Professional Documents
Culture Documents
Market Segmentation
Introduction
1. Attributes of effecting segmentation
2.Criteria for selecting market segments
3. Basis of consumer market segmentation
4. Basis of business market segmentation
Forming Segments
1. Requirements for segmentation
2. Product differentiation and market
3. Customer group identification
4. Forming groups based on response differences
Examples
MARKET SEGMENTATION
INTRODUCTION
The market for any product is normally made up of several segments. A market after
all is the aggregate of consumers of a given product. And, consumer (the end user),
who makes a market, are of varying characteristics and buying behavior. There are
different factors contributing for varying mind set of consumers. It is thus natural that
many differing segments occur within a market.
In order to capture this heterogeneous market for any product, marketers usually divide
or disintegrate the market into a number of sub-markets/segments and the process is
known as market segmentation market segmentation. Thus we can say that market
segmentation is the segmentation of markets into homogenous groups of customers,
each of them reacting differently to promotion, communication, pricing and other
variables of the marketing mix.
Market segments should be formed in that way that difference between buyers within
each segment is as small as possible. Thus, every segment can be addressed with an
individually targeted marketing mix. The importance of market segmentation results
from the fact that the buyers of a product or a service are no homogenous group.
Actually, every buyer has individual needs, preferences, resources and behaviors.
Since it is virtually impossible to cater for every customers individual characteristics,
marketers group customers to market segments by variables they have in common.
These common characteristics allow developing a standardized marketing mix for all
customers in this segment.
Through segmentation, the marketer can look at the differences among the customer
groups and decide on appropriate strategies/offers for each group. This is precisely why
some marketing gurus/experts have described segmentation as a strategy of dividing
the markets for conquering them.
Segmenting markets is the foundation for superior performance. Understanding how
buyer needs and wants vary is essential in designing effective marketing strategies.
Segmenting markets may be critical to developing to developing and implementing
market driven strategy.
The need to improve an organizations understanding of buyers is escalating because of
buyers demand for uniqueness and an array of technology available to generate
Geographic variables
Demographic variables
Psychographic variables
Behavioral variables
Geographic Segmentation
In geographical segmentation, market is divided into different geographical units like:
A company, either serving a few or all geographic segments, needs to put attention on
variability of geographic needs and wants. After segmenting consumer market on
geographic bases, companies localize their marketing efforts (product, advertising,
promotion and sales efforts).
Demographic Segmentation
In demographic segmentation, market is divided into small segments based on
demographic variables like:
Age
Gender
Income
Occupation
Education
Social Class
Generation
Family size
Family life cycle
Home Ownership
Religion
Ethnic group/Race
Nationality
Demographic factors are most important factors for segmenting the customers groups.
Consumer needs, wants, usage rate these all depend upon demographic variables. So,
considering demographic factors, while defining marketing strategy, is crucial.
Psychographic Segmentation
In Psychographic Segmentation, segments are defined on the basis of social class,
lifestyle and personality characteristics.
Psychographic variables include:
Interests
Opinions
Personality
Self Image
Activities
Values
Attitudes
Usage Rate
Product benefits
Brand Loyalty
Price Consciousness
Occasions (holidays like mothers day, New Year and Eid)
User Status (First Time, Regular or Potential)
There are many ways that a segment can be considered. For example, the auto market
could be segmented by: driver age, engine size, model type, cost, and so on. However
the more general bases include:
A company will evaluate each segment based upon potential business success.
Opportunities will depend upon factors such as: the potential growth of the segment the
state of competitive rivalry within the segment how much profit the segment will deliver
how big the segment is how the segment fits with the current direction of the company
and its vision.
Market analysis may identify segments which are not recognized or served effectively
by the competitors. There may be opportunities to tap into new areas and create a
unique space in the market.
For example, in France Accor has established the highly successful formula 1 hotel
chain by building a new market segment in between the traditional strategic groups in
the hotel market.
In general one star hotels offer low prices; on the other hand two-star hotels offer more
amenities and charge higher prices.
Accor analysis of customer need found that customer choose the one star hotel
because it is cheap, but trade up from the one star hotel to the two star hotel for the
sleeping environment that is clean ,quiet rooms with more comfortable beds not all
the other amenities that are offered.
While formula 1 provides the superior sleeping environment of the two star hotel, but
not the other facilities, which allows it to offer this at the price of the one star hotel.
Formula1 had built a market share larger than sum of the next five largest competitors.
efficient planes having half the cargo space of those being replaced. Atlas customers
include British airways, china airlines, KLM Lufthansa, Swissair, and SAS, all attracted
by low cost and reliable services.
Atlas AIR carries flowers and shoes from Amsterdam to Singapore for KLM and fish
cattle, and horses from Taipei to Europe for china air.
Positioning involves implementing our targeting. For example, Apple Computer has
chosen to position itself as a maker of user-friendly computers. Thus, Apple has done a
lot through its advertising to promote itself.
They iterate that any brand is valued by the perception it carries in the prospect or
customer's mind. Each brand has thus to be 'Positioned' in a particular class or
segment.
Example: Mercedes is positioned for luxury segment, Volvo is positioned for safety.
The position of a product is the sum of those attributes normally ascribed to it by the
consumers its standing, its quality, the type of people who use it, its strengths, its
weaknesses, any other unusual or memorable characteristics it may possess, its price
and the value it represents.
Although there are different definitions of Positioning, probably the most common is: A
product's position is how potential buyers see the product", and is expressed relative to
the position of competitors. Positioning is a platform for the brand. It facilitates the brand
to get through to the mind of the target consumer .The position of the brand has thus to
be carefully maintained and managed.
Example: When Marlboro cut down its prices, its sales dropped immediately, as it
began being associated with the generic segment. Watches like Rolex are positioned as
luxury segment watches, thus they being one of the most expensive have become a
symbol for accomplishment in life. If Rolex reduces its prices, it loses its perceived
image and hence is in danger of losing its customers.
Demographics are often more useful to describe consumer segments after they have
been formed rather than to identify them. Nonetheless, variables are popular because
available data often relate demographics to the other segmentation variables.
Geographic location maybe useful for segmenting product markets. Example, there are
regional differences in the popularity of transportation. In several US states the most
popular vehicle is the pick-up truck. The truck belt runs from the upper mid west &
through Texas & the Gulf coast states. The Ford brand is dominant in the northern half
of the truck belt while Chevrolet leads in the southern half.
Concentration considers the number of customer and the relative buying power. Product
customization determines the extent to which the supplier must tailor the product to
each organizational buyer. If one or both of these factors indicate quite a bit of diversity,
segmentation opportunities many exist.
Boeing caters to the specific needs of each air carrier purchasing commercial aircraft.
Example, an airline ordering a 747 has a choice of 4 configurations for the interior wall
at the front of the rare cargo compartment. This decision how 2,550 parts are installed.
While Boeings efforts to provide customized designs are preferred by the customers,
the costs are high & Boeing has had to evaluate the value/cost relationship of its
attempts to satisfy the needs of single airline segments.
Cost sensitive physician for whom cost is paramount such as those with
a sizeable number of indigent patient.
A sales representative provides the medical thought leader with cutting-edge clinical
studies, where as the cost- sensitive doctor is provided information related to cost of
treatments.
Mass customization offers a promising means of responding to different use
situation at competitive prices. Example, lutron electronics gives its buyers
customized light dimmer switches by programming desired features using computer
chip build into the switches- the company holds 80% of all dimmer patents, and has
achieved a 75% market share, with a product catalog including several thousand
product variation in dozen of colors.
Determining how well a particular brand may satisfy the needs, and/or,
Attitudes
Buyers attitudes towards brands are important because experience and research
findings indicate that attitudes influence behavior. Attitudes are enduring systems of
favorable or unfavorable evaluation of brands. Attitudes may develop from personal
Forming Segments
The credit card division of American Express (AMEX) identifies market segments based
on purchase behavior. One group of cardholders pays the annual fee for the card but
rarely uses it. This group of zero spenders is made up of:
AMEXs objective is to identify the second group of potential buyers because they offer
card usage opportunities and may potentially give up their card. AMEX uses selfselecting incentive offers (e.g. two free airline tickets for heavy card use over six
months) to identify the valuable nonuser cardholders. While this segmentation approach
is expensive, it costs less than obtaining a new customer to replace one who leaves
AMEX. It also does not require using expensive marketing research to identify card
holders with the ability (financially) to use their cards.
Requirements for segmentations
An important question is deciding if its worthwhile to segment a product-market. E.g.
Gillette has successfully adopted a one product for all strategy in the razor market.
While in many instances segmentation is a sound strategy, its feasibility and value need
to be evaluated. Nonetheless, the growing fragmentation of mature mass markets into
segments with different needs and responsiveness to marketing actions may mandate
segmentation strategy. Correspondingly, the growth of narrowcast media cable
television & radio; specialized magazines; cell-phone and personal digital assistant
screens; and the internet makes major changes in the costs of reaching market
segments. Segment targets that could not traditionally be reached with communications
and product variants to match their needs at reasonable costs to the seller may now be
accessible targets.
It is important to decide if it is worthwhile to segment a product-market. Five criteria
useful for evaluating a potential segmentation strategy are:
1. Response Differences
Determining differences in the responsiveness of the buyers in the product-market to
positioning strategies is a key segment identification requirement. Suppose the
customers in a product-market are placed into four groups, each a potential
segment, using a variable such as income. If each group responds (e.g. amount of
purchase) in the same way as all other groups to a marketing mix strategy, then the
four groups are not market segments. If segments actually exist in this illustration,
there must be, there must be differences in the responsiveness of the groups to
marketing actions, such as pricing, product features, and promotion. The presence
of real segments requires actual response differences. Simply finding differences in
buyers characteristics such as income is not enough.
E.g. A study conducted by a New Delhi thing tank identifies a premium segment in
the Indian consumer market. Families with annual income in excess of 1 million
rupees have as much buying power as a U.S. family with three times the same
income. Living costs for the Indian family are very low. The premium segment is a
promising target for luxury goods brands like Mercedes-Benz, Cartier and Christian
Dior. There are 600,000 Indian households in the premium segment, including
200,000 in Bombay. Several Japanese, U.S. and European auto manufacturers plan
to produce luxury cars in India.
2. Identifiable segments
It must be possible to identify the customer groups that exhibit response differences,
and sometimes finding the correct groups may be difficult. E.g. even though
variations in the amount of purchase by customers occur in a market, it may not be
possible to identify which people correspond to the different response groups in the
market. While it is usually feasible to find descriptive differences among the buyers
in a product-market, these variations must be matched to response differences.
Recall AMEXs approach to identifying cardholders with buying power who use the
card infrequently. Incentives are used to attract nonuser card holders with buying
power.
3. Actionable Segments
A business must be able to aim a marketing program strategy at each segment
selected as a market target. As discussed earlier, especially magazines offer one
means of selective targeting. Ideally, the marketing effort should focus on the
segment of interest and not be wasted on non segment buyers cable television,
magazine, and radio media are able o provide coverage of narrowly defined market
segments. The internet offers great potential for direct marketing channels to reach
specialized segments. Similarly, databases offer much focused access to buyers.
4. Cost/Benefits of Segmentation
Segmentation must be financially attractive in terms of revenues generated and
costs incurred. It is important to evaluate the benefits of segmentation. While
segmentation may cost more in terms of research and added marketing expenses, it
should also generate more sales and higher margins. The objective is to use a
segmentation approach that offers a favorable revenue and cost combination.
E.g. British based ICI fertilizers experienced substantial losses in the late 1980s,
but rebuilt its business around an innovative market segmentation strategy.
Research showed that farmers priorities in fertilizer purchasing were dominated by
price only in 10% of cases; instead, farmers were more influenced by advanced
technology, loyalty to traditional merchants, and loyalty to brands. ICI created new
product ranges around these needs, restructured the business around these ranges,
and built impressive profitability.
Resources Inc. collect and publish consumer panel data on a regular basis. These data
provide a wide range of consumer characteristics, advertising media usage, and other
information that are analyzed by product and brand sales and market share. The data
are obtained from a large sample of households through the United States. Similar
statistical data are available in many overseas countries.
Information is available for use in forming population subgroups within product-markets.
The analyst can use man y sources, as well as managements insights and hunches
regarding the market. The essential concern is whether a segmentation scheme
identifies customer groups that display different product and brand responsiveness. The
more evidence of meaningful differences, the better chance those useful segments
exist. Cross- classification has some real advantages in terms of cost and ease of use.
There may be strong basis for choosing a segmenting scheme that uses this approach.
This occurs more often in business and organizational markets, where management
has good knowledge of user needs, because there are fewer users than there are in
consumer product-markets. Alternatively, this approach may be a first step leading to a
more comprehensive type of analysis.
Database Segmentation
The availability of computerized databases offers a wide range of segmentation analysis
capabilities. This type of analysis is particularly useful in consumer market
segmentation. Databases are organized by geography and buyers descriptive
characteristics. They may also contain customer response information as shown in the
AMEX cardholder illustration. Databases can be used to identify customer groups,
design effective marketing programs, and improve the effectiveness of existing
programs. The number of available databases is rapidly expanding, the costs are
declining, and the information systems are becoming user friendly. Several marketing
research and direct mail firms offer database services.
Forming groups based on response differences
Statistical analysis formed the segments using 12 variables concerning price and
service trade-offs and buying power. The study included 161 Signodes national
accounts. Measures of the variables were obtained from sales records, sales managers
and sales representatives. The segments vary in responsiveness based on relative
price and relative service.
The widespread adoption of CRM system offers greater opportunity for timely and
detailed analysis of response differences between customers. The data warehouse, by
integrating transactional data around customer types, makes possible complex analyses
to understand differences in the behavior of different customer groups, observe
customer life cycles, and predict behavior.
Response difference approaches draw more extensively from buyer behavior
information than the customer group identification methods discussed earlier. Note, for
example, the information on Signodes customer responsiveness to price and service.
We now look at additional applications to more fully explore the potential of the
customer response approaches.
1. Cluster analysis: Cluster analysis (a statistical technique) groups people
according to the similarity of their answers to questions such as brand
preferences or product attributes. This method was useful to form segments for
Signode Corporation. The objective of cluster analysis is to identify groupings in
which the similarity within a group is high and the variation between groups is as
great as possible. Each cluster is a potential segment.
2. Perceptual maps: Another promising segmentation method uses customer
research data to construct 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. While the end result of perceptual mapping Is
simple to understand, its execution is demanding in terms of research skills.
Although there are variations in approach , the following steps are illustrative:
Evaluate how well the solution corresponds to the data that are
analyzed.
Interpret the results as to market-target and product-positioning
strategies.
Maturity of market
The latter criterion may be less of an issue with mass customization since changes can
be accommodated.
It is useful to consider the tradeoff between the cost of developing a better
segmentation scheme and the benefits gained.eg. Instead of one variable being issued
to segment, a combination of 2 or 3 variables might be used. The cost of a more
insightful segmentation scheme includes the analysis time and complexity of strategy
development. The potential benefits include better determination of response
differences which enable the design of more effective marketing mixed strategies.
Importantly segmentation should not be viewed as static but as dynamic as dell learned
more about the pc market, the segmentation approach involved and developed.
The competitive advantage gained by finding a new market segment can be very
important. Segment strategies are used by a wide range of small companies with
excellent performance records. E.g. Segmenting the market for people. One way to
segment is according to the used situation. The uses of paper include:
Newspapers
Magazines
Books
Announcements
Letters
Other applications
Crane and company, a firm competing in this market is the primary supplier of paper for
printing money. The segment of the high quality paper market consists of single
customer the US treasury. The companys commitment to making quality products as
sustained to competitors its competitive advantage in this segment since 1879. In the
early 1990s crane introduced a new currency paper designed to identify counterfeit bills
by placing a polyester thread in the paper. The other 3 quarters of cranes sales includes
fine writing papers and high quality paper products
Customers
Competitors
Positioning strategy
Customer analysis: when forming segments it is useful to find out as much as possible
about the customers in each segment. Variables such as those used in dividing product
markets into segments are also helpful in describing the people in the same segment.
The discussions of customer profiles include information needed to profile a product
market. Similar information is needed for the segment profile although the segment level
analyzes is more comprehensive than the product market profile.
The objectives are to find descriptive characteristics but are highly correlated to the
variables used to form the segments. Standardized information services are available
for some product markets including foods, heath n beauty aids, and pharmaceuticals.
Large markets involving many competitors make it profitable for research firms to collect
and analyze data that are useful to the firms serving the market.
Information resources Inc., a Chicago based research supplier has combined
computerized information processing with customer research methods to generate
information for market segmentation. Its behaviors scan system electronically tracks
total grocery store sales and individual household purchase behavior through complete
Universal Product Code (UPC) scanner coverage.
An essential part of the customer analyses its determining how well the buyers in the
segments are satisfied. We know that customers satisfaction is measured by
comparing customer expectation about the product and supporting services with the
performance of the product and supporting services.
Customer satisfaction depends on the perceived performance of a product and
supporting services and the standards that customers use to evaluate the performance.
The customers standards complicate the relationship between organizational product
specification and satisfaction.
Competitor analysis: market segment analysis considers the set of key competitors
currently active in the market in which the segment is located plus any potential
segment entrance. In complex market structures mapping the competitive arena
requires detailed analysis. The competing firms are described and evaluated to highlight
their strength and weakness.
Competitors analysis includes
Business scope and objectives
Market position
Market targets and customer base
Positioning strategy
Financial
Technical
Operating strengths
Management experience and capabilities
Special competitive advantage
do not fit into conventional information reporting, planning processes, and budget
systems in the company may be ignored or not adequately resourced. Innovative
models of customer segments and market opportunities may be rejected by managers
or the culture of the organization.
There are dangers that managers may prefer to retain traditional views of the market
and structure information in that way or the segmentation strategy will be driven by
existing organizational structures and competitive norms. It is to build effective
marketing strategy around market segmentation mandates and emphasizes on
actionably as well as technique and analysis.
The issues that impact on the operational capabilities of a company to implement
segmentation strategies are:
The ability to work with partners may be needed to develop new products and
services to build a strong position in a key market segment.
Segment analysis illustration: A 2 year period is used for estimating sales, cost,
contribution margin, and market share. Depending on the forecasting difficulty,
estimates for a longer time period can be used. When appropriate estimates can be
expressed as present values of future revenues and cost. Business strengths refer to
the present position of the firm relative to the competition in the segment. Alternatively it
can be expressed as the present position and estimated future position based upon
plans for increasing business strength.
EXAMPLES
In fact, the housewife was known to add blue to her laundry to give that extra
whiteness to the white clothes. Interestingly, green was also a color that was perceived
to clean extra-dirty clothes.
Armed with this research on color perceptions and income groups, HLL launched the
following :
Sunlight (yellow)
Wheel(green)
Rin (blue)
Surf Ultra(white)
Detergents powders for different market segments. This strategy of segmenting the
markets, understanding its needs and then evolving marketing mix to suit separate
segment needs helped HLL win back its lost market.
In fact Nirma made all other consumer product companies sit up and take a fresh look
at their markets It announced ,for many, a beginning of an era of low priced products for
a highly price sensitive Indian Market , and, to others ,an end of a mass marketing era.
After carrying out an in-depth market study, Titan identified three distinct
Market segments for its watches. The segments were arrived at using benefit
And income level as the bases.
1. The first consisted of the high income / elite consumers who were buying a watch
as a fashion accessory not as a mere instrument showing time. They were also
willing to buy a watch on impulse. The price tag did not matter to this segment.
2. The next segment consisted of consumers who preferred some fashion in their
watches but to them price did matter. While they had the capacity to pay the
price required for a good watch, they would not purchase a watch without
comparing various offers in the market.
3. The third segment consisted of the lower-income consumers who saw a watch
mainly as a time-keeping device and bought mainly on the basis of price.
For the first segment, Titan offered Aurum and Royale in the gold/ jewellery
Watch range. They were stylish dress watches in all gold and precious metals.
The prices ranged between Rs.20,000 and Rs. 1 lakh.
For the middle segment, Titan offered the Exacta range in stainless steel, aimed
at withstanding the rigours of daily life. There were 100 different models in the
range. The price range was Rs.500-700. Titan also offered the RAGA range for
women in this segment.
And, for the third segment, Titan first offered the TIMEX watches and later,
when the arrangement with Timex was terminated, the SONATTA range. The
price range was Rs. 350 500. It was offered in 200 different models. Titan
also offered the Dash! range for children.
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