Applied Market Segmentation
A Senior Executives Toolkit
Declan Bannon is an academic and
chartered marketer with over thirty years
experience in senior marketing roles as
executive trainer, business advisor, and
consultant. As an academic teacher in
higher education, his specialties are
marketing and strategy development for
multinational companies in the United
Kingdom and Ireland, Europe, Asia, and
Africa.
Business Expert Press 978-1-94784-312-7 (2018)
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Bannon_B24_166712.indd 1
Declan P. Bannon, BSc, MBA, PhD, DipM, CM, FCIM,
FHEA
Abstract: Marketing segmentation and targeting tech-
niques are widely used in the commercial, public sector,
not-for-profit and third sectors. However, the appropri-
ateness, limitations, and efficiency of marketing seg-
mentation have received little critical appraisal from the
academic or practitioner literature.
The objectives of this article are first to explain the poten-
tial benefits and limitations of the marketing segmentation
process in the light of over 80 years of academic literature
and nine centuries of marketing practice. Second, to review
the methods in which segments can be constructed, and the
inherent limitations of the process. Finally, to introduce a
generic toolkit for segmenting, prioritizing targets, identifica-
tion of Critical Buying Factors (CBF) and the development
of Competitor Focused Index (CFI) to focus managerial
decision making in the context of applied marketing.
Key words: Critical buying factors competitor focused
index, Market segmentation, Positioning, Primary and
secondary targets, Targeting.
Introduction
Lord Marshall of Knightsbridge and former Chairman of
British Airways, is quoted as saying:
One of the abiding principles of sound business
practice is know your customer; know your market.
The objective of course, is to gain competitive ad-
vantage by building sustained customer loyalty,
with products and services meeting, quite precisely,
the demands of closely defined markets. The art of
defining target markets rarely progresses beyond
the assembly of somewhat dull demographics. The
logical conclusion is that, if everyone is doing the
same, differential advantage is difficult to attain.
(McDonald & Dunbar, 2012)
The objectives of applied market segmentation (AMS)
are, first, to consider the process in the context of applied
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 Applied Market Segmentation
marketing and to explain the potential ben-
efits and limitations of the marketing seg-
mentation process in the light of nearly 80
years of academic literature. Second, to re-
view the ways in which segments can be
constructed. Finally, to introduce generic
tools for segmenting, targeting, position-
ing, and implementing marketing plans for
profit, effectiveness, and greater efficiency.
Despite the consistency of academic ap-
proaches to marketing segmentation and
acceptance (at least in theory) by organizations
of the value of marketing segmentation,
not too many organizations are segmenting
their markets effectively. Organizations are
not basing their strategies on research-based
marketing segmentation and there is a need
to adopt a more professional, outcome-
orientated, and strategic approach (Smith,
1956; Wind, 1978: 2000; Jenekins & McDon-
ald, 1997; Bannon, 2005; Dibb, 2010; Webber,
2011; McDonald & Dunbar, 2012; Budeva
etal., 2014; Solomon, 2014; Maricic & Djord-
jevrc, 2015; Dibb etal., 2015; Thomas, 2016;
Ernst & Dolinocar, 2017).
The practical difficulties that organiza-
tions experience in segmenting their
markets, is that most of the academic
work in this domain is prescriptive,
with virtually no pragmatic guide-
lines provided to enable managers
to make sense of the confusing array
of data and information available to
them. (McDonald & Dunbar, 2012)
The purpose of AMS is to guide practitio-
ners thinking and direct marketing man-
agers to address these issues as a means of
achieving competitive advantage and thus
profitability via the robust and rigorous use
of the practical tools detailed in this article.
Organizations are too internally focused
on key performance indicators (KPIs) and
Balanced Score Cards, more than they
are externally focused on primary target
segment(s) and competitor(s).
Over prescriptive managerial direc-
tives in common usage, such as KPIs, lead
2 Business Expert Press 978-1-94784-312-7 (2018)
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Bannon_B24_166712.indd 2
to introspection and analysis paralysis of
numbers that are expensive to collect,
demotivational for managers, ignore core
competencies in the value creation chain,
and prioritize incorrectly what is important
for customers and competitive advantage.
It is argued that marketing segmenta-
tion could be viewed as antimarketing in
that it is not treating the customer as a
unique individual but as a standardized
unit within a segment. There is a tendency
to assume that segmentation is ipso facto
a good activity and the potential benefits
derived are rarely challenged. Such blind
obedience to the marketing segmentation
process is nave, misleading, and could po-
tentially be an expensive mistake (Cui &
Choudray, 2002).
A generic framework for evaluating and
prioritizing segments has been developed
and is described in detail, along with a criti-
cal buying factor (CBF) matrix leading to
the development of competitor-focused in-
dex (CFI) criteria for application.
Background
Marketing is both a philosophy and a func-
tion. As a philosophy, marketing pursues
knowledge, understanding of exchanges,
and the process of enhancing value. There
is no general theory of marketing (Baker,
2000; Grnroos, 1994; Sheth et al., 1988;
Sheth & Parvatiyar, 2000; Moon etal., 2016).
There are 12 different schools of marketing
and 21 schools of postmodern marketing
thought (Sheth, 1988; Brown 1998). As a
function within organizations, marketings
scope and boundaries should encompass
four specific areas:
1. The understanding of customer and
potential customer values.
2. The creation of products and services
that customers value.
3. To communicate with specific segments
the values they wish to exchange.
4. Marketing implementation, i.e., ensuring
delivery of value from the organization
to the customers being targeted.
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 Applied Market Segmentation
As a management function, marketing
is a process of decision-making that entails
six areas of focus:
Market identification.
Segmentation of markets.
Target marketing for maximizing organiza-
tional profit, effectiveness, and efficiency.
Understanding and creating products and
services that are positioned more favor-
ably than competitor offerings.
Market planning and resource allocation
(Doyle, 2000).
Implementation and evaluation, i.e.,
marketing metrics.
Frederick first introduced the concept of
segmentation in 1934 (Goller etal., 2002).
Over the last 80 years it has attracted con-
siderable interest from both academics and
practitioners as the importance and ben-
efits became apparent for consumer, B2B,
services, not-for-profit, social and societal
marketing. Goller etal. (2002) classifies the
academic research of segmentation into
four main areas:
1. The development of segmentation bases
and models (Hummel, 1960; Haley,
1968; Wind & Cardozo, 1974; Bonoma &
Shapiro, 1983; Moriarity & Ruibstein, 1986;
File & Prince, 1996; Dibb etal., 2015);
2. Research methodologies (Webster, 1978;
Silk & Kalwani, 1982; Flodhammar, 1988;
Mitchell, 1994);
3. The development and application
of statistical analysis tools (Frank &
Green, 1968; Green & Carmone, 1977;
Rao & Winter, 1997; Acito & Jain, 1980;
Klastorin, 1983; Green & Krieger, 1991;
Fish etal., 1995; Balakrishnan etal., 1996);
4. Segmentation implementation (Beik
& Busby, 1973; Mahajan & Jain, 1978;
De Kluyver & Whitlark, 1986; Piercy &
Morgan, 1995; McDonald & Dunbar, 2012).
Goller etal. (2002) contend that the above
research areas have mainly been developed
in isolation of each other that has led to a
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Bannon_B24_166712.indd 3
fragmented understanding of the process as
a whole. What at first appears to be a rela-
tively straightforward process of segment-
ing, targeting, and positioning, in reality
becomes a highly complex field of study.
In the early 1930s Joan Robinson and
Edwin Chamberlain formulated the the-
ory of imperfect competition. This was
driven by the dissatisfaction with classic
economic theory of the interaction of sup-
ply and demand. These theories provided
the necessary stepping stone to the con-
cept of marketing segmentation. It was
the recognition of heterogeneity in the
demand for goods and services that led to
the disaggregation of the traditional single
demand schedule and the acceptance of a
fragmented demand schedule where sub-
markets or segments exist. The distinction
between product differentiation and mar-
ket segmentation is an important distinc-
tion to note. Wendell Smith in 1956 noted
that product differentiation is supply-led,
i.e., it emanates from a production orien-
tation whereas market segmentation is
fundamentally of a marketing orientation
driven by an understanding and knowl-
edge of the customer (Figure 1).
Each individual customer, from a con-
sumer buying behavior perspective, is
unique. Each consumer constructs their
own unique social reality and consumer re-
quirements. However, from a practical and
resource perspective, rarely can organiza-
tions customize to the nth degree.
Marketing segmentation can be viewed
as a compromise and meaningful position
between two extremes that are generally
unpractical positions (Baker, 2000:262).
This is not to say, as Figure 2 seems to im-
ply, that disaggregation and aggregation
will produce the same market segments.
The precise definition of a market is elu-
sive, because all productmarket bound-
aries are arbitrary (Day et al., 1979; Baker,
2000:261). Historically, a market was a place
to sell and buy goods. However, the term has
come to be used as a generic term for a large
geographic area, the relationship between
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