Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs and priorities, and then designing and implementing strategies to target them. Market segmentation strategies may be used to identify the target customers, and provide supporting data for positioning to achieve a marketing plan objective. Businesses may develop product differentiation strategies, or an undifferentiated approach, involving specific products or product lines depending on the specific demand and attributes of the target segment.
- 1 Criteria for segmenting
- 2 Methods for segmenting consumer markets
- 3 Using segmentation in customer retention
- 4 Price discrimination
- 5 Algorithms and approaches
- 6 Divide and Rule Political Concept
- 7 See also
- 8 References
Criteria for segmenting
An ideal market segment meets all of the following criteria:
- It must be large enough to earn profit.
- It is possible to measure.
- It must be stable enough that it does not vanish after some time.
- It is possible to reach potential customers via the organization's promotion and distribution channel.
- It is internally homogeneous (potential customers in the same segment prefer the same product qualities).
- It is externally heterogeneous(potential customers from different segments have different quality preferences).
- It responds consistently to a given market stimulus.
- It can be reached by market intervention in a cost-effective manner.
- It is useful in deciding on the marketing mix.
- It identifies the target customer(s) (surrogate(s))
- It provides supporting data for a market positioning or sales approach.
Methods for segmenting consumer markets
Marketers can segment according to geographic criteria—nations, states, regions, countries, languages, cities, neighborhoods, or postal codes. The geo-cluster approach combines demographic data with geographic data to create a more accurate or specific profile. With respect to region, in rainy regions merchants can sell things like raincoats, umbrellas and gumboots. In hot regions, one can sell summer clothing. A small business commodity store may target only customers from the local neighborhood, while a larger department store can target its marketing towards several neighborhoods in a larger city or area, while ignoring customers in other continents. Geographic Segmentation is important and may be considered the first step to international marketing, followed by demographic and psychographic segmentation. The use of national boarders is the institutional use of geographic segmentation, although geographic segments may be classified by identified geological regions.
Segmentation according to demography is based on variables such as age, gender, occupation and education level  or according to perceived benefits which a product/service may provide. Benefits may be perceived differently depending on a consumer's stage in the life cycle. Demographic segmentation divides markets into different life stage groups and allows for messages to be tailored accordingly.
Behavioral segmentation divides consumers into groups according to their knowledge of, attitude towards, usage rate or response to a product There is an extra connectivity with all other market related sources.
Psychographic segmentation, which is sometimes called Lifestyle. This 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. Psychographic is highly important to segmentation, because it identifies the personal activities and targeted lifestyle the target subject endures, or the image they are attempting to project. Mass Media has a predominant influence and effect on Psychographic segmentation. Lifestyle products may pertain to high involvement products and purchase decisions, to speciality or luxury products and purchase decisions. Lifestyle segmentation reflects on how the target subject identifies themselves, or how they desire to identify themselves in society. By identifying and understanding consumer lifestyle, businesses can develop promotional mixes and product lines, which tailor to their needs.
Segmentation according to occasions relies on the special needs and desires of consumers on various occasions - for example, for products for use in relation with a certain holiday. Products such as decorations or lamps are marketed almost exclusively in the time leading up to the related event, and will not generally be available all year round. Another type of occasional market segments are people preparing for a wedding or a funeral, occasions which only occur a few times in a person's lifetime, but which happen so often in a large population that ongoing general demand makes for a worthwhile market segment.
Segmentation by benefits
Segmentation can take place according to benefits sought by the consumer.
Cultural Segmentation is used to classify markets according to cultural origin. Culture is a strong dimension of consumer behaviour and is used to enhance customer insight and as a component of predictive models. Cultural segmentation enables appropriate communications to be crafted to particular cultural communities, which is important for message engagement in a wide range of organisations, including businesses, government and community groups. 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 also be mapped according to state, region, suburb and neighbourhood. 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 (onomastics) is the most reliable and efficient means of describing the cultural origin of individuals. The accuracy of using name analysis as a surrogate for cultural background in Australia is 80-85%, after allowing for female name changes due to marriage, social/political reasons or colonial influence. The extent of name data coverage means a user will code a minimum of 99 percent of individuals with their most likely ancestral origin.
Multi-Variable Account Segmentation
In Sales Territory Management, using more than one criterion to characterize the organization’s accounts, such as segmenting sales accounts by government, business, customer, etc. and account size/duration, in effort to increase time efficiency and sales volume.
Using segmentation in customer retention
The basic approach to retention-based segmentation is that a company tags each of its active customers with three values:
- Is this customer at high risk of canceling the company's 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.
- Is this customer worth retaining?
- What retention tactics should be used to retain this customer?
For customers who are deemed worthy of saving, it is essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing special customer discounts to sending customers communications that reinforce the value proposition of the given service.
Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the price can be increased further if the market can be segmented with different prices charged to different segments charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behavior is rational on the part of the monopolist, but is often seen by competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Areas in which this price discrimination is seen range from transportation to pharmaceuticals. Price discrimination may be considered price-fixing under the control of an oligopoly or consortium in certain circumstances of deregulation and leisure.
Algorithms and approaches
Any existing discrete variable is a segmentation - this is called "a priori" segmentation, as opposed to "post-hoc" segmentation resulting from a research project commissioned to collect data on many customer attributes. Customers can be segmented by gender ('Male' or 'Female') or attitudes ('progressive' or 'conservative'), but also by discretized numeric variables, such as by age ("<30" or ">=30") or income ("The 99% (AGI<US $300,000)" vs "The 1% (AGI >= US $300,000)").
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 Forests
Divide and Rule Political Concept
In politics and sociology, divide and rule (or divide and conquer) is gaining and maintaining power by breaking up larger concentrations of power into pieces that individually have less power than the one implementing the strategy. The concept refers to a strategy that breaks up existing power structures and prevents smaller power groups from linking up.
- Demographic profile
- Mass marketing
- Niche market
- Precision marketing
- Target market
- Industrial market segmentation
- Sagacity Segmentation
- 'What is geographic segmentation' Kotler, Philip, and Kevin Lane Keller. Marketing Management. Prentice Hall, 2006. ISBN 978-0-13-145757-7
- Reid, Robert D.; Bojanic, David C. (2009). Hospitality Marketing Management (5 ed.). John Wiley and Sons. p. 139. ISBN 9780470088586. Retrieved 2013-06-08. "[...] market segmentation can be based on the benefits that consumers are seeking when they purchase a product."
- Riley, Jim (2012-09-23). "Market Segmentation - Demographics". Tutor2u.net. Retrieved 15 July 2014.
- Fripp, Geoff.“Market Segmentation Bases” Market Segmentation Study Guide
- "Market Segmentation and Targeting". Academic.brooklyn.cuny.edu. 2011. Retrieved 15 July 2014.
- Dove, Michael (2013-09-05). "Cultural Segmentation - Customer Segmentation". OriginsInfo.com.au. Retrieved 6 October 2014.Cultural Segmentation
- Dove, Michael (2013-09-05). I have census data. How does Origins add value? "Data Reliability". OriginsInfo.com.au. Retrieved 8 October 2014.
- Dove, Michael (2013-09-05). "Cultural Segmentation - How Does Origins Work". OriginsInfo.com.au. Retrieved 6 October 2014.
- "CHAPTER 14 - Time, Territory, and Self-Management: Keys to Success". People.tamu.edu. Retrieved 15 July 2014.
- Gupta, Sunil. Lehmann, Donald R. Managing Customers as Investments: The Strategic Value of Customers in the Long Run, pages 70-77 (“Customer Retention” section). Upper Saddle River, NJ: Pearson Education/Wharton School Publishing, 2005. ISBN 0-13-142895-0
- Goldstein, Doug. “What is Customer Segmentation?” MindofMarketing.net, May 2007. New York, NY.
- Bhanji, Shaira (2 April 2012). "Price Discrimination in Pharmaceutical Companies: The Method to the "Madness"". Harvard College Global Health Review. Retrieved 15 July 2014.