Segmentation

SEGMENTATIONExplain the concept of segmentation with specific reference to financial services and products

Overview

• Definition• Why Segmentation?• Objectives of Segmentation• Market Matching Strategy• Levels of Segmentation• Bases and methods for Segmentation• Criteria which segments should meet• Benefits and Limitations of Segmentation• A traditional example of Segmentation• Segmentation and Customer Relationship Management

(CRM)• Example: Credit Card• Example: Banking products

Definition

• What is Segmentation?Segmentation is defined as, “The subdividing of a market into distinct subsets of customers, where any subsets may conceivably be selected as a target market to be reached with a distinct marketing mix.” – Philip Kotler, Professor of International Marketing at Northwestern University.

Market Segmentation

• Market segmentation is dividing the market into smaller groups of consumers or organisations in which each consumer has a common characteristic such as a need or want.

• It involves building up or breaking down of potential buyers into groups called market segments. These segments will allow marketers to understand their target audience and thereby make marketing more effective.

Segmentation helps us to answer these questions

• Who are the best customers?• What products and services do they need?• When will they need them?• How do they want to interact with us?• Why do they behave the way they do?

Objectives of Market Segmentation

• Breaking down of mass market into groups of consumers that have clearly expressed common needs.

• Group customers with similar needs and buying behavior into segments .

• Satisfy requirements of different customer segments .

• Increase efficiency and effectiveness of marketing initiatives by identifying strategic marketing goals.

Mass Marketing v/s Segmented market

• In mass marketing: marketing of a product is done to a wide audience. Typically, things which are perceived to be necessary to the consumer such as toothpaste, automobiles, computers, medicine, soft drinks, etc. are subject to mass marketing.

• Segmentation: defining the customer’s needs and wants by placing them in specialised groups that receive different attention.

Market Matching Strategy

Market Matching

Segmentation Targeting Positioning

Levels of Segmentation

• Same product to all consumers

• No segmentation

Mass Marketing

• Different products to one or more segments

• Some segmentation

Segment Marketing

• Different products to subgroups within segments

• More segmentation

Niche Marketing

• Products to suit the tastes of individuals or locations

• Complete segmentation

Micromarketing

Bases of Segmentation

The bases available for segmenting are nearly unlimited and there is no perfect way of segmenting consumers since customers’ characteristic are spread over several variables.

Basically we have four types of segmentation bases which are:- Demographic- Psychographic- Geographic- Behavioral

1. Demographic

It consists of dividing the market into groups based on variables such as: Age, gender, family size, family life cycle, income, occupation, education, generation, religion.

Advantages : Demographic

• Very simple to apply and use, as government statistical data is readily available in most countries.

• Suitable data can be obtained quite quickly and cheaply.

• Easy for everybody to understand, from management, to sales and customer service staff, it can be more easily built into an internal marketing plan.

Examples: demographic

1. Cosmetics and perfumes firms could effectively use a variety of segmentation variables. For example, males and females would have different needs, as would younger and older consumers.

2. As people age their needs and wants change, some organizations develop specific products aimed at particular age groups for example  nappies for babies, toys for children, clothes for teenagers and so on.  

2. PsychographicsPsychographics segmentation groups consumers according to their life-style, buying psychology, social class, individual personality, attitudes, interests.

Advantages: Psychographic

• Gives a much better insight into the consumer as a person, which more likely lead to the identification of underlying needs and motives.

• Should deliver a much better understanding of the consumer, which in turn which should create more valid and responsive segments and subsequent marketing programs.

Example: Psychology

1. Segmenting by social class makes sense for this product category, as cars are often a reflection of a consumer’s lifestyle and used as a social symbol of success.

3. GeographicCommon used by multinational and global business, which alter their marketing mix according to the differing needs of consumers based on each geographic segment they operate within. These includes; region, population density, climate conditions.

Advantages: geographic• Quite a valuable approach for a large company that

operates across many countries, as geographic segmentation would allow them to consider cultural differences.

• Effective approach for small firms, with limited resources that often need to operate in a defined geographic area for efficiency purposes.

• Tends to work well in cities/countries where there are significant differences in socio-economic status in different geographic areas, or where there is significant changes in lifestyle across regions.

Example: Geographic

1. McDonalds globally, sell burgers aimed at local markets, for example, burgers are made from lamb in India rather then beef because of religious issues. In Mexico more chilli sauce is added and so on.

4. Behavioural

Divides the market intro groups based on their behaviour, knowledge, attitudes, usage and the way they respond to the product. Factors which usually affect behaviour are: occasions, benefits, loyalty status, user status, buyer readiness and level of usage.

Advantages: Behavioural• Often used in mature markets, where the firm is

looking to understand: how to activate a non-user, target switchers, convert a medium user to a heavy user and so on.

Behavioural segments can group consumers in terms of:• OccasionsFor example, cereals have traditionally been marketed as a breakfast-related product. Kelloggs have always encouraged consumers to eat breakfast cereals on the "occasion" of getting up. More recently, they have tried to extend the consumption of cereals by promoting the product as an ideal, anytime snack food.

• UsageSome markets can be segmented into light, medium and heavy user groups.

• LoyaltyLoyal consumers - those who buy one brand all or most of the time - are valuable customers. Many companies try to segment their markets into those where loyal customers can be found and retained compared with segments where customers rarely display any product loyalty.

Criteria of Segments

Measurable

AccessibleSubstanti

alDifferentialActionable

• Size, purchasing power, profiles of segments can be measured

• Segments must be effectively reached and served

• Segments must be large or profitable enough to serve

• Segments must respond differently to different marketing mix elements and actions

• Must be able to attract and serve the segments

B e n e fi t s o f M a r k e t S e g m e n t a t i o n

• Improve understanding of customer needs

• More appropriate resource allocation

• Clearer identification of marketing opportunities

• Focus on the companyBetter focus Better returns

• Increase in competitionFocus increase competition increases

Benefits of Market Segmentation

• Market Expansion- Geographic segmentation Where expansion is immediately possible- You cannot expand in a market where you have no idea of which segment of customers you will be meeting.

• Customer Retention- It is encouraged through the life cycle segments, i.e. a product is available to any customer whatever his age or budget.

Benefits of Market Segmentation

• Better Communications- Know your market segmentation form a communication message.

• Increases in profitability- Segmentation increases competitiveness, brand recall, brand equity, customer retention and improve in communication. Therefore increasing profitability.- Focus sales More profits

Limitations of Market Segmentation

• Segments are too small• Consumers are misinterpreted• Costing is not taken into consideration• There are too many brands• Consumers are confused• Product is completely new

Example Car: BMW

• Demographic segmentation- give customers chance to select their own wants ( income, gender age)

• BMW- most preferred by men > 35 years and income > $75,000

• BMW retail stores located in upper classes’ neighborhoods (geographic segmentation)

• X-series are used by different types of customers:

Example Car: BMW

• Females prefer X3

• Families prefer X5

• As sport car, X6 takes the first rank

CUSTOMER RELATIONSHIP MANAGEMENT

Segmentation and Customer Relationship Management

CUSTOMER RELATIONSHIP MANAGEMENT

• Financial organisations also segment existing customer accounts based on extent of customer’s relationship with the company.

• Defined as: the marketing activities/processes that an organisation has in place so as to maintain its communication and repeated transactions with existing customers.

• These existing customers who have longer stream of transactions are offered special treatment and care.

Using CRM to promote market segments

• Marketer has information on the characteristics of a particular segment, which comes from a database of customer’s preferences and purchasing habits.

• CRM marketers use the information from the databases and create promotions designed to meet customer wants and needs. This further segmentation helps retain customers, since customer retention is vital for profitability.

• Promotions can include:1) Customer Loyalty programs,2) Ability to customise the product to suit exact needs

of the customer.

CUSTOMER RELATIONSHIP MANAGEMENT

Market Segmentation

Tailor services to segments

Retain loyal and profitable customers

Example: Credit Card

Type of Credit card

Key benefits sought by Target Segment

1. Basic Transaction Processing purchasing a product of interest at retail location.

2. Loyalty Rewards such as airline miles or discounts rewards are linked to the amount of usage of the card.

3. Premium Predefined benefits serve a higher tier of the market. Membership fees are charged with privileges and membership benefits granted in return, e.g. access to entertainment events such as concerts.

4. Small Business

Rewards, Transaction processing Customers are attracted to the unique credit card features needed to run a small business.

5. Super Elite Unique benefits, personal concierge and high spending limit e.g. American Express, Visa’s stratus card. They serve as a symbol of wealth and status.

• Credit Card market can be broken into different segments, based on individuals’ specific needs.• The different cards available reflect consumer

needs.

Banking Example: Needs of new financial consumers

Fast Trackers• Young technology enthusiasts: make and spend

money; always online Young Aspirationals• Curious about technology; budget conscious; need

help saving money

Middle of the Roaders• Like to spend money despite moderate incomes

Value Seekers• Older and financially stable consumers; frequently use

credit card Simplifiers• Older, lower-income consumers with simple banking

needs; not too interested in technology Conventional Stalwarts• Older, traditional-minded referring to pay by cash and

cheque; often visit the bank; use technology lightly

• The consumer segments and characteristics are as follows:

Implications: recognising that different customers have different needs.Consumer Segments

Implication for Financial Institutions

Fast Trackers • Provide service through email and mobile and promotion of online banking services.

• Guidance in investments and financial options. • Encourage them by offering rewards.

Young Aspirationals

• Offer products and services that recognise loyalty, e.g. offering discounts.

• Guidance in managing finance and building credit.

• Promotion of online banking services.

Middle-of-the-roaders

• Help in managing their money through online systems.

• Provide tips in money management.

Value Seekers • Offer rewards on products and provide investment tools, specially retirement portfolio.

Simplifiers • Promote an online bill payment.• Migration from paper to eStatement. • Promote an element of trust.

Conventional Stalwarts

• Impacts of regulation in terms of additional fees.• Offer quarterly statements: reduce cost, improve

efficiency.

Banking example: Results obtained after segmenting the market.

CONCLUSION• Market segmentation is clearly a crucial marketing

strategy. It enables the marketing manager to divide total demand into relatively homogeneous segments identified by geographic, demographic, psychographic and behavioural variables.

• Once a segment has been identified, it is possible to develop a product or service to meet the needs of the segment. A marketing mix can then be devised to reach the segment identified efficiently.

• Market segmentation is an important aspect of modern marketing management and the financial services marketing is to no exception.

• Segmentation-based strategies are a wise approach to

the marketing of financial services due to the diversity of customer needs.

Thank you for your attention