to the needs and wants of local customer groups
(trading areas, neighborhoods, even individual stores). Thus Citibank provides different mixes of banking
services in its branches depending on the bank''s neighborhood demographics. And Kraft helps
supermarket chains identify the cheese assortment and shelf positioning that will optimize cheese sales in
low-income, middle-income, and high-income stores, and in different ethnic communities.

Those in favor of localizing a company''s marketing point to the pronounced regional differences in
communities'' demographics and lifestyles. They see national advertising as wasteful because it fails to
address local target groups. They also see powerful local and regional retailers who are demanding more
fine-tuned product assortments for their neighborhoods.

Those against local marketing argue that it drives up manufacturing and marketing costs by reducing
economies of scale. Logistical problems become magnified when companies try to meet different regional
and local markets'' requirements. And a brand''s overall image might be diluted if the product and
message differ in different localities.

INDIVIDUAL MARKETING. The ultimate level of segmentation leads to "segments of one," "customized
marketing," or "one-to-one marketing." The prevalence of mass marketing has obscured the fact that for
centuries consumers were served as individuals: The clothier tailor-made the suit, the cobbler designed
shoes for the individual, and so on. And much business-to-business marketing today is customized, in
that a manufacturer will customize the offer, logistics, and financial terms for each major account. It is the
new technologies?specifically computers, databases, robotic production, and instant communication
media such as e-mail and fax?that are permitting companies to consider a return to customized
marketing, or what is called "mass customization." Mass customization is the ability to prepare on a mass
basis individually designed products and communications to meet each customer''s requirements.