This lecture
discusses why market segmentation is a crucial step in setting marketing
strategy. Also, various approaches for segmenting consumer markets will be
covered.
The
importance of market segmentation as a strategic decision has been magnified
because many product categories are in the maturity stage of the product
lifecycle. One characteristic of the maturity stage is that the number of new
customers available dwindles. Thus, growth is achieved either by taking market
share from competition or by finding new customers. The latter option can be
realized by segmenting markets to identify new groups to serve. For example, Mercedes-Benz plans to introduce the CLA-class, models with a price
point under $30,000. The strategy behind this new product line was to reach
younger buyers who might not otherwise consider spending $35,000 or more, the
price points of other Mercedes models. Mercedes-Benz and other companies recognize
that incremental revenues can be gained if they can meet the needs of customer
segments that have not been targeted previously.
Breaking
down a population using demographic variables is the most common method used to
segment consumer markets. Demographic data collected or that can be determined
on individuals include:
|
�
Sex |
�
Ethnicity |
|
�
Age |
�
Occupation |
|
�
Income
(individual or household) |
�
Generation
group |
|
�
Education level
attained |
�
Family life
cycle stage (single, married no kids, married with kids at home, etc.) |
Two
reasons that demographic segmentation is so prevalent are: 1) ease of gathering
information and 2) ease of understanding demographic characteristics. Demographic data can be
obtained using secondary research such as census data or purchasing �off the
shelf� market research reports (like your Marketplace
research). Also, demographic information can be gathered using primary research
like customer surveys, product registration, and customer information stored in
a database. In general, data on individuals� demographic characteristics are
easy to understand and interpret. Identifying people based on characteristics
such as male/female, the dollar amount of income earned, and the highest level
of education attained is rather straightforward and can be understand by
managers throughout the organization.
Along with
demographic characteristics, geographic data on individuals are considered
�state of being� variables. They are rather stable characteristics of us that
comprise who we are- our gender, what we do for a living, and where we live.
They are not necessarily permanent traits, but they tend to give fitting
descriptions on an ongoing basis.
Geographic
segmentation can be conducted at broad or narrow levels. Broad geographic
segmentation is using country, region, or state boundaries to define market
segments. A broad approach to geographic segmentation is useful when a
geographic market is broad or large. Also, segmenting broadly such as regions
of the U.S. is appropriate when consumer needs vary in different parts of the
country. For example, car owners in northern states will have a need for tires
that are designed to perform in snowy conditions while that benefit will not be
a priority for southern car owners.
Geographic
segmentation at a more narrow level occurs when city/county, zip codes, or even
neighborhoods represent the scope of a market area. A lawn care and landscaping
service could use geographic segmentation to identify subdivisions with houses
worth more than $300,000 if it believes that these homeowners are more likely
to use its service (this example also shows how multiple segmentation variables
are combined to arrive at a target market).
In contrast
to demographic and geographic variables being about state of being,
psychographic variables are considered to capture individuals� �state of mind.�
Psychographics describe people in terms of how they live their lives. These
characteristics include:
�
Values
�
Lifestyles
�
Interests
�
Hobbies
These
characteristics of people can cut across different demographic groups. For
example, Harley Davidson has a target market that is
primarily male, but the Harley owner is better described for the impact the brand
has on his/her self-concept (e.g., gives a sense of freedom, empowering, makes
owner feel young). Harley owners represent a rather broad range of ages and to
an extent, incomes. But, many owners can be described as adventurous, thrill
seekers, or rugged.
Another
brand that has effectively used psychographic segmentation is Gatorade.
The sports drink brand segments the market for its product based on a
psychographic characteristic, an active lifestyle that includes physical
activity. As discussed previously, Gatorade does not use this single
segmentation approach, but incorporating psychographics along with other
segmentation variables results in a clearer picture of the typical customer for
Gatorade.
Demographic
and geographic characteristics are valuable for describing consumers� state of
being. But, the usefulness of those variables can be enhanced by combining them
with consumers� psychographic characteristics. This approach is referred to as
geo-demographic segmentation. The combination of geographic, demographic, and
psychographic data is used to create what are referred to as lifestyle
clusters.
One method
for geo-demographic segmentation developed by the marketing research firm Claritas is its Prizm consumer profiles. Claritas has blended demographic
data with information on people�s preferences for media consumption,
entertainment, and personal values. The result is a classification system that
breaks down the U.S. population into sixty-eight segments. Now, enter your zip code and review the results. Does the
information on the segments living in your zip code seem to match well with the
people you observe around you?
Geo-demographic
segmentation approaches like Nielsen�s MyBestSegments give a more complete
profile of the characteristics of a customer segment. However, the benefit of
that insight comes at a cost; purchasing this type of data can be cost
prohibitive for smaller businesses.
One of the
most effective ways to segment consumer markets is to group individuals
according to a specific behavior. For marketers, perhaps the behavior that is
of greatest interest is product usage. Segmenting a market on the basis of
product usage enables strategies to be created to appeal to a segment based on
consumers� frequency of purchase, quantity purchased, or brand purchased. Five
segments that can be identified from segmenting using product usage include:
�
Heavy
users � Customers who buy the most or most often; they represent the �low
hanging fruit� as they are already tend to be loyal
customers and are convinced of the value a product or service offers. An
effective tactic for marketing to heavy users is loyalty or frequency programs.
These programs can be free, such as Hilton Honors, or they can generate revenue
via an annual fee like the Barnes &Noble Membership Program. Loyalty
programs encourage repeat purchases and reward customers for purchase activity.
�
Moderate
users �� This segment does not buy at the level of heavy users but are
typically a profitable group. Can their purchase behavior be escalated? As with
heavy users, frequency and loyalty programs along with price-based incentives
are tactics that could increase customers� product usage.
�
Light
users � This group buys occasionally; their profitability may be marginal or
even slightly unprofitable. When evaluating light users as a target segment,
the decision must be made whether to attempt to persuade these customers to
purchase more or change how they are serviced to improve profitability. For
example, an office supply wholesaler could raise the minimum purchase eligible
for free delivery or only accept online orders from light users to reduce
selling costs.
�
Competitors�
users � This segment uses the type of product your firm sells, but they do not
use your brand. Can they be persuaded to switch? Comparative advertising
is a tactic used often when targeting competitors� users. For example, Apple
successfully used this approach in its well-known �Mac versus PC�
advertising campaign.
The aim was to persuade Windows users that Macs were easier to use and offered
a better experience.
�
Nonusers
� For those people who do not buy the product you sell (from you or anyone
else), can any of them be persuaded to adopt the product in general and your
brand specifically? Up-selling customers to a better or more expensive product
sometimes is pursued by attempting to attract nonusers. For example, the target
market for electric razors or toothbrushes could include a segment of consumers
who use traditional, manual-operated versions of those products.
When
determining why consumers buy a product in terms of their motivations for using
it, identifying the benefit sought can be useful in segmenting the market. We
buy products not necessarily because we want to own the product; we want to
receive the benefit or utility the product offers. There is an old saying that
�people don�t buy drills; they buy the holes that the drill makes.� Benefit
segmentation is about marketing the holes, not the drill.
The
possibilities for determining how to use benefit segmentation are numerous. The
choice of using benefit segmentation depends on what consumers value and how
well your product or service performs relative to competing brands. Examples of
benefits sought that could be the basis of customer segmentation include:
�
Low
price
�
Convenience
�
Speed
�
Status
Benefit
segmentation can be effective when a product has few perceived differences.
Think about items like toilet paper and toothpaste. The basic benefit provided
by each of these products is one that all people would value. However, we know
that the markets for toilet paper and toothpaste are segmented along benefits
provided. For toilet paper, different brands segment using different benefits
(e.g., extra soft, low price, brand image). Toothpaste brands also use benefit
segmentation, appealing to customers based on product attributes (e.g., cavity
protection, tartar control, and whitening).
Benefit
segmentation is not limited to consumer packaged goods. Consider a service like
automobile insurance. Consumers might perceive few differences among insurance
companies in terms of premiums paid, deductibles, coverage offered, etc. Yet,
the major auto insurance brands have carved out a distinctive position using
benefit segmentation:
�
Allstate � Company stability and reliability
(�You�re in good hands with Allstate�)
�
Geico � Low priced; easy to use
�
Progressive � Buyer�s resource (gathers rate
information on competition)
�
State Farm � Reliability of the agent to be
there for policy owners
All these
brands have succeeded in segmenting the auto insurance market by staking claim
to a benefit that it focuses on providing better than competition.
Segmenting consumer markets is necessary in order to identify
the people who can be best served by a company. As stated earlier, segmentation
involves using multiple variables or approaches in order to better develop a picture
of the typical product buyer or user. Segmenting markets creates a distinction
between �large audience� and �right audience.� The size of a target market
shrinks as more segmentation variables are applied. But, that is a reduction
marketers should value as it means we are eliminating less likely buyers to get
to the profile of typical buyers. In other words, segmentation provides clarity
so that marketing decisions (e.g., product design, pricing, communication
campaigns, and distribution options) match favorably with needs and wants of
consumers in targeted segments.