Segmentation

Dr. Lili Adi Wibowo,S.Sos, S.Pd., MM.

Basic

• Segmenting markets is a foundation for superior performance.

• Understanding how buyers’ needs and wants vary is essential in designing effective marketing strategies.

• The need to improve understanding of buyers isescalating because of buyers’ demands foruniqueness and an array of technologies availableto generate products to satisfy these demands.

• Buyers vary according to how they use products,the needs and preferences that the productssatisfy, and their consumption patterns.

• Definition Segmentation :

• Market segmentation is the process of identifying andanalyzing subgroups of buyers in a product-market withsimilar response characteristics.

• Even for consumer products, the concept of a “one-size-fits-all mass market” is increasingly less relevant.

• The most specific form of market segmentation is toconsider each buyer as a market segment—basis for “one-to-one marketing

Levels and Types of Market Segmentation

• Segmentation is an important capability in strategicmarketing, which is linked to choosing market targetsand positioning against alternatives to buildcompetitive advantage.

• Many traditional views emphasize segmentation as anoperational tool—for example, to aim advertisingeffectively at different types of customers.

• While advertising-oriented segmentation identifiestargets that differ in responses to messages, strategicsegmentation tries to identify market segments thatdiffer in purchasing power, goals, aspirations andbehavior, in ways relevant to identifying new productand value opportunities.

Levels and Types of Market Segmentation

VisionStrategic intentProduct benefits

Resource allocationAlignmentPlanning

Marketing programs:- Advertising-Sales- Distribution

StrategicSegmentation

ManagerialSegmentation

OperationalSegmentation

Exhibit 1.Levels of Market Segmentation

Levels and Types of Market Segmentation

• Strategic segmentation. Links to the managementvision and strategic intent of corporate strategyand emphasizes product benefits that differenttypes of buyers seek.

• Managerial segmentation. Concerned withallocating resources around segment targets,including them in marketing plans and aligningorganizational processes around them.

• Operational segmentation. Concerned with themarketing program changes needed to reachsegment targets with advertising and promotions,and with distribution systems.

Levels and Types of Market Segmentation

• In considering the role of segmentation, the deepest decisionsare whether to revise the business model in response to howsocial forces are changing the lives of different types of customer,how to position a brand, which segments to pursue, and whetherto make fundamental changes to the product or to develop anentirely new product.

• The shallowest decisions are concerned with issues like whetherto make small improvements in existing products, how to selecttargets of a media campaign, or whether to adjust prices.

Market-Driven Strategy and SegmentationSegments

Value opportunities

New market space

Matching value opportunities and capabilities

Market targeting

Strategic positioning

Exhibit 2.Segmentation inthe Market-Driven Strategy Process

Market-Driven Strategy and Segmentation

Market segmentation:

• Placing buyers in a product-market into subgroups so thatmembers of each segment display similar responsiveness to aparticular positioning strategy.

• Identification process aimed at finding subgroups of buyerswithin a total market. The term “market niche” is sometimes usedto refer to a marketing segment that represents a relatively smallportion of the buyers in the total market.

Market-Driven Strategy and Segmentation

Value opportunities:

• Buyers in a segment have similar value requirements concerningspecific product/brand attributes.

• Segmentation offers a company an opportunity to better matchits products and capabilities to buyers’ value requirements.

• Customer satisfaction can be improved by providing a valueoffering that matches the value proposition considered importantby the buyer in a segment.

Market-Driven Strategy and Segmentation

New market space:

• Market analysis may identify segments not recognized or servedeffectively by competitors.

• There may be new opportunities to tap into new areas of valueand create a unique space in the market.

Market-Driven Strategy and Segmentation

Matching value opportunities and capabilities:

• Examining specific market segments helps to identify how to (1)attain a closer match between buyers’ value preferences andorganization’s capabilities, and (2) compare the organization’sstrengths (and weaknesses) to the key competition in eachsegment.

Market-Driven Strategy and Segmentation

Market targeting:

• Consists of evaluating and selecting one or more segments whosevalue requirements provide a good match with the organization’scapabilities.

• When segmentation is employed, it should be by design, and theunderlying analyses should lead to the selection of one or morepromising segments to target.

Market-Driven Strategy and Segmentation

Positioning strategy:

• Combination of the actions management takes to meet the needsand wants of each market target.

• Consists of product(s), and supporting services, distribution,pricing, and promotion components—management’s choicesabout how to influence target buyers by favorably positioning theproduct in their eyes and minds help in designing the positioningstrategy.

Defining the marketto be segmented

Identifying marketsegments

Forming marketsegments

Finer segmentation strategies

Selecting thesegmentation strategy

Exhibit 3.Activities and Decisions in Market Segmentation

Activities and Decisions inMarket Segmentation

• It is necessary to decide how to segment the market, identifying segments,which involves selecting the variable(s) to use as the basis for identifyingsegments—frequency (frequent, moderate, and occasional) of use of aproduct may be a possible basis of segmentation.

• Method of forming market segments is decided. This may consist of managersusing judgment and experience to divide the market into segments. Segmentsmay also be formed using statistical analysis. Customer purchase behavior byCRM systems provides base for this analysis.

• Decide whether finer (smaller) segments should be used.

• Strategic analysis is conducted on each segment determine which segment totarget.

Defining the Market to be Segmented

Level ofCompetition

Product Definition

Illustrative Competitors

Need/Want Satisfied

Generic Health and beauty aids

Consumer productscompanies

Enhancement of health and beauty

Product type Shaving equipment Gillete, Bic, Rubie Shaving

Product variant Electric razors Braun, Panasonic, Remington, Norelco

Electric shaving

Exhibit 4. Segmentation in the Health and Beauty Supplies Market

Defining the Market to be Segmented

• Generic-level segmentation is illustrated by segmenting supermarketbuyers based on shopper types (like available shopping time).

• Product-type segmentation is shown by the differences in price, quality,and features.

• Product-variant segmentation considers the segments within acategory.

• It is important to consider in defining the market to be segmentedestimating the variation in buyers’ needs and requirements at thedifferent product-market levels and identifying the types of buyersincluded in the market. These change rapidly so it needs frequent re-evaluation.

Identifying Market Segments

Segmentation Variables:• Characteristics of People and Organizations: Consumer Markets. Characteristics of people fall into two categories:

(1) geographic and demographic; and (2) psychographic (lifestyle andpersonality).

Organizational Markets. Includes types of industry (vertical market),company size, stage of industry development, and the stage of thevalue-added system (producer, distribution, retailer). Aided byexamining (1) extent of market concentration which considersnumber of customers and relative buying power, and (2) degree ofproduct customization determines the extent to which supplier musttailor the product.

Identifying Market SegmentsSegmentation Variables:• Product Use Situation Segmentation. Markets may be segmented

based on how the product is used.• Buyers’ Needs and Preference. Brands may used as segmentation

bases and segment descriptors. Brand loyalty. Consumer Needs. Important in (1) determining how well a brand may

satisfy need; and/or (2) indicating what change(s) are necessary toprovide a better solution to a buyer’s needs.

Attitudes. Enduring systems of evaluation about brands. Reflectbuyer’s overall liking or preference for a brand.

Perceptions. The process by which an individual selects, organizes, andinterprets information inputs (marketing stimuli such as advertising,personal selling, price, and the product) to create a meaningful pictureof the world. Perceptions form attitudes.

Identifying Market Segments

Segmentation Variables:

• Purchase Behavior. Size and frequency of purchases are useful insegmenting consumer and business markets.

Volume of the purchase.

Frequency

Buyer decisions. Can be classified according to the extent towhich the buyer is involved in the decision (high or low).

Identifying Market SegmentsConsumer Markets Industrial/Organizational

Markets

Characteristics of people/organizations

Age, gender, raceIncomeFamily sizeLifecycle stageGeographic locationLifestyle

Type of industrySizeGeographic locationCorporate cultureStage of developmentProducer/intermediary

Use situation OccasionImportance of purchasePrior experience with productUser status

ApplicationPurchasing procedureNew task, modified rebuy, straight rebuy

Buyer’s needs/preferences Brand loyalty statusBrand preferenceQualityProneness to make a deal

Performance requirementsBrand preferencesDesired featuresService requirements

Purchase behavior Size of purchaseFrequency of purchase

VolumeFrequency of purchase

Exhibit 5. Illustrative Segmentation Variables

Forming Market Segments

Requirements for Segmentation. It is important to decide if it is worthwhileto segment a product. Five criteria are useful for evaluating a potentialsegmentation strategy:• Response Differences. Determining differences in the responsiveness of the

buyers in the product –market to positioning strategy is a key segmentidentification requirement.

• Identifiable Segments. Descriptive differences among buyers in a product-market must be matched to response differences.

• Actionable Segments. A business must be able to aim a marketing programstrategy at each segment selected as a market target.

• Cost/Benefit of Segmentation. Evaluate the benefits vs. cost.• Stability over Time. Needs should not change too fast.Product Differentiation and Market Segmentation. Product differentiation occurs

when buyers perceive an offering as different from its competition.

Forming Market SegmentsApproaches to Segment Identification. Segments are formed by: (A)grouping customers using descriptive characteristics and then comparingresponse differences across the groups; or (B) forming groups based on responsedifferences (e.g. frequency of purchase) and determining if the groups can beidentified based on differences in their characteristics.

Segment identification

A – Start with identifiers of customer groups:Characteristics of people and organizations, e.g., income, family size, industrial sector

B – Start with customer response profile:Form groups based on response patterns, e.g., frequency of purchaseExhibit 6. Approaches to

Segment Identification

Forming Market Segments

Customer Group Identification. It is necessary to select one or moreof the characteristics of people or organizations as the basis ofsegmentation. Using these variables, segments are formed by: (1)management judgment and experience; or (2) supporting statisticalanalyses. The objective is to find differences in responsivenessamong the customer groups. Customer grouping methods that showhow segments are formed:• Management Insight and Available Information. Management’s

knowledge of customer needs is often a useful guide tosegmentation. This includes experience and analysis of publishedinformation.

Forming Market Segments

Customer Group Identification:

• Cross Classification Analysis. Identify customer groups usingdescriptive characteristics and compare response rates by placingthe information in a table.

• Data Mining for Segmentation. The availability of computerizeddatabases offers a wide range of segmentation analysiscapabilities.

• Segmentation Illustrations.

Forming Market Segments

Forming Groups Based on Response Differences. An alternative toselecting groups based on characteristics is to identify groups based onresponse differences. The widespread adoption of CRM systems offersgreater opportunity for timely and detailed analysis of responsedifferences between customers. Additional applications would be:

• Cluster Analysis. A statistical technique that groups people according to thesimilarity of their answers to questions such as brand preferences or productattributes.

• Perceptual Maps. Use of consumer research data to construct perceptual mapsof buyers’ perceptions of products and brands. The information helps selectmarket-target strategies, and decide how to position a product for a markettarget.

Finer Segmentation Strategies

Logic of Finer Segments:• Customized Offerings. Capabilities of organizations to offer

customized products is feasible because of extensive informationflow and comprehensive databases, computerized manufacturingsystems, and integrated value chains.

• Diverse Customer Base. Allowing the buyer to specify the detailand design choices. Example is the automobile industry

• Close Customer Relationships. By identifying customer valueopportunities and developing cost effective customized offerings,relationships can be profitable and effective in creatingcompetitive barriers.

Finer Segmentation Strategies

Finer Segmentation Strategies. Three approaches:• Micro-segmentation. Seeks to identify narrowly defined segments

using one or more of the variables. It differs from more aggregatesegment formations in that it results in a large number of very smallsegments.

• Mass Customization. Providing customized products at prices not muchhigher than mass produced items is feasible. Through computer-aideddesigns and manufacturing software, flexible manufacturing techniques,and flexible supply systems.

• Variety-Seeking Strategy. Intended to offer buyers opportunities to varytheir choices in contrast to making unique choices. The logic is thatbuyers offered alternatives may increase total purchases of a brand.

Finer Segmentation Strategies

Finer Segmentation Issues:• How much variety should be offered to buyers? What attributes

are important in buyers choices and to what extent do they needto be varied?

• Will too much variety have negative effects on buyers? It ispossible that buyers will become confused and frustrated whenoffered too many choices?

• Is it possible to increase buyers’ desire for variety, creating acompetitive advantage?

• What processes should be used to learn about customerpreferences? This may involve indirect methods (e.g., databaseanalysis), or involving buyers in the process.

Selecting the Segmentation Strategy

Deciding How to Segment. The choice of a segmentationmethod depends on such factors as the maturity ofmarket, the competitive structure, and the organization’sexperience in the market. An essential first step insegmentation is analyzing the existing customer base toidentify groups of buyers with different response behavior.

Selecting the Segmentation Strategy

Strategic Analysis of Market Segments:

• Customer Analysis. Find out as much as possible about the customersin each segment. An essential part of customer analysis is determininghow well the buyers in the segment are satisfied.

• Competitor Analysis. It is also important to anticipate the futurestrategies of key competitors.

• Positioning Analysis. Obtain guidelines for positioning strategy whichshould meet the needs and requirements of the targeted buyers at acost that yields a profitable margin for the organization.

Selecting the Segmentation Strategy

Strategic Analysis of Market Segments:• Estimating Segment Attractiveness. Financial and market attractiveness of

each segment needs to be evaluated. Included are the specific estimates ofrevenue, cost, and segment profit contribution over the planning horizon.

• Segmentation and “Fit” and Implementation. One important aspect ofevaluating segment attractiveness is how well the segment match companycapabilities and the ability to implement marketing strategies around thosesegments. It is important to realistic in balancing attractiveness of segmentagainst the ability of organization.

• Segment Attractiveness Analysis. Estimate sales, costs, contribution margin,and market share.