Unit 3- Segmentation

This chapter focuses on segmentation and why it is important.

Aims

The aims of this chapter are to:

• explain why firms undertake segmentation and preempt on the next chapter- targeting and
positioning

• describe the process of Segmentation

• assess the problems in implementing segmentation

Learning Outcomes

 Understand the concept of segmentation

 Understand bases of segmentation the consumer markets
 Critically evaluate requirements for effective market segmentation
 Describe the seven approach to consumer market segmentation
 Understand the bases for segmenting business markets
 Describe the eight stages in segmenting business markets

Essential reading

Kotler, P. and G. Armstrong Principles of marketing. (Upper Saddle River, NJ: Pearson Prentice
Hall, 2012)

Dibb, S. and L. Simkin ‘Implementation problems in industrial market segmentation’, Industrial

Marketing Management 23(1) 1994, pp.55–63.

Fuchs, C. and A. Diamantopoulos ‘Evaluating the effectiveness of brand-positioning strategies

from a consumer perspective’, European Journal of Marketing, 44(11) 2010, pp.1763–86.

Park, D-B. and Y-S. Yoon ‘Segmentation by motivation in rural tourism: a Korean case study’,
Tourism Management 30(1) 2009, pp.99–108.
3.1 What is segmentation?

Customers have different needs and wants. Business all over the world are faced with the
challenge of satisfying these customers, however they cannot satisfy the different customers with
the same product. Age, sex, gender, preferences are the differences that customers come with.
Children under the age of 6 years old have got different needs with those children above the age
of 6. Therefore there is a need to group these customers into different groups where their needs
and wants will be satisfied adequately, and this process is known as segmentation. Kotler &
Armstrong (2012) define it as the process of breaking down all consumers into groups of
potential buyers with similar characteristics.

Van Der Walt (1996) defines segmentation is a process of dividing a large

HETEROGENEOUS market into sub HOMOGENOUS markets which respond in a similar
way to marketing stimuli. The thinking behind the market segmentation is that the total market is
composed of different potential buyers who also have different needs and wants and exhibit
different characteristics. For example, the market for beer can be divided into rural and low
income customers, ladies, working class, and the higher end. The beer market then can have such
offerings as scuds, clear lagers. Delta beverages market can be segmented into the following
segments:-

• Lager segment
• Carbonated soft drink segment
• Sorghum or Chibuku segment

NB above segments can still be subdivided into small subsets e.g the lager segment can be sub-
divided into premier lager market (bohlingers, Pilsener, Zambezi, etc.) and low cost lagers
(Eagle, Lion, Castle, Black label)

Merits of segmenting the market

• Allows marketers to focus more accurately on customer needs

• The differences exhibited on the market can easily be identified and respond
accordingly
• A greater degree of customer satisfaction can be realised
• Easy to identify opportunities in the market
 • Allows for customisation of the market offering
• Facilitates resource allocation
• Choice of promotional tools is facilitated

Demerits of segmenting markets

• Developing products for each segment and separate marketing strategies becomes
expensive
• Limited market coverage
• Excessive differentiation may lead to proliferation of products and services resulting
in cannibalisation (This is a situation where one product takes away the market share
for another existing product of the same firm.)

Task 3.1
a) Identify the segments that Midlands State University has adopted and explain the
characteristics of each segment.
b) Cresta group of hotels wants to segment its hotel market into five sub markets. State and
describe the submarkets.
c) What is a market segment

3.2 Bases for segmenting consumer markets

There various ways marketers can divide their heterogeneous markets, using geographic
variables, psychographic variables, geographic variables, demographic variables,
geodemographic variables.

Geographic segmentation

This segmentation base is the dividing of the broad market based on the locations of the
target market, e.g. Simbisa brands’ Chicken Inn brand can segment their markets according
to nations, Zimbabwe, Zambia, etc. they can also segment their markets based on regions
say, Matebeleland, Manicaland, etc. it is easy to use geographical segmentation, as different
people in different geographical segments usually respond fairly in the same manner and it is
also less expensive. A company can decide to operate in only a few of the segments, or in all
of them but customize their offering according to the geographical differences in needs and
wants said by Kotler & Armstrong (2003).

Demographic segmentation

This is the diving of the broad heterogenic market based on the demographics of the
customers such as age gender, size of the family education, income, family life cycle
religion, race, generation, and occupation. The demographics are easy to measure and they
depend on the customer needs. The needs of women and men of the same age differs hence a
need to create different market segments based on their demographics.

Psychographic segmentation

In using this variable, various psychological variables are considered in dividing the broad
market and the psychological variables can be in the form of lifestyle, social class,
personality. The psychographic entails that as marketers there is need to understand the
customer’s minds, how they think, and what their beliefs and attitudes which in turn
influences their purchase behaviors. People and family structures change in overtime hence
the need to use psychographic and behavioral segmentation together so as to identify
profitable markets, e.g. usage rate and purchase situations can be used together

Behavioral segmentation

This type of market segmentation criteria divides the heterogeneous market segments based
on the behavior of the population and their usage patterns and how they formulate. For
example, older people prefer to deal with brands they have been using before and are risk
averse whereas the younger generation will always try new things and are prone to
experiment with new products. Most people are likely to buy flowers during the valentine’s
day than any other day, this is the usage based behavioral segmentation.

There is also benefits sought behavioral segmentation e.g. toothpaste- whitening, or odor
removal
3.3 Requirements for effective Market Segmentation

For a market segment to be considered it should be identifiable, measurable, substantial,

accessible, durable, responsive and compatible.

a) Identifiable- the customers who are member of the market segment must be identifiable
and these identified customers must respond in the same way to marketing mix element,
or a marketing stimuli. They must exhibit similar characteristics.
b) Measurable-marketers must be able to know the number of potential customers in that
market segment, thus it be measurable in terms segment size, market potential,
purchasing power of the market
c) Substantial- the market segment must be large enough to be profitable. It must be worth
to target.
d) Accessible- the marketer must be able to reach the market either physically or
electronically when delivering the offering, and to communicate with the market segment
e) Durable- There must be stability in the market segments thus the must be minimal
changes to the needs and wants of the segment to minimize the costs
f) Responsive-there must be willingness among the members of the market segment to
exchange something of value with the organisation, they must be willing to pay for the
organizational offering. The segment must respond to the various marketing mixes, of the
organisation.

3.4 Seven step approach to segmenting consumer markets

McDonald and Dunbar (2004), noted that there are seven steps of segmenting markets, they
refer to it as the seven step segmentation process.

Step 1 - Defining the 'market' (The scope of the project)

This is the clear understanding of the segments in which the business is/wants to operate in. .
The market must be defined such a balance must be achieved between a manageable market
and a broad market. The defined market includes assessment of penetrated market (existing
customer base) and untapped market (noncustomers), Jadczaková, (2013).
A market that is deemed to be too narrow may limit the potential opportunities that could
have been identified by segmenting whereas a too broad market will defeat the whole process
of segmentation process. Emerging from this, a market should integrate several dimensions,
such as buyer needs, buyer groups, competition, products and technologies. It should not
simply be viewed in terms of a specific geographical area, product, industry, state-of-action
or state-of-mind.

Defining the market must also be done in line with the identifications of the organization’s
current position, capabilities, objectives and constraints. The segments might be favorable
but the organisation might fail to satisfy the market segment due to limited financial
resources and competencies.

2) Segmentation base selection

This is a stage where as a set of variables or characteristics are used to assign potential
customers to homogeneous groups.” (Wedel & Kamakura, 2000) e.g. based on the
geographic, or demographic variable. The marketers need to ascertain which bases are going
to be used to divide the market

3) Deciding on the segmentation method selection

4) Forming segments

In this stage segments are created based on the variable that would have been chosen by the
marketers. Consumers are put into group that have the same characteristics, e.g. those in
Binga, Zvishavane etc.

5) Profiling target segments

Once the segments have been developed they are then evaluated using a set criteria to
ensure that they are useable and logical. This requires the segments to be assessed against a
checklist of factors, such as: are the segments reachable, do they have different groups of
needs, are they large enough, and so on.

6) Selecting target segments

Those segments to be targeted are then selected

7) Implementation and evaluation of segments

The strategies are then implemented in each segments and an evaluation is made. Are the
segments viable and profitable?

3.5 Segmenting business markets- the nested approach

Segmenting business markets is different from segmenting consumer markets. The nested
approach is used to segment business markets. In this model five criteria for segmentation are
presented in the form of a ‘’nest’’ by starting at the first and outermost criteria which have to
be examined first and then moving towards to inner criteria which are harder to asses. ‘’The
outermost nest contains the most general segmentation criteria, demographics. These
variables give a broad description of the company and relate to general customers’ needs and
usage patterns. They can be determined without visiting the customer and include industry,
company size and customer location (Shapiro & Bonoma, 1984)’’

The second segmentation criteria are named operating variables (Shapiro & Bonoma, 1984).
These variables enable a better understanding of current and potential customers within the
demographic variables of the first criteria and also do not require a lot of time to research.
Operating variables may refer to the technology that a company is using in order to
manufacture their products or technology in other processes which can indicate the buying
needs of that company. Furthermore, product and brand use status can be used to identify
companies that use the same particular product or brand which means they generally share
some characteristics. Another operating variable would be the financial, technical and
operating capabilities of the customers in order to spot strengths and weaknesses in a market
which can be used to gain a competitive advantage, kuipers, (2018).

The third criteria refer to the formal organization of the purchasing process, power structures,
the nature of the buyer seller relationships, the general purchasing policies and the
purchasing criteria (Shapiro & Bonoma, 1984). The purchasing approach can influence the
way that customers want to be treated and that makes a valuable criterion to segment
customers on. However, to research the purchasing approach of a customer requires more
time and effort, Kuipers, (2018)
The fourth criteria of the Shapiro and Bonoma model is the called situational factors (Shapiro
& Bonoma, 1984). This criterion is very similar to operating variables but the differences is
that the situational factors are temporary and require a more detailed knowledge of the
customers in order to find out the information of these variables of the customer. This could
refer to the urgency of the order, whether it is a routine order or an emergency order, the
product application and the size of the order. This way you could for example segment
customers that want small lot sizes and urgent orders and customers that want larger and a
more routine based order schedule. The fifth criteria are the personal characteristics of the
buyer or the customers. This might refer to some buyers being more risk adverse than others
which might influence their purchasing decision or process. However, information on
personal characteristics are expensive to get and also difficult. This stressed the need for a
good and formal sales information system to ensure that the sales staff transmit the data to
the marketing department, Kuipers, (2018).
 Unit 4 Targeting
Targeting is selecting which identified segments to serve. In selecting which segment to enter the
marketer has to examine opportunities and threats in the various segments. The firm has to
decide the number of segments it can serve and this is done after an assessment of the
attractiveness of the segment. The following factors must be considered before qualifying a
segment

• Segment size
• Growth potential of the segment
• Segment structural attractiveness (level of competition in the segment, existence of
potential substitutes may limit price freedom, and profits that can be earned from that
segment, relative power of buyers affects segment attractiveness, will try to force
prices down)
• Company resources and objectives
• Expected profitability

Assessing the attractiveness of segment

Attractiveness factors Rating* Weight** Score

Large Market size 5 8 40

Growth rate of segment 4 9 36

Good Access to raw materials 5 8 40

Favourable Regulatory climate 4 6 24

Fewer competitors 4 7 28

High prospects of Profit potential 5 8 40

Investment intensity 2 4 8

Total score

*Rating is on a 5 point scale, 5 = very attractive

**Weight on a 10 point scale, 10 = very important

Selecting the target market

There are basically 3 broad approaches namely concentrated, differentiated and undifferentiated
marketing

Concentrated marketing / Niche marketing

Several market segments exist within a population. The organization develops a marketing mix
with a set of products and/or services specifically for one market segment only. The organization
commits itself to outstanding performance in reaching this one market segment. Success requires
detailed information about this segment, particularly about its recreation & leisure behaviors.
Concentrated marketing reduces program development & marketing costs, but entails much
higher risks than undifferentiated or differentiated strategies

Identify a company in Zimbabwe that pursues niche or concentrated marketing strategy

and discuss the merits and demerits of this strategy

Undifferentiated Marketing

The entire population is treated as a single market. • One basic marketing mix is used even if the
organization offers different types of services or products. There may be differences in a
population, but the organization decides to ignore them. Instead, the organization bases its
marketing on commonalities on the assumption that this facilitates reaching the largest number
of potential customers or users. E.g

Undifferentiated strategy by age

Toddlers

Pre-teens

Teens

Young Adults

Adults Seniors
Differentiated

Most firms tailor their offerings in one way or another to meet the needs of different segments of
customers. Because these organizations don’t have all their eggs in one basket, they are less
vulnerable to competition. Econet wireless is an example of an organisation following the multi-
segment targeting approach. Population is divided into several market segments. Marketing
mixes & possibly products or services are specifically designed for two or more of these market
segments (but not necessarily for all of them). Differentiated strategies usually have higher
response levels than undifferentiated strategies, but they also cost more.

Micro marketing

This approach is still more narrowly focused than concentrated marketing. Micro marketing
involves targeting potential customers at a very basic level, such as by the postal code, specific
occupation or lifestyle. Ultimately, micromarketing may even target individuals themselves. It is
referred to as marketing to segments of one. The internet allows marketers to boost the
effectiveness of micromarketing. With the ability to customize (individualization attempts by the
firm) and to personalize (individualization attempts by the

Mass customization

A new marketing strategy made possible by technological advances in marketing research &
direct communications. • An organization targets all segments within a population, but uses
customized offerings to respond to specialized needs & interests. Customers provide necessary
information about themselves, allowing highly personalized responses & reducing market
research costs. Production & inventory costs are reduced because the organization can operate
“on demand.

Q1. Identify companies in Zimbabwe that pursue this strategy and discuss whether the strategy
enables such companies to command a market leadership position.

Q2. Explain how companies identify attractive market segments and choose a target marketing
strategy
Task
Match the following real life marketing examples with the above mentioned targeting
approaches.

1. Econet now offering insurance and other financial services

2. A promotional email from Ok Zimbabwe based on your previous purchases

3. Fast Jet with its no-frills, single-class airline model

4. The battery-operated, eco-friendly electric car, Reva

Positioning
Having chosen an approach for reaching the firm’s target segment, marketers must then decide
how best to position the product in the market. The concept of positioning seeks to place a
product in a certain ‘position’ in the minds of the prospective buyers. Positioning is the act of
designing the company’s offer so that it occupies a distinct and valued place in the target
customers’ minds. In a world that is getting more and more homogenized, differentiation and
positioning hold the key to marketing success!
Positioning is what the customer thinks about the organization’s offering,

Attribute positioning e.g Benson and hedges position their cigarettes in terms of lightness and
taste

Benefit positioning – emphasizes unique benefits consumers get from using a product .eg Gillett
blades promise an even closer shave

Use/application positioning- position in terms of product use e.gGrac’a wine position wine as a
wine to be enjoyed at all kinds of occasions

User positioning – position products with users in mind, e.g thrill seekers, fun seekers, status
seekers

Competitor positioning – against competitor offerings, Kana usinadroskyhaunachigayo, car

rental USA “we are number two”

Quality/price positioning– affordability, exceptional quality through high price, unbeatable

prices. Payless at Payless.
Luth Research has identified ten bases for positioning commonly in use:

 Premium – quality, exclusivity

 Value – cost effective, more for less
 Traditional – proven, stable, often evokes another time or place
 Innovative – new ideas, advances in technology or business practices
 Lifestyle – current or aspirational Problem-solver – satisfies unmet needs
 Ease of Use – convenient, simple
 Stylish – aesthetics Performance – excels in a critical area, out-performs competition
 Biggest – largest, most comprehensive
 Competition

Task
Give examples of the following positioning strategies:
 Premium
 Value
 Traditional-Innovative
 Lifestyle
 Ease of Use
 Stylish Biggest
 Competition