Concept Of Market Segmentation

Published Date: 02 Nov 2017

The marketing theory demonstrate that to develop a successful marketing strategy correctly, service marketers must develop segmentation strategies based on the attributes and behaviour patterns of target customers. These attributes would be related to the use of the service. The Purpose of this chapter is to review the academic literature on market segmentation and provide a comprehensive bibliography. Several points will be covered in the literature review, which are the concept of market segmentation, market segmentation archetypes, segmentation approaches, and types of needs, segmentation models, importance of customer service and previous studies and research.

3.1 The Concept of Market Segmentation

Building on the property that all customers are not equal in their requirements, preferences, and needs, customer segmentation is method that companies used to know their profile of customers. From the views of marketing activities, segmenting customers are the most significant tasks for allocate resources effectively (Chen and Chang, 2004). The concept of segmentation recognizes that consumers vary not only in the price they will pay, but also in a wide range of benefits they expect from the product (or service), and its method of delivery (Minhas and Jacobs, 1996).

If companies don't know who their customers are, how will they be able to evaluate whether they are meeting their needs? Since success depends on the ability to meet customers' needs and desires, they must know who their customers are, what they want, where they live and what they can give (Moyo, 2005).

Levina (2010) mentioned that the concept of market segmentation has its roots starting from 1930s, when Chamberlin and Robinson proposed their theories of imperfect competition. The principles of market segmentation can be related to economic pricing theory, which suggested that discriminatory pricing could be used to maximise profits between different consumer groups.

The concept of market segmentation was introduced half-a-century ago by Wendell Smith (1956), as an "alternative marketing strategy" in an environment where diversity had become the market habit, and defined as a subject of "viewing a heterogeneous market as a number of smaller homogeneous markets, in response to references differences, attributable to desires of consumers for more particular satisfaction of their varying wants" (Fiang, 2000; Alfansi and Sargeant, 2000).

Kim and Lee (2010) noted that Smith acknowledged its close relationship to product differentiation, but argued that the two procedures had opposite orientations: whereas differentiation focused on the supply side and aimed to align demand with the supplier’s priorities by advertising and promotion, segmentation was demand-side oriented, accepted marketplace heterogeneity as a given, and geared product specification and marketing strategy to the satisfaction of distinct consumer requirements. Niche marketing, database marketing, micro marketing, interactive marketing and relationship marketing, and mass customization are some of the concepts that should not be treated as alternative strategy to market segmentation. Although these terms or concepts may sound completely different from one another, the idea behind these concepts is very comparable, that is to create more effective and efficient ways of reaching individual consumers in order to satisfy their unique needs and wants in the best way (Kara and Kaynak, 1997).

Target market selection is used to select one or more market segments. In general, there are three types of target market selection. Mass marketing (undifferentiated marketing) is usually used in situations where almost all customers have the same characteristics. Organizations using this strategy may save production and promotion costs, but finds them at a disadvantage compared to competitors that target specific market groups (Epetimehin, 2011).

Targeted marketing (differentiated marketing) separates the market into groups of customers with somewhat diverse wants and needs. This strategy is often used in markets where customers have different characteristics. Organizations adopting this strategy often support different marketing mixes tailored to the needs and requirements of customers in selected market sectors (Canever et al., 2007; Fu Ho and Chi Hung, 2008).

Niche marketing (concentrated segmentation) focuses on small numbers of customers in a market. This strategy has often been used by organizations that have highly specific goods or techniques attractive only to small groups of consumers with certain common characteristics. Although organizations adopting this strategy might create higher customer loyalty, they put themselves at risk by being firmly joined to specific groups, which may see diminished purchasing power to competitive appeals (Fu Ho and Chi Hung, 2008).

Market segmentation is shifting toward mass customization after having left a long way. However, greater market diversity makes it more and more difficult to create meaningful segments. Therefore, it calls for replacing market segmentation with mass customization; mass customization refers to the idea that by leveraging certain technologies, companies can provide customers with customized products while retaining the economic advantages of mass production (Fiang, 2000).

The concept of market segmentation is based on three critical premises:

(1) Differences between customers.

(2) Differences in customers relate to differences in demand.

(3) Segments of customers can be isolated within the overall market.

According to Dibb and Simkin (2010) view segmentation as a three-part process comprising (1) segment classification, (2) segment requirement, and (3) segment attractiveness. Under this scheme, segment classification relates to the design of the segments, while the requirement phase concerns the extent to which the emerging customer groups can be operationalised. The segment attractiveness element fits with targeting decisions about resource allocation and segment priorities.

Today’s consumer marketers look to market segmentation systems to:

discover their key consumer segments,

identify the varying importance of those segments to their business,

understand individual consumers by identifying the group to which they fit in, thus bridging the gap between mass marketing and a "one-to-one" emphasis,

understand how consumers will respond to new products, modify brand loyalties, respond to different media,

target new prospects more effectively, and

Communicate with both customers and prospects in order to create and enhance relationships (Bickert, 1997; Simkin, 2008).

Understanding a customer needs (Dibb et al., 2002).

Allocate resources more appropriate (Sausen et al., 2005).

Identify market opportunities clear (Sausen et al., 2005) and

Market segmentation arises because it is essential to balance diverse customer needs with the capabilities and resources of competing organizations in the marketplace. In most markets the extent of customer requirements is too extreme to allow single organizations to satisfy all customer products and service needs all of the time. Companies are more likely to achieve a match between their particular assets and the variety of needs by intent efforts on customer groups with fairly homogeneous requirements (Dibb and Simkin, 1997).

Any segmentation development must begin with a clear approval of corporate objectives. Lack of clear objectives may cause the segmentation analysis to fail before it has begun. An effective segmentation process involve three steps: marketing analysis to increase knowledge or current marketing intelligence; strategy development to formalize ideas; and marketing programs to achievement the determined revised segmentation strategy (Dibb and Simkin, 1997).

Freathy and O’Connell (2000) cited that Sarabia (1996) determine the process for identifying customer segments as demonstrated in figure 3.1. The process begins with the search and selection of information, followed by detailed segment descriptions and an associated evaluation. Once a segment has been selected then the task of how to position the organization and which marketing mix variables to use can be determined.

Creation of segments

Description

Evaluation

Selection

Positioning

decisions

Marketing mix development

Search for and select information

Figure 3.1: The process for identifying customer segments

Source: Freathy and O’Connell, 2000

3.2 Market Segmentation Archetypes

Jenkins and McDonald (1997) noted Piercy and Morgan (1993) who provided a conceptual framework for viewing market segmentation which acknowledges the difference between explicit and implicit aspects of the market. An explicit viewpoint refers to the traditional marketing theorists’ view that markets are "out there" and are basically groups of customers. The implicit viewpoint relates to the role of cognitions, culture, processes and structure in determining the organisation's view of the market. The implicit aspects of segmentation are significant for two reasons. Firstly, at an implementation level, conservative frameworks for understanding segmentation tend to ignore the capacity of an organization to implement a marketing strategy within a particular segment. Secondly, there is the issue of market drift. If implicit issues are main in the definition and segmentation of markets, the organization may be unable to recognize changes in the marketplace which may undermine their entire market strategy.

Jenkins and McDonald (1997) established four archetypes of market segmentation, based on the degree of organizational integration as well as on the degree to which the market is customer driven, as demonstrated in figure 3.2.

Customer driven

Low high

Bolt-on segmentation

Strategic segmentation

Sales-based segmentation

Structural segmentation

Low high

Organisational integration

Figure 3.2 Market Segmentation Archetypes

Source: Sausen et al., 2005

Sales based segmentation, describes as an organizational archetype where is segmented on the basis of how the sales function is organized, which does not necessarily reflect clusters of particular customer characteristics or needs.

Structured segmentation represents a further archetype where there is little emphasis on segments as groups of customers. Segments are defined by how the organization is structured; this approach is deeply set in the organization as a whole.

Bolt-on segmentation, presents an archetype where a high level of customer focus is brought into the significant of market segments. The organization applies customer data which are often available within organization, such as location purchase patterns and product preference.

Strategic segmentation combines both a customer focus and a high level of organizational is able to apply customer-based data in order to develop a set of defined segments. These segments have been defined around customer groups, but are also deeply set in organization through their own operations and processes, which are tailored to the needs of their respective segments (McDonald and Dunbar, 2004; Sausen et al., 2005).

3.3 Segmentation Approaches

There are two main approaches for market segmentation. One is an a priori or post hoc approach or "management- imposed" method (Allred et al., 2006; Dennis et al., 2001), in which the segmentation variables and their categories are decided before data are collected. Traditional segmentation approaches based on geographic, socio-demographic variables (Rao and Wang, 1995), demographic and socio-economic characteristics such as age, income, occupation, family size and education fall into this category (Dibb and Wensley, 2002 ; Salaimeh, 2008).

A prioriisegmentation presumes that a significant correlation between the external characteristics of customers and their needs exist (Machauer and Orgner, 2001). The other approach is a clustering-based segmentation design in which the segments are determined by a cluster analysis on a set of relevant variables. An example of this approach is benefit segmentation. Benefit segmentation means the benefits which people are seeking in consuming a given product are the essential reasons for the existence of true market segments (Rao and Wang, 1995; Lupas and Moisey, 2001).

Koh et al. (2010) noted that benefit segmentation predicts performance better than demographic or geographic segmentation. It has been proposed that when the benefits present as attributes of a product or service, may cause consumers to purchase the product or service, rather than just describe who they are as consumers in terms of socio-economic, demographic, or psychographic data. By having knowledge of the benefits sought by customers, a marketer no longer needs to estimate which motivation might encourage consumers to buy a particular product or service.

Park et al. (2011) demonstrated that the benefit segmentation formula based on three levels (benefits sought, personal characteristics, and attitudinal outcomes). That is, consumers are clustered based on benefits sought, and the identified segments are then evaluated for differences in both personal characteristics and attitudinal outcomes.

In addition to the above, there is now a more focus on behavioral segmentation, which contrasts with the process of segmentation based on customer characteristics in that the focus is driven by customer "needs". It is argued that such a need identification approach is more powerful than a classification of characteristics and that it is more probable that the segments, which are consequently identified, will be ultimately more predictive of purchase behavior (Hollywood et al., 2007). To satisfy the target consumer’s needs, benefit needs and product attributes are the most accepted variables for segmenting the market. When benefit needs variables integrated with benefit segmentation analysis can add more focused and effective marketing strategies (Wu, 2001).

As shown in figure 3.3 Martin et al. (2000) mentioned that segmentation variables are classified according to their objective versus subject character, general and specific characteristics. The variables as general and objective (demographic and socio-economic and geographic variables) has been frequently used in the field of services and widely used in segmenting markets.

General

Specific

Objective

Demographic: age, sex, marital status, family size …

Socio economic: income level, occupation …

Geographic: nationality, region, habitat…

Consumption structure

Use of product (great, medium, small)

Brand/company loyalty

Type of purchase

Place of purchase

Subjective

Psychographic

Personality

lifestyle

Benefits sought

Attitudes

expectations

perceptions

preferences

Figure 3.3 Market segmentation approach

Source: Martin et al. (2000)

Socio-demographic and geographic classification have been most widely used in segmenting markets, but benefit segmentation is more useful in planning unique positioning messages to appeal successfully to each benefit segment and in adjusting advertisement messages (Lupas and Moisey, 2001; Park et al., 2011).

Segmentation can be based on customer value matrix, the customer value matrix was developed from a desire to apply RFM (recently, frequency and monetary value) analysis, the customer value matrix assists in identifying appropriate, segment-specific marketing strategies and tactics, and it enhances the evaluation of cross- segment strategies and tactics that provide a considerable return on marketing investment (Marcus, 1998; Montinaro and Sciascia, 2011).

Transport market segmentation has been classified using different approaches. These approaches are categorized into the priori approach and post hoc approach (Yalch, 1998). In the priori approach, segments are defined in advance based on known characteristics, and then, the perceptions/behaviors of each segment are analyzed. While, the post hoc approach relies on a multivariate analysis of several combinations of variables to define the relevant segments, the population and therefore, the segments are identified by the similarity of individuals’ attitudes towards these variables. (Yalch, 1998; Mahmoud et al, 2012).

All segmentation approaches have their own advantages and drawbacks. However, behavioral variables are assumed to have an advantage over the other types of base on responsiveness and action ability. In particular, the benefits that potential customers request have been one of the most-used segmentation bases in both consumer and industrial markets (Canever et al., 2007).

In practice, the choice of approach will depend on the purpose of the study, the nature of the market, the method of distribution, the media obtainable for market communication, the motivation of the buyers, and the choice of segmentation methods (Goyat, 2011).

Among various approaches of segmentation, need based segmentation, and demographic characteristics are selected for this study as it focus on specific attributes of services that consumers consider in the railway sector. The focus on needs instead of another base that needs is the primary determinants of purchase behavior. Also, unlike consumer markets, business market participants buy or take on products or services to meet the consequential demand for their own products and services most profitably. These need-based segments are likely to show similar price and product feature elasticity and respond similarly to changes in the marketing mix (Dowling et al., 1993).

3.4 Effective Market Segmentation

There are five criteria for an effective segmentation:

Measurable: It has to be probable to establish the values of the variables used for segmentation with acceptable efforts. This is important particularly for demographic and geographic variables.

Applicable: The size and profit potential of a market segment have to be large enough to economically validate separate marketing activities for this segment.

Available: The segment has to be available for the organization.

Distinguishable: The market segments have to be diverse to explain different reactions to different marketing mixes.

Practicable: It has to be probable to approach each segment with a particular marketing program and to draw advantages from that (Recklies, 2001; Freathy and O’Connell, 2000; Dibb and Simkin, 2010; Hattum and Hoijtink, 2010).

McDonald and Dunbar (2004) mentioned that there are number of factors to be considered before going on to specify the step-by-step process for effective market segmentation which are:

Suggestion flexibility: the degree to which suggestion can be tailored to the needs of different groups of customers.

Market granularity: the degree to which customer needs and motivations vary within a defined market.

Organizational considerations: the most important point about organizational structure is that there are number of issues that all firms have to address these are geographic location, products, markets and channels.

3.5 Steps in Segmenting a Market

There are ten steps to follow in segmenting the market:

Step 1: choose a market or product class for study

Define the overall market or product category to be studied, either new or old.

Step2: register prospective needs

A brainstorming sitting is used to identify needs. Through this, identifying the reasons why consumers buy the product. The list must stress needs, benefits and satisfaction.

Step 3: Choose approach or approaches for segmenting the market

There are no systematic procedures for selecting segmentation variables. However, a successful segmentation method must produce segments that meet the four basic criteria namely: substantial, identifiable, accessible and responsive.

Step 4: choose segmentation descriptors

Descriptors identify the particular segmentation variables to use. For example, demographics may be used as a basis of segmentation. Examples may be age, occupation, sex and income.

Step 5: Profile and investigate homogeneous segments

The profile of individual segments should contain the segments’ size, expected growth, purchase frequency, current brand usage, brand loyalty, and long-term sales and profit potential (levina, 2010).

Step 6: Identify the determining dimension

A determining dimension is related to the seller’s competitive advantage. A determining dimension must be identified for each potential segment, because it will eventually determine a consumer’s decision to buy or not to buy.

Step 7: Name and select target markets (Moyo, 2005).

Step 8: Securing the resources necessary for the target(s),

Step 9: Adopting positioning plans for the market offerings for the segments, and

Step 10: Developing marketing mixes proper for each segment (Hunt and Arnett, 2004).

3.6 Marketing Strategy and Segmentation

The marketing segmentation process means dividing a market into several market groups. In each market segment consumers have similar product needs. Each segment requires a different mix of marketing strategies to satisfy its special consumer’s needs. The idea of designing marketing for marketing segments is based on consumers’ wants and interests (Lin, 2002).

Marketing strategy is defined as the total sum of the integration of segmentation, targeting, differentiation, and positioning strategies designed to create, communicate, and deliver an offer to a target market. Marketing strategy is the key to the extension of sales and the consequent beneficial effects on company performance. The planning of strategies contain: Product, pricing, promotion, place, competitive analysis, customer analysis and customer relationships (El-Ansary, 2006; Musyoka et al., 2007).

The most difficult part of any segmentation project is the translation of the study results into an effective marketing strategy. In addition to recognizing the subjective elements inherent in segmentation studies, managers must also understand and act on the information generated. The segmentation process itself does not provide prescriptive solutions to marketing problems but purely offers a description of the market. It is possible that segments generated from a particular study may already be well served by competitors or uneconomical to reach, for example managers must decide which segments to target and how to best operate the marketing mix to influence the behavior of consumers in particular segments. Therefore, segmentation studies should not be considered in separation but need to be developed with a sound understanding of the factors influencing consumer behavior and the nature of the marketing environment (Fuller et al., 2005).

3.7 The Segmentation Models

There are some models related to segmentation which are Bonoma and Shapiro’s that reflect industrial market segmentation and need scope that related to consumer needs.

3.7.1 Bonoma and Shapiro’s nested model

Bonoma and Shapiro (1984) developed the primary model of industrial market segmentation. Mitchell and Wilson (1998) mentioned that Bonoma and Shapiro try to bridge the gap between what is practical for sellers to use (identifiable/accessible segmentation) and most appropriate theoretically (needs/benefits-oriented segmentation. Figure 3.4 illustrates the basic model. Bonoma and Shapiro argue that the benefits-orientated approach is the more attractive in the theoretical sense, but also more difficult for managers to implement, "the identifying approach provides readily identifiable customer groupings, but can state no causal relationship to sought benefits".

The nested approach suggests that the buyer start with factors those are company-oriented, general or easily identifiable and continue to seek customer knowledge that becomes increasingly more specific and intimate until worthwhile targets become clear. The outermost layer suggests that industrial marketers first segment customers using demographics characteristics. Demographic variables provide a broad description of the potential customer and include the company’s industry, size and location. The next base for segmentation includes operating variables. These variables include the customer’s technology base, use/non-use of particular products and brands and operating, technical and financial capabilities (Eckert and Goldsby, 1997).

The next, more precise layer of the model identifies customers according to their purchasing approaches. This nest includes identification of the potential customer’s formal purchasing organization, power structure, nature of existing organizational relationships, purchasing policies and criteria (Eckert and Goldsby, 1997; Mitchell and Wilson, 1998). The nested approach can be used for logistical segmentation and industrial market segmentation (Murphy and Daley, 1994).

Operating variables

Demographics

Purchasing approach

Situational factors

Personal characteristics

Figure 3.4 Bonoma and Shapiro’s nested model

Source: Eckert and Goldsby, 1997

3.7.2 Need Scope Consumer-Brand Relationship Model

Need Scope is a unique tool that helps to expose hidden needs and basic motivations. The tool was developed in New Zealand on the basis of Jung’s Archetypes (1959). The heart of need scope is a psychological model that summarises human emotions. This provides a constant framework to develop and implement strategy. Need scope is a unique instrument that helps to reveal the consumers needs. Consumers’ needs can be distinguished in three categories as shown in figure 3.5 the most accessible category accounts for the functional needs, such as safety, speed and ease. These needs are rational and are or are not fulfilled by the product characteristics of a brand (Wilson and Calder, 2006; Hagen, 2009).

Somewhat more difficult to understand are the social identity needs. Every human being wants to belong to a certain group and to identify with it. The core of all consumer behaviour is emotional needs, such as the need for safety or the need for control (Hagen, 2009). These emotive needs are the real drives of brand choice and are satisfied by brand symbolism. At this level, consumer needs take two different forms which are gratification and expressive. Gratification needs are satisfied by a feeling, a change in mood, brand can make the person feel safe and secure. Expressive needs are about satisfying a personality ambition (Wilson and Calder, 2006).Untitled3.pngUntitled3.png

Consumer requirements Untitled3.png

Brand Image

Figure 3.5 Layered subdivisions of needs

Source: Hagen, 2009

3.8 Types of Needs

Consumer can be motivated to satisfy either utilitarian or hedonic needs. Utilitarian needs are a desire to achieve some functional or practical benefit and tangible attributes (Irani and Hanzaee, 2011). Hedonic needs are subjective, experiential and intangible attributes; consumer might rely on a product to meet their needs for excitement, self confidence, or fantasy. Consumer can be motivated to purchase a product because it provides both types of benefits (String fellow et al., 2004; Hanzaee and Khonsari, 2011).

Social need can be treated as a type of hedonic need, as interaction with others in the communities, as the process itself becomes a source of fun, pleasure and excitement. In the communities of fancy, people can create new personality and stories as they wish and treat it as a chance for their self expression. Self expression is the course of action which provides performer with an anchor of his/her identity, thus self expression needs are defined as the need to present one’s identity to other people. Self expression is a type of utilitarian need, because self expression is a means to achieve the objective of expressing self identity in the community (Han et al., 2007).

Purchase decisions are determined by two kinds of needs: (1) functional-those satisfied by product functions; and (2) emotional-deeper needs associated with the psychological aspects of product ownership. Only by understanding such deeper needs firms are capable to provide true value to the customer. To build customer relationships, firms need to "turn strangers into friends and friends into customers" by knowing more about them and then using the detailed information gained to provide them what they need. To fully understand customer purchase behavior requires viewing a customer as a human being first and a customer second (Stringfellow et al., 2004).

Unlike most physical phenomena, the goal of meeting customer needs often can hardly be expressed in objective and quantitative terms, which restricts the option of exploring, assessing, and optimizing different alternatives. In the mean time, it has been acknowledged that the key to product success relies on better understanding of the voice of the customer and on better links between the preferences of the customers, feedbacks, and value with the capability of the companies. These preferences often have to be articulated in subjective and qualitative terms. (Wang and Tseng, 2011).

3.9 Emotions in Consumer Behavior

Emotion is generally considered as a key determinant of consumer behavior and affects especially customers Purchase decisions. Several studies have demonstrated that positive emotions are important predictors of behavioral intentions (Bouguerra et al., 2011). After a long period in which consumers take a rational decisions based on utilitarian product attributes and benefits, in the last two decades, marketing scholars have started to study emotions attributes represented by marketing stimuli, products and brands. Many studies concerning consumer emotions have focused on consumers’ emotional responses to advertising, and the mediating role of emotions on the satisfaction of consumers. Emotions play an important role in other contexts, such as complaining, service failures and product attitudes (Laros and Steenkamp, 2005).

In studying consumer emotion in services both situational influences and individual differences need to be measured. Services are not a homogeneous area that the diversity is based on industry classification but are heterogeneous according to certain essential characteristics across industry; these characteristics may moderate the differing emotional knowledge structures that people form (Edwardson, 1998).

3.10 The Role of Service Marketing Mix

Marketing mix is not a scientific theory, but just a conceptual framework that identifies the principal decision making managers make in configuring their offerings to suit consumers’ needs. The marketing mix tools can be used to develop both long-term strategies and short-term tactical programs (Goi, 2009).

The marketing mix concept has two essential benefits. First, it is an important tool used to enable one to see that the marketing manager’s job is, in a large part, a matter of trading off the benefits of one’s competitive strengths in the marketing mix against the benefits of others. The second benefit of the marketing mix is that it helps to reveal another dimension of the marketing manager’s job (Goi, 2009). All managers have to allocate available resources among various demands, and the marketing manager will in turn allocate these available resources among the various competitive strategy of the marketing mix. In doing so, this will help to introduce the marketing philosophy in the organization (Low and Tan, 1995).

Service marketing mix is controlled variables which can be used by company to influence consumer reaction from certain market segment who are targeted by the company. The tools of marketing mix or internal factors that can be controlled by company from marketing mix consist of 4 main components that are product, price, distribution and promotion, and in the advancement there are 3 more added that are people, physical evidence, and process (Ivy, 2008; Fu Ho and Chi Hung, 2008; Manafzadeh,et al., 2012).

Marketing is not only concerned with the development and achievement of successful programs and strategies. For marketing to be successful there needs to be a marketing orientation throughout the company, this fosters the marketing concept and demonstrates a marketing approach to all internal and external activities (Plomaritou et al., 2011). The concept of customer orientation emphasizes the sufficient understanding of the target customers so as to deliver superior values for them. Therefore, customer-oriented firms show a continuous and proactive nature toward identifying and meeting customers' expressed and latent needs. With customer-oriented values, firms do extremely well in creating and maintaining bonds with customers and therefore obtain affirmative attitudes, linking customer satisfaction in addition to positive financial outcomes (Zhou and Li, 2010).

Marketing mix capability is expected to perform as a connecting engine by carefully reforming a new solution, developing new approaches of advertisements and sales promotions, providing a right range of the pricing scheme, placing products at the right place and time for the customers. These carefully programmed and deployed marketing activities can change the organizational cultural level of customer orientation to better customer satisfaction, market share growth and profitability. When customer needs change rapidly, customer orientation enables firms to recognize those changes, and guides themselves to explore necessary actions and build relevant abilities to develop appropriate programs to meet customers’ needs (Shin, 2012).

3.11 Segmentation Methods

Regardless of the extensive literature on market segmentation, there is no overall agreement about the optimal segmentation methodology. One reason for this diversity is the fact that segmentation can be viewed from different perspectives (Lopez and Jeronimo, 2008).

Kim and Lee (2011) cited that segmentation methods and modeling techniques established two decades ago were summarized and briefly explained by Beane and Ennis (1987), who emphasized the need for their creative application. Those were: automatic interaction detection and its multivariate variant; canonical analysis; factor analysis; cluster analysis (Park and Sullivan, 2009); regression analysis (Wu, 2001); discriminant analysis; multidimensional scaling; conjoint analysis and componential segmentation (Pas and Huber, 1992).

According to Wedel and Kamakura (2000) demonstrated that the segmentation methods classification is based on either a priori if "the type and number of segments are determined in advance by the researcher" or post hoc if "the type and number of segments are determined depending on the results of data analyses". The difference between those in which the statistical methods used were descriptive, analyzing relations among a set of variables but making no difference between dependent and independent variables, and those that are predictive, in which "one set consists of dependent variables to be explained by the other set of independent variables" .

ANOVA and clustering analysis are frequently used in segmenting analysis (Kennedy et al., 2008; Fu Ho and Chi Hung, 2008). Clustering analysis is an unofficial process of dividing patterns into groups and make objects within cluster show relatively high intra-similarity whereas objects between different clusters have low inter-similarity (Chih et al., 2010).

Cluster analysis is a simply empirical method of classification because it makes no prior assumptions about essential differences within a population (Mitchell, 1994). This method can be described as post hoc since the types and number of segments are determined according to the results from data analysis, and descriptive with no distinction between dependent and independent variables (Pieniak et al., 2010). Clustering-based segmentation, segments can be identified by the data analysis procedure, typically by using cluster analysis. This clustering is most regularly based on consumer statements of the importance of product attributes. In other words, cluster analysis is used to categorize subjects on the basis of rated importance of various product attributes and benefits (Kimiloglu et al., 2010). There are two types of cluster analysis which are hierarchical method like linkage method, ward’s minimum variance method and non hierarchical method cluster analysis methods like K means (Rao and Wang, 1995; ke, 2007).

Conjoint analysis is a statistical technique used to study the importance of product attributes to consumers, as well as the consumer value from the same attribute levels. A product is usually composed of numerous attributes. The different combinations and specific levels of each attribute makes products diverse. For different consumers, the importance of product attributes and the utility values on different levels of the similar attribute are not the same; this is the core difference of consumer demand. The assessment of the product attributes and the utility values of the specific attribute level are appropriate standards in market segmentation (Li et al., 2011).

3.12 Previous Studies and Research

This part will demonstrate a comprehensive review of segmentation studies that applied in different sectors. Start with the transportation area and then other sectors, Table 3.1 illustrate the summary of segmentation studies.

Pas and Huber (1992) characterized the market for passenger rail service according to the needs and preferences of potential riders in the corridor. The five primary rail service attributes that were included in this study are rail travel time, cost, and number of departures per day, food service and seating type. The five identified traveler clusters are: functional traveler, day tripper, train lover, leisure-hedonic traveler, and family traveler. Krizek and El-Geneidy (2007) used habits and preferences for both users and non users of the metro services. They used factor scores to cluster the respondent into four categories: captive riders with regular commuting habits, captive riders with irregular commuting habits, choice riders with regular commuting habits, and choice riders with irregular commuting habits. Similarly, non-users were classified into four categories: auto captives with regular commuting habits, auto captives with irregular commuting habits, potential riders with regular commuting habits, and potential riders with irregular commuting habits. Mahmoud et al (2012) measured the preferences of different categories of users towards the quality of bus service and determined the salient preferences of different segments in the market. This study indicated that different categories of users evaluate the quality of the service in different patterns, so they must be targeted with different approaches/policies.

The study of Dutch railways used a segmentation model which focuses on the psychographic needs of train passengers. This segmentation model allows company to ensure whether the current provision of services meets the customers’ requirements. By understanding these needs, the unfulfilled services can be developed. The segmentation model has been used to transform the provision of services both in the trains and on the stations, as well as to train employees to deal better with the varying needs of customers. Dutch railways started to look for an unambiguous segmentation instrument that was demand rather than supply- based that derived from the passengers and not from the current supply of Dutch railways. This study represents six different need segments, according to a type of passenger: the explorer, the individualist, the functional planner, the certainty seeker, the socialiser and the convenience seeker (Hagen, 2009).

Other studies of rail services demonstrated that benefit segmentation can be a useful means of determining market segments of tourists. It helps managers and tourism promoters work more effectively toward advertising their products. This study divided rail users into five benefit segments: fitness Seekers, typical trail users, group naturalists, and enthusiasts (Lupas and Moisey, 2001).

Some researchers took customer expectation as a variable of segmentation to provide managers with a powerful tool to identify customer and can be source of better customer services. This type of segmentation provides an instrument for companies to tailor their services to the segments they chose as targets, focusing on the factors which most influence customers’ satisfaction and making the customers feel that their needs are being understood (Martin et al., 2000). For example, the study of airline industry used expectation as a segmentation approach. Passenger’s expectations of desired airline service quality are differences due to service dimensions like reliability; assurance; facilities; employees; flight patterns; customization and responsiveness. Regarding the service dimension expectations, there are no significant differences between passengers who made their own airline choice (decision makers) and those who did not (non-decision makers) (Gilbert and Wong, 2003).

Psychographics is an approach used to identify and measure the lifestyles of consumers. It has been utilized substituted with the activities, interests and opinions measures (AIO). Marketers used this approach because it provides more detailed information about consumer than basic demographic variables (Tam and Tai, 1998). The study of mobile TV content of public transportation used market segmentation concept to identify the profiles of market segments based on the demographic characteristics and life style variables (Tao, 2008).

Other different sectors used different segmentation approaches for example Park and Sullivan (2009) identified the segment of university student based on clothing benefits sought and develop a profile of each segment in terms of attribute evaluations, shopping orientations, and repatronage behavior. Consumers were classified into three different groups according to clothing benefits sought which are: the utilitarian benefit group, the hedonic benefit group, and the composite benefit group. Park et al (2011) employed shopper segments based on benefits sought from TV home shopping and profiled the identified segments in term of personal characteristics, satisfaction and repurchase intentions.

Woo (1998) used customer perception as a basis for market segmentation to measure student’s perception of service quality in distance education institution. Also, some financial services sector (retail banking) using service quality dimensions as segmentation variables that can be the basis for differentiation in a highly competitive environment. The identification and measurement of the dimensions of service quality, and their relationship to customer satisfaction provides managers with a better understanding of what constitutes quality service from the customer’s viewpoint (McDougall and Levesque, 1994).

Mukiibi and Bukenya (2008) segmented grocery shoppers in Alabama based on preferences, lifestyles and shopping habits by employing cluster analysis technique. Kaze and Skapars (2011) analyzed consumption patterns and consumer behaviour in Latvian alcohol market by using lifestyle and human values based segmentation.

The study of Kumar et al (2012) focused on clustering e-banking consumer based on customer characteristics, behavior, life time value of a customer (LTV) and demographic variables. Understanding customer value in each cluster, the bank would gain opportunities to establish better customer relationship management strategies, improve customer loyalty and revenue and find opportunities for increasing the selling.

Souiden (2002) identified the market segments of Arab countries based on marketing mix variables. This study proposed a solution to the issue of marketing standardization adaptation by trying to find out how multinationals can apply standardize marketing plan to reach homogeneous segment while at the same time designing different strategies for different segments.

Table 3-1 Summary of Segmentation Studies

Researcher (year)

Application area

Segmentation variables

Kumar et al. (2012)

Mahmoud et al (2012)

Kaze and Skapars (2011)

Park et al. (2011)

Lupus and Moisey (2011)

Park and Sullivan (2009)

Hagen (2009)

Tao (2008)

Bukenya (2008)

Krizek and Elgeneidy (2007)

Gilbert and Wong (2003)

Souiden (2002)

Martin et al. (2000)

Woo (1998)

Mc dougall and Levesque (1994)

Pas and Huber (1992)

Banking

Bus services

Alcohol market

TV home shopping

Railway

University student

Train services

Public transportation

Grocery shoppers

Metro transit system

Airline industry

Arab countries

Tourism services

Education

Retail banking

Railway services

Behavior and value

preferences

Lifestyle and value

Benefit sought

Benefit sought

Benefit sought

Psychographic needs

Lifestyle

Preference and lifestyle

Habit and preferences

Expectation

Marketing mix

Expectation

Perception

Service quality

Needs and preferences

3.18 Chapter Summary

In this chapter the researcher introduced and defined the concept of market segmentation and archetypes. The discussion also included the characteristics, steps involved in segmenting markets and the different kinds and approaches of segmentation. Also, demonstrated the methods and techniques used in segmentation. The information enabled a firm to define and measure its chosen market segment and establish if it would be sustainable on an ongoing basis.

Market segmentation would help to predicting future behaviour, a method of detecting, evaluating and selecting homogeneous groups and a way of identifying a target market for which a competitive strategy can be formulated. It allows the company to discover key consumer groups, estimate the importance of each segment to the business and communicate and target products and resources more effectively. Further, if one can identify such groups one will have better understanding of the structure of the market for some product or service and therefore be able to do a better job of designing, operating and marketing the product or service. The outcomes that stem from a successful segmentation strategy are various and include a reduction in competitive challenge, pricing stability, protection against replacement and an opportunity to build differentiation.

There are a variety of segmentation bases but the identification of customer needs in order to serve and build the value of customer segments is a major challenge that marketers encounter. Despite the availability of demographic information on business-to business customers, the actual needs of the customer cannot be determined from this information. By linking readily available macro segmentation demographic descriptors to highly effective micro segmentation based need information, the marketer can now classify and target customers in a timely and cost-effective manner. By using a sample of customers to identify their needs and relating them to demographic factors, the necessity of identifying the specific needs of each customer. Also, through benefit segmentation, companies can divide large, heterogeneous markets into smaller segments that can be reached more effectively with products and services that match consumer’ unique needs. As consumers obtain satisfaction for their needs, a company can become more successful.

Segmentation methodology contains variety of statistical techniques but clustering analysis is the most frequently used statistical methods for classification or segmentation of people.

The next chapter includes the methodology for this research study, specifically the mixed methodology adopted by the researcher, research questions, model and hypotheses.