What is Market Segmentation?
It may be defined as a process of splitting or dividing potential customers into certain groups or segments sharing similar levels of needs. The definition explains that the process is simply a division of markets into target groups. It is creating sub-sets of a market based on similar characteristics of consumers with similar demands and providing them with a product to satisfy their need in a much better way than it could have been otherwise. In this article, we explain the importance of the concept giving examples wherever necessary.
Why Market Segmentation?
Do we need to segment the Market? Marketing may be based on broad markets or small sub-segments. Mass marketing is the process or strategy to use the same marketing channels for all consumers without identifying the needs of a specific group of people. Mass marketing strategy employs mass promotion, mass production and mass distribution in the same way for mass consumers. In the past, companies have used mass marketing to achieve the economies of scale. However, times have changed, and it is almost impossible to create products to appeal to the entire market. Pursuing this strategy, several companies have lost their market leadership or a considerable chunk of their market share. An example would be Ford Motors when they offered T Model to all buyers "in any color as long as it is black." This is why there is a need of market strategy based on specific groups of customers as buyers’ needs are different; they cannot be satisfied the same way. The division of markets into various sub groups on the basis of several variables will more closely match particular needs of a particular group of consumers.
Bases for Market Segmentation
Markets may be divided into several sub-markets on several bases. We will discuss the most general and popular variables here.
1. Geographic Segmentation
A market segmented into sub-markets on the basis of geographic location is known as Geographic Segmentation. Examples of such division are nations, states, regions, provinces, districts, counties, cities or even neighbourhoods. An international firm may divide its market on the basis of nations and then move further down to the level of cities and neighbourhoods. A national company may start with at the level of counties/regions and move down to cities and other sub-levels. Geographic segmentation is important as there are many factors contributing to the varying needs of consumers across different regions of the world. What is considered as a need in the US may be a luxury in Singapore. What is a luxury in India may be something redundant or useless in the UK. The customer needs and wants, the ways and means to satisfy them may be entirely different in one country from those who in another.
2. Demographic Segmentation
A market split into sub-segments on the basis of variables such as age, gender, sex, family, income, education, religion, culture, occupation, profession, ethnicity etc is known as demographic segmentation. To make it simpler, it is the division of market on the basis of demographics. We will discuss each variable briefly here.
This is one of the most effective ways of demographic segmentation. Modern firms use this as a very useful marketing tactic to create and retain their customers right from birth to death. At the age of 1 to 2, firm shall try to offer stuff like nappies for new born, baby cream, anti colic, baby clothes etc. With the passage of time, these may change to toys ( a lot of sub-division) then bikes, balls, sport, jeans, school, then college, then University, car, insurance, employment, then retirement, pension and even death (funeral services!)
McDonald's different ads and media campaigns target people of different ages such as children, teens, adults and senior citizen. Insurance companies announce special packages and offers for people over certain age. Theme Parks offer kids and infants deals.
The multi-cultural societies’ potential customers may all be located in the same geographic location but their needs and wants and ways to satisfy these needs and wants are different. Companies have successfully segmented their markets on ethnic basis all over the world in areas where the demand needs to be met that way. HFA (Halal Monitoring Authority) in the UK makes sure that Muslim consumers are provided Halal foods (food that is processed, or meat that is obtained and sold in the market per Islamic regulations of slaughtering). HMC (the Halal Monitoring Committee) in the UK even goes a step further by providing halal meat only to specific grocery stores after these shop meet very strict and stringent.
Indian restaurants and clothes shops around Europe and America are some of the best examples of Market Segmentation based on ethnic grounds.
Gender segmentation is another powerful and successful segmentation and can be seen in areas like clothing, cosmetics, beauty products, hair styles, careers, cars, insurance and now even education. Perfume companies target men and women separately with their various model and brands. Sheila's Insurance provides insurance only to women while other companies specifically target only the young drivers (who may have just recently passed their driving tests). Girls like pink bags while boys may go for blues or blacks. Subtleties do make difference. There are several separate male and female schools. Again in Europe, schools for girls only have successfully targeted the part of the ethnic population who are averse to co-education. Car designers know that subtleties make difference, so Nissan's Micra and Mini Cooper have special attractions for ladies.
There is a huge scope of demographic segmentation and is not limited to age, ethnicity and gender only. Other bases for this type of segmentation are like Life Cycle Stage, Income groups, sexual orientations, family size, education and many others.
3. Psychographic Segmentation
Life style, social class and personality may the basis for psychographic segmenting of markets. Examples of life styles segments would be people drinking decaf coffee or tea, weight watchers, seekers of less fatty food. Products based on life styles may be highly customised to appeal to a particular way of life. Younger people’s life-style requirements may be a great deal different than of those who are above their age group.
Examples of social class segments are holdiays, hotels and air travel tickets targeting people of a particular class.
The consumer in psychographic segmentation may have the same income level and gender but they may have different inclinations and a unique style of living. They may have different personalities determining their likes and dislikes for a particular class of products.
4. Behavioural Segmentation
Behavioural segmentation is based on the variables of the actual behaviour of the consumer. For instance, some users may be classed as heavy users while others as light users. Some may be just first time user while other are occasional users only. To summarise the behavioural segment may consist of the following variables.
Attitude towards product
Readiness to buy
5. Other Variables
Marketers have even further dug the subject and provided some other variables. Briefly these are:
Industrial (Business) Market Segmentation
Industrial Market Segmentation is division of the Market on Business or industry basis. This kind of division occurs in Business to Business Marketing. B2B Segments may have the following variables. These may be used as additional variables along with B2C segmenting as discussed above.
Advantages and Benefits of Market Segmentation
Following are some of the benefits as cited in leading marketing books.
1. Customer needs
It is easier to understand the exact needs of the customer and target the marketing strategy at a particular group. It is much easier and more successful to create and promote specific and customised products and services.
2. Profit Potential
Mass marketing is a strategy of the past. Target marketing and positioning creates new potential customers and new ideas for new products and services. Companies can create better products and hence maximise their potential profit.
Segmenting the markets creates further opportunities for business growth. Specific groups require specific products.
4. Retaining Customer
It is a great way to retain customers. Firms can establish a life-long relationship with their consumers via formulating an effective market segmenting strategy.
5. Right Target Market
The company's resources are utilized for producing the right product for the right customer.
6. Market Share
Segmenting business and consumer markets is important to maintain existing market share and expand it. A successful company needs to gain competitive advantage by looking closely at the specific needs of customers and devising strategies to provide maximum benefit and value.
Considerations and Pre-requisites
Before jumping into a segment, it is important to understand a few important features of that particular market.
The market must be identifiable. It is important to identify the market and its potential. The plan must identify the goals and objectives.
The segment must be accessible so that various marketing channels can reach it such as communication, distribution etc.
It should be large enough to save the company's resources saved from being wasted.
4. Unique Needs
This is, perhaps, the most important of the requirements. By its very definition, segmenting is necessary because of the customer's unique need. If a market segment does not justify a unique offering, there is no need to open a new area.
It refers to the stability of the segment. The more durable the segment is, the lesser the cost of production. Instability due to frequent changes produces negative impact.
Positioning Versus Segmentation
"Positioning is not what you do to a product; it is what you do to the mind of a prospect." Ries and Trout (1972). So positioning is basically identification of a market niche and utilization of marketing strategies to create a mental impression about the brand. Segmentation is the process of separating customers while positioning is providing those customers the right product at the right time.
Limitations (Disadvantages) of MS
Market segmentation has its own limitations and marketers have pointed certain disadvantages.
1. No highly customised product. Only group served not individuals.
2. No link to competitive advantage
3. Lack of suitable process
Others have identified limitations such as:
Infrastructure Barrier: The firm may not have suitable infrastructure to make the right product. This may result in loss of profits, market share, failures etc.
The process of creating segments may not be followed correctly or the segments may not be created at all.
The company fails to implement the market segmentation strategy.