Market Segmentation

What Are Markets

Markets are a group of potential buyers with needs and wants and the purchasing power to satisfy them.

Learning Objectives

Diagram the different types of markets and their relationship to one another

Key Takeaways

Key Points

  • Markets can be more tightly defined as a people who have a true need or want for the company’s offering, the ability to pay for it, and the willingness and authority to buy it. The total number of buyers must be large enough to be profitable for the company.
  • Markets can also be a place such as a shopping center. This identification of markets is useful for marketing decision-making purposes because factors such as product features, price, location of facilities, and promotional design are affected by geographic factors.
  • The market can be defined as an economic entity because in most cases, a market is characterized by a dynamic system of economic forces including supply, demand, competition, and government intervention.
  • The primary types of markets are consumer markets, industrial markets, institutional markets, and reseller markets. These categories are not always clear-cut and in some industries, a business may be in a different category altogether or may even encompass multiple categories.

Key Terms

  • latent: Existing or present but concealed or inactive.
  • esoteric: Confidential; private.
  • buyer’s market: An excess of supply over demand, leading to abnormally low prices. A situation when there is an abundance of product, prices are usually low, and customers dictate the terms of sale.

Defining the Market

A basic definition of a market is a group of potential buyers with needs and wants and the purchasing power to satisfy them.

We will also consider a more expansive definition given the complexities of these components.

The Market is People: Since exchange involves two or more people, the market can be thought of as people, individuals, or groups. People constitute markets only if they currently recognize their need or desire for an existing or future product.

Individuals and members of households are the largest category of markets, but business establishments and other organized behavior systems also represent valid markets. However, people or organizations must meet all five of the following basic criteria in order to represent a valid market:

  • There must be a true need or want for the product, service, or idea; this need may be recognized, unrecognized, or latent.
  • The person or organization must have the ability to pay for the product via means acceptable to the marketer.
  • The person or organization must be willing to buy the product.
  • The person or organization must have the authority to buy the product.
  • The total number of people or organizations meeting the previous criteria must be large enough to be profitable for the marketer.

The Market is a Place: The market can also be thought of as a place or as a geographical area within which trading occurs. International markets, American markets, a shopping center, and even the site of a single retail store can be called a market.

people walking around the hall of a shopping mall with stores around

Shopping Mall: A market is a place where trading takes place. An example of a market is a shopping mall.

This identification of markets is useful for marketing decision-making purposes because factors such as product features, price, location of facilities, and promotional design are all affected by geographic factors. Finally, a market may be somewhere other than a geographical region, such as a catalog or ad that allows you to place an order without a marketing intermediary.

The Market is an Economic Entity: In most cases, a market is characterized by a dynamic system of economic forces including supply, demand, competition, and government intervention. The terms buyer’s market and seller’s market describe different conditions of bargaining strength. Finally, the extent of personal freedom and government control produces free market systems, socialistic systems, and other systems of trade and commerce.

Types of markets

The primary types of markets are consumer markets, industrial markets, institutional markets, and reseller markets.

These categories are not always clear-cut. In some industries, a business may be in a different category altogether or may even encompass multiple categories. It is also possible that a product may be sold in all four markets.

Consumer Markets

Consumer markets include individuals and households who buy consumer goods and services for their own personal use. They are not interested in reselling the product or setting themselves up as a manufacturer.

Industrial Markets

The industrial market consists of organizations and the people who work for them, those who buy products or services for use in their own businesses or to make other products. For example, a steel mill might purchase computer software, pencils, and flooring as part of the operation and maintenance of their business.

Institutional Markets

The institutional market is made up of various types of profit and nonprofit institutions, such as hospitals, schools, churches, and government agencies. Institutional markets differ from typical businesses because they are motivated by satisfying esoteric, often intangible, needs rather than profits or market share. Because institutions operate under different restrictions and employ different goals, marketers must use different strategies to be successful.

Reseller Markets

All intermediaries that buy finished or semi-finished products and resell them for profit are part of the reseller market. This market includes approximately 383,000 wholesalers and 1,300,000 retailers that operate in the US.

With the exception of products obtained directly from the producer, all products are sold through resellers. Producers are always cognizant of the fact that successful marketing to resellers is just as important as successful marketing to consumers.

The Importance of Market Segmentation

Segmentation splits buyers into groups with similar needs and wants to best utilize a firm’s finite resources through buyer based marketing.

Learning Objectives

Examine the benefits of market segmentation

Key Takeaways

Key Points

  • The market segmentation and corresponding product differentiation strategy can give a firm a temporary commercial advantage. Most market segmentations are the techniques used to attract the right customer.
  • Objectives of segmentation are: 1) To reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed; 2) To increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment’s characteristics.
  • While the market is initially reduced to its smallest homogeneous components (perhaps an individual), business in practice requires the marketer to find common dimensions that will allow him to view these individuals as larger, profitable segments.

Key Terms

  • target: A person (or group of people) that a person or organization is trying to employ or to have as a customer, audience etc.
  • product differentiation: Tangibly or intangibly distinguishing a product from that of all competitors in the eyes of customers.

Market segmentation pertains to the division of a set of consumers into persons with similar needs and wants. Market segmentation allows for a better allocation of a firm’s finite resources. Due to limited resources, a firm must make choices in servicing specific groups of consumers. With growing diversity in the tastes of modern consumers, firms are taking note of the benefit of servicing a multiplicity of new markets.

Market segmentation can be defined in terms of the STP acronym, meaning Segment, Target and Position.

Benefits of Segmentation

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. Most market segmentations are the techniques used to attract the right customer.

In essence, the marketing objectives of segmentation analysis are:

  • To reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed
  • To increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment’s characteristics

Market segmentation is a twofold process that includes:

  1. Identifying and classifying people into homogeneous groupings, called segments
  2. Determining which of these segments are viable target markets.

The Segmented Market

The premise of segmenting the market theorizes that people and/or organizations can be most effectively approached by recognizing their differences and adjusting accordingly. By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer.

While product differentiation is an effective strategy to distinguish a brand from competitors ‘, it also differentiates one product from another. For example, a company such as Franco-American Spaghetti has differentiated its basic product by offering various sizes, flavors, and shapes. The objective is to sell more product, to more people, more often. The problem is not competition; the problem is the acknowledgment that people within markets are different and that successful marketers must respond to these differences.

Choosing a Target Market from within a Defined Segment

While it is relatively easy to identify segments of consumers, most firms do not have the capabilities or the need to effectively market their product to all of the segments that can be identified. Rather, one or more target markets (segments) must be selected. A company selects its target market because it exhibits the strongest affinity to a particular product or brand. It is in essence the most likely to buy the product.

Kellogg's Crunchy Nut Cereal with Free Bowling in the pack

Kellogg’s Crunchy Nut Cereal: Kellogg’s segmented its audience into children and adults. The cereal appealed to children, while free bowling appealed to adults.

While the market is initially reduced to its smallest homogeneous components (perhaps a single individual), business in practice requires the marketer to find common dimensions that will allow him to view these individuals as larger, profitable segments.

Developing a Market Segmentation

A market segmentation is developed based on one of two strategies and several consumer identifying characteristics like demographics and behavior.

Learning Objectives

Review the characteristics of market segmentation

Key Takeaways

Key Points

  • The two major segmentation strategies followed by marketing organizations are concentration strategy and multi- segment strategy.
  • Segmentation of a market to reach a target consumer base can be done by defining consumers in terms of geographic, demographic, psychographic, and behavioral characteristics.
  • An ideal market segment is possible to measure, large enough to earn profit, stable, possible to reach, internally homogeneous, externally heterogeneous, consistent in response to market stimulus, reachable in a cost-effective manner, and useful in determining marketing mix.

Key Terms

  • marketing mix: A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.
  • psychographic segmentation: The division of the market into subsets according to consumers’ lifestyle, personality, values, and social class.
  • psychographic: The science of using psychology and demographics to better understand consumers.
  • market segment: A subset of consumers who have common needs and desires as well as common applications for the relevant goods and services.

Criteria for Segmenting

An ideal market segment meets all of the following criteria:

  • It is possible to measure.
  • It must be large enough to earn profit.
  • It must be stable enough that it does not vanish after some time.
  • It is possible to reach potential customers via the organization’s promotion and distribution channel.
  • It is internally homogeneous (potential customers in the same segment prefer the same product qualities ).
  • It is externally heterogeneous. In other words, potential customers from different segments have different quality preferences.
  • It responds consistently to a given market stimulus.
  • It can be reached by market intervention in a cost-effective manner.
  • It is useful in deciding on the marketing mix.

Segmentation Strategies

There are two major segmentation strategies followed by marketing organizations: a concentration strategy and a multi-segment strategy.

In the concentration strategy, a company chooses to focus its marketing efforts on only one market segment. Only one marketing mix is developed. This strategy is advantageous because it enables the organization to analyze the needs and wants of only one segment and then focus all its efforts on that segment. The primary disadvantage of concentration is that if demand in the segment declines, the organization’s financial position will also decline.

A blue rolex watch

Concentration Strategy: Rolex focuses on customers who want a luxury watch. Rolex is a prime example of the concentration strategy in market segmentation.

In the multi-segment strategy, a company focuses its marketing efforts on two or more distinct market segments. The organization does so by developing a distinct marketing mix for each segment. They then develop marketing programs tailored to each of these segments. This strategy is advantageous because it can increase total sales since more marketing programs are focused at more customers. The disadvantage of this strategy is the higher costs stemming from the need for multiple marketing programs.

Segmenting Methods

Segmentation of a market to define a target consumer base can be done in a variety of methods such as:

Geographic Segmentation

Geographic criteria—nations, states, regions, countries, cities, neighborhoods, or zip codes–define the market segments. The geo-cluster approach combines demographic data with geographic data to create a more accurate profile of a specific consumer. In areas prone to rain, you can sell things like raincoats, umbrellas, and gumboots. In hot regions, you can sell summer wear, while in cold regions, you can sell warm clothes.

Demographic Segmentation

This consists of dividing the market into groups based on variables such as age, gender, family size, income, occupation, education, religion, race, and nationality. Demographic segmentation variables are among the most popular bases for segmenting customer groups because customer wants are closely linked to variables such as income and age and because there is a plethora of demographic data available.

Psychographic Segmentation

In psychographic segmentation, consumers are divided according to their lifestyle, personality, values, and social class. Foreigners within the same demographic group can exhibit very different psychographic profiles.

Behavioral Segmentation

Consumers are divided into groups according to their knowledge of, attitude toward, use of, or response to a product. It is actually based on the behavior of the consumer.

Occasions

Companies can segment the market according to the occasions of use, such as whether the product will be used alone or in a group, or whether it is being purchased as a present or for personal use.

Benefits

Companies can segment the market according to the benefits sought by the consumer.

Usage Rate

Markets could also be segmented by usage rates. For example, it has been suggested that targeting heavy users can lead to increased sales. Segmenting by usage could divide the market by heavy users vs. light users.