Market segmentation

Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs, and then designing and implementing strategies to target their needs and desires using media channels and other touch-points that best allow to reach them.

Market segments allow companies to create product differentiation strategies to target them.

Criteria for segmenting

An ideal market segment meets all of the following criteria:

• It is possible to measure.
• It must be large enough to earn profit.
• 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, that is, 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.

Basis for segmenting consumer markets

Geographic segmentation

The 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 accurate profile of specific With respect to region, in rainy regions you can sell things like raincoats, umbrellas and gumboots. In hot regions you can sell summer wear. In cold regions you can sell warm clothes. A small business commodity store may target only customers from the local neighborhood, while a larger department store can target it's marketing towards several neighborhoods in a larger city or area.

Psychographic segmentation

Psychographics is the science of using psychology and demographics to better understand consumers. Psychographic segmentation: consumers are divided according to their lifestyle, personality, values and social class. Consumers within the same demographic group can exhibit very different psychographic profiles.

Behavioral segmentation

In behavioral segmentation, consumers are divided into groups according to their knowledge of, attitude towards, use of or response to a product.

Occasions

Segmentation according to occasions is based on the arising of special need and desires in consumers at various occasions. For example, for products that will be used in relation with a certain holiday. Products such as Christmas decorations or Diwali 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 their wedding or a funeral, occasions that only occurs a few times in a persons lifetime but happens so often in a large population that it can be considered a market segment.

Benefits

Segmentation takes place according to benefits sought by the consumer or which the product/service can provide.

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?

This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer.

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.

Price discrimination

Main article: Price discrimination

Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits 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.^{[citation needed]}

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

See also

• Demographic profile
• Mass marketing
• Niche market
• Precision marketing
• Psychographic
• Target market
• Industrial market segmentation

External links

• www.segmentationstudyguide.com