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Market segmentation

Types of market segmentation

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Depending on company philosophy, resources, product type or market characteristics, a business may develop an undifferentiated approach or differentiated approach. In an undifferentiated approach, the marketer ignores segmentation and develops a product that meets the needs of the largest number of buyers. In consumer marketing, it is difficult to find examples of undifferentiated approaches. Even goods such as salt and sugar , which were once treated as commodities, are now highly differentiated.

Consumers can purchase a variety of salt products; cooking salt, table salt, sea salt, rock salt, kosher salt, mineral salt, herbal or vegetable salts, iodised salt, salt substitutes and many more. Sugar also comes in many different types - cane sugar, beet sugar, raw sugar, white refined sugar, brown sugar, caster sugar, sugar lumps, icing sugar also known as milled sugar , sugar syrup, invert sugar and a plethora of sugar substitutes including smart sugar which is essentially a blend of pure sugar and a sugar substitute.

Each of these product types is designed to meet the needs of specific market segments. Invert sugar and sugar syrups, for example, are marketed to food manufacturers where they are used in the production of conserves, chocolate, and baked goods. Sugars marketed to consumers appeal to different usage segments — refined sugar is primarily for use on the table, while caster sugar and icing sugar are primarily designed for use in home-baked goods.

A number of factors are likely to affect a company's segmentation strategy: The process of segmenting the market is deceptively simple. Seven basic steps describe the entire process including segmentation, targeting, and positioning. In practice, however, the task can be very laborious since it involves poring overloads of data, and requires a great deal of skill in analysis, interpretation and some judgment.

Targeting comprises an evaluation of each segment's attractiveness and selection of the segments to be targeted. Positioning comprises the identification of optimal position and development of the marketing program. The market for a given product or service known as the market potential or the total addressable market TAM. Given that this is the market to be segmented, the market analyst should begin by identifying the size of the potential market.

For existing products and services, estimating the size and value of the market potential is relatively straightforward. However, estimating the market potential can be very challenging when a product or service is totally new to the market and no historical data on which to base forecasts exists. A basic approach is to first assess the size of the broad population, then estimate the percentage likely to use the product or service and finally to estimate the revenue potential. Another approach is to use historical analogy.

To support this type of analysis, data for household penetration of TV, Radio, PCs, and other communications technologies is readily available from government statistics departments.

Finding useful analogies can be challenging because every market is unique. However, analogous product adoption and growth rates can provide the analyst with benchmark estimates, and can be used to cross-validate other methods that might be used to forecast sales or market size. A more robust technique for estimating the market potential is known as the Bass diffusion model , the equation for which follows: The major challenge with the Bass model is estimating the parameters for p and q.

However, the Bass model has been so widely used in empirical studies that the values of p and q for more than 50 consumer and industrial categories have been determined and are widely published in tables. A major step in the segmentation process is the selection of a suitable base.

In this step, marketers are looking for a means of achieving internal homogeneity similarity within the segments , and external heterogeneity differences between segments. In addition, the segmentation approach must yield segments that are meaningful for the specific marketing problem or situation.

For example, a person's hair color may be a relevant base for a shampoo manufacturer, but it would not be relevant for a seller of financial services. Selecting the right base requires a good deal of thought and a basic understanding of the market to be segmented. In reality, marketers can segment the market using any base or variable provided that it is identifiable, substantial, responsive, actionable and stable. For example, although dress size is not a standard base for segmenting a market, some fashion houses have successfully segmented the market using women's dress size as a variable.

Marketers normally select a single base for the segmentation analysis, although, some bases can be combined into a single segmentation with care. For example, geographics and demographics are often combined, but other bases are rarely combined. Given that psychographics includes demographic variables such as age, gender, and income as well as attitudinal and behavioural variables, it makes little logical sense to combine psychographics with demographics or other bases.

Any attempt to use combined bases needs careful consideration and a logical foundation. Based on Wikiversity, Marketing [E-Book], c. The following sections provide a detailed description of the most common forms of consumer market segmentation. Geographic segmentation divides markets according to geographic criteria. In practice, markets can be segmented as broadly as continents and as narrowly as neighborhoods or postal codes. The geo-cluster approach also called geodemographic segmentation combines demographic data with geographic data to create richer, more detailed profiles.

They classify residential regions or postcodes on the basis of census and lifestyle characteristics obtained from a wide range of sources. This allows the segmentation of a population into smaller groups defined by individual characteristics such as demographic, socio-economic or other shared socio-demographic characteristics.

Geographic segmentation may be considered the first step in international marketing, where marketers must decide whether to adapt their existing products and marketing programs for the unique needs of distinct geographic markets.

Tourism Marketing Boards often segment international visitors based on their country of origin. A number of proprietary geo-demographic packages are available for commercial use. Geographic segmentation is widely used in direct marketing campaigns to identify areas which are potential candidates for personal selling, letter-box distribution or direct mail. Geo-cluster segmentation is widely used by Governments and public sector departments such as urban planning, health authorities, police, criminal justice departments, telecommunications and public utility organisations such as water boards.

Segmentation according to demography is based on consumer- demographic variables such as age, income, family size, socio-economic status, etc. Typical demographic variables and their descriptors are as follows:. The use of multiple segmentation variables normally requires analysis of databases using sophisticated statistical techniques such as cluster analysis or principal components analysis.

It should be noted that these types of analysis require very large sample sizes. However, data-collection is expensive for individual firms. For this reason, many companies purchase data from commercial market research firms, many of whom develop proprietary software to interrogate the data. The labels applied to some of the more popular demographic segments began to enter the popular lexicon in the s.

Psychographic segmentation, which is sometimes called psychometric or lifestyle segmentation, is measured by studying the activities, interests, and opinions AIOs of customers. It considers how people spend their leisure, [55] and which external influences they are most responsive to and influenced by.

Psychographics is a very widely used basis for segmentation, because it enables marketers to identify tightly defined market segments and better understand consumer motivations for product or brand choice. While many of these proprietary psychographic segmentation analyses are well-known, the majority of studies based on psychographics are custom designed.

That is, the segments are developed for individual products at a specific time. One common thread among psychographic segmentation studies is that they use quirky names to describe the segments.

Behavioural segmentation divides consumers into groups according to their observed behaviours. Many marketers believe that behavioural variables are superior to demographics and geographics for building market segments [57] and some analysts have suggested that behavioural segmentation is killing off demographics.

Note that these descriptors are merely commonly used examples. Marketers customise the variable and descriptors for both local conditions and for specific applications. For example, in the health industry, planners often segment broad markets according to 'health consciousness' and identify low, moderate and highly health conscious segments.

This is an applied example of behavioural segmentation, using attitude to product or service as a key descriptor or variable which has been customised for the specific application. Purchase or usage occasion segmentation focuses on analyzing occasions when consumers might purchase or consume a product. Unlike traditional segmentation models, this approach assigns more than one segment to each unique customer, depending on the current circumstances they are under.

The benefits sought by purchasers sometimes called needs-based segmentation divides markets into distinct needs, perceived value, benefits sought or advantage that accrues from the purchase of a product or service. Marketers using benefit-sought segmentation might develop products with different quality levels, performance, customer service, special features or any other meaningful benefit and pitch different products at each of the segments identified. Benefit segmentation is one of the more commonly used approaches to segmentation and is widely used in many consumer markets including motor vehicles, fashion and clothing, furniture, consumer electronics, and holiday-makers.

Loker and Purdue, for example, used benefit segmentation to segment the pleasure holiday travel market. This can be through market or survey research, or through database or other data analysis. However, it is also important to realise that segmentation also involves using the groups for business development.

As such, it normally comes with a cost and complexity overhead so segments need to be robust, replicable and have sufficient potential sales volume to make them worth addressing. At a research-level there are four major ways of segmenting a market, partly according to the level of precision required and the type of data and analysis available about your customers.

However, in finding different market segments it is important to keep in mind that the business will have to use the segments and implement segment specific business decisions - such as tailored products, pricing or service to meet the needs of each segment. Important questions are therefore how are you going to place customers into each group and how are you going to target and track each group. Do you leave it up to the customer to select themselves into a segment, or do you have specific segment sales managers?

A-priori pre-existing segments are the most basic way of creating market segments. In A-priori segmentation, the market is split according to pre-existing demographic criteria such as age, sex or social economic status, or other criteria available.

More sophisticated versions include lifestage which combines information about age, presence of children and working status and geodemographics such as Experian's Mosaic or CACI's Acorn classification systems where households are allocated to specific clusters on the basis of typical household make up and housing type.

For website analysis, segments can include country, browser type, or previous history. A priori segments are easy to define and easy to target with advertising and media. For some sectors, for instance technology, there are such strong relationships between age and use, that a priori segments are all that are needed. However in other markets - for instance drinks, it is more difficult to use pre-existing variables for segmentation.

A priori segmentations are also the simplest segmentation to apply and use. A database can be flagged or sorted on the pre-existing data and that data used to drive sales and marketing campaigns. Similarly, on a website basis, segments can be identified from session histories and IP identifiers.

However, although better than pure mass marketing, even the most sophisticated a priori systems are quite crude. In geodemographics there is the assumption that you buy or think the same way as your neighbour which is clearly not always the case.

A usage segmentation is based on prior behaviour. There are two main approaches: The usuage history can then be used to tailor products or services, for instance tiering extra services, or account management for the larger purchaser groups. A simple transaction history or visit history on a customer databases, or visit histories for online behaviour can be used to split the database according to weight of sales, value of purchases, number of visits etc.

This is normally used in business-to-business markets and is a core part of database analysis for consumer markets. Secondly, usage can be considered in terms of time and place. A cafe might sell sandwiches at lunchtime but main meals in the evening because the purchasers are looking for different things.

It may even be the same purchaser just in a different "mode". Usage studies are also extremely common in market research, but normally to determine measures of market share and other metrics.

However this information can also be used as the basis of a segmentation approach - checking heavy versus light user groups for different attitudes or behaviours. Often usage segmentation is used to try and establish underlying driving forces from other demographic variables. So if women are more likely to be heavy users would it be easier to convert more light users who are female, rather than target their male counterparts.

Then these statements become the inputs to the final segmentation analysis. The final step is to attach a segment code to each market segment identified and then cross-tab all of the questionnaire variables by the segments. Some of the most common mistakes:. Virtually all segmentation work, historically, has been based upon the assumption of mutually exclusive market segments.

Therefore, it is wise to develop two distinctly different segmentation solutions: The concept of market segmentation is sound. A great deal of money is wasted on psychographic segmentations that never lead to any marketing actions. If you segment the market by psychographics, there are several essential uses of the segmentation: That is, the advertising message is the way to reach the psychographic segment rarely can a psychographic segment be defined by demographics or geography.

Second, segmentation can provide the guiderails for brand positioning. That is, positioning assumes, or takes place in relation to, a target market segment; you are positioning your brand in relation to a market segment. Third, the segmentation can define opportunities for new products targeted to each psychographic segment. That is, the market segments can be a template for new product development.

He may be reached at or This article may not be copied, published, or used in any way without written permission of Decision Analyst. Market Segmentation by Jerry W. Market segmentation is a much broader concept, however, and it pervades the practice of business throughout the world.

What is market segmentation? That is, the members of a market segment share something in common. The purpose of segmentation is the concentration of marketing energy and force on the subdivision or the market segment to gain a competitive advantage within the segment. Concentration of marketing energy or force is the essence of all marketing strategy, and market segmentation is the conceptual tool to help achieve this focus.

Our focus is on consumer markets rather than business markets, but most of the following concepts also apply to B2B. For example, someone might want to segment the market for widgets among to year-olds who live in Vermont and buy brand XYZ.

As is evident, the client is asking that a tiny sliver of the market be segmented. True, this tiny sliver can be segmented, but rarely are the resulting segments of any value, because they are just too small. The market should be broadly defined for a segmentation analysis to be most effective. Variables have to move up and down for the multivariate analysis to work. The highest-rated variables, and the lowest-rated, are likely to fall out of the multivariate analyses.

However, you should always look at these universal statements. Any one of them might be the basis for a positioning or a strategy that would appeal to everyone. If you find something unique that appeals to everyone, the heck with segmentation. Go for the whole hog. Creating too many segments. There is a practical limit to the size of segments that companies can effectively target. If you create more than four or five market segments, you run the risk that the resulting segments will be too small to target, at least by mass media.

This is not always true, but it is a good rule of thumb.


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Market segmentation is a process by which market researchers identify key attributes about customers and potential consumers that can be used to create distinct target market groups. Learn what you need to know about using market segmentation in .

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Market research analysis using segmentation is a basic component of any marketing effort. It provides a basis upon which business decision makers maximize profitability by focusing their company’s efforts and resources on those market segments most favorable to .

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Market segmentation is a technique for using market research in order to learn all you can about your customers. The purpose of market segmentation is not just to sell products and services, but to inform research and development. Market segmentation. Segmentation is concerned with identifying different groups of purchasers in a market in order to target specific products and services for each group or .

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Psychographic segmentation is a legitimate way to segment a market, if we can identify the proper segmentation variables (or lifestyle statements, words, pictures, etc.). Qualitative research techniques (focus groups, depth interviews, ethnography) become invaluable at this stage. Market segmentation creates subsets of a market based on demographics, needs, priorities, common interests, and other psychographic or behavioral criteria used to better understand the target audience.