LEVELS AND TYPES OF MARKET SEGMENTATION

MARKET DRIVEN STRATEGY AND SEGMENTATION

MARKET SEGMENTATION, VALUE OPPORTUNITIES,
AND NEW MARKET SPACE

 Market segmentation is the process of placing the buyers in a product-market into sub-groups so that the members
of each segment display similar responsiveness to a particular positioning strategy.
 Buyer similarities are indicated by the amount and frequency of purchase, loyalty to a particular brand, how the
product is used, and other measures of responsiveness. So, segmentation is an identification process aimed at
finding subgroups of buyers within a total market.
 The opportunity for segmentation occurs when differences in buyers’ demand (response) functions allow market
demand to be divided into segments, each with a distinct demand function.
 The term “market niche” is sometimes used to refer to a market segment that represents a relatively small portion
of the buyers in the total market. We consider a niche and a segment to be the same.
MARKET SEGMENTATION, VALUE OPPORTUNITIES,
AND NEW MARKET SPACE

 Segmentation identifies customer groups within a product-market, each containing buyers with similar value
requirements concerning specific product/brand attributes.
 A segment is a possible market target for an organization competing in the market. Segmentation offers a
company an opportunity to better match its products and capabilities to buyers’ value requirements.
 Customer satisfaction can be improved by providing a value offering that matches the value proposition
considered important by the buyer in a segment.
 Importantly, market analysis may identify segments not recognized or served effectively by competitors.
 There may be opportunities to tap into new areas of value and create a unique space in the market.
MARKET SEGMENTATION, VALUE OPPORTUNITIES,
AND NEW MARKET SPACE

 Examining specific market segments helps to identify how to (1) attain a closer match between buyers’ value
preferences and the organization’s capabilities, and (2) compare the organization’s strengths (and weaknesses) to
the key competitors in each segment.
MARKET TARGETING

 Market targeting consists of evaluating and selecting one or more segments whose value requirements provide a
good match with the organization’s capabilities.
 Companies typically appeal to only a portion of the people or organizations in a product-market, regardless of how
many segments are targeted.
 Management may decide to target one, a few, or several segments to gain the strength and advantage of
specialization.
STRATEGIC POSITIONING

 Positioning strategy is defined as the combination of the actions management takes to meet the needs and wants of
each market target.
 The strategy consists of product(s) and supporting services, distribution, pricing, and promotion components.
 Management’s choices about how to influence target buyers by favorably positioning the product in their eyes and
minds help in designing the positioning strategy.
ACTIVITIES AND DECISIONS IN MARKET SEGMENTATION

 The process of segmenting a market involves several interrelated activities and decisions beginning with defining
the market to be segmented (Exhibit 3.3).
DEFINING THE MARKET TO BE SEGMENTED

 An important consideration in defining the market to be segmented is estimating the variation in buyers’ needs and
requirements at the different product-market levels and identifying the types of buyers included in the market.
IDENTIFYING MARKET SEGMENTS

 After the market to be segmented is defined, one or more variables are selected to identify segments.

Segmentation Variables
 One or more variables (e.g., frequency of use) may be used to divide the product-market into segments.
 Demographic and psychographic (lifestyle and personality) characteristics of buyers are of interest, since this
information is available from the census reports and many other sources including electronic databases.
 The use situation variables consider how the buyer uses the product, such as purchasing a meal away from home
for the purpose of entertainment.
 Variables measuring buyers’ needs and preferences include attitudes, brand awareness, and brand preference.
 Purchase-behavior variables describe brand-use and consumption (e.g., size and frequency of purchase).
IDENTIFYING MARKET SEGMENTS

Characteristics of People and Organizations

Consumer Markets
 The characteristics of people fall into two major categories: (1) geographic and demographic, and (2) psychographic (lifestyle and
personality).
 Demographics are often more useful to describe consumer segments after they have been formed rather than to identify them.
 Geographic location maybe useful for segmenting product-markets.
 Demographic variables describe buyers according to their age, income, education, occupation, and many other characteristics.
Demographic information helps to describe groups of buyers such as heavy users of a product or brand.
 Lifestyle variables indicate what people do (activities), their interests, their opinions, and their buying behavior.
 Profiles can be developed using lifestyle characteristics. This information is used to segment markets, help position products, and
guide the design of advertising messages.
IDENTIFYING MARKET SEGMENTS

Characteristics of People and Organizations

Organizational Markets
 Several characteristics help in segmenting business markets. The type of industry is related to purchase behavior
for certain types of products.
 Other variables for segmenting organizational markets include size of the company, the stage of industry
development, and the stage of the value-added system (e.g., producer, distribution, retailer).
IDENTIFYING MARKET SEGMENTS

Characteristics of People and Organizations

Product Use Situation Segmentation
 Markets can be segmented based on how the product is used.
 Needs and preferences vary according to different use situations.

Buyers’ Needs and Preferences

 Needs and preferences that are specific to products and brands can be used as segmentation bases and segment descriptors.
Examples include brand loyalty status, benefits sought, and proneness to make a deal.
 Buyers may be attracted to different brands because of the benefits they offer.
Consumer Needs - Needs motivate people to act. Understanding how buyers satisfy their needs provides guidelines for marketing actions.
Consumers attempt to match their needs with the products that satisfy their needs.
Attitudes - Buyers’ attitudes toward brands are important because experience and research findings indicate that attitudes influence behavior.
Perception - defined as “the process by which an individual selects, organizes, and interprets information inputs to create a meaningful picture of
the world.” Perceptions are how buyers select, organize, and interpret marketing stimuli, such as advertising, personal selling, price, and the
IDENTIFYING MARKET SEGMENTS

Purchase Behavior
 Consumption variables such as the size and frequency of purchases are useful in segmenting consumer and
business markets.
IDENTIFYING MARKET SEGMENTS
 Exhibit 3.7 summarizes the various segmentation variables and shows examples of segmentation bases and
descriptors for consumer and organizational markets. As we examine the methods used to form segments, the role
of these variables in segment determination and analysis is illustrated.
FORMING MARKET SEGMENTS

Five criteria are useful for evaluating a potential segmentation strategy.

 Response Differences - Determining differences in the responsiveness of the buyers in the product-market to positioning strategies is
a key segment identification requirement.
 Identifiable Segments - It must be possible to identify the customer groups that exhibit response differences, and sometimes finding
the correct groups may be difficult.
 Actionable Segments - A business must be able to aim a marketing program strategy at each segment selected as a market target.
 Cost/Benefits of Segmentation - . While segmentation may cost more in terms of research and added marketing expenses, it should
also generate more sales and higher margins.
 Stability over Time - If buyers’ needs change too fast, a group with similar response patterns at one point may display quite different
patterns several months later.
 Product Differentiation and Market Segmentation - Product differentiation occurs when a product offering is perceived by the buyer
as different from the competition on any physical or nonphysical product characteristic, including price.
FINER SEGMENTATION STRATEGIES

Logic of Finer Segments - Several factors working together point to the benefits of considering very small segments— in some
cases, segments of one. These include (1) the capabilities of companies to offer cost effective, customized offerings; (2) the
desires of buyers for highly customized products; and (3) the organizational advantages of close customer relationships.
Finer Segmentation Strategies - Three approaches for finer segmentation opportunities: micro-segmentation, mass
customization, and variety seeking.
 Micro-segmentation - This form of segmentation seeks to identify narrowly defined segments using one or more of the
previously discussed segmentation variables.
 Mass Customization - Providing customized products at prices not much higher than mass produced items is feasible using
mass customization concepts and methods. Achieving mass customization objectives is possible through computer-aided
design and manufacturing software, flexible manufacturing techniques, and flexible supply systems.
 Variety-Seeking Strategy - This product strategy is intended to offer buyers opportunities to vary their choices in contrast to
making unique choices. The logic is that buyers who are offered alternatives may increase their total purchases of a brand.
SELECTING THE SEGMENTATION STRATEGY

Deciding How to Segment

 The choice of a segmentation method depends on such factors as the maturity of market, the competitive structure,
and the organization’s experience in the market.
 The more comprehensive the segmentation process, the higher the costs of segment identification will be, reaching
the highest level when field research studies are involved and finer segmentation strategies are considered.
 An essential first step in segmentation is analyzing the existing customer base to identify groups of buyers with
different response behavior (e.g., frequent purchase versus occasional purchase).
STRATEGIC ANALYSIS OF MARKET SEGMENTS

Customer Analysis
 When forming segments, it is useful to find out as much as possible about the customers in each segment.
Variables such as those used in dividing product-markets into segments are also helpful in describing the people in
the same segments. The objective is to find descriptive characteristics that are highly correlated to the variables
used to form the segments. Standardized information services are available for some product-markets including
foods, health and beauty aids, and pharmaceuticals.
 An essential part of customer analysis is determining how well the buyers in the segment are satisfied. Customer
satisfaction depends on the perceived performance of a product and supporting services and the standards that
customers use to evaluate that performance.
STRATEGIC ANALYSIS OF MARKET SEGMENTS

Competitor Analysis
 Market segment analysis considers the set of key competitors currently active in the market in which the segment
is located plus any potential segment entrants.
 The competing firms are described and evaluated to highlight their strengths and weaknesses. Information useful
in the competitor analysis includes business scope and objectives; market position; market target(s) and customer
base; positioning strategy; financial, technical, and operating strengths; management experience and capabilities,
and special competitive advantages (e.g., patents). It is also important to anticipate the future strategies of key
competitors.
STRATEGIC ANALYSIS OF MARKET SEGMENTS

Positioning Analysis
 Positioning analysis shows how to combine product, distribution, pricing, and promotion strategies to favorably
position the brand with buyers in the segment.
 The positioning strategy should meet the needs and requirements of the targeted buyers at a cost that yields a
profitable margin for the organization.
STRATEGIC ANALYSIS OF MARKET SEGMENTS

Estimating Segment Attractiveness

 Market attractiveness can be measured by market growth rate projections and attractiveness assessments made by
management.
 Financial analysis obtains sales, cost, and profit contribution estimates for each segment of interest.
STRATEGIC ANALYSIS OF MARKET SEGMENTS

Segmentation “Fit” and Implementation

 There are many organizational barriers to the effective use of segmentation strategies.
 New segment targets which do not fit into conventional information reporting, planning processes, and budget
systems in the company may be ignored or not adequately resourced.
 Innovative models of customer segments and market opportunities may be rejected by managers or the culture of
the organization.
 It is important to be realistic in balancing the attractiveness of segments against the ability of the organization to
implement appropriate marketing strategies to take advantage of the opportunities identified.
 Building effective marketing strategy around market segmentation mandates an emphasis on actionability as well
as technique and analysis.
SUMMARY

 Because buyers differ in their preferences for products, finding out what these preferences are and grouping
buyers with similar needs is an essential part of business and marketing strategy development. Effective
segmentation is key to market-driven strategy, linking strategic issues with the management of resources and
operations around segment targets. Segmentation links value opportunities in the market and new market spaces to
a company’s capabilities to achieve a strong strategic positioning.
 Segmentation demands close attention to market definition, identifying market segments and forming segment
targets, which are described, analyzed, and evaluated. Segmentation of a product-market requires that response
differences exist between segments and that the segments are identifiable and stable over time. Also, the benefits
of segmentation should exceed the costs. The variables useful as bases for forming and describing segments
include the characteristics of people and organizations, use situation, buyers’ needs and preferences, and purchase
behavior.
SUMMARY

 Segments can be formed by identifying customer groups using the characteristics of people or organizations. The
groups are analyzed to determine if the response profiles are different across the candidate segments.
Alternatively, customer response information can be used to form customer groupings and then the descriptive
characteristics of the groups analyzed to find out if segments can be identified. Several examples of segment
formation are discussed to illustrate the methods that are available for this purpose.
 Finer segmenting strategies present attractive options for moving toward small segments and responding to
buyers’ unique value requirements. Technology, buyer diversity, and relationship opportunities are the drivers of
finer segmentation strategies. These strategies include micro segmentation, mass customization, and variety
seeking. While potentially attractive, finer segmentation strategies are more complex than other forms of
segmentation and require comprehensive benefit and cost evaluations.
SUMMARY

 Segment analysis and evaluation consider the strengths and limitations of each segment as a potential market
target for the organization. Segment analysis includes customer descriptions and satisfaction analysis, evaluating
existing and potential competitors and competitive advantage, marketing program positioning analysis, and
financial and market attractiveness. Segment analysis is important in evaluating customer satisfaction, finding
new-product opportunities, selecting market targets, and designing positioning strategies. Nonetheless, it is also
important to understand the organizational barriers to implementing segmentation strategy which may exist in a
company, and to evaluate the “fit” of segmentation with company capabilities. Effectively implemented, a good
segmentation strategy creates an important competitive edge for an organization