Market Segmentation

Identifying Market Segments and Target Customers

Segmenting Consumer Markets
• Market segmentation divides a market into well-defined slices. A
market segment consists of a group of consumers who share a similar
set of needs and/or profile characteristics.
• Common types of segmentation include the following:
• Geographic
• Behavioral
• Psychographic
Demographic Segmentation
• Age
• Stage in the Life Cycle
• Gender
• Income
Geographic Segmentation
• Divides the market into geographic units such as nations, states,
regions, countries, cities, or neighborhoods.
• The company can operate in one or a few areas, or it can operate in
all areas while heeding local variations. In that way, it can tailor
marketing programs to the needs and wants of local customer groups
in trading areas and neighborhoods. I can even cater to the needs of
individual customers.
• Regional differences matter in geographic segmentation.
Behavioral Segmentation
• User Status: Based on their prior experience with the company’s offerings, consumers can be
classified into the following:
• Nonusers
• Potential users
• First-time users
• Ex-users
• Usage Rate: Light, Medium, and Heavy product users.
• Buyer-readiness stage: Some people are unaware of the product, some are aware, some are
informed, some are interested, some desire the product, and some intend to buy.
• Loyalty Status:
• Hard-core loyal consumers
• Split-loyal consumers (loyal to 2-3 brands)
• Shifting-loyalty consumers (move from one brand to another)
• Switchers (no loyalty to any brand)
• Occasions: Consumers buy a company’s products and services for different reasons. We can
distinguish buyers according to the occasions when they develop a need, purchase a product, or
use an offering.
Psychographic Segmentation
• Buyers are divided into groups on the basis of psychological traits,
lifestyle, or values.
• Psychographic segmentation is important because demographic,
geographic, and behavioral characteristics of consumers do not
always accurately reflect their underlying needs.
• One of the oldest framework for psychographic segmentation is VALS
(vales, attitudes, and lifestyle).
Segmenting Business Markets
• Demographic Factors: Industry (which industries should we serve?), company
size (what size companies should we serve?), and location (what geographic areas
should we serve?).
• Operating Variables such as technology, user or non user status, and customer
capabilities (should we serve customers needing many or few services?).
• Purchasing Approaches such as purchasing-function organization (should we
serve companies with a highly centralized or a decentralized purchasing
organization?); power structure (should we serve companies that are engineering
dominated? Financially dominated?); nature of existing relationship (should we
serve companies with which we have strong relationships or simply go after the
most desirable companies?); general purchasing policies, and purchasing criteria
(quality, price, service).
• Situational Factors such as urgency, specific application, and size of order.
• Personal Characteristics such as buyer-seller similarity, attitude towards risk, and
loyalty.
Effective Segmentation Criteria
To be useful, market segments must rate favorably on 5 key criteria
• Measurable: The size, purchasing power, and characteristics of the
segments can be measured.
• Substantial: The segments are large and profitable enough to serve. A
segment should be the largest possible homogeneous group worth going
after with a tailored marketing program.
• Accessible: The segments can be effectively reached and served.
• Differentiable: The segments are conceptually distinguishable and respond
differently to different marketing-mix elements and programs.
• Actionable: Effective programs can be formulated for attracting and
serving the segments.
Evaluating and Selecting Market Segments
• In evaluating market segments, the firm must look at 2 factors:
• The segment’s overall attractiveness
• The company’s objectives and resources
• How well does a potential segment score on the 5 criteria? Does it have
characteristics that make it generally attractive, such as size, growth,
profitability, scale economies, and low risk?
• Does investing in it make sense given the firm’s objectives, competencies,
and resources?
• Some attractive segments may not mesh with the company’s long-run
objectives or the company may lack one or more competencies necessary
to offer superior value.
Levels of Market Segments
• Full Market Coverage: A firm attempts to serve all customer groups with
all the products they might need. Only very large firms can undertake a full
market coverage strategy, example, Microsoft, GM, etc.
• Undifferentiated or Mass Marketing: The firm ignores segment differences and goes
after the whole market with one offer. It designs a marketing program for a product
with a superior image that can be sold to the broadest number of buyers via mass
distribution and mass communications. It is appropriate when all consumers have
roughly the same preferences and the market shows no natural segments.
• Differentiated Marketing: When different groups of consumers have different needs
and wants. The company can offer better design, price, disclose, and deliver the
product or service and also fine-tune the marketing program and activities to better
reflect competitors’ marketing. The firm sells different products to all the different
segments of the market.
Levels of Market Segments
• Multiple Segment Specialization: With selective specialization, a firm
selects a subset of all the possible segments, each objectively attractive
and appropriate.
• A super-segment is a set of segments sharing some exploitable similarity.
• With product specialization, the firm sells a certain product to several different
market segments. For example, a microscope manufacturer sells to university,
government, and commercial laboratories.
• With market specialization, the firm concentrates on serving many needs of a
particular customer group, such as by selling an assortment of products only to
university laboratories. The firm gains a strong reputation among this customer
group and becomes a channel for additional products its members can use.
Levels of Market Segments
• Single-Segment Concentration: The firm markets to only one particular
segment. Through concentrated marketing, the firm gains deep knowledge
of the segment’s needs and achieves a strong market presence. It also
enjoys operating economies by specializing its production, distribution, and
promotion. If it captures segment leadership, the firm can earn a high
return on its investment.
• A niche is a more narrowly defined customer group seeking a distinctive
mix of benefits within a segment. Marketers usually identify niches by
dividing a segment into sub segments.
• Niche customers have a distinct set of needs; they will pay a premium to
the firm that best satisfies them; the niche is fairly small but has size,
profit, and growth potential and is unlikely to attract many competitors;
and it gains certain economies through specialization.
Levels of Market Segments
• Individual Marketing: The ultimate level of segmentation leads to “segments of one,”
“customized marketing,” or “one-to-one marketing.”
• As companies have grown proficient at gathering information about individual customers
and business partners (suppliers, distributors, retailers), and as their factories are being
designed more flexibly, they have increased their ability to individualize market offerings,
messages, and media.
• Mass customization is the ability of a company to meet each customer’s requirements-to
prepare on a mass basis individually designed products, services, programs, and
communications.
• Services are also a natural setting to apply customized marketing: airlines, hotels, and
rental car agencies are attempting to offer more individualized experiences.
• One-to-one marketing is not for every company. It works best for firms that normally
collect a great deal of individual customer information and carry a lot of products that
can be cross sold, need periodic replacement or upgrading, and offer high value.
Market Segmentation Process
• Group customers in to segments based on similar needs and benefits sought by
Needs-Based Segmentation customers in solving a particular consumption problem

• For each needs-based segment, determine which demographics, lifestyles, and

Segment Identification usage behaviors make the segment distinct and identifiable (actionable)

• Using predetermined segment attractiveness criteria (such as market growth,

Segment Attractiveness competitive intensity, and market access), determine the overall attractiveness of each
segment.
• Determine Segment Profitability
Segment Profitability
• For each segment, create a “value proposition” and product-price positioning
Segment Positioning strategy based on that segment’s unique customer needs and characteristics.

• Create “segment storyboard” to test the attractiveness of each segment’s

Segment “Acid Test” positioning strategy.

• Expand segment positioning strategy to include all aspects of the marketing mix;
Marketing-Mix Strategy product, price, promotion, and place.