MK0012-Unit-08-Retail Market Segmentation

Unit-08-Retail Market Segmentation

Structure
8.1 Introduction

Objectives

8.2 Importance of Market Segmentation in Retail

8.3 Criteria for Effective Segmentation

8.4 Dimensions of Segmentation

Geographic segmentation

Geo-demographic segmentation

Demographic segmentation

Psychographics segmentation

Behaviouristic segmentation

Demographic-psychographics segmentation (Hybrid approach)

8.5 Limitations of Market Segmentation

8.6 Summary

8.7 Terminal Questions

8.8 Answers

8.1 Introduction

The retail marketing strategies and retail promotions, which you have already studied, are
directed towards specific group of customers, known as market segments. The concept of
market segmentation emerged as an extension of the marketing concept in the latter part of
1950s. It is based on the simple observation that all the existing and potential consumers are
not alike: there are significant differences in their needs, wants, tastes, background, income,
education and experience, etc., and these characteristics change over time with lifestyle
changes. Had they been alike, it would have eliminated the need to have different variations
of the same basic product and one promotional campaign is all that would have been needed.
For example, there would have been only one type of soap, one detergent, one car, one
computer, one washing machine and so on.
Objectives
After studying this unit, you should be able to:

· Explain the importance of market segmentation

· Discuss the criteria for effective segmentation

· Identify the dimensions for market segmentation

· State the limitations of market segmentation

8.2 Importance of Market Segmentation in Retail

A market segment is a portion of a larger market in which the individuals, groups, or

organisations share one or more characteristics that cause them to have relatively similar
product needs.

Segmentation studies are used to uncover needs and wants of specific groups of consumers for
whom the marketer develops especially suitable products and services to satisfy their needs.

Marketers also use these studies to guide them in redesigning, repositioning, or targeting new
segments for the existing product. For example, the heavy user adult market has been
targeted for Johnson baby shampoo. For sensitive skins, Dove has come out with a variant,
Dove Gentle Exfoliating Bar (it has a pH range of 6.5 - 7.5, almost neutral, neither acidic nor
alkaline).

Segmentation studies help in identifying the most appropriate media for promotional
messages. Almost all media vehicles use segmentation studies to determine the characteristics
of their audience and publish their findings to attract marketers seeking a similar audience.

Segmentation is an important input to marketing planning because it can be used to formulate

company "product-market" objectives, by which the enterprise may: define its markets,
position ranges of brands and product varieties, identify gaps which offer significant
opportunities for expansion or new product positioning and rationalize policies for existing
brands, products and mixes.

Market segmentation plays a dual role, namely as a marketing tool, and as a basic input to
business planning. There are three main reasons for the importance of market segmentation.
These are:

· Market fragmentation: it is caused by demographic and lifestyle changes, new product and
process developments and intense market competition/some markets, which once had a
homogeneous character, has now split into a variety of consumer groups, each with different
tastes and preferences.

· The development of retailer power: with this, the relative advantage obtained from bulk
buying, the use of retailers’ brands, and policy limitations on the merchandise stocked, all
combined to put the manufacturer or supplier at a disadvantage. At the same time
concentration has occurred amongst retail companies, leaving a small number of very large
companies as well as a large number of smaller retailers.

· The volume trap: this situation occurs when suppliers who are capable of volume production
and distribution to retail multiple chains dominate the markets for commodity type products
(like plant-baked bread). But to avoid this situation, marketers can use segmentation. For
example, value-added or non-standard items are now frequently targeted on customer
segments which seek to avoid the purchase of standardized products, whether these are
foodstuffs, clothes, computers or industrial machinery. Alternatively, production arrangements
may be designed to be flexible enough to supply target markets in a large number of relatively
small and specialized niches, such as in the market for industrial or aviation control systems.

8.2.1 Marketing complex

Marketing departments use segmentation so they can target their products more accurately. It
affects each of the 4Ps in their marketing mix. If the product is effectively segmented a
company will be able to promote the right product, at the right price and use the right
distribution to reach the place where the consumers are. Now look at the way the 4Ps are used
in market segmentation.

Product

Companies produce a wide range of products or variations that is meant for different groups or
segments. For example, a car manufacturer will often have a range that includes a family
model, an executive model and a sports model. Lifestyle segmentation will be used to develop
their product line and to target their products.

Price

There are obvoius linkages between price and quality, but not all customers can afford to buy
the most expensive goods. There is a large range of televisions on the market, for example,
each with slightly different features. Within this range of products, there will also be a range
of prices to cater for varying disposable incomes.

Promotion

Studying how a product is advertised can reveal its target market. Recently Nokia, a leading
mobile phone company, used advertising campaigns that varied for men and women. The male
phone was pictured in black and white, and all its features and business applications
described. The female phone was in bright colors, and was pictured as a matching accessory to
go with a woman’s lipstick and handbag. You may not agree with this stereotyping, but it is a
good example of gender segmentation.

Place

It is very important for firm to know where its target market is. A producer of automobile
parts needs to identify areas where automobile companies are located. The firm would have to
consider how best to get its product to these areas.

Self Assessment Questions

1. Segmentation often plays a dual role, one as a marketing tool and another as a basic input
to ____________ .

2. Market fragmentation is usually caused by _________ and __________ changes.

8.3 Criteria for Effective Segmentation

Marketing managers should ensure that the segmentation passes through six criteria based acid
tests. As a student of marketing, you need to understand what makes a good segmentation so
that in the event of doing segmentation in your workplace, you can test your decisions on
these grounds. These six criteria include identity; accessibility, responsiveness, size,
measurability and nature of demand.

1. Identity: The marketing manager must have some means of identifying members of the
segment – i.e. some basis for classifying an individual as being or not being a member of the
segment. There must be clear differences between segments. Members of such segments can
be readily identified by common characteristics, and display similar behavior.

2. Accessibility: It must be possible to reach the different segments in regard to both

promotion and distribution. In other words, the organization must be able to focus its
marketing efforts on the chosen segment. Segments must be accessible in two senses. First,
firms must be able to make them aware of products or services. Second, they must get these
products to them through the distribution system at a reasonable cost.

3. Responsiveness: A clearly defined segment must react to changes in any of the elements of
the marketing mix. For example, if a particular segment is defined as being cost-conscious, it
should react negatively to price rises. If it does not, this is an indication that the segment
needs to be redefined.

4. Size: The segment must be reasonably large to be a profitable target. It depends upon the
number of people in it and their purchasing power. For example, makers of luxury goods may
appeal to small but wealthy target markets whereas makers of cheap consumption goods may
sell to the large number of persons who are relatively poor. The idea is that enough potential
buyers must exist to cover the costs of production and marketing required in that segment.
This is often called as substantiality.

5. Nature of Demand: It refers to the different quantities demanded by various segments.

Segmentation is required only if there are market differentiation in terms of demand. The
marketing manager should not only be able to find out the total demand but also the
differences in demand patterns in each of these segments.

6. Measurability: The purpose of segmentation is to measure the changing behavioral pattern

of consumers. For example, the segment of a market for a car is determined by a number of
considerations, such as economy, status, quality, safety, comforts etc.

Self Assessment Questions

3. The members of a particular segment should posses some _________ features.

4. A segments accessibility is defined in terms of _________ and _________.

8.4 Dimensions of Segmentation

Markets are complex entities that can be segmented in a variety of ways. It is an important
issue to find an appropriate segmentation scheme that will facilitate target-marketing,
product positioning, and developing successful marketing strategies and action programmes.

A segmentation variable is a characteristic of individuals, groups or organisations that

marketers use to divide and create segments of the total market. One approach to
segmentation is on “a priority” basis. In this case, the marketer may assume that differences
must exist among heavy users and light or medium users of a product category. Segmentation
descriptors fall under four major categories and include geographic variables, demographic
variables, psychographic variables, and behaviouristic variables.

· Geographic variables focus on where the customers are located.

· Demographic variables identify who the target customers are.

· Psychographic variables refer to lifestyle and values.

Behaviouristic variables identify benefits customers seek, and product usage rates.
Before collecting any data on the market, the basis for segmentation is analysed. The
marketer can also assume that dual-income households are growing in urban areas and then
develop a programme for this segment.

Selecting the right segmentation variable is critical. For example, small car producers might
segment the market on the basis of income but they probably would not segment it on the
basis of political beliefs or religion because political leanings or religious beliefs do not
normally influence consumers’ automobile needs. Segmentation variable must also be
measurable to segment the market accurately. For example, segmenting the market on the
basis of intelligence would be difficult because this characteristic cannot be measured
accurately. Marketers can use one or more variables to segment the market. Different
variables are used to segment consumer markets. Broadly speaking, segmentation variables fall
under two categories: consumer characteristics or consumer responses. The most popular
bases for market segmentation include geographic factors, demographic factors, psychological
characteristics, social/cultural variables; use related factors, use situation variables, benefits
sought and combination of several segmentation bases called hybrid formats, such as
demographic/psychographic profiles, geo-demographic variables, values and lifestyles. Table
8.1 lists the variables that can be used to segment the market.

Table 8.1: Segmentation Variables

The subsequent sub-sections discuss various bases for market segmentation.

8.4.1 Geographic segmentation

Geographic segmentation focuses on dividing markets into different geographic units, such as
regions, nations, states, urban, rural, etc. Customers located in different geographic areas
vary in terms of climates, terrain, natural resources, population density, culture, service
needs, sales potential, growth rates, competitive structure of the market, frequency of
purchases for a variety of goods and services. For example, Jeeps are more popular in rural
areas in India than in urban areas. Shopping malls are located only in larger cities in India, and
raincoats are sold more in rainy areas. Geographic segmentation is used both in consumer and
organisational markets, particularly where customers are not willing to travel far to acquire
goods and services.

8.4.2 Geo-demographic segmentation

Many segmentation approaches involve both geographic and demographic descriptors.

This approach is based on the premise that people who live close to one another are likely to
have similar economic status, tastes, preferences, lifestyles and consumption behaviour. Geo-
demographic segmentation is particularly useful when a marketer is capable of isolating its
prospects with similar personalities, goals, interests, and in terms of where they live. For
products, and services used by a wide cross-section of society, this approach may not be
suitable. For example, some retailers who propose to open new stores are interested in
knowing something about the people who live within a defined area whom they aim to attract.

8.4.3 Demographic segmentation

Demographic characteristics are commonly used to segment the market. Factors such as age,
sex, education, income, marital status, household life cycle, family size, social class, etc., are
used singly, or in a combination, to segment a market. Shaving products for women are based
on the demographic variable of gender. Toy manufacturers such as Funskool and Mattel Toys
segment the market on the basis of age of children. Auto manufacturers segment the market
by considering income as an important variable. Producers of refrigerators, washing machines,
microwave ovens etc., take income and family size as important variables in segmenting the
market. Ready-to-wear garment producers often segment the market on the basis of social
class. Examples are Chirag Din, Arrow, Van Heusen, Louis Philippe, Levis and others. In
general, the social class can represent lower, middle and upper class depending on education,
income, status, etc. For example, an engineer and a clerk are considered as members of
different social classes. Figure 8.1 depicts the classification of the Indian population in a
pyramid form

Figure 8.1 Socio-economic Pyramid of Indian Population

8.4.4 Psychographics segmentation

When segmentation is based on personality or lifestyle characteristics, it is called

psychographic segmentation. Consumers have a certain self-image and this describes their
personality. There are people who are ambitious, confident, aggressive, impulsive,
conservative, modern, gregarious, loners, extrovert, introvert, etc. Some motorcycle
manufacturers segment the market on the basis of personality variables such as macho image,
independent and impulsive. Some producers of liquor, cigarettes, apparel, etc., segment the
market on the basis of personality and self-image. Marketers, are often not concerned about
measuring how many people have the characteristic as they assume that a substantial number
of consumers in the market either have the characteristic or want to have it.

Lifestyle: It is an indicator of how people live and spend their time and money. What people
do in their spare time is often a good indicator of their lifestyle. For example, John L.
Lastovicka, John P. Murray, Erich A. Joachimsthaler, Gaurav Bhalla and Jim Sheurich in their
study, were identified two lifestyle segments that were most likely to drink and drive: good
timers and problem kids. Good timers are partygoers, macho and high on sensation seeking.
Problem Kids frequently display troublesome behaviours. According to Morris B. Holbrook,
people who have an affinity for nostalgia, or the desire for old things, also represent a lifestyle
segment and can be a key market for old movies, antiques and books. Surfing on the Internet
has also created a new type of lifestyle. Another study by Rebecca Piirto of fashion consumers
found six major groups: yesteryears (older consumers), power purchasers (married households
with college degree), fashion foregoers, social strivers, dutifuls (highly practical) and
progressive patrons (high-income/quality buyers). Consumers in different countries and
cultures may have characteristic lifestyles.For example, Indian women are home focused, less
likely to visit restaurants, more price-sensitive, spend time preparing meals at home and fond
of movies.

AIO inventories are useful additions to demographic data but marketers have found the original
AIO inventories as being too narrow. Now, psychographics or lifestyle studies generally include
the following:

· Attitudes include evaluative statements about people, products, ideas, places, etc.

· Values refer to widely held beliefs about what is right/acceptable/desirable, etc.

· Activities and interests cover behaviours with respect to activities other than occupation to
which consumers devote time and effort, such as hobbies, interests, social service, etc.

· Demographics cover gender, age, education, occupation, income, family size, geographic
location, etc.

· Media preferences describe which specific media the consumers prefer to use.

· Usage rate focuses on measurements of consumption level within a particular product

category and is generally recorded as heavy, medium, light, or non-user.

Table 8.2 lists various lifestyle dimensions that are of interest to the marketers.

Table 8.2: Lifestyle Dimensions

The sample size is often 500 or more individuals who provide this information and are placed
in groups whose members have similar response patterns. According to F. W. Gilbert and W. E.
Warren, most studies use the first two or three dimensions mentioned above to group
individuals. The use of other dimensions provides more complete profiling of each group.

Generally, the AIO measurements are product or activity specific. For example, W. A.
Kamakura and M. Wedel have reported a study related to fashion clothing which included 40
statements and respondents reported their degree of agreement or disagreement. Five of the
statements are mentioned here:
· I like parties with music and chatting.

· I like clothes with a touch of sensuality.

· I choose clothes that match my age.

· No matter where I go, I dress the way I want to.

· I think I spend more time than I should on fashion.

In this study, statements relevant to activities and demographics were also included. General
lifestyle studies can be used to spot new product opportunities, while product specific lifestyle
analysis may help repositioning decisions regarding existing brands.

The VALS (Values and Lifestyles)

Stanford Research Institute (SRI) developed a popular approach to psychographics

segmentation called VALS (Values and Lifestyles). This segmented consumers according to their
values and lifestyles in USA. Researchers faced some problems with this method and SRI
developed the VALS2 programme in 1978 and significantly revised it in 1989. VALS2 puts less
emphasis on activities and interests and more on a psychological base to tap relatively
enduring attitudes and values. To measure it, respondents are given 42 statements with which
they are required to state a degree of agreement or disagreement. Some examples of the
statements are:

· I am often interested in theories.

· I often crave excitement.

· I liked most of the subjects I studied in school.

· I like working with carpentry and mechanical tools.

· I must admit that I like to show off.

· I have little desire to see the world.

· I like being in charge of a group.

· I hate getting grease and oil on my hands.

VALS2 has two dimensions. The first dimension, self-orientation, determines the type of goals
and behaviours that individuals will pursue, and refers to pattern of attitudes and activities
which help individuals reinforce, sustain, or modify their social self-image. This is a
fundamental human need. The second dimension – resources – reflects the ability of individuals
to pursue their dominant self-orientation that includes the full range of physical,
psychological, demographic and material means such as self-confidence, interpersonal skills,
inventiveness, intelligence, eagerness to buy, money, position, education, etc. The questions
above are designed to classify respondents based on their self-orientation. Stanford Research
Institute (SRI) has identified three basic self-orientations:

· Principle-oriented individuals are guided in their choices by their beliefs and principles and
not by feelings, desires and events.

· Status-oriented individuals are heavily influenced by actions, approval and opinions of others.
· Action-oriented individuals desire physical and social activity, variety and risk taking. Based
on the concepts of self-orientation and resources, Values and Lifestyle typology breaks
consumers into eight groups. VALS2 suggests that a consumer purchases certain products and
services because the individual is a specific type of person. The purchase is believed to reflect
a consumer’s lifestyle, which is a function of self-orientation and resources. People with most
resources are at the top and the ones with least resources are at the bottom of this typology.
Each of the eight groups exhibits a distinctive behaviour, decision-making approach and
product or media usage attributes. VALS2 represents an interconnected network of segments,
which means that adjoining segments have many similar characteristics and can be combined
to suit particular marketing objectives.

8.4.5 Behaviouristic segmentation

Dividing the market on the basis of such variables as use occasion, benefits sought, user status,
usage rate, loyalty status, buyer readiness stage and attitude is termed as behaviouristic
segmentation.

Buyers can be identified according to the use occasion when they develop a need and purchase
or use a product. For example, Archies greeting cards are used on many different occasions.
User status, such as non-users, potential users, or first time users can be used to segment the
market. Markets can also be segmented into light, medium, or heavy users of a product. Brand
loyalty of varying degree can be presented among different groups of consumers and may
become the basis to segment the market. There are consumers, who are very loyal to cigarette
brands, beer and even toothpaste. Markets may also be divided on an imaginary Likert-type
scale by considering level of product awareness such as unaware of the product, aware,
interested, desirous, or contemplating to purchase the product. Based on attitude, consumers
may be enthusiastic, indifferent, or hostile towards the product, and these differences can be
used to segment the market.

Benefit Segmentation: By purchasing and using products, consumers are trying to satisfy
specific needs and wants. In essence, they look for products that provide specific benefits to
them. Identifying consumer groups looking for specific benefits from the use of a product or
service is known as benefit segmentation and is widely used by marketers. For example, there
are distinct groups of auto buyers. One group might be more interested in economy, the other
in safety and still other in status.

Segmentation bases, such as demographics are descriptive. These variables are useful but do
not consider why consumers buy a product. Benefit segmentation has the potential to divide
markets according to why consumers buy a product. Benefits sought by consumers are more
likely to determine purchase behaviour than are descriptive characteristics.

Marketers should also appreciate that many benefits sought by consumers are subject to
change with changing technologies, changing social values and competitive offers. This
requires that marketers must constantly reassess benefit segments. The present scenario in
the computer market is an example. With the introduction of faster and better products, the
benefits consumers seek, are constantly changing. Benefit segmentation can be seen in the
toothpaste market; fresh breath, decay prevention and whiter teeth are some examples and
the leading brands involved are Colgate Total, Close-Up and Promise. Table 8.3 presents the
benefit segmentation of the toothpaste market.

Table 8.3: Benefit Segmentation of Toothpaste Market

8.4.6 Demographic-psychographics segmentation (Hybrid pproach)

Demographic and psychographic profiles work best when combined together because combined
characteristics reveal very important information about target markets. Demographic-
psychographics information is particularly useful in creating consumer profiles and audience
profiles. Combined demographic-psychographic profiles reveal important information for
segmenting mass markets, provide meaningful direction as to which type of promotional
appeals are best suited and selecting the right kind of advertising media that is most likely to
reach the target market.

Self Assessment Questions

5. ___________ variables of market segmentation focuses on lifestyle and values of the
customers.

6. ___________ segmentation can be used effectively when the marketers can identify the
prospects in terms of the goals and interests and their location.

7. What people do in their past time and how they live their life can be good indicators while
segmenting the markets based on behavior. (True/False)

8. The evaluative statements about a product, place or idea reflects the attitude of the
person. (True/False)

9. Principal-oriented individuals are guided by the rational benefits and not by feelings and
desire. (True/False)

10. Benefit segmentation is a descriptive method of market segmentation. (True/False)

8.5 Limitations of Market Segmentation

Market segmentation has certain limitations too. Some of them are as follows:
· Targeting multiple segments increases marketing costs.

· Segmentation can lead to proliferation of products.

· Narrowly segmenting a market can hamper the development of broad-brand equity.

Self assessment questions

11. Segmenting a market is always a good option. (True/False)

12. Wrong segmentation has adverse effects on store’s brand equity. (True/False)

8.6 Summary

The concept of market segmentation is based on the fact that all consumers are not alike.
They differ in their needs, wants, desires, income, education, lifestyles and so on.

Market segmentation is the process of dividing the heterogeneous market into relatively
homogenous sub-groups of consumers with somewhat similar characteristics.

When a marketer selects one of more segments and develops a distinct marketing programme
to accomplish marketing objectives, it is called target marketing. There are certain conditions
that must exist for segmentation to be meaningful. Many approaches are used for segmenting
the market.

Some of the popular bases for segmentation are geographic, demographic, psychographic and
behavioural. Other specific approaches have been used and found to be quite effective, such
as segmentation based on lifestyles.

Lifestyle approach is based on studying how consumers spend their spare time, what they
consider important in their surroundings, what are their beliefs on broad issues and their self
image. Such data is generally combined with demographic variables to furnish a clearer picture
about consumers.

The marketer generally has options either to adopt undifferentiated marketing, differentiated
marketing, or concentrated marketing.

Glossary
Market Segmentation: creating groups or sets of people based on common characteristics and
homogeneous needs

Market Fragmentation: emergence of new segments (in a previously homogeneous market)

which have their own distinct needs, requirements, and preferences

Geo-demographic Segmentation: segmentation on the basis of both, geography and

demography of the population

Psychographic Segmentation: segmentation based on personality or lifestyle characteristics

of the customers

Benefit Segmentation: segmentation based on differences in specific benefits different groups

of consumers look-for in a product

8.7 Terminal Questions

1. What is segmentation? What are its benefits?

2. Why has segmentation gained importance in recent years?

3. Discuss the criteria for effective segmentation.

4. When can demographic and benefit segmentation be used to maximum efficiency?

5. Write a short note on- psychographic segmentation.

8.8 Answers

Answers to Self Assessment Questions

1. Business Planning

2. Demographic, Lifestyle

3. Common

4. Promotion, distribution

5. Psychological

6. Geo-demographic

7. False

8. True

9. True

10. False

11. False

12. True

Answers to Terminal Questions

1. Refer to 8.2 – Segmentation involves grouping people with similar needs and characteristics.
It plays a dual role- as a marketing tool and as input in business planning.

2. Refer to 8.2 – In face of growing competition and changing customer profiles, segmentation
helps in promoting the right products to right set of people.

3. Refer to 8.3 – The criteria for effective segmentation include identity; accessibility,
responsiveness, size, measurability and nature of demand.

4. Refer to 8.4 – Demographic segmentation can be used for any product and by any company
and benefit segmentation can be used when the product has varied uses or distinctive
features.

5. Refer to 8.4 – Psychographic segmentation is based on personality or lifestyle of the

customers.
Mini-case
Divided by Geography
Does Wal-Mart tailor its products to specific geographic markets and regions, or do they just
sell the same stuff all across the country?

They tailor their products to who the consumer is in the region. It is heard that Wal-Mart in
Colorado stock a lot more organic items than they do in say, in South Carolina. Since there are
so many stores all across the country, it is necessary to do that in order to gain the most
profit. You wouldn’t want to stock 20 snowblowers in Arizona!! But if you did that in Michigan,
it would seem more appropriate.

Sometimes the products (that are the same) at different Wal-Mart stores within the same
region have different prices. In a region, there are two Wal-Marts in the same county, yet one
has generally cheaper prices than the other because of the different neighborhoods that are
located around them. This is simply another way to target the general demographic in the area
the store is located.

Also, on a side note, Wal-Mart also has stores where it "experiments" to see if certain products,
visual displays, or policies draw customers in. If the "experiment" is successful, they will
expand it to other stores, then eventually nationwide. An example of this is the new $4
generic prescription drug plan. You can learn about this plan on their website. But basically, it
began in larger cities in Florida, then spread to the whole state, and now it has spread to other
select states.

Question

Does Wal-Mart practices too much geographic segmentation?

Hint Answer: Wal-Mart does practice geographic segmentation to a considerable extent as

evident from the case.

Source: maciowa.com