Effective Segmentation

Posted by Resource Center 21/09/2019 0 Comment(s) Investing, Finance & Economics,Business and Management,

Effective Segmentation

 

1.    the analysis gives a company the opportunity to review developments and anticipate before in it’s chosen segment from competitive activity, legal, political before and etc

2.    Sales opportunities are more likely to be effectively and fully exploited by staff when target audiences are properly defined.

3.    Better services tailored to the needs of particular market segments are offered.

4.    Prices are tailored to customer circumstances and situations.

5.    Assists in identifying gaps – market segmentation involves marketing research.  During the process the marketer can also engage in gap analysis which will uncover market needs for existing services not fulfilled.

6.    Facilitates planning – the process of segmentation is a logical approach to market and this facilitates clearly defined strategies either at pricing, product and promotion and place.

 

Criteria for Effective Segmentation.

 

The choice of segments should be in line as to whether they fit within the company image and objectives.  This means that effective segmentation should fulfill the following criteria:

 

1.    Identifiability

Segments should constitute a separate section of the overall markets with  common characteristics distinguishing it from the over all market.

 

2.    Measurability

Marketers need to know the size of the segment and deciding on the programmes directed at it.

 

3.    Reliable / stable

Segments chosen must demonstrate a feature and history to sustain organization activity. Stability also means that the behaviour of the segment can be predicted with sufficient degree of confidence.

 

4.    Accessibility

Marketers must be able to reach the segment with a particular product and communication package.

 

5.    Substantiability

Good segments should be sufficiently large to be worthwhile as distinct target markets.  Development of a segment must be cost effective.  Size and value is therefore important.

 

6.    Profitability

Segment chosen should be capable of achieving desired company profitability objectives.  Segments producing little profit could be considered worthwhile if they demonstrate potential for growth.

 

7.    Sustainability

The organization must be capable of serving select segments in the long term. Identifying large segments beyond the companies resources would create dissatisfied consumers who could easily move to competitors.

 

Note.  Segments choosen should fit / match the company’s objectives

 

Process of market  segmentation.

 

In identifying market segments, 3 stages are involved:

 

a)   Survey Stage

The researchers initially conduct informal interviews with groups of consumers to find out their motivation, attitudes and behaviour.

 

Based on preliminary work the researchers conduct more formal research by use of structured questionnaires using a representative sample of consumers.

 

The information sought includes:

i)            The importance and ratings given to certain attributes of products.

ii)         The extent to which people are aware of existence of different brands of products.

iii)      If brand awareness exists, how people rate different brands.

iv)      How, when, where and by whom the product is used

v)         Attitudes towards the product category.

vi)      Demographic, psychographics, behavioral and geographic profiles of the products

 

b)    Analysis stage

Researches can use an appropriate statistical method to analyse the data to categorize the segments based on the identified characteristics

 

b)   Profiling Stage

Each segment is profiled with respect to its distinguishing attitudes, behaviour, demographics, psychographics and geographic habits

Segment characteristics and make up vary over time so the procedures have to be periodically carried out.

 

Variables / bases for segmenting consumer markets

 

1)   Geographic variables

It is sub- dividing the market into different geographical units e.g. nations, states, regions, cities, countries, neighbourhoods.  Attention should be paid to variations in geographical needs and preferences.

 

Geographical segmentation assists the seller to position retail outlets in most appropriate locations as well as simply identifying the needs on the basis of the consumers on location.

 

2)   Demographic segmentation

It consists of dividing the market into groups on the basis of demographic variables e.g. age, gender, family size, family life cycle, income levels, education, occupation, region, race and nationality.

These variables are popular for distinguishing consumer markets because consumer wants and preference are closely related and easily measured.

 

a)    Age

Consumer needs and wants go with age hence the market should be segmented as young, old etc.  E.g. Johnson products, clothes, pampers

 

b)   Gender

This can be employed to segment markets such as for clothes, perfumes, lotion, magazines, colognes, shoes

 

c)    Family Life Cycle

Products needs may vary according to marital status and present ages of children.  Thus family cycle can be divided into single, married with no children etc.

 

d)   Income

Marketers can segment the market according to the distribution of income.  E.g. clothes, cars, cosmetic, travel i.e. business and economy class

 

 

3)   Psychographic variables

Psychographics are psychological profiles of consumers developed from research sometimes called A.I.O (attitudes. Interest and opinion profiles)

In this buyers are divided into groups based on their social class, lifestyle and personality characteristic.  People within the same demographic group can exhibit different psychographic profiles.  Consumers are sub divided on the bases of the following.

 

a)    Social class

It has a strong influence on peoples preference marketers designing product or services for specific social classes build in those features that appeal to the target social class.  E.g. cars

 

b)   Life Style

Consumers life style are delivered from their activities, interests and opinions. Different marketing mixes influence each life style group.  i.e. 4p’s

 

c)    Personality characteristics

Types of personality groups may include:

i)                  Ambitious

ii)               Alert to……..

iii)            Self image

iv)            Self confident

v)               Prestige Conscious

 

4)   Behavioral segmentation

Buyers are divided into groups on the basis of their knowledge, attitude, behaviour, use of product or response to a product. In this respect behavioral variables used to segment markets are:

 

i) Occasion benefits

Buyers can be distinguished according to occasions when they have a need, purchase a product or use a product.  E.g. wedding dress, flowers decorations, travel, food

Occasions can be used to expand the usage of a product.

 

ii) Benefits

Buyers are classified according to different benefits they seek from a product.  Variables here include economy, medical or good taste (toothpaste)

 

Benefit segmentation requires determination of: -

a)    Major benefits people seek from a product

b)   Kind of people who look for such benefit

c)    Major brands that delivers each benefit.

 

iii) User status

Many markets can be segmented into non –users, ex – users, potential users, regular user etc.

All these people require different marketing approaches.

 

iv) Usage rates

Marketers can be segmented into light, heavy and medium users of the product

 

v)   loyalty status

A market can be segmented by customer loyalty patterns according to the loyalty status buyers can be divided into

 

a)    Hard core loyal – consumers who buy one brand all the time.

b)   Soft core loyal – loyal to 2 or 3 brands

c)    Shifting loyal – consumers who shift from favouring one brand to another.

d)   Switchers – show no loyalty to any brand.

 

A company should study the characteristics of its hard-core customers e.g. whether they are middle class or large families etc.

 

By studying soft-core loyals the company can pinpoint which brands are most competitive with its own.

 

By looking at customers who are shifting away from its brands a company can learn about its marketing weaknesses.

 

vi)            Attitudes

People in a market can be classified according to their degree of enthusiasm for a product.  Five attitude classes can be distinguished.

(a) Enthusiastic

(b)                        Positive

(c) Indifferent

(d)                        Negative

(e) Hostile

 

Levels of market segmentation

 

Market segmentation represents an effort to increase a company’s targeting precision.  It can be carried out at the following levels:-

 

a)   Mass Marketing

The seller engages in mass production, mass distribution and mass promotion for one product for all buyers. E.g. Henry Ford’s strategy with the model T that buyers could buy in any model as long as it is black.

 

Black and Decker in power tool market.   It emerges when a firm deliberately ignores any differences that exist within a market and decide instead to focus on a feature that appears common or acceptable for all buyers.

 

 

Advantages

-         Offers scope for enormous cost economies in production, promotion and distribution since the organization deals with standardized product.

 

Disadvantages

-         Consumers do not have a variety to choose from.

 

b)   Segment marketing

A market segment consists of a large identifiable group within a market.  A company that practices segment marketing recognizes that buyers differ in wants, purchasing power, geographical locations, buying attitudes and habits.

 

Consumers belonging to a particular segment are assumed to be quite similar in their needs and wants.

 

Advantages

1.    Consumers enjoy a variety of goods

2.    A company can create a more fine tuned product offer and price it appropriately for the target audience.

3.    Choice of distribution and communication channels becomes easier.

4.    Company may face fewer competitors if fewer competitors are focusing on this market segment.

5.    Different consumer needs are met accordingly.

 

c)    Niche marketing

A Niche is a more narrowly defined group typically a small market whose needs has not been well met.

 

Niches are very small and attract few competitors.

 

Target a specific customer class.  An attractive Niche is characterized by: -

i)                  Customers in the Niche have a complete and distinct set of needs.

ii)               They will pay a premium to the firm best satisfying their needs.

iii)            The Nicher has the required skills to serve the niche in a superior way.

iv)            The nicher gains certain economies through specialization.

v)               The niche is not likely to attract other competitors.

vi)            The niche has sufficient size, profit and growth potential.

 

d)   Local / gross root marketing

Target marketing is increasingly taking over the character of regional and local marketing with marketing programmes being tailored to the needs and wants of local customer groups.  This is in favour of localizing a company’s profit and pronounced regional differences in communities’ demographics and lifestyle.

 

e.g.    EABL – makes different brands of beer

          BAT – Sportsman, Roaster, Embassy

 

Disadvantages

1)   Drives up manufacturing and marketing costs by reducing economies of scale

2)   Brands image may be diluted if the product and promotion message differ in different localities.

3)   Logistical problems become magnified when companies try to meet different regional and local market requirements.

 

e)    Individual marketing / customerisation

The ultimate level of segmentation leads to the market of one.  Today’s customers are taking more individual initiative in determining what and how to buy e.g. customers buying online.

 

MARKETING TARGETING

 

It is the process of how many segments and which segment to serve.

The marketer has to evaluate all the segments then has to consider the following.

 

Factors to consider before entering into a segment

 

1)   Segment size & growth

Size is measured in terms of sales volume.

Companies should not only focus on sales volume but on the growth potential as well.

It is however very uneconomical to serve a small segment as large segments have the potential to grow and are therefore the best.

 

2)   Segments structural attractiveness

A segment may be of the right size and have growth characteristics but may not be profitable.  The organization has to evaluate long-term profitability of the market segment.  Michael Porter came up with 5 forces that determine the long-run attractiveness of the segment and these are: -

 

a)    Industry competitors

b)   Potential entrants

c)    Existence of substitute products

d)   Bargaining power of buyers

e)    Bargaining power of suppliers

 

The above forces pose the following threats: -

 

a)    Threat of intense segment rivalry

The segment is unattractive if there are already aggressive competitors in it e.g. the mobile market.

 

b)   Threat of new entrants

A segment is unattractive if there are no barriers to entry, as this will bring competitors who will bring in new capacity, substantial resources and a drive for market share growth.

e.g. of barriers: - Legislation i.e. government not allowing a particular business to enter into the market, patent and copyrights, access to raw materials, high capital requirement, nearness to market (distribution).

 

c)    Threat of substitute products

A segment is unattractive if there exists actual or potential substitutes for the product e.g. beverages: tea, coffee, water, uji, juices, beer.

 

d)   Threats of growing bargaining power of buyers.

A segment is unattractive where buyers possess strong or increasingly bargaining power.  This is where the buyers come together and force the organization to low prices yet want good quality e.g. fuel industry.

 

e)    Threat of growing bargaining power of suppliers

Suppliers who have a bargaining power make the segment unattractive.  They raise prices, reduce quality and quantity of the product, e.g. sale of oil by OPEC.

 

3)   Company objectives and resources

The company has to consider its own objectives and resources even if the segment has positive  growth and it is attractive.

There has to be a match between corporate objectives and the segment to serve.  Where the segment fits the companies objectives, it must consider whether it has the right skills and resources to succeed.

 

4)    Segments interrelationship (synergy)

Segments should be inter-related in terms of costs, performance and technology for effectiveness.  A synergy is having two segments put together to be more effective and give more advantage in terms of marketing to the firm i.e.  Give 1+1=3

 

Selecting the market segment

From the results of segment evaluation, the company may select one or more segments.  The company can choose 5 possible market coverage patterns.  These are:

 

1)   Concentrated marketing / single segment concentration

The company selects only a single segment to concentrate on. This is because: -

 

a)    The company may have a natural match to the segments success requirements.

b)   The company may have very limited resources.

c)    It might be a segment with no competitors i.e. like niche markets.

d)   Can be a segment that is a logical launching pad (starting part) for further segment expansion, e.g. Volkswagen concentrates on small market while Porsche serves luxurious cars.

 

Advantage

1.    A firm achieves strong market position in the segment owing to it’s greater knowledge of the segments needs and special reputation it builds.

2.    A firm enjoys many operative economics through product specialization, distribution and promotion.

3.    It can earn high returns on interests.

 

Disadvantage

1.    Particular segments can turn sour due to disappearing needs of consumers or coming of new legislation.

2.    Competitor may decide to enter same market

 

2)   Selective specialization (Multi-segment coverage)

Here the firm selects a number of segments where each is objectively attractive and matches the organizations objectives and resources.

 

Advantage

1.    A firms risk is diversified and even if the segment is unattractive, it can still make profits in other segments.

2.    may result in synergistic effects

3.    promotion costs are lowered

4.    more customers are captured

 

Disadvantage

1.    Can cause losses

2.    It is expensive due to serving many segments.

3.    needs more resources

 

3)   Product specialization

The firm concentrates on making one product and selling it to a variety of customer groups.  This strategy works when: -

i)                  demand is continuous

ii)               There are homogeneous (similar) goods.

iii)            Same resources are used.

 

Disadvantage

A lot of expenditure on advertisements.

 

Advantage

1.    A firm avoids putting all eggs in one basket i.e. spreading the risk.

 

 

4)   Market specialization

A firm concentrates on serving many needs of particular customer group.e.g school uniforms distributors.

 

5)   Full market coverage

Here, the firm attempts to serve all customer groups with all the products that they may need.

 

Large firms cover the market in two broad ways:

a)    Undifferentiated marketing

b)   Differentiated marketing

 

 

a)   Undifferentiated Marketing

i)            Market Aggregation

The firm ignores market segment differences and goes after the whole market with one product offer.

 

ii)         Focus

It focuses on what is common in needs of buyers rather than what is different.

 

iii)      Design

It designs a product and a marketing programmes that will appeal to the broadest number of buyers.

 

iv)      Reliance

Relies on mass distribution and mass advertisement.  The aim is to give a product a superior image in peoples minds.

 

Advantage

1.    The narrow product line keeps down production, inventory and transportation costs.

2.    The absence of segmentation lowers the cost of marketing research and product management.

3.    The undifferentiated advertising programmes keep down advertising costs

 

Disadvantage

1.    Lack of personal touch

2.    New entrants

3.    There may be intense competition in the large market segments.

4.    It may be unprofitable operating in large segments.

 

b)   Differentiated Marketing

Here the firms operate in most segments of the market but designs tailored programmes for each significantly different segments.

 

Advantage

1.    Creates more total sales than undifferentiated marketing

2.    Customer satisfaction

3.    Better defined marketing programmes.

 

Disadvantages

Increase cost of doing business e.g.

1.    Production modification

2.    Production

3.    Administrative

4.    Inventory

5.    Promotion

6.    Distribution costs

 

Tags: segmentation

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