Download market segmentation bases in b2c markets

MARKET SEGMENTATION, TARGETING AND POSITIONING
Market segmentation refers to the process of grouping customers so that the formed
groups (or segments) are internally homogeneous, but heterogeneous across the
groups. A number of companies segment markets (although, surprisingly, some
don’t!) because they know the customers’ needs and wants are heterogeneous in
many ways. By segmenting the heterogeneous customers, however, a manager can
“create” a more homogeneous market subset that is more manageable.
Segmentation helps managers develop a more fine-tuned product/service offering
priced appropriately for the specific customer group. The choice of distribution and
communications channels becomes much simpler.
Furthermore, because a
segment is only a subset of the total market, the company may find only a subset of
competitors existing in the total market, thus a fewer competitors to deal with.
The following chart describes a generic STP process that should be used in market
opportunity identification and marketing execution.
The STP Process Framework
Market Definition
1. Define market.
Segmentation
1. Group customers into internally homogeneous clusters according
to the basis selected (e.g., attitudes, purchase propensities, usage,
media habits, etc.).
2. Describe or profile segment characteristics.
Targeting
1. Evaluate segments according to normative criteria such as
organizational goals and resources, and the environmental and
competitive forces.
2. Rank all segments according to the fit with these criteria.
3. Select one or more segments to target.
Positioning
1. Identify positioning alternatives for each segment, given customer
needs and competitive positions.
2. Select desirable positioning in the context of overall corporate
goals.
Design and Implement Marketing Program
1. Design all elements of the marketing program to be consistent with
the positioning strategy.
2. Implement marketing program.
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Source: Adopted from Bagozzi, Rosa, Celly, and Coronel (1998)
MARKET SEGMENTATION BASES IN B2C MARKETS
The starting point for market segmentation is to identify what variables to use to
group customers within the defined market. More than one variable may be required
to develop segments that are meaningful for marketing actions.
Table 1 provides a listing of commonly used variables for consumer market
segmentation.
There are four primary categories: demographic, geographic,
psychographic, and behavioral.
Examples of Segmentation Variables
Segmentation
Variables
Example
Demographic
Population
<20,000; 20,000-99,999; 100,000-249,999; >250,000
Age
<18; 18-20; 21-25; 26-30; 31-35; 36-40; >40
Gender
Male; Female
Household Income
< $30,000; $30,000-39,999; $40,000-49,999; $50,00059,999; >$60,000
Marital Status
Never married; Married; Separated; Divorced;
Widowed
Occupation
Unemployed; Student; Professional and Technical;
Managers, Officials, and Proprietors; Clerical and
Sales; Craftspeople; Forepersons; Farmers;
Homemakers; Retired
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Education Level
Grade school or less; Some High School; High School
Graduate; Some College; College Graduate
Race
Caucasian; African American; Hispanic; Asian and
Pacific Islander; Native American
Social Class
Lower lowers; Upper lowers; Lower middle; Middle;
Upper middle; Lower uppers; Upper uppers
Geographic
Region
Pacific; Mountain; West North Central; West South
Central; East North Central; East South Central; South
Atlantic; Middle Atlantic; New England
City/Metro Size
< 5,000; 5,000-19,999; 20,000-49,999; 50,000-99,999;
100,000-249,999; 250,000-499,999; 500,000-999,999;
1,000,000-4,999,999; > 5,000,000
Density
Urban; Suburban; Rural
Psychographic
Lifestyles
Attitude: Conservative vs. Liberal
VALS 2: Actualizers; Fullfilleds; Achievers;
Experiencers; Believers; Strivers; Makers; Strugglers
Personality
Compulsive; Gregarious; Authoritarian; Ambitious;
Introvert; Extrovert
Behavioral
User Status
Usage Rate
Buyer Readiness
Stage
Loyalty Status
Benefits Sought
Media Habits
Nonuser; Ex-user; Potential User; First-time User;
Regular Users
Light User; Medium User; Heavy User
Unaware; Aware; Informed; Interested; Intended; Trial
Random Switcher; Variety Seeking Switcher; Brand
Loyal; Producer Loyal; Store Loyal
Economy; Performance; Prestige; Service; Speed
TV (network, cable, premium, pay-per-view); Internet;
Magazine; Radio; Newspaper
Source: Adapted from Kotler (1997) and Bagozzi et al. (1998)
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Demographic variables
Demographic variables are probably the most commonly used segmentation bases
because these data are often readily available from national census data and other
published materials. Furthermore, many managers believe that consumer
preferences (e.g., product preferences) and behaviors (e.g., usage rate) are highly
correlated with demographic variables. For instance, upper income groups would be
more interested in buying luxury items, such as high-fashion designer clothing,
expensive vacation, or well regarded wine.
Although convenient, the validity of demographic variables as segmentation bases
should not be blindly accepted. They are useful only when they are correlated or
associated with the relevant objective function, such as purchase behavior or brand
preference. For example, the household income level might not be the most highly
correlated variable to the brand preference of Coca-Cola or Pepsi Cola. A better
choice may be geographic since Coca-Cola is known to be traditionally strong in the
South and Pepsi in the Northeast. Another example of geographical segmentation is
Kraft General Foods’ Maxwell House ground coffee that is sold nationally but
flavored regionally (i.e., stronger flavor in the West than in the East).i Obviously,
Maxwell House segmented the national market by region because it is a good
predictor of flavor preferences.
Psychographic segmentation
Psychographic segmentation is based on attitude, lifestyle, and/or personality. The
psychographic segmentation is much pursued by consumer psychologists who
wanted to explain why consumers do, feel, think the way they do. In other words, it
is an effort to understand people’s motivation, or underlying cause of behavior. For
example, the Martha Stewart Living magazine defines its audience by a consumer
lifestyle that is characterized by do-it-yourself attitude and good, affluent, suburban
tastes. The presence or absence of this do-it-yourself attitude is critical for the
lifestyle ideas Martha Stewart sells in her magazine, which is full of how-tos on
various domestic affairs such as low fat cooking, crafts, gardening, and interior
designs.
However, interesting and intuitively appealing, psychographic segmentation has
several major limitations. One danger of using “off-the-bookshelf” segmentation
schemes is that they divide the market into segments without regard to the specific
product or service. Even though a particular scheme might be valid and correctly
classify people for a general purpose, it is entirely another matter whether or not it is
useful in predicting people’s behavior in particular situations, such as the intent to
purchase Heinz ketchup! Second, often these psychological segmentation schemes
are developed based on long interviews and survey questionnaires, which present a
great challenge to obtain large scale, representative samples. Third, it takes
considerable efforts and training to develop reliable psychological measures. But,
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even with good measures, self-reported attitude and behavioral intentions tell only an
incomplete story about future consumer behavior.
Behavioral segmentation
A more successful approach in market segmentation is behavioral segmentation. It
is based on what consumers actually do, rather than what they say they will do,
think, or feel. Segmenting by user status, for example, helps marketers to analyze
how and why non-users are different from users, why ex-users stop buying the
products by comparing them to existing users, and how regular users and occasional
users differ. These are all based on actual behavior and are more reliably known
(i.e., observable) than psychological states. Many companies also use usage rate
segmentation. For example, a laundry detergent company, such as P&G, might be
interested in knowing what brand is preferred by heavy users of fabric softeners and
why. Perhaps, heavy users are more price sensitive and prefer private brands more
than light users. Benefits segmentation is based on what benefits consumers seek
from a product. It is behavioral because it is based on what is sought by consumers.
For instance, the toothpaste market can be segmented by benefits sought: cavity
prevention, social benefits (whitening, brightness, fresh breath), economy (price),
gums disease prevention, and flavor. The credit card market can be segmented by
such primary benefits as financial flexibility (credit limit), prestige (gold, platinum
cards), and acceptance (number of accepting business establishments).
SEGMENTATION IN B2B MARKETS
Yoram Wind and Richard Cardozo (1974) suggested industrial market segmentation
based on the following classifications:

Company / organization size: one of the most practical and easily
identifiable criteria, it can also be good rough indicator of the potential
business for a company. However, it needs to be combined with other factors
to draw a realistic picture.

Geographic location is equally as feasible as company size. It tells a
company a lot about culture and communication requirements. For example a
company would adopt a different bidding strategy with an Asian customer
than with an American customer. Geographic location also relates to culture,
language and business attitudes. For example, Middle Eastern, European,
North American, South American and Asian companies will all have different
sets of business standards and communication requirements.

Purchasing situation, i.e. new task, modified re-buy or straight re-buy. This
is another relatively theoretical and unused criteria in real life. As a result of
increased competition and globalisation in most established industries,
companies tend to find focus in a small number of markets, get to know the
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market well and establish long-term relationship with customers. The general
belief is, it is cheaper to keep an existing customer than to find a new one.
When this happens, the purchase criteria are more based on relationship,
trust, technology and overall cost of purchase, which dilutes the importance of
this criteria.

Benefit segmentation: The product’s economic value to the customer (Hutt &
Speh, 2001), which is one of the more helpful criteria in some industries. It
“recognises that customers buy the same products for different reasons, and
place different values on particular product features. (Webster, 1991) For
example, the access control industry markets the same products for two
different value sets: Banks, factories and airports install them for security
reasons, i.e. to protect their assets against. However, sports stadiums,
concert arenas and the London Underground installs similar equipment in
order to generate revenue and/or cut costs by eliminating manual tickethandling.

Type of institution, e.g. banks would require designer furniture for their
customers while government departments would suffice with functional and
durable sets. Hospitals would require higher hygiene criteria while buying
office equipment than utilities. And airport terminals would need different
degrees of access control and security monitoring than shopping centres.
ADVANTAGES OF MARKET SEGMENTATION
Why Segment Your Market?
Companies must work harder to ensure that their marketing has the greatest impact
possible.
Increasing competition makes it difficult for a mass marketing strategy to succeed.
Customers are becoming more diversified and firms are constantly differentiating
their products relative to competitors.
When the focus is on segmented markets, the company's marketing can better
match the needs of that group. Market segmentation allows firms to focus their
resources more effectively, and with a greater chance of success. Marketing, product
and brand managers are continuously being asked to increase their return on
investment. They're constantly searching for new information about their markets,
and new ways to approach them.
TARGETING
“A target market consist of a set of buyers who share common needs for
characteristics that the company decides serve”. (KotlerandArmstrong2004,
p.251)
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Once segmentation variables are chosen and segments are identified, how can a
manager evaluate a market to target? For the manager to answer this question,
Kotler (1997) provides five noteworthy criteria as requirements for useful market
taregeting:

Measurable: The size, purchasing power, and characteristics of the segments
can be measured.
 Substantial: The segments are large and profitability potential is good enough to
serve. A market segment should be the largest possible homogeneous subset of
market, yet worth going after with a tailored marketing effort.
 Accessible: The segment can be effectively reached and served.
 Differentiable: The segments are distinguishable and respond differently to
different marketing stimuli and programs (i.e., product, price, promotion, and
distribution).
 Actionable: Effective marketing programs can be formulated for attracting and
serving the segments.
There are four targeting approaches in practice.
1.
2.
3.
4.
Mass marketing
Differentiation marketing
Niche marketing
Localised marketing
Mass marketing
Mass marketing -- also called undifferentiated marketing -- casts a wide net.
Companies use mass marketing to promote a single product or service to as many
people as possible without differentiating how various segments of the market might
respond. For example, a fast-food chain might offer the same hamburger promotion
at all of its franchises to create a demand for its new product. The disadvantage of
mass marketing is its limited appeal. Consumers don’t all think alike, so what works
well in one geographic region or for one demographic might not work well for others.
For example, a hamburger promotion might be a hit in college towns but founder in
well-off suburbs.
Differentiated marketing
Differentiated marketing remedies this problem by targeting various market
segments with different campaigns. For example, a fast-food chain might offer the
hamburger promotion to franchises in college towns while marketing a more healthconscious product -- such as a selection of fresh salads -- to franchises in well-off
suburbs.The disadvantage of differentiated marketing is the increased cost of
running multiple advertising campaigns. Each campaign might require separate
products, packaging, promotional literature and radio and television spots. For
companies with sizable budgets, differentiated marketing allows them to compete
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effectively. But small businesses might have a tough time running multiple
campaigns.
Niche marketing
Small businesses often use niche, or concentrated, marketing to narrow the scope of
their campaign to a specific demographic. It’s an effective way to satisfy the specific
needs of a subset of the market. For example, a campaign might promote a product
specifically designed for newlyweds. Highly concentrated campaigns are called
micromarketing. A hair salon, for example, might buy advertising space in a local
magazine that caters to women of a specific age group. Some businesses, such as
car dealerships, target individual clients with personalized campaigns.
Micromarketing avoids wasting advertising dollars on consumers who are unlikely to
use your product or service, but its narrow focus limits your exposure.
Localised Marketing
Kotler, 2009 describes how a localised marketing strategies advantages are that
there is a more direct and simplified approach to pleasing a smaller (local) market.
Using a localised strategy, a marketer has less concern about language barriers, due
to the fact that they will be marketing in the spoken languages, the only acceptations
would be people living in that market area who do not speak the spoken language.
Cultural issues would be a much smaller hurdle than marketing globally as the
culture divides will be on a lot smaller scale.
Most marketing activities will be more successful when adapted to local conditions
and circumstances in the marketplace. In this way a pure global marketing strategy
is not ideal as it does not take locally related issues into account. Marketers need to
understand how their brand is meeting the needs of customers and how successful
their marketing efforts are in individual countries (Kotler, 2009).
POSITIONING
“Positioning is a choice of target market in which a company wishes to
compete on differential advantage”. (Jobber2007)
Positioning refers to how a firm communicates the essential benefits of its l business
to potential customers. Where the firm sells the product, how they make it, where
they make it and how it prices all convey subtle messages to the marketplace, even
without using any overt advertising, public relations or promotions.
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Positioning on Low Price
Some companies position themselves as affordable options for consumers by selling
low-priced goods. This may require a corresponding decrease in quality, such as a
restaurant spending less on interior design or a car manufacturer offering fewer
standard options, such as leather seats. An example of this low-price strategy is the
99-cent menus offered by many fast-food chains. Consumers know they can get a
sandwich, side and drink for less than $5.00. This strategy works only if your
potential customer is looking for affordability.
Positioning on High Price
Some companies price their products or services higher than their competition to
create a perceived value. Consumers wonder why a particular company is able to
sell its product for more or why their fellow consumers are willing to pay more for the
product. In the end, they may believe that the higher-priced product or service is
worth more. An example of this strategy is a personal trainer who charges $10 per
hour more than the other trainers in his town
Positioning on Distribution
Where you sell your product says much about its quality. Tennis and golf equipment
manufacturers position certain models in their line as higher quality by selling them
only in pro shops or specialty stores. Because these rackets and clubs are not
available at Gamestores or Target, the public may believe these are the top-of-theline models and desire them more.
Conclusion
Market definition and segmentation are the foundation of business strategy.
Businesses cannot be started, maintained, or grown without defining what market
they are in and to which customer group(s) they can deliver superior value. This
simple logic is often taken lightly perhaps because it is too obvious. Unfortunately so
many organizations, large or small, do not systematically approach these important
questions or truncate the process and end up with a segmentation scheme that is
largely a biased intuition
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