4.1: What is Market Segmentation?

Chapter 4 Learning Objectives

• Understanding segmentation and its importance as a customer selection process.
• How to identify the market for segmentation.
• Understanding the various ways to think about segmenting a marketplace.
• Apply segmentation criteria.
• Gain a working knowledge of segmentation variables.
• Learning the decision process for selecting market segments.
• Understand the broad segmentation strategies.
• Comprehend the similarities among different segments.
• Understand how to profile each market segment selected.

---

Generally, market segmentation is a marketing strategy that involves dividing a broad target market into subsets (groupings) of consumers’, who have common needs and priorities, and then designing and implementing strategies to target them. Market segmentation strategies are useful to identify the target customers, and provide supporting data for positioning to achieve a marketing plan objective. Businesses may develop product differentiation strategies, or an undifferentiated approach, involving specific products or product lines depending on the specific demand and attributes of the target segment.

---

Prior to beginning the segmentation process, the potential operator must clearly define the marketplace itself in terms of city and area, potential customers, and existing and future competition as such:

Elements of the Trading Area

• geographic area
• the major descriptors of the target market such as demographics, psychographics, and behavioral characteristics and

Industry Structure

• Existing competitors (primary and secondary)
• Potential competitors and the market conditions that aid or hinder their entry
• Product substitutes in general that could hamper sales
• Suppliers’ products and services needed for operation.

What is Market Segmentation?

By definition, market segmentation is the process of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers’ (known as segments) based on some type of shared characteristics. In dividing or segmenting markets, researchers typically look for shared characteristics such as common needs, common interests, similar lifestyles, or even similar demographic profiles. The overall aim of segmentation is to identify high yield segments – that is, those segments that are likely to be the most profitable or that have growth potential – so that these can be selected for special attention (i.e. become ‘target markets’).

There are many different ways to segment a market. Business-to-business (B-to-B) sellers might segment the market into different types of businesses. While business to consumer (B-to-C) sellers might segment the market into demographic segments, lifestyle segments, behavioral segments or any other meaningful segment. The most common approach is a progression of segmentation, targeting, and positioning (known as STP). The STP approach highlights the three areas of decision-making

The process of segmenting the market is deceptively simple. Seven basic steps describe the entire process including segmentation, targeting and positioning. In practice, however, the task can be very laborious since it involves poring over loads of data, and requires a great deal of skill in analysis, interpretation and some judgement. Although a great deal of analysis needs to be undertaken, and many decisions need to be made, marketers tend to use the so-called S-T-P process, that is Segmentation→ Targeting → Positioning, as a broad framework for simplifying the process and outlined here in Figure 1.1:

Figure 1.1: Segmentation Process

Segmentation	Targeting	Positioning
1. Identify market and segments 2. Identify, select and apply base or bases to be used in the segmentation 3. Develop segment profiles	4. Evaluate each segment's attractiveness 5. Select segment or segments to be targeted	6. Identify optimal positioning for each segment 7. Develop the marketing program for each segment

Market segmentation assumes that different market ‘segments’ require different marketing programs – that is, different offers, different prices, different promotion, different distribution or some combination of marketing variables. Market segmentation not only identifies the most profitable segments, but also to develop profiles of key segments in order to better understand their needs and purchase motivations. Insights from segmentation analysis subsequently support marketing strategy development and planning. Many marketers use the S-T-P approach to provide the framework for marketing planning objectives. That is, identify your market segments, select one or more segments for targeting, and position products or services in a way that resonates with the selected target market or markets.

Market Segmentation: Brief Historical Overview

Richard S. Bedlow, a specialist in the history of business at the Harvard Business School identifies four stages in the evolution of market segmentation:

1. Fragmentation (pre 1880s): Small regional suppliers who sold goods on a local or regional basis categorized the business economy.
2. Unification or Mass Marketing (1880s–1920s): As transportation systems improved, the economy underwent unification. Standardized and branded goods now occurs at a national level. Manufacturers tended to insist on strict standardization in order to achieve scale economies with a view to penetrating markets in the early stages of a product's life cycle - like the Model T Ford. In Henry Ford’s words: “Any customer can have a car painted any color that he wants so long as it is black”
3. Segmentation (1920s–1980s): As market size increased, manufacturers were able to produce different models pitched at different quality points to meet the needs of various demographic and psychographic market segments. The era of market differentiation based on demographic, socio-economic and lifestyle factors.
4. Hyper-segmentation (1980s+): a shift towards the definition of ever more narrow market segments. Technological advancements, especially in the area of digital communications, allow marketers to communicate with individual consumers or very small groups sometimes known as one-to-one marketing.

Wendell R. Smith was the first to introduce the concept of market segmentation into the marketing literature in 1956 with the publication of his article, "Product Differentiation and Market Segmentation as Alternative Marketing Strategies." Smith's article makes it clear that he had observed "many examples of segmentation" emerging and to a certain extent saw this as a natural force in the market that would "not be denied." Smith was codifying implicit knowledge that available in advertising and brand management since the 1920s.

Contemporary market segmentation emerged in the twentieth century as marketers responded to two pressing issues. Demographic and purchasing data were available for groups but rarely for individuals and secondly, advertising and distribution channels were available for groups, but rarely for single consumers. Between 1902 and 1910, George B Waldron, working at Mahin's Advertising Agency in the United States used tax registers, city directories and census data to show advertisers the proportion of educated vs illiterate consumers and the earning capacity of different occupations etc. in a very early example of simple market segmentation. In 1924 Paul Cherington developed the 'ABCD' household typology; the first socio-demographic segmentation tool. With access to group level data only, brand marketers approached the task from a tactical viewpoint. Thus, segmentation was essentially a brand-driven process.

Until relatively recently, most segmentation approaches have retained this tactical perspective in that they address immediate short-term decisions; such as describing the current “market served” and are concerned with informing marketing mix decisions. However, with the advent of digital communications and mass data storage, it has been possible for marketers to conceive of segmenting at the level of the individual consumer. Extensive data is now available to support segmentation at very narrow groups or even for the single customer; allowing marketers to devise a customized offer with an individual price that for dissemination via real-time communications.

A key consideration for marketers is whether to segment or not to segment. Depending on company philosophy, resources, product type or market characteristics, a business may develop an undifferentiated approach, or differentiated approach. In an undifferentiated approach (also known as mass marketing), the marketer ignores segmentation and develops a product that meets the needs of the largest number of buyers. A differentiated approach targets one or more market segments, and develops separate offers for each segment.

Even simple products like salt are highly differentiated in practice. In consumer marketing, it is difficult to find examples of undifferentiated approaches. Even goods such as salt and sugar, once treated as commodities, are now highly differentiated. Consumers can purchase a variety of salt products; cooking salt, table salt, sea-salt, rock salt, kosher salt, mineral salt, herbal or vegetable salts, iodized salt, salt substitutes and if that is not enough choice, at the brand level, gourmet cooks are likely to make a major distinction between a rare salt and other competing brands. The following table outlines the main strategic approaches to think about creating segments.

Table 1: Main Strategic Approaches to Segmentation

Number of segments	Segmentation strategy	Comments
Zero	Undifferentiated strategy	Mass marketing: no segmentation
One	Focus strategy	Niche marketing: focus efforts on a small, tightly defined target market
Two or more	Differentiated strategy	Multiple niches: focus efforts on 2 or more, tightly defined targets
Thousands	Hyper-segmentation	One-to-one marketing: customize the offer for each individual customer

A number of factors are likely to affect a company's segmentation strategy:

• Company resources: When resources are restricted, a concentrated strategy may be more effective.
• Product variability: For highly uniform products (such as sugar), an undifferentiated marketing may be more appropriate. For products that can be distinctive such as QSR or casual themes then either a differentiated or a concentrated approach is appropriate.
• Product life cycle: For new products, one version might be useful at the launch stage, but expanded to a more segmented approach over time. As more competitors enter the market, it may be necessary to differentiate.
• Market characteristics: When all buyers have similar tastes, or are unwilling to pay a premium for different quality, then undifferentiated marketing is an appropriate strategy.
• Competitive activity: When competitors apply differentiated or concentrated market segmentation, using undifferentiated marketing may prove to be fatal. A company should consider whether it ‘can ‘use a different market segmentation approach.