The market contains various products/services, and they differ from each other in their specifications, quality, durability, and prices. The customers also differ in their habits, preferences, hobbies, income, culture, purchase decisions, etc. In order to streamline the marketing process, the consumers of similar characteristics are grouped in segments. This is termed as ‘market segmentation.’
Market segmentation means a division of a market into smaller groups having similar needs and qualities. This helps the company to modify the products or services to suit the different groups more effectively. Even the advertisement messages and promotional methods are needed to be modified so that they are well-understood by the group.
According to Philip Kotler, “Market segmentation is sub-dividing a market into distinct and homogeneous subgroups of customers, where any group can conceivably be selected as a target market to be met with the distinct marketing mix.”
The quality of precision in market segmentation is helpful in accurately defining customer needs. The actual objective of segmentation is to develop a separate marketing plan for each segment so that consumers can be better served and their expectations are met effectively. In marketing planning, market segmentation is perceived as the first step towards betterment.
Requirements for Effective Segmentation
In order to profit from segmentation, the segments must meet certain requirements:
1) Measurable: While establishing a market segment, the consumers of the product/services are counted along with their financial status and characteristics. The number of such consumers has to be so much that they can be measured with ease. These calculations are obtained only after the marketing analysis and research work is done.
2) Substantial: The market segment must have customers of similar characteristics like age group, financial status, culture, and should be aware of the different brands of the product/services. The size of the segment should be substantial so that a suitable marketing strategy can be adapted, which is convenient for all.
3) Accessible: The services and market segment should be compatible with the price and financial status of the population. The location of the segment should have an easy transportation facility for the smooth flow of the services. One consumer group’s marketing strategy is always different from another consumer group due to differences in their needs.
4) Differentiable: The marketing managers should clearly differentiate between the different segments since each segment requires different marketing strategies. The consumers react differently to other products/services, and the advertisements are also designed in accordance with the consumers of different locations. Various marketing tools are used to take due care of the local area’s nuances to attract the customers.
5) Actionable: A well-defined market segmentation is always actionable on the part of the consumers, who are captivated by the products, services, advertisements, and marketing strategies and, as a result, indulge in purchasing activity. The product/service placed at a reasonable price, coupled with marketing efforts, is bound to bring favorable returns.
Process of Market Segmentation
The various steps which are involved in the market segmentation process are described below:
1) Identify Bases for Segmenting the Market: By clubbing the different consumers sharing similar types of characteristics that are seen as substantial to design, delivery, promote, or price a certain service, the segmentation of the market can be accomplished. Demographic segmentation, geographic segmentation, psychographic segmentation, and behavioral segmentation are the most widely used basis for market segmentation.
Either one or the combination of many bases specified above can be used for identifying the segments. For example, for the working people who have their office from 8 A.M. to 5 P.M., fitness classes can be offered at 5 A.M. and 5:30 P.M.
2) Develop Profiles of Resulting Segments: After identifying the market segment, developing a certain profit is quite important. When we talk about consumer markets, demographic characterizations, or psychographic or usage segments, it can be used to profile the consumer segments.
The importance of this stage is that all the profiles must be different from each other. The desired benefits form the segmentation may not be accomplished if these segments are not distinct from each other.
3) Develop Measures of Segment Attractiveness: We should notice that the existence of a certain customer segment does not indicate that the segment’s selection as a target market by the company is justified. In fact, attractiveness is the main point to evaluate segmentation.
In order to ensure the worth of investment in marketing and relationship costs related to a certain group, the firms are required to have a better understanding of the size and purchasing power of the segments in measurable form.
Apart from this, accessibility to this segment is also required, which means that some kind of marketing vehicles or advertising tools must be presented, which can facilitate the organization to approach the customer segment.
4) Select the Target Segments: On the basis of evaluation, the target market or segment to be served will be chosen by the service marketers. The firm needs to decide on the size and the prospect of growth in the segment. In order to decide whether the substantial potential is present in the market or not, the size of the market has to be estimated, and demand needs to be forecasted.
The final choice regarding the target segments can be further assisted by the competitive analysis incorporating the present and future competitors, the bargaining power of customers and suppliers, substitute products. Finally, the firm has to decide whether servicing the market segment helps fulfill the organizational objectives.
5) Ensure that Target Segments are Compatible: Compared to other steps in the market segmentation process, this step is considered the most critical, especially for the service firms than for the manufacturing organizations. As the presence of the customers is quite essential for the performance of almost all the services, thus it is the responsibility of the service marketer to ensure the compatibility of customers with each other.
For example, if a hotel selects to serve two different segments during the non-peak season, which are not compatible with each other, merging both segments may not be possible. However, some marketers may think that merging of two segments in this example is possible so that they have no interaction with each other, but if it is not ensured, then the customers of either segment may have some negative effect, which will deteriorate the business of the hotel.
Bases for Segmentation
The bases for service market segmentation are as follows:
1) Geographical Segmentation: This includes the segmentation of the market based on location, size, population density, climate, etc. This type of segmentation enables the planning for better marketing. Rural and urban markets can be easily segmented by such segmentation. The geographic location is very helpful for marketers to design the marketing plan.
For example, geographical segmentation is used by the banks when they make decisions related to the opening of a new branch. As for the banks, it is not possible to have branches in almost every location. Thus the resources of the banks must be allocated cautiously so that their business goals can be accomplished.
This can be achieved by establishing a new branch office in that geographical location, which seems to be quite promising.
2) Demographic Segmentation: Another important basis commonly used for market segmentation is the demography, i.e., age, gender, income, education, religion, family size, social class, nationality, etc. Most marketers admire this type of division of the market.
For example, the bank can develop an executive banking group, particularly for the doctors, accountants, businessmen, etc. The use of demographic segmentation is quite extensive, particularly in banking, tourism, and the attractions field.
Demographic segmentation is the basis for most of the tourism-marketing stereotypes. For example, museums are commonly considered popular among older people, while the youth favors the theme parks. Women are considered to be attracted by shopping while sightseeing is more popular among men.
3) Psychographic Segmentation: Psychographic segmentation of the market is not correct. It is generally found that persons of the same age, equal financial status, educational background, and occupation adopt different procedures in purchasing the products, selecting a new product, or choosing a shop.
This is due to some psychographic factors, including personality, values, lifestyles, beliefs, etc.
- “Young professional on fast track” can be treated as the main market for credit card sales for the banking industry.
- With the help of 5-year compulsory deposit schemes, banks can concentrate on traditional consumers who are looking to protect their savings.
The below-mentioned variables can form the basis of psychographic segmentation:
- Lifestyle: This form of segmentation is a new attempt to determine the different dimensions of consumers’ lives, influencing their purchase behaviors. It mainly deals with questioning the respondents to express their extent of agreement or disagreement through a combination of statements (which could prolong till 25 pages of statements) related to their Activities, Interests, and Opinions and called AIO statements. Once the analysis of these responses is done, the marketers will be in a position to judge whether they can be combined as a unique set of customers or not. If there is a grouping, then a certain lifestyle profit will be given by the marketer for each group. This will facilitate the marketers to understand customer’s lifestyles better, how they buy products that suit their lifestyles, different alternative products, and the type of advertising theme that can influence the customers. Most of the merchants, e.g., Stuarts Department Stores who mainly focus on low-income group customers, have comprehensive information related to the lifestyles of these customers along with their shopping habits: For example, the merchants may have information about a group of customers that they do not prefer to buy seasonal merchandise until the weather breaks.
- Social Class: The market can also be segmented based on social class, which includes varied characteristics and wants of the customers belonging to various classes. The markets are often segmented based on social class by marketers. The upper-class consumer segment is entertained by departmental prestige stores, while the lower class consumer segment is tried to be satisfied by the discount department stores and retailers. In order to attract the customers belonging to a certain social class, advertisements, furnish stores, product features, and different elements of the marketing mix are designed and developed by the marketers that match the traits of these social class consumers. For example, General Wine and Spirits Company used the ad slogan “what the rich give the wealthy” to promote its Royal Salute Scotch whiskey.
- Personality: Another variable in psychographic segmentation is personality. Different individuals have different personalities, which determines their buying behavior. Marketers utilize this phenomenon to design products having a brand personality. Thus they segment the market according to the personality of individuals. The banks are trying to attract sociable customers by showing friendly behavior as the customer service staff are asked to use the customers’ first names. In fact, most of the cosmetics marketers and mutual funds have aggressive customers as their target customers. The relationship between the different personality traits and the buying behavior has been established in many research studies, but these results are not substantially validated. Yet, most marketers use the personality as the prime factor while segmenting their market with a faith that the customer’s preference to buy a specific product and brand is greatly affected by his or her personality.
4) Volume Segmentation: Depending upon the usage rate, usage expenses, and brand loyalty, the ultimate consumers and organizational consumers can also be segmented. In the case of uses, the market is segmented based on volume, which is as below: i) Heavy usage (also known as heavy half), ii) Medium usage, iii) Light usage, iv) Non-users.
The customers who consume a larger proportion of goods and services sold in comparison to the market size are labeled as heavy usage segments. In most businesses, a larger proportion of sales, e.g., 80%, is generated by a small proportion of customers, say 25%. This is termed as Pareto Principle.
5) Benefit Segmentation: The process of segmenting the market based on various benefits sought from a certain product is termed as benefit segmentation. For example, graphics-oriented hardware and software are offered by Apple for desktop publishing products, and the customers can utilize the benefits of easy typing settings in the normal business environment.
On the other hand, customers can be segmented together looking for speedy and comfortable banking services. The services, such as telephone loan services, promising same day approval, can be promoted to this consumer segment.
Customer Loyalty Segmentation
An important indicator of the successful marketing of an enterprise is the number of loyal customers it has. Customer loyalty, therefore, is an important index to determine the competitive position of the firm. This is also used to segment the market, evolve the marketing strategy for each segment, and encourage customer loyalty. Based on loyalty, we have the following segments:
1) Hard Core Loyals: Hardcore loyals are those customers who continue to buy the same brand over and over again. The test here is, will the customer refuse the competition brand, if offered, and insist on buying his preferred brand? Newspaper readers, cigarette smokers, and tea drinkers are some customer groups where such hardcore loyalties are commonly visible.
2) Soft Core Loyals: Those loyal to two or three brands in a product group are called soft core loyal. For example, a housewife who buys Lux, Lux, Lux, Cinthol, Cinthol, Cinthol, and Pears, Pears, Lux in her nine shopping cycles will be considered a softcore loyal. The marketer needs to watch such customers and motivate them to shift to the hardcore loyalty segment.
3) Switchers: Switchers are those customers who never stick to a brand. These are the customers for whom brand switching is as easy as changing a shirt. They may switch for variety or a special deal. In either case, this is a slipping market segment for the marketer.
The firm needs to examine why it is losing its customers to competitor brands. This can help it to evolve marketing strategies to strengthen its competitive position in the market.