Market Segmentation

The division of a market into different homogeneous groups of consumers is

known as market segmentation.

Rather than offer the same marketing mix to vastly different customers, market
segmentation makes it possible for firms to tailor the marketing mix for specific
target markets, thus better satisfying customer needs. Not all elements of the
marketing mix are necessarily changed from one segment to the next. For
example, in some cases only the promotional campaigns would differ.

A market segment should be:

• measurable
• accessible by communication and distribution channels
• different in its response to a marketing mix
• durable (not changing too quickly)
• substantial enough to be profitable

A market can be segmented by various bases, and industrial markets are

segmented somewhat differently from consumer markets, as described below.

Consumer Market Segmentation

A basis for segmentation is a factor that varies among groups within a market,
but that is consistent within groups. One can identify four primary bases on which
to segment a consumer market:

• Geographic segmentation is based on regional variables such as region,

climate, population density, and population growth rate.
• Demographic segmentation is based on variables such as age, gender,
ethnicity, education, occupation, income, and family status.
• Psychographic segmentation is based on variables such as values,
attitudes, and lifestyle.
• Behavioral segmentation is based on variables such as usage rate and
patterns, price sensitivity, brand loyalty, and benefits sought.

The optimal bases on which to segment the market depend on the particular
situation and are determined by marketing research, market trends, and
managerial judgment.
Business Market Segmentation

While many of the consumer market segmentation bases can be applied to

businesses and organizations, the different nature of business markets often
leads to segmentation on the following bases:

• Geographic segmentation - based on regional variables such as

customer concentration, regional industrial growth rate, and international
macroeconomic factors.
• Customer type - based on factors such as the size of the organization, its
industry, position in the value chain, etc.
• Buyer behavior - based on factors such as loyalty to suppliers, usage
patterns, and order size.

Profiling the Segments

The identified market segments are summarized by profiles, often given a

descriptive name. From these profiles, the attractiveness of each segment can
be evaluated and a target market segment selected.
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 businesses—from camera to shampoo
to athletic footwear to automobile marketers—rely 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 groupings—but 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.

Finding Customers: Market Segmentation

A key factor to success in today's market place is finding subtle differences to give the
business a marketing edge. A business that targets specialty markets will promote its
products more effectively than a business aiming at the "average" customer. What makes
the business unique? How can these unique features be promoted to "targeted"
customers?
Undifferentiated Marketing

Some businesses treat the market as a whole, focusing on what is common to the needs of
customers, rather than on what is different. Often called undifferentiated marketing, this
technique relies on mass advertising and is implemented on the basis of cost savings to
the business. Undifferentiated marketing is successful when the competition is scarce or
the product has mass appeal.

Differentiated Marketing

Differentiated marketing builds greater loyalty and repeat purchasing by considering

customer needs and wants. Differentiated marketing creates more total sales with a
concentrated marketing effort in selected areas. Concentrated or target marketing gains
market position with specialized market segments. Target marketing of products or
services reduces the cost of production, distribution, and promotion. With differentiated
marketing, there is the risk of the market going sour or a competitor entering the same
market.

Market Segments

Marketing opportunities increase when customer groups with varying needs and wants
are recognized. Markets can be segmented or targeted on a variety of factors including
age, gender, location, geographic factors, demographic characteristics, family life cycle,
desire for relaxation or time pressures. Segments or target markets should be accessible to
the business and large enough to provide a solid customer base. A business must analyze
the needs and wants of different market segments before determining its niche.

Market segmentation is dividing a larger market into submarkets based upon different
needs or product preferences. A key factor in competitive success is focusing on little
differences that give a marketing edge and are important to customers. Market
segmentation matches consumer differences with potential or actual buying behavior. It
may prove more profitable to develop smaller market segments into a target segment.

Profile Customers

Analyze market segments. Where do customers differ? Is it geographic area,

demographic characteristics, social class, stage in family life cycle, personality, self-
image or benefits sought (such as convenience, time saving, independence from chores or
buying behavior)?

Also, consider frequency or regularity of purchase, amount of purchase, brand loyalty,

attitudes toward the product or brand, use of cash, check or credit card, or customer's
desire for personal friendship with business personnel.

Use a customer profile form to identify potential target markets (see sample form on page
3). A customer profile form might ask age (18-24, 25-35, 36-49, 50-65, over 65),
approximate income (less than $20,000, $20,000-$29,999, $30,000-$44,999, more than
$45,000), gender (female-male), occupation (clerical, professional, retired, not employed)
how the customer learned about the business (newspaper, direct mail, word of mouth,
chance), children at home (under 6 years, 6-12, 13-18, over 18), in college, in military,
married, employed outside the home and sports enthusiasts. Ask questions important to
your business interests. Try to identify types of customers and the benefits they need and
want.

Profile of Industry

What does the product or service industry look like? Is the trend toward growth or
decline? What other businesses are in the industry? If the new business is in the
entertainment field, what related businesses exist? Search the reference section of the
local library for information on industry trends, including sales figures, size of firms and
number of employees.

Who is the Competition?

Identify and evaluate the competition, their number, size, location, strengths and
weaknesses. How will the business overcome competitors' strengths and take advantage
of their weaknesses?

In most cases, seek a market segment not being well served that shows potential for
growth. Remember, many factors influence actual sales volume, including economic
conditions and advertising effort. Develop alternative markets, such as additional market
segments, or a wider distribution area.

Constantly review marketing strategies to determine if the customer needs are being met,
and analyze sales trends, customer comments, number of returns, requests for unavailable
merchandise, repeat customers, customer surveys, etc. Decide whether to offer new
products, seek new markets or further penetrate current markets.

Segmenting Markets

One way to segment markets is by product or service benefit sought by the customer.
What benefits are customers seeking? Quality? Low price? Convenience? Identify the
benefits customers want and create the product or service to meet the need. Direct
marketing efforts toward increasing customer awareness of those benefits. Sometimes it
is difficult to accurately estimate the size of the customer group. Some customers are
interested in two or three benefits, not just a single one. Knowing customers needs and
wants is basic to successful marketing.

Markets can be divided by customer use of products or services, such as: nonusers, ex-
users, potential users, first-time users and regular users of a product. Other markets may
be segmented by usage rate. Are customers light, medium or heavy users of the product
or service? Heavy users may constitute a small portion of the market but a major
percentage of sales volume. Each target group requires a separate marketing plan. One
marketing effort will probably not cover all the bases. Potential users and regular users
require different types of marketing efforts.

At any point in time customers are in various stages of readiness for a product or service.
Some are unaware of the product, some aware, some informed, some interested, some
desirous and some intend to purchase. The customer's stage of readiness makes a
significant difference in designing a marketing program.

Factors that influence the potential for future markets include changes in:

• population, such as an increase in older people or an increased diversity in the

population;
• available income due to changes in employment;
• supply of natural resources, such as energy or water;
• laws, such as child restraint systems or 65 mile-per-hour speed limit;
• institutions, such as the deregulation of the banking industry; weather;
• consumer tastes and preferences;
• competition, such as a new super store.

Market Strategy

Market strategy is defined as an action plan for influencing customer choices and
obtaining a market share. Market strategy should entice customers to buy the product or
service. Market strategy encompasses customer perception of the relationship between
price and quality. Is the quality of the product or service worth the price? Is the price too
low for the quality the customer desires? Is the price higher than the customer's
perception of quality? Market research identifies the price and quality relationship
customers perceive to be important. Remember, customer perception is the bottom line.

Market strategy also includes the distribution channels for the product, pricing and terms
of sale, promotion and advertising plan, marketing budgets, inventory selection and
management, visual merchandising, customer relations and an evaluation of the
marketing strategy.

The marketing plan provides information on what the market will be (retail, wholesale)
and what specific customer groups will be targeted, what will be sold, where it will be
sold, and how wide the area of distribution will be.

Ideally, market segments with a potential for high sales, profits, growth and a minimum
of competition are the most attractive.

A Word of Caution

Price is a function of both cost and marketing. Price should be determined in relation to
fixed and variable cost and should reflect a profit. Profit is the reason to be in business!
For more information on determining price, refer to Home Business Fact Sheet, Pricing,
CDFS-1326. Price is also a function of marketing. What the customer perceives to be a
just price may not be sufficient to cover the costs of the business. Be sure to consider
both functions of price before determining what price to charge.

Summary

Target marketing or market segmentation based on customer needs and wants can
increase profits. Target marketing identifies customer groups and the reasons they
purchase. Market segmentation helps a business be more responsive to changing
customer needs. An overall marketing plan or strategy visually shows how all aspects of
a marketing effort work together. Remember, the ultimate goal of any business is to sell
the product or service.

Customer Profile Form

Use the customer profile form shown below as an example only. Develop your own
customer profile based on the type of business you operate. Think carefully about what
you would like to know about your customers. How will you use the information you
collect? What will it tell you about customers or potential customers? What else would be
helpful to know? Do you want to know if customers buy particular products similar to
yours or which compliment the purchase of your product? Do you think that customers
who live a certain lifestyle such as people who ski or take vacations are more likely to
buy your product? Are people who own certain appliances more likely to buy your
product? Spend time watching customers in settings similar to your business setting. How
do they act? What questions are asked? What do they purchase? Then, develop your
customer profile to learn more about who are your potential customers. Use the
information learned to make decisions concerning store location, hours of operation,
choice of advertising to reach your target market.
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