Chapter 2 – Market Segmentation

Chapter 2 - Market Segmentation and the

Marketing Environment

LEARNING OBJECTIVES
After reading this chapter, students should be able to:
 Explain how the marketing environment can influence consumer behaviour
 Describe the trends in consumption behaviour, with particular relevance to the current environment
 Use principles of consumer behaviour to explain market segmentation
 Distinguish between the segmentation approaches for the consumer and business markets
 Discuss the conditions required for segmenting markets, as well as evaluate segmentation as a
marketing tool
 Describe the ways that various target marketing strategies are used to meet consumer needs.

CHAPTER TOPICS
1. The Marketing Environment in the Noughties
 Technology boom
 Focus oh healthier lifestyles
 Case in point 2.1—Maccas turns a new leaf
 Multicultural influences
 Busy lifestyles
 Changing household composition
 Changing media consumption patterns
 Sports marketing
 Environmentally aware community
 Changing gender roles
2. What is segmentation?
3. Market aggregation
4. Broad approaches to segmentation
5. Conditions for effective segmentation
6. Advantages and limitations of segmenting markets
7. Business market segmentation

The marketing environment in the noughties

The 21st century from 2000–2010 is also known as the noughties, just as we refer to other decades as the
eighties or nineties. Over the last decade a lot of trends have evolved as a result of significant events or changing
lifestyles. The marketing environment is defined as ‘those factors that have an influence on the operation of a
business and its effectiveness in the marketplace’ (text, p. 34). It can include factors internal to the business over
which the company has control, such as skills of the workforce, and factors external to the company, such as
employment rates and health of the economy, over which the company exerts no control.

Some of the current trends that can affect the purchase and consumption of products and services include the
following.

Technology boom
Technology has changed the way we live, consume and do business. Marketers can have access to a global
market through the World Wide Web, whilst consumers are able to acquire information and products from
wherever they want. Marketers can use technology as part of their marketing strategy—impacting all parts of the

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marketing mix. Some products are only offered in a digital format online; the Internet can serve as a distribution
channel and online store; special discounts can operate through an online environment since it is cheaper for a
marketer to use online facilities with fewer service staff required; and promotions such as SMS, coupons, email
marketing, tailored website design and unmatched information dissemination can occur as a direct result of
technological advancements.

Focus on healthier lifestyles

Consumers now have access to more information, and tend to be better educated as a result of this access.
Health is a greatly debated topic, with a lot of ideas and remedies existing for living longer or looking younger.
Consider some of the ‘Reality TV’ shows like ‘Extreme Makeover’. Issues like childhood obesity, the dangers
of smoking and other drugs of addiction, and nutrition in foods are regularly featured in news and other
television programs. Marketers need to be socially responsible, not just in their quest to protect the environment,
but also their consumers. A good example is take-away food outlets such as McDonald’s having to introduce
healthy options to ensure long-term profits. ‘Healthy food’ chains like Subway are being introduced at a rapid
pace across the country. Consider examples of how companies have modified their offerings or come into being
because of this ‘healthy lifestyle’ trend.

Case in point 2.1—Maccas turns a new leaf

McDonald’s has responded to the growing concern over levels of obesity by introducing their ‘Salads Plus’
range. Instead of viewing the media treatment of the issue as a threat, the market leader saw an opportunity to be
‘a solution to the problem’, rather than the cause. In hindsight, we know just how successful this initiative has
been, with many other fast-food giants following McDonald’s’ lead.

Encourage students to consider other examples of companies viewing potential threats as opportunities to grow
with consumer needs.

Multicultural influences
Australia is known for its diverse ethnicity. A scan through the Yellow Pages on the types of cuisine available in
restaurants, or a visit to any supermarket, shows the origins of many countries. Trying other nation’s cuisines is
also encouraged. Ask students to name some of the brands in a supermarket that seem to be a direct result of our
multicultural acceptance of our society. Nostalgic reference to the 1950s and 60s is warranted here—when the
only cuisines apart from ‘steak and veg’ were Chinese and perhaps Italian (pizza).

Busy schedule
Is 24 hours in a day long enough any more? Should we sleep less? How can we get everything done that is
required? Many of us are now considered ‘time poor’, where the one resource we seem to be most short of is
time. Many businesses have introduced products to help us manage our busy lives better. Ask students what
products or services exist as a result of ‘busy-ness’. A diverse range of ideas should be raised, including home
appliances like dishwashers, Internet shopping, pre-prepared foods, drive-through dry cleaners, Internet
banking.

Changing household compositions

Households do not necessarily equate to a nuclear family—of two parents and their children. More than a third
of marriages now end in divorce, many couples live together without being married, there is growing acceptance
of homosexual relationships, higher infertility rates, child-bearing at a later age and the amount of single or
couple-only households has grown substantially. Marketers need to respond to these changes to be more
competitive. Encourage students to think of ways marketers have responded to the trends mentioned here. For
example, smaller households mean smaller sizes available for purchase or single serve ready-prepared meals
like Lean Cuisine. Child-care centres with longer operating hours are required for single-parents working full-
time.

Changing media consumption patterns

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Consumers are not necessarily reached with mass media like television and radio anymore. This is typically a
result of trends such as busy lifestyles, women in the workforce, and the availability of more effective
technologies for communication. The way consumers enter competitions, searching for comparative information
for shopping goods, the creative use of different tools like interactive screens in shopping centres and highly
specialised magazines are all changes that are happening in media to better reach consumers. Encourage
students to raise some of the new media that are now available to marketers to help them reach their consumers.

Sports marketing
‘Australians’ are known for their love of sport and the ‘great outdoors’. Sports marketing can cover two areas:
sportspeople are now marketed heavily, alongside the sport they represent. Some of our greatest heroes are
sportspeople. Ian ‘Thorpedo’ Thorpe immediately springs to mind. To hop on this bandwagon, marketers
sponsor sporting events in the hope that they will be associated with the success of that event. Sponsors can also
keep the cost of entry down for spectators and allow better coverage of particular events. Encourage discussion
of those companies that sponsor particular sports (or cultural) events. This is a good exercise for brand recall!

Environmentally aware community

Care of the environment and the surrounding community is paramount for marketers. Packaging, production and
disposal of waste and by-products must all be closely monitored. Agencies exist to regulate these activities, as
well as watchdogs in the media. Encourage students to focus on the marketing aspect, and consider companies
that are ‘environmentally friendly’ either in their packaging (recyclable materials) or their processes (e.g.
product testing—Body Shop).

Changing gender roles

The traditional roles of men and women have been changing over the last few decades. No longer are men the
sole money earner, or women responsible for household duties. How can marketers take advantage of these
trends? Encourage students to consider products available for cleaning and how these have changed as a result
of gender roles. Also consider some of the products that are now available since women are often working
instead of, or as well as, their male partners. Long-daycare centres, convenience products, and quicker cleaning
methods such as Enjo are examples that could be raised.

What is segmentation?
The entire market is too large for most marketers to serve and satisfy. It is impossible to ‘be all things to all
people’. Marketers need to break the market into groups of customers with similar needs. The process of
dividing the market into similar groups is called market segmentation. Segmentation allows marketers to
properly satisfy the needs of their particular markets. A separate marketing mix is then developed to match each
segment’s needs.

The actual process of segmentation involves identifying target market(s) to serve.

There are five steps to identifying markets:

1. Conduct research to identify customer needs for each type of product
2. Consider how these needs relate to segmentation bases (see below)
3. Describe segments
4. Determine which segment/s you will target and your positioning strategy
5. Develop the appropriate marketing mix.

Bases of segmentation
Markets can be segmented by criteria often referred to as bases of segmentation. The segmentation bases used in
consumer markets include the following:
 Geographic—for example by country, state, region, urban/rural, by climate, suburb, local government
area.

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 Demographic—this is best described as the information students used to collect at school when
studying a country. For example, population, gender, income, age, religion, ethnicity, family lifecycle
stage, education.
 Psychographic/lifestyle—These criteria, in particular, will be looked at in some detail in this course.
They include attitudes, interests, opinions, social class and lifestyle traits. Sometimes our
psychographic profile is a function of some of the other bases of segmentation. For example, our
education level may govern our opinions on many issues, or the lifestyle that we lead.
 Benefit- and product-related—benefits desired from a particular product category, loyalty towards a
brand, level of usage, brand switchers. Loyalty is an important variable to always consider, since it is
far more expensive to recruit new buyers than to satisfy loyal ones.
 Geodemographic—this is a combination of geographic and demographic, since people who live in a
certain area tend to display similar ‘demographic’ characteristics.

Solomon (2002) suggests that segmentation needs to be focused more on consumer characteristics and
behaviour rather than on products’ characteristics.1

3. Market aggregation
Market aggregation is where the marketer targets the entire market. One marketing mix is developed for the
whole market. This is only appropriate when:
 the majority of customers have the same attitudes and perceptions about the products in the market;
 economies of scale can be achieved through production or other efficiencies;
 the company has insufficient resources to design and manage separate marketing mixes; or
 the identified segments are too small to warrant separate attention.

4. Broad approaches to segmentation

Effective segmentation requires that a company really understanding its customers and prospects. The questions
that need to be addressed include:
 What business is the company really in?
 What are the psychological reasons or underlying motives behind consumers’ expressed needs?
 How is the market changing? Examples include local competitors, global players, new products or
substitutes, government regulation and the Internet.

For example, Nokia introduced camera phones because of the rapid growth of the digital camera market. As a
result, Kodak have seen digital technology as a threat and lost significant market share and substantial profits.
Other companies like Big W have seen an opportunity, introduced photography, and now print some of the
cheapest digital photographs.

5. Conditions for effective segmentation

The overriding aim of marketing activities is to better understand the customer in order to satisfy their needs.
However, company objectives and resources also need to be kept in mind. Meeting all consumers’ unique needs
would be a timely and costly exercise. Profit is usually the main aim of any company. With each market
segment served, separate marketing programs need to be developed. Resources, human and financial, are then
required to serve each segment. Therefore, it is important a company does not target too many segments—or
long-term profits will be jeopardised.

A segment should meet the following criteria:

 Measurable—well-defined so a marketer can determine precisely how many people are in the
segment.
 Accessible—a marketer can actually serve the market with their resources, capabilities and
knowledge.
 Profitable—the segment needs to have enough sales potential to cover costs and make a profit.

6. Advantages and limitation of segmenting markets

1
Solomon, M.R. (2002) Consumer behaviour: buying, having and being. Prentice-Hall, New Jersey, Chapter 1.

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There are several advantages and limitations to segmentation.

Benefits of segmentation
Companies that understand where their customers live, their preferences for certain styles of products, and basic
demographic characteristics are able to improve their marketing activities, better satisfy the needs of their
customers and provide a sustainable advantage over competitors. Segmentation also allows for more efficient
use of limited company resources—beyond financial.

Limitations of segmentation centre on the need to develop separate marketing mixes for each segment. It can be
expensive to produce small amounts of different items, with different colours and sizes. Tailored production
runs are far more expensive than more standardised runs where economies of scale can be achieved.

Case in point 2.2—Telltale habits

Freedom Furniture is developing technology to discover what sort of people their customers are, rather than
relying only on geographic criteria. Micro-segmentation tools are being used to develop detailed statistical
profiles of its customers. The information is being used to fine-tune catalogue distribution, determine product
ranges for individual stores and guide direct marketing activities.

A better understanding of life stage and spending patterns of customers in specific regions controls a lot of the
marketing activities of Freedom, including store layout, display and product ranges. For example, more
exclusive areas require more elaborate contemporary interior designs. Areas where families reside require
greater durability and more conservative designs. Although this information was assumed, it can now be
supported by research data and allow greater use of direct marketing rather than advertising. Knowing
consumers’ needs allows brochures to be sent out to specific micro-segments, which often results in greater
spending by core customers.

Ask students to use their intuition in their town or suburb, to describe the likely key areas of demand for
furniture and furnishings. What type of segmentation bases are being used in their assumptions?

7. Business market segmentation

Business markets can be segmented like consumer markets, but use different criteria.
 Geographic—same concept as consumer markets with consideration of countries, regions, states, etc.
 Customer type and size—size of the organisation can affect marketing, because of the more formal
processes involved in dealing with larger organisations. Telstra would offer different services to the
small office/home office (SOHO) segment, compared to a call centre operating a national base like
Ezibuy.
 Industry type is another segmentation variable to consider.

Other variables that could be considered are addressed in the table below.

Table 1: Bases for segmenting business markets

Base of segmentation
Description
Demographic Industry
(addressed above) Company size
Location
Operating variables Which customer technologies should be focused on
User/non-user status
Customer capabilities and number of services required
Purchasing Centralised or decentralised purchasing functions
approaches Power structure and culture—engineering focused, R&D focused, customer
centred
Extent of existing relationships
Purchasing policies—leasing, outright purchase, service contracts
Purchasing criteria like service, quality and price
Situational factors Urgency—requires quick delivery

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Specific application of our product

Size of order
Personal Buyer–seller similarity—values similar to our company
characteristics Attitudes towards risk and willingness to try new supplier
Loyalty to supplier
Source: Adapted from Kotler, P., Adam, S., Brown, L. and Armstrong, G. (2003) Principles of Marketing, 2nd edition. Pearson Education:
Australia, p. 226.

DISCUSSION EXERCISES
1. You are the product brand manager for Kellogg’s Nutri-Grain. Determine which trends in the environment
might impact on your marketing activities.
2. Choose a magazine from a newsagent. Determine what bases of segmentation could be used to describe the
target market for that magazine.
3. Scan through some newspapers and look at the attention given to particular social or environment issues.
What opportunities exist for companies with this type of issue? Which companies are under threat? What
will companies need to do prior to introducing a new product or extension of an existing product?
4. You are the marketing manager for the Australian Meat & Livestock Corporation. Consider the different
types of market you could target. Describe two different consumer markets and two different business
markets which could be worth targeting with specialised marketing efforts. Justify your reasons.

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