Major Levels of Market Segmentation and Bases for Segmenting Consumer and Business Markets

This discusses Three Major levels of market segmentation and bases for segmenting consumer and business markets.

Definition:

“Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments”

The Process of Market Segmentation:

Mainly there are three steps involve in market segmentation.

Identifying Target Markets:

First, it is necessary to define the markets the organization is in, or wishes to be in, and how these divide into segments of customers with similar needs. The choice of markets will be influenced by the corporate objectives as well as the asset base. Information will be collected about the markets, such as the markets’ size and growth, with estimates for the future.

Understanding the Value required by Target Market:

Once each market has been defined, it is necessary to understand what value the customers within each of the segments it divides into are looking for. This value is most simply thought of as the benefits gained from the product or service, but it can also encompass the value to the customer of surrounding services such as maintenance or information. This step also encompasses what the customer is prepared to give in exchange, in terms of price and other criteria, such as loyalty. This step of “Understand value required” also includes predicting the value which will be required in the future.

Understanding Competitor Value Positioning:

‘Understand competitor value positioning’ refers to the process of establishing how well the organization and its competitors currently deliver the value that the customers seek. Again it involves looking into the future to predict how competitors might improve, clearly a factor in planning how the organization is to respond.

From these three processes, the relative attractiveness of the different markets and, within each of them, their different segments can be evaluated. One tool of relevance here is Porter’s five

forces model (1985), showing the forces which shape industry competition and hence the attractiveness of a given market, or of a given segment. The output will be some form of analysis, and one way of summing up much of the key information is in a portfolio matrix. Such a matrix provides a sensible basis for prioritization amongst the many possible product/ segment combinations which the organization could address.

Levels and Basis of Market Segmentation

The following is a brief review of the “predetermined” approaches frequently used in market segmentation.

Products and services

The problem with segmenting markets according only to the products or services offered, or the technology type, is that in most markets, many different types of customers buy or use the same products or services. For example, if a mail company organizes itself around express packages, or around mail sorting, it is unlikely that the company will ever get to understand fully the real and different needs of, say, universities, banks, advertising companies, direct mail houses, manufacturing companies, retailers and so on. However, by understanding which particular features of the product or service appeal to different customers, along with features associated with all the other aspects of a purchase, such as the channel, we have a route for understanding the motivations behind the choices that are made. This is because it is through these features that customers seek to attain the benefits they are looking for. Once this is understood, the needs- based propositions required for different segments can be developed.

Demographics

Variables such as sex, age, lifestyle and so on, when used to define segments, are by implication claiming, for example, that every 30-35-year-old will respond to the same proposition.

Just reflect for a moment on the students in my years at school; would I expect them all to be wearing the same clothes, taking the same types of holidays, pursuing the same interests and driving the same cars? When someone wakes up on their birthday, do they become a stereotype associated with that age? For administrative convenience i would like the answer to be “yes”, but the answer is “no”. In business-to-business markets, customers are frequently segmented around business classification lines, which implies that all the companies in a particular sector, such as financial services, have exactly the same requirements and will respond to a single proposition. This approach could well be ignoring one or more of the following:

Different divisions and departments existing behind the business descriptor may have different applications for the product or service you supply. For example, would the mail company mentioned earlier find that the advertising and promotions department has the same requirements and specifications for mail services as the sales ledger department?

The requirements of, say, advertising and promotions departments may well be the same regardless of business type;

Even within a single division of a company, there may well be different applications for the product or service you supply which, in turn, may have different specifications attached to them;

Segmentation along business classification lines assumes all the companies within the classification employ identical people with identical values. Businesses, of course, don’t buy anything; it’s their employees we have to sell to!

Although demographics on their own cannot define a segment because they do not define the proposition a segment requires, they have an important role to play in a segmentation project. This background information about customers can be used to identify the particular profiling characteristics associated with the customers found in each segment. In other words, demographics helps identify who is found in each segment which, in turn, will help you determine how to reach them.

Geography

Rather like demographics, segments based on geographic areas, however tightly defined, assume that everyone in a predetermined area can be expected to react to a particular offer in exactly the same way. Even at the postcode level this does not appear to work; simply if we look along our own street. Has everyone got the same furniture, do they buy from the same shops, eat the same food? Once again, however, although geographic areas on their own cannot define the propositions required by segments and, therefore, cannot define segments, they, too, have a useful role to play in a segmentation project. This particular type of background information about customers can be used to identify the most likely locations the customers in each of the segments may be found and, therefore, further help you determine how to reach them. A further consideration with respect to “geography” is its use in international market segmentation.

Channel

Routes to market are becoming more sophisticated and complex, and are also becoming an increasingly important component of many winning customer propositions. Channels in

themselves, however, do not define segments as they are simply the means by which customers and companies connect with each other. It is only when you understand the motives behind the channel choices made by customers that the channel component of a needs-based proposition can be developed. However, even if channel does not feature as a key component of a winning proposition, it is, along with demographics and geography, background information about customers that should be tracked during a segmentation project. It could well be that some segments can be associated with particular routes to market; therefore it is the channel(s) they use that provides the means for reaching them with their specific proposition.

Psychographics

Here we have another customer insight that can contribute to a segmentation project but, on its own, cannot define the entirety of a winning customer proposition. However, by identifying internal drivers of customer behavior that can be associated with specific segments, psychographics can help define the most appropriate promotional stance to take. This not only provides the means of catching the attention of target groups in an ever cluttered world of communication, it can also provide the means by which you isolate and reach particular segments.

Levels of Market Segmentation

Market segmentation represents an effort to increase a company''s targeting precision It can be carried out at four levels segments, niches, local areas, and individuals

Market segmentation represents an effort to increase a company''s targeting precision. It can be carried out at four levels: segments, niches, local areas, and individuals. Before we discuss these levels, however, we need to say a word about mass marketing.

MASS MARKETING. In mass marketing, the seller engages in the mass production, mass distribution, and mass promotion of one product for all buyers. Henry Ford epitomized this marketing strategy when he offered the Model-T Ford to all buyers; they could have the car "in any color as long as it is black." Coca-Cola also practiced mass marketing for many years when it sold only one size Coke in a 6.5-ounce bottle.

The traditional argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can translate into either lower prices or higher margins. However, many critics point to the increasing splintering of the market, which makes mass marketing more difficult. According to Regis McKenna:

[Consumer]. . . have more ways to shop: at giant malls, specialty shops, and superstores; through mail-order catalogs, home shopping networks, and virtual stores on the Internet. And they are bombarded with messages pitched through a growing number of channels: broadcast and narrow-cast television, radio, on-line computer networks, the Internet, telephone services such as fax and telemarketing, and niche magazines and other print media.

The proliferation of advertising media and distribution channels is making it difficult to practice "one size fits all" marketing. No wonder some have claimed that mass marketing is dying. Not surprisingly, many companies are retreating from mass marketing and turning to micromarketing at one of four levels.

SEGMENT MARKETING. A market segment consists of a large identifiable group within a market. A company that practices segment marketing recognizes that buyers differ in their wants, purchasing power, geographical locations, buying attitudes, and buying habits. At the same time, though, the company is not willing to customize its offer/communication bundle to each individual customer. The company instead tries to isolate some broad segments that make up a market. For example, an auto company may identify four broad segments: car buyers seeking basic transportation, those seeking high performance, those seeking luxury, and those seeking safety.

Thus segmentation is a midpoint between mass marketing and individual marketing. 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 and benefits not included in the offer, while others would gladly give up something that they don''t want very much. For example, Ritz-Carlton Hotels target affluent guests and provide many amenities and a lower price. Thus segment marketing is not as precise as individual marketing but is much more precise than mass marketing.

Segment marketing offers several benefits over mass marketing. The company can create a more fine-tuned product/service offer and price it appropriately for the target audience. The choice of distribution

channels and communications channels becomes much easier. And the company may face fewer competitors if fewer competitors are focusing on this market segment.

NICHE MARKETING. Market segments are normally large identifiable groups within a market?for example, nonsmokers, occasional smokers, regular smokers, and heavy smokers. A niche is a more narrowly defined group, typically a small market whose needs are not being well served. Marketers usually identify niches by dividing a segment into subsegments or by defining a group with a distinctive set of traits who may seek a special combination of benefits. For example, the sema, and heavy smokers with emphysema who are overweight.

While segments are fairly large and thus normally attract several competitors, niches are fairly small and normally attract only one or a few competitors. Niches typically attract smaller companies. Larger companies, such as IBM, whose lose pieces of their market to nichers; Dalgic labeled this confrontation as "guerrillas against gorillas." As a defense, some larger companies have turned to niche marketing, which has required more decentralization and some changes in the way they do business. For example, Johnson & Johnson consists of 170 affiliates (business units), most of which pursue niche markets.

Niche marketers presumably understand their niches'' needs so well that their customers willingly pay a price premium. For example, Ferrari gets a high price for its cars because its loyal buyers feel that no other automobile comes close to offering the product-service-membership benefit bundle that Ferrari does.

An attractive niche is characterized as follows: The customers in the niche have a distinct and complete set of needs; they will pay a premium to the firm best satisfying their needs; the "nicher" has the required skills to serve the niche in a superior fashion; the nicher gains certain economies through specialization; the niche is not likely to attract other competitor or the nicher can depend on itself; and the niche has sufficient size, profit, and growth potential.

An advertising agency executive wrote: "There will be no market for products that everybody likes a little, only for products that somebody likes a lot." A chemical company executive predicted that chemical companies that succeed in the future will be those that can identify niches and specialize their chemicals to serve each niche''s needs. According to Linneman and Stanton, niche-pickers will find riches in niches and companies will have to niche or be niched. Blattberg and Deighton claim that "niches too small to be served profitably today will become viable as marketing efficiency improves." In many markets today, niches are the norm.

LOCAL MARKETING. Target marketing is increasingly taking on the character of regional and local marketing, with marketing programs being tailored to the needs and wants of local customer groups (trading areas, neighborhoods, even individual stores). Thus Citibank provides different mixes of banking services in its branches depending on the bank''s neighborhood demographics. And Kraft helps supermarket chains identify the cheese assortment and shelf positioning that will optimize cheese sales in low-income, middle-income, and high-income stores, and in different ethnic communities.

Those in favor of localizing a company''s marketing point to the pronounced regional differences in communities'' demographics and lifestyles. They see national advertising as wasteful because it fails to address local target groups. They also see powerful local and regional retailers who are demanding more fine-tuned product assortments for their neighborhoods.

Those against local marketing argue that it drives up manufacturing and marketing costs by reducing economies of scale. Logistical problems become magnified when companies try to meet different regional and local markets'' requirements. And a brand''s overall image might be diluted if the product and message differ in different localities.

INDIVIDUAL MARKETING. The ultimate level of segmentation leads to "segments of one," "customized marketing," or "one-to-one marketing." The prevalence of mass marketing has obscured the fact that for centuries consumers were served as individuals: The clothier tailor-made the suit, the cobbler designed

shoes for the individual, and so on. And much business-to-business marketing today is customized, in that a manufacturer will customize the offer, logistics, and financial terms for each major account. It is the new technologies?specifically computers, databases, robotic production, and instant communication media such as e-mail and fax?that are permitting companies to consider a return to customized marketing, or what is called "mass customization." Mass customization is the ability to prepare on a mass basis individually designed products and communications to meet each customer''s requirements.