Consumer Based Market Segmentation

Published Date: 23 Mar 2015

The process of dividing the market into different groups is called the market segmentation. This division is done to group up the similar customers based on their specific needs and requirements of the products/services.

Market segmentation is one of the steps that go into defining and targeting specific markets. It is the process of dividing a market into a distinct group of buyers that require different products or marketing mixes. A key factor to success in today's market place is finding subtle differences to give a business the marketing edge. Businesses that target specialty markets will promote its products and services more effectively than a business aiming at the "average" customer. Opportunities in marketing increase when segmented groups of clients and customers with varying needs and wants are recognized.

Characteristics of Marketing Segmentation

A good market segmentation will result in segment members that are internally homogenous and externally heterogeneous; that is, as similar as possible within the segment, and as different as possible between segments. A market segment must have the following characteristics:

Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified.

Accessible: the segments must be reachable through communication and distribution channels.

Substantial: the segments should be sufficiently large to justify the resources required to target them.

Unique needs: to justify separate offerings, the segments must respond differently to the different marketing mixes.

Durable: the segments should be relatively stable to minimize the cost of frequent changes.

There are two types of Industries Consumer Based and Industrial Based. Market segmentation for both of them varies. We will take a look on both of these.

Consumer Based Market Segmentation

A basis for segmentation is a factor that varies among groups within a market, but that is consistent within groups. One can identify four primary bases on which to segment a consumer market:

Geographic segmentation: is based on regional variables such as region, climate, population density, and population growth rate.

Demographic segmentation: is based on variables such as age, gender, ethnicity, education, occupation, income, and family status.

Psychographic segmentation: is based on variables such as values, attitudes, and lifestyle.

Behavioural segmentation: is based on variables such as usage rate and patterns, price sensitivity, brand loyalty, and benefits sought.

The optimal bases on which to segment the market depend on the particular situation and are determined by marketing research, market trends, and managerial judgment. Lets discuss these points in details.

Geographic Segmentation

This type of segmentation is mostly used by multi-national corporations or transnational businesses. Such firms operating across the boundaries alter their marketing mix based on the different requirements of consumers with in each geographic segment they operate in. As today the world has become a global village so this type of market segmentation is becoming more important. The following are some examples of geographic variables often used in segmentation:

Region: by continent, country, state, or even neighborhood. This kind of segmentation involves division of customer base by continent, country or state etc. If you are an organization working on a global scale you may divide by global regions such as Europe, North America, South America, Asia and Africa. McDonalds globally, sell burgers aimed at local markets, for example, burgers are made from lamb in India rather than beef because of religious issues. In Mexico more chili sauce is added and so on.

Size of metropolitan area: segmented according to size of population. for example, in London UK certain parts of the West End of London are more affluent then the East End and you will find particular products sold in these regions based on their affluence.

Population density: often classified as urban, suburban, or rural.

Climate: according to weather patterns common to certain geographic regions.

Demographic Segmentation

Demographic segmentation consists of dividing the market into groups based on variables such as age, gender family size, income, occupation, education, religion, race and nationality. As you might expect, demographic segmentation variables are amongst the most popular bases for segmenting customer groups.

This is partly because customer wants are closely linked to variables such as income and age. Also, for practical reasons, there is often much more data available to help with the demographic segmentation process. The main demographic segmentation variables are summarized below:

Age: Consumer needs and wants change with age although they may still wish to consumer the same types of product. So Marketers design, package and promote products differently to meet the wants of different age groups. Good examples include the marketing of toothpaste (contrast the branding of toothpaste for children and adults) and toys (with many age-based segments).

Life-cycle stage: A consumer stage in the life-cycle is an important variable - particularly in markets such as leisure and tourism. For example, contrast the product and promotional approach of Club 18-30 holidays with the slightly more refined and sedate approach adopted by Saga Holidays.

Family size: Addressing the needs of the customer based on their family. For example selling the different size of breakfast cereals.

Occupation: Targeting the customer based on their profession. It is good for the teachers and stunt drivers to buy the life insurance because of their profession.

Gender: Gender segmentation is widely used in consumer marketing. The best examples include clothing, hairdressing, magazines and toiletries and cosmetics.

Income: Another popular basis for segmentation. Many companies target affluent consumers with luxury goods and convenience services. Good examples include Coutts bank; Moet & Chandon champagne and Elegant Resorts - an up-market travel company. By contrast, many companies focus on marketing products that appeal directly to consumers with relatively low incomes. Examples include Aldi (a discount food retailer), Air tours holidays, and discount clothing retailers such as TK Maxx.

Social class: Many Marketers believe that a consumers "perceived" social class influences their preferences for cars, clothes, home furnishings, leisure activities and other products & services. There is a clear link here with income-based segmentation.

Lifestyle: Marketers are increasingly interested in the effect of consumer "lifestyles" on demand. Unfortunately, there are many different lifestyle categorization systems, many of them designed by advertising and marketing agencies as a way of winning new marketing clients and campaigns!

Ethnicity: Producing the products for the customers based on the ethnic values. For example we can see the ethnic food section in all the major stores like TESCO and Sainsbury's etc.

Religion: Addressing the needs of the customer based on their religion values. For example providing the halal meat for the Muslims and providing the vegetable products for the Hindus based on their different religion values.

Psychographic Segmentation

Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO) surveys are one tool for measuring lifestyle and AIO's dictate our everyday behavior from where we shop to what we buy. Some psychographic variables include:

Lifestyle groups: and develop lifestyle profiles on their target market. If we understand the lifestyle of a particular group we can sell them product/services on the basis that it will enhance their lifestyle. A lifestyle group is a particular segment defined by the organization that is marketing a product or service. This lifestyle segment is labeled because individual within it display similar characteristics. For example in the early 1980s within the UK as the economy was booming the City of London were increasingly employing young independent staff on very high salaries. The media termed this group as YUPPIES; they were young upwardly mobile professionals, associated with mobile phones, money, expensive cars, and prestigious city jobs. Third agers are another group termed and identified by the marketing industry. They are people in their 50's retired from a profession, and have a high disposable income with time on the hand. Many of these third-agers are adventurous and experimenters, as they have spent their past lives working hard and they seek enjoyment from their remaining years and have the income to spend on luxury items. In the United States there are 70 million third-agers who are the fastest growing users of the internet, spending more time on the internet then their younger counterpart. 

Personality Characteristics: Products and brands can also be aimed at particular personalities. Pigaio motorcycles are aimed at young 18-25 outgoing, independent persons. Often marketers try to develop personalities for their brands and products that mimic that of their target market.

Social Class Segmentation: Divides society into 6 distinct groups based solely on occupation. (a) Professional staff (b) Middle management (C1) Junior management (C2) Skilled manual (D) Semi-skilled and unskilled workers (E) Those dependent on the state. Social class segmentation works on the assumption that the higher your profession the more you will earn. Thus the more affluent lifestyle you will lead.  Marketers use this type of information to sell products and services based on lifestyle behavior, and your profession does have an impact on the way you behave.

Behavioral Segmentation

Refers to why people purchase a product or service. Behavioral segmentation has the advantage of using variables that are closely related to the product itself. It is a fairly direct starting point for market segmentation.

Benefit sought: Behavioral segmentation can be broken down into the benefit a consumer seeks from purchasing a product. How will the product enhance their overall lifestyle? When purchasing a computer the benefit sought maybe of 'ease of use' to the 'need for speed'.

Occasion: is another variable. When should a product be purchased? The demand for turkeys increases during Christmas, flowers and chocolates on mother's day and so on. Occasion segmentation aims to increase the 'reason to buy factor' and thus increase sales.

Usage rate: divides customers into light, medium and heavy users. Heavy users obviously contribute more to turnover then light or medium users, the objective of an organization should be to attract heavy users who will make a greater contribution to company sales.

Brand loyalty: customers never want to give their brand loyalty and this is one of the biggest advantages for the organization to earn more benefits. For example the smoker who smokes Benson and Hedges will never switch to Gold Leaf.

User status: it also effects the selling of product/service. A customer can be a potential, first-time or regular buyer. If a customer is purchasing something for the first time he/she will hesitate a bit because he/she has not an idea of quality of the product/service.

Industrial Market Segmentation

In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They evaluate offerings in more detail, and the decision process usually involves more than one person. These characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments, and institutions.

While many of the consumer market segmentation bases can be applied to businesses and organizations, the different nature of business markets often leads to segmentation on the following bases:

Geographic segmentation: based on regional variables such as customer concentration, regional industrial growth rate, and international macroeconomic factors.

Customer type: based on factors such as the size of the organization, its industry, position in the value chain, etc.

Buyer behaviour: based on factors such as loyalty to suppliers, usage patterns, and order size.

Geographic segmentation

In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some industries firms tend to cluster together geographically and therefore may have similar needs within a region.

Customer type

Business customers can be classified according to type as follows:

Company size

Industry

Decision making unit

Purchase Criteria

Buyer behaviour

In industrial markets, patterns of purchase behaviour can be a basis for segmentation. Such behavioural characteristics may include:

Usage rate

Buying status: potential, first-time, regular, etc

Purchase procedure: sealed bids, negotiations, etc

Why Market Segmentation Matters

The marketing concept calls for understanding customers and satisfying their needs better than the competition. But different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike.

Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, and mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, another firm likely would enter the market with a product that serves a specific group, and the incumbent firms would lose those customers.

Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them with the same offering. The first step in target marketing is to identify different market segments and their needs.

Role of Market Research

Research, as a general concept, is the process of gathering information to learn about something that is not fully known. Nearly everyone engages in some form of research. From the highly trained geologist investigating newly discovered earthquake faults, to the author of best selling spy novels gaining insight into new surveillance techniques, to the model train hobbyist spending hours hunting down the manufacturer of an old electric engine, each is driven by the quest for information.

For marketers, research is not only used for the purpose of learning, it is also a critical component needed to make good decisions. Market research does this by giving marketers a picture of what is occurring (or likely to occur) and, when done well, offers alternative choices that can be made. For instance, good research may suggest multiple options for introducing new products or entering new markets. In most cases marketing decisions prove less risky (though they are never risk free) when the marketer can select from more than one option.

Using an analogy of a house foundation, marketing research can be viewed as the foundation of marketing. Just as a well-built house requires a strong foundation to remain sturdy, marketing decisions need the support of research in order to be viewed favorably by customers and to stand up to competition and other external pressures. Consequently, all areas of marketing and all marketing decisions should be supported with some level of research.

While research is key to marketing decision making, it does not always need to be elaborate to be effective. Sometimes small efforts, such as doing a quick search on the Internet, will provide the needed information. However, for most marketers there are times when more elaborate research work is needed and understanding the right way to conduct research, whether performing the work themselves or hiring someone else to handle it, can increase the effectiveness of these projects.

As noted, marketing research is undertaken to support a wide variety of marketing decisions. The table below presents a small sampling of the research undertaken by marketing decision area.

Marketing Decision

Types of Research

Target Markets

sales, market size; demand for product, customer characteristics, purchase behavior, customer satisfaction, website traffic

Product

product development; package protection, packaging awareness; brand name selection; brand recognition, brand preference, product positioning

Distribution

distributor interest; assessing shipping options; online shopping, retail store site selection

Promotion

advertising recall; advertising copy testing, sales promotion response rates, sales force compensation, traffic studies (outdoor advertising), public relations media placement

Pricing

price elasticity analysis, optimal price setting, discount options

External Factors

competitive analysis, legal environment; social and cultural trends

Other

company image, test marketing

Market research consists of a plan that charts how relevant data is to be collected and analyzed so that the results are useful and relevant for making marketing decisions. Once the research and the related analysis are complete, the results are communicated to management. This provides management with in-depth information regarding crucial factors that have an impact on the target market and existing marketing mix. Market research allows management to make the changes necessary for better results through adopting a proactive approach.

Marketing research is a process that investigates both organizations and people. Of course, organizations are made up of people so when it comes down to it, marketing research is a branch of the social sciences. Social science studies people and their relationships and includes such areas as economics, sociology and psychology. To gain understanding into their fields, researchers in the social sciences use scientific methods that have been tested and refined over hundreds of years. Many of these methods require the institution of tight controls on research projects. For instance, many companies survey (i.e., ask questions) a small percentage of their customers (called a sample) to see how satisfied they are with the company's efforts. For the information obtained from a small group of customers to be useful when evaluating how all customers feel, certain controls must be in place including controls on who should be included in the sample.

Primary Research

When marketers conduct research to collect original data for their own needs it is called primary research. This process has the marketer or someone working for the marketer designing and then carrying out a research plan. As we noted earlier, primary research is often undertaken after the researcher has gained some insight into the issue by collecting secondary data.

While not as frequently used as secondary research, primary research still represents a significant part of overall marketing research. For many organizations, especially large consumer products firms, spending on primary research far exceeds spending on secondary research.

The primary research market consists of marketers carrying out their own research and an extensive group of companies offering their services to marketers. These companies include:

Full-Service Market Research Firms - These companies develop and carryout the full research plan for their clients.

Partial-Service Market Research Firms - These companies offer expertise that address a specific part of the research plan, such as developing methods to collect data (e.g., design surveys), locating research participants or undertaking data analysis.

Research Tools Suppliers - These firms provide tools used by researchers and include data collection tools (e.g., online surveys), data analysis software and report presentation products.

Primary research is collected in a research "instrument" designed to record information for later analysis. Marketing researchers use many types of instruments from basic methods that record participant responses to highly advanced electronic measurement where research participants are connected to sophisticated equipment.

Advantages

Following are the major advantages of the Primary Research:

Addresses Specific Research Issues - Carrying out their own research allows the marketing organization to address issues specific to their own situation. Primary research is designed to collect the information the marketer wants to know and report it in ways that benefit the marketer. For example, while information reported with secondary research may not fit the marketer's needs (e.g., different age groupings) no such problem exists with primary research since the marketer controls the research design.

Greater Control - Not only does primary research enable the marketer to focus on specific issues, it also enables the marketer to have a higher level of control over how the information is collected. In this way the marketer can decide on such issues as size of project (e.g., how many responses), location of research (e.g., geographic area) and time frame for completing the project.

Efficient Spending for Information - Unlike secondary research where the marketer may spend for information that is not needed, primary data collections' focus on issues specific to the researcher improves the chances that research funds will be spent efficiently.

Proprietary Information - Information collected by the marketer using primary research is their own and is generally not shared with others. Thus, information can be kept hidden from competitors and potentially offer an "information advantage" to the company that undertook the primary research.

Disadvantages

Following are the major disadvantages of the Primary Research:

Cost - Compared to secondary research, primary data may be very expensive since there is a great deal of marketer involvement and the expense in preparing and carrying out research can be high.

Time Consuming - To be done correctly primary data collection requires the development and execution of a research plan. Going from the start-point of deciding to undertake a research project to the end-point to having results is often much longer than the time it takes to acquire secondary data.

Not Always Feasible - Some research projects, while potentially offering information that could prove quite valuable, are not within the reach of a marketer. Many are just too large to be carried out by all but the largest companies and some are not feasible at all. For instance, it would not be practical for McDonalds to attempt to interview every customer who visits their stores on a certain day since doing so would require hiring a huge number of researchers, an unrealistic expense. Fortunately, as we will see in a later tutorial there are ways for McDonalds to use other methods (e.g., sampling) to meet their needs without the need to talk with all customers.

Secondary Research

By far the most widely used method for collecting data is through secondary data collection, commonly called secondary research. This process involves collecting data from either the originator or a distributor of primary research (see Primary Research discussion below). In other words, accessing information already gathered.

In most cases this means finding information from third-party sources such as marketing research reports, company websites, magazine articles, and other sources. But in actuality any information previously gathered, whether from sources external to the marketer or from internal sources, such as accessing material from previous market research carried out by the marketer's organization, old sales reports, accounting records and many others, falls under the heading of secondary research.

Advantages

Following are the major advantages of the Secondary Research:

Ease of Access - In years past accessing good secondary data required marketers to visit libraries or wait until a report was shipped by mail. When online access initially became an option marketers needed training to learn different rules and procedures for each data source. However, the Internet has changed how secondary research is accessed by offering convenience (e.g., online access from many locations) and generally standardized usage methods for all data sources.

Low Cost to Acquire - Researchers are often attracted to secondary data because getting this information is much less expensive than if the researchers had to carry out the research themselves.

May Help Clarify Research Question - Secondary research is often used prior to larger scale primary research to help clarify what is to be learned. For instance, a researcher doing competitor analysis, but who is not familiar with competitors in a market, could access secondary sources to locate a list of potential competitors.

May Answer Research Question - As noted, secondary data collection is often used to help set the stage for primary research. In the course of doing so researchers may find that the exact information they were looking for is available via secondary sources thus eliminating the need and expense to carrying out their own primary research.

May Show Difficulties in Conducting Primary Research - The originators of secondary research often provide details on how the information was collected? This may include discussion of difficulties encountered. For instance, the secondary research may be a research report written by a large market research company. These types of reports often include a section discussing the procedures used to collect the data and within this may disclose problems in obtaining the data, such as a high percentage of people declining to take part in the research. After reading this the marketer may decide the potential information that may be obtained is not worth the potential difficulties in conducting the research.

Disadvantages

Following are the major disadvantages of the Secondary Research:

Quality of Researcher - As we will discuss, research conducted using primary methods are largely controlled by the marketer. However, this is not the case when it comes to data collected by others. Consequently, the quality of secondary research should be scrutinized closely since the origins of the information may be questionable. Organizations relying on secondary data as an important component in their decision-making (e.g., market research studies) must take extra steps to evaluate the validity and reliability of the information by critically evaluating how the information was gathered, analyzed and presented.

Not Specific to Researcher's Needs - Secondary data is often not presented in a form that exactly meets the marketer's needs. For example, a marketer obtains an expensive research report that looks at how different age groups feel about certain products within the marketer's industry. Unfortunately, the marketer may be disappointed to discover that the way the research divides age groups (e.g., under 13, 14-18, 19-25, etc.) does not match how the marketer's company designates its age groups (e.g., under 16, 17-21, 22-30, etc). Because of this difference the results may not be useful.

Inefficient Spending for Information - Since the research received may not be specific to the marketer's needs, an argument can be made that research spending is inefficient. That is, the marketer may not receive a satisfactory amount of information for what is spent.

Incomplete Information - Many times a researcher finds that research that appears promising is in fact a "teaser" released by the research supplier. This often occurs when a small portion of a study is disclosed, often for free, but the full report, which is often expensive, is needed to gain the full value of the study.

Not Timely - Caution must be exercised in relying on secondary data that may have been collected well in the past. Out-of-date information may offer little value especially for companies competing in fast changing markets.

Not Proprietary Information - In most cases secondary research is not undertaken specifically for one company. Instead it is made available to many either for free or for a fee. Consequently, there is rarely an "information advantage" gained by those who obtain the research.