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Market segment
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A market segment is a subgroup of people or organizations sharing one or more characteristics that cause them to have similar product and/or service needs. A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a market stimulus, and it can be reached by a market intervention.
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Encyclopedia
A market segment is a subgroup of people or organizations sharing one or more characteristics that cause them to have similar product and/or service needs. A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a market stimulus, and it can be reached by a market intervention. The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts. These can broadly be viewed as 'positive' and 'negative' applications of the same idea.
"Positive" market segmentation
Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private sector. Generally segmentation is conducted using demographic, geographic, attitudinal or behavioral data. Small segments are often termed niche markets or specialty markets. However, all segments fall into either consumer or industrial markets. Although industrial market segmentation is quite different from consumer market segmentation, both have similar objectives. All of these methods of segmentation are merely proxies for true segments, which don't always fit into convenient demographic boundaries.
Consumer-based market segmentation can be performed on a product specific basis, to provide a close match between specific products and individuals. However, a number of generic market segment systems also exist, e.g. the Claritas Prizm system provides a broad segmentation of the population of the United States based on the statistical analysis of zip codes.
The process of segmentation is distinct from targeting (choosing which segments to address) and positioning (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to address; to understand their behaviour; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved.
Improved segmentation can lead to significantly improved marketing effectiveness. Distinct segments can have different industry structures and thus have higher or lower attractiveness (Michael Porter). With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased.
"Negative" market segmentation
An example of market segmentation which does not benefit the consumer would be 'Rip Off Britain', the policy many computer software and consumer entertainment companies had of charging $X in America and £X in the UK for the same product, at a time when the pound was worth twice as much as the dollar. On occasion it also happened that the products sold in the UK were sometimes inferior, in that they were missing features (DVD extras for example) present in the US version. The IT consumer magazine PC Pro has been particularly scathing of manufacturers like Microsoft and Adobe for their pricing policies, though retail companies like Amazon have also come under fire. DVD and Blu-Ray region coding (for otherwise identical products playing in otherwise identical readers) is possibly the most well known application of this philosophy.
Successful Segmentation
Successful segmentation requires the following
- homogeneity within the segment
- heterogeneity between segments
- segments are measurable and identifiable
- segments are stable over time
- segments are accessible and actionable
- target segment is large enough to be profitable
Variables Used for Segmentation
- Geographic variables
- region of the world or country, East, West, South, North, Central, coastal, hilly, etc.
- country size/country size : Metropolitan Cities, small cities, towns.
- Density of Area Urban, Semi-urban, Rural.
- climate Hot, Cold, Humid, Rainy.
- Demographic variables
- Psychographic variables
- Behavioral variables
- benefit sought
- product usage rate
- brand loyalty
- product end use
- readiness-to-buy stage
- decision making unit
- profitability
- income status
- Technographic variables
- motivations
- usage patterns
- attitudes about technology
- fundamental values
- lifestyle perspective
When numerous variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. When the profile is limited to demographic variables it is called a demographic profile (typically shortened to "a demographic"). A statistical technique commonly used in determining a profile is cluster analysis. Other techniques used to identify segments are algorithms such as CHAID and regresion-based CHAID and discriminant analysis. Alternatively, segments can be modelled directly from consumer preferences via discrete choice methodologies such as choice-based conjoint and maximum difference scaling
Top-Down and Bottom-Up
George Day (1980) describes model of segmentation as the top-down approach: You start with the total population and divide it into segments. He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship management software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioural, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called database marketing or micro-marketing. Its use is most appropriate in highly fragmented markets. McKenna (1988) claims that this approach treats every customer as a "micromajority". Pine (1993) used the bottom-up approach in what he called "segment of one marketing". Through this process mass customization is possible.
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 (referred to as price discrimination), 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 behaviour 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. Examples of this exist in the transport industry (a plane or train journey to a particular destination at a particular time is a practical monopoly) where Business Class customers who can afford to pay may be charged prices many times higher than Economy Class customers for essentially the same service. Microsoft and the Video industry generally also price very similar products at widely varying prices depending on the market they are selling to.
See also
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