MARKET SEGMENTATION

Concept of Market : Unless you know the exact market(s) to which your organization wants to cater, your focusing will be wrong and your planning will be faulty and you will fail to develop an appropriate marketing strategy or effort to meet the needs of your target market. To identify the target market let us first define the term `market’. The term market has more than one meaning:

–          It can be used in respect of the network of institutions like wholesalers and brokers dealing in a product;

–          It can also be used to refer to the nature of demand for the product, as when we speak of the market for soap;

–          The two meanings are related but are physically distinct. Related because without the wholesalers and other institutions, it will be difficult to serve customers (demand).

We are concerned with a `market for’ a product. The market for a product relates to the function(s) served by the product.

THE CONCEPT OF A SEGMENT

Different buyers have different evaluative criteria about what constitutes the right choice for performing the function of a product. As a consequence different offerings will attract different buyers.

To illustrate, all brands of coloured television sets will appeal to some degree to those in the market for a coloured TV but some brands will appeal to some groups more than others. But, if there were only one brand of coloured TV set, there will be no choice for the buyers. But as the market develops, manufacturers seek to cater more closely to some groups than to others and buyer choice widens as a result.

At the most detailed level every buyer is a market in himself for every buyer’s ‘want’ is probably distinct in some way. But on the basis of similarities and differences, such unique wants can be grouped into sub-classes. What it means is that wants within a sub-class are more related to each other than wants between sub-classes.

Based on the above discussion we can now attempt to explain market segments and the process of market segmentation.  

Market segments refer to the sub-classes of the market reflecting sub-classes of wants and the process of conceptually distinguishing segments is known as the process of market segmentation.  

Relationship of a segment to a market 

To put it differently a market segment consists of buyers who seek (occasionally or often) the same aspects of a product. And the concept of a market as a set and a segment as a subset is the basis on which the process of segmentation is carried out.

But the relationship of a segment to a market is also one of means to goals. The implications of this relationship are:

–          Since means for accomplishing goals can be varied, different segments of a market may demand radically different substitutes (for example, electric razor for a safety razor)

–          Since the function distinguishing a market is a means to some higher-level function that can be served by a variety of markets, there can be mobility of buyers among the several markets which may result in instability in any individual market (for example from `movie’ of the film industry to `entertainment’ where TV competes with the film industry)

–          Since choice is exercised by people within the context of what is available, the buyers are not necessarily satisfied with what they buy meaning thereby that a possibility always remains of designing an attributes mix better suited to the segment.

We can say that buyers within a segment are more homogeneous in their market wants when compared to those who are in the market at large, but differences will always remain in wants among those within a segment notwithstanding this similarity. What it means is this that a marketer can always achieve additional homogeneity by subdividing the original set of segments further until, theoretically speaking, we have segments to which only one buyer belongs.

The question that arises is how far the process is carried towards this end. The answer will depend on:

– the commercial viability of small segments, and

– the competitive practices of rivals.

Now what a marketer should do? He may ignore the differences and treat the segment as a homogeneous segment, or he may, take account of some of the differences in product variety, promotion and distribution and segment the market on that basis.

So segments will be distinguishable on the basis of such differences, In other words one will be able to distinguish one segment from another on the basis of what segment members have in common in respect of what they seek from a product. However, since consumer wants keep on changing with the passage of time, segment wants would also change in time necessitating the manufacturer to adapt his offering without necessarily affecting the definition of the core want.

MARKET SEGMENTATION VS PRODUCT DIFFERENTITION

We hope you have now understood what we mean by market segmentation. Let us define it also.

Market segmentation may be defined as the division of a market into groups of segments having similar wants. But wants must be interpreted very broadly, in terms far broader than product characteristics only. Segments may differ also in their needs for information, reassurance, technical support, service, promotion, distribution, and a host of other `non-product’ benefits that are part of their purchase. They may also differ in their capacity to pay for these differences.

Economists view a product as differentiated if it is preferred by some buyers to similarly priced rival brands on the ground of differences in the following:

–          physical aspects of the product

–          services offered

–          convenience in using or buying the product

–          image projected.

If you analyse the above view put forward by economists you will reach the conclusion that all segmentation except segmentation involving price alone entails differentiation. 

But it does not mean that the two are the same. For segmentation involves more than what is achieved through product differentiation. In market segmentation the aim is not merely to divide the market into sub-classes based on product differentiation but to distinguish want-categories that correspond to the distinct demands of various groups in the market.

So we can say that in product differentiation the marketer produces two or more products that are different in terms of features, styles, quality, sizes and so on. The objective here is to offer variety to buyers rather than to appeal to different market segments.

BENEFITS AND DOUBTS ABOUT SEGMENTATION 

We will now try to describe both the benefits and the doubts that arise from the strategy of market segmentation.

First, we will highlight the benefits from segmentation and these are:

–          Segmentation helps a company to exploit its market better by selecting market niches (suitable segments) that are compatible with its resources

–          Segmentation helps in focusing strategies more sharply on target groups

–          Segmentation is more likely to result in instilling customer `loyaltysince the firm’s offering is better matched to those in the segment. 

Doubts about effectiveness of segmentation 

The discussion that follows concentrates on the doubts which have been expressed on the effectiveness of segmentation. 

Are segments mutually exclusive groups? 

Remember, segments are not mutually exclusive customer groups. What we are exactly grouping is `anticipated orders’ from buyers, not buyers themselves. To assume that he or she is in one segment and one segment only, is to assume that the circumstances are so constant that use-functions and generated functions remain fixed. What we are really trying to emphasise is that the same consumer may appear under different descriptions for different segments. 

To illustrate: Pepsodent and Colgate toothpastes differ and seem aimed at different segments, but the same people may buy both of these. The fact that the same people buy both of these products does not in itself imply the absence of meaningful segments. Products in different segments of the market may be bought by the same buyer for different family members, or for different occasions, or just for variety, etc. 

Is segmentation merely on the basis of different product forms? 

It is not right to say that segmentation is merely done on the basis of different product forms. Although this is what usually happens. But segmentation can be on other bases as well like distribution, price, promoted image, etc. 

When insignificant differences exist between brands 

What happens in a situation where markets are not heavily segmented or where the differences between products are marginal?

In a situation like this, one can’t help saying that not much purpose is served by segmentation. In other words in a situation where insignificant differences exist between brands segmentation is not a feasible strategy.

WHAT IS GROUPED IN FORMING SEGMENTS? 

One of the problems involved in segmentation is to know what precisely is being grouped to form segments. As far as consumers are concerned they are not mutually exclusive categories, for people may buy cigarettes today and pipe tobacco tomorrow. But since classes should be mutually exclusive by and large, what precisely is that which we are grouping into segments? The answer is that we are grouping buyers’ probability of purchasing different types of offering. 

But for effectiveness of the segmentation strategy it is necessary that a marketer must describe its segments both in terms of what is wanted and who is likely to buy it. In other words, we must define the configuration of benefits sought and also draw up a profile of those in the segment that distinguishes them from the members of other segments.

A good, practical approach for gathering comprehensive knowledge about what is wanted and who is likely to buy it is to ask yourself questions such as: 

What

–          benefits does the customer seek?

–          factors influence demand?

–          functions does the product perform for the customer?

–          are the important buying criteria?

–          is the basis of comparison with other products?

–          risks does the customer perceive?

–          services do customers expect?

How

–          do customers buy?

–          long does the buying process last?

–          do various elements of the marketing programme influence customers at each stage of the process?

–          do customers use the product?

–          does the product fit into their life style or operation?

–          much are they willing to spend?

–          much do they buy?

Where

–          is the decision made to buy?

–          do customers seek information about the product?

–          do customers buy the product?

When

–          is the first decision to buy made?

–          is the product repurchased?

Why

–          do customers buy?

–          do customers choose one brand as opposed to another?

Who

–          are the occupants of segments identified by previous questions?

–          buys our product, and why?

–          buys our competitors’ products, and why?

When asking questions such as these you should keep in mind the following points:

–          the list of questions is only suggestive, you will have to review it to suit the specific situation;

–          you will have to collect the necessary data to supply the answers.

You will have to relate the answers to the decision at hand. To illustrate, it is not sufficient to find out where the consumer buys this product? The answer will have to be related to decisions that you have to take say with respect to channel, advertising, packaging etc. 

SELECTION OF SEGMENTS 

Before we conclude our discussion on market segmentation we should also discuss how a company should select its segments. Both general factors which one uses to evaluate any economic opportunity and the factors specific to the situation should be considered in evaluating segment options against these criteria. 

General factors

The following are some important general factors and these you must consider:

Company thrust: The company that is segmenting its market needs to identify the requirements for success in the concerned target market. Next, it must determine what particular business system consisting of marketing, production, finance, personnel, etc., will be needed to meet the requirements for success in that segment. As far as possible the firms’s thrust should be such that it gives the company a critical advantage in that segment.

Size and growth potential: Not only the present size but also the future growth potential of the concerned target market must be considered. The current market demand by itself may prove misleading. The measurement might also create its own problems.

Investment needed: Investment needed for tapping that particular target market is another factor to consider and you must take care to see that both entry costs and costs associated with building market share have been included.

Profitability: The question of profitability is associated with investment decision. To calculate it we have to estimate both future sales and costs in the concerned segment. What must also be considered is value-added to the product that is to be marketed in that target segment, for a low value-added product makes profitability more hazardous.

Risk: There are the usual risks associated with the extent to which a particular target market would respond. But these are not the only ones. Other risks like the new product taking away part of the market share form the existing product(s) of the company in that target market need also be considered.

Competition: The selection of target market also implies selecting the competitors with whom the company will compete. Another important point to note in this context is that segment may be large but may already be will served by several well-entrenched competitors. The question naturally would be whether one would like to enter such a segment.

Specific segmentation factors 

The specific segmentation factors that you need to consider are as follows:

Segment durability: Remember, segments based on fads and fashions are of a short duration, that is their life cycles are ephemeral and your plans to tap such segments must take this into account. Besides, you can’t think of making substantial investments in such ventures from the long-term point of view.

Mobility: Mobility means the movement in and out of a segment of members of a target group. If the mobility rate of target group members is high in respect of a certain product, say, hair oils, the company in order to keep its sales stable would have to attract new users to its product.

Visibility: Visibility refers to the extent to which the want of a target market or segment is distinctive. If what is sought by the members of that segment is perceived as very different, from what is sought in other segments, the segment `loyalty’ will be greater but those in other segments may regard that offering as very different and something which is not meant for them. Highly visible segments, however, are likely to be more stable than other segments of. a market.

Accessibility: Those in the segment or the target market should be directly reachable through established communications and distribution channels. If that particular segment cannot be reached the exercise in market segmentation will be futile.

For evaluating segment options on the basis of these factors, please remember that you will have to weigh these factors in the context of your specific situation.

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