A market segment is a subgroup of people or organizations sharing one or more characteristics that cause them to have similar product needs. A true market segment meets all of the following criteria: it is distinct from other segments (heterogeneity across segments), it is homogeneous within the segment (exhibits common attributes); it responds similarly to a market stimulus, and it can be reached by a market intervention.
Market segmentation is the process of classifying a
marketinto distinct subsets (segments) that behave in similar ways or have similar needs. The segmentation process in itself consists of segment identification, segment characterization, segment evaluation and target segment selection. If each segment is fairly in its needs and attitudes, it is likely to respond similarly to a given marketing strategy. That is, they are likely to have similar feelings and ideas about a marketing mixcomprising a given product or service, sold at a given price, and distributed and promoted in a certain way.
Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private sector. Generally segmentation is conducted using demographic, geographic, attitudinal or behavioral data. Small segments are often termed
niche marketsor specialty markets. However, all segments fall into either consumer or industrial markets. Although industrial market segmentationis quite different from consumer market segmentation, both have similar objectives.
The process of segmentation is distinct from
targeting(choosing which segments to address) and positioning (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to address; to understand their behaviour; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved.
Improved segmentation can lead to significantly improved
marketing effectiveness. Distinct segments can have different industry structures and thus have higher or lower attractiveness (Porter). With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased.
Successful segmentation requires the following
* within the segment
* segments are measurable and identifiable
* segments are stable over time
* segments are accessible and
* target segment is large enough to be
Variables Used for Segmentation
regionof the world or country, East, West, South, North, Central, coastal, hilly, etc.
countrysize/country size : Metropolitan Cities, small cities, towns.
Density of AreaUrban, Semi-urban, Rural.
climateHot, Cold, Humid, Rainy.
genderMale and Female
**family life cycle
educationPrimary, High School, Secondary, College, Universities.
nationality/race ( ethnic marketing)
product usage rate
product end use
decision making unit
variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. When the profileis limited to demographic variables it is called a demographic profile(typically shortened to "a demographic"). A statistical technique commonly used in determining a profile is cluster analysis. Other techniques used to identify segments are algorithms such as CHAIDand regresion-based CHAID and discriminant analysis. Alternatively, segments can be modelled directly from consumer preferences via discrete choicemethodologies such as choice-based conjointand maximum difference scaling
Top-Down and Bottom-Up
George Day(1980) describes model of segmentation as the top-down approach: "You start with the total population and divide it into segments". He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship managementsoftware or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioural, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called database marketingor micro-marketing. Its use is most appropriate in highly fragmented markets. McKenna (1988) claims that this approach treats every customer as a "micromajority". Pine (1993) used the bottom-up approach in what he called "segment of one marketing". Through this process mass customizationis possible.
monopolyexists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segments (referred to as price discrimination), charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behaviour is rational on the part of the monopolist, but is often seen by competitionauthorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Examples of this exist in the transport industry (a plane or train journey to a particular destination at a particular time is a practical monopoly) where Business Class customers who can afford to pay may be charged prices many times higher than Economy Class customers for essentially the same service. Microsoft and the Video industry generally also price very similar products at widely varying prices depending on the market they are selling to.
Terms for market segments
Fast moving consumer goods
Market Segmentation Index
* Day, G. (1980) "Strategic Market Analysis: Top-down and bottom-up approaches", working paper #80-105, Marketing Science Institute, Cambridge, Mass. 1980.
* McKenna, R. (1988) "Marketing in the age of diversity", "Harvard Business Review", vol 66, September-October, 1988.
* Pine, J. (1993) "Mass customizing products and services", "Planning Review", vol 22, July-August, 1993.
* Steenkamp and Ter Hofstede (2002) "International market segmentation: issues and perspectives", Intern. J. of Market Research, vol 19, 185-213
* Wedel, Michel and Wagner A. Kamakura (2000). Market Segmentation: Conceptual and Methodological Foundations. Amsterdam: kluwer.
*DOClink| [http://www.icrsurvey.com/docs/segmentation_white_paper_final_111505.doc Overview of market segmentation] |936
* [http://www.eurekafacts.com/company/documents/STPWhitePaper.pdf Overview of the Segmentation, Targeting and Positioning STP process]
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