Buyers in the market are different in many ways (need, want, location, attitudes, beliefs, purchasing power). A brand cannot satisfy every type of buyer. So, market segmentation is necessary for any brand to serve the market better and have high sales numbers. Market segmentation is the process of differentiating market buyers by several criteria and choosing the best’ segment’ for maximum sales.
Learn Market Segmentation With Our Comprehensive Guide.
What Is Market Segmentation?
Based on the market definition, we can reiterate that buyers in the same market seek products for broadly the same function.
But different buyers have different evaluative criteria about what constitutes the right choice for performing the function. As a consequence, different offerings will attract different buyers.
To illustrate, all brands of colored television sets will appeal to some degree to those in the market for a colored TV, but some brands will appeal to some groups more than others.
But, if there were only one brand of colored TV set, the buyers would have no choice. But as the market develops, manufacturers seek to cater more closely to some groups than others, and buyer choice widens.
At the most detailed level, every buyer is a market in himself, for every buyer’s ‘want’ is probably distinct in some way.
But based on similarities and differences, such unique wants can be grouped into sub-classes. It means that wants within a sub-class are more related to each other than wants between sub-classes.
Based on the above discussion, you can now attempt to explain market segments and the market segmentation process.
Market segments refer to the sub-classes of the market, reflecting sub-classes of wants, and the process of conceptually distinguishing segments is known as the process of market segmentation.
To put it differently, a market segment consists of buyers who seek (occasionally or often) the same aspects of a product. And the concept of a market as a set and a segment as a subset is the basis on which the process of segmentation is carried out.
In simple words, Market segmentation is dividing a market into groups of segments with similar wants.
Market segmentation means dividing the total market for a product into different parts, i.e., segments on certain bases, and using each segment fully for marketing and sales promotion.
Due to segmentation, each segment will have uniform features, and a suitable marketing mix can be introduced to promote sales in each segment. Markets consist of buyers who differ in one or more ways, such as needs, wants, resources, locations, buying attitudes, and buying practices.
For market segmentation, sellers identify broad classes of buyers who differ in their product needs or buying behavior.
For example, General Motors (GM) has found that high-and low-income groups differ in car-buying needs and wants. It also knows that young consumers’ needs and wants differ from those of older consumers.
Thus, GM has designed specific models for different income and age groups. It sells models for segments with varied combinations of age and income.
Definition of Market Segmentation
Different experts, writers, arid scholars have defined market segmentation; important ones have been given as follows:
- According to Philip Kotler, market segmentation means “dividing a market into distinct groups of buyers who might require separate products or marketing mixes.”
- According to William J. Stanton, “Market segmentation is the process of dividing the total heterogeneous market for a good or service into several segments. Each of which tends to be homogeneous in all significant aspects.”
- According to Ronald W. Hasty and W. R. Ted, “Segmenting markets simply divides the heterogeneous mass market into groups, each of which has one or more homogeneous characteristics.”
Markets consist of buyers, and buyers differ in one or more respects. They may differ in their wants, resources, geographical locations, buying attitudes, and buying practices. Any of these variables can be used to segment a market.
Relationship of a Market Segment to a Market
By now, you understand that a market segment consists of buyers seeking the same product aspects. And the concept of a market as a set and a segment as a subset is the basis for the segmentation process.
But the relationship of a segment to a market is also one of the means to goals. The implications of this relationship are:
- Since means for accomplishing goals can be varied, different segments of a market may demand radically different substitutes (for example, an electric razor for a safety razor)
- Since the function distinguishing a market is a means to some higher-level function that a variety of markets can serve, there can be the mobility of buyers among the several markets, which may result in instability in any individual market, for example, from ‘movie’ of the film industry to ‘entertainment’ where TV competes with the film industry)
- Since people exercise choice within the context of what is available, the buyers are not necessarily satisfied with what they buy, meaning that a possibility always remains of designing an attributes mix better suited to the segment.
We can say that buyers within a segment are more homogeneous in their market wants when compared to those who are in the market at large. Still, differences will always remain in wants among those within a segment, notwithstanding this similarity.
What it means is that a marketer can always achieve additional homogeneity by subdividing the original set of segments further until, theoretically speaking, we have segments to which only one buyer belongs.
The question that arises is how far the process is carried toward this end. The answer will depend on:
- the commercial viability of small segments, and
- the competitive practices of rivals.
Now, what should a marketer do?
He may ignore the differences and treat the segment as a homogeneous segment, or he may take account of some of the differences in product variety, promotion, and distribution and segment the market on that basis.
So segments will be distinguishable based on such differences.
In other words, one will be able to distinguish one segment from another based on what segment members have in common in respect of what they seek from a product.
However, since consumer wants to keep on changing with time, segment wants would also change in time, necessitating the manufacturer to adapt his offering without necessarily affecting the definition of the core want.
Benefits of Market Segmentation
We will now try to describe both the benefits and doubts arising from the market segmentation strategy.
First, we will highlight the benefits of segmentation, and these are:
- Market segmentation helps a company exploit its market better by selecting market niches (suitable segments) compatible with its resources.
- Market segmentation helps in focusing strategies more sharply on target groups.
- Market segmentation is more likely to result in instilling customer ‘loyalty’ since the firm’s offering is better matched to those in the segment.
Doubts about the effectiveness of segmentation!
The discussion that follows concentrates on the doubts which have been expressed on the effectiveness of segmentation.
Are segments mutually exclusive groups?
Remember, segments are not mutually exclusive customer groups. What we are exactly grouping is ‘anticipated orders’ from buyers, not buyers themselves.
To assume that he or she is in one segment and one segment only is to assume that the circumstances are so constant that use functions and generated functions remain fixed. We are trying to emphasize that the same consumer may appear under different descriptions for different segments.
To illustrate: Forhans and Colgate toothpaste differ and seem aimed at different segments, but the same people may buy both of these.
The fact that the same people buy both of these products does not in itself imply the absence of meaningful segments. Products in different market segments may be bought by the same buyer for different family members or occasions, or just for variety, etc.
Is segmentation merely based on different product forms?
It is not right to say that segmentation is merely done based on different product forms, Although this is what usually happens. But segmentation can be on other bases: distribution, price, promoted image, etc.
When insignificant differences exist between brands
What happens in a situation where markets are not heavily segmented or where the differences between products are marginal?
In a situation like this, one can’t help saying that not much purpose is served by segmentation. In other words, segmentation is not a feasible strategy in a situation where insignificant differences exist between brands.
Why is Market Segmentation Important? – 7 Reasons Why Market Segmentation is Required for a Brand.
Dividing the total market into small parts or segments is called market segmentation. Market segmentation is a customer-oriented concept. It makes it easy to identify the target market and make marketing plans and programs.
Market segmentation plays an important role in identifying market opportunities, effectively using market resources, evaluating competitors, making strategic plans, specializing market, making effective marketing mix, and making business organizations adaptable to the environment.
- Identification of Market Opportunities
- Effective use of marketing resources
- Evaluation of competitors
- Strategic planning
- Market specialization
- Effective marketing mix
- Environmental adaptation
Let’s try to understand them further.
Segmentation Helps with Identification of Market Opportunities
To be able to identify market opportunities is an important aspect of market segmentation. Each segment’s size, development, and wants can be analyzed by dividing the total market into several segments.
Besides, the characters of the customers of each segment and possible profit also can be analyzed by segmenting the market.
Market opportunities can be identified from such analysis. A more profitable market segment can be chosen, leaving aside the less profitable one. As a result, the business firm becomes able to achieve its goal.
Market Segmentation Results in Effective Use of Marketing Resources.
The other important aspect of market segmentation is to be able to use marketing resources effectively. Different marketing mixes for each segment can effectively use marketing resources.
Goods or services can be produced according to the demand of the market segment. The price of goods or services can be fixed according to the purchasing power of the customers of each segment. Promotional activities also can be conducted according to the market segment.
A proper distribution channel can be selected according to the demand and wants of the segment. If the market is not segmented, it becomes difficult to produce suitable goods or services for all segments, fix prices, conduct promotional activities, and select distribution channels.
Evaluate the Competitors, Find out which Segment They Are Targeting.
The other important aspect of market segmentation is the successful evaluation of competitors. It is necessary to get all information about competitors’ situation in each segment from market segmentation.
Their weak and strong aspects can be identified through their evaluation. True information about competitors’ strategies and marketing mix can be obtained. Business success can be achieved by identifying weak aspects of competitors.
Strategic Marketing Plan Requires Market Segmentation
The other important aspect of market segmentation is to help in making effective marketing strategic plans.
Strategic plans can be made for each market segment by segmenting the market.
Information about the number of customers, purchasing behavior of customers, their purchasing power, and purchasing purpose should be obtained for making strategic plans.
Along with this, it is also necessary to know about competitors’ market strategies.
If a detailed study is carried out of the market segment by the segmenting market, information about all these matters can be acquired. Appropriate strategic plans for each segment can be made based on this information.
Market specialization using segmentation
Market segmentation also helps in market specialization. The total market becomes vast. In a vast market, it becomes difficult to specialize in the market by analyzing customers.
So, a business organization should divide the total market into different segments, specialize market by studying and analyzing the customers of each segment, and can specialize in market adjusting with marketing mix to satisfy the customers.
Effective Marketing Mix with Market Segmentation
The other important aspect of market segmentation is to be possible for an effective marketing mix. True information about customers’ interests, habits, customs,- purchasing power, purchase behavior, buying motives, etc., can be acquired from market segmentation. A proper marketing mix can be prepared for each market segment.
The basis of such information can be implemented effectively. Besides this, the marketing mix can be changed according to necessity and time.
Environmental Adaptation Using Market Segmentation
The environment is an important component to affect any business organization. If the environment is made favorable to the organization, business success can be easily achieved.
Environmental components of small segments also can be identified through market segmentation. The quick-changing environment can be anticipated. As a result, a business organization can be made adaptable to the environment by marketing mix.
Forming Market Segments – What is Grouped in Making Segments?
One of the problems involved in segmentation is knowing what precisely is being grouped to form segments.
As far as consumers are concerned, they are not mutually exclusive categories, for people may buy cigarettes today and pipe tobacco tomorrow.
But since classes should be mutually exclusive by and large, what precisely is that which we are grouping into segments? The answer is that we are grouping buyers’ probability of purchasing different types of offerings.
But for the effectiveness of the segmentation strategy, a marketer must describe its segments both in terms of what is wanted and who is likely to buy it.
In other words, we must define the configuration of benefits sought and also draw up a profile of those in the segment that distinguishes them from the members of other segments.
A good, practical approach for gathering comprehensive knowledge about what is wanted and who is likely to buy it is to ask yourself questions such as:
| What |
|
| How |
|
| Where |
|
| When |
|
| Why |
|
| Who |
|
When asking questions such as these, you should keep in mind the following points:
- the list of questions is only suggestive; you will have to review it to suit the specific situation;
- you will have to collect the necessary data to supply the answers.
You will have to relate the answers to the decision at hand. To illustrate, it is insufficient to find out where the consumer buys this product.
The answer will have to be related to decisions that you have to make, say for a channel, advertising, packaging, etc.
What are the Bases of Market Segmentation – 4 Types of Market Segmentation
For effective segmentation, a marketer has to use different segmentation variables alone and in combination.
4 Bases or types of market segmentation are;
- Geographic Market Segmentation
- Demographic Market Segmentation
- Psychographic Market Segmentation
- Behavioral Market Segmentation.
The table below shows details of each type of market segmentation:-
| 4 Types of Market Segmentation | |
| Variable | Typical Breakdowns |
| Geographic Market Segmentation | |
| Region |
|
| County size |
|
| City Size |
|
| Population Density | Urban, Suburban, Rural |
| Climate | Northern, Southern |
| Demographic Market Segmentation | |
| Age |
|
| Gender | Male, Female |
| Family size | 1-2, 3-4, 5+ |
| Family life cycle |
|
| Income |
|
| Occupation |
|
| Education |
|
| Religion | Muslim, Catholic, Protestant, Jewish, others |
| Race | White, Black, Asian, Hispanic |
| Nationality | American, British, French, German, Scandinavian, Italian, Latin American, Middle Eastern, Japanese |
| Psychographic Market Segmentation | |
| Social class | Lower lowers, upper lowers, working-class, middle class, upper middles, lower uppers, upper uppers |
| Lifestyle | Achievers, believers, strivers |
| Personality | Compulsive, gregarious, authoritarian, ambitious |
| Behavioral Market Segmentation | |
| Purchase occasion | A regular occasion, special occasion |
| Benefits sought | Quality, service, economy |
| User status | Nonuser, ex-user, potential user, first-time user, a regular user |
| Usage rate | Light user, medium user, heavy user |
| Loyalty status | None, medium, strong, absolute |
| Readiness state | Unaware, aware, informed, interested, desirous, intending to buy |
| Attitude toward product | Enthusiastic, positive, indifferent, negative, hostile |
Criteria under these 4 types of market segmentation are not limited to just those that we mentioned in the table. This is for the consumer market segmentation.
For business market segmentation, 5 Bases need to be covered. These are;
- Demographics.
- Operating Variables.
- Purchasing Approaches.
- Situational Factors.
- Personal Characteristics.
Factors To Consider for Selecting Market Segments
Before we conclude our discussion of market segmentation, we should also discuss how a company should select its segments.
Both general factors which one uses to evaluate any economic opportunity and the factors specific to the situation should be considered in evaluating segment options against these criteria.
- General factors
- Company thrust
- Size and growth potential
- Investment needed
- Profitability
- Risk
- Competition
- Specific segmentation factors
- Segment durability
- Mobility
- Visibility
- Accessibility
Let’s try to understand them one by one.
General Factors To Consider for Selecting Market Segments
The following are some important general factors these you must consider:
Company thrust
The company that is segmenting its market needs to identify the requirements for success in the concerned target market.
Next, it must determine what particular business system consisting of marketing, production, finance, personnel, etc., will be needed to meet the requirements for success in that segment.
As far as possible, the firm’s thrust should be such that it gives the company a critical advantage in that segment.
Size and growth potential
Not only the present size but also the future growth potential of the concerned target market must be considered. The current market demand, by itself, may prove misleading. The measurement might also create its own problems.
Investment needed
Investment needed for tapping that particular target market is another factor to consider, and you must take care to see that both entry costs and costs associated with building market share have been included.
Profitability
The question of profitability is associated with an investment decision. To calculate it, we have to estimate both future sales and costs in the concerned segment.
What must also be considered is value-added to the product that is to be marketed in that target segment, for a low value-added product makes profitability more hazardous.
Risk
There are the usual risks associated with the extent to which a particular target market would respond. But these are not the only ones.
Other risks, like the new product taking away part of the market share from the company’s existing product(s) in that target market, need also be considered.
Competition
The selection of the target market also implies selecting the competitors with whom the company will compete.
Another important point to note in this context is that the segment may be large but may already be well served by several entrenched competitors. The question naturally would be whether one would like to enter such a segment.
Specific Segmentation Factors To Consider for Selecting Market Segments
The specific segmentation factors that you need to consider are as follows:
Segment durability
Remember, segments based on fads and fashions are of short duration; that is, their life cycles are temporary, and your plans to tap such segments must take this into account.
Besides, you can’t think of making substantial investments in such ventures from a long-term point of view.
Mobility
Mobility means the movement in and out of a segment of members of a target group. If the mobility rate of target group members is high in respect of a certain product, say, hair oils, the company, to keep its sales stable, would have to attract new users to its product.
Visibility
Visibility refers to the extent to which the want of a target market or segment is distinctive.
If what is sought by the members of that segment is perceived as ver;.’ different from what is sought in other segments, the segment’ loyalty’ will be greater.
But those in other segments may regard that offering as very different and something which is not meant for them. Highly visible segments, however, are likely to be more stable than other segments of a market.
Accessibility
Those in the segment or the target market should be directly reachable through established communications and distribution channels. If that particular segment cannot be reached, the exercise in market segmentation will be futile.
For evaluating segment options based on these factors, please remember that you will have to weigh these factors in the context of your specific situation.
How is the Basis for Segmentation Selected?
Before selecting a basis, you must arm yourself with substantive knowledge about the buyer. The basis selected should be such that it evokes a sufficient purchase response to justify cultivating that segment.
Remember, if it were easy to identify the various mixes of benefits sought by the various groups in the market, segmentation would hardly present any problems. In that case, the various groups would constitute potentially different segments.
But the major problem lies in determining what benefits the prospective buyers seek and the relative ranking of these benefits that they discriminate against various buyer groups in the market.
To illustrate, how does one discover that consumers discriminate among, say, toilet soaps based on price, image, cosmetic power, size, packaging, hygienic effect, smoothness, freshness, etc., and also what relative weights do they assign to these variables?
Another problem that arises is that consumers are not actively seeking what they would buy if it were available. What it means is that we are all open to new offers, and in the process, our preferences may change.
4 Levels Of Market Segmentation
Thus, market segmentation divides the total market into different sub-markets that have similar characteristics. There are 4 market segmentation levels, which are used based on the target marketing process.
4 levels of market segmentation are;
- Mass Marketing or Undifferentiated Marketing.
- Product-Variety Marketing or Differentiated Marketing.
- Concentrated Marketing or Niche Marketing.
- Micro Marketing.
To understand market segmentation levels, we need to see what a market looks like with no, partial and full segmentation. Let’s see a hypothetical six buyers in the market and how they are segmented;
As you can see, the market segmentation levels are the way a company looks at the market and sets how broad its market targeting should be.
Let’s try to under all 4 levels of market segmentation;
1. Mass Marketing or Undifferentiated Marketing – Target the entire market with just one marketing campaign.
Mass marketing is the process of communicating a product to the entire market with one marketing strategy, using the power of mass distribution and mass media.
Also known as undifferentiated marketing because this strategy does not target individual market segments. Different market segments are marketed with the same blanket approach to maximize sales volume.
Most businesses try combining mass and niche marketing strategies.
Advantages of Mass Marketing
- Economies of scale can be obtained in mass markets because of their enormous size. Thus, the average cost of bringing the product to the market will be lower, making profit margins higher.
- Only one marketing plan is required, and no specific market segment is targeted. One marketing campaign targets the whole market, facilitating marketing economies of scale.
- Providing products for a mass market enables establishing a more extensive base of customers. This will generally increase profitability.
Limitations of Mass Marketing
- In mass marketing, the competition is usually broad and extreme.
- There are very high barriers to entry for mass markets. Often incumbent competition has invested in capital equipment, large-scale factories, offshore centers, efficient supply chain management processes, etc. Huge competition can make it extremely difficult to compete successfully in a mass market as a new firm.
- Mass marketing is less focused and requires more resources.
- The company can suffer a high loss if the marketing strategy fails.
2. Product-Variety Marketing or Differentiated Marketing – Target the Entire market with different products and marketing mix
In Product-Variety Marketing or Differentiated Marketing, the marketer divides the market into different segments depending on the consumer’s buying behavior, requirements, purchasing power, location, and age level.
In product-variety marketing, the seller produces two or more products that have different features, styles, quality, and so on.
Subsequently, Kohinoor produced several kinds of toothpaste bearing different brands with other packages. They were designed to offer variety to consumers rather than creating various appeals to different market segments.
Differentiated marketing helps the marketer to connect to each type of customer in the best possible way. Most companies use different market segments for marketing their entire list of products catering to different market levels.
The promotional and advertising activities for a particular focus only on the target market for that product.
For example, Unilever sells different soap-like brands like Lux, Lifebuoy, wheel, etc.
In differentiated marketing, firms promote several products with different marketing mixes to serve smaller market segments.
By providing increased satisfaction for each of the many target markets, a company produces more sales and increases production, inventory, and promotional costs.
A company can remain competitive and profitable despite the higher marketing costs. The increased marketing cost actually comes back as ROI with a high number of sales and a huge loyal customer base.
3. Niche Marketing or Concentrated Marketing – Target a few well-defined segments of the market
Niche marketing targets specific and well-defined market segments and concentrates all marketing efforts on a small but specific and well-defined segment of the population.
Niches are ‘created’ by identifying needs, wants, and requirements addressed poorly or not at all by other firms, and developing and delivering goods or services to satisfy them.
As a strategy, niche marketing aims to be a big fish in a small pond instead of a small fish in a big pond.
A niche may be identified by dividing a segment into sub-segments or by defining a group with a different set of characteristics
who may look for a unique combination of benefits of attributes in the product
The main requirements or characteristics of Niche Marketing are
- Customers have a distinct set of needs and want for the service or product.
- The seller of the service provider needs more skills or niche skills.
- Premium prices for higher quality and specialized niche services.
Advantages of Niche Marketing
- When a specific market segment is targeted in a firm’s marketing, marketing tends to be more focused and likely to have a greater appeal within the targeted segment. Mass marketing is not as focused and, as such, tends to focus on the ‘average’ consumer.
- Businesses can become highly specialized in finding out the needs and want of a niche market they are targeting. With needs and wants being better met, customer loyalty can ensue.
- Competitive rivalry within a niche market is less than that for broader markets. Less competition can translate into increased pricing power for a firm’s differentiated products, which, in turn, can lead to increased profitability.
Limitations of Niche Marketing
- Niche markets, by their definition, are small. The number of total potential customers in the market is limited. Niche marketing strategies may miss potential customers and depress sales revenues.
- Economies of scale may not be obtained in niche markets due to their limited size. Thus, the average cost of bringing the product to the market will be higher, leading to higher prices and or lower profit margins.
- Profitable niche markets with low barriers to entry are likely to attract new competitors into the industry. Niche markets are small and cannot sustain a relatively high number of competitors.
Rather than market its products separately to several segments, a firm opt for a concentrated marketing approach.
With concentrated marketing or niche marketing, a firm focuses on profitably satisfying only one market segment. It may be a small segment but a profitable segment.
This approach can appeal to a small firm that lacks the financial resources of its competitors and to a company that offers highly specialized goods and services. Along with its benefits, concentrated marketing has its dangers.
Since this approach ties a firm’s growth to a particular segment, changes in the size of that segment or customer buying patterns may result in severe financial problems.
Sales may also drop if new competitors appeal successfully to the same segment. Niche marketing leaves the fortunes of a firm to depend on one small target segment.
4. Micro Marketing – Target at a very basic level of the market segment
Micro-marketing looks at the activities individual in marketers in the entire economic sector. This approach is still more narrowly focused than concentrated marketing. Micro-marketing involves targeting potential customers at a very basic level, such as 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 customer), the internet offers the benefit of mass customization – by reaching the mass market with individualized offers for the customers.
Several types of micro marketing;
- Local Marketing.
- Individual Marketing
Local marketing
In Local marketing, the seller or the marketer only concentrates on the local market. The products also have the local appeal or the local usages, and the promotional activities are planned based o the location only with local flavor.
Here the cost remains high due to lower production, and competition is also less. Marketers can concentrate on mom in the local market to reach all the customers in the region. The best example would be the marketing of regional chain of hotels or restaurants, locally produced food products, etc.
Local marketing can be studied from both the retailer’s and manufacturer perspective. For the retailer, local marketing implies the optimization of the store’s marketing mix.
For the manufacturer, local marketing implies optimizing the product’s marketing mix at the store level. We focus on the interaction between manufacturers and retailers, and how manufacturers and retailers optimize the marketing mix for a product (category) at the store level.
Individual Marketing
Individual marketing focuses on satisfying the needs and wants of individual customers. It’s also known as one-to-one marketing and customized marketing; it’s the segmentation level where the seller offers a customized product to the consumer.
In simple words, making and selling the product(s) according to the needs and preferences of the consumer.
For example, a Fabrics company will cut your clothes according to the needs of the individual customers.
Individual Marketing happens when several specific attributes are “fulfilled,” will the personal message be automatically triggered by one person.
The more attributes included triggering the message, the more relevant it becomes for the person. Let’s look at the type of attributes.
- Customer profile attributes: A simple message commonly used is the birthday month promotion.
- New and renewal: Sending automatic messages triggered to the person based on the new, active, lapsing, or inactive customers (or members) group. The content will be relevant based on their activity level.
- Buying behavior: The spending history (the type of product, average spend, frequency, changing spending patterns) is used to trigger a message.
- Channel behavior: the channel interactions (web, mobile, e/m-commerce, social media, visits) is used to trigger a message.
- Customer sentiments: may include feedback forms, service cases, and likes on social media.
- Location: These are often real-time messages being sent when a person is close to, outside, or inside a particular location.
However, many triggers may be using multiple attributes across categories to send the message.
Example of individual marketing:
A person has recently bought shirts on your e-commerce site.
Based on his previous spending pattern, he usually also buys ties to go with the shirts. You have recently launched a new set of ties in one of your stores. Three days later, as he walks down the street outside your store, your beacon detects that he is very close by.
Based on this information, the following push message with a picture is automatically created and sent via your mobile app to the customer: “Within the next 2 hours, you have 10% off our new ties that have just arrived”.
Why is Market Segmentation Levels Important?
Because the market and its buyers are vastly diverse, most companies cannot compete in an entire market. So a company must identify the parts of the market that it can serve profitably.
Companies, nowadays, are shifting from mass marketing and product-variety marketing, and micro-marketing toward target marketing. Target marketing is more useful to sellers in locating their marketing opportunities.
Sellers can develop the most appropriate product for each target market and mold their prices, distribution channels, and advertising to reach the target market efficiently.
While sellers adopt the “shotgun” approach (scattering marketing efforts) in mass marketing and product-variety marketing, they adopt the “rifle” approach (focusing on the buyers who have greater purchase interest) in target marketing.
With the increasing fragmentation of mass markets into many micro-markets, each with different needs and preferences, target marketing is increasingly assuming the form of micro marketing.
Adopting micromarketing, companies develop their marketing programs to the needs and wants of narrowly defined geographic, demographic, psychographic, or behavior segments.
Target marketing finally takes the form of customized marketing. In customized marketing, the company adapts its product and marketing program to the needs of a specific customer or buying organization.
5 Requirements of Effective Market Segmentation – Ensure Market Segment is Good for Brand
We have observed that there are many bases to segment a market. But all of them are not useful.
For example, buyers of pasteurized milk could be divided into fair complexioned and dark-complexioned customers.
But skin color does not affect the purchase of milk
Moreover, if all milk buyers bought the same amount of milk each month, believed all milk is the same, and wanted to pay the same price, the company would not benefit from segmenting this market.
5 requirements of effective Market Segmentation are;
- Divisible.
- Measurable.
- Accessible.
- Substantial.
- Actionable.
Divisible – Market should be made divisible for market segmentation,
The market should be made divisible for market segmentation. The market should be divided based on purchasing power, purchasing purpose, purchasing habits, lifestyle, living style, gender, religion, place, etc. While dividing the market, the customers having the same wants and character should be grouped.
In doing so, it becomes easy to form a marketing mix strategy. If the total market is not easy to divide and has no characters, adopting a market segmentation policy becomes impossible.
Measurable – Segments must be measurable.
Customers’ wants, purchasing power, and characteristics should be measurable. Besides, the information necessary for market segmentation also should be easily available.
Customers’ income, age, gender, etc. can be easily available. Customers’ income, age, gender, etc. can be easily obtained and measurable. But beliefs, perceptions, and attitudes of the customers cannot be measured.
So, market segmentation should not be made based on the components which cannot be measured because true information cannot be obtained from it. As a result, it becomes difficult to make the marketing mix.
Accessible – Market segments must be easily accessible.
Market segmentation should be made in a way that it becomes easy to reach there and provide effective services. Market segmentation should be made in a way that marketing activities such as distribution, advertisement media, selling efforts, etc. can reach there easily.
If market segmentation is made beyond the access, it becomes difficult to reach there, provide goods or services, and market segmentation becomes ineffective.
So, these factors should be well thought and considered while segmenting the market.
Substantial – Segments should be large enough to worth marketing efforts.
Profit components should not be missed while segmenting the market. If profit cannot be earned from providing goods or services to the customers, a business firm cannot make sustainable development.
The main purpose of market segmentation by identifying the target market is to earn a profit.
So, the market should be segmented so that profit can be seen. For this, market segments should be sufficient and satisfactory. If the market segment is small, it becomes difficult to earn a profit.
Actionable – Selected Market segment must have ways to implement marketing plans and actions.
The other important requirement of market segmentation is actionability. A business organization should be able to implement its policy and programs to attract, targeted market segment, and provide services.
So, market segmentation should be made considering the human, physical, and financial resources of a firm so that it can be easily implemented.
If actions cannot be carried out due to the lack of human, physical, and financial capacity, the market segmentation becomes ineffective.
3 Criteria for Evaluating Market Segments
By segmenting the market, the company discovers its opportunities in various segments. After segmentation, the company evaluates different segments to identify which ones and how many segments it should target. We will now discuss the process of evaluating and selecting market segments.
A company takes into account three factors in evaluating different market segments. These are segment size and growth, segment structural attractiveness, and company objectives and resources.
Segment Size and Growth – The market segment should have the right size and is growing.
A company first determines segment size and growth. It collects and analyses data on current segment sales, growth rates, and expected profitability for various segments. The company will be concerned with segments that have the right size and growth characteristics.
But the idea of the right size and growth is relative. Some companies will want to choose segments with large current sales, a high growth rate, and a high-profit margin.
However, every company may not find the largest, fastest-growing segment of attractive ones. Smaller companies may feel that they don’t have the skills and resources needed to serve the large segments, or that these segments are too competitive.
These companies may select segments that are smaller and less attractive, but that are potentially more profitable for them.
Segment Structural Attractiveness – Market Segment should allow the brand to differentiate from others.
A segment with desirable size and growth may not have strong profit potential. For assessing long-run segment attractiveness in terms of profit, the company must examine several major structural factors.
For instance, a segment is less attractive if it is composed of many strong and aggressive competitors. If there are many substitute products, they may restrict prices and profits. The relative power of buyers also influences segment attractiveness.
If the buyers in a segment are stronger than sellers in bargaining, they will try to pull down the prices, want more quality and services, and set competitors in fierce competition – all affecting seller profitability adversely.
A segment may be less attractive when it is composed of strong suppliers who can manipulate prices or decrease the quantity or quality of ordered goods and services.
Suppliers are powerful in situations where they are large and concentrated, substitutes are few, or supplied product is an important input.
Company Objectives and Resources – Company’s value, practice, innovation should complement the market segment.
Even if a segment appears to be lucrative in terms of size, growth, and structure, the company must consider its objectives and resources to that segment.
Some attractive segments could be dropped from consideration because they are not compatible with the company’s long-run objectives.
Although such segments might be attractive in themselves, they might deflect the company’s attention and energies away from its primary goals and objectives. Again, from an environmental, political, or social-responsibility viewpoint, it might be unwise to choose them.
For example, in recent years, several companies and industries have been criticized for unfairly targeting vulnerable segments -children, the aged, low-income minorities, and others – with questionable products or tactics.
If a segment is compatible with the company objectives, the company then must think about whether it has the skills and resources necessary to succeed in that segment. If the company does not have the strengths needed to compete successfully in a segment, it should refrain from entering the segment.
The company should decide to enter segments only where it can offer superior value and gain advantages over competitors by putting skills and resources superior to those of the competitors.
Methods Companies use for Selecting Basis for Market Segmentation.
As such, there is no standard answer to what basis is the best in a particular case, and companies resort to one or more of the following:
Intuition and experience
Many marketers try to segment their market based on their empathetic understanding of the situation. But they must not target to check such intuitive thinking against the evidence which may be there in support of such a hypothesis.
Trial and error: Trial and error is another method which is used to divide a market into different groups based on product attributes and to subsequently check whether such groups are proving meaningful in terms of market response.
Research on consumption systems
Observing and studying the total consumption system associated with the product in use helps generate new ideas for benefit segmentation.
The consumption system refers to the total situation in the context in which the product is used. It helps in understanding the specific use-context, applications, and usages of that product.
Research on attitudes and perceptions
This is an area in which there is currently the greatest interest. This type of research is being used in respect of quite a few of the consumer products that are being introduced by large-sized companies in India. Perceptual mapping is one technique that is used for such research.
Two approaches are used for breaking up a market either from the top down or from the bottom up.
If we use the top-down approach called logical division, we start with the market and break it down into more and more refined markets or market segments.
As against this, if we follow the bottom-up approach called ordering, we start with the individual consumers and group their likely wants into segments.
Logical division
As stated earlier in the logical division, it is the top-down approach that is followed. We divide the market into dichotomous sub-classes based on the product, offering, or customers:
Demographic sub-classes, Tor example, are divided into social classes, stage in life cycles or psychographic sub-groups (for example. AlO/personality), etc., from which we infer likely benefits sought.
If what is being sought in each sub-class differs from the description of who is in each sub-class, such sub-classes may be regarded by the firm as market segments.
Sub-classes based on the mix of benefits sought: If we also know who seeks the various sets of benefits, the sub-classes can be regarded as market segments.
Remember, the logical division can be an empty exercise unless the buses for making the dichotomous categories are known to be relevant to purchase behavior.
Classification and ordering also called the bottom-up approach, may be used either as an alternative or as a complement to logical division.
Here we seek to identify the wants or individual brands in the market and cluster them to form segments.
Various perceptual mapping techniques have been used to show a set of brands on a graph, with the relative positions of the brands being based on the consumer’s perceptions of similarity and dissimilarity.
Perceptual Mapping Technique
Market structure analysis is the one technique that is used. It is the name given to a map that shows the perceived relative positions of products to the dimensions used to evaluate brands. On such a map, we can also plot the consumer’s preference or ideal point.
The first step in perceptual mapping is to identify the attributes or dimensions by which those in the market evaluate the product by using research techniques like in-depth interviews.
The next step is to ask consumers to rate each brand along each of the dimensions identified. (Statistical techniques such as factor analysis may be used to reduce a large number of dimensions to the few underlying dimensions.)
Next, plot the consumer’s preference or ideal point on the perceptual map.
To illustrate, assume that ‘flavor’ and ‘sweetness’ have been identified as two underlying dimensions to evaluate brands in the soft drinks market. The perceptual map (showing brands and ideal point) follows.
To keep it simple, only three brands X, Y, and Z, have been taken, and only one ideal point has been plotted.
In other.it is only a partial perceptual map. Also, remember ‘flavor’ and ‘sweetness’ are not an all or nothing affair but a matter of degree.
The criterion for assigning product attributes into segments is not usually a ‘yes’ or ‘no’ decision but a matter of order, where nest pigeon holes are replaced by references to spaces of dimensions.
In examining the above perceptual map, remember the following assumptions:
- the closer the positioning of two brands on the map, the more likely they are to compete with each other
- the closer a brand is to a consumer’s ideal point, the more likely it is to be preferred by them
- gaps on the map can be identified as potential market niches or segment possibilities or other ideal points.
Further, the above perceptual map can be used to cluster brands into competing groups as a basis for defining segments.
Considerations in using perceptual maps
The following points have to be borne in mind while using perceptual maps:
- Two brands may be similar that are near each other to the two dimensions of the map, but it may be so only for buying occasion A and not for buying occasion B.
- Two consumers may have the same location on a map but arrive at that position by very different perceptual or attitudinal routes, i.e., preference point may be the same. Still, it may be the result of different attitudinal frameworks.
- Just because two brands, A and B, are closest on the map and the position occupied by A is the ideal point for a certain group of customers, it does not follow that B will necessarily be chosen if brand A for some reason, cannot be bought. There is also no guarantee that the withdrawal of one brand may not bring about a reordering of the rest of them.
Further, to ask some consumer(s) about their ideal points or preferences about the purchase of a particular product may create semantic problems about the meaning of the ideal point.
The meaning can vary from ‘prefer just now’ to ‘always prefer.’ Responses also can vary depending both on the context in which the consumer.
Market Segmentation Versus Product Differentiation
Market segmentation divides the market into groups of segments having similar wants.
But wants must be interpreted very broadly, in terms far broader than product characteristics only.
Segments may also differ in their needs for information, reassurance, technical support, service, promotion, distribution, and a host of other ‘nonproduct’ benefits that are part of their purchase. They may also differ in their capacity to pay for these differences.
Economists view a product as differentiated if it is preferred by some buyers to similarly price rival brands on the ground of differences in the following:
- physical aspects of the product
- services offered
- convenience in using or buying the product
- image projected.
If you analyze the above view put forward by economists, you will reach the conclusion that all segmentation except segmentation involving price alone entails differentiation.
But it does not mean that the two are the same.
For segmentation involves more than what is achieved through product differentiation.
In market segmentation, the aim is not merely to divide the market into sub-classes based on product differentiation but to distinguish want categories that correspond to the distinct demands of various groups in the market.
So we can say that in product differentiation, the marketer produces two or more products that are different in terms of features, styles, quality, sizes, and so on.
The objective here is to offer variety to buyers rather than to appeal to different market segments.
International Market Segmentation
Many companies, large and small, are engaged in international operations, although they vary in their level of international involvement. These companies need to divide their world markets into segments with distinct buying needs and behaviors as they do within their home markets.
One or a combination of several variables can be used for segmenting international markets. Major variables used to international segment markets are geographic location, economic factors, political and legal factors, and cultural factors.
Companies can segment international markets by geographic location grouping countries by regions such as Western Europe, Far East, South Asia, or North Africa. In geographic segmentation, it is assumed that nations close to one another will have many common characteristics.
However, this is not always the case.
For example, the United States and Canada have much in common. Yet both differ culturally and economically from neighboring Mexico. Even within a region, consumers can differ greatly. For example, in Southeast Asia, Malaysia is no more like Indonesia than Thailand is like Singapore.
Economic factors can also be used for segmenting world markets.
For example, countries might be classified by population, income levels, or by their overall level of economic development.
Some countries are highly industrialized, such as the United States, Britain, France, Canada.
Other countries are newly industrialized or developing economies such as Nigeria, Bangladesh, India, Pakistan,. There are less developed countries also such as,.
A country’s economic characteristics largely determine the product and service needs of its population and also the marketing opportunities that exist.
Countries can also be segmented by political and legal factors. Important of these factors are the stability of government, receptivity to foreign firms, monetary regulations, and the nature of bureaucracy.
These factors affect a company’s choice of which countries to enter and how. By using cultural factors, markets are grouped according to common languages, religions, values and attitudes, customs, and behavioral patterns.
Segmenting international markets based on geographic, economic, political, cultural, and other factors presupposes that segments should consist of clusters of countries.
However, many companies adopt a different approach, called Intermarket segmentation. Intermarket segmentation involves forming segments of consumers who have similar needs and buying behavior even though they are located in different countries.
For example, Mercedes-Benz targets the world’s well-to-do, regardless of their country. And Pepsi uses ads filled with kids, sports, and rock music to target the world’s teenagers.
It recently introduced sugar-free Pepsi Max in 16 countries, including Britain, Australia, and Japan, with a single set of ads aimed at teens who like to live on the wild side.
Final Words – Market Segmentation Helps in Optimizing the Marketing Mix for a Segment
All corporate marketing activities have to be necessarily carried out in such a way that they lead to the generation of surplus funds.
Even in the case of non-profit and non-manufacturing setups, it becomes important to achieve marketing goals in the most economical way. This is so primarily because of budgetary constraints in such organizations.
One of the ways to obtain economies in marketing is to concentrate and focus the marketing effort for a well defined homogeneous cluster of potential customers.
This approach, known as market segmentation, helps in optimizing the marketing mix for a segment.
The market for this purpose can mean the market for a particular product, which in effect means the functions served by that product.
Products catering to the same function are in competition and consequently are in the same market. The way we define our function—widely or narrowly—will determine how globally we want to define our competition.
A market segment was explained to mean a homogeneous group consisting of buyers who seek the same offering. The two concepts are related to each other in the sense that the concept of a market as a set and a segment as a subset is the basis on which the process of segmentation is carried out.
In defining a segment, however, we think less in terms of functions and more in terms of benefits sought and by whom. The output of segmentation analysis is, therefore:
- a profile of our customer target group, focusing on those details that will best help us develop product, promotional, pricing, and distribution strategies;
- the set of benefits sought so we can build our offering to match the configuration of benefits sought and then select benefits in our offering that will constitute a critical advantage to act as the buying inducement.
Next, we discussed the type or bases of segmentation. For the consumer market segmentation, the 4 bases are Geographic, Demographic, Psychographic, Behavioral.
For segmentation of a market is not an arbitrary process, but neither is there a unique set of segments to be discovered. It was emphasized that the ultimate aim of segmentation was to relate consumers in the segment and their likely response to different offerings.
The two approaches, top-down and bottom-up (logical division and offering), which are used for breaking up a market, were then described. Finally, factors both general and specific for evaluating segment options were explained.