Market segmentation

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Market segmentation is a concept in economics and marketing. A market segment is a sub-set of

a market made up of people or organizations sharing one or more characteristics that cause them to
demand similar product and/or services based on qualities of those products such as price or function. A
true market segment meets all of the following criteria: it is distinct from other segments (different
segments have different needs), it is homogeneous within the segment (exhibits common needs); it
responds similarly to a market stimulus, and it can be reached by a market intervention. The term is also
used when consumers with identical product and/or service needs are divided up into groups so they can
be charged different amounts. These can broadly be viewed as 'positive' and 'negative' applications of the
same idea, splitting up the market into smaller groups.

While there may be theoretically 'ideal' market segments, in reality every organization engaged in a
market will develop different ways of imagining market segments, and create Product
differentiation strategies to exploit these segments. The market segmentation and corresponding product
differentiation strategy can give a firm a temporary commercial advantage.

Contents
 [hide]

1 "Positive" market segmentation

2 Positioning

3 Top-Down and Bottom-Up

4 Using Segmentation in Customer

Retention

o 4.1 Process for tagging

customers

5 Price Discrimination

6 See also

7 References

[edit]"Positive" market segmentation

Market segmenting is dividing the market into groups of individual markets with similar wants or needs
that a company divides the market into distinct groups who have distinct needs, wants, behavior or who
might want different products & services. Broadly, markets can be divided according to a number of
general criteria, such as by industry or public versus private although industrial market segmentation is
quite different from consumer market segmentation, both have similar objectives. All of these methods of
segmentation are merely proxies for true segments, which don't always fit into convenient demographic
boundaries.

Consumer-based market segmentation can be performed on a product specific basis, to provide a close

match between specific products and individuals. However, a number of generic market segment systems
also exist, e.g. the Nielsen Claritas PRIZM system provides a broad segmentation of the population of the
United States based on the statistical analysis of household and geodemographic data.

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 behavior; 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 (Michael Porter). With the
right segmentation, the right lists can be purchased, advertising results can be improved and customer
satisfaction can be increased leading to better reputation.

[edit]Positioning

Once a market segment has been identified (via segmentation), and targeted (in which the viability of
servicing the market intended), the segment is then subject to positioning. Positioning involves
ascertaining how a product or a company is perceived in the minds of consumers.

This part of the segmentation process consists of drawing up a perceptual map, which highlights rival
goods within one's industry according to perceived quality and price. After the perceptual map has been
devised, a firm would consider the marketing communications mix best suited to the product in question.

[edit]Top-Down and Bottom-Up

George S. 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 management software or a database of some kind.
Profiles of existing customers are created and analysed. Various demographic, behavioral,
and psychographic patterns are built up using techniques such as cluster analysis. This process is
sometimes called database marketing or 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 customization is possible.

Creating a market segment may allow a firm or other organistion to set itself apart from other competitors.

[edit]Using Segmentation in Customer Retention

Segmentation is commonly used by organizations to improve their customer retention programs and help
ensure that they are:

 Focused on retaining their most profitable customers

 Employing those tactics most likely to retain these customers

The basic approach to retention-based segmentation is that a company tags each of its active customers
with 3 values:

Tag #1: Is this customer at high risk of canceling the company's service? (Or becoming a non-
user)
One of the most common indicators of high-risk customers is a drop off in usage of the company's
service. For example, in the credit card industry this could be signaled through a customer's decline in
spending on his card.

Tag #2: Is this customer worth retaining?

This determination boils down to whether the post-retention profit generated from the customer is
predicted to be greater than the cost incurred to retain the customer. [1]

Tag #3: What retention tactics should be used to retain this customer?
For customers who are deemed “save-worthy”, it’s essential for the company to know which save tactics
are most likely to be successful. Tactics commonly used range from providing “special” customer
discounts to sending customers communications that reinforce the value proposition of the given service.

[edit]Process for tagging customers

The basic approach to tagging customers is to utilize historical retention data to make predictions about
active customers regarding:

 Whether they are at high risk of canceling their service

 Whether they are profitable to retain
 What retention tactics are likely to be most effective
The idea is to match up active customers with customers from historic retention data who share similar
attributes. Using the theory that “birds of a feather flock together”, the approach is based on the
assumption that active customers will have similar retention outcomes as those of their comparable
predecessors.[2]

From a technical perspective, the segmentation process is commonly performed using a combination
of predictive analytics and cluster analysis.

Illustration of retention-based segmentation process:

[edit]Price Discrimination
Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the
quantity sold less, generatingmonopoly 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 competition authorities 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.

[edit]See also
 Market Segmentation
The purpose for segmenting a market is to allow your marketing/sales program to focus on the subset
of prospects that are "most likely" to purchase your offering. If done properly this will help to insure
the highest return for your marketing/sales expenditures. Depending on whether you are selling your
offering to individual consumers or a business, there are definite differences in what you will consider
when defining market segments. 

Category of Need
The first thing you can establish is a category of need that your offering satisfies. The following
classifications may help.

For businesses:
 Strategic - your offering is in some way important to the enterprise mission, objectives and
operational oversight. For example, a service that helped evaluate capital investment
opportunities would fall into this domain of influence. The purchase decision for this category
of offering will be made by the prospect's top level executive management.
 Operations - your offering affects the general operating policies and procedures. Examples
might be, an employee insurance plan or a corporate wide communications system. This
purchase decision will be made by the prospect's top level operations management.
 Functional - your offering deals with a specific function within the enterprise such as data
processing, accounting, human resources, plant maintenance, engineering design,
manufacturing, inventory control, etc. This is the most likely domain for a product or service,
but you must recognize that the other domains may also get involved if the purchase of the
product or service becomes a high profile decision. This purchase decision will be made by the
prospect's functional management.

For the individual consumer:

 Social Esteem or Pleasure - your offering satisfies a purely emotional need in the consumer.
Examples are a mink coat or a diamond ring. There are some products that are on the
boundary between this category and the Functional category such as a Rolex watch (a Timex
would satisfy the functional requirement and probably keep time just as well).
 Functional - your offering meets a functional requirement of the consumer such as a broom,
breakfast cereal or lawnmower.

Segmentation of Needs
Then you should establish what the need is and who is most likely to experience that need. Your
segmentation will be determined by a match between the benefits offered by your offering and the
need of the prospect. Some "need" categories for segmentation include:
Reduction in expenses
Prospects might be businesses that are downsizing (right sizing), businesses that have
products in the mature stage of their life cycle or individuals with credit rating problems.
Improved cash flow
Prospects might be businesses that have traditionally low profit margins, businesses that have
traditionally high inventory costs or individuals that live in expensive urban areas.
Improved productivity
Prospects might be businesses that have traditionally low profit margins, businesses that have
recently experienced depressed earnings or individuals with large families.
Improved manufacturing quality
Prospects might be businesses with complex, multi-discipline manufacturing processes.
Improved service delivery
Prospects might be service businesses in highly competitive markets, product businesses
requiring considerable post-sale support or individuals in remote or rural areas.
Improved employee working conditions/benefits
Prospects might be businesses where potential employees are in short supply.
Improvement in market share/competitive position
Prospects might be new entrants to a competitive market.
Need for education
Prospects might be businesses or individuals looking for books on business planning, or
seminars on Total Quality Management.
Involvement with social trends
Prospects might be businesses concerned with environmental protection, employee security,
etc. or individuals who believe in say 'no' to drugs, anti-crime, etc.
Specific - relating to product/service characteristics
Prospects might be businesses or individuals interested in safety, security, economy, comfort,
speed, quality, durability, etc.
Factors that segment prospects
Having determined the more general segmentation characteristics you can proceed to a more detailed
analysis of the market. There are literally thousands of ways to segment a market, but the following
are some of the more typical segmentation categories.

For businesses:
Industry by SIC code
This is especially beneficial for vertical market offerings.
Size - revenues, # employees, # locations
In general if your offering is highly sophisticated, requires significant resources or provides
greater value based on volume, then the target should be the larger enterprises.
Job position/responsibility
Examples of offerings might be planning software for managers or cleaning agents for
maintenance managers.
Climate
Examples of offerings might be dehumidifiers in areas near the ocean or snow plows in
northern areas.
Time related factors
Some services in this category are vacation related industries in summer and tax planners in
the spring.
Language
An example of a language specific service is a Spanish TV channel.
Status in the industry
You might want to target businesses that are the technology leader or revenue leader or
employee satisfaction leader, etc.
Accessibility
To minimize promotion and sales expense you may want to target urban rather than rural or
local rather than national prospects.
Future potential
A good example is how Apple Computer supplied products to schools at all levels to condition
students graduating into the marketplace.
Ability to make a quick purchase decision
Targeting individual purchasers versus business committees can significantly reduce marketing
expense and increase the probability of a quick close.
Access (or lack of access) to competitive offerings
Cable TV business's significant investment in their service delivery system has allowed a near
monopoly for some time. IBM's service reputation insured minimal competition during the
mainframe days.
Need for customization
 Offerings such as police cars, busses for municipalities and specialized computer systems fall
into this category.
Product or service application to a business function
Examples are data processing, accounting, human resources and plant maintenance.
For Individual Consumers:
Physical Size
Offerings might be big men's clothing, golf clubs for shorter players, etc.
Creation of or response to a fad
Examples are hula hoops, Jurassic Park T-shirts, pet rock, physical fitness, etc.
Geographic location
Marketers take advantage of location by selling suntan lotion in Hawaii, fur coats in Alaska,
etc.
Time related factors
You may be able to target vacationers in summer, impulse buyers during the holidays or
commuters at 7AM.
Demographics/culture/religion
Ethnic products would fall into this category.
Gender
Product examples are scarves for women, ties for men, etc.
Age
Product examples are toys for children, jewelry for women, etc.
Social status
This could include country club memberships, philanthropic contributions, etc.
Education
Product and service examples are encyclopedias, scientific calculators, learning to read tools
and financial counseling.
Avocation
This could include products for hunting, fishing, golf, art work, knitting, etc.
Special Interests
You could target cat lovers, science fiction readers, jazz music collectors, etc.
Accessibility
Because the individual is more difficult to reach you may want to segment by urban versus
rural, train commuters, people who read Wall Street Journal, etc.
Access (or lack of access) to competitive offerings
Due to high investment capital requirements or timing of market entry you may be able to
capture a significant market share in a specific geographical area. Examples might be a trash
service, emergency medical support, etc.
Need for specific information
Based on features or content of your offering you can target a market segment. A product
might be books on how to start a business or a service might be seminars on how to quit
smoking.
Need for customization
Product/service examples are home decoration, fashion wear, personal portraits, etc.
Need for quality, durability, etc.
Product examples are mountain climbing gear, carpenter's tools, etc.
Degree of a product/service ingredient
Segmentation based on prospect preferences is common. An example is dark chocolate for
some tastes, light chocolate for others.
Purchase decision influencers
Once you have isolated a specific segment of the market on which to focus, then you can consider
more subtle influences on the purchase decision. Some of these are:
Preference for channel of distribution
Many prospects prefer to buy through a specific distributor or wholesaler. For individuals this
may be due to subtle, as well as, economic reasons. For example, an individual prospect may
immediately think of Wal-Mart or Home Depot when considering an offering like yours. A
business often has a preference so they can have a single communication point for all
purchases. This also often results in lower purchase prices.
Number of decision makers
 When selling to consumers or businesses, the more individuals or groups involved in the
purchase decision, the more difficult the sale. Marketing costs for selling bread can stay low
because one person normally makes the purchase decision. Car purchases are more complex
because the purchase decision normally involves a husband and wife. Business sales to
committees often require months to achieve a decision.
Financial strength of the prospect
Less affluent prospects may desire time payments versus a cash purchase and Chevrolets
instead of Cadillacs.
Quantity/volume requirements
Restaurants will want large jars of pickles while individuals want small jars. Businesses use
large amounts of electricity at predictable times.
Ability to use the offering
Trying to sell to a prospect who lacks either the knowledge or resources to properly benefit
from your offering will result in a 'no sale' situation or an unhappy customer. The prospect
should have knowledge and resources such as time, equipment, facilities, personnel and
complementary products/services.
Commitment required
If the offering requires a high commitment in terms of time, resources or money by the
customer then the target should be prospects who 'really need' the offering rather than
prospects who get some, but not a lot, of benefits.
Brand awareness/users
Examples are prospects who ask for IBM compatible PC's or Pitney Bowes mailing machines or
Winnebago R.V.s
Attitude toward a personality or enterprise
Reputation helps sell AT&T long distance service, IBM computers, Michael Jordan tennis shoes,
etc.
Attitude toward price versus value
For example, purchasers of collectors items aren't price sensitive while purchasers of
commodity items are price sensitive.
Experience with other products/services your enterprise has offered
You are looking for a reaction like "I liked your first product so I'll try your second."
Prospect bias
Examples are, 'Buy USA', I want a car with a 'solid' feel, fast cars, sweet wines, large
print playing cards, etc.
Affiliation with other organizations
Such as the U.S. Chamber of Commerce, AMA, IEEE, doctors, attorneys, pastors, franchisors,
entrepreneurs, etc.
After sale support expectations
It is often beneficial to target prospects who have enough expertise that they will require a
minimum of after sale support.
Seller Characteristics that can influence purchase decision:
Another form of influence is how the prospect perceives your offering and/or enterprise. If you can
determine the characteristics your prospects most value in an enterprise they purchase from, you can
identify those your organization possesses and promote them to the prospect.
Unique employee skills, knowledge
Extensive experience with a specific market segment or field of scientific inquiry can be a
powerful promotional tool. For example if an enterprise could sat, "Our scientists knows more
about corn silk genetic structures than anyone in the world" they would have a strong sales
statement.
Special relationships with distribution channels
Product or service accessibility is a critical factor in sales success. If an enterprise could say,
"Due to a unique relationship, the XYZ video stores give us more shelf space than any
competitor" prospects will likely respond positively.
Customer service capabilities
Prospects like to know that they can depend on post sale support from the product or service
provider. A statement like, "We have more service outlets in New Hampshire than any
competitor" will help secure sales.
Unique product forms
 Credible uniqueness such as, "Our product is the only one that offers dynamic digi-whirling" is
appealing to the market.
Manufacturing expertise
The market is always interested in purchasing from the "best". If an enterprise can confidently
state, "We are the only enterprise that can manufacture molecular engineered widgets", they
have created an image of being the "best".
Longevity
Reliability is important. A statement like, "We have been in business for 50 years, so you can
count on us to be there when you need us" is usually a strong selling point.
Purchase Decision Makers
Finally, a point to consider is, given the characteristics of your offering, what type of decision maker
will most likely be interested in purchasing from you. It may be beneficial to rank your prospects
based on the following classifications. While you may not be able to make this classification of the
prospect prior to the first contact, if your sales personnel are sensitive to these characteristics it can
strongly influence your sales strategy.

Ultra Conservative - don't rock the boat, whatever they purchase must be consistent with their
current way of doing things.

 They are most likely interested in products/services that are improvements to existing
offerings rather than something new.
 Once established as a customer they are seldom inclined to review alternatives.
 Very negative to technically complex offerings or offerings requiring extensive user education.
 Cost effective offerings are only of interest if they don't disturb the status quo.
 They are likely to react positively to any volume purchasing opportunities.

Conservatives - are willing to change, but only in small increments and only in a very cost effective
manner.

 Will consider new products/services but only if related concept has been proven to be
effective. More likely to purchase improvements to existing offerings.
 Will probably want to review competitive offerings, but will gravitate to best known offering
with lowest risk decision.
 Negative to neutral when considering technically complex offerings or offerings requiring
extensive user education.
 Strongly influenced by cost effective offerings and/or 'best price' opportunities

Liberals - regularly looking for new solutions, willing to make change (even major change) if the
benefit can be shown.

 Will usually consider new products/services even if the related concept has not yet been
proven to be effective, but only if the potential benefits can be specified and understood.
 Wants offerings that make effective use of technology, but is not interested in offerings just
because they use a certain technology.
 Will always want to review competitive offerings, but will usually choose the one offering the
greatest benefit, even if there is some risk involved.
 Neutral to positive when considering technically complex offerings or offerings requiring
extensive user education.
 Usually concerned with keeping employees informed and educated, so will often consider
educational offerings.
 Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they
are not the most cost effective.
 Often are on social trend bandwagons so react positively to offerings that address these
needs.
Technical Liberals - enamored with the benefits provided by high tech solutions and any purchase
decision will be biased by the technical content of the offering.

 Usually consider new products/services even if the related concept has not yet been proven to
be effective.
 Often consider just because they use a certain technology.
 Will always want to review competitive offerings, but will usually choose the one offering the
most hi-tech features, even if there is some risk involved.
 Consider themselves technically competent and will expect leading edge use of technology.
 Positive to fanatic when considering technically complex offerings even when requiring
extensive user education.
 Conversion costs usually not a major concern if technical benefits are there.
 Not particularly concerned with keeping employees informed and educated, so educational
offerings are not of great interest.
 Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they
are not the most cost effective.

Self Helpers - consistently defines/designs solutions to their problems, likes to acquire tools that help
in the innovation process.

 Will usually consider new products/services, but the related concept must have been proven to
be effective.
 Often consider just because they use a certain technology that is relevant to the development
program they have underway.
 Will always want to review competitive offerings, but will usually choose the one offering the
most effective 'do it yourself' features.
 Usually consider themselves technically competent and will expect very effective use of proven
technology.
 Not especially inclined toward technically complex offerings, would rather have user friendly,
but thought provoking, offerings.
 Conversion costs usually not a major concern if offering promises potential for innovation.
 Usually concerned with keeping employees informed and educated, so educational offerings
are of interest.