Chapter 3: Strategic Market Segmentation

Prepared by:

Ma. Anna Corina G. Kagaoan Instructor College of Business and Accountancy

Strategic Market Segmentation
• Segmenting markets performance. is a foundation for superior • Understanding how buyers’ needs and wants vary is essential in designing effective marketing strategies. • The need to improve understanding of buyers is escalating because of buyers’ demands for uniqueness and an array of technologies available to generate products to satisfy these demands.

• Buyers vary according to how they use products, the needs and preferences that the products satisfy, and their consumption patterns.

Strategic Market Segmentation
• Market segmentation is the process of identifying and analyzing subgroups of buyers in a product-market with similar response characteristics.
• Even for consumer products, the concept of a ―onesize-fits-all mass market‖ is increasingly less relevant. • The most specific form of market segmentation is to consider each buyer as a market segment—basis for ―one-to-one marketing.‖

Levels and Types of Market Segmentation
• Segmentation is an important capability in strategic marketing, which is linked to choosing market targets and positioning against alternatives to build competitive advantage. • Many traditional views emphasize segmentation as an operational tool—for example, to aim advertising effectively at different types of customers. • While advertising-oriented segmentation identifies targets that differ in responses to messages, strategic segmentation tries to identify market segments that differ in purchasing power, goals, aspirations and behavior, in ways relevant to identifying new product and value opportunities.

Levels and Types of Market Segmentation
Vision Strategic intent Product benefits
Strategic Segmentation Managerial Segmentation Operational Segmentation

Resource allocation Alignment Planning Marketing programs: - Advertising -Sales - Distribution

Exhibit 1. Levels of Market Segmentation

Levels and Types of Market Segmentation
• Strategic segmentation. Links to the management vision and strategic intent of corporate strategy and emphasizes product benefits that different types of buyers seek. • Managerial segmentation. Concerned with allocating resources around segment targets, including them in marketing plans and aligning organizational processes around them. • Operational segmentation. Concerned with the marketing program changes needed to reach segment targets with advertising and promotions, and with distribution systems.

Levels and Types of Market Segmentation
• In considering the role of segmentation, the deepest decisions are whether to revise the business model in response to how social forces are changing the lives of different types of customer, how to position a brand, which segments to pursue, and whether to make fundamental changes to the product or to develop an entirely new product. • The shallowest decisions are concerned with issues like whether to make small improvements in existing products, how to select targets of a media campaign, or whether to adjust prices.

Market-Driven Strategy and Segmentation
Segments Value opportunities New market space Matching value opportunities and capabilities Exhibit 2. Segmentation in the Market-Driven Strategy Process Market targeting Strategic positioning

Market-Driven Strategy and Segmentation
Market segmentation:
• Placing buyers in a product-market into subgroups so that members of each segment display similar responsiveness to a particular positioning strategy. • Identification process aimed at finding subgroups of buyers within a total market. The term ―market niche‖ is sometimes used to refer to a marketing segment that represents a relatively small portion of the buyers in the total market.

Market-Driven Strategy and Segmentation
Value opportunities:
• Buyers in a segment have similar value requirements concerning specific product/brand attributes. • Segmentation offers a company an opportunity to better match its products and capabilities to buyers’ value requirements. • Customer satisfaction can be improved by providing a value offering that matches the value proposition considered important by the buyer in a segment.

Market-Driven Strategy and Segmentation
New market space: • Market analysis may identify segments not recognized or served effectively by competitors.

• There may be new opportunities to tap into new areas of value and create a unique space in the market.

Market-Driven Strategy and Segmentation
Matching value opportunities and capabilities: • Examining specific market segments helps to identify how to (1) attain a closer match between buyers’ value preferences and organization’s capabilities, and (2) compare the organization’s strengths (and weaknesses) to the key competition in each segment.

Market-Driven Strategy and Segmentation
Market targeting: • Consists of evaluating and selecting one or more segments whose value requirements provide a good match with the organization’s capabilities. • When segmentation is employed, it should be by design, and the underlying analyses should lead to the selection of one or more promising segments to target.

Market-Driven Strategy and Segmentation
Positioning strategy: • Combination of the actions management takes to meet the needs and wants of each market target.

• Consists of product(s), and supporting services, distribution, pricing, and promotion components—management’s choices about how to influence target buyers by favorably positioning the product in their eyes and minds help in designing the positioning strategy.

Defining the market to be segmented

Identifying market segments

Selecting the segmentation strategy

Finer segmentation strategies

Forming market segments

Exhibit 3. Activities and Decisions in Market Segmentation

Activities and Decisions in Market Segmentation
• It is necessary to decide how to segment the market, identifying segments, which involves selecting the variable(s) to use as the basis for identifying segments—frequency (frequent, moderate, and occasional) of use of a product may be a possible basis of segmentation. • Method of forming market segments is decided. This may consist of managers using judgment and experience to divide the market into segments. Segments may also be formed using statistical analysis. Customer purchase behavior by CRM systems provides base for this analysis. • Decide whether finer (smaller) segments should be used. • Strategic analysis is conducted on each segment determine which segment to target.

Defining the Market to be Segmented
Level of Competition Product Definition Illustrative Competitors Need/Want Satisfied

Product type Product variant

Health and beauty aids
Shaving equipment Electric razors

Consumer products companies
Gillete, Bic, Rubie

Enhancement of health and beauty

Braun, Panasonic, Electric shaving Remington, Norelco

Exhibit 4. Segmentation in the Health and Beauty Supplies Market

Defining the Market to be Segmented
• Generic-level segmentation is illustrated by segmenting supermarket buyers based on shopper types (like available shopping time). • Product-type segmentation is shown by the differences in price, quality, and features. • Product-variant segmentation considers the segments within a category. • It is important to consider in defining the market to be segmented estimating the variation in buyers’ needs and requirements at the different product-market levels and identifying the types of buyers included in the market. These change rapidly so it needs frequent re-evaluation.

Identifying Market Segments
Segmentation Variables: • Characteristics of People and Organizations:  Consumer Markets. Characteristics of people fall into two categories: (1) geographic and demographic; and (2) psychographic (lifestyle and personality).  Organizational Markets. Includes types of industry (vertical market), company size, stage of industry development, and the stage of the value-added system (producer, distribution, retailer). Aided by examining (1) extent of market concentration which considers number of customers and relative buying power, and (2) degree of product customization determines the extent to which supplier must tailor the product.

Identifying Market Segments
Segmentation Variables: • Product Use Situation Segmentation. Markets may be segmented based on how the product is used. • Buyers’ Needs and Preference. Brands may used as segmentation bases and segment descriptors. Brand loyalty.  Consumer Needs. Important in (1) determining how well a brand
may satisfy need; and/or (2) indicating what change(s) are necessary to provide a better solution to a buyer’s needs.  Attitudes. Enduring systems of evaluation about brands. Reflect buyer’s overall liking or preference for a brand.  Perceptions. The process by which an individual selects, organizes, and interprets information inputs (marketing stimuli such as advertising, personal selling, price, and the product) to create a meaningful picture of the world. Perceptions form attitudes.

Identifying Market Segments
Segmentation Variables:
• Purchase Behavior. Size and frequency of purchases are useful in segmenting consumer and business markets.  Volume of the purchase.  Frequency  Buyer decisions. Can be classified according to the extent to which the buyer is involved in the decision (high or low).

Identifying Market Segments
Consumer Markets Characteristics of people/organizations Age, gender, race Income Family size Lifecycle stage Geographic location Lifestyle Occasion Importance of purchase Prior experience with product User status Brand loyalty status Brand preference Quality Proneness to make a deal Size of purchase Frequency of purchase Industrial/Organizational Markets Type of industry Size Geographic location Corporate culture Stage of development Producer/intermediary Application Purchasing procedure New task, modified rebuy, straight rebuy Performance requirements Brand preferences Desired features Service requirements Volume Frequency of purchase

Use situation

Buyer’s needs/preferences

Purchase behavior

Exhibit 5. Illustrative Segmentation Variables

Forming Market Segments
Requirements for Segmentation. It is important to decide if it is worthwhile to segment a product. Five criteria are useful for evaluating a potential segmentation strategy:
• Response Differences. Determining differences in the responsiveness of the buyers in the product –market to positioning strategy is a key segment identification requirement. • Identifiable Segments. Descriptive differences among buyers in a product-market must be matched to response differences. • Actionable Segments. A business must be able to aim a marketing program strategy at each segment selected as a market target. • Cost/Benefit of Segmentation. Evaluate the benefits vs. cost. • Stability over Time. Needs should not change too fast. Product Differentiation and Market Segmentation. Product differentiation occurs when buyers perceive an offering as different from its competition.

Forming Market Segments
Approaches to Segment Identification. Segments are formed by: (A) grouping customers using descriptive characteristics and
then comparing response differences across the groups; or (B) forming groups based on response differences (e.g. frequency of purchase) and determining if the groups can be identified based on differences in their characteristics.
A – Start with identifiers of customer groups: Characteristics of people and organizations, e.g., income, family size, industrial sector Segment identification B – Start with customer response profile: Form groups based on response patterns, e.g., frequency of purchase

Exhibit 6. Approaches to Segment Identification

Forming Market Segments
Customer Group Identification. It is necessary to select one or more of the characteristics of people or organizations as the basis of segmentation. Using these variables, segments are formed by: (1) management judgment and experience; or (2) supporting statistical analyses. The objective is to find differences in responsiveness among the customer groups. Customer grouping methods that show how segments are formed: • Management Insight and Available Information. Management’s knowledge of customer needs is often a useful guide to segmentation. This includes experience and analysis of published information.

Forming Market Segments
Customer Group Identification:
• Cross Classification Analysis. Identify customer groups using descriptive characteristics and compare response rates by placing the information in a table. • Data Mining for Segmentation. computerized databases offers segmentation analysis capabilities.
• Segmentation Illustrations.

The availability a wide range

of of

Forming Market Segments
Forming Groups Based on Response Differences. An alternative to selecting groups based on characteristics is to identify groups based on response differences. The widespread adoption of CRM systems offers greater opportunity for timely and detailed analysis of response differences between customers. Additional applications would be:
• Cluster Analysis. A statistical technique that groups people according to the similarity of their answers to questions such as brand preferences or product attributes.
• Perceptual Maps. Use of consumer research data to construct perceptual maps of buyers’ perceptions of products and brands. The information helps select market-target strategies, and decide how to position a product for a market target.

Finer Segmentation Strategies
Logic of Finer Segments:
• Customized Offerings. Capabilities of organizations to offer customized products is feasible because of extensive information flow and comprehensive databases, computerized manufacturing systems, and integrated value chains. • Diverse Customer Base. Allowing the buyer to specify the detail and design choices. Example is the automobile industry • Close Customer Relationships. By identifying customer value opportunities and developing cost effective customized offerings, relationships can be profitable and effective in creating competitive barriers.

Finer Segmentation Strategies
Finer Segmentation Strategies. Three approaches:
• Micro-segmentation. Seeks to identify narrowly defined segments using one or more of the variables. It differs from more aggregate segment formations in that it results in a large number of very small segments. • Mass Customization. Providing customized products at prices not much higher than mass produced items is feasible. Through computer-aided designs and manufacturing software, flexible manufacturing techniques, and flexible supply systems. • Variety-Seeking Strategy. Intended to offer buyers opportunities to vary their choices in contrast to making unique choices. The logic is that buyers offered alternatives may increase total purchases of a brand.

Finer Segmentation Strategies
Finer Segmentation Issues:
• How much variety should be offered to buyers? What attributes are important in buyers choices and to what extent do they need to be varied? • Will too much variety have negative effects on buyers? It is possible that buyers will become confused and frustrated when offered too many choices? • Is it possible to increase buyers’ desire for variety, creating a competitive advantage? • What processes should be used to learn about customer preferences? This may involve indirect methods (e.g., database analysis), or involving buyers in the process.

Selecting the Segmentation Strategy
Deciding How to Segment. The choice of a segmentation method depends on such factors as the maturity of market, the competitive structure, and the organization’s experience in the market. An essential first step in segmentation is analyzing the existing customer base to identify groups of buyers with different response behavior.

Selecting the Segmentation Strategy
Strategic Analysis of Market Segments:
• Customer Analysis. Find out as much as possible about the customers in each segment. An essential part of customer analysis is determining how well the buyers in the segment are satisfied.
• Competitor Analysis. It is also important to anticipate the future strategies of key competitors. • Positioning Analysis. Obtain guidelines for positioning strategy which should meet the needs and requirements of the targeted buyers at a cost that yields a profitable margin for the organization.

Selecting the Segmentation Strategy
Strategic Analysis of Market Segments:
• Estimating Segment Attractiveness. Financial and market attractiveness of each segment needs to be evaluated. Included are the specific estimates of revenue, cost, and segment profit contribution over the planning horizon. • Segmentation and ―Fit‖ and Implementation. One important aspect of evaluating segment attractiveness is how well the segment match company capabilities and the ability to implement marketing strategies around those segments. It is important to realistic in balancing attractiveness of segment against the ability of organization. • Segment Attractiveness Analysis. Estimate sales, costs, contribution margin, and market share.