Unit 5 – Marketing Segmentation
It was previously noted that the mission statement of the marketer is to design goods and
services that best fit customers’ needs and wants. Over time there has been a move in
business operations according to customers’ requests. The pre-revolution period was
marked by an individual marketing approach were the major focus was on designing unique
goods and services according to each individual’s personalised requests. This marketing
approach yields product personality and a pure specialisation approach even though it is
likely to be time consuming and costly, furthermore, the marketer cannot stock from before
especially during times when demand is high.
The post-revolution period was marked by a move towards mass marketing. A set of
homogenous (identical) products where designed focusing mainly on an optimum size level
thus securing efficiency due to a cost minimization strategy and wide availability of
inventory. However, product impersonality is enhanced.
Recent years have been marked by alternative requests from specific customers. Their
demands comprised differentiated marketing mix approach in order to satisfy their superior
expectations. Thus, a midpoint between individualised marketing and mass marketing was
determined by dividing the total market into submarkets, grouping customers with similar
characteristics. This is known as market segmentation or mass customization.
Market segmentation
The division of a market into distinct groups of buyers with similar characteristics, grouping
them and designing a differentiated marketing mix thus enhancing a specialised approach.
Market segmentation has become highly popular across all markets. This may be noted
among furniture retailers, automobile sellers, but even marketers offering convenience
products as well as hair and beauty services.
Benefits of Market Segmentation:
1. If the market is segmented in the right way, it may result in a superior turnover
and profitability.
2. Market segmentation enables the firm to market its products more efficiently by
targeting those customers it can serve best.
3. Market segmentation promotes specialisation thus, enabling the firm to use its
resources more effectively. This is particularly relevant in the case of SMEs which
are often characterised by limited resources. Thus, it is more beneficial for them
to move away from mass markets (which are dominated by market leaders who
excel in cost minimization strategies) and target specialised market segments
were brand loyalty is sought after.
Limitations of Market Segmentation:
1. Changes in population, tastes and lifestyle patterns may strongly effect organisations
focusing on marketing segmentation rather than mass marketing.
2. Firms focusing their operations on simply one segment may risk going out of
business should unexpected situational factors materialise. Thus, it may be more
beneficial to focus on more segments in order to secure risk spreading. It is also
important to note that loss-marking segments may be financed by profit-making
segments in the short-term period in order to help them recover.
Requirements/Criteria for Effective Segmentation:
The following are the five criteria’s which are necessary in order to ensure that market
segmentation yields the requested customer expectations, as well as profit maximisation.
1. Measurable;
It must be easy to measure the potential of each segment in terms of size purchasing
power and characteristics. This is usually derived through market research,
2. Substantial;
Segments must be made up of a significant number of customers which guarantee an
effective return on investment. How large the segment is and what market share the
firm is expected to target will depend on the size of the business. This is actually
measured according to turnover, number of employees and capital invested.
3. Differentiable;
If the firm decides to target more than one segment than differences in marketing mix
strategies must be conceptually distinguishable. Furthermore, differences in prices must
be justified by quality differences.
4. Accessible;
The segments must be effectively reached and served. Thus, it must be easy to
communicate with business customers or individual customers making up the segment
in a cost-effective manner. This is particularly relevant in terms of market research and
promotion.
5. Actionable;
Before segmentation is marketed it is imperative to carry out a cost and benefit analyses
in order to ensure that effective programmes are formulated for attracting and
formulating services. Customers’ expectations are likely to increase following marketing
of segmentation and the marketer must ensure that the firm is actually able to meet its
promoted marketing mix programmes. Thus, the feasibility and market ability of the
market segmentation programme must be assessed.
Consumer Market Segmentation Methods:
The following are the six bases upon which consumer markets are segmented. It is
important to note that the first four methods are highly complemented and are often used
together.
1. Demographic Segmentation;
This segmentation method is very much based on population changes. The following are
the variables to consider; age, gender, income, social class, education/occupation,
religion, race, culture, family size, family life cycle, nationality. Demographic
segmentation is considered to be the most widely used due to its flexibility. Most goods
and services are age related, for example the baby milk powder Nan offers the following
products: Nan 1, Nan 2, Nan 3, Nan 4 targeting different age brackets. TV service
providers, such as Melita and GO, offer different TV packages targeting alternative age
brackets, income patterns, and nationalities. Supermarkets offer alternative food
products in different packages targeting alternative cultures and family sizes.
2. Psychographic Segmentation;
This segmentation basis takes into consideration individual’s tastes, lifestyle patterns
and personality traits. People in the same demographic bracket may have very different
psychographic makeups. Melita and GO offer alternative TV packages according to
peoples tastes lifestyle patterns and personality traits. This includes TV channels
featuring sports, fashion, cuisine, movies, history, geography, etc.
3. Usage/Behavioural Segmentation;
This segmentation method divides the market into submarkets according to rate of
consumption and frequency of purchase. This is mainly applicable to products with high
perishability and obsolescence conditions. Changes in people’s lifestyle patterns have
resulted in less frequent purchases of habitual products even though the amount
demanded per purchase has increased. For example, a bakery sells highly perishable
products (mainly bread). The current lifestyle pattern may dictate less frequent
purchases (in contrast with the daily purchases) and large quantities demanded for
every purchase consideration. For example, if customers purchase bread on Sundays
and Wednesday then the required inventory level would have to be formulated in order
to avoid over supply or undersupply of inventory. Another example involves different
sizes offered for convenience products such as Kellogg’s cereal packs offered at 375g,
500g, and 750g, each pack caters for different consumption patterns.
4. Benefit Segmentation;
This is the division of the total market into submarkets in accordance to utility factors or
benefit customers seek from the use of the good or service concerned. Segments may
target bargain, superior quality or prestige factors. For example, Samsung offers mobile
phone models for customers seeking bargain considerations as well as mobile phone
models targeting customers seeking premium quality products. Apple aims to deliver a
psychological reward impact thus targeting buyers seeking prestige.
5. Geographic Segmentation;
This segmentation method divides the market into submarkets according to different
locations such as regions, cities, towns, and villages. This segmentation method is not
highly relevant for smaller countries such as Malta due to its small size. However, this
segmentation method is particularly applicable in Malta in the case of habitual products
such as food and beverages, fruit and vegetables but also in the case of specific frequent
services such as hair and beauty services (even though the interpretation is highly
subjective). An example includes a small bakery targeting customers living in Kirkop.
6. Geo-Demographic Segmentation;
This segmentation method is considered to be more detailed/exhausted since
geographic and demographic considerations are included. For example, a traditional
barber situated in Marsaxlokk, targeting male customers (by gender) mainly adults (by
age), living in close proximity to Marsaxlokk (geographic).
Industrial Market Segmentation Methods:
The following are five methods upon which business markets may be segmented providing
measures how suppliers may target business customers.
1. Demographic Segmentation;
The total market is divided into sub markets according to size of firm and type of
industry. For example, a small bakery may decide to target exclusively convenience
stores focusing on one or few supermarkets or grocers. On the other hand, a larger
bakery may target hotels or other accommodation spots within the hospitality industry,
as well as, restaurants. Magro Brothers and Farsons Group design differentiated
marketing mix strategies in order to target alternative industry and firm operations.
2. Geographic Segmentation;
The marketer may decide to target specific business segments according to geographic
location. For example, importers of Mercedes may decide to target business customers
situated in specific geographic zones thus ensuring specialisation and managing time
appropriately.
3. User Status Segmentation;
Suppliers may target business customers by differentiated marketing mix strategies
depending on whether they are considered to be first time prospects, novices or
sophisticates.
In the case of first-time prospects, business customers decide to effect an order for the
first time. Thus, the firm must take into consideration that business customers will judge
their operation according to the outcome of the first order. A positive performance
review would often create conditions for future relationship.
In the case of novices, business customers have already purchased in the past occasions
thus a measure of loyalty exists and the firm must ensure that this relationship is
enhanced in order to guarantee continuation of supply that is also based on trust and
commitment. Trade discounts are often awarded and customers’ expectations are likely
to be on the rise.
In the case of sophisticates, business customers would not only request supply of
inventory but they often demand a maintenance agreement programme thus
augmenting the commitment level. For example, Intercomp not only sells its electronic
equipment to commercial banks and health centres or hospitals but they also offer a
maintenance contract promising immediate repair were a failure materialises. Thus, this
segment requests closer monitoring and specialised technician are hired in order to offer
this maintenance service on a 24-hour basis.
4. Usage Segmentation;
This segmentation method takes into consideration business customers’ consumption
pattern with regards to number of orders effected during a specific period of time as
well as quantity ordered. This is very much linked to size of firm (demographic
segmentation) and market share potential. This segmentation method guarantees that
he right supply level is available thus avoiding under supply or over supply of inventory.
5. Benefit Segmentation;
This segmentation method may target business customers offering lower priced
products (for business customers seeking lower priced supply), superior quality supplies
or supplies deriving a psychological reward impact (prestige factor). For example, Nestle
Malta targets business customers seeking superior quality products. The exclusive
manufacturers of Lidl (Cien, Carre, Milbona, Crownfield, Freeway) design products which
deliver a price sensitivity operation. On the other hand, Mercedes targets its car
resellers by focusing on high status representation.
International Market Segmentation Methods:
Different countries vary greatly in their economic cultural and political makeup.
International firms need to group their world markets into segments with distinct buying
needs and behaviours. The following are the alternative international marketing
segmentation methods.
1. Geographic Location;
Market segmentation may be based on location were a business decides to establish
themselves in a specific country due to beneficial weather conditions and mobility
factors. For example, Lufthansa Technique has established itself in Malta due to mild
climates, good weather conditions and short distances.
2. Economic Factors;
A firm may establish itself in a specific country due to beneficial employment
opportunities, standard of living considerations, as well as favourable costs of
operations. For example, Lego opened a factory in Czech Republic in order to benefit
from a fast-developing economy, lower costs of production and favourable employment
opportunities.
3. Political/Legal Factors;
Firms may establish their operations in specific countries according to stability of
government, tax considerations and favourable legal benefits which may be offered. For
example, Brandstatter opened its doors in Malta over 25 years ago producing a wide
range of Playmobile products, thus benefiting from tax conventions. Another example
includes MSC cruises were the largest family owned cruise liner company in the world is
now registering its new cruise ships in Malta thus benefiting from tax conventions and
their employees (now totalling over 37,000) declare their incomes in Malta thus
resulting in increased government tax revenues. It is also important to note that firms
operating in foreign countries, including EU member countries would often have to
adhere to different policies and standards implemented in the country of operation this
includes environmental standards.
4. Socio-Cultural Factors;
When a business operates in a foreign country it must take into consideration
differences in people’s lifestyle and cultural pattern. Thus, a differentiated marketing
mix would have to be designed and this may include provision for any language barriers
which may materialise.
5. Inter-Market/Cross-Market Segmentation;
Firms form segments of consumers having similar needs and buying behaviours even
though they are located in different countries and/or market different products. This
partnership agreement may benefit all parties concerned due to an increase in pulling
power. This includes the partnership agreement between Coca-Cola and McDonalds
(international agreement), Burger King, Pizza Hut and KFC with Pepsi (domestic
intermarket agreement), MSC cruises and Cirque Du Soleil, MSC cruises with Chicco and
Lego, Starbucks and Apple (intermarket segmentation), as well as McDonalds and
Samsung (cross market segmentation).
STP Process:
This process considers strategies marketers embrace in order to ensure that their products
reach customers effectively securing profit maximisation. To succeeded in today’s
competitive marketplace, firms should be customer centred. Intensive customer analyses
are mandatory and the key is to establish a competitive advantage. It is important to note
that most firms know that they cannot profitably serve all target customers in a given
market in the same manner.
1. Segmentation;
This is the manner how the total market is divided into distinct groups of buyers who
have different needs, characteristics or behaviours and who might require separate
products or marketing mix programmes.
2. Targeting;
This is the process of evaluating each markets segments attractiveness and selecting one
or more segments to enter. It is important to ensure that the five requirements for
effective segmentation are satisfied.
3. Positioning;
It is important to ensure that a product occupies a clear distinctive and desirable place
relative to competing products in the minds of target consumers. As Philip Kotler states;
‘products are created in the factory but brands are created in the mind.’ Thus, it is
imperative to ensure that brands and products qualities and functions are projected
appropriately in order to guarantee an effective promotional champaign where the
target market understands the major utility factors and appeal of the product.
Repositioning Strategies:
It was previously noted that product positioning is crucial when developing and launching a
new product for the market. However, markets change and evolve overtime this includes
changes in consumer tastes, competitors market offers, technological advances, as well as
changes in political and economic factors. Thus, marketers must continuously assess the
effectiveness of existing positioning strategies of products and brands. The following are the
two alternative repositioning strategies.
1. Repositioning into Existing Segments;
The aim is to revitalise a product or brand which is losing sales, profits and market
share has approached the end of its life. This type of repositioning does not target
new customers but rather seeks to update the image and features of a product and
brand. Oxo stock cubes and Bovril have changed their image consistently over time
utilising ingredients which are consistent with current health standards as well as
reflecting changing social and family attitudes. This includes modifications in
packaging and labelling conditions. Another example involves the addition of an
ingredient within the baby milk powder Nan offered by Nestle known as Bifidus B
which is highly recommended by medical practitioners due to the volume of iron it
contains.
2. Repositioning into New Segments;
Marketers may decide to move out of the present segment and position their
product into a new segment. The current market segment may have become
saturated and the marketer may find more appealing segments following a cost and
benefit analyses. A modification in the current marketing mix may often have to be
effected. This is particularly relevant when the business decides to reposition its
products in the international market due to cultural, economic and political
differences. This repositioning strategy may often include changes in packaging and
labelling systems as well as rebranding strategies. For example, Lucozade had
originally been introduced into the market as a pharmaceutical product treating
colds, over time the market became saturated due to intensive competition thus the
firm decided to reposition the product as a sports drink targeting athletes. An
intensive modification in the marketing mix was effected particularly with regards to
product specifications such as ingredients used for taste, flavours, packaging,
labelling and promotional strategies. The product may eventually be launched with
an alternative market strategy following a cost and benefit analyses. Another
example involves Coca-Cola which had originally entered the market as a medicine
treating sick people. Over time Coca-Cola has been repositioned and nowadays it is
considered as the most popular soft drink in the world.
