segrnented and organised

n*
','
,,,,, l,
Chris Dawson ,,

w "LHA.n N l f )|-* " ou"T-s.Q MF $

After reading this chapter you should be able to:

I Define market segmentation

I Understand why market segmentation is used
f Appreciate the requirements necessary for segments to
be viable
I Recognise the methods used to identify consumer and
industrial market segments
I Determine the relative attractiveness of various groups
of customers

t(Ey.w_o_ap$.. ,.

ACORN Market aggregation

Atomisation Market segmentation
Behavioural variables Mass marketing
Brand cannibalisation MOSAIC
Concentrated ma rketing Pinpoint
Critica I events segmentation Profile variables
Demographic Psychogra ph ic a na lysis
Family life cycle Psychogra ph ic va ria bles
Geographic Self-actualisation
Industrial markets SIC codes
Just-in-Time SMEs
Lifestyle analysis Standard Industrial Classifications
Likert scales Supply chain management
Loyalty segmentation
Y*We,-:
ffi#*.P
Wlfr#fld#
Part'lwo Understarrding the cristorner

IN TRODUCTI ON

In Chapter 5 we explored how and why customers behave

as they do in the market
place' Now we turn our attention to how business organisations
can group
customers together to make-viable target markets for the priducts
they offerio the
prospective customers, and to ensure that custom"., ,,oi only
receive what they
require, but receive it effectively and efficientlv.
From a consumer's point of view we see ourselves as individuals.
Howev er,by
our age profile, where we live and our behaviour patterns, organisations
can
categorise us into segments which make it easier to seli products
arid services to us
(see spotlight 6.1)' In doing this, we must first look
at t"r,y *" bother to divide the
market up, and what are the advantages and disadvantages of doing
this, for both
the customer and the organisation. We then examine the"requirements
for such an
exercise to be viable, consider the criteria by which consumer
and industrial
markets can be subdivided before finally looking at methods
of analysis to
determine which subdivision(s) are most attractive foi further company
action.

6.1 PRINCIPLES AND PROCTSS OF MARKET SEGMINTATION

Without any shadow of doubt, the UK market place is a very different world
from
what it was 50 years ago. After the Second World War consumer disposable
income
was very limited. Products and services were also limited, and corisumerism
was
product-led and based upon Maslow's basic needs (see Chapter 5).
Nowadays the
UI i.t made up of people with very different backgrounds, countries of *igt.,,
religions,_age groups, needs and wants, interests and lifestyles,
and disposible
income is higher.
It- is this very diversity that makes market segmentation
not only viable and
profitable but also desirable as a business strategy. The conditions necessary
for

Spotlight 6.1
Readership of this book
 Chapter Six How cLrstomers are segrnenterl anrl organiserl
ffi
segmentation are a PoPulation of sufficient size, with
sufficient affluence and with
sufficient diversity to lend itself to division on the basis
of au*ogrupiy, fry.t o_
logical or some other strategic variable. These conditions
exist in the uK and also in
all other countries in the developed world, and in some emerging
nations also.
Hence these markets are attractive not only to home-baseo
companies but also to
global organisations.
The provision, by businesses, of alternative product
offerings with alternative
strategies are designed to better satisfy customeri'needs
and thJreby increuse thei.
satisfaction and, at the same time, increase the companies,
profits. Hence market
segmentation is a positive force for both customers and companies.

Market segmentation can be defined as the process of dividing the

market up into
distinct subgroups of customers who dispiay common characteristics
and then
selecting one or more subgroups which io-pur,y action targets
with a unique
strategy. In earlier years, before the widespiead acknowledlgement
of market
segmentation as a business strategy, the prevalent way of dolng
business with
customers was via mass rnarketing (or market aggregation), that
is offering the
same product to all customers with the same strate gy a'one
Mass marketing could be seen in the early strate
- size fits all, apprlach.
W the Ford Motor Co-pu.,y
un{er Hu*y Ford and his Model T 'You-can havelny"fcolour you like
as long as it
is black.' One product, one colour was offered to all customers. The
sole benefit of
such a strategy in today's market place is cost saving as it obviously
costs a
company less to produce one product and offer it to att comers with
a single
strategy' The key drawback to such a strategy is that it allows competing
companies
t9 Sain a competitive advantage over the firm practising mass rnarketlng
because
the rival-companies are l]1a better position to saiisfy.rrrtirr,urc via markef
segmen-
tation. However, it be equally dangerous to view the market place as I vast
1a1
collection of potential subgroups and attempt to be all things to all people. By
offering a vast array of products with a huge seiection of strategi", .o*piniei fail
to
satisfy any subgroup sufficiently and *ay pay the ultimate pur,utty of cibsure.
Other factors, such as environmental issues and legiilation, can also be an
influence on changing needs. This can be seen in spJtligh t 6,.2 on the power
generation market.
Market segmentation also has levels of strategy within it, ranging from concen-
trated marketing, which concentrates on only one subgroup oflne market
to the
exclusion of all others (e.g. Rolls Royce, which .otl."--t ttutes on the very high-
income, luxury-loving, status-seeking segment), to atomisation, which treais
every
customer individually and uniquely (e.g. an architect designing a one-off
building
for a client or a bespoke tailor making a one-off suit of ltottrur for a customer).
Flowever, in reality, most companies choose to concentrate their efforts
on a
number of segments.
#S,*,*i.
Part Two Understarrding the custorlte,
Sffit#%
w)w.n#i

OF

Clearly, because market segmentation more closely matches supply

to the demands
of customers, and also because the segments contain fewer and more similar
customers, the business is able to obtain much more detailed information
about
customer characteristics. This leads to a number of benefits or advantages:

' Businesses are able to develop strategies that more truly meet
the demands of
customers, and hence overcome the lack of competitive advantage that
is so
obvious under mass marketing. For example, Mercedes-Benz deireloped
the
Smart car, which meets the demand for an environmentally friendly urban
runabout, while their S series meets the demand for the luxury
.ur.
Neither of these models would be particularly successful if aimed"*".rii,ou
at the mass
market with a single strategy.
 Chapter Six How customers are segmentert anrlorganiseci
ffi,#j
o Trends that arise in the market place due, perhaps,
to changing tastes among
customers can be more quickly detected and strategies
adapte? i.orai"git Fo,
example, sony developed the walkman to capitulire
on the taste for music on
the move. This was much copied over the y"u., but,
as taste and rifestyles
changed, so did music on the move, from portable
CD players to mini_disc
players, to MP3 players (see Spotlight 6.3).

s potliS; t

r Product launches can be better timed, as can the releases of

promotional
campaigns. For example, hot snacks can be launched and promoted
more readily
from autumry while cold drinks are launched and promoted more from
r spring.
Because of the greater knowledge businesses u.u u^bl" to
build up ,egarding
chosen segments, financial budgets can be allocated more exactlyinJr"
tLi.
and"when
they are required- companies can move budgets from segments that are
responding especially well to the strategies to segnients that requilre
more support.

However, a number of costs or disadvantages also arise:

r Costs will inevitably rise due to the investigation of more segments

and the
development of a variety of strategies to meet-the segments' reqriirements.
' Overlapping segments can lead to brand cannibalisition as one product
within
the company steals sales from other products within the complny. Breakfast
cereals and margarine-type spreads can have particular problems
in tids area and
some comPanies have begun to rationalise their producf[nes in view
of this.
' Due to producing multiple product ranges, sometimes for smaller segments,
manufacturing costs can rise due to shorter production runs. Also, simiLr
costs
can occur as a result of losing media quantify discounts due to advertising
in
more varied media to reach more diverse market segments. Thus *uik"t
segmentation can result in greater sales for the compiny but frequently
at
higher costs. The.ultimate goal, howeve4, is for the r"r.rltir,g increase'd sales
to
lead to increased revenue and profit, which should outweigh the increased
costs, which is illustrated in Spotlight 6.4.
'*#"n* *
*ku "iv'" Dart lwo Understanr.ling the custonrer
t# *#i "x

we see into the next decade is how to keep coar avairabirity,,

-ln: l?"g:ry
says
T?no
Hank Courtright, vice-president for the generation and disiributeo
resourc'es
sect?r at the Electrical power Research Institute ,And the xey is going
to be
l:r'.ls from coal combustion to coal s;i;;;;, ;;ffl,,;;;; #;
potential of

#;il ; ff;;;'::j:;""_ .iches in a saturated market,, FTcom,

30

There are several requirements that need attention if the segmentation process is to
be viable.
 Chapter Stx How custoryiers are segmenierl anrlorganiseci
ffiT,
The segment needs to be identifiable
It must be possible for the business to identify relevant characteristics
to be able to
subdivide the market into subgroups on the basis of shared
needs or common
characteristics. Some segmentatiot
'ouiiublus, such as geographic (physical location)
and demographic (r:T, ug:,
may even be observable, while :thnic groups, etc.) ,rarilutJs are easy to identify and
others, s.r.h us income or marital siatus, etc., can be
determined via questionnaires. However, other variables,
such as lifestyle or
benefits sought, are much more difficult to,identify. It is here
that knowleige ot
consurner behaviour (discussed in Chapter 5) is esplcially
useful to the businesses
that wish to use such intangibles as a basis for their'market
segmentation.

The segment needs to be measurable

This does notsimply relate to measuring numbers of customers,
but to measuring
the nature and behaviour of the segments. In order to formulate
viable strategies it
is necessary to be able to measure the people who exhibit
similar behaviour. It is, for
example, insufficient to measure the number of young adult males
between the ages
of 18 and 25 as x million, and then develop a strate"gy based on this figure,
if the
largest part of that number would neverbeha.re it thI *ay
you want and. buy your
product' Much of the study of consumer behaviour is about measuring
behaviolr.

The segment needs to be accessible

This relates to the reachability of segments. Companies must be
able to reach their
chosen segments effectively and economically and, as such, are
always looking out
for new ways to reach segments with the minimum of waste and the
maximum of
competitive advantage. The growth in usage of the Internet is the latest
medium to
attract businesses in this way. It allows the use of personalised emails
to keep
prospective and existing customers in their segments lnformed of new
products or
special deals.

The segment needs to be substantial

This very often means the size of market segments. While generally larger
market
segments are more attractive due to economy of scale factors, r*Jllu, niche
segments can also be very substantial in terms of profitability. Rolex has
a relatively
small segment in the overall wristwatch market but because of its niche at the
very
top end of that market it remains a profitable company. In fact, the main
concern is
not the basic physical si-ze of the segment, but the subsiance of the segment
in terms
of profit after the cost of segmentation has been considered.
 Part Two Unrlerstanrling the custoner
W
The segment needs to be appropriate
The segment should be appropriate to the organisation's
objectives and resources.
The cost of changingthe offering may make-the segment
non-viable as the costs
outweigh the potential benefit, for example, a steel pid.l.",
considering going into
car production as a nl:ans of securing an outlet foi its core
product. Tf,Jcorimon
problem here is also identifying market segments that will
iespond favourably to
the specific strategy designed for them. There is little to
commeid the developnient
of a unique strategy for a segment unless enough members
of the segment.espona
to it' Segmentation has to reflect the competitiire advantage
of the o"rganisation. It
does not take place in a vacuum but in conJugation with
the"organisation,s strategy.

Dilemma 6.1

The segment needs to be stable

The segment should be stable over a period of time in order to recover
the costs.
some markets are too volatile for organisations to respond to them.

Should the above criteria be fulfilled, market segmentation is an attractive

proposition.
should any remain unmet, then the costs may well outrareigh the benefits.
 Chapter Six How customers are segmenied anrl organrsed
ffi
:'.iii""::'

Lp,E NTI FY
.$[ G MENTS
Many methods or variables can be used to segment markets
and there is no single
prescribed way of segmenting a market. rne first step is
to select the most
appropriate method(s) on which to segment the market.
Several categories of
consumer characteristics may be found that form the methodology
for"segmen-
t-1tion, although some categories could be classed as splitting
rrairs. A prlctical
division of segmentation categories could be the three majo, Jilririor,,
of profite
variables, psychographic variables and behavioural variables,
each broad
category containing several subdivisions within it. There are also
certain hvbrid
forms of segmentation in existence, such as geodemographic
r"gt"""iu,;, rir6.r,
use a combination of several segmentation bases to provide richer
and more
comprehensive profiles of customer segments (see Table 6.1).

Table 5.1 Market segmentation type and selected variables for corrsumer
markets

Profile Psychographic Behaaioural Critical Eaents Hybrid

Age Lifestyle Benefits Marriage Geodemographic
Sex Usage rate Birth
Income Usage situation Death
Social class Purchase situation Unemployment
Geography Loyalty Illness
Family life cycle Retirement
Moving house

o.g, ROFILE SEGMEN

'f'
Age
Customers'needs and interests in products will often vary with age. For instance,
adults of all ages buy clothes primarily to conform to social .ro.rir, but there
are
other motivations which set adult consumers apart with regard to this fundamental
purchase' Younger adults will buy clothes tolollow fashion or make themselves
'look good', while older adults are less likely to be influenced by the pure ,fashion-
ability' of clothes but may buy to reflect status, or on a more funitionaibasis.
Because of these age-motivational differences marketers have found
age to be a
particularly useful demographic basis for market segmentation. Many irarketers
have concentrated on specific age groups and in ro-doirrg have carved a viable
niche in the market place. For example, McVities aimed its ririni packs of jaffa
Cake
W;ffi*dp
%,,1W
';Wr,ffil
Pari Two Understancling the custonter
^.

biscuits at young children and later followed up with mini

packs of chocolate
digestives and ginger nuts aimed at adults.
However demographers have drawn two significant differences
variable: age effects (occurrences due to chroiological age) and
in the age
age cohorts
(occurrences due to growing up during a specific
timJperioJ). An exariple of the
age effect is the greater propensity of ietired people (both
singte and married) to
take extended holidays abroad during the winter. This trend
is"an example of age
effects because it seems to occur as people reach a particula
contrast, the age cohort effect is demonitrated by the idea that
r age category. In
people hold on to the
interests they grew up to appreciate.-For example, the fact
tilat many of the
audience at rock concerts are 40+ is not because
-i.ry
altered their musical tastes but because these p"optu
older people have suddenly
grew up with rock music
(Meredith and Schew e, 1994).
It is important for marketers to be aware of these distinctions. One
stresses the
impact of ageing and the other stresses the influence of the period
in which one is
born and the shared experiences with others of the same age (e.g.
same history,
same music and emerging technologies (Bickert,1gg7).

Sex
Sex is frequently a distinguishing segmentation variable, and
the differentiation
starts very early - blue baby clothes for a boy and pink for a girl. Men
have
traditionally been seen as the main users of DIY and shaving produits, women
the
main users of cosmetics and hair care products. However, this distinction
is
blu*ing, brought about by changes in society, the growth of dual income
households, role reversal and a higher divorce rate. To the-marketer
this means that
sex is no longer an accurate method of distinguishing consumers in
some product
categories. For example, women are no* signilicant purchasers oi ho*u
improvement products and the market for men's=cosmetics has grown. It
is now
more common to see advertisements that depict both women and men
in roles
traditionally reserved for the opposite sex (e.g. chlldcare;. This blurring has also
led
to the growth of unisex products such as Lalvin Klein,s cK1, a ,riiru* eau de
toilette. Media coverage for the sexes has also changed and marketers have
been
forced to explore more avenues of direct marketinf, such as catalogues
and the
Internet, to reach many time-pressured working *o.tt"r, who use thei to
shop for
clothing and household accessories as well as tniny family needs.

lncorne
This has long been an important variable for identifying market segments,
due to
marketers'beliefs that income level is a strong indicaior6f the abilit| to purchase
a
product' For example, marketers of lower-priced PCs (under 600) feit that the main
target market would be a household with a fairly modest income. However, they
have also Proven to be attractive to higher-level ir,.ot,u households who
want
additional PCs for children. To make the best use of this variable it is common to
 Chapter Six How custorners are segrnenterl and organised

combine it with other vanable-s to give a more clearly defined

segment, for
with age in the case of the affluent retired, or with age and oc-cupation example
as in the
yuppie segment. University students are also a so-ught-afte, segment
which
combines age, education and also occupation and income]

Socia I class
This is a variable that is measured in different ways depending
upon the country
taking the measurement. In the UK, occupation is iradititnaly
used in the form of
the Registrar General's classification of A, B, c!, c2, D and -E.
In other European
countries a combination of variables is used.
The extent to which this variable is a useful predictor of buyer
behaviour is open
lo -q}Tli_on' Many consumers in the same occupation exhibit different lifestyles,
hold different values and show dissimilar purchasing patterns. Ho*""ur,
,b*u
studies have shown that social class can be useful in discriminating
between
ownership of certain product classes (o'Brien and Ford, 19gg).

,-r
(jeogra p
r

ny
In its simplest form geographic segmentation refers to regional differences
between
areas of the same country such as taste differences (nortiern versus
southern beer,
or English preference for pork sausage versus Scottish preference for beef
sausage).
In its wider sense it takes in cross-country boundaries iarith the incumbent
cultural
differences, language differences and taste differences. While there has
been an
increased- level of globalisation and strategies have been sought
that will be useful
worldwide, many companies have found that some degree of"adaptation is essential
if they are to become successful on a pan-European bas-is. For example, McDonald,s
have had to adapt their product range to country tastes, and Nike found
that their
'in your face strategy' did not sit well worldwide.
While the European Union has opened boundaries to freer trade among member
states, the regional taste and value structures, as well as differences in
conlumption
pattems, are ignored at the marketers'peril (Euromonitor, 2002).

Fa m ily life cycle

Family life cycle is a useful variable for marketers because purchasing
requirements and disposable income are likely to vary according to life-cycle
stage
(young and single versus young and married with children;. This variabtl is
Utety
to be of greater value to marketers for more precise segmentation because
consumption is more affected by family responsibility than byiimple chronological
age. For example, a married 1.9 year old with a child is iitety to exhibit iery
different consumption patterns from a single 1,9 year old. Likewisl 'empty nesters,,
whose children have left home, are viable targei markets for expensive household
items due to their greateraffluence compared to young married couples starting
out
and building a home for the first time.
%l'S"r
Part lwo UniierstarrrJing tlre custorner
ffil#*
The financial services sector in particular have found life-cycle
analysis of great
use in better targeting their services. Financial advice for retirement
and income tax
preparation were relatively more important for older consumers
than those in the
bachelor or'full nest'stages flavalgi and Dion, lggg).

Lifestyle
Simple profile variables of segmentation simply describe consumers
and tend to be
based on bare statistical information in as much they tend to lack
depth and richness
in their descriptions. As a result marketers have embraced psychographic
research in
an attempt to address this problem. This type of applied researCh
is referred to as
lifestyle analysis and can be a valuable tooi in aiding the identification
of consumer
segments that are likely to be responsive to specific marketing messages.
Lifestyle research measures actiaities, interests and oplnions oi simply, AIos
(Reynolds and Darden,l'974:87). Activities measure how
consumers spend their
time, interests measure preferences and priorities, and opinions measure
consumers'feelings about a wide variety_of events, political issues, etc. Examples
of
each,category are shown in Table 6.2. Demogrup-hi., are also included
in most
psychographic or AIO studies, as lifestyle segmentation does not replace
profile
studies but enhances them.
AIO studies may be general or specific. In general studies marketers seek to
classify the consumer pfouhtion into groups based on general lifestyle
character-
istics, with the intention that consumers *ithin each grirp have
similar lifestyles.
The danger here is of stereotyping and generalisatior,.-r.om a customer
view point

Table 6.2 Lifestyle dimensions

Actioities [nterests Opinions Demographics

Work Family Themselves Age
Hobbies Home Social issues Education
Social events Iob Politics Income
Holidays Community Business Occupation
Entertainment Recreation Economics Family size
Club membership Fashion Education House type
Community Food Products Geography
Shopping Media Future Cityltown size
Sports Achievements Culture Stage in life cycle
Source:Plummer (1974)
 L4

Chapter Six llow cLrstorners are segrnentecl ancl organisecl

ffiffi
individuals may feel varying emotions, from humour at being so labelled to anger.
However, stereotyping serves the purpose of highlighting certain behaviour, which
may help the marketer.
The specific approach seeks to understand consumer behaviour in relation to a
particular product or service. The AIO questions must be tailored to make them more
product-specific. The advantage of this method is that groups emerge which are
much more sharply defined in terms of their usage of a particular product or service.
In either type of study, customers are usually presented with Likert scales in
which respondents are asked whether they strongly agree, agree, are neutral,
disagree, or strongly disagree with the statements in the questionnaire. Under
normal Likert scales, ranged on a five-point scale, a mid-, or neutral, point exists. It
is possible to get more accurate results if a six-point scale is used as this forces
respondents to be either side of neutral. Psychographic studies are used to develop
an in-depth understanding of market segments. Psychographics can be used to
define segments, although it is better practice to avoid defining the segments
through AIOs in favour of using AIOs to provide a better understanding of
segments previously defined using more traditional variables.
Cross-tabulations are used to analyse AIO statements on the basis of variables
that are believed to be valuable for developing market segmentation strategies, such
as sex/ income, age, religion, etc. Factor analysis is commonly used to group the
statements into a much reduced, and more usable, format. Factor analysis is a
mathematical technique for examining the intercorrelation between statements in an
attempt to determine corunon factors that explain observed differences (Hair et al.,
t998). Such techniques often reveal factors such as the'traditional' segment or the
'natural' segment, or the 'health-conscious' segment, or perhaps the 'modern'
segment, etc. within a segment defined by other variables.
Several companies have identified a health-conscious segment of consumers
through psychographics to either reposition or launch products. Sales of CafdHag,
the decaffeinated coffee, took off when repositioned to the health-conscious
segment. Olive oil and sunflower oil margarine, and low fat spreads, are all aimed
at the health-conscious segments. Gillette targets its male razors to the young
moderns with the line 'Be the best a man can be'.
Psychographic analysis allows marketers to better understand the lifestyles of
those considered to be core customers, and thus marketers are better able to
communicate more effectively with consumers in that segment. It also allows better
positioning of new products within that segment, due to its ability to look beyond
simple demographics and to position the product in line with hopes, fears,activities
and dreams of the products'customers.
The objective of psychographic segmentation is to develop strategies that are
consistent in all their elements with the AIOs of the target market. Hence
advertising often stresses lifestyle elements rather than product attributes and uses
models consistent with that lifestyle when viewed bv the audience.
M!v#*,:,.
ry#fu':#
':W,",,W
Part Two Understarding tlie custonter

Benef its
Marketers are constantly striving to identify the one key benefit of
a product or
service that will be most meaningful to consumers. There are many
eiamples of
such benefits but some of the more common ones include: patn reiiey (Nuiofen);
white teeth (Pearl
?lopr), clean-smelling clothes (Radion);y'nancial ,rruiity (scottish
Widows); safety and longmity (Volvo).
The process of benefit segmentation involves:

r Developing a complete list of the benefits that could be of value in segmenting

the market. Not all benefits will elicit a favourable response from consu]ners.
o Developing sensitive and reliable scales to measure major attitude dimensions
towards the benefits.
o Developing a quantitative measurement of the market which results in the
clustering of respondents by their attitudes.
r Identifying those segments whose needs (sought benefits) remain largely
unmet.

Changing lifestyles can play a major role in determining what benefits consumers
will respond to and present marketers with opporiunities for new product
development in order to capitalise on new emerging benefits. Supermariets
are
now realising the benefit of home shopping and -delivery ,equi.ed by many
shoppers, hence the^development of growing-numbers of supermarkets Lffering
Internet shopping. similarly, by opening stores for 24 hours, supermarkets are
offering consumers who work different hours an added benefit.
Benefit segmentation can be used to position various brands within the product
category (Haley, L995). A classic case of successful benefit segmentation in many
countries is the market for toothpaste: the Signal brand is targeted towards parents
because it stops the formation of cavities in children's teeth; Ihe Cotgate Complete
lrand encompasses several benefits in its approach to adults as it rlduces plaq.,e
(health benefit) and removes tartar (cosmetiJ benefit); Sensodyne reduces
pain in
sensitive teeth (health and social benefit); and many home brands offer similar
benefits to the branded products plus the additional cost benefit.

Usage rate
This method differentiates between heavy, medium, light and non-users of a
specific product, service or brand. However, research hasionsistently shown that
Pareto's Law (the 80/20 rule) applies in some degree or other. For example, approx-
imately 25-35% of beer drinkers account for approximately 70-75% of ail'beer
consumed. It is for this reason that marketers target their advertising towards the
heavy users rather than spending considerably more attempting to atiract the light-
user segment.
 Chapter Six How customers are segmenterJ anrl organiseci
ffi

r mililon cusromers ln tne uK by the end of 2003. The phones are being sold at
more than 1,000 outlets in the UK, including branches of Carphone Warehouse,
comet, Dixons and the Link. The operator's flagship videophone costs s200.
According to(u peupre
people ar
at nurcnrson
FJutchison 5Lr,
3G, tne
the nanoset's
handset's most popular service is the
:'*1:"'E
live video call, with video calls accounting for almost half of all usage. Video
calls,
at 5Op a minute, are one of its most expensive services.
Average customer spending on the phones is also high. About two-thirds of
have opted_for one of tariffs at 060 and
:yr^t:i.^ .two'ail-inct.usive'monthly
f 100' By comparison, average customer spending on mobile phones in the UK is

il:|l:::rpentf,8 birion * th. our.nu,. o,sJ r,..n"". r": ,r.,r:,"; ,,

;:
network, analysts said it desperately:needd to generate above-average revenues

:::'::1Tl
fi:ff:ffi: here is how can the company'increase usase *,. ro rnu, prices
:

io gen e rate p rotit' w h a t selm e n -

;l';:T: ff :"; ;:;1" "'s
f;;"il:.1:xlill5
from an article bv Robert Budden, Telecommunications correspondent, Financia! Times,
:',fi:TralT"d

The same analysis can be applied in a wide range of other markets both in the
consumer and industrial markets. Hence, targeting heavy users has become the
basis of the marketing strategy of many companies. It should be noted, however,
that medium and light users can be effectively targeted if marketers take note of the
gaps in market coverage. Also non-users of a company,s brand should not be
ignored. Research can highlight reasons for their apparent dislike of a brand, and
repositioning can then be effective.
 Part Two Understancting the custorrrer
W"ffi^

Usage and purchase situation

It is often recognised by marketers that the occasion or situation can often
determine what consumers will purchase. For this reason the usage
situation can be
focused uPon as a segmentation variable. The following statement
perhaps reveals
the potential of situation segmentation: 'I always b"uy my wire lowers
on st
Valentine's Day.'On other occasions or under diifereni circumstances
the same
consumer might choose differently. Circumstances can also influence
choice, for
example the day of the week, time, who the product is for, and. so on.
Marketers have tried to suggest the suitability of products for certain
occasions;
others have tried to break consurner habits. Kell,oggs, for example, have
advertised
cornflakes as more than a breakfast cereal. fhey suggest it can Le eaten
anytime, as
a snack, for suppeq, and it can be made into cakes.
Many products are Promoted for special usage occasions. The greeting
card
industry stresses special cards for a wide variety ol occasions (Christmas,
Mo"ther,s
Day, Easter, etc.). The wristwatch industry promotes its products
as a coming of age
or-retirement gift. The diamond industry promotes diamond rings as u*iirurrury
gifts or as a symbol of engagement. The chocolate industry promotes
chocolates as
suitable for christmas, Mother's Day, Easter, etc. (see spouight o.s;.

Loya lty
Loyalty segrnentation involves marketers identifying differences in characteristics
between brand-loyal customers and non-brand-loyal buyers so that they can direct
their marketing effort to people with similar characteristics in the wider population
with the objective of increasing the size of the loyal population. However, .o1g*",
innovators, almost by definition, tend not to be brand ioyal. Increasingly, companies
are rewarding brand loyalty in order to increase the brand-loyal se-gment. These
rewards often take the form of 'club'membership, for example store-loyalty cards
 Chapter Six How ctistorners are segmenter.l ancl organised
ffi
that give discounts from a variety of member stores, or British Airways,
frequent-
flyer bonuses. These relationship programmes offer a variety of benefits to
keep the
loyalty of the frequent or regular customers.

Our lives are,comPosed of major events which cause stress, happiness and other
emotions, and affect our subsequent behaviour. These include:

r Marriage
o Birth
o Death
o Unemployment
o Illness
o Retirement
o Moving house.

These critical events offer companies opportunities to specialise and thus

to provide
products and services which meet not just our basii needs but also he$ us to
achieve self-actualisation, in Maslow's terms, to give expression to the outside
world of who and what we are. Marketers call this critical events segmentation.

o. io

Geodemogra ph ic
Geodemographic segmentation is the combining of location information and
demographic information. Emerging in the elrly 1.970s for public sector
applications, but given the central nature of segmentation to marketing strategy, it
was rapidly picked ug as providing a major step forward in consu*r r"gil"r,-
tation (Mitchell and McGoldrick, 1,994). The first company to ofJer a
geodemographic system in the UK was CACI, with its ACORN iA ilassification of
Residential Neighbourhoods) system. It is based around census data and offers 3g
neighbourhood types aggregated up to 11 neighbourhood groups (Mazur,1993). Its
major premise is that people who live in similar ateas aie likelv to have similar
lifestyle, behavioural and purchasing habits. In the uK, census data such as
household size, ethnic origin, number of cars, family size and occupation are used
lo-g1oup small geographic areas into segments that share similar characteristics (see
Table 6.3). As the industry has grown, other systems have become available, such as
MOSAIC (CCN), PIN (Pinpoinr) and Superprofiles (CDMS).
 Part Two Uncierstancling the customer
W
Table 6.3 AC0RN User Guide

Index - Categories and Groups

Category 1- Wealthy achievers

Group A - Wealthy executives
Group B -Affluent greys
Group C - Flourishing families

Category 2 - Urban prosperity

Group D - Prosperous professionals
Group E - Educated urbanites
Group F -Aspiring singles

Category 3 - Comfortably off

GroupG-Startingout
Group H - Secure families
Group I - Settled suburbia
Group J - Prudent pensioners

Category4-Modestmeans
Group K - Asian communities
Group L - Post industrial families
Group M - Blue-collar roots

Category5-Hardpressed
Group N - Struggling families
Group O - Burdened singles
Group P - High rise hardship
Group Q - Inner city adversity

Source: Caci Ltd. (http:www.caci.co.uk)

The information obtained can be used to select targets for direct mail campaigns,
to
identify locations for retail stores and to identify the most effective poster sites.
Thjs is made Possible because consumers are being identified by postcodes.
Advertising spots on television can also be bought more precisely ty Hnking
information from viewership panels with postcodes to ubl" certain geodemo-
graphic groups to be targeted. "t
A major strength of geodemographics is to link buying behaviour to customer
grouPs. Buying behaviour can be obtained from large-siale syndicated surveys,
such as MORI or Target Group Index. Respondents are then geocoded and then
geocoding those ACORN groups that are most likely to puichase a particular
product or brand can be identified. Hence merchandise mix decisions .ut b" made
with greater accuracy. Supermarkets use drive-time maps to identify customers
within a certain driving time (usually 10-15 minutes) to help selectihe product
range for each store.
 Cirri rt:, Sr.y I rn..,. lus iil),$,. ;t L ct;rrtuil{Lil ; r,rl u, I;1r {.sL ti

GeodemograPhic databases are becoming more sophisticated

. but should not be
viewed as a Panacea to solve all marketing problemr. B"foru
selecting a database
marketers must identify exactly what it ls they require and
select the database that
best fits their needs. They also need to recognise that databases
are only as good as
the information contained within them (o'Nialley et a1., 1995).
Geodemographic analysis is likely to becoml more prevalent in
pan-European
studies in an attempt to identify groups of 'Euro-corr'rr-urr,
living in separate
countries but demonstrating similar socio-economic and demographic
ciaracte.istics.

6.11 $[SM[NTING INDUSTRIAL MARKTTS

.

To a great extent, inclustr:ial nrarkets can be segmented using

similar variables to
the ones just discussed. The difference, of course, is that instead of
using the charac-
teristics and behaviour of the individual customer, the segrienter uses
characteristics and behaviours of the organisation. For example,ln
the case of
microprocessors, different industry types, from consumer electronics
manufacturers
to military hardware manufacturers, may buy them. Order sizes may
differ from
light to heav,Y usage. Geographic location *iy rru.y from domestic purchasers
to
international purchasers, and organisational iize may differ from huge multina-
tional to small regional manufacturer. The type of purchase may differ from
straight
repurchase to new task purchase, and different benefits may be
sought, etc. Figure
6.1 shows that business customers may be segmented on ine uusiJof
geograir,y,
organisational characteristics, purchase tehaviour and usage patterns and
organisa-
tional predispositions or policy.

Methods for
segmenting business
markets

Geographic Organisational Purchase Organisational

characteristics behaviour and j predisposition
ugage patterns or policy
I
Location
Domestic/
Industry type
Organisational
Order size
(heavy vs light)
f;;ffi^---
i knowledge
international stze Centralised vs
Technology decentralised
used purchasing
Type of Multiple vs single
repurchase supplier policy
(straight vs new
task)

Figure 6.1 Selected rrrethods foi" segmentinp, business markels

Part Two Understanding the custorier

Geographic
Lacatian
Delivery times for perishable goods can be a limiting factor in
the selection of
customers' Examples will include milk and local prodrice for
farmers, markets. In
ethical pharmaceuticals, distribution (prescription medicines
to local pharmacists)
relies upon a national network of warehourur-o, regional
distributors.

Dom esti c/ I nte r n ati o n a I

For business-to-business marketing the decision whether to serve
the domestic
market (Uf only) or go international will depend upon delivery
chargeq uotulg"
rates, tariffs (different VAT rates, etc.), regulatory requirements (;lthou;h
these tend
to be reduced within the European Union), and hidden costs
such as translation
costs of documentation.

Orga n isationa I cha racteristics

lndustry type
The Standard Industrial Classifications (SIC) index is an international
method of
identification for all industries. SIC codes are useful in the selection of
segments for
business-to-business marketing. When companies register at Companfes
House
(www.companieshouse.gov.uk) they have to describe Ihe main business
and give
the appropriate SIC code. Organisations can look at their customer base and
analyse
the SIC codes from their records at Companies House. Mailing list companies
such
as Dun and Bradstreet and Thomson Directories will proJuce mailing
lists of
similar companies.

Organisational size
This can be defined either by number of employees or by turnover. Segmentation
can therefore include sIC code, numbei of employees and turnover or a
combination.

Technology used
A company selling business software will only need to identify customers who
use
computers. A company selling nitrogen freezers will only need to identify those
companies which-use that technology, for example sperm banks, pharmaceutical
companies, etc. Norcool is a Scandinavian company selling comrilercial fridges.
Their product range includes glass-fronted fridges which aie used in pubs, cllbs
and restaurants' They also have a range of fridgei that can take panels, and kitchen
designers use these.
The potential of e-commerce in business-to-business marketing in reducing costs
is enormous. However, the use of EPOS systems means that onlyiuppliers *f,o
.u1
interface with the technology can take advantage.
 Chapter Six How custcrmers are segmenierl anrl organised
ffi
Purchase behaviour and usage patterns
Order size (heavy vs light)
In a production line organisation, the longer the production runs the
cheaper the
unit cost' This saving can then be passed on t-o customers. This will only
be
profitable if the customers can take advantage of larger orders.
Organisations using price as an incentive will lo-ok for customers
who can take
larger orders. They do this by having minimum order sizes. This
leaves smaller-
order customers who cannot meet the minimum order size requirement
to have
their needs met elsewhere.

Centralised ys dece ntalised purchasing

Organisations with multiple sites may have different policies for their
services. For
example, legal services will be contracted out on u ."-nt.ulised basis
whereas other
seryices, such as window cleaning, may be decentralised but with
a budget allocation.

Type of repurchase (straight vs new fask)

Repurchasing, that is re-ordering, is essential to long-term profitability.
If the
repurchase is a repeat order, the set-up costs may havi been covered
by ihe first
older, so repurchasing b" very piofitable. Ii the orders are unique and not
:T be
identical, then there will set-up costs involved. Sometimes stindardising
processes can overcome these problems.

Orga n isationa I pred isposition or policy

Praduct knowledge
In a business-to-business situation specialised product knowledge may be required
in order to get the maximum benefit out of the product or service. Customers who
already have these skills can be selected to avoid training costs. An example would
include suppliers of energy-efficient boilers looking for &stomers who aiready
use
this type of equipment.

Benefits sought
Corgi developed an energy-efficient boiler which met the energy reduction
requirements being introduced by the European Community in the Larly 1990s.
Their initial customers were heating engineers who supplied replacement boilers.

O rga n i sati a n a I p ro biems

Some organisations in their normal business have a requirement for specialised
needs. This can include health and safety reguirements, for example diiposing of
asbestos or other toxic by-products.
;"#h'$P;
trk-*3s
rdsr'''w
Part-lwo Understantling the custotrler
{

Multiple ys single supptier policy

using modern supply chain management techniques,
lompanies- including |ust-in-
Time, tend to have.a single supplier policylThe selection
of the comp"any will
depend upon a number of issuei,-inclubing past experience
and quality as #eil as
p.rice. other companies- use multiple supplilrs to avoid
being depenjent upon a
single supplier and to allow trade-offs between competing
suppriers.

n"ii BUSINTSS"

The reality of segmentation in the business-to-business area

may-of
not be as scientific
as- that suggested above. Customers tend to arise out
buyer/supplier
relationships rather than being sought out as in consumer activities,
6'6' This is looked at in more detail in chapter j.L on relationships. r i
see Spotlight
 Chapter Six How custoniers are segmented anilorganrsed
ffifuf;

The reality of segmentation in 'rear-life'may not be

as simpre as suggested in this
chapter' The segments will appear blurred. tutuny organisations
have been around
for some time (and surviving lnd maybe thriving) #tno,rt
a formal segmentation
process. Many sMEs (small and medium enterprGes)
say that they just
it' Their customers are anyone who will pay for'their goods. However, [et on with
ifive analyse
their customer profiles we very often find that the *oi" ,,r..ussful
organisations are
focused uPon a narrow segment. This is especially true in
the case oT not-for-profit
organisations such as charities where their segment is clearly
defined.
As customers we are becoming more eclectic, taking our lifestyles
from more
than one source. As customers we are also becoming inlreasingly
more difficult to
pigeonhole. From an organisation's point of view we-appear,
as individuals, to be in
more than one (or even two) seg*ents. In Chapter I2'ie will
look at how changes
in customer profiles are forcing organisations to have a major rethink.
Organisations segment their customers so that they can position their
products
and target their marketing activities to produce a cosi-effective
solution - one that
benefits customers (giving them the products they want/need)
and the organisation
(by maximising their profit).

spotlight 6.3 showed sony walkman as an example of product-ted innovation.

Would such a product developed with no prior consumer research
be as
successful today?
Taking into consideration the techniques and methods of lookrng
at customers
in earlier chapters, what new customer types are rikery to anse wnen we
consider lifestyle segmentation?
spotlight 6.5 showed rhorntons as an example of how marketers can use
a
purchase situation, such as Easter, christmas, st valentine's
Day, to commercial
advantage. ls this an example of increased commercialisation or are
we being
miserable Scrooges for even suggesting it?
spotlight 6.6 showed that many small business exports come from ,web
su rfers':
(a) Should small businesses trust to 'luck' when setting up a website?
(b) How can small businesses use their existing customer base to identify
potential new customers?
ffi##ffi
}ffiliJ#tntr
Part Two Understantlingthecustonler

If you can't beat 'em, join 'em. The news that Levi strauss is planning
to sell cheap
jeans throrrgh supermarkets suggests that
brand manufacturers want a slice of the
mass market.
It was not that long ago that Levi's was hauling Tesco before the
courts to stop
Britain's biggest retailer selling its jeans at barg"ain prices. The jeans
had been
bought on the so-called grey mirket, bypassing ipp.o'oea retail
c-hains set up by
brand owners to exploit the different pricing of tte
[ooas in different markets.
But last week Levi's announced that its Signatu"re jeans, about
to be sold in the
us through the discount group wal-Mart, would be coming to the uK and that
was in talks with mass-market discount retailers. For that, ,eid
it
,.rp"r*arkets.
Brand owners, which have long spurned the advances of mass-market
retailers
keen to stock their gogd? are havingiadically to rethink their
approach. The fastest-
growing segments of the consumer products markets are super-premium
and
discount. While some manufacturers are committed to remaining
solely in one
camP, many/ like Levi's, are determined to see if they can straddle
both. Ri tne top
of its range Levi's sells jeans for f,175 a pair. The ne#Signature
trousers will sell for
825, against an average price for its products of f4S.
For supermarkets, selling branded goods cheaply often half
-
retail price * helps to bring more customers into their stores. Tesco
the recommended
and Asda have
also targeted such areas as perfumes, sunglasses, watches and jewellery.
It is part of
a drive into non-food, something that will come under scrutiny
by the Comp"titiol
Commission under its current investigation into the safeway bid battle
Tim Mason, marketing director at Tesco, says the move by Levi's is
a recognition
the grouP was missing out on a channel to market that was selling
-that a lot oljeans.
are only trading in part of the avai]able market,, says Mr Mason]He
-ftuy
has sold-1 million pairs of its own-label jeans at just f,6 each. ,we
,uyr'Tur.o
have 1rut,,ru pu.,
already that sell very well', he says. 'we w-ill tak 6 Levi,s again, but
I think this may
be a Signature without a flourish.' David Miles, head of spiciality
retailing at Asda,
agrees. 'signature is not what our customers tell us they w^ant,, he
says.
,tf,"y do not
want a value version. They want the right version at the right price.,
But both men are sure that the decision by Levi's is parl of a recognition
by brand
manufacturers that the times are changing. 'ilrand o*."., are just figntir,g us any
more in the way they used to', says Mr Miles. Mr Mason says it "oI is a victorlifor the
mass market and its way of doing business. 'Whether peopleiike
i! or like ii not, the
mass market is a discount market. You can be in thaf mass market,
or the branded
end, both of which are doing very well. The risk is getting caught in the middle.,
Johanna waterous, a leader of the European retail pruiti.u at McKinsey, the
consultancy, agrees that Levi's is not alone in seeing thai retailing is changi"g.
Snu
predicts that the grouP will be just one of a numbe, of .orlrtr-er product
iraiufac-
turers that are forced to analyse their retail partnerships. 'Across all sectors
of
retailing in the US the theme of the year is competing in i value-driven world
and
how primarily wal-Mart,-but other players as well,-are beginning to reshape the
industry in terms of supply chain and supplier behaviour,, says Ms waterous. ,At
the end of the day, distribution matters and the traditional middle-market
channels
 Chapter Six How customers are segmentecl and organised
ffi
- department stores and other mid-market branded retailers - just cannot deliver
the volume.'
Whatever their decisions, making the move into the mass
market will not be easy
for branded manufacturers. To meet the scale demands
of the likes of wal-Mart,
many groups will have to re-engineer their supply chains,
overhaul sourcing and
review design. 'It is difficult to see what they won,t have
to change,, says Ms
Waterous. 'To do tn1ljor any company is quite Jhalenging.,
According to McKinsey, companies can go one of twJways.
They can improve
their existing infrastructure, lo&ing for economies of scale,
and then fine-tune on
the margins. or they can start from scratch by building an
entirery new and
dedicated part of the business.
way-they jump, it is crear that life is changing for the brands.
-whichever
-Middleton,
Levi's F,uropean president, in effect admitted as much last week. Jo
The
grguP, he says, could no longer afford not to tackle directly
the growing ranks of
value-conscious consumers. 'The whole value channel in
clottiing ha"s become
extremely large in recent years, and is becoming bigger',he
says. ,tt re-a1y cannot be
ignored by anybody in our industry any more.,
source: Extracted from 'Ievi's leaps into the mass market' by Susanna Voyle in Financial Times, LMay
2003.

Questrons
L Are supermarkets and crothing shops seiling to different
segments?
2 can Levi's have a two-price structure in different types of ouilet?
3 can Levi's alter the quality of their product to justify a price differentiation?

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