SEGMENTING THE MARKET

Market segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function. 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. The people in a given segment are supposed to be similar in terms of criteria by which they are segmented and different from other segments in terms of these criteria. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting up the market into smaller groups. Examples:

Gender Price Interests

While there may be theoretically 'ideal' market segments, in reality every organization engaged in a market will develop different ways of imagining market segments, and create Product differentiation strategies to exploit these segments. The market segmentation and corresponding product differentiation strategy can give a firm a temporary commercial advantage.

"Positive" market segmentation

Market segmenting is dividing the market into groups of individual markets with similar wants or needs that a company divides into distinct groups which have distinct needs, wants, behavior or which might want different products & services. Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private. 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 system provides a broad segmentation of the population of the United States based on the statistical analysis of household and geodemographic data. The process of segmentation is distinct from 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 behavior; 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

Positioning
Once a market segment has been identified (via segmentation), and targeted (in which the viability of servicing the market intended), the segment is then subject to positioning. Positioning involves ascertaining how a product or a company is perceived in the minds of consumers. This part of the segmentation process consists of drawing up a perceptual map, which highlights rival goods within one's industry according to perceived quality and price. After the perceptual map has been devised, a firm would consider the marketing communications mix best suited to the product in question.

Using Segmentation in Customer Retention

The basic approach to retention-based segmentation is that a company tags each of its active customers with 3 values: Tag #1: 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.

Tag #2: 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. Managing Customers as Investments.
[1] [2]

Tag #3: What retention tactics should be used to retain this customer? For customers who are deemed save-worthy, its 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. Process for tagging customers The basic approach to tagging customers is to utilize historical retention data to make predictions about active customers regarding:

Whether they are at high risk of canceling their service Whether they are profitable to retain What retention tactics are likely to be most effective

The idea is to match up active customers with customers from historic retention data who share similar attributes. Using the theory that birds of a feather flock together, the approach is based on the assumption that active customers will have similar retention outcomes as those of their comparable predecessor.

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. 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.

 Customer value proposition

In marketing, a customer value proposition (CVP) consists of the sum total of benefits which a vendor promises a customer will receive in return for the customer's associated payment (or other value-transfer). A customer value proposition is a business or marketing statement that describes why a customer should buy a product or use a service. It is specifically targeted towards potential customers rather than other constituent groups such as employees, partners or suppliers. It is a clearly defined statement that is designed to convince customers that one particular product or service will add more value or better solve a problem than others in its competitive set.

Why CVPs are important

A good customer value proposition will provide convincing reasons why a customer should buy a product, and also differentiate your product from competitors. Gaining a customers attention and approval will help in build sales faster and more profitable, as well as work to increase market share.[2] Understanding customer needs is important because it helps promote the product. A brand is the perception of a product or service that is designed to stay in the minds of targeted consumers.

Examples BMW vs. Other Luxury Car Manufacturers - BMW, "the ultimate driving machine". This is a key value proposition for BMW or Bavarian Motor Works. They build luxury cars for those who can afford them. When other luxury companies started making vehicles in direct competition to BMWs, BMW had to differentiate itself once again. In North America it did this via a customer value added proposition through their No Cost Maintenance program. The No Cost Maintenance plan comes with the purchase of a new BMW vehicle and provides the owner with no cost maintenance for the first 4 years/50,000 miles of use. Neither Audi, Lexus nor Mercedes offer a comparable program.

 Market Segmentation - why segment markets?

There are several important reasons why businesses should attempt to segment their markets carefully. These are summarised below Better matching of customer needs Customer needs differ. Creating separate offers for each segment makes sense and provides customers with a better solution Enhanced profits for business Customers have different disposable income. They are, therefore, different in how sensitive they are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits Better opportunities for growth Market segmentation can build sales. For example, customers can be encouraged to "tradeup" after being introduced to a particular product with an introductory, lower-priced product Retain more customers Customer circumstances change, for example they grow older, form families, change jobs or get promoted, change their buying patterns. By marketing products that appeal to customers at different stages of their life ("life-cycle"), a business can retain customers who might otherwise switch to competing products and brands Target marketing communications Businesses need to deliver their marketing message to a relevant customer audience. If the target market is too broad, there is a strong risk that (1) the key customers are missed and (2) the cost of communicating to customers becomes too high / unprofitable. By segmenting markets, the target customer can be reached more often and at lower cost Gain share of the market segment Unless a business has a strong or leading share of a market, it is unlikely to be maximising its profitability. Minor brands suffer from lack of scale economies in production and marketing, pressures from distributors and limited space on the shelves. Through careful segmentation and targeting, businesses can often achieve competitive production and marketing costs and become the preferred choice of customers and distributors. In other words, segmentation offers the opportunity for smaller firms to compete with bigger ones.

Market segmentation can be defined as the process of dividing a market into different homogeneous groups of consumers. Market consists of buyers and buyers vary from each other in different ways. Variation depends upon different factors like wants, resources, buying attitude, locations, and buying practices. By segmentation, large heterogeneous markets are divided into smaller segments that can be managed more efficiently and effectively with products and services that match to their unique needs. So, market segmentation is beneficial for the companies serving larger markets.

 Criteria for selecting Market Segments

Measurable
A segment should be measurable. It means you should be able to tell how many potential customers and how many businesses are out there in the segment.

Accessible
A segment should be accessible through channels of communication and distribution like: sales force, transportation, distributors, telecom, or internet.

Durable
Segment should not have frequent changes attribute in it.

Substantial
Make sure that size of your segment is large enough to warrant as a segment and large enough to be profitable

Unique Needs
Segments should be different in their response to different marketing efforts (Marketing Mix). Consumer and business markets cannot be segmented on the bases of same variables because of their inherent differences.

Market Segmentation Strategy Development

QDI's proven market segmentation strategies can boost your odds for success. Segmentation has big pay-offs when used in strategy development, product and market planning and sales targeting. Each level of segmentation increases your customer insight. Segmentation is a well-accepted concept. Many companies create a segmentation strategy to define their markets and direct product development. However, a common mistake is to use one segmentation strategy for all decision sets, which leads to less than optimal product development and sales effectiveness. Take a critical look at your current market segmentation strategy.

Does it begin by identifying a business opportunity and go all the way to customer adoption behavior or does it fall short? Does it start too late or stop too early? Are you trying to use the same segmentation approach for each decision set you make?

Few companies utilize segmentation in all the sets of decisions that drive profitability. Market segmentation drives three critical sets of decisions:

What are the results of inadequate segmentation? That depends on where your business is in its market life cycle.

If youre deciding to enter a market, Structural Segmentation can help identify the markets that offer a higher than average return. Once youve made that evaluation, Needs-Based Segmentation drives your product and service development. SalesEffectiveness Segmentation builds sales momentum by targeting early adopters and those customers most likely to switch. Boost your success rate by using focused, qualitative research in the early planning stages. Sharpen your focus on customer needs and use that information to develop your support services accordingly. The enhanced services you develop, in turn, will act as a magnet to attract new customers. Next, use Sales Effectiveness Segmentation to look at your future customers. Once youve identified the hot prospects, youre on your way to build sales momentum. The ability of market segmentation to improve the return on your investments for each type of decision is why segmentation research is so important. Identifying segments and measuring their potential produces insights and opportunities that would otherwise be overlooked and avoids costs that would otherwise be spent chasing low potential opportunities.

Bases for Consumer Market Segmentation

There are number of variables involved in consumer market segmentation, alone and in combination. These variables are:

Geographic variables Demographic variables Psychographic variables

Behavioral variables

Geographic Segmentation
In geographical segmentation, market is divided into different geographical units like:

Regions (by country, nation, state, neighborhood) Population Density (Urban, suburban, rural) City size (Size of area, population size and growth rate) Climate (Regions having similar climate pattern)

A company, either serving a few or all geographic segments, needs to put attention on variability of geographic needs and wants. After segmenting consumer market on geographic bases, companies localize their marketing efforts (product, advertising, promotion and sales efforts).

Demographic Segmentation
In demographic segmentation, market is divided into small segments based on demographic variables like:

Age Gender Income Occupation Education Social Class Generation Family size Family life cycle Home Ownership Religion Ethnic group/Race Nationality

Demographic factors are most important factors for segmenting the customers groups. Consumer needs, wants, usage rate these all depend upon demographic variables. So, considering demographic factors, while defining marketing strategy, is crucial.

Psychographic Segmentation
In Psychographic Segmentation, segments are defined on the basis of social class, lifestyle and personality characteristics. Psychographic variables include:

Interests Opinions Personality Self Image Activities Values Attitudes

A segment having demographically grouped consumers may have different psychographic characteristics.

Behavioral Segmentation
In this segmentation market is divided into segments based on consumer knowledge, attitude, use or response to product. Behavioral variables include:

Usage Rate Product benefits Brand Loyalty Price Consciousness Occasions (holidays like mothers day, New Year and Eid) User Status (First Time, Regular or Potential)

Behavioral segmentation is considered most favorable segmentation tool as it uses those variables that are closely related to the product itself.

Bases for Business Market Segmentation

Business market can be segmented on the bases consumer market variables but because of many inherent differences like

Businesses are few but purchase in bulk Evaluate in depth Joint decisions are made

Business market might be segmented on the bases of following variables:

Company Size: what company sizes should we serve? Industry: Which industry to serve? Purchasing approaches: Purchasing-function organization, Nature of existing relationships, purchase policies and criteria. Product usage Situational factors: seasonal trend, urgency: should serve companies needing quick order deliver, Order: focus on large orders or small. Geographic: Regional industrial growth rate, Customer concentration, and international macroeconomic factors.

The segmentation process

The segmentation process involves establishing criteria by which groups of consumers with similar needs can be identified. These criteria have to establish consumer groups that have the following characteristics: The consumers in the segment respond in the same way to a particular marketing mix. The consumers within the segment have to react in a clearly different way from other groups of consumers to the marketing mix on offer.

The group has to be large enough to provide the return on investment necessary to the organization. The criteria used to identify the segment have to be operational. Recently a small company in the magazine market identified a group of customers that had clear needs. Overseas nationals living in the UK wished to buy magazines from their home country. The organization s proposed marketing offer was to import magazines from overseas and mail them out directly to the consumers homes. This was a potential customer group that all responded in the same way to the proposed marketing mix. They clearly acted differently from other groups in the magazine market. This potential segment was large and potentially profitable; however, this was a difficult group to make operational. You cannot identify overseas nationals easily as no official organization or overseas institute will give you their names and addresses. The only way of pursuing this opportunity was to persuade overseas nationals to identify themselves. This could have been accomplished by attracting consumers to respond to a promotional campaign, allowing the organization to build a customer database. However, for a small organization this was likely to be a costly operation and the idea was dropped in favour of other options. Given the fact that segments need to demonstrate these four characteristics, the next step is to examine the variables that can be usefully employed to segment a market. Understanding consumer buyer behaviour theory is central to the successful development and application of segmentation criteria.

SEGMENTATION

Having been battered by the worst recession in over 50 years and having made across-the-board cuts to survive, don't make the same mistakes again by simply re -building resource and business as it was before. Take this opportunity to re -evaluate the way that you do business, such that you can re -build and grow in targeted and efficient way. The key to this approach is the segmentation of your markets and activity to secure the best return on any resource applied. The following guide takes you through the 6 basic steps necessary to change the way that you work and benefit from the lessons you have learned. Adopting these simple steps will give you a better chance of navigating current market conditions, put you in a strong position for growth and ensure that you are able to withstand any future changes. There are just six steps in the process of developing marketing strategy.

STEP 1 - Identify and select the bases by which the market may be segmented
This is the hardest and most challenging step. You must determine the basis for breaking your total market into customer clusters. It is very tempting, but inadvisable, to do this on simple observable or demographic differences. SIC codes in business markets or age and socio economic groups in a consumer market. These characteristics are unlikely to be drivers of buyer behavior. You are looking for differences in attitude or need. Answering the question why different customers buy can be a useful starting point if you want to ensure you are focused on customer need. Tip: Try generating three lists for your market:

Why do people buy i.e. what benefits are they seeking Who buys; this may be who in the decision making unit or it could be a profile of company type When do they buy; what are the triggers for the buying process.

Think about your market as though it was a Rubics cube with the answers to these three questions defining each cell. Example: The example below represents the magazine market.

Each cell represents a different combination of who, when and why and represents a potential segment. You can screen these to identify those which are worth further research or analysis.

STEP 2 - Develop segment profiles

At this next stage the quality of your own customer data and the data you can purchase will help you build your understanding of each segment. This is the point at which geo-demographic analysis and mapping

solutions can be a real asset helping you identify and later target more customers within a segment. Start by mapping your own customer data into the different cells who are your current customers, this will help you identify the segments where you already have a competitive advantage essentially your market is segmenting itself. Where are the customers in the segment located, how and where are they making their purchases, how much do they spend and how often. HOW MAPPING WORKS In simple terms Geoplan mapping software contains data which is broadly handled as sheets, like transparent acetate layers, one laid over the other, visualisation like this helps show areas of opportunity, difficulty, overlap, market potential, competitive pressure or, waste. In our context we are using them as the framework for segmentation profiles. The Data Layers typically used in a business orientated mapping system can be broadly categorised as: Map base. Postcode boundary and point layers. Other boundary layers administrative, media, industry specific. Demographic or business data layers. Customers own boundaries, territories, catchments or coverage areas. Customers own performance data, revenue, cost, margin, KPI's, stores, branches, depots, offices, personnel, customers, suppliers or competitors.

Starting with your own customer data, the key to linking, visualising and analysing it on a map is through the use of a geocode e.g. Postcode in the UK or ZIP code in the USA. The Postcode for example has a specific grid reference. As a consequence any data attached to that Postcode e.g. contact details, sales data, sales representative, can be mapped. Either as individual point locations or aggregated up to higher levels of geography such as Postcode Sector, sales territories or store catchments. Data managed in this way can be mapped to show areas of opportunity, difficulty, overlap, market potential, competitive pressure or, waste.

As a consequence any data attached to that Postcode e.g. Contact details, sales data, sales representative, can be mapped. Either as individual point locations or aggregated up to higher levels of geography such as Postcode Sector, sales territories or store catchments.

STEP 3 Evaluate the attractiveness of each segment

As you build up the picture of each segment in your market you will be in a much better position to judge their potential and the feasibility of you growing your business in this customer cluster. There are two dimensions to the decision about where you want to focus your marketing efforts: 1. Does the segment deliver what the company wants in terms of potential sales, profit and future prospects. 2. Does the company have the capability to deliver the benefits these customers value (that is the potential for building a competitive advantage). To decide which segments to target you first need to think through carefully this decision criteria and it will differ from company to company and market place to market place but it might look like this if we were doing the analysis for a credit card company:

COMPANY REQUIREMENTS what makes an attractive segment Number of potential customers in the segment Low propensity to pay off outstanding balances monthly Low risk of default Low propensity to switch providers frequently

COMPANY REQUIREMENTS their buying criteria in the credit card market Credit limit available Card costs per annum Acceptability of the card at home and abroad Quality of customer service and support

Average or above card utilization rate

Nature of any penalty clauses and responses Additional benefits and services available

Different segments will have different profiles and so will both value, or judge this companies credit card offer differently but will also be judged differently by them. Not all segments are equally attractive. Weighting these decision criteria enables you to distinguish between the criteria which may not all be equally important. So whilst cost and credit limit may appear on all customers decision lists some segments will judge credit availability to be the most important and another will be more concerned with cost. By allocating a weighting for each criterion out of a total of 10 differences between the priorities of the segments become clear.

CRITERIA Credit limit available Card costs per annum Acceptability of the card Customer service and support Penalty clauses and responses Additional benefits Public image of the card Total weighting

SEGMENT 1 SEGMENT 2 2 3 1 1.5 0 0.5 1 1 2 2 1.5 2

10

10

Now you can rate how well your offer meets the different customer criteria. Scoring out of 5 where a 3 indicates you are as good as the best of breed competitor, above 3 a competitive advantage and below 3 a disadvantage. Multiplying the weighting and rating gives you a notional competitive advantage score for each segment.

CRITERIA Credit limit available Card costs per annum

RATING SEGMENT 1 SEGMENT 2 4 4 2=8 3 = 12 1=2 1.5 = 4.5 1=4 1=4 2=4 2=6

Acceptability of the card 2 Customer service 3

Penalty clauses Additional benefits

3 2

2=6 0=0 0.5 = 1 10 = 33.5

0.5 = 1.5 1.5 = 1.5 2=4 10 = 25

Public image of the card 2

You have a significantly stronger competitive advantage with Segment 1 that segment 2. You can repeat this exercise weighting the managements criteria and then rating how well each segment delivers against it giving you 2 scores out of a maximum potential of 50 for each segment.

STEP 4 Select the segments to be targeted

Using a decision tool like a multifactor matrix you can then plot each segment in terms of its attractiveness to the business and your potential to gain a competitive advantage with it. (Scores above 33 out of 50 count as high and below 17 as low on each axis). Below you can see 10 possible segments within a market plotted in this way. The size of the circle indicates potential sales volume or value.

TIP: Remember customers needs and company priorities change so your analysis needs to be kept under review to avoid strategic wear-out. Segments 1, 2, 4 and 3 are attractive delivering benefits to both customer and company but note

the differences, low potential value from 2 and 3 hasnt got all that convincing a competitive advantage. Segments 10, 5, 8 and 6 are not and we should ignore them. Segment 9 delivers what you want as a company but the customer doesnt like your offer. You can go back to the analysis to find out what they want that you dont offer and try to find a way of building an advantage with them. If you cant do not waste your efforts targeting them. Segment 7 likes what you have to offer but for some reason you do not like them (this could be a situation like the one faced by Burberry when their products became popular with Chavs). Again your analysis would allow you to review why this segment was failing to deliver the business goals and possibly re-engineer the approach to improve yields or potential in some way. You can check to see if the potential business from segments 1, 2, 3 and 4 will deliver the target objectives set for this market. If they will fine, if not consider the review segments 7 and 9. When you consider the differences between segments within a market in this way, the need importance of not adopting a one size fits all approach to the market becomes apparent.

STEP 5 & 6 Identify the best possible positioning for each selected target and Choose, develop and communicate the best positioning concept
Positioning is the blueprint against which all other tactical decisions are based. So which segments to target and how to position ourselves to win business from them (marketing strategy) drives the tactical market and communication mix decisions. It is not just the decision about how to position our offer to each targeted segment that is a critical but so is the communication of that positioning to others internally.

Positioning maps are often used to help managers think through their positioning options and decisions. The axes are based on the key buying criteria in the market. The example below illustrates some of the positioning map options for the magazine market we considered earlier.

However these simple diagrams are not particularly helpful when it comes to communicating with others you may find analogies much more useful.