You are on page 1of 16

Exam Preparation

3. Segmentation (lecture 4)
• Different segmentation methods
• Advantages and disadvantages of the methods
• Related to the fast food industry
Market Segmentation
The technique used by marketers to get grips with the diverse nature of markets is
called market segmentation
The identification of individuals or organizations with similar characteristics that have
significant implications for the determination of marketing strategy.
Tesco caters for two market segments: consumers looking for value and those who
are more quality conscious.
Q: what are the different varieties of eggs you can buy in a large supermarket?

Market segmentation benefits


Target Market selection
Market segmentation provides the basis for the selection of target market, a target
market is a chosen segment of market that company has decided to serve, and
single marketing mix can be developed to match target market segment
requirements.
Creative approaches towards segmentation may result in the identification of new
segments, that have not been served adequately and may form attractive target
market, eg google regularly introduce new product offers to serve the functional
needs of different target markets, such as google wallet for shoppers on move and
google + alternative to Facebook.
Tailored marketing mix
Market segmentation allows the grouping of customers based upon similarities e.g
benefit sought that are important when designing marketing strategy
Consequently this allows marketer in-depth understanding of the requirement of
segment and tailor marketing mix package to meet the needs.
This is fundamental step in the implementation of the marketing concept,
segmentation promotes the notion of customer satisfaction by viewing market as
diverse set of needs that suppliers must understand and meet.
e.g BMW i3 which is high performance low emission saloon car to serve a target
market that want more sustainable mode of transport than conventional carbon-
fuelled car
Differentiation
Market segmentation allows the development of differentiated market strategy, by
breaking a market into its consistent sub-segments a company may differentiate its
offering between segments (if it chooses to target more than one segment) and
within each segment it can differentiate its offering from competition.BY creating a
differential advantage over the competition, a company is giving the customer a
reason to buy from it rather than competition
Apple iPhone created a smart phone market in 2007 with bundling of new set of
application and functionality into mobile set gave iPhone a difference needed to
attract a new generation of mobile users, however now competition is very intense
due to Samsung and other mobile phone are technically similar , companies are
finding way to create differentiate their phones.
Opportunities and threats
Market segmentation is useful when attempting to spot opportunities and threats.
Markets are rarely static. As customers become more affluent, seek experiences and
develop new values, new segments emerge. The company that first spots a new and
underserved market segment and meets its needs better that the competition can
benefit from increasing sales and profit growth.
Zara is a fashion brand build on market opportunity, to supply fashionable clothing to
the market quickly, and is pioneered “Fast Fashion” which mean new design are
available in weeks rather than industry standard 6 months, spotting this opportunity
made Zara one of world largest fashion brands.
Similarly the neglect of a market segment can pose a threat if the competition use it
as a gateway to market entry, for example
Gap failed to spot the changing trends among fashion conscious shopper, failed to
attract younger fashion hungry customer, which ultimately leads to lose the market
lead to Zara.
The point is that market segments need to be protected from competitors, otherwise
there is a threat that new entrant might establish a foothold and grow market share in
the poorly served segment
The Process of Market segmentation and Target Marketing
 Understand the requirement and characteristic of the individual and or
organisation that comprise the market(Market research can be done here)
 Divide the market according to these requirement and characteristics
into segments that have implication on developing marketing strategies
o Market can be segment in various way dependent on the choice
criteria, there are no rules how a market should ne segmented
o e.g cars could be segmented into type of buyer(individual or business),
major benefit sought(Functionality or status), family size
 Choose market segment to target
o Marketing mix can then be developed based on a deep understanding
of target market customer needs and values (distinctive from
competition)
------------------------------------------------------------------------------------------------------
Segmenting consumer market
There are various way of segmenting consumer market
There are 3 broad groups of consumer segmentation criteria:
Behavioural
Psychographic
Profile
Since the purpose of segmentation is to identify difference in behaviour that have
implication for marketing decision behavioural variable such as benefit sought from
the product and buying pattern may be considered the ultimate bases for
segmentation
Psychographic variable are used when researcher believe that purchasing
behaviour is correlated with personality or lifestyle of consumers, consumers with
different personality or lifestyles have varying product or service preferences and
may respond differently to marketing mix offering. Having found these differences
the marketer need to describe the people who exhibit them and this is where profile
variable such as socio economic group or geographic location are valuable

Behavioural segmentation
The key behavioural bases for segmenting consumer market are
 Benefit sought: Convenience, status, performance, price
 Purchase occasion: Self buy, gift, special occasion, eating occasion
 Purchase behaviour : Solus buying, brand switching, innovators
 Usage: Heavy, light
 Perceptions and beliefs :Favourable, unfavourable

Benefit sought
This segmentation criterion can be applied when the people in the market seek
different benefits from a product e.g fruit drink could be segmented by benefit sought
Extra energy: Lucozade energy orange
Natural: innocent apple and mange
Convenience: Capris sun
Benefit segmentation provides an understanding of why people buy in a market and
can aid the identification of opportunities e.g lego friends for girls
Many market are segmented on the basis of price sensitivity, often a market will be
characterized by a segment of customer who value the benefit of low price and
another that value high quality or service and is prepared to pay more for the benefit
In UK grocery market, Tesco and Sainsbury have developed product aimed for
different market segment eg, tesco value, tesco finest on the other hand Sainsbury
taste the difference.
Easy jet and Ryan air who target price sensitive customer, while bigger airline
missed on this opportunity
Benefit segmentation is fundamental method of segmentation, because the objective
of marketing is to provide customer with benefits they value which is also basic
prerequisite of understanding markets.
Profile analysis can be performed to identify the type of people (eg, age gender,
socioeconomic, grouping) in each benefit segment so that targeting can take place
Purchase occasion
Customer can be distinguished according to the occasion when they purchase the
product, e.g tyre may be purchased due to emergency or as a routing unpressurised
buy, price sensitivity is likely to be lower if its emergency, mobile phones can be
purchased as gift or for personal use, the difference in occasion can have implication
for marketing mix and targeting decision
e.g Tesco the UK leading supermarket has different store formats for different
occasions according to when customer grocery shop, for weekly shop, tesco
superstore with wide range of products are offered and for convenience, tesco metro
or extra with limited product range
Occasion such as Easter and Christmas are associated with higher price, with
different packaging design, however price fall rapidly in the form of sales.
Purchase behaviour
Difference in purchase behaviour can be based on the time purchase relative to the
launch of the product or on pattern of purchase, when the new product launched, a
key task is to identify the innovator segments of the market, innovators are more
likely to buy the product soon after launch and have distinct characteristic that allow
communication to be targeted specifically to them.
Other will take more time to assess benefit until after innovator have taken the risk of
purchase
Once credential have been established among innovator, the brand moved to wider
target audience
e.g electric cars
The degree of brand loyalty in a market may also be useful basis for segmenting
customer. Solus buyer are totally brand loyal, most customer switch brand, and
some switch brand based on offers or because they are variety seekers
By profiling the characteristic of each group a company can target each segment
accordingly, by knowing the characteristic and shopping habits of the offer-seekers,
brand loyal sales promotions can be targeted correctly.
Eg. VW has divided its customers into first time buyer, replacement buyer and switch
replacers and tailored marketing mix to cater their requirements.
Loyalty scheme (biographic) is the new trend in consumer service, which accounts
individual purchase behaviour and give benefit to customer by the means of
vouchers and discounts.
Usage
Customer can also be segmented on the basis of heavy users or light users and
non-users of the products
Perception, attitude, beliefs and values
The final behavioural base for segmenting consumer market is by studying
perception, attitudes, beliefs and values

Psychographic segmentation
Psychographic segmentation involves grouping people according to their life styles
and personality
Lifestyle
This form of segmentation attempts to group people according to their way of living,
as reflected in their activities and opinion, the question that arise with lifestyle
segmentation is the extent to which general life style patterns are predictive of
purchasing behaviour in specific market, however it’s proved popular among
advertising agencies, e.g Hugo boss to a particular lifestyle (e.g aspirational) and sky
has made lifestyle segments to target special interest groups , sports lover( SKY
sports), movie lover (sky Movies) and others.

Personality
The idea of brand choice may be related to personality is intuitive appealing,
Personality and lifestyle segmentation is more likely to work when brand choice is a
reflection of self-expression; the brand becomes a badge that makes public an
aspect of personality ,I choose this brand to say this about me and this is how I
would like you to see me, e.g Mercedes brand personality is all about the brand
assertiveness and is reflected in the strapline” the best or nothing”, similarly , BMW
uses the phrase “ the ultimate driving machine” which reflect sensuous personality

Profile Segmentation
Profile segmentation variable allow consumer groups to be classified in such a way
that they can be reached by communication media, e.g. advertisement and internet
There is often a need to analyse the resulting segment in terms of profile variable
such as age, socio-economic group even after behaviour and psychographic
segmentation have been successfully established.
Demographics
Age, gender, and lifecycle
Age
Age has been used to segment many consumer market, e.g. cereal aimed for kids,
TV programme aimed for Kids,
L’Oréal target the over 50’s with its age perfect and revita lift brands
Age is not only widely used for segmenting product market, but is also used as a
segmentation variable in services,
The holiday market is heavily age segmented with offering targeted at the under 30
and the over 60’s
Gender
Gender also offer much for a marketing manager planning a segmentation strategy.
The differ
Life cycle
Socio-Economic variables
Geographic variable
Influence of digital technology on segmentation variables
Segmenting Organisational Market
The organisational market can be segmented on several factors broadly classified
into two major categories macro, micro segmentation
Macro segmentation focuses on the characteristic of the buying organisation such as
size industry and geographic location
Micro segmentation require more detailed level of market knowledge, as it concerns
the characteristics of decision making within each macrosegment based on such
factors as choice criteria, decision making unit structure, decision making process,
buy class, purchasing organisation and organisation innovativeness
Often organisational market are first grouped on a macrosegment basis and the finer
sub segments are identified through micro segmentation
Macro segmentation
Organisation size
The size of buying organisations may be used to segment market. Large
organisation differ from medium sized and small organisation in having greater order
potential more formulized buying and management process, increased specialization
of function and special needs e.g. quantity discounts
The result is that they may form important target market segments and require
tailored marketing mix strategies. E.g. sales force for key account and dedicated
sales team for important industrial accounts
Industry
Another important variable in industry sector. Different industries may have unique
requirements from products e.g. software application suppliers like Sap, ORACLE
can market their product to various sector such as banking, accounting and others
each of which has unique needs in term of software programs, service, price and
purchasing practice, By understanding the industry needs in depth, a more effective
marketing mix can be designed, in some case further segmentation is required such
as in education , primary, secondary and others with different requirements.
Geographic location
Reginal variation in purchasing practice and need may imply the use of geographic
location as a basis for differentiation marketing strategies. The purchasing practices
and expectation of companies in central and Western Europe are likely to differ
marketing from those in Western Europe.
Micro segmentation
Choice criteria
The factor segments the organisation market on the basis of the key choice criteria
used by buyers when evaluation supplier offering. One group of customers may rate
price as the key choice criteria another segment may favour productivity. While third
segment may be service oriented. These varying preference mean that marketing
and sales strategies need to be adopted to cater for each segment’s needs. Three
different marketing mixed would be needed to cover the three segment and
salespeople would have to stress different benefits when talking to customer in each
segments
Decision making unit structure
Another way of segmenting organisation market is based on decision making unit
composition; member of the DMU and its size may vary between buying organisation
.DMU consist of all those people in a buying organisation who have an effect on
supplier choice. DMU size can also vary considerably, one segment might feature
large complex units while another might comprise small single members
Decision making process
Decision making process can take a long time or be relatively short in duration
depended on DMU composition, marketing expenditure should be based on DMU
composition. Large DMU often take long time and vice versa.
Buy Class
Organisation purchases can be categorized into straight rebuy, modified rebuy and
new task, the buy class affects the length of decision making process, the complexity
of DMY and number of choice criteria that used in supplier selection,
Purchasing organisation
Decentralized verses centralized purchasing is another micro segmentation variable
because of its influence on the purchase decision
Centralized purchasing is associated with purchasing specialist, specialist are
experts in buying range of product, they are more familiar with cost factor and the
strength and weakness of suppliers
Decentralized are generalist
E. g centralized purchasing segment cold be served by a national salesforce,
whereas the decentralized purchasing segment might be covered by territory
representative
Organisation innovativeness
A key segmentation variable when launching new products is the degree of
innovativeness of potential buyers Marketers need to identify the specific
characteristic of the innovator segment, since these companies should be target first
when new products are launched. Follower firms may be willing to buy the product
but only after the innovator have approved it
Variable Examples
Macrosegment
Organisation size Large, medium, small
Industry Engineering, textile etc.
Geographic location Local, National, European,
global
Microsegment
Choice criteria Economic, Value,Delievery,
Price, Service
DMU structure Complex, Simple
DM process Long, Short
Buy class Straight, rebuy, modified rebuy,
new task
Purchasing organisation Centralized, Decentralized
Organisation Innovator, follower, laggard
innovativeness

Case studies

McDonald’s
The business is managed as distinct geographic segmentation (Profile)
Geographical segmentation
US
Europe
Asia/Asia pacific:
And other countries
Reflect global taste preferences (behavioural segmentation)
Benefit sought = convenience, taste
India: Mc veggie, Mc aloo Tikki, Paneer salsa
China: Crispy Chinese
America: Chicken California, classic chips, florida beef etc
Demographical
Age (children) happy meal, Teenages( Burgers and sandwiches, family(family
meals)
Young adults: Free wifi
Gender: Women:Lower calorie items, e.g salad fruits, vegetable salads and yogurts
Income segmentation, cheese burger cost for £1.50 pounds, extra value
Market is the place where buyers and sellers meet and where exchanges take place
between them. We can no longer get all of our customers, but must actively
determine our target audience. Segmentation is to divide the market into different
groups based on differences and similarities between buyers, and then process the
buyers in the selected segments in the same way
Objective: To offer the customer something that the customer requests and is
satisfied with
Problem: The number of customers is many and options to process each of these
are huge
Solution: To divide the market into different segments where individuals are grouped
in similarities for the customer to process the same way

Why segmentation?
Key Segment Variables

Geographic segmentation Classification of market buyers based on where they


reside
Demographic Segmentation Segmentation of market buyers based on variables
such as age, gender, occupation, marital status, education, and income.
Behavioral segmentation Categorization of market buyers based on their behavior in
terms of purchasing habits, payment preferences and loyalty
Psychographic Segmentation Breakdown of Market Buyers Based on Their
Lifestyles and Interests and How They Think and Reason
Demographics, Geography, and What Benefits the Buyer Seeks for the Product
Which industry belongs to the customer, how big is their turnover, how many
employees do they have? How long have they been? Do they buy at home or do
they buy from abroad? Do they prefer quality or are they priced?

Personal Characteristics of the Purchasing Company Employees Purchaser's Age,


Personality and Lifestyle ...Purchasing culture among buyers Is the purchasing
organization centralized or decentralized? Do they only buy from recommended
companies or have free hands?

Situational factors How large is the size of the order and how fast does the customer
have?
Operational factors The buyer's technology and capacity as well as the use of the
product

Successful segmentation
Segmentation that meets the criteria that segments are identifiable, measurable,
available, achievable and of sufficient size. Effective Identify groups whose needs
are homogeneous and can be treated in a similar manner The measurable segment
should be clear and can be quantified objectively Accessible The segment will be
able to reach the company's marketing campaign Actionable The company must
have the ability and resources to carry out the campaign against the current segment
(eg, foreign establishment) The Profitable Segment should be large enough to be
profitable. Micro segments (pockets) and large unprocessed segments (untapped)
can be profitable if they are properly noted.
Notes and applications

There is no single right way to segment the market.


Segment is not a onetime process.
Collectively exhaustive: Everyone in the market should be in a segment
Mutually exclusive: Each segment should be distinct
Segment should be based on what people value not demographic characteristics
you will eventually create demographics
Types of segments
Demographics
Psychographics
Behavioural

Segment based analysis


User based
Derives value based segments from types of potential users
e.g satellite phone users
Military
Journalist
Segment should have distinct value profile, if they don’t combine them
Benefit based
Derives segment from the benefit that different group appreciates
Occasion based
Occasion when customer may buy particular product
Any customer can fit into occasion based segmentation
Different angles -> same results
List of customer segment different in preference structure
Layer demographic description on top of value based segments

Attribute to segment matrix


Possible segments
Import attributes in product category
Performance of your offering and competitors offering

Levels of segmentation
Mass marketing
– Mass producing, distributing, and promoting the same product to all consumers
– Argument: largest potential market => lowest costs => low prices or high profits
– Nowadays problematic because of (a) splintering of consumer segments and (b)
proliferation of distribution channels and advertising media
Segment marketing
– Broad segment, adapt offering to closely match the needs of the market
– Benefits – market more efficiently, only consumers it can serve best, fine-tune
products/prices/programs, face fewer competitors
Niche marketing
– Focus on subgroups within segments
– = Narrowly defined segment, or a “sub segment” of a segment
– E.g. SUV segment => luxury SUVs
– Normally only one or a few competitors
– Opportunity for small companies
– Customers need to be willing to pay a price premium
– In todya's markets, niches are the norm
Micromarketing
– Local marketing
– Cities, neighborhoods, specific stores
– E.g. Citibank offers customized banking services to different neighborhoods
– May have problems – reduce economies of scale, logistics problems, dilution of
brand image
– Individual marketing
– = one-to-one or customized marketing, markets-of-one marketing
– Back to the roots – for centuries products were tailored to customer needs
– Mass customization – moden technology allows for efficient production of
customized products, e.g. Dell Computer
– Self-marketing – consumer finds information by him/herself
Requirements for effective
segmentation
– Measurable – size, purchasing power, and profiles can be measured
– Accessible – can be effectively reached and served (move in same places?)
– Substantial – must be large or profitable enough (people taller than 10 feet not
good)
– Differentiable – two segments that react the same way are not actually separate
segments
– Actionable – effective programs can be designed for the segment, i.e. matches
company capabilities
37 / 126
Principles of Marketing
Consumer markets Geographic segmentation
– Nations, regions, states, counties, cities, neighborhoods
– Localization, spicing of food, etc
Demographic segmentation
– Based on demographic variables (age, gender, family size, ...)
– One of the most popular bases
– Required in almost all cases because size of segment is interesting regardless of
actual segmentation criteria
– Some demographic bases
– Age and life-cycle (watch out for stereotypes – 70 yr old tennis player)
– Gender (e.g. clothing, toiletries, cars, ...)
– Income – also lower income segment may be profitable
Psychographic segmentation
– Social class, lifestyle, or personality characteristics
– People in same demographic segment may have different psychographic
characteristics and vice versa
Behavioral segmentation
– Knowledge, attitudes, uses, or responses to a product
– Occasions - “Coke in the morning”, Christmas ads, underwater / baby photos
– Benefits sought – gambling or fun aspect of travel,, toothpaste benefits: economic,
medicinal, cosmetic, taste
– User status – nonusers, ex-users, potential users, first-time users, regular users
– Usage rate – light, medium, heavy
– Loyalty status – loyal, somewhat loyal, not loyal; somewhat loyal segment may
provide valuable information on why competitor's attractive
Using multiple bases is normal
– E.g. start with one base, and then expand to others
– Geodemographic segmentation
– Link census data with lifestyle patterns => segment markets down to zip codes,
or even city blocks (e.g. PRIZM)
Business markets All consumer market segmentation bases usable
In addition
– Customer operating characteristics
– Technology, customer capabilities
– Purchasing approaches
– Centralized or decentralized buying?
– Engineering, finance, or marketing dominated?
– Leasing or service contracts?
– Quality, service, price?
– Situational factors
– Quick delivery or service?
– Specific applications or generic?
– Large or small orders?
– Personal characteristics
– Buyer-seller similarity, attitude to risk, loyalty to suppliers
38 / 126
Principles of Marketing
International markets Geographic location
– Regions, e.g. Western Europe, Pacific Rim, Middle East, Africa, EMEA, ...
– Assumption: countries in a region will share reactions to marketing => but there are
exception (e.g. USA and Canada vs. Mexico)
Economic factors
– Population income level or level of economic development
Political and legal factors
– Type and stability of government
– Receptiveness to foreign firms
– Monetary regulations
– Amount of bureucracy
Cultural factors
– Language, religions, values and attitudes, customs, behavioral patterns
Intermarket segmentation [“cross country segmentation”]
– Forming segments of consumes who have similar needs and buying behavior even
though they are located in different countries
– E.g. Mercedes-Benz, MusicTV