CHAPTER 4

SEGMENTATION

Introduction
Successful segmentation relies on a clear understanding of the market. Knowledge of consumer
behaviour is the crucial foundation on which that market understanding is built.

Why Segment ?
There are a number of reasons organisations undertake segmentation (Doyle, 1994):

• Meet consumer needs more precisely: by developing a distinct marketing mix for each
consumer segment an organisation can offer customers better solutions for their needs.

• Increase profits: Segmentation allows an organisation to gain the best price it can in every
segment, effectively raising the average price and increasing profitability.

• Segment leadership: In any particular market the brands that have dominant shares of the
market will be highly profitable. Their market leadership gives them economies of scale, in
marketing and production they will also have established access to distribution channels.

• Retain customers: Providing products or services aimed at different consumer segments

allows an organisation to retain that customer’s loyalty as their needs change

• Focus marketing communications: Segmentation allows an organisation to identify media

channels that can specifically reach the target groups.

The Segmentation Process

The segmentation process involves establishing criteria by which groups of consumers with
similar needs can be identified, These criteria have to establish consumer groups that have the
following characteristics:

• The consumers in the segment respond in the same way to a particular marketing mix.
• The consumers within the segment have to react in a clearly different way from other
groups of consumers to the marketing mix on offer.

• The group has to be large enough to provide the return on investment necessary to the
organisation.

• The criteria used to identify the segment have to be operational.

Consumer Behaviour
Consumer buyer behaviour relates to the end customer, the individual who purchase products
and services for personnel consumption.

1. Social influences

- Culture: Behaviour is largely learned so the traditions, values and attitudes of the society
an individual is brought up in will influence their behaviour.

- Social class: An individual’s social class has been seen as an important influence on
consumer behaviour.

- Reference groups: Individuals will tend to exhibit purchasing behaviour that is deemed to
be acceptable by their reference group.

- Family: Attitudes and beliefs in general and patterns of purchasing behaviour in

particular are all learnt initially from the family into which an individual is born and raised.

2. Personal Influences

Factors such as the individual’s age, occupation and financial situation, their personality, their
family life cycle stage and their lifestyle in general will affect the pattern of their consumption
decisions.

3. Psychological Influences

- Motivation: A motive is a need that has reached a level that drives an individual to search
for ways to alleviate its demands. Two of the most influential theories is worthwhile to illustrate
their influence on marketing practice:
a) Freud’s theory: An individual’s consciously stated reason for buying a product may hide
a more fundamental unconscious motive. An individual proposing to purchase an executive car
may claim that this decision is based on the need for quality and reliability, whereas the
unconscious desire may be for status.

b) Maslow’s theory: Individuals have a hierarchy of needs. Individuals will seek different
products and services as they move up this hierarchy.

- Perception: The way an individual perceives an external stimulus will influence their
reaction. Individuals can have different perceptions of the same stimulus due to the process of:

a) Selective attention: Refers to the tendency of individuals to screen out the majority of
stimulants to which they are exposed.

b) Selective distortion: The tendency to adjust perceptions to conform to their current

mindset.

c) Selective retention: Information that reinforces their attitudes and beliefs is more likely to
be retained.

- Learning, attitudes and beliefs: Learning relates to any change in the content of an
individuals long-term memory and is associated with how information is processed. There are
various ways in which learning can take place:

a) Conditioning learning theories: if an individual’s experience of a particular product is

positive this will reinforce their positive attitudes and beliefs about the brand.

b) Social learning theories: learning can take place without direct personal reinforcement.

c) Cognitive learning theory: an individual may use their own powers of cognitive reasoning
to develop their attitudes and beliefs about a product.

- The buying situation: Affected by the particular situational factors surrounding the
activity. The following factors are involved:

a) Self-image: The purchase has a major effect on an individual’s selfimage such as the
purchase of a car.
b) Perceived risk: The impact of a mistaken purchase would have a dramatic effect on the
consumer.

c) Social factors: An individual’s level of social acceptance may depend on the right
purchasing decision.

d) Hedonic factors: The purchase is concerned with products or services that are linked to
providing personal pleasure

Consumer Segmentation Criteria

Segmentation criteria can be divided into three main categories:

• Profile variables: Are used to characterise the consumer but in terms that are not
expressly linked to, or predictive of, an individual’s behaviour in the specific market.

• Behavioural variables: Relate to the behaviour of the consumer. Thus behavioural factors
such as benefits sought, usage, and the purchase occasion all come under this category.

• Psychographic variables: Identify individual’s attitudes, opinions and interests to build up

a lifestyle profile that includes the consumer’s consumption patterns. Thus these profiles are
inextricably associated with specific purchasing behaviour.

Marketers can use any variable as a starting point (first order variables), and then add further
variables (second order variables) to give the grouping a clearer definition.

Profile Variables
There is a range of demographic, socio-economic and geographic segmentation variables in this
category.

Demographic segmentation

The key demographic variables consist of age, gender and the family life cycle:

• Age: Consumer’s purchasing decisions will change with age.

• Gender: There are still major differences within the gender category. Younger women
may have different needs to older woman.

• Life cycle segmentation: At each stage a consumer’s needs and disposable income will
change. Someone who is young and single has very few commitments so although their income
in real terms may be low, they have high disposable income. Once an individual is married with
children, commitments have increased.

Socio-economic segmentation

In socio-economic segmentation factors such as occupation, educational background, place of

residence and income are used to classify individuals into larger ‘social class’ groupings.

There are still several problems with socio-economic approaches to segmentation for marketing
managers:

• Social class isn’t an accurate gauge of disposable income.

• In western societies there has been a major trend towards women working.

• The variety and the changing nature of people’s occupations make it increasingly difficult
to apply social class categories consistently. It may, therefore, be more important for marketers
to identify individuals who share a common interest rather than identify social class groupings.

Geographic segmentation

• Geographic: Where geographic variables are used, they tend to be used to reflect some
wider cultural differences between markets.

• Geodemographics: Geodemographic segmentation combines information on household

location with certain demographic and socio-economic data. This approach relies on information
that is gathered in census returns.

Behavioural Variables
The main behavioural variables in this category are benefits, usage and purchase occasion.
1. Benefit segmentation

Benefit segmentation uses the underlying reasons why an individual purchases a particular
product or service, rather than trying to identify an individual’s particular personal attributes.
Benefit segmentation is based on the concept that the key reason a consumer buys the product or
service is for the benefit that product or service gives them.

2. Usage segmentation

The characteristics and patterns of consumer usage is the essence of this segmentation approach.
Consumers will generally fall into categories of heavy users, medium users, occasional users and
non-users of a particular product or service.

Psychographic variables
Psychographics is a more recent approach that attempts to identify segments based on lifestyle
characteristics, attitudes and personality. Rather than concentrating on single factors such as age,
sex, marital status it attempts to build a broader picture of consumers’ lifestyles based on their
activities, interests and opinions.

Questions posed in Lifestyle studies (Source: Plummer, 1974)

Several models have been developed using this approach. There is a range of these models
available, two will be discussed in more detail.

1. The VALs framework

The VALs framework developed by Arnold Mitchell at the Stanford Research Institute

2. The Monitor framework

The Monitor Framework developed by the Taylor Nelson research agency

Organisational/industrial segmentation techniques

There are differences between the type of segmentation variables used in an organisational
market and the ones that have so far been outlined for consumer markets. The difference in
approach lies in the nature of organisational buyer behaviour.

Organisational buyer behaviour

All the individuals that participate in the decision-making process will have interdependent goals
and share common risks although they may face different systems of reward. What emerges is a
decision-making unit (DMU) made up of all these individuals and groups. Individuals in the
DMU will play one of six main roles:

1. Initiator: Identifies a problem that can be overcome by the purchase of a product or service.

2. User: Will be the actual user of the product in the merchandising function of the company in
this case. They may well be the initiators although this role may be someone outside the user
group.

3. Buyer: Actually undertakes the negotiation with potential suppliers. The brief for the technical
requirements of the software needed, however, is likely to come from one of the other areas of
the DMU

4. Influencer: Does not directly make the product or supplier choice but has a major impact on
the decisions made.

5. Decider: This is the individual who actually makes the decision to purchase. This individual
may not have direct line management control of the merchandise or IT areas of the business but
occupies this role because of the power and influence they have over the area being investigated.
This is a crucial position in the DMU
6. Gatekeeper: Determines the flow of information within the DMU without being directly
involved in the buying decision. They control whether a potential supplier gains access to other
individuals in the DMU.

The size of the DMU will depend in part on the type of purchase decision being undertaken.
Organisational purchases can be classified in terms of their level of risk as follows:

- Routine order products

- Procedural problem products

- Performance problem products

-Political problem products

The Webster-Wind Framework

This framework identifies four categories of variables that have an influence on organisational
buying decisions.

● Environmental: This includes political, economic, cultural, legal, technological and physical
environments.

● Organisational: There are several organisational factors that affect behaviour. The company’s
goals and objectives set parameters on activity. The organisation’s structure and resources act as
constraints on its culture in terms of the type of policies and procedures that are followed.

● Interpersonal: The relationship between the individuals in the buying centre are an important
determinate of how decisions are reached. How coalitions are formed and where loyalties lie within an
organisation will be dependent on these relationships.

● Individual: The individuals personal goals, past experience and training will inform their way of
operating. Each individual will influence the DMU’s decisions to a greater or lesser extent.

The Sheth Framework

Sheth (1973) developed a model that has some elements in common with the Webster–Wind framework
but also has more of an emphasis on the psychology of the decision-making process. He identified the
importance of four main factors that influence organisational buyer behaviour:

● The expectations of the members of the DMU. When the purchase being considered contains a
high level of risk to the organisation it is likely that a rigorous process will be undertaken to identify as
many sources of information as possible. This information search is likely to be undertaken by the
professional buyers and can lead them to play an important gatekeeping role by choosing what
information is passed on to other members of the DMU.

● The factors influencing the buying process. The first set of factors relate to the product itself:
perceived risk, time pressure, and type of purchase. The second set of factors that influence the buying
process are related to the organisation itself: the organisation’s orientation, size of the organisation,
degree of centralisation/decentralisation, and character of the decisions-making process.

● The character of the decisions-making process.The model outlines four approaches to making
decisions: problem solving, persuasion, bargaining, and politicking.

● Situational factors. situational variables that are outside the control of the organisation but
influence the DMU. These variables would be such things as: a strike at a key supplier, a supplier is
suddenly taken over by a competitor, financial problems, production breakdown, and changes in
corporate taxation.

Approaches to Organisational Market Segmentation

Organisational markets can be segmented according to the characteristics of the organisation, this is
sometimes referred to as the macro level. Factors that would be analysed at this level would be:

● Industry sector. Standard industry classification codes (SIC codes) will identify an organisation’s
primary business activity. Different industry sectors may have unique needs from a product or service.

● Size of the organisation. This can be judged using several variables such as the number of
employees, volume of shipments and market share.

● Geographic location. Traditional industries can tend to cluster geographically. However, even
emerging technologies show the tendency to locate in the same geographical area.
● End-use application. Establishing an end-use application can help establish the perception of
value that will be used in particular segments.

Organisational markets can also be segmented according to the characteristics of the DMU, this is
sometimes called micro segmentation. The factors used include: the structure of the DMU, the decision-
making process, structure of the buying function, attitude towards innovation, key criteria used in
reaching a decision on a purchase, and personal characteristics of decision makers.

A more systematic method to organisational market segmentation has been developed called the nested
approach. This approach effectively establishes a hierarchical structure in which to undertake the
segmentation process.