Market Segmentation

 

1.0 INTRODUCTION

 All corporate marketing activities have to be necessarily carried out in such a way that they lead to generation of surplus funds. Even in the case of non-profit and non-manufacturing set-ups, 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 efforts in respect of a well-defined homogeneous cluster of potential customers.

That is, to choose its markets and serve them through target marketing. In target marketing, sellers distinguish the major market segments, target one or more of these segments, and develop products and marketing programmes tailored to each segment. This approach known as market segmentation helps in optimizing the marketing mix for a segment. In this note, we will examine the concept and bases for market segmentation. 

2.0 OBJECTIVES

At the end of through this note, you should be able to:

·         explain the term market segmentation

·         discuss the bases for market segmentation

·         explain benefits derived from market segmentation

·         explain methods of segment selection. 

 3.0 MAIN CONTENT

3.1 The Concept of a Market Unless you know the exact market(s) to which your organization wants to cater, your focus will be wrong and your planning will be faulty, and you will fail to develop an appropriate marketing strategy or effort to meet the needs of your target market. To identify the target market, let us first define the term ‘Market’. The term market has more than one meaning:

(a)A market is a place where people gather to transact business mainly to sell and buy commodities and other physical goods.

(b) It can be used in respect of the network of institutions like wholesalers and brokers dealing in a product. (c)It can also be used to refer to the nature of demand for the product, as when we speak of the market for soap. (d) A market can be referred to as people with needs and wants, with enough disposable income to spend on goods and services provided to satisfy their special needs and wants and the willingness to expend their income on these goods and services.

(e)Stanton (1981:65) defines a market as people with needs to satisfy, money to spend and willingness to spend it.

Before you proceed further, do attempt this exercise

 3.1 The Concept of a Segment

The previous discussion must have helped you to understand the term ‘market’. On the basis of market definition given earlier, 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.

For example, all brands of color television sets will appeal, to some degree, to those in the market for a color TV, but some brands will appeal to some groups than others. If there were only one brand of color TV set, there will be no choice for the buyers. But as the market develops, manufacturers seek to cater more closely to some groups than to others, and buyers’ choice widens as a result.

At the most detailed level, buyer is a market in himself, for every buyer’s want is probably distinct in some way. But on the basis of similarities and differences, such unique wants can be grouped into subclasses. What it means is that wants within a sub-class are more related to each other than wants between sub-classes. Based on the above discussion, we can now attempt to explain Market Segments and Process of Market Segmentation.

 3.1.1 Market Segmentation

Market segments refer to the sub-classes of the market reflecting subclasses of wants and the process of conceptually distinguishing segments is known as ‘Market Segmentation’.

A market segment consists of a large identifiable group within a market. Stanton (1981) defines market segmentation as the process of dividing the total, heterogeneous market for a product into several sub-markets or segments, each of which tends to be homogeneous in all significant aspects.

Akanbi (2002) defines it as the process of dividing the consumers in a given economy into target markets. Segmentation is a midpoint between mass marketing and individual marketing. Market segmentation is a customer-oriented philosophy. The consumers belonging to a segment are assumed to be quite similar in their wants and needs. Yet they are not identical. Some segment members will want additional features or benefits not included in the offer, while others would gladly give up something that they don’t want very much. For example, in buying a car, some consumers may buy those windows with manual winders, while others may reject them.

Again, in a hotel, some may want to find more items in their room(s), such as fan, machine, cable TV, etc. while others may prefer fewer amenities and a lower price.  As part of the strategy of segmenting its markets, a company will frequently develop a different variety of the basic product for each segment.

However, market segmentation can also be accomplished with no change in the product, but rather with separate programmes, each tailored to a given market segment. A producer of pain relief drugs such as ‘Panadol’ can market the product to the youth market, and a different product for the old-people market. Here, the promotional programmes for the two markets will be different. 

3.2 Benefits of Market Segmentation

Segment marketing offers several benefits, which include

the following:

(a)The company can create a more fine-tuned product or service offer and price it appropriately for the target audience.

(b) The choice of distribution channels and communication channels becomes much easier.

(c)Such a company may face few competitors if fewer competitors are focusing on this market segment.

(d) Segmentation helps a company to exploit its market better by selecting market niches (suitable segments) that are compatible with its resources.

(e)Segmentation helps in focusing strategies more sharply on target groups. (f)Segmentation is more likely to result in instilling customers’ loyalty since the firm’s offering is better matched to those in the segment.

 3.3 Conditions for Effective Segmentation

There are many ways to segment a market but not all segmentations are effective. However, to be useful, market segments must have the following characteristics:

(1) Measurability: The size, purchasing power and profiles of the segments should be measurable. However, certain segmentation variables are difficult to measure. For example, Kotler (1997) reported that there were 24 million left-handed people in the United States – almost equaling the entire population of Canada. Yet few products were targeted towards this segment. The major problem may be that the segment is hard to identify and measure.  

(2) Accessibility: The market segments should be effectively reached and served. Suppose a perfume company finds that heavy users of its brand are single men, who stay out late and socialize a lot. Unless this group lives or shops at certain places and exposed to certain media, its members will be difficult to reach.

(3) Substitutability: The market segments should be large or profitable enough to be served. A segment should be the largest possible homogeneous group worth pursuing with tailored marketing programmes.

(4) Actionability: Effective programmes should be designed in order to be attractive and to serve the segment(s) better. A case of this 

3.4 Bases for Segmenting Consumer Markets There is no single way to segment a market. A marketer has to try different segmentation variables, alone and in combination, to find the best way to view the market structure. Here, we examine major variables.

3.4.1 Geographical Segmentation Geographical segmentation calls for dividing the market into different geographical notes such as nations, states, regions, countries, cities or neighborhoods. A company may decide to operate in one or a few geographical areas, or to operate in all areas but pay attention to geographical differences in needs and wants. Many companies today are regionalizing their marketing programmes – localizing their products, advertising, promotion, and sales efforts to fit the needs of individual regions, cities, and even neighborhoods. Coca-cola and Pepsi-cola uses this method for their products. 

3.4.2 Demographic Segmentation This consists of dividing the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race and nationality. Demographic factors are the most popular bases for segmenting customer groups. One reason is that consumer needs, wants, and usage rates often vary closely with demographic variables. Another is that demographic variables are easier to measure than most other types of variables. Even when market segments are first defined using other bases, such as personality or behavior, their demographic characteristics must be known in order to assess the size of the target market and to reach it efficiently.

Age and Life Cycle Stage Consumer needs and wants change with age. Some companies, for example, use age and life cycle segmentation, offering different products or using different marketing approaches for different age and life cycle groups. Marketers must, however, be careful to guard against stereotypes when using age and life cycle segmentation. For example, a seventy-year old man might be in wheel chair, while another might be in the tennis court(s). Other elements are gender, income, etc. 

3.4.3 Psychographic Segmentation

This involves dividing buyers into different groups based on social class, life styles or personality characteristics. People in the same demographic group can have very different psychographic make-ups such as: (a) Social Class – Many companies design products or services for specific social classes, building in features that appeal to these classes. Wristwatches, clothing, etc. are good examples of this.

(b) Lifestyle – People’s interest in various goods is affected by their lifestyles and the goods they buy express those lifestyles. Examples of this are films, books, magazines, etc.

(c)Personality – Marketers also use personality variables to segment markets, giving their products personalities that correspond to consumer personalities. Successful market segmentation strategies based on personality have been used for products such as cosmetics, cigarettes, insurance and liquor.  

3.4.4 Behavioral Segmentation This involves dividing buyers into groups based on their knowledge, attitudes, uses, or responses to a product. Many marketers believe that behavioral variables are the best starting point for building market segments.

Occasions – Buyers can be grouped according to occasions when they get the idea to buy, actually make their purchase, or use the purchased item. Occasion segmentation can help firms build up product usage. An hotelier can use this variable for his/her hotel rooms.

Benefits Sought – A powerful form of segmentation is to group buyers according to the different benefits that they seek from the product. Benefit segmentation requires finding the major benefits people look for in the product class, and the kinds of people who look for each benefit. Colgate Palmolive for example, used benefit segmentation to reposition its Irish spring soap. Others are Close-Up, Maclean, Beauty soap, Dettol soap, Delta soap, etc. Others could be flower and product appearance, brightness, etc.

User Status – Markets can be segmented into groups of nonusers, ex-users, potential users, first-time users, and regular users of a product. Note, potential and regular users may require different kinds of marketing appeals.

Usage Rate – Markets can also be segmented into light, medium, and heavy-user groups. Industrial products are easily classified under this, such as: salt, starch, sugar, cement, roofing sheets, etc.

Attitude Towards Product – People in a market can be enthusiastic, positive, indifferent, negative or hostile about a product. These are variables of behavioral segmentation. 

3.5 Segmenting Industrial/Business Markets

You might assume that the bases for segmentation will differ between industrial and consumer markets. However, they have much in common i.e. industrial markets can be segmented with many of the same variables used in consumer market segmentation. For instance, segmenting markets on the basis of end-user application is essentially benefit segmentation; a demographic basis is geographical location; while a behavior basis is the way the company buys. As knowledge of industrial customers advances, segmentation can take account of the buying criteria, technical, economic, etc. as applied to the selection of suppliers.  

3.6 Methods of Segment Selection

 Before selecting a basis, you must arm yourself with substantial knowledge about the buyer. The basis selected should be such that it evokes a sufficient purchase response to justify cultivating that segment. It should however be noted that if it were easy to identify the various mixes of benefits sought by the various groups in the market, segmentation would hardly present any problem. But the major problem lies in determining what benefits the prospective buyers are seeking, and what is the relative ranking of these benefits that distinguish various buyer groups in the market?

 For instance, how does one discover that consumers discriminate among, say, different brands of toilet soap on the basis of price, image, cosmetics power, size, packaging, hygiene effect, smoothness, freshness, etc? Also, what relative weights do they assign to these variables?

Another problem that arises is that consumers do not actively seek what they would buy if it were available. 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: 

(1) Intuition and Experience – Many marketers try to segment their market on the basis of their empathetic understanding of the situation. But they must not forget to check such intuitive thinking against the evidence which may be there in support of such hypothesis.

(2) 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 such groups is proving meaningful in terms of market response.  

(3) Research on Consumption Systems – Observing and studying the total consumption system associated with the product in use helps generate new ideas for segmentation.

(4) Research on Attitude and Perceptions – This is an area which currently arouses 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. Perceptual mapping is one technique which is used for such research.

 3.7 Selection of Segments

Before we conclude this note, let us examine how companies select their segments. Both general factors which are used to evaluate any economic opportunity and the factors specific to the situation would be considered.

(1) General Factors

Company Thrust – The company that is segmenting its market needs to identify the requirements for success in the concerned target market. Also, 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. Besides the measurement might also create its own problem.

Investment Needed – Investment needed for tapping that particular target market is another factor to be considered, 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 investment decisions. 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.

Risk – There are risks associated with the extent to which a particular target market would respond. Other risks should as well be considered.

Competition – The selection of target market also underlies 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 wellentrenched competitors. The question naturally would be whether one would like to enter such a segment.

(2) Specific Factors

·         segment durability

·         mobility

·         visibility

·         accessibility. 

4.0 CONCLUSION

 A sound marketing programme starts with the identification and analysis of the market for a product or service. A market is people with money to spend and the willingness to spend it. For most products, the total market is too broad and heterogeneous for a strategy of market aggregation. A more effective strategy is market segmentation, in which the total market is viewed as several smaller but more uniform submarkets. 

5.0 SUMMARY

We started this note by defining the two concepts, viz. market and segment. Market for this purpose was defined to mean the market for a particular product which in effect means the functions served by the product. Next, we discussed benefits of market segmentation, conditions for effective segmentation, bases for consumer and industrial markets segmentation, and methods for segment selection.

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