Definition and brief explanation
Market segmentation is the process of dividing up mass markets into groups with similar needs and wants. The rationale for market segmentation is that in order to achieve competitive advantage and superior performance, firms should: "(1) identify segments of industry demand, (2) target specific segments of demand, and (3) develop specific 'marketing mixes' for each targeted market segment. " From an economic perspective, segmentation is built on the assumption that heterogeneity in demand allows for demand to be disaggregated into segments with distinct demand functions.History
The business historian, Richard S. Tedlow, identifies four stages in the evolution of market segmentation: * Fragmentation (pre-1880s): The economy was characterized by small regional suppliers who sold goods on a local or regional basis * Unification orCriticisms
The limitations of conventional segmentation have been well documented in the literature. Perennial criticisms include: * That it is no better than mass marketing at buildingMarket segmentation strategy
A key consideration for marketers is whether to segment or not to segment. 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 a differentiated approach the firm targets one or more market segments, and develops separate offers for each segment. In consumer marketing, it is difficult to find examples of undifferentiated approaches. Even goods such asSegmentation, targeting, positioning
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 over voluminous data, and requires a great deal of skill in analysis, interpretation, and some judgment. Although a great deal of analysis needs to be undertaken, and many decisions need to be made, marketers tend to use the so-called S-T-P process, that is Segmentation→ Targeting → Positioning, as a broad framework for simplifying the process. Segmentation comprises identifying the market to be segmented; identification, selection, and application of bases to be used in that segmentation; and development of profiles. Targeting comprises an evaluation of each segment's attractiveness and selection of the segments to be targeted. Positioning comprises the identification of optimal positions and the development of the marketing program. Perhaps the most important marketing decision a firm makes is the selection of one or more market segments on which to focus. A market segment is a portion of a larger market whose needs differ somewhat from the larger market. Since a market segment has unique needs, a firm that develops a total product focused solely on the needs of that segment will be able to meet the segment's desires better than a firm whose product or service attempts to meet the needs of multiple segments. Current research shows that, in practice, firms apply three variations of the S-T-P framework: ad-hoc segmentation, syndicated segmentation, and feral segmentation. * Ad-Hoc segmentation closely resembles the original S-T-P framework in that firms initiate and conduct independently a market segmentation project. Firms focus on a category of offerings as the starting point for identifying a base of consumers and performing analysis to validate distinct consumption profiles. The resulting market segmentation profiles are often treated as trade secrets. * Syndicated segmentation means that firms purchase segmentation frameworks that are commercially available from specialized firms that apply data science to generate consumer profiles. The resulting segments are available for commercial distribution, and clients can consult the segments for a fee. * Feral segmentation: it is the process in which cultural intermediaries coin, circulate, and validate the consumer categories that some marketers use as market segments - consumer categories emerge, unsolicited, in popular culture. Segments are “feral” because consumer categories emerge in the public domain, unsolicited, without the direct involvement of professional marketers, outside managerial control, and without mobilizing the prescribed market research techniques.Identifying the market to be segmented
The market for any given product or service is 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 a historical analogy. For example, the manufacturer of HDTV might assume that the number of consumers willing to adopt high-definition TV will be similar to the adoption rate for color TV. 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 theBases for segmenting consumer markets
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 other words, they are searching for a process that minimizes differences between members of a segment and maximizes differences between each segment. 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. * ''Identifiability'' refers to the extent to which managers can identify or recognize distinct groups within the marketplace * ''Substantiality'' refers to the extent to which a segment or group of customers represents a sufficient size to be profitable. This could mean sufficiently large in number of people or in purchasing power * ''Accessibility'' refers to the extent to which marketers can reach the targeted segments with promotional or distribution efforts * ''Responsiveness'' refers to the extent to which consumers in a defined segment will respond to marketing offers targeted at them * ''Actionable'' – segments are said to be actionable when they provide guidance for marketing decisions. 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. However, the most common bases for segmenting consumer markets include: geographics, demographics, psychographics, and behaviour. Marketers normally select a single base for the segmentation analysis, although, some bases can be combined into a single segmentation with care. Combining bases is the foundation of an emerging form of segmentation known as ‘Hybrid Segmentation’ (see ). This approach seeks to deliver a single segmentation that is equally useful across multiple marketing functions such as brand positioning, product and service innovation and eCRM. The following sections provide a detailed description of the most common forms of consumer market segmentation.Geographic 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. Typical geographic variables include: * Country Brazil, Canada, China, France, Germany, India, Italy, Japan, UK, US * Region North, North-west, Mid-west, South, Central * Population density: central business district (CBD), urban, suburban, rural, regional * City or town size: under 1,000; 1,000–5,000; 5,000–10,000 ... 1,000,000–3,000,000 and over 3,000,000 * Climatic zone: Mediterranean, Temperate, Sub-Tropical, Tropical, Polar The geo-cluster approach (also called ''Demographic segmentation
Segmentation according to demography is based on consumer- demographic variables such as age, income, family size, socio-economic status, etc. Demographic segmentation assumes that consumers with similar demographic profiles will exhibit similar purchasing patterns, motivations, interests, and lifestyles and that these characteristics will translate into similar product/brand preferences. In practice, demographic segmentation can potentially employ any variable that is used by the nation's census collectors. Typical demographic variables and their descriptors are as follows: * Age: Under 5, 5–8 years, 9–12 years, 13–17 years, 18–24, 25–29, 30–39, 40–49, 50–59, 60+ * Gender: Male, Female * Occupation: Professional, self-employed, semi-professional, clerical/ admin, sales, trades, mining, primary producer, student, home duties, unemployed, retired * Socio-economic: A, B, C, D, E, or I, II, III, IV or V (normally divided into quintiles) * Marital Status: Single, married, divorced, widowed * Family Life-stage: Young single; Young married with no children; Young family with children under 5 years; Older married with children; Older married with no children living at home, Older living alone * Family size/ number of dependants: 0, 1–2, 3–4, 5+ * Income: Under $10,000; 10,000–20,000; 20,001–30,000; 30,001–40,000, 40,001–50,000 etc. * Educational attainment: Primary school; Some secondary, Completed secondary, Some university, Degree; Postgraduate or higher degree * Home ownership: Renting, Own home with a mortgage, Home owned outright * Ethnicity: Asian, African, Aboriginal, Polynesian, Melanesian, Latin-American, African-American, American Indian, etc. * Religion: Catholic, Protestant, Muslim, Jewish, Buddhist, Hindu, Other In practice, most demographic segmentation utilizes a combination of demographic variables. The use of multiple segmentation variables normally requires analysis of databases using sophisticated statistical techniques such as cluster analysis or principal components analysis. 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 1980s. These include the following: ::Psychographic segmentation
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, 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
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 and some analysts have suggested that behavioural segmentation is killing off demographics. Typical behavioural variables and their descriptors include: * Purchase/Usage Occasion: regular occasion, special occasion, festive occasion, gift-giving * Benefit-Sought: economy, quality, service level, convenience, access * User Status: First-time user, Regular user, Non-user * Usage Rate/Purchase Frequency: Light user, heavy user, moderate user * Loyalty Status: Loyal, switcher, non-loyal, lapsed * Buyer Readiness: Unaware, aware, intention to buy * Attitude to Product or Service: Enthusiast, Indifferent, Hostile; Price Conscious, Quality Conscious * Adopter Status: Early adopter, late adopter, laggard * Scanner data from super market or credit card information data Note that these descriptors are merely commonly used examples. Marketers customize 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 customized for the specific application.Purchase/usage occasion
Purchase or usage occasion segmentation focuses on analyzing occasions when consumers might purchase or consume a product. This approach customer-level and occasion-level segmentation models and provides an understanding of the individual customers’ needs, behaviour, and value under different occasions of usage and time. Unlike traditional segmentation models, this approach assigns more than one segment to each unique customer, depending on the current circumstances they are under.Benefit-sought
Benefit segmentation (sometimes called ''needs-based segmentation'') was developed by Grey Advertising in the late 1960s. The benefits-sought by purchasers enables the market to be divided into segments with distinct needs, perceived value, benefits sought, or advantage that accrues from the purchase of a product or service. Marketers using benefit 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. The segments identified in this study were the naturalists, pure excitement seekers, escapists.Attitudinal segments
Attitudinal segmentation provides insight into the mindset of customers, especially the attitudes and beliefs that drive consumer decision-making and behaviour. An example of attitudinal segmentation comes from the UK's Department of Environment which segmented the British population into six segments, based on attitudes that drive behaviour relating to environmental protection: * Greens: Driven by the belief that protecting the environment is critical; try to conserve whenever they can * Conscious with a conscience: Aspire to be ''green''; primarily concerned with wastage; lack awareness of other behaviours associated with broader environmental issues such as climate change * Currently constrained: Aspire to be ''green'' but feel they cannot afford to purchase organic products; pragmatic realists * Basic contributors: Skeptical about the need for behaviour change; aspire to conform to social norms; lack awareness of social and environmental issues * Long-term resistance: Have serious life priorities that take precedence before a behavioural change is a consideration; their everyday behaviours often have a low impact on the environment, but for other reasons than conservation * Disinterested: View ''greenies'' as an eccentric minority; exhibit no interest in changing their behaviour; may be aware of climate change but have not internalized it to the extent that it enters their decision-making process.Hybrid segmentation
One of the difficulties organisations face when implementing segmentation into their business processes is that segmentations developed using a single variable base, e.g. attitudes, are useful only for specific business functions. As an example, segmentations driven by functional needs (e.g. “I want home appliances that are very quiet”) can provide clear direction for product development, but tell little how to position brands, or who to target on the customer database and with what tonality of messaging. Hybrid segmentation is a family of approaches that specifically addresses this issue by combining two or more variable bases into a single segmentation. This emergence has been driven by three factors. First, the development of more powerful AI and machine learning algorithms to help attribute segmentations to customer databases; second, the rapid increase in the breadth and depth of data that is available to commercial organisations; third, the increasing prevalence of customer databases amongst companies (which generates the commercial demand for segmentation to be used for different purposes). A successful example of hybrid segmentation came from the travel company TUI, which in 2018 developed a hybrid segmentation using a combination of geo-demographics, high-level category attitudes, and more specific holiday-related needs. Before the onset of Covid-19 travel restrictions, they credited this segmentation with having generated an incremental £50 million of revenue in the UK market alone in just over two years. Facebook has recently developed what marketing professor Mark Ritson describes as a “very impressive” hybrid segmentation using a combination of behavioural, attitudinal, and demographic data. With a clear break from the traditional paradigm of focusing on a single variable base, many marketers view hybrid segmentation as marking the beginning of a new era in segmentation.Other types of consumer segmentation
In addition to geographics, demographics, psychographics, and behavioural bases, marketers occasionally turn to other means of segmenting the market or developing segment profiles.Generational segments
A generation is defined as "a cohort of people born within a similar span of time (15 years at the upper end) who share a comparable age and life stage and who were shaped by a particular span of time (events, trends, and developments)." Generational segmentation refers to the process of dividing and analyzing a population into cohorts based on their birth date. Generational segmentation assumes that people's values and attitudes are shaped by the key events that occurred during their lives and that these attitudes translate into product and brand preferences. Demographers, studying population change, disagree about precise dates for each generation. Dating is normally achieved by identifying population peaks or troughs, which can occur at different times in each country. For example, in Australia the post-war population boom peaked in 1960, while the peak occurred somewhat later in the US and Europe, with most estimates converging on 1964. Accordingly, Australian Boomers are normally defined as those born between 1945–1960; while American and European Boomers are normally defined as those born between 1946–64. Thus, the generational segments and their dates discussed here must be taken as approximations only. The primary generational segments identified by marketers are: * Builders: born 1920 to 1945 *Cultural segmentation
Cultural segmentation is used to classify markets according to their cultural origin. Culture is a major dimension of consumer behaviour and can be used to enhance customer insight and as a component of predictive models. Cultural segmentation enables appropriate communications to be crafted for particular cultural communities. Cultural segmentation can be applied to existing customer data to measure market penetration in key cultural segments by product, brand, channel as well as traditional measures of recency, frequency, and monetary value. These benchmarks form an important evidence-base to guide strategic direction and tactical campaign activity, allowing engagement trends to be monitored over time. Cultural segmentation can be combined with other bases, especially geographics so that segments are mapped according to state, region, suburb, and neighborhood. This provides a geographical market view of population proportions and may be of benefit in selecting appropriately located premises, determining territory boundaries, and local marketing activities. Census data is a valuable source of cultural data but cannot meaningfully be applied to individuals. Name analysis (Online customer segmentation
Online market segmentation is similar to the traditional approaches in that the segments should be identifiable, substantial, accessible, stable, differentiable, and actionable. Customer data stored in online data management systems such as a CRM or DMP enables the analysis and segmentation of consumers across a diverse set of attributes. Forsyth et al., in an article 'Internet research' grouped current active online consumers into six groups: Simplifiers, Surfers, Bargainers, Connectors, Routiners, and Sportsters. The segments differ regarding four customers' behaviours, namely: * The amount of time they actively spend online, * The number of pages and sites they access, * The time they spend actively viewing each page, * And the kinds of sites they visit. For example, ''Simplifiers'' make over 50 percent of all online transactions. Their main characteristic is that they need easy (one-click) access to information and products as well as easy and quickly available service regarding products.Selecting target markets
Another major decision in developing the segmentation strategy is the selection of market segments that will become the focus of special attention (known as ''Criteria for evaluating segment attractiveness
There are no formulas for evaluating the attractiveness of market segments and a good deal of judgment must be exercised. Nevertheless, a number of considerations can be used to assist in evaluating market segments for overall attractiveness. The following lists a series of questions that can be asked.Segment size and growth
* How large is the market? * Is the market segment substantial enough to be profitable? (Segment size can be measured in the number of customers, but superior measures are likely to include sales value or volume) * Is the market segment growing or contracting? * What are the indications that growth will be sustained in the long term? Is any observed growth sustainable? * Is the segment stable over time? (Segment must have sufficient time to reach desired performance level)Segment structural attractiveness
* To what extent are competitors targeting this market segment? * Do buyers have bargaining power in the market? * Are substitute products available? * Can we carve out a viable position to differentiate from any competitors? * How responsive are members of the market segment to the marketing program? * Is this market segment reachable and accessible? (i.e., with respect to distribution and promotion)Company objectives and resources
* Is this market segment aligned with our company's operating philosophy? * Do we have the resources necessary to enter this market segment? * Do we have prior experience with this market segment or similar market segments? * Do we have the skills and/or know-how to enter this market segment successfully?Developing the marketing program and positioning strategy
When the segments have been determined and separate offers developed for each of the core segments, the marketer's next task is to design a marketing program (also known as the marketing mix) that will resonate with the target market or markets. Developing the marketing program requires a deep knowledge of key market segments' purchasing habits, their preferred retail outlet, their media habits, and their price sensitivity. The marketing program for each brand or product should be based on the understanding of the target market (or target markets) revealed in the market profile. Positioning is the final step in the S-T-P planning approach; Segmentation → Targeting → Positioning; a core framework for developing marketing plans and setting objectives. Positioning refers to decisions about how to present the offer in a way that resonates with the target market. During the research and analysis that forms the central part of segmentation and targeting, the marketer will have gained insights into what motivates consumers to purchase a product or brand. These insights will form part of the positioning strategy. According to advertising guru, David Ogilvy, "Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the minds of the target market. The goal is to locate the brand in the minds of consumers to maximize the potential benefit to the firm. A good brand positioning helps guide marketing strategy by clarifying the brand’s essence, what goals it helps the consumer achieve, and how it does so in a unique way." The technique known as perceptual mapping is often used to understand consumers' mental representations of brands within a given category. Traditionally two variables (often, but not necessarily, price and quality) are used to construct the map. A sample of people in the target market are asked to explain where they would place various brands in terms of the selected variables. Results are averaged across all respondents, and results are plotted on a graph, as illustrated in the figure. The final map indicates how the ''average'' member of the population views the brand that makes up a category and how each of the brands relates to other brands within the same category. While perceptual maps with two dimensions are common, multi-dimensional maps are also used. There are a number of different approaches to positioning: # Against a competitor # Within a category # According to product benefit # According to product attribute # For usage occasion # Along price lines e.g. a luxury brand or premium brand # For a user # Cultural symbols e.g. Australia's Easter Bilby (as a culturally appropriate alternative to the Easter Bunny).Basis for segmenting business markets
Segmenting business markets is more straightforward than segmenting consumer markets. Businesses may be segmented according to industry, business size, business location, turnover, number of employees, company technology, purchasing approach, or any other relevant variables. The most widely used segmentation bases used in business to business markets are geographics and firmographics.Weinstein, A., ''Handbook of Market Segmentation: Strategic Targeting for Business and Technology Firms'', 3rd ed., Routledge, 2013, Chapter 4 The most widely used bases for segmenting business markets are: : Geographic segmentation occurs when a firm seeks to identify the most promising geographic markets to enter. Businesses can tap into business census-type products published by Government departments to identify geographic regions that meet certain predefined criteria. : Firmographics (also known as ''emporographics'' or ''feature based segmentation'') is the business community's answer to demographic segmentation. It is commonly used inUse in customer retention
The basic approach to retention-based segmentation is that a company tags each of its active customers on four axes: ; Risk of customer cancellation of company service : One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry, this could be signaled through a customer's decline in spending on his or her card. ; Risk of customer switching to a competitor : Many times customers move purchase preferences to a competitor brand. This may happen for many reasons those of which can be more difficult to measure. It is many times beneficial for the former company to gain meaningful insights, through data analysis, as to why this change of preference has occurred. Such insights can lead to effective strategies for winning back the customer or on how not to lose the target customer in the first place. ; Customer retention worthiness : This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer and includes evaluation of customer lifecycles. This analysis of customer lifecycles is usually included in the growth plan of a business to determine which tactics to implement to retain or let go of customers. Tactics commonly used range from providing special customer discounts to sending customers communications that reinforce the value proposition of the given service.Segmentation: algorithms and approaches
The choice of an appropriate statistical method for the segmentation depends on a number of factors including, the broad approach ( a-priori or post-hoc), the availability of data, time constraints, the marketer's skill level, and resources.A-priori segmentation
A priori research occurs when "a theoretical framework is developed before the research is conducted". In other words, the marketer has an idea about whether to segment the market geographically, demographically, psychographically or behaviourally before undertaking any research. For example, a marketer might want to learn more about the motivations and demographics of light and moderate users in an effort to understand what tactics could be used to increase usage rates. In this case, the target variable is known – the marketer has already segmented using a behavioural variable – user status. The next step would be to collect and analyze attitudinal data for light and moderate users. The typical analysis includes simple cross-tabulations, frequency distributions and occasionally logistic regression or one of a number of proprietary methods. The main disadvantage of a-priori segmentation is that it does not explore other opportunities to identify market segments that could be more meaningful.Post-hoc segmentation
In contrast, post-hoc segmentation makes no assumptions about the optimal theoretical framework. Instead, the analyst's role is to determine the segments that are the most meaningful for a given marketing problem or situation. In this approach, the empirical data drives the segmentation selection. Analysts typically employ some type of clustering analysis or structural equation modeling to identify segments within the data. Post-hoc segmentation relies on access to rich datasets, usually with a very large number of cases, and uses sophisticated algorithms to identify segments. The figure alongside illustrates how segments might be formed using clustering; however, note that this diagram only uses two variables, while in practice clustering employs a large number of variables.Statistical techniques used in segmentation
Marketers often engage commercial research firms or consultancies to carry out segmentation analysis, especially if they lack the statistical skills to undertake the analysis. Some segmentation, especially post-hoc analysis, relies on sophisticated statistical analysis. Common statistical approaches and techniques used in segmentation analysis include: * Clustering algorithms – overlapping, non-overlapping and fuzzy methods; e.g. K-means or otherData sources used for segmentation
Marketers use a variety of data sources for segmentation studies and market profiling. Typical sources of information include:Internal sources
* Customer transaction records e.g. sale value per transaction, purchase frequency * Patron membership records e.g. active members, lapsed members, length of membership * Customer relationship management (CRM) databases * In-house surveys * Customer self-completed questionnaires or feedback formsExternal sources
* Commissioned research (where the business commissions a research study and maintains exclusive rights to the data; typically the most expensive means of data collection) * Data-mining techniques * Census data (population and business census) * Observed purchase behaviours * Government agencies and departments * Government statistics and surveys (e.g. studies by departments of trade, industry, technology, etc.) * Omnibus surveys (a standard, regular survey with a basic set of questions about demographics and lifestyles where an individual can add specific sets of questions about product preference or usage; generally lower cost than commissioned survey methods) * Professional/Industry associations/Employer associations * Proprietary surveys or tracking studies (also known as ''syndicated research''; studies carried out by market research companies where businesses can purchase the right to access part of the data set) * Proprietary databases/softwareCompanies (proprietary segmentation databases)
*See also
References
External links
{{Commonscat Demographics