Market segmentation

Market segmentation: It refers to dividing a market into different parts based on some criteria to
tailor the needs and wants of customers. The criteria of market segmentation may be geographic,
demographic, psychographic or different behavioral aspects.

Importance of Market segmentation:

 to tailor specific needs of the customers

 to increase sales volume of the organization
 to meet local responsiveness.

Basis of segmenting market:

 Business market
 Consumer market

Levels of segmentation

There are six levels of market segmentation. Those are:

 Mass marketing
 Segment marketing
 Niche marketing
 Local marketing
 Individual marketing
 Self marketing

1) Mass marketing: It is the first level of market segmentation. It involves mass production,
mass distribution, mass promotion and mass marketing of one product for all buyers. It creates the
largest potential market, which leads to the lowest costs, which leads to lower product price or
higher profit margin. There is a controversy between market segmentation and mass production,
because the production must be same for all segments to reduce costs, production time. Besides,
advertisement cost is huge due to increase in advertisement media or distribution channels.

2) Segment marketing: A market segment consists of a group of customers who share a similar
set of wants. When an organization undertakes its production, distribution, promotion and selling
efforts for different customer groups based on some different criteria is known as segment
marketing. The marketer’s task is to identify the segments and decide which ones to target. Segment
marketing offers several benefits over mass marketing. The company can create a more fine-tuned
product or service offering and price it appropriately for the target segment.
3) Niche marketing: A niche is a more narrowly defined group seeking a distinctive mix of
benefits. Marketers usually identify niches by dividing a segment into sub-segments. This
marketing has some benefits. The customers in the niche have a distinct set of needs; they will pay a
premium to the firm that best satisfies their needs; the niche is not likely to attract other
competitors; the niche gains certain economies through specialization; the niche has size, profit and
growth potential. Whereas segments are fairly large and normally attract several competitors, niches
are fairly small and normally attract only one or two. Example is the ‘Ley-Land’, a sea-rescue auto
mobile company.

4) Local marketing: When an organization emphasizes on local responsiveness or local wants &
demands on its product and design, the marketing program is known as local marketing. When
national advertisement is considered as wasteful because it fails to address local needs, local
marketing is useful but it rises up manufacturing and marketing costs, a brand image is diluted if the
product & message is different in different localities and finally some logistical problems may arise.

5) Individual customer marketing: The ultimate level of segmentation leads to ‘segment to

one’, ‘customized marketing’ or ‘one-to-one’ marketing. Every man has a unique set of wants and
preferences. This marketing concept satisfies each individual, meeting their own needs & wants.
Mass customization is the ability of a company to prepare on a mass basis individually designed
products, services, programs and communications to meet each customer’s requirements.

6) Self marketing: It is a form of individual marketing where an individual takes more

responsibility for determining which products & brands to buy. Customers are taking more
individual initiative in determining what and how to buy. They log on to the Internet, look-up
information and evaluations of product or service offers; dialogue with suppliers, users and product
critics and in many cases, design the product they want.

Product differentiation

Differentiated marketing typically creates more costs for the organization. The following costs are
likely to be higher:

 Product modification costs: Modifying a product to meet different market-segment

requirements usually involves R&D, engineering and special tooling costs.

 Manufacturing costs: It is usually more expensive to produce 10 units of 10 different products

than 100 units of one product. The longer the production setup time and the smaller the sales
volume of each product, the more expensive the product becomes. However, if each model is
sold in sufficiently large volume, the higher setup costs may be quite small per unit.
 Administrative costs: The Company has to develop separate marketing plans for each market
segment. This requires extra marketing research, forecasting, sales analysis, promotion,
planning and channel management.
 Inventory costs: It is more costly to manage inventories containing many products.
 Promotion costs: The Company has to reach different market segments with different
promotion programs. The result is increased promotion-planning costs and media costs.
 Market segmentation procedure & pattern

Patterns:

Market segment can be built up in many ways. Buyers are asked how much they value the attributes of
the products. Three different patterns can emerge.

Attribute ‘a’
Attribute ‘a’

Attribute ‘a’
Fig: Homogeneous preference Clustered preference Diffused preference

Attribute ‘b’ Attribute ‘b’ Attribute ‘b’

a) Homogeneous preferences: This is the pattern where all the consumers have roughly the same
preferences. The market shows no natural segments. The existing brand would be similar and
cluster around the middle of the scale in all attributes.

b) Diffused preferences: This is the pattern where consumer preferences may be scattered
throughout the space as those vary greatly. If several brands are in the market, they are likely to
position throughout the space and show real differences to match consumer-preference
differences.

c) Clustered preferences: In this pattern, the market might reveal distinct preference clusters,
called natural market segments. The first firm in this market has three options. It might position
in the center, hoping to appeal to all groups. It might position in the largest market segment. It
might develop several brands, each positioned in a different segment. If the first firm
developed only one brand, competitors would enter and introduce brands in the other segments.
 Market segmentation procedure

The procedure of market segmentation is to classify the consumers based on various factors, such as
demographically, income group, age group, wealth class etc. Market segmentation must be done
periodically because segments change. One way to discover new segments is to investigate the
hierarchy of attributes consumers examine in choosing a brand.

Market segmentation procedure has three stages; Survey stage, analysis stage and profiling stage.

a) Survey stage: In this stage, the company undertakes a survey. It may be done by providing
questionnaire, forms, interview method etc. The purpose of this stage is to determine the needs
& wants of consumers.

b) Analysis stage: This stage includes a data collection activity. It may be done by undertaking a
census or sampling method. In a census, whole population is included whereas, in a sampling
method, a certain number of populations are selected randomly. In this stage, various types of
data are collected such as, product rating, grade, importance on product attributes, preferences
of customers etc.

c) Profiling stage: This is the last stage. In this stage, each cluster is profiled in terms of its
distinguishing attributes, behaviors, media partners, demographic, psychographic patterns etc.

But Roger Best proposed the seven-step needs-based market segmentation approach which includes:

1) Needs-based segmentation: Group customers into segments based on similar needs and
benefits sought by customer in solving a particular consumption problem.

2) Segment Identification: For each needs-based segment, determine which demographics,

lifestyle and usage behaviors make the segment distinct and identifiable.

3) Segment Attractiveness: Using predetermined segment attractiveness criteria (such as market

growth, competitive intensity, and market access), determine the overall attractiveness of each
segment.

4) Segment Profitability: Determine segment profitability

5) Segment Positioning: For each segment, create a “value proposition” and product-price
positioning strategy based on that segment’s unique customer needs and characteristics.

6) Segment “Acid-test”: Create “segment storyboards” to test the attractiveness of each segment’s
positioning strategy.

7) Marketing-Mix Strategy: Expand segment positioning strategy to include all aspects of the
marketing mix: product, price, promotion and place.
 Effective segmentation

All segmentation is not useful. A market segment must be relevant with its criteria on which it is
segmented. Suppose, table salt buyers could be divided into blond and brunette customers, but hair
color is not relevant to the purchase of salt. To be useful, market segment must be:

 Measurable: The size, purchasing power and characteristics of the segments can be measured.
 Substantial: The segments are large and profitable enough to serve. A segment should be the
largest possible homogeneous group worth going after with a tailored marketing program. It
would not pay, for example, for an automobile manufacturer to develop cars for people who
are less than four feet tall.
 Accessible: The segments can be effectively reached and served.
 Differentiable: The segments are conceptually distinguishable and respond differently to
different marketing-mix elements and programs. If married and unmarried women respond
similarly to a sale on perfume, they do not constitute separate segments.
 Actionable: Effective programs can be formulated for attracting and serving the segments.

Segmenting Consumer market

Two broad groups of variables are used to segment consumer markets. The first group of segments is
based on customer characteristics; demographic, geographic and psychographic whereas the second
group of segments is based on the consumer responses to benefits, use occasions or brands. The major
segmentation variables are: geographic, demographic, psychographic and behavioral segmentation.

1) Geographic segmentation: It calls for dividing the market into different geographical units
such as nations, states, regions, counties, cities or neighborhoods. The company can operate in
one or a few geographic areas or operate in all but pay attention to local variations.

2) Demographic segmentation: In this segmentation, the market is divided into groups on the
basis of variables such as age, family size, family life cycle, gender, income, occupation,
education, religion, race, generation, nationality and social class. These variables are the most
popular bases for distinguishing customer groups because these are easily measurable and
customer’s needs, wants, usage rates and preferences are often associated with demographic
variables.

3) Psychographic segmentation: In this segmentation, buyers are divided different groups on the
basis of lifestyle or personality or values. People within the same demographic group can
exhibit very different psychographic profiles.

4) Behavioral segmentation: In this segmentation, buyers are divided into groups on the basis of
their knowledge of, attitude toward, use of, or response to a product. The behavioral variables
such as occasions, benefits, user status, usage rate, loyalty status, buyer-readiness stage and
attitude are the best starting points for constructing market segments.
 Segmenting Business Market

Business markets can be segmented with some of the same variables used in consumer market
segmentation, such as geography, benefits sought, usage rate but business marketers also use other
variables. These variables are listed below:

Variables Focused on Description

Demographic Industry Which industry to serve?

Factors
Company What size of Company to serve?

Location What geographical areas to serve?

Operating Technology What customer technologies should to focus?

Variables
User or non-userHeavy users, medium users, light users or non-users to serve?
status
Customer Do the customers need more or few services?
capabilities
Purchasing Purchasing Do the organizations highly centralized or decentralized in
Approaches Function org. purchasing?
Power structure Do the companies engineering dominated or financially dominated or
so on?
Relationship What kind of relationship exists with companies, strong or simple?

Purchase Do the companies prefer leasing, service contracts, system purchases

policies or sealed bidding?
Purchasing Do the companies seek for quality, service or price?
criteria
Situational Urgency Do the company needs quick and sudden delivery?
Factors
Specific Any specific application or general application to serve?
application
Size of order Large or small orders.

Personal Buyer-seller Do the companies have the same type of people and values?
Characteristics similarity
Attitude towardsRisk taking or risk avoiding customers to serve?
risk
Loyalty Do the companies have high or low loyalty to their suppliers?
 Market targeting

Once the firm has identified its market-segment opportunities, it has to decide how many and which
ones to target. In evaluating different market segments, the firm must look at two factors; the
segment’s overall attractiveness such as size, growth, profitability, scale economies, low risk etc and
the company’s objectives and resources & competencies. After evaluating different segments, the
company can consider five patterns of target market selection.
M1 M2 M3 M1 M2 M3 M1 M2 M3 M1 M2 M3 M1 M2 M3

P3 P3 P3 P3 P3

P2 P2 P2 P2 P2

P1 P1 P1 P1 P1

(a) (b) (c) (d) (e)

Fig: Different patterns of Target Market Selection

(a) Single-segment concentration: In a single-segmented concentrated marketing, the firm gains

a strong knowledge of the segment’s needs and achieves a strong market presence. If it
captures segment leadership, the firm can earn a high return on its investment but it also
involves risks. The firm serves one market with only one product. Fig (a).

(b) Selective specialization: The firm selects a number of segments, each objectively attractive
and appropriate and each segment is a promising to be a moneymaker. This multi-segment
strategy has the advantage of diversifying the firm’s risk. Fig (b).

(c) Product specialization: The firm makes a certain product that it sells to several segments.
Example: microscope that manufacturer sells to University, government and commercial
laboratories. The main risk is that the product may be supplanted by an entirely new
technology. Fig (c).

(d) Market specialization: The firm concentrates on serving many needs of a particular customer
group. The firm gains a strong reputation in serving this customer group and becomes a
channel for additional products the customer group can use. The main risk is that the customer
group may suffer budget cuts. Fig (d).

(e) Full market coverage: The firm attempts to serve all customer groups with all the products
they might need. Only large firms can undertake a full market coverage strategy, such as IBM,
General motors etc. The firms can cover a whole market in two broad ways; through
undifferentiating or differentiating marketing. Fig (e).
Show the family life cycle and their buying behavior.

Family life cycle Buying behavior

1. Bachelor stage Young, single, not living at home. Buy basic home equipments, furniture, equipments for
the mating game, vacations.
2. Newly married Young, no children. Highest purchase rate. Buy cars, appliances, furniture, vacations.
couples
3. Full nest I Youngest child under six. Home purchasing at peak, liquid assets low. Buy washers,
dryers, TV, baby food, dolls, vitamin etc.
4. Full nest II Youngest child six or over. Financial position better. Buy multiple unit deals, foods,
cleaning material, by-cycles etc.
5. Full nest III Older married couples with dependent children. Buy new furniture, auto-travel, dental
services, magazines etc.
6. Empty nest I Older married couples, no children living with. Buy vacations, luxuries, home
improvements, make gifts, travel etc.
7. Empty nest II Older married. No children living with them. Drastic cut in income. Buy medical
appliances, medical care products,
8. Solitary survivor In labor force. Income still good but likely to sell home.
stage I
9. Solitary survivor Retired. Same medical & product needs as other retired group. Drastic cut in income.
stage II Special need for attention, affection & security.