Prepared by Pramish Shakya Gurukul CA

CHAPTER-4 MARKET SEGMENTATION AND TARGETING

Coverage:
1. Meaning of market segmentation and targeting
2. Benefits of segmentation
3. Requirements for effective segmentation
4. Process of market segmentation
5. Product positioning and its steps
6. Segmentation variables for consumer markets
a) Geographic variables
b) Demographic variables
c) Psychographic variables
d) Behavioral variables
7. Segmentation variables for industrial markets
a) Geographic variables
b) Demographic variables
c) Operating variables
d) Purchase-related variables
8. Market segmentation in Nepal
9. Exam questions

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Introduction
The essence of marketing is identifying the needs and wants of consumers and satisfying them to
achieve organizational goals and earn profit. There are more than six billion people in this world
as of now, each with individual personality, likes and need. So the big question is who to focus
to provide need satisfying products? Though all of them are unique individuals, they show
similarities in their consumption pattern, lifestyle and personalities. They show similar behavior
according to their age, income, nationality, religion and demography.
In the past era, all the customers were treated as one through mass marketing. Their unique needs
were ignored. But this is the age of customized marketing where every consumer is treated
separately. A single marketing mix is not enough to cater all their need. So the customers are
categorized according to the homogeneity in their needs and wants. This creates different
heterogeneous clusters of consumers each containing customers of homogenous need. It becomes
lot more easier to the marketers to cater the market.

Meaning of market segmentation and targeting

Market segmentation is the process of categorizing the consumers into homogeneous groups
according to their need, characteristics, buying behavior, purchasing power and preferences.
Consumers show different characteristics according to their nationality, religion, culture, income,
social class, reference groups and age. Thus each segment contains consumer with similar taste,
need and preferences. This allows the marketers to create marketing strategies and marketing
mix for each segment. This process creates multiple heterogeneous segments consisting of
homogeneous customers.

The marketer realizes their core competencies and selects the best segment where they can
perform better than their competitors and can earn better profit. They focus on those groups
where they can better satisfy the needs. This selection of focus group is called targeting. Every
marketer selects the segment where they can perform better.

According to Philip Kotler “Marketing segmentation is the act of identifying and profiling
distinct groups of buyers who differ in their needs and preferences.

According to Stanton, Etzel and Walker, “Market segmentation is a process of dividing the
total market for a good or service into several smaller groups, such that the members of each
group are similar with respect to the factors that influence demand.

Segmentation and targeting goes side by side. where the market is first divided into
homogeneous segments and the best segment is targeted. A proper marketing mix is introduced
to the segment.

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Therefore segmentation implies:

 Division of total market into groups

 The group should be large enough for marketing purposes.
 The group should be homogeneous in preferences.
 The customers in a group should have similar needs and characteristics.

The segmentations can be of following types:

1. Target marketing: The market is divided into different groups according to their
homogeneity in taste and preferences and one or more segments among them are selected
as target market.
2. Niche marketing: Niche market is smaller groups with very specific need. There are
fewer consumers in market niche than in market segment but their need are special and
specific. They are ready to pay higher price to satisfy their need. Thus a special
marketing mix is tailored for each market niche.
3. Local marketing: Specific locality with similar need is selected as a segment and
specific marketing mix is created for the local market.
4. Customized marketing: Each individual is treated differently and specially tailored
marketing mix is created for each individual. Eg. Tailor made clothes, designer jewelries
etc.

Benefits of segmentation
The benefits of segmentation are:

1. Identification of market opportunities:

Segmentation allows the marketers to focus on specific group of customers to know their needs,
size, growth and profit potentials, which enables them to identify the opportunities within the
market.

2. Effective use of marketing resources:

Segmentation allows marketers to create customized marketing strategies for each segment. This
allows them to utilize their resources effectively and efficiently. They can manage their resources
as per need in each segment.

3. Competitive response
Marketers face less competition as they target the segment where there are few competitors and
where they are stronger. This enables them to dominate the segment with their marketing mix.

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4. Environmental adaptation:
Segmentation allows the marketers to understand their segments properly. This enables them to
predict and anticipate the environmental changes and their effect in their marketing strategy.
Also marketers can change their marketing mix to adapt to the changing environment and grab
opportunities within it.

5. Objective achievements:
Segmentation leads to effective marketing strategy. This allows the marketers to achieve their
organizational objectives effectively and efficiently.

Requirements for effective segmentation

Each segment must be:
1. Measurable: The segment must be measurable in terms of size, purchasing power,
demand and need. It must be quantifiable.
2. Divisible: Each segment must be divisible. They must be different from other segments.
They should react differently to each marketing mix.
3. Accessible: Each segment must be accessible for marketing activities such as
distribution, transportation, promotion, production etc. To perform their activities.
4. Substantial: Each segment must be able to generate sustainable profit for the marketer.
The income generated should be large enough to cover the cost of marketing and earn
substantial profit.
5. Actionable: The segment must be actionable for implementing marketing strategies.
There should not be any restriction to necessary marketing activities.

Process of marketing segmentation

Marketing segmentation consists of following processes to segment the consumers in the market:
1. Market survey: The process of segmentation starts by understanding the market and the
consumers. The need, taste, preferences, brand awareness, product usage pattern, desired
product attributes and consumer’s attitude toward the product are studied and identified.
2. Segment identification: Consumers are categorized into different homogeneous groups
according to their behavior, need, taste and consumption pattern. A collection of
heterogeneous groups are identified, each consisting of homogeneous consumers.
3. Segment profiling: Each identified segment is profiled according to their similarities and
dissimilarities in behavior, characteristics, demand etc. This enables the marketer to
identify each segment.
4. Segment evaluation: After identifying the segments, each segment is evaluated in terms
of their size, growth, profit, competition, technology, customer loyalty and risks. A
SWOT analysis is conducted for each segment and is environmentally scanned in order to
understand their feasibility.

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5. Segment selection: After evaluation, the best promising segment or segments are
selected to be served. The marketing strategy and marketing mix are designed for each
selected segment.
Segment selection should consider Market coverage levels (Targeting level) as under:
i) Single market coverage: The organization selects or targets one segment and
tailors a marketing mix for that specific segment.
ii) Multi- segment coverage (selective specialization): The organization selects
multiple segments and tailors multiple marketing mixes for respective segments
as per their need. This diversifies the risk and insures greater sales volume.
iii) Product specialization: The organization sells single product to multiple
segments. The marketing mix is modified for each segment.
iv) Market specialization: The organization focuses in one market and serves
multiple products in one specific market. The organization tries to build a strong
base in that market. However the organization becomes over dependent to that
market.
v) Full market coverage: The organization serves all the market segments with full
range of products. Multiple product lines are introduced to cater the need of
different consumers. The whole market becomes the target market and respective
marketing mixes are designed for each market segment.

Product positioning
Product positioning is the strategic step to create a need position in the heart and mind of the
consumers. It insures how consumers will take the product in comparison to that of competitors’
products. It is also a strategic tool where marketers position their product above or below their
competitors to avoid competition.
Product position describes how an organization’s brand and product is superior and different in
comparison to their immediate competitor. It also determines the level of their competition.
Marketers create a level of their product in the mind of consumers. This enables the target
market to judge the utility of the product in comparison to other available products.
Product positioning enables the marketers to avoid competition as consumers compare the
products in similar level. The leveling factors can be the price of the product, quality of the
product and brand image. The marketers position their product according to their core
competencies in their target market. This enables them to stay ahead of their competitors and
gain market share.
The steps in positioning the product are as follows:
a) Identify potential competitive advantage: The marketers focus on their potential
competitive advantage that they can gain over their competitors. They evaluate their
strengths and weakness and identify the potential competitive advantage.
b) Establish the product’s distinctive competitive advantage: The marketers focus and
highlight over their strengths they possess over their competitors. They select the target
market where the demand for their competitive strength is high,

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c) Communicate the competitive advantage: They promote the product focusing into their
competitive advantage creating an image of being superior in their class. For example,
many mobile companies focus on camera or processing speed to create an image of
superior device than that of their competitors.
d) Attributes: The product can be distinguished as per its characteristics such as size, color
or taste. Following are different variables which marketers can use in order to position
their product:
 Price: high, medium, low, best value price
 Quality: high, medium, low or superior quality
 Technology: manual, automatic, computerized, robotized.
 Service: pre-sale, during sale, after sales services.
 Competition: Better than competitor, cheaper maintenance.
 Use: Differentiate the utility of the product. For example: noodles as tiffin, as snack, as
meal etc.
 Benefits: Differentiate according to the benefit. For example, Tea as refreshing drink, tea
as slimming drink, tea as blood purifying drink etc.
 Category: categorize the product to create class. For example, best in class car, most
economically run etc.

Segmentation variables for consumer markets

Individual consumers have different need, choice, expectations, purchasing power, buying
behavior etc. Therefore, there are different variables under which a market can be segmented.
Identifying the right variable to create the right segment is the main motive of every marketer
while targeting their customers.
The segmentation variables for consumer markets can be broadly categorized into following
categories:
1. Geographic
2. Demographic
3. Psychographic
4. Behavioral

The segmentation can be based on:

 Single variable segmentation, where only one variable is considered to segment the total
market
 Multi-variable segmentation, where more than one or multiple variables are considered to
segment the total market.

1. Geographic variables:
There are multiple variables for segmentation of market under geographic location:

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 Area: The market can be divided into different areas such as country, developmental
areas, zones, districts, province etc.
 Topography and climate: The market can be divided according to the topography and
climate such as hills, mountains, flat-lands, tropical, temperate and alpine etc.
 Population density: The market can be divided into different geographic location
according to the density of population residing in it such as urban and rural, high and low
density area etc.

2. Demographic variables
The market can be segmented according to human life style and population. Following are the
variables:
 Age: Segment the market according to the age such as infants, kids, teenagers, adults,
senior citizens etc.
 Gender: segment the market demand according to gender such as male, female and
others.
 Family size: The demand for product can vary according to the family size. So the
market can be segmented according to the family size such as joint family, big family,
small family and nuclear family etc.
 Family life cycle: The buying behavior depends upon the family life cycle. Thus the
market can be segmented according to family life cycle such as: young bachelor living
alone, young couple with no children, couple with single child, couple with multiple
child, middle aged couple with/without children, older couples/single.
 Education: The level of education also determines the life style and consumption
behavior. Therefore the market can be segmented according to the education level such as
highly literate, literate, illiterate etc.
 Income: The purchasing power depends upon the income level of the consumers. The
market can be segmented according to the income level of the consumers such as rich,
middle income, poor, extremely poor etc.
 Social class: The consumption pattern is highly influenced by the social class in which
the consumers live in. The market can be classified as high class, medium class or low
class.
 Ethnicity: The market can be classified according to class, race, nationalities and ethnic
groups.
 Religion: The market can be classified according to different religion such as Buddhist,
hindu, muslims etc as the religion directly affects the consumption behavior of the
consumers.

3. Psychographic variables
The consumers show different psychological behavior which determines their taste and
preferences, buying behavior and consumption behavior. The variables under psychographic
variables are:

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a) Buying motives: Buying motives means the core reason that motivates the consumers to
make the purchase. Consumers have different reasons and motives to make the purchase.
The motives can be:
 Rational motives: choosing the products rationally according to economy,
durability, efficiency and convenience.
 Emotional motives: choosing the products emotionally for love, affection,
friendship and belongingness
 Ego motives: motives for status, respect, prestige and recognition.

b) Life style: The consumption patterns of consumers depend upon their life style. What
consumers do, how they spend their time, what they eat, wear and how they get
entertained determines the type of product they use. The variables can be categorized as:
 Activities such as culture oriented, sports oriented and outdoor oriented.
 Interests: such as their family time, job, fashion, food, recreation, hobbies
 Opinion about life, society, politics, business, products, culture and religion etc.

c) Personality: Personality means how consumers present themselves, their likes and
dislikes and how they react over conditions. This shapes the overall behavior a consumer
shows. Under this variable the consumers can be categorized as:
 Extraversion or introversion
 Agreeableness or disagreeableness
 Conscientiousness or non- conscientiousness
 Emotional stability or emotionally instable
 Openness to experiences or closed to experiences

4. Behavioral variables
Behavioral variables relates to how consumers behave in different situations towards products
and their consumption. The different variables under behavioral variables are:
a) Occasions: how consumers use the products in occasions such as daily use or in special
occasions as festivals, marriage, death etc.
b) Benefits: how consumer seek for benefits such as quality, service, economy, convenient,
multi-use etc.
c) User status: using behavior as first time user, regular user, ex-user, potential user, non-
user etc.
d) Usage rate: rate of using such as heavy user, daily user, occasional user, non-user etc
e) Loyalty status: loyalty towards product such as hard-core split loyal, shifting loyal or
switchers.
f) Attitude towards the product such as positive, negative, indifferent or hostile.

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Segmentation variables for industrial users

Industrial users are different than that of individual users. They consume to create utilities while
individual users or non-industrial users create to consume utilities. Therefore their consumption
patterns are different according to quantity and regularity. Their demand is directly related to the
demand of the product they produce. Thus the industrial market can be categorized under
following variables:

1. Geographic variables
a) Location: location of the industry such as urban area, rural area, industrial area etc.
b) Topography: Terrain to be served such as mountain, hills, flat lands etc. It affects
movement of products.
c) Climate: climate to be served such as hot, humid, tropical, temperate, alpine. It affects
product needs and packaging requirements.

2. Demography variables
a) Type of industry: such as agricultural industry, mining and construction, assembling
industry, transport and communication, finance, insurance and other services.
b) Size of customers: Size of demand such as cottage industry with low demand market,
medium industry serving medium market, big industries serving larger market mega
industries serving global markets.

3. Operating variables
a) Technology: The level of technology used while operating the industry such as manual
technology, mechanized technology, automated technology, computerized or digital
technology and robotized technology.
b) Usage rate: the frequency and intensity of the usage of materials such as heavy use,
medium use, light use.
c) Service needs: need for additional services such as pre-sale services, during sale services
or after sale services.

4. Purchase-related variables:
Procedure for purchase such as purchase policy, committee, department, purchase
documentation, negotiation period etc.
These are different variables under which industrial suppliers can segment their market and
prepare proper marketing mix and strategies to supply their products to the industrial users.

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Market segmentation in Nepal

Nepali market is in evolving process. Most of the marketers still practice mass marketing where
they use the same marketing mix for all types of consumers. Many marketers still do not have
idea of understanding the market itself. One main reason behind this is marketers do not initiate
to understand the market. They still find the cost of obtaining information from the market as
unnecessary expense. For them, the cost of understanding market behavior is financial burden
rather than intelligent investment.
Nepali market is in transitional phase. Though the market still practice outdated marketing
concepts and strategies, many businesses have come forward to use better marketing approaches.
They believe in understanding consumer behavior, embrace the fact that every consumer is
different and should be treated differently. It is therefore Nepali market currently shows mixed
behavior.
Non-systematic: Market segmentation in Nepal is not systematic and does not follow standard
procedures. The marketers still use their perception, experiences, management instincts and
competitors’ strategy and tend to follow the status quo.
Variable for segmentation: Most commonly used variables for segmentation of market in
Nepal are geographical such as hilly, mountain and flat lands, development zones, cities and
districts, economic such as the purchasing power and social class, demographic such as gender,
age, family life cycle, and religion and psychographic such as life style and personality and
behavioral such as benefits, motives, usage rate and loyalty.
However, geographic, economic and socio-cultural variables are mostly used segmentation
variable in Nepal and behavioral variable is least used.
Lack of information: Nepali market behaves in two dimensions. Firstly the marketers lack clear
information about the market they operate in. Secondly, the consumers lack proper knowledge
and information about the products available and their usage. Consumers lack awareness about
new products and new utilities being offered in the market. Therefore, even the marketer provide
better product to the consumers, the consumers are reluctant to accept it. This is quite a challenge
to the marketers in Nepal.
Government policies: Government has been acting as stumbling block rather than stepping
stone to the marketers. Government has not been able to update its policies as per the need of the
time. So marketers face restriction and unnecessary control over their innovative marketing
strategies. In addition to this, poor governance and corruption have fueled to black marketing and
illegal and unethical business practices, thus suffocating novel marketing ideas and practices.

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Exam Questions:
1. What makes the market segmentation meaningful and effective? Explain. (5)
2. Briefly explain the following (2)
a) Niche marketing
b) Market segmentation
c) Benefits of niche marketing
3. What is target market? Explain the evaluation criteria to select the target market for
business purpose. (2+3=5)
4. What is market segmentation? List the factors that are required for effective market
segmentation. (5)
5. What are the requirements for effective segmentation of a consumer market? (5)
6. Describe the meaning and importance of market segmentation. (2+3=5)
7. Explain the requirements for effective market segmentation. (5)
8. Write a short note on market segmentation and explain its benefits to marketers. (5)
9. What is marketing segmentation? Explain the basic requirements of meaningful market
segmentation. (2+3=5)
10. Explain the criteria for evaluating market segments. (5)

Other questions:
1. Describe the variables used for segmentation of consumer markets. (5)
2. Explain the variables used in segmentation of an industrial market. (5)
3. Describe the use of life-style for segmentation of the consumer market. (5)
4. Describe the market segmentation practice in Nepal. (5)
5. Why do you segment the market for your product? (5)
6. What is the process of segmenting the market for consumer products? (5)

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