Market segmentation


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Market segmentation

  1. 1. Market segmentationWhile there may be theoretically ideal market segments, in reality every organization engaged in a market willdevelop different ways of imagining market segments, and create product differentiation strategies to exploit thesesegments. The market segmentation and corresponding product differentiation strategy can give a firm a temporarycommercial advantage.Criteria for SegmentingAn ideal market segment meets all of the following criteria: It is possible to measure. It has to be large enough to earn profit. It has to be stable enough that it does not vanish after some time. It is possible to reach potential customer via organizations promotion and distribution channel. It is internally homogeneous (potential customers in the same segment prefer the same product qualities). It is externally heterogeneous, that is, potential customers from different segments have different quality preferences. It responds similarly to a market stimulus. It can be reached by market intervention in a cost-effective manner. useful in deciding on marketing mixMarket segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumerswho have common needs and applications for the relevant goods and services. Depending on the specificcharacteristics of the product, these subsets may be divided by criteria such as age and gender, or other distinctions,like location or income. Marketing campaigns can then be designed and implemented to target these specificcustomer segments.Basis for segmenting consumer marketsGeographic segmentationThe market is segmented according to geographic criteria—nations, states, regions, countries, cities, neighborhoods,or zip codes. Geo-cluster approach combines demographic data with geographic data to create a more accurateprofile of specific [1] With respect to region, in rainy regions you can sell things like raincoats, umbrellas andgumboots. In hot regions you can sell summer wear. In cold regions you can sell warm clothes.Demographic SegmentationDemographic segmentation consists of dividing the market into groups based on variables such as age, gender, familysize, income, occupation, education, religion, race and nationality. As one might expect, demographic segmentationvariables are amongst the most popular bases for segmenting customer groups. This is partly because customerwants are closely linked to variables such as income and age. Also, for practical reasons, there is often much moredata available to help with the demographic segmentation process.
  2. 2. Psychographic SegmentationPsychographics is the science of using psychology and demographics to better understand consumers. Psychographicsegmentation: consumer are divided according to their lifestyle, personality, values. Aliens within the samedemographic group can exhibit very different psychographic profiles.[2]"Positive" market segmentationMarket segmenting is dividing the market into groups of individual markets with similar wants or needs that acompany divides into distinct groups which have distinct needs, wants, behavior or which might want differentproducts & services. Broadly, markets can be divided according to a number of general criteria, such as by industry orpublic versus private. Although industrial market segmentation is quite different from consumer marketsegmentation, both have similar objectives. All of these methods of segmentation are merely proxies for truesegments, which dont always fit into convenient demographic boundaries.Consumer-based market segmentation can be performed on a product specific basis, to provide a close matchbetween specific products and individuals. However, a number of generic market segment systems also exist, e.g. thesystem provides a broad segmentation of the population of the United States based on the statistical analysis ofhousehold and geodemographic data.The process of segmentation is distinct from positioning (designing an appropriate marketing mix for each segment).The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups toaddress; to understand their behavior; and to respond with appropriate marketing strategies that satisfy the differentpreferences of each chosen segment. Revenues are thus improved.Improved segmentation can lead to significantly improved marketing effectiveness. Distinct segments can havedifferent industry structures and thus have higher or lower attractivenessOnce a market segment has been identified (via segmentation), and targeted (in which the viability of servicing themarket intended), the segment is then subject to positioning. Positioning involves ascertaining how a product or acompany is perceived in the minds of consumers.This part of the segmentation process consists of drawing up a perceptual map, which highlights rival goods withinones industry according to perceived quality and price. After the perceptual map has been devised, a firm wouldconsider the marketing communications mix best suited to the product in question.Behavioral SegmentationIn behavioral segmentation, consumers are divided into groups according to their knowledge of, attitude towards,use of or response to a product. It is actually based on the behavior of the consumer.OccasionsSegmentation according to occasions. We segment the market according to the occasions of use. For example,whether the product will be used alone or in a group, or whether it is being purchased as a present or for personaluse.
  3. 3. BenefitsSegmentations according to benefits sought by the consumer.Using Segmentation in Customer RetentionThe basic approach to retention-based segmentation is that a company tags each of its active customers with 3values:Tag #1: Is this customer at high risk of canceling the companys service? One of the most common indicators of high-risk customers is a drop off in usage of the companys service. For example, in the credit card industry this could besignaled through a customers decline in spending on his or her card.Tag #2: Is this customer worth retaining? This determination boils down to whether the post-retention profitgenerated from the customer is predicted to be greater than the cost incurred to retain the customer. ManagingCustomers as Investments.[3][4]Tag #3: What retention tactics should be used to retain this customer? For customers who are deemed “save-worthy”, it’s essential for the company to know which save tactics are most likely to be successful. Tactics commonlyused range from providing “special” customer discounts to sending customers communications that reinforce thevalue proposition of the given service.Process for tagging customersNiche MarketingA niche is a more narrowly defined customer group who seek a distinct set of benefits. İdentified by dividing asegment into subsegments,distinct and unique set of needs,requires specialization, and is not likely to attract toomany competitors.Local MarketingMarketing programs tailored to the needs of local customer groups.Price discriminationMain article: Price discriminationWhere a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantitysold less, generating monopoly profits for the seller. These profits can be increased further if the market can besegmented with different prices charged to different segments charging higher prices to those segments willing andable to pay more and charging less to those whose demand is price elastic. The price discriminator might need tocreate rate fences that will prevent members of a higher price segment from purchasing at the prices available tomembers of a lower price segment. This behavior is rational on the part of the monopolist, but is often seen bycompetition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Areasin which this price discrimination is seen range from transportation to pharmaceuticals.[citation needed]
  4. 4. Algorithms and ApproachesAny discrete variable is a segmentation. For instance, customers might be segmented by gender (Male or Female)or attitudes (progressive or conservative). Numeric variables may be discretized to become segmentations, such asage ("<30" or ">=30") or income ("The 99% (AGI<US $300,000)" vs "The 1% (AGI >= US $300,000)").Segmentations can be obtained by any number of approaches. Minimally, an existing discrete variable may be chosenas a segmentation, also called "a priori" segmentation. At the other extreme, a research project may becommissioned to collect data on many attributes and use statistical analyses to derive a segmentation, also called"post-hoc" segmentation. In between, qualitative knowledge of the market based on experience may be used toidentify divisions that are likely to be useful.Common statistical techniques for segmentation analysis include: Clustering algorithms such as K-means or other Cluster analysis Statistical mixture models such as Latent Class Analysis Ensemble approaches such as Random ForestsLatent class analysis and k-means analysis may be viewed as identifying new variables that maximize the sum ofmutual information between the segmentation variable and a set of basis variables.[5]Market SegmentationMarket segmentation is the identification of portions of the market that are different from one another.Segmentation allows the firm to better satisfy the needs of its potential customers.The Need for Market SegmentationThe marketing concept calls for understanding customers and satisfying their needs better than the competition. Butdifferent customers have different needs, and it rarely is possible to satisfy all customers by treating them alike.Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to allcustomers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, andmass communication. The drawback of mass marketing is that customer needs and preferences differ and the sameoffering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, anotherfirm likely would enter the market with a product that serves a specific group, and the incumbant firms would losethose customers.Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them withthe same offering. The first step in target marketing is to identify different market segments and their needs.Requirements of Market SegmentsIn addition to having different needs, for segments to be practical they should be evaluated against the followingcriteria: Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified. Accessible: the segments must be reachable through communication and distribution channels.
  5. 5. Substantial: the segments should be sufficiently large to justify the resources required to target them. Unique needs: to justify separate offerings, the segments must respond differently to the different marketing mixes. Durable: the segments should be relatively stable to minimize the cost of frequent changes.A good market segmentation will result in segment members that are internally homogenous and externallyheterogeneous; that is, as similar as possible within the segment, and as different as possible between segments.Bases for Segmentation in Consumer MarketsConsumer markets can be segmented on the following customer characteristics. Geographic Demographic Psychographic BehavioralisticGeographic SegmentationThe following are some examples of geographic variables often used in segmentation. Region: by continent, country, state, or even neighborhood Size of metropolitan area: segmented according to size of population Population density: often classified as urban, suburban, or rural Climate: according to weather patterns common to certain geographic regionsDemographic SegmentationSome demographic segmentation variables include: Age Gender Family size Family lifecycle Generation: baby-boomers, Generation X, etc. Income Occupation Education Ethnicity Nationality Religion Social classMany of these variables have standard categories for their values. For example, family lifecycle often is expressed asbachelor, married with no children (DINKS: Double Income, No Kids), full-nest, empty-nest, or solitary survivor. Someof these categories have several stages, for example, full-nest I, II, or III depending on the age of the children.Psychographic Segmentation
  6. 6. Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO)surveys are one tool for measuring lifestyle. Some psychographic variables include: Activities Interests Opinions Attitudes ValuesBehavioralistic SegmentationBehavioral segmentation is based on actual customer behavior toward products. Some behavioralistic variablesinclude: Benefits sought Usage rate Brand loyalty User status: potential, first-time, regular, etc. Readiness to buy Occasions: holidays and events that stimulate purchasesBehavioral segmentation has the advantage of using variables that are closely related to the product itself. It is afairly direct starting point for market segmentation.Bases for Segmentation in Industrial MarketsIn contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. Theyevaluate offerings in more detail, and the decision process usually involves more than one person. Thesecharacteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments,and institutions.Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets mightbe segmented on characteristics such as: Location Company type Behavioral characteristicsLocationIn industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor forvendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In someindustries firms tend to cluster together geographically and therefore may have similar needs within a region.Company TypeBusiness customers can be classified according to type as follows: Company size Industry
  7. 7. Decision making unit Purchase CriteriaBehavioral CharacteristicsIn industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristicsmay include: Usage rate Buying status: potential, first-time, regular, etc. Purchase procedure: sealed bids, negotiations, etc.