Market Segmentation

Market Segmentation

In this lesson, you’re expected to:
– learn why segmentation is a crucial element in the STP process
– understand the process of how to perform a segmentation analysis
– discover the different levels and bases of market segmentation

Today, Segmentation, Targeting and Positioning (STP) is a familiar strategic approach in modern marketing. It is one of the most commonly applied marketing models in practice. In a poll conducted by Smart Insights, asking about the most popular marketing model, it is the second most popular, only beaten by the SWOT Matrix.

Segmentation, targeting, and positioning together comprise a three-stage process:
(1) determine which kinds of customers exist
(2) select which ones you are best off trying to serve
(3) implement your segmentation by optimizing your products or services for that segment.

How to use STP?

Through segmentation, you can identify niches with specific needs, mature markets to find new customers and thus deliver more focused and effective marketing messages.

The needs of each segment are the same, so marketing messages should be designed for each segment to emphasize relevant benefits and features. This approach is efficient, delivering the right mix to the same group of people, rather than a scattergun approach.

See full-size image here:
What is Segmentation?

Segmentation is simply a way of arranging your customers into smaller groups according to type. These distinct sub-groups or segments should be characterized by particular attributes. Using these attributes, you can target specific, relevant marketing messages at each group.

And it’s not just about what you say. How you communicate is also vital, and segmentation often requires a carefully structured marketing mix. That’s because some customers may prefer the direct approach, such as telephone marketing, while others respond better to a local advertising campaign.

Why is Segmentation Necessary?

No two consumers are alike. Since customers will have different reactions to your concept or communication, it is not possible to take a one-size-fits-all approach to your marketing strategy.

Thus, segmentation is the solution. It allows differing customer groups to be approached in an effective way. It also gives you insight into which segment is best suited to your product or service, and which segments you can ignore.

Segmenting a market enables you to develop a deeper understanding of your customers and discover what makes them tick. When you are communicating a message, it will be more effective if the recipient of the message finds it relevant.

How to segment customers
Segmentation does not have to be complex. For a small company, it could be about recognizing that you have two or three distinct customer types with different needs. Start with the simple question: Who do we want to talk to?

Segmentation principles can then add several layers of intelligence, based on key differentials, such as:
– spending patterns
– gender
– where they live
– age
– socio-economic group

What is important is not surface differences, but those differences that actually affect buying behaviour.

Performing Segmentation Analysis

Segmentation, in practice, means dividing up the market according to pre-selected characteristics. This division makes groups of comparable potential customers. An attraction park might, for example, segment its customers according to interests, readiness to travel, visiting patterns and composition of group. Segmentation generally uses the following characteristics:

– Geographical (region, city, district)
– Demographic (age, gender, household composition)
– Socio-economic (income, profession, education)
– Psychographic (personal characteristics, lifestyle)
– Behavioral (loyalty, frequency of use, readiness to buy)

Segmentation is an instrument for concepts which are difficult to grasp, such as values, emotions and identity.

Customer Segmentation Process

#1 Understand customer needs
#2 Group customers by groups
#3 Identify most attractive segments
#4 Develop unique value propositions by segment
#5 Develop unique go-to-market strategies by segment
View full-size image:
Levels of market segmentation
1) Mass Marketing

The starting point for discussing segmentation is mass marketing. In mass marketing, the seller engages in the mass production, distribution and promotion of one item for all buyers.

Henry Ford epitomized this strategy when he offered the Model-T Ford in one colour – black. Coca-Cola also practised mass marketing when it sold only one kind of Coke in a standard bottle.

Decline of Mass Marketing

The argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can lead to lower prices or higher margins. This is the least cost production paradigm that has served many firms well for several decades.

However, in contemporary buyers’ markets, companies are faced with new challenges. Increasing levels of competition present customers with a wide choice of possible suppliers. This results in them wanting more for their money and there has been a transformation in the concept of value.

Firms now have to provide market offerings that their customers perceive to possess the right value standard. Also many markets display an increasing trend to break up into several segments. Fewer standardized products and services can be offered to customers. Thus, the use of mass marketing is in decline and most companies are turning to micro-marketing at one of four levels: segments, niches, local areas and individuals. 

2) Segment Marketing

A market segment consists of a group of customers who share a similar set of needs and wants. Rather than creating the segments, the marketer’s task is to identify them and to decide which one(s) to target.

Segment marketing offers key benefits over mass marketing. The company can offer a market offering that can be positively differentiated from the competition.

3) Niche Marketing

A niche is a more narrowly defined customer group seeking a distinctive mix of benefits or values. Marketers usually identify niches by dividing a market segment into sub-segments.

For example, while Hertz, Avis and Eurocar specialize in airport rental cars for business and leisure travellers, Enterprise has attacked the low-budget market by primarily renting to customers whose cars have been written off or stolen. By creating unique associations with low cost and convenience in an overlooked niche market, Enterprise has been highly profitable.

The objective of a niche competitor, such as Porsche, is to be a large fish in a small pool. The niche market customers have a distinct set of value requirements and they will pay a premium to the firm that provides the best market offering. Niche markets are generally fairly small in terms of volume but constitute a sufficiently attractive size, profit and growth potential.

4) Local Marketing

Target marketing is leading to marketing programmes tailored to the needs and wants of local customer groups in trading areas, neighbourhoods, even individual stores.

Retail firms such as Starbucks have all found great success emphasizing local marketing initiatives, but other types of firms are also going local. Supermarkets vary the stock they carry to suit the locations of their stores while IKEA customizes merchandise to match the perceived demand of local areas.

5) Individual Marketing

The ultimate level of segmentation results in ‘segments of one’, ‘customized marketing’ or ‘one- to-one marketing’. Today, customers are taking a more individual initiative in determining what and how to buy.

They log on to the Internet; look up information and evaluations of product or service offers; conduct dialogues with suppliers, users and product critics; and, in many cases, design the product they want.

[Optional] Levels of Market Segmentation
For more details, check out this link:
Bases for segmenting market
1) Geographic Segmentation

Geographic segmentation involves dividing the market into different geographical units such as nations, states, regions, counties, cities or neighborhoods.

A company can operate in one or a few areas, or operate in all but pay attention to local variations.

2) Demographic Segmentation

The market is divided into groups on the basis of variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality and social class.

One reason demographic variables are so popular with marketers is that they are often associated with customer needs and wants. Another is that they are easy to measure.

3) Psychographic Segmentation

In psychographic segmentation, buyers are divided into different groups on the basis of psychological/personality traits, lifestyle or values. People within the same demographic group can exhibit very different psychographic profiles and thus display different lifestyles.

Psychographic profiles are typically developed with reference to three variables known as the AIO factors that describe individual lifestyles: activities, interests, opinions.

While demographics explain ‘who’ your buyer is, psychographics inform you ‘why’ your customer buys.

4) Behavioral Segmentation 

In behavioral segmentation, marketers place buyers into groups on the basis of their knowledge of, attitude towards, use of or response to a product.

Behavioral Variables: Many marketers believe variables such as occasions, benefits, user status, usage rate, loyalty status and attitude are the best starting points for constructing market segments.

Decision Roles: People play five roles in a buying decision – initiator, influencer, decider, buyer and user. 

For example, assume a wife initiates a purchase by requesting a coffee maker for her birthday. The husband may then seek information from many sources, including his friend who has a Nespresso and is a key influencer in what models to consider. After presenting the alternative choices to his wife, he then purchases her preferred model which, as it turns out, is a Nespresso.

Different people are playing different roles, but all are crucial in the decision process and ultimate consumer satisfaction. 

[Optional] Top 4 Bases for Segmenting Consumer Market
For more information on how to segment consumers, read the following article:
Jim Rohn Sứ mệnh khởi nghiệp