Market Segmentation

SocratesEuropean Commission Education and Culture

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European Commission

Education and Culture

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SESSION IIISESSION III

MARKET SEGMENTATIONMARKET SEGMENTATION

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Location of Segmentation in Marketing

“… it is at the heart of strategic marketing, since it forms the basis by which marketers understand their markets and develop strategies for serving their chosen customers better than the competition.”

(Jobber & Fahy, 2006)

‘Focussed competitors dominate their target market segments – by fending off broad-coverage competitors who have to compromise to serve the segment, and outperforming rivals with the same focus …Focussed strategies also gain meaning from the differences between the segments covered and the rest of the market.’

(Day, 1994)

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Definitions of Segmentation

‘Market segmentation – described as how we as marketers can divide the market into groups of similar customers, where there are important differences between those groups …’(Hooley, Saunders & Piercey, 1998)

‘The process of grouping customers in markets with some heterogeneity into smaller, more similar or homogeneous segments. The identification of target customer groups in which customers are aggregated into groups with similar requirements and buying characteristics.’

(Dibb, Simkin, Pride & Ferrell, 2001)

‘The technique that is used by marketer to get to grips with the diverse nature of markets is called market segmentation. Market segmentation may be defined as ‘the identification of individuals or organisations with similar characteristics that have significant implications for the determination of marketing strategy.’ (Jobber, 2004)

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Why Segment? (1/2)

Differentiation Market segmentation

Target market

selection

Tailored marketing

mix

Opportunitiesand threats

Provides the basis for the selection of target markets – the chosen segment of the market a company has decided to serve

Enables marketers to tailor a marketing mix that meets the segment’s needs

Enables a company to differentiate its offerings between segments, and from its competitors

Enables the company to spot the opportunities/threats involved in serving/neglecting emerging or un-served markets

[D. Jobber (2004) Principals and Practice of Marketing, 4th ed., London:McGrawHill]

Advantages of segmentation:

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Why Segment? (2/2)

Benefits of segmentation:� More precise market definition (know your consumers)� Identification of gaps in the market (unserved or underserved

consumers)� In mature markets identify segments that are still growing (PLC)� Better analysis of competition (real not peripheral)� More rapid response (easier to monitor)� Efficient resource allocation (better use of finite/scarce resources)� Effective strategic planning (segmentation is the first step)� Dangers of not segmenting when competitors do (loss of

competitive advantage)� Particularly useful for SMEs

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Segmenting Consumer Markets

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Behaviouristic segmentation

Given that the purpose of segmentation is to discover different behaviours among customers in order to target them with a specific marketing mix, behavioural variables can be considered the ultimate segmentation base

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Psychographic segmentation

� Usefulness is likely to depend on the product category� More likely to work when brand choice is a reflection of self-expression

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Profile segmentation

� Once behaviouristic and/or psychographic differences have been found, profiling helps identify the people who exhibit them

� Profile segmentation easiest to implement because data are readily available

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Geodemographics

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Deciding on the Segmentation Base

The Gravity of Decision Spectrumλ Shallow end of spectrum (products and/or services that save

time, effort or money): Price sensitivity, habits and impulsiveness.

λ Mid spectrum (big-money decisions): Quality, design, complexity and status.

λ Deepest end of spectrum (not only big-money but also strong emotional investment): Core values and beliefs.

[D. Yankelovich & D. Meer (2008) Rediscovering Market Segmentation, Harvard Business Review, 84(2):122-131]

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Bases of segmentation?

Tesco caters for two market segments: •Consumers looking for low cost•Consumers looking for premium quality

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Market segments should be

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Target marketing – what is it?

• The next step in the STP process• Having identified the market segment(s), target

marketing refers to the choice of which, and how many, segment(s) to serve

• Two broad issues first need to be examined:– Attractiveness of the market segment– Company’s capability to serve the segment

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Evaluating market attractiveness

ν Political: Telecomms deregulation

ν Social: Next in fashion retailingν Environmental: The Body Shop

ν Aggressive markets less attractiveν Market dynamics affected by entry of new

competitorsν A true competitive difference?

ν Larger = more profitable

ν Growth markets vs. stagnant or decliningν Must be profitableν High sensitivity increases competitionν Negotiating muscle of buyers and suppliers

ν Are high costs associated with entering or leaving a market segment?

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Evaluating competitive capability

� Market segments may be attractive, but does the company have the resources and capabilities to serve it?

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Market & Segment Choices (1/4)

Target market selection matrix

[G.J Hooley, J.A. Saunders & N.F. Piercy (1998) Marketing Strategy & Competitive Positioning, 2nd ed., London-Prentice Hall Europe]

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Weak

Strong

Average

AttractiveAverageUnattractive

Cur

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Market Segment Attractiveness

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Weak

Strong

Average

AttractiveAverageUnattractive

Cur

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Market Segment Attractiveness

A

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Generic targeting strategies

• Undifferentiated marketing• Differentiated marketing• Focused marketing• Customised marketing

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Undifferentiated marketing

PostOffice

• Product• Price• Promotion• Distribution

Everybody

Organisation Marketing mix Target market

Marketing mix 1

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Undifferentiated marketing

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Utilitarian Customer

Trendy-Casual

Price shopper

Mainstream

Traditionalist

Levi’s

Marketing Mix 1

MarketingMix 2

Marketing Mix 3

MarketingMix 4

Marketing Mix 5

Differentiated marketing

Marketing mix 1

Marketing mix 2

Marketing mix 3

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Problems with differentiated marketing

• The case of Gap Inc.– A premium brand in smart-casual basics like khakis, chinos, jeans and t-

shirts

• Success enabled the brand to serve new segments– Acquired Banana Republic 1983 – lifestyle brand targeting people with a

taste for travelling– In response to new, cheaper competitors, Old Navy launched in 1994 –

“big, loud, fun and cheap”

• BUT – distinction between the brands became blurred• Gap and Old Navy sold same basics at different price points

using same kind of advertising and promotion• When customers noticed, they opted for the cheaper brand and

Gap suffered

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Problems with differentiated marketing

• Gap responded by re-launching its brand, going back to basics and focusing on its core exclusivity, BUT -

• Now the brand was closer to Banana Republic!• The result: confused customers and a massive profit loss• What did Gap do next? In 2002 the new CEO tried to create

a clear distinction between market segments– Gap: a return to classic image of basics– Old Navy: stay aimed at the cost-conscious segment– Banana Republic: a designer feel offering 25-35’s sophisticated

business and casual wear

• The future? Gap Inc. must work hard to differentiate its marketing mix between the three brands

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Focused marketing

• Product• Price• Promotion• Distribution

Cementmanufacturer

Builders’Merchants

NationalDIY chains

Unserved

Organisation Marketing mix UnservedIndependentDIY shops

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Focused marketing

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Customised marketing

MarketingMix 1

MarketingMix 2

MarketingMix 3

MarketingMix 4

Nissan

Birdseye

Heinz

Levi’s

Industrialelectronicsystems supplier

Individual mixesOrganisation Individual customers

Marketing mix 1

Marketing mix 2

Marketing mix 3

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Customised marketing

http://www.motiontours.com/sample.php?client=foster s

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Steps for Segmentation -M.McDonald & I.Dunbar (1/2)

Step 1 – Market Map

Step 3 – What, where, when and how is it bought

Step 4 – Who buys what, where, when and how

Step 2 – Who buys

Step 5 – Why is it bought Step 6 – Segmenation

Step 7 – Check against criteria (e.g. size, reach…)

Step 8 – Segment attractiveness criteria

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Steps for Segmentation -M.McDonald & I.Dunbar (2/2)

Step 9 – Weight the attractiveness criteria

Step 11 – Score the segments

Step 12 – Company competitiveness

Step 10 – Criteria parameters

Segments should:• Reflect the company’s strategy• Indicate where sources of revenue or profit are located.• Identify customers’ values, attitudes and beliefs to the offering• Focus on behaviour• Make sense to executives• Accommodate or anticipate changes in markets and/or consumers

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Cluster AnalysisA set of techniques for grouping objects or persons in terms of their similarities in order to identify similar (homogeneous) groups based on some pre-determined criterion. Aim is to minimise within cluster variation and maximise between cluster differences.

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Steps in Cluster Analysis

λ Select clustering variables/bases (avoid multicolinearity).λ Collect data from a representative sample. Identify and

deal with outliers.λ Decide on: how to measure similarities; how to form

clusters (extraction method); how many clusters to form.λ Interpret clusters: determine size of clusters; examine

cluster centroids; name clusters based on clustering variables.

λ Validation with selected outcome variables.λ Profiling with additional descriptive (demographic or

emporographic) variables.

Market Segmentation

Documents

target market segments

bases of segmentation

location of segmentation

purpose of segmentation

advantages of segmentation

benefits of segmentation

culture session

market unserved