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Market Segmentation I. Introduction • Market segmentation is the process of dividing a market into groups of similar consumers

and selecting the most appropriate group(s) for the firm to serve. • The group or segment that a company selects to market to is called a target market. • The process of market segmentation is divided into six steps, as shown in Figure 5.1 • Market segmentation analysis is a cornerstone of sound marketing planning and decision

making. II. Delineate Firm’s Current Situation • A firm must do a complete situational analysis when embarking on a new or modified

marketing program. • At the marketing planning level, such an analysis aids in determining objectives,

opportunities, and constraints to be considered when selecting target markets and developing marketing mixes.

• Marketing managers must have a clear idea of the amount of financial and other resources that will be available for developing and executing a marketing plan.

• The inclusion of this first step in the market segmentation process is intended to be a reminder of tasks to be performed prior to marketing planning.

III. Determine Consumer Needs and Wants • Successful marketing strategies depend on discovering and satisfying consumer needs and

wants. o As a practical matter, new technology often brings about an investigation of

consumer needs and wants for new or modified products and services. • In these situations, the firm is seeking the group of consumers whose needs could best be

satisfied by the new or modified product. • Further, at a strategic level, consumer needs and wants usually are translated into more

operational concepts. IV. Divide Markets on Relevant Dimensions • In a narrow sense, this step is often considered to be the whole of market segmentation. • Three important questions should be considered here:

o Should the segmentation be a priori or post hoc? o How does one determine the relevant dimensions or bases to use for segmentation? o What are some bases for segmenting consumer and organizational buyer markets?

A. A Priori versus Post Hoc Segmentation • An a priori segmentation approach is one in which the marketing manager has decided

on the appropriate basis for segmentation in advance of doing any research on a market. • Post hoc segmentation is an approach in which people are grouped into segments on the

basis of research findings. • Both of these approaches are valuable, and the question of which to use depends in part

on how well the firm knows the market for a particular product class. • If through previous research and experience a marketing manager has successfully

isolated a number of key market dimensions, then an a priori approach based on them may provide more useful information.

• In the case of segmentation for entirely new products, a post hoc approach may be useful for determining key market dimensions.

• However, even when using a post hoc approach, some consideration must be given to the variables to be included in the research design.

B. Relevance of Segmentation Dimensions • Unfortunately, there is no simple solution for determining the relevant dimensions for

segmenting markets. • Managerial expertise and experience are needed for selecting the appropriate

dimensions or bases on which to segment particular markets. • In most cases, however, at least some initial dimensions can be determined from

previous research, purchase trends, and managerial judgment. • The most market-oriented approach to segmentation is on the basis of what benefits the

potential consumer is seeking. Thus, consideration and research of sought benefits are a strongly recommended approach in the marketing literature.

C. Bases for Segmentation • A number of useful bases for segmenting consumer and organizational markets are

presented in Figure 5.2. • Two commonly used approaches for segmenting markets include benefit segmentation

and psychographic segmentation. • Geodemographic segmentation, a recent development with a number of advantages for

marketers, is another approach for segmenting markets.

Benefit Segmentation • The belief underlying this segmentation approach is that the benefits people are

seeking in consuming a given product are the basic reasons for the existence of true market segments.

• This approach attempts to measure consumer value systems and consumer perceptions of various brands in a product class. o To illustrate, Russell Haley provided the classic example of a benefit

segmentation in terms of the toothpaste market.

o Haley identified five basic segments, which are presented in Figure 5.3. • Benefit segmentation is clearly a market-oriented approach that seeks to identify

consumer needs and wants and to satisfy them by providing products and services with the desired benefits.

Psychographic Segmentation • Whereas benefit segmentation focuses on the benefits sought by the consumer,

psychographic segmentation focuses on consumer lifestyles. • Consumers are first asked a variety of questions about their lifestyles and then

grouped on the basis of the similarity of their responses. • Lifestyles are measured by asking consumers about their activities, interests, and

opinions (AIO). • The best-known psychographic segmentation is called VALSTM. • As shown in Figure 5.4, the U.S. VALSTM framework has eight psychographic

groups based on two dimensions. • The vertical dimension segments people based on the degree to which they are

innovative and have resources such as income, education, self-confidence, intelligence, leadership skills, and energy.

• The horizontal dimension of primary motivations provides context about an individual’s self-perception and worldview.

• Consumers driven by knowledge and principles are motivated primarily by ideals. These consumers include the Thinkers and Believers.

• Consumers driven to demonstrate success to their peers are motivated primarily by achievement; Achievers and Strivers.

• Consumers driven by a desire for social or physical activity, variety, and risk taking are motivated primarily by self-expression; Experiencers and Makers.

• Innovators and Survivors operate outside of primary motivations. • Innovators because they have the most abundant resources and may express any of

the three motivations. • Survivors because they have few resources, live complacently and within their means

without a strong primary motivation. Figure 5.4 gives more details about each of the eight groups.

Geodemographic Segmentation • Geodemographic segmentation identifies specific households in a market by focusing

on local neighborhood geography to create classifications of actual, addressable, mappable neighborhoods where consumers live and shop.

• One geodemographic system is called Nielsen PRIZM, which stands for consumers “Potential Ranking Index of ZIP Markets.” o The system classifies every U.S. neighborhood into one of 14 groups.

• The PRIZM segmentation is available on major marketing databases from leading providers.

• The PRIZM system is based on the assumptions that consumers in particular

neighborhoods are similar in many respects and that the best prospects are those who actually use a product or other consumers like them.

• Marketers use PRIZM to better understand consumers in various markets, what they are like, where they live, and how to reach them.

V. Develop Product Positioning • By this time, the firm should have a good idea of the basic segments of the market that

could potentially be satisfied with its product. • The current step is concerned with positioning the product favorably in the minds of

customers relative to competitive products. • Several different positioning strategies can be used:

o First, products can be positioned by focusing on their superiority to competitive products based on one or more attributes.

o Second, products can be positioned by use or application. o Third, products can be positioned in terms of particular types of product users. o Fourth, products can be positioned relative to a product class. o Finally, products can be positioned directly against particular competitors.

• One way to investigate how to position a product is by using a positioning map, which is a visual depiction of customer perceptions of competitive products, brands, or models.

• Figure 5.5 presents a sample positioning map for automobiles that offers marketers a way of assessing whether their brands are positioned appropriately.

• Some experts argue that different positioning strategies should be used depending on whether the firm is a market leader or follower and that followers usually should not attempt to position directly against the industry leader.

VI. Decide Segmentation Strategy • There are four basic alternatives in segmentation strategy.

o First, the firm may decide not to enter the market. o Second, the firm may decide not to segment but to be a mass marketer.

 There are at least three situations when this may be the appropriate decision for the firm:  The market is so small that marketing to a portion of it is not profitable.  Heavy users make up such a large proportion of the sales volume that

they are the only relevant target.  The brand is the dominant brand in the market, and targeting to a few

segments would not benefit sales and profits. o Third, the firm may decide to market to one segment. o Fourth, the firm may decide to market to more than one segment and design a

separate marketing mix for each.  Three important criteria on which to base such decisions are that a viable

segment must be:  Measurable—for a segment to be selected, the firm must be capable of

measuring its size and characteristics.  Meaningful—a meaningful segment is one that is large enough to have

sufficient sales and growth potential to offer long-run profits for the firm.  Marketable—a marketable segment is one that can be reached and served

by the firm in an efficient manner. • Figure 5.6 offers a list of questions marketing managers should answer when deciding

whether a market segment meets these criteria. VII. Design Marketing Mix Strategy • The firm is now in a position to complete its marketing plan by finalizing the marketing

mix or mixes to be used for each segment. • While the marketing mix design is placed at the end of the model, many of these decisions

are made in conjunction with target market selection.