Market segmentation leads to a solid and loyal customer base

When economics textbooks give the impression that all consumers are alike, they are ignoring variances in the way different groups treat a product. In management, the term unsegmented, mass marketing is used to describe this approach.

A company selling paper clips may engage in unsegmented, mass marketing because there is little diversity among customer needs or because it is more cost effective to target the aggregate market. The product is standardized, one model for the entire market, which may result in economies of scale in production, distribution and/or promotion.

The danger with the unsegmented, mass marketing approach is that trying to appeal to everyone may result in the company appealing to no one or missing key opportunities to attract an important segment of the market. Paper clips can come in different types – gold paper clips, paper clips with different shapes, bankers’ paper clips, magnetic paper clips, memo paper clips, etc. Each segment will have a substantial market.

This shows that even with paper clips, a market segmentation approach is possible where companies provide product options that meet the needs of a defined group. Dividing a large market into a number of smaller subgroups is called market segmentation or customer segmentation. While there is a great diversity in the number of ways a market can be divided, the basic logic behind a segmentation strategy is the same.

• „„Not all buyers are alike.
• Subgroups of people with similar behaviours or values may be identified.
• Subgroups will be smaller and more homogeneous than the market as a whole.
• A marketing effort targeted at the unique needs of smaller groups of similar customers should be more effective than a marketing effort to satisfy the diverse needs of a large group of heterogeneous customers.

A good marketer will be able to cluster similar customers into specific market segments with different, and sometimes unique, demands. For example, the possible market segments (based on benefits) of a mobile carrier might be (1) highly social, (2) work-oriented, (3) safety contact, (4) status symbol. And, for a restaurant, it might be (on behaviour) (1) regulars, (2) special occasion, (3) business lunch, (4) quick spot. Each of these markets can be further segmented. The number of market segments within the total market depends largely on the strategist’s ingenuity and creativity in identifying those segments. The traditional bases for differentiating market segments are virtually unlimited. Although the possible segmenting variables are numerous, a far smaller number of variables are, in fact, the ones most commonly used. Demographics With this strategy, a company simply divides the larger market into groups based on several defined traits. Age, race, gender, marital status, occupation, education and income are among the commonly considered demographics segmentation traits. As a simple example of usage, a company that sells feminine hygiene products will include ‘female’ in its description of its primary market segment.

Geographic

Geographic segmentation is used by companies that sell products or service specific to a certain community, state, region, country or group of countries. Local businesses usually get no benefit in paying for national or international advertising. Companies that operate nationally can often save by delivering the same marketing messages to a national audience through one television, radio and magazine or newspaper ad. Global businesses typically decide whether to maintain a universal message or tailor messages to each country’s marketplace.

Psychographics and lifestyle

Psychographics or lifestyle segmentation has become increasingly common as companies look to identify consumers based on interests and activities in lieu of demographics. As an example of this strategy’s benefits, consider the lifestyle of an outdoor adventurer. Camping enthusiasts, for instance, typically have few consistent demographic traits. Campers are a diverse group. Thus, marketers would likely target a segment of outdoor hobbyists or campers for new camping equipment through outdoor programmes or magazines.

Behavioural

Behavioural segmentation is based on user behaviours, including patterns of use, price sensitivity, brand loyalty and benefits sought. A company may have customers with a similar demographic makeup but distinct behavioural tendencies. Some may use the product daily, while others use it weekly or monthly. Higherincome earners may have more interest in higher-quality models versus low-cost models. This may prompt the provider to target higher-end products and services to one group and more value-oriented offerings to lower-income or budget-conscious customers.

Business segmentation

Segmenting for business customers often has overlap but commonly includes geographic, customer type and behaviourbased strategies. Geographic business segmentation is similar to that with consumer segmenting. Customer type segmenting may include business size or the nature of the business. Banks, for instance, often have different products for small versus large businesses. Behavioural segmenting is based on repeat or loyal customers versus one-time users. Thus, the above are the four main types of market segmentation. Usage-based market segmentation, price-based market segmentation, all these different types of segmentation are a derivative of the above four types only. So what type of market segmentation can you use for business and how would you like to implement segmentation?

Identifying viable segments

Clearly defined market segmentation criteria not only ensure that customers are more likely to identify – and purchase – the product that is right for them; it also minimizes wastage of resources, reducing the time spent marketing the wrong products to the wrong customers. It is important, however, to focus resources on market segments whose size, growth and profitability is good, both immediately and in the long run. The following five market segmentation criteria should be useful when planning your own company’s market segmentation strategy. A market segment should be: Measurable: Market segments are usually measured in terms of sales value or volume (i.e. the number of customers within the segment).

Reliable market research should be able to identify the size of a market segment to a reasonable degree of accuracy, so that strategists can then decide whether, how and to what extent they should focus their efforts on marketing to this segment. Substantial: Simply put, there would be no point in wasting marketing budget on a market segment that is insufficiently large, or has negligible spending power. A viable market segment is usually a homogenous group with clearly defined characteristics such as age group, socio-economic background and brand perception.

Longevity is also important here: no market segmentation expert would recommend focusing on an unstable customer group that is likely to disperse or change beyond recognition within a year or two. Accessible: When demarcating a market segment, it is important to consider how the group might be accessed and, crucially, whether this falls within the strengths and abilities of the company’s marketing department. Different segments might respond better to outdoor advertising, social media campaigns, television infomercials or any number of other approaches.

Differentiable: An ideal market segment should be internally homogeneous (i.e. all customers within the segment have similar preferences and characteristics), but externally heterogeneous. Differences between market segments should be clearly defined, so that the campaigns, products and marketing tools applied to them can be implemented without overlap.

Actionable: The market segment must have practical value – its characteristics must provide supporting data for a marketing position or sales approach and this in turn must have outcomes that are easily quantified,

ideally in relation to the existing measurements of the market segment as defined by initial market research. A good understanding of the principles of market segmentation is an important building block of your company’s marketing strategy – the foundation for an efficient, streamlined and ultimately successful approach to customers and a means of targeting your products and services accurately, with the minimum of wastage.

(Lionel Wijesiri, a corporate director with over 25 years’ senior managerial experience,can be contacted at [email protected])