Market Segmentation (Encyclopedia of Business and Finance)
Market segmentation is one of two general approaches to marketing; the other is mass-marketing. In the mass-marketing approach, businesses look at the total market as though all of its parts were the same and market accordingly. In the market-segmentation approach, the total market is viewed as being made up of several smaller segments, each different from the other. This approach enables businesses to identify one or more appealing segments to which they can profitably target their products and marketing efforts.
The market-segmentation process involves multiple steps (Figure 1). The first is to define the market in terms of the product's end users and their needs. The second is to divide the market into groups on the basis of their characteristics and buying behaviors.
Possible bases for dividing a total market are different for consumer markets than for industrial markets. The most common elements used to separate consumer markets are demographic factors, psychographic characteristics, geographic location, and perceived product benefits.
Demographic segmentation involves dividing the market on the basis of statistical differences in personal characteristics, such as age, gender, race, income, life stage, occupation, and education level. Clothing manufacturers, for example, segment on the basis of age groups such as teenagers, young adults, and mature adults. Jewelers use gender to divide markets. Cosmetics and hair care companies may use race as a factor; home builders, life stage; professional periodicals, occupation; and so on.
Psychographic segmentation is based on traits, attitudes, interests, or lifestyles of potential customer groups. Companies marketing new products, for instance, seek to identify customer groups that are positively disposed to new ideas. Firms marketing environmentally friendly products would single out segments with environmental concerns. Some financial institutions attempt to isolate and tap into groups with a strong interest in supporting their college, favorite sports team, or professional organization through logoed credit cards. Similarly, marketers of low-fat or low-calorie products try to identify and match their products with portions of the market that are health-or weight-conscious.
Geographic segmentation entails dividing the market on the basis of where people live. Divisions may be in terms of neighborhoods, cities, counties, states, regions, or even countries. Considerations related to geographic grouping may include the makeup of the areas, that is, urban, suburban, or rural; size of the area; climate; or population. For example, manufacturers of snow-removal equipment focus on identifying potential user segments in areas of heavy snow accumulation. Because many retail chains are dependent on high-volume traffic, they search for, and will only locate in, areas with a certain number of people per square mile.
Product-benefit segmentation is based on the perceived value or advantage consumers receive from a good or service over alternatives. Thus, markets can be partitioned in terms of the quality, performance, image, service, special features, or other benefits prospective consumers seek. A wide spectrum of businessesrom camera to shampoo to athletic footwear to automobile marketersely on this type of segmentation to match up with customers. Many companies even market similar products of different grades or different accompanying services to different groups on the basis of product-benefit preference.
Factors used to segment industrial markets are grouped along different lines than those used for consumer markets. Some are very different; some are similar. Industrial markets are often divided on the basis of organizational variables, such as type of business, company size, geographic location, or technological base. In other instances, they are segmented along operational lines such as products made or sold, related processes used, volume used, or end-user applications. In still other instances, differences in purchase practices provide the segmentation base. These differences include centralized versus decentralized purchasing; policy regarding number of vendors; buyer-seller relationships; and similarity of quality, service, or availability needs.
Although demographic, geographic, and organizational differences enable marketers to narrow their opportunities, they rarely provide enough specific information to make a decision on dividing the market. Psychographic data, operational lines, and, in particular, perceived consumer benefits and preferred business practices are better at pinpointing buyer groupingsut they must be considered against the broader background. Thus, the key is to gather information on and consider all pertinent segmentation bases before making a decision.
Once potential market segments are identified, the third step in the process is to reduce the pool to those that are (1) large enough to be worth pursuing, (2) potentially profitable, (3) reachable, and (4) likely to be responsive. The fourth step is to zero in on one or more segments that are the best targets for the company's product(s) or capacity to expand. After the selection is made, the business can then design a separate marketing mix for each market segment to be targeted.
Adopting a market-segmentation approach can benefit a company in several specific areas. First, it can give customer-driven direction to the management of current products. Second, it can result in more efficient use of marketing resources. Third, it can help identify new opportunities for growth and expansion. At the same time, it can bring a company the broad benefit of a competitive advantage.
Adopting the market-segmentation approach can also be accompanied by some drawbacks. Particularly when multiple segments are targeted, both production and marketing costs can be more expensive than mass marketing. Different product models, for example, are required for each segment. Separate inventories must be maintained for each version. And different promotion may be required for each market. In addition, administrative expenses go up with the planning, implementation, and control of multiple marketing programs.
During the late 1960s, market segmentation moved ahead of mass marketing as the predominant marketing approach. In the following decades, societal changes and wider economic opportunity continually expanded the number of groups with specialized product needs and buying power. In response, businesses increasingly turned to the segmentation approach to capture and/or hold market share.
Croft, Michael J. (1994). Market Segmentation: A Step-By-Step Guide to Profitable New Business. London: Routledge.
Dibb, Sally, and Simkin, Lyndon. (1996). The Market Segmentation Workbook: Target Marketing for Marketing Managers. London: Routledge.
Michman, Ronald D. (1991). Lifestyle Market Segmentation. New York: Praeger.
Weinstein, Art. (1994). Market Segmentation: Using Demographics, Psychographics, and Other Niche Marketing Techniques to Predict Model Customer Behavior. Chicago: Probus Publishing.
Market Segmentation (Encyclopedia of Small Business)
Market segmentation is the science of dividing an overall market into key customer subsets, or segments, whose members share similar characteristics and needs. Because it involves significant market research, market segmentation can be costly. But it is particularly important for small businesses, which often lack the resources to target large aggregate markets or to maintain a wide range of differentiated products for varied markets. Market segmentation allows a small business to develop a product and a marketing mix that fit a relatively homogenous part of the total market. By focusing its resources on a specific customer base in this way, a small business may be able to carve out a market niche that it can serve better than its larger competitors.
Market segmentation lies somewhere near the middle of a continuum of marketing strategies that range from mass marketingn which a single product is offered to all customers in a marketo one-toone marketingn which a different product is specifically designed for each individual customer in a market. Most businesses realize that since no two people are exactly alike, it is unlikely that they will be able to please all customers in a market with a single product. They also realize that it is rarely feasible to create a distinct product for every customer. Instead, most businesses attempt to improve their odds of attracting a significant base of customers by dividing the overall market into segments, then trying to match their product and marketing mix more closely to the needs of one or more segments. A number of customer characteristics, known as segmentation bases, can be used to define market segments. Some commonly used bases include age, gender, income, geographical area, and buying behavior.
Though mass marketing (also known as market aggregation or undifferentiated marketing) cannot fully satisfy every customer in a market, many companies still employ this strategy. It is commonly used in the marketing of standardized goods and servicesncluding sugar, gasoline, rubber bands, or dry cleaning serviceshen large numbers of people have similar needs and they perceive the product or service as largely the same regardless of the provider. Mass marketing offers some advantages to businesses, such as reduced production and marketing costs. Due to the efficiency of large production runs and a single marketing program, businesses that mass market their goods or services may be able to provide consumers with more value for their money.
Some producers of mass market goods employ a marketing strategy known as product differentiation to make their offering seem distinct from that of competitors, even though the products are largely the same. For example, a producer of bath towels might embroider its brand name on its towels and sell them only through upscale department stores as a form of product differentiation. Consumers might tend to perceive these towels as somehow better than other brands, and thus worthy of a premium price. But changing consumer perceptions in this way can be very expensive in terms of promotion and packaging. A product differentiation strategy is most likely to be effective when consumers care about the product and there are identifiable differences between brands.
Despite the cost advantages mass marketing offers to businesses, this strategy has several drawbacks. A single product offering cannot fully satisfy the diverse needs of all consumers in a market, and consumers with unsatisfied needs expose businesses to challenges by competitors who are able to identify and fulfill consumer needs more precisely. In fact, markets for new products typically begin with one competitor offering a single product, then gradually splinter into segments as competitors enter the market with products and marketing messages targeted at groups of consumers the original producer may have missed. These new competitors are able to enter a market ostensibly controlled by an established competitor because they can identify and meet the needs of unsatisfied customer segments. In recent times, the proliferation of computerized customer databases has worked to drive marketing toward ever-more-narrowly focused market segments.
Applying a market segmentation strategy is most effective when an overall market consists of many smaller segments whose members have certain characteristics or needs in common. Through segmentation, businesses can divide such a market into several homogeneous groups and develop a separate product and marketing program to more exactly fit the needs of one or more segments. Though this approach can provide significant benefits to consumers and a profitable sales volume (rather than a maximum sales volume) to businesses, it can be costly to implement. For example, identifying homogeneous market segments requires significant amounts of market research, which can be expensive. Also, businesses may experience a rise in production costs as they forfeit the efficiency of mass production in favor of smaller production runs that meet the needs of a subset of the market. Finally, a company may find that sales of a product developed for one segment encroach upon the sales of another product intended for another segment. Nonetheless, market segmentation is vital to success in many industries where consumers have diverse and specific needs, such as homebuilding, furniture upholstery, and tailoring.
In order to successfully implement a market segmentation strategy, a business must employ market research techniques to find patterns of similarity among customer preferences in a market. Ideally, customer preferences will fall into distinct clusters based upon identifiable characteristics of the population. This means that if customer requirements were plotted on a graph using certain characteristics, or segmentation bases, along the axes, the points would tend to form clusters.
To be pursued by a marketer, according to Alexander Hiam and Charles D. Schewe in The Portable MBA in Marketing, the customer segments should be:1) identifiable and measurable; 2) large enough to be profitable; 3) reached effectively (for example, its members must tend to view the same television programs, read the same publications, or shop in the same places); 4) responsive to marketing; and 5) stable and not expected to change quickly. A company might elect to serve a single market segment or attempt to meet the needs of several segments.
Determining how to segment a market is one of the most important questions a marketer must face. Creative and effective market segmentation can lead to the development of popular new products, but unsuccessful segmentation can cost a great deal of money and still not yield the desired results. There are three main types of segmentation bases for businesses to considerescriptive bases, behavioral bases, and benefit basesach of which breaks down into numerous potential customer traits.
Descriptive bases for market segmentation include a variety of factors that describe the demographic and geographic situation of the customers in a market. They are the most commonly used segmentation bases because they are easy to measure, and because they often serve as strong indicators of consumer needs and preferences. Some of the demographic variables that are used as descriptive bases in market segmentation might include age, gender, religion, income, and family size, while some of the geographic variables might include region of the country, climate, and population of the surrounding area.
Behavioral bases for market segmentation are generally more difficult to measure than descriptive bases, but they are often considered to be more powerful determinants of consumer purchases. They include those underlying factors that help motivate consumers to make certain buying decisions, such as personality, lifestyle, and social class. Behavioral bases also include factors that are directly related to consumer purchases of certain goods, such as their degree of brand loyalty, the rate at which they use the product and need to replace it, and their readiness to buy at a particular time.
Businesses that segment a market based on benefits hope to identify the primary benefit that consumers seek in buying a certain product, then supply a product that provides that benefit. This segmentation approach is based upon the idea that market segments exist primarily because consumers seek different benefits from products, rather than because of various other differences between consumers. One potential pitfall to this approach is that consumers do not always know or cannot always identify a single benefit that influences them to make a purchase decision. Many marketers use a combination of bases that seem most appropriate when segmenting a market. Using a single variable is undoubtedly easier, but it often turns out to be less precise.
THE SEGMENTATION PROCESS
Hiam and Schewe have identified six steps that companies should take in the market segmentation process. The first step is to determine the boundaries of the market. In completing this step, a marketer should use a formal business plan to develop a broad definition of their business, and then consider the offerings of both direct and indirect competitors to gain information about the basic needs of consumers in the market. The second step in the process is to decide which variables to use in segmenting the market. Many companies fall into the trap of collecting data on as many variables as possible and then attempting to sort through it later to draw meaningful conclusions. Instead, Hiam and Schewe recommend that marketers use their knowledge of the market to select a few relevant variables in advance. This approach is generally less expensive and will likely provide more useful results.
The third step in the market segmentation process is actually collecting and analyzing data, which involves applying market research tools. The goal in analyzing the data is to identify market segments that are internally homogeneous, yet are distinctly heterogeneous with respect to other segments. The fourth step is to develop a detailed profile of each market segment, which involves selecting those variables that are most closely related to consumers' actual buying behavior.
The fifth step in the market segmentation process is to decide which segment or segments to serve. In targeting a particular segment, a marketer should look for opportunities (i.e., customers with unsatisfied wants and needs) that provide a good match for the organization and its resources. It is important that the marketer consider not only the size and potential profitability of a market segment, but also whether the company's skills, technologies, and objectives would enable it to meet the needs of that segment better than its competitors. The sixth and final step is to develop a product and marketing plan that will appeal to the selected market segment. This involves identifying the product attributes that are most important to consumers in the segment, and developing a marketing strategy that will attract their attention. In fact, market segmentation can be usefully applied during the earliest stages of product design, when a company first identifies who its target customer will be in terms of demographic, geographic, and behavioral characteristics.
In general, customers are willing to pay a premium for a product that meets their needs more specifically than does a competing product. Thus marketers who successfully segment the overall market and adapt their products to the needs of one or more smaller segments stand to gain in terms of increased profit margins and reduced competitive pressures. Small businesses, in particular, may find market segmentation to be a key in enabling them to compete with larger firms. Many management consulting firms offer assistance with market segmentation to small businesses. But the potential gains offered by market segmentation must be measured against the costs, whichn addition to the market research required to segment a marketay include increased production and marketing expenses.
Dickson, Peter R., and James L. Ginter. "Market Segmentation, Product Differentiation, and Marketing Strategy." Journal of Marketing 51:1-10.
Gabriel, Angela. "Single Message May Not Hit All Markets." Phoenix Business Journal. November 20, 1998.
Hiam, Alexander, and Charles D. Schewe. The Portable MBA in Marketing. Wiley, 1992.
Kelner, Brad, et al. "Market Segmentation Strategies and Service Sector Productivity." California Management Review. Summer 1999.
Millier, Paul. "Intuition Can Help in Segmenting Industrial Markets." Industrial Marketing Management. March 2000.
Sandhusen, Richard L. Barron's Business Review Series, Marketing. 2nd Ed. Barron's Educational Series, Inc., 1993.
SEE ALSO: Demographics; Target Market
Market Segmentation (Encyclopedia of Business)
Market segmentation is the process of identifying key groups or segments within the general market that share specific characteristics and consumer habits. Once the market is broken into segments, companies can develop advertising programs for each segment, focus advertising on one or two segments or niches, or develop new products to appeal to one or more of the segments. Companies often favor this method of marketing to the one-size-fits-all mass marketing approach, because it allows them to target specific groups that might not be reached by mass marketing programs.
To identify segments, marketers examine consumers' interests, tastes, preferences, and socioeconomic characteristics in order to determine their patterns of consumption and how they will respond to various marketing strategies. The primary information marketers seek is why consumers purchase specific products or services but not others. Catalog retailers and direct-marketing firms make up some of the key users of market segmentation, although many other kinds of companies and organizations use this technique.
Market segmentationlso called micromarketingimplifies the marketing process, because it allows marketers to concentrate their advertising on groups of consumers who share significant characteristics. Marketers, therefore, can produce specific advertising geared towards specific segments; otherwise marketers have to create very general advertising and hope that it will appeal to a diverse audience. Market segmentation also can be more efficient than traditional marketing techniques such as product differentiation. Because marketers focus their advertising on specific segments, they can expect better results from each segment than they could expect from these consumer groups if treated as a whole.
Catalog clothing stores, for example, convincingly illustrate these advantages of market segmentation. If a catalog marketer provides both men's and women's clothes, it would have to produce a very large catalog to include all of its merchandise, which would cost a lot to produce and mail. By sending such a catalog to all potential customers, the company could fail to capture the attention of many potential customers simply by having a man on the cover and sending it to women or a woman on the cover and sending it to men. At one point catalog marketers relied on this approach. But contemporary catalog retailers produce numerous versions of their catalogs designed for specific market segments, such as men between 20 and 35, women between 20 and 35, men between 35 and 50, and women between 35 and 50.
Market segmentation, however, works effectively only for certain kinds of products and services. First, to determine whether to segment a market, marketers must find out if the market can be identified and measured, which entails determining which consumers belong to specific market segments. Second, marketers must determine if the segments are large enough to be profitable. While marketers can easily divide the total market into smaller groups, these groups might be so small that they do not justify the expenses associated with market segmentation. Third, marketers must be able to reach the segments through their advertising. If the members of a particular segment do not share interest in a common magazine or television show, for example, then marketers have no way of reaching the segment and so the segment is superfluous.
Fourth, marketers must gauge the responsiveness of the segments and find out if a proposed segment would likely respond to a marketing campaign. If it is not probable that a segment will react to a promotion, then the segment is not useful. Fifth, marketers must determine if the segments will change in the near future. Since it takes time to prepare a marketing strategy for specific segment and since it takes time for market segmentation to be profitable, creating segments where consumer needs and wants are likely to change would not be productive.
The market can be divided into segments by using four "segmentation bases": psychographic, behavioristic, geographic, and demographic bases. Psychographic and behavioristic bases are used to determine preferences and demand for a product and advertising content, while geographic and demographic criteria are used to determine product design and regional focus.
Psychographic bases include personality traits such as consumer attitudes, lifestyles, and interests, while behavioristic bases include attitudes towards products such as the frequency of use, brand loyalty, benefits sought in a product, and readiness to purchase the product.
Geographic bases focus on preferences contingent on regional factors, such as region (e.g., North or South), county, population density, urban or rural location, and climate. Demographics include personal characteristics such as gender, age, marital status, social attributes (such as ethnicity and religion), and income level.
Other bases for segmentation include occasions and consumer knowledge of and interest in particular brands. Marketers can use various occasions such as marriage, graduation, anniversaries, birthdays, and holidays to promote products. Marketers can advertise an assortment of products including candy, cards, and flowers to various segments based on occasions. In addition, marketers can create segments based on consumer knowledge and interest, targeting novices and veterans with different promotions for their products or brands. But whatever segmentation bases marketers use, they analyze their data and group consumers in order to determine consumer behavior.
THE SEGMENTATION PROCESS
Once a company has gathered information from these segmentation bases, it must decide how to divide the market, bearing in mind that market segmentation seeks to minimize the differences within a segment and maximize the differences among segments. Consequently, depending on the product or service to be marketed, simple divisions along age, gender, or geographic lines alone may yield segments that are too vague to be of use. Instead, marketers may have to consider several characteristics or clusters of characteristics in order to divide the market into useful segments. When considering beer consumption, for example, marketers must look at both age and gender: the majority of beer drinkers are both young and male.
Hence, to begin segmenting the market, marketing managers must select the segmentation bases they will use to develop the segments, depending on the products or services to be marketed. Marketers may select a few segmentation bases they believe are the most relevant at the outset and develop market segments using them. On the other hand, they may compile a large array of information using all the segmentation bases and use this information to group consumers in various segments.
Next, marketers conduct any primary market analysis they may need, by preparing questionnaires and samples and by assessing the response to them. Using this information, marketers try to determine the most fruitful segmentshe ones with greatest similarities within them. Because this process can be labor-intensive and require advanced knowledge of statistics, companies often rely on outside firms or artificial intelligence technology to produce meaningful market segments.
Once relevant, stable, reachable, profitable market segments are established, marketers can target the segments they believe will offer the best opportunities for growth given their products and resources and the ones they believe that correspond to the products being marketed the best. Finally, marketers can develop and launch advertising campaigns that appeal to the various segments.
Companies tend to choose the largest segments, although the segments with the most consumers are not always the most profitable and usually have the most competition. Consequently, marketers might benefit from considering targeting smaller segments or segments ignored by competitors, such as low-income consumers, which is frequently referred to as "niche marketing."
METHODS OF SEGMENTATION
Companies can implement market segmentation in three general ways: through differentiation, concentration, and atomization. Differentiation refers to marketing products or services to different market segments based on each segment's individual needs as well as to developing new products for different segments. For example, a computer maker could market its products to home users, corporations, small businesses, and government agencies, thereby differentiating the needs of each of these four segments and appropriately targeting them.
A company also may opt to target just one segment of the market, employing the market segmentation method of concentration. After considering various segmentation bases and conducting research, a company might find that its competitors are not reaching specific segments and decide to target this segment or niche exclusively. A computer maker, for instance, could concentrate solely on the home-user segment of the market and ignore the needs of the other segments. To do so, the computer maker would have to offer products that meet home-user needs at prices these consumers could afford. Since concentrated marketing costs less than differentiated marketing, it may appeal to small businesses in particular.
Atomization involves dividing the market into very small segments, which may include a single customer in some cases. Although rare, some companies offering expensive and highly customized products or services rely on this method. If a computer maker focused on government clients, it might have to build special computers for various government branches based on their individual needs. Some marketing analysts predict that atomization will grow in the coming millennium as companies strive to offer more individualized service.
When choosing a method of market segmentation, marketers must take several factors into consideration. First, they must select a method consistent with company resources, because differentiated marketing, for example, has a significant cost and some companies may not be able to afford it. Second, marketers must consider the product line they are trying to sell. If the product line is limited, marketers usually choose the concentrated marketing method. If the product line is expansive, however, then marketers usually opt for the differentiated marketing method.
After choosing a method of market segmentation, marketers must integrate the method into an overall marketing strategy. The marketing strategy will try to make the target product or service appeal to the target segment through an advertising campaign developed based on segmentation information such as age, gender, or location. Marketers also consider what a company's strategic position in a market is.g., if it is a computer supplier to home users or businessesnd create a marketing program that will help a company achieve or maintain this position. If the segment is properly defined for a specific product or service, then developing promotional strategies and reaching the target segment should be relatively easy. The information used to help create the market segments should help marketers choose among promotional techniques (e.g., direct marketing, advertising, publicity, and sales promotion), pricing strategies, and distribution strategies. This information also should help marketers choose among various advertising media.
Companies using market segmentation techniques typically strive to maintain a relationship with their customers, instead just making an isolated sale. After collecting a large amount of information about their customers, marketers can plan promotions and products that will appeal to various segments over a long time by determining what products a segment wants in the future and offering them at the appropriate time.
SEE ALSO: Catalog Marketing
Cohen, Eric. "How to Target Smarter." Target Marketing, May 1998, 58.
Haim, Alexander, and Charles D. Schewe. The Portable MBA in Marketing. New York: John Wiley & Sons, 1992.
Moschis, George P., Lee Euehun, and Anil Mathur. "Targeting the Mature Market: Opportunities and Challenges." Journal of Consumer Marketing, fall/winter 1997, 282.
Sandhusen, Richard L. Barron's Business Review Series: Marketing. 2nd ed. Barron's Educational Series, 1993.
Weinstein, Art. Market Segmentation. Chicago: Probus Publishing, 1987.