Market Segmentation

Market segmentation is one of two general approaches to marketing; the other is mass-marketing. In the mass-marketing approach, businesses look at the total market as though all of its parts were the same and market accordingly. In the market-segmentation approach, the total market is viewed as being made up of several smaller segments, each different from the other. This approach enables businesses to identify one or more appealing segments to which they can profitably target their products and marketing efforts.

The market-segmentation process involves multiple steps (Figure 1). The first is to define the market in terms of the product's end users and their needs. The second is to divide the market into groups on the basis of their characteristics and buying behaviors.

Possible bases for dividing a total market are different for consumer markets than for industrial markets. The most common elements used to separate consumer markets are demographic factors, psychographic characteristics, geographic location, and perceived product benefits.

Demographic segmentation involves dividing the market on the basis of statistical differences in personal characteristics, such as age, gender, race, income, life stage, occupation, and education level. Clothing manufacturers, for example, segment on the basis of age groups such as teenagers, young adults, and mature adults. Jewelers use gender to divide markets. Cosmetics and hair care companies may use race as a factor; home builders, life stage; professional periodicals, occupation; and so on.

Psychographic segmentation is based on traits, attitudes, interests, or lifestyles of potential customer groups. Companies marketing new products, for instance, seek to identify customer groups that are positively disposed to new ideas. Firms marketing environmentally friendly products would single out segments with environmental concerns. Some financial institutions attempt to isolate and tap into groups with a strong interest in supporting their college, favorite sports team, or professional organization through logoed credit cards. Similarly, marketers of low-fat or low-calorie products try to identify and match their products with portions of the market that are health-or weight-conscious.

Geographic segmentation entails dividing the market on the basis of where people live. Divisions may be in terms of neighborhoods, cities, counties, states, regions, or even countries. Considerations related to geographic grouping may include the makeup of the areas, that is, urban, suburban, or rural; size of the area; climate; or population. For example, manufacturers of snow-removal equipment focus on identifying potential user segments in areas of heavy snow accumulation. Because many retail chains are dependent on high-volume traffic, they search for, and will only locate in, areas with a certain number of people per square mile.

Product-benefit segmentation is based on the perceived value or advantage consumers receive from a good or service over alternatives. Thus, markets can be partitioned in terms of the quality, performance, image, service, special features, or other benefits prospective consumers seek. A wide spectrum of businesses—from camera to shampoo to athletic footwear to automobile marketers—rely on this type of segmentation to match up with customers. Many companies even market similar products of different grades or different accompanying services to different groups on the basis of product-benefit preference.

Factors used to segment industrial markets are grouped along different lines than those used for consumer markets. Some are very different; some are similar. Industrial markets are often divided on the basis of organizational variables, such as type of business, company size, geographic location, or technological base. In other instances, they are segmented along operational lines such as products made or sold, related processes used, volume used, or end-user applications. In still other instances, differences in purchase practices provide the segmentation base. These differences include centralized versus decentralized purchasing; policy regarding number of vendors; buyer-seller relationships; and similarity of quality, service, or availability needs.

Although demographic, geographic, and organizational differences enable marketers to narrow their opportunities, they rarely provide enough specific information to make a decision on dividing the market. Psychographic data, operational lines, and, in particular, perceived consumer benefits and preferred business practices are better at pinpointing buyer groupings—but they must be considered against the broader background. Thus, the key is to gather information on and consider all pertinent segmentation bases before making a decision.

Once potential market segments are identified, the third step in the process is to reduce the pool to those that are (1) large enough to be worth pursuing, (2) potentially profitable, (3) reachable, and (4) likely to be responsive. The fourth step is to zero in on one or more segments that are the best targets for the company's product(s) or capacity to expand. After the selection is made, the business can then design a separate marketing mix for each market segment to be targeted.

Adopting a market-segmentation approach can benefit a company in several specific areas. First, it can give customer-driven direction to the management of current products. Second, it can result in more efficient use of marketing resources. Third, it can help identify new opportunities for growth and expansion. At the same time, it can bring a company the broad benefit of a competitive advantage.

Adopting the market-segmentation approach can also be accompanied by some drawbacks. Particularly when multiple segments are targeted, both production and marketing costs can be more expensive than mass marketing. Different product models, for example, are required for each segment. Separate inventories must be maintained for each version. And different promotion may be required for each market. In addition, administrative expenses go up with the planning, implementation, and control of multiple marketing programs.

During the late 1960s, market segmentation moved ahead of mass marketing as the predominant marketing approach. In the following decades, societal changes and wider economic opportunity continually expanded the number of groups with specialized product needs and buying power. In response, businesses increasingly turned to the segmentation approach to capture and/or hold market share.

Croft, Michael J. (1994). Market Segmentation: A Step-By-Step Guide to Profitable New Business. London: Routledge.

Dibb, Sally, and Simkin, Lyndon. (1996). The Market Segmentation Workbook: Target Marketing for Marketing Managers. London: Routledge.

Michman, Ronald D. (1991). Lifestyle Market Segmentation. New York: Praeger.

Weinstein, Art. (1994). Market Segmentation: Using Demographics, Psychographics, and Other Niche Marketing Techniques to Predict Model Customer Behavior. Chicago: Probus Publishing.

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