Market segmentation can trace its origins back to the 1930s when the prevailing theories of perfect competition and pure monopoly no longer seemed to fit the situation. A new monopolistic theory emerged based around the idea that every firm was in itself in some important way unique. Every business was in effect able to create its own local monopolistic position by offering a product different in some way from others. That differentiation could be based on certain product characteristics, packaging, distribution or the real or imagined value associated with, for example, a brand name.
Economists called this process “product differentiation” and concluded that it resulted in different demand curves for each group of different buyers. The term and concept of “market segmentation” have been attributed to Wendell R. Smith, a marketing consultant. His article “Product differentiation and market segmentation as alterative marketing strategies”, published in The Journal of Marketing, vol. 21, 1: pp. 3-8 on Jul 1st 1956, won the Alpha Kappa Psi Foundation award as the most significant marketing article of the year.
That customers have different needs means that we need to organize our marketing effort so as to address those individually. Customers and potential customers have to be organized into clusters or groups of ‘similar’ types. For example, a carpet/upholstery cleaning business can have private individuals and business clients as its clients. These two segments are fundamentally different, with one segment being more focused on cost and the other more concerned that the work is carried out with the least disruption to the business. Also, each of these customer groups is motivated to buy for different reasons, and the promotional message has to be modified accordingly.
Every business will have segmentation criteria unique to its industry and prevailing needs. These are some of the more ubiquitous ways by which markets can be segmented.
- Psychographic Segmentation divides individual consumers into social groups such as ‘Yuppies’ (young, upwardly mobile professionals), ‘Bumps’ (borrowed-to-the-hilt, upwardly mobile, professional showoffs) and ‘Jollies’ (jet-setting oldies with lots of loot). A recent addition is Generation C born out of the Covid-19 pandemic, though unsurprisingly there is little firm agreement on their characteristics. These categories try to show how social behavior influences buyer behavior.
Forrester Research, claims when it comes to determining whether consumers will or will not go on the internet, how much they will spend and what they will buy, demographic factors such as age, race, and gender don’t matter anywhere near as much as the consumers’ attitudes towards technology. Forrester has used two categories: technology optimists and technology pessimists, and has used these alongside income and what it calls ‘primary motivation’ – career, family and entertainment – to divide up the whole market. Each segment is given a new name – ‘Techno-strivers’, ‘Digital Hopefuls’ and so forth.
- Benefit Segmentation recognizes that different people can get different satisfaction from the same product or service. Lastminute.com claims two quite distinctive benefits for its users. First, it aims to offer people bargains that appeal because of price and value. Second, the company has recently been laying more emphasis on the benefit of immediacy. This idea is rather akin to the impulse-buy products placed at checkout tills, which you never thought of buying until you bumped into them on your way out. Whether 10 days on a beach in Goa or a trip to Istanbul are the types of things people ‘pop in their baskets’ before turning off their computers, time will tell.
- Geographic Segmentation arises when different locations have different needs. For example, an inner-city location may be a heavy user of motorcycle dispatch services, but a light user of gardening products. However, locations can ‘consume’ both products if they are properly presented. An inner-city store might sell potatoes in 1 kg bags, recognizing that its customers are likely to be on foot. An out-of-town shopping center may sell the same product in 20 kg sacks, knowing its customers will have cars.
- Multivariant Segmentation is where more than one variable is used. This can give a more precise picture of a market than using just one factor.
These are some useful rules to help decide whether a market segment is worth trying to sell into:
- Measurability. Can you estimate how many customers are in the segment? Are there enough to make it worth offering something ‘different’?
- Accessibility. Can you communicate with these customers, preferably in a way that reaches them on an individual basis? For example, you could reach the over-50s by advertising in a specialist ‘older people’s’ magazine with reasonable confidence that young people will not read it. So if you were trying to promote Scrabble with tiles 50 per cent larger, you might prefer that young people did not hear about it. If they did, it might give the product an old-fashioned image.
- Open to profitable development. The customers must have money to spend on the benefits that you propose to offer.
- Size. A segment has to be large enough to be worth your exploiting it, but perhaps not so large as to attract larger competitors.
Segmentation is an important marketing process, as it helps to bring customers more sharply into focus, and it classifies them into manageable groups. It has wide-ranging implications for other marketing decisions. For example, the same product can be priced differently according to the intensity of customers’ needs. The first- and second-class mail is a classic example. It is also a continuous process that needs to be carried out periodically, for example when strategies are being reviewed.
Contributed to Branding Strategy Insider by: Colin Barrow, Author of The 30 Day MBA In Marketing (Kogan Page)
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