Why do we segment the market

Why market segmentation?

 

When it comes to marketing strategies, most people spontaneously fall for the 4P (Product, Price, Place,

Promotion) - possibly expanded to include three more Ps for the marketing of services (People, Processes, Physical Evidence).

However, the market segmentation and the determination of sub-markets and target markets based on it is an important element of the marketing strategy, which only lays the basis for the concrete design of the marketing mix. The following sequence of steps is generally suggested in the literature:

 

after Kotler and Doyle

 

 

 

 

 

 

The importance of market segmentation is based on the fact that all buyers of a product or service are not homogeneous. Strictly speaking, every buyer has very individual needs, preferences, resources, buying habits, etc. Since it is only possible in exceptional cases to take into account the individual characteristics of each customer in marketing, customers become market segments based on individual variables that they have in common summarized. These similarities enable a uniform marketing approach for all customers in a segment.

 

Definition:

Market segmentation therefore comprises the subdivision of the market into homogeneous groups of customers, who each react differently to promotion, communication, pricing policy and other variables in the marketing mix. The market segments are formed in such a way that the differences between all members of a segment are as small as possible. This means that every market segment can be addressed with a targeted marketing mix.

 

 

Criteria for market segmentation

The number of theoretically usable variables for a market segmentation is confusing. In addition to demographic factors that are relatively easy to determine, other variables can be derived from user behavior and customer preferences. In addition, there are significant differences between (private) end users and corporate customers. The most important traditional segmentation variables are summarized in the following overview:

 

Consumer goods markets

Industrial markets / corporate markets

Geographically:

· Country or region

· Rural or urban residential area

Demographic:

· Age, gender, marital status

· Income, occupation, education

· Religion, nationality, ethnicity

Psychographic:

· Social status

· Lifestyle type

· Personality type

Behavioral:

· Intensity of product use

· Brand loyalty

· Usage habits

· Industry

· Middlemen / processors or end users

Type of company (public or private sector)

· Company size

· Geographical location

· Intensity of use

· Purchasing organization

· Centralized vs. decentralized

· Purchasing policy, rules and criteria

 

With increasing customer orientation of companies, segmentation according to customer loyalty and loyalty also gains in importance. Here the elements of the loyalty ladder offer themselves as segmentation variables:

 

 

From the available variables, select those that are specifically to be used for segmentation. The basic rule here is to focus on a few variables. Too much subdivision of the market would result in the marketing budget being split up into small, no longer effective packages. In addition, the multitude of different marketing activities for the individual segments could irritate customers and lead to cannibalization effects.

 

Kotler named five criteria for useful segmentation:

·       Measurable: It must be possible to determine the values ​​of the variables used for segmentation with a reasonable amount of effort. This is especially true for demographic and geographic variables. In the case of direct sales (without intermediaries), your own customer database also provides numerous information on buyer behavior (frequency, payment behavior, product groups, etc.)

·       Substantive: The size of the market segment and its profit potential must be large enough to justify a separate processing from an economic point of view.

·       Reachable: The segment must be effectively accessible and operable. This means, for example, that target group-specific advertising media should be available for the segment (e.g. magazines or websites that address precisely this customer group).

·       Separable: The segments have to be different enough and react differently to different characteristics of the marketing mix.

·       Makeable: It must be possible to address the individual segments separately through effective marketing programs and to derive advantages from them.

 

 

Reasons for market segmentation

It has already been shown that the segmentation of the market is the basis for the development of target group-oriented and effective marketing plans. Furthermore, the analysis of the market segments enables decisions about the intensity of the processing of individual market segments.

 

In principle, segmented processing of individual sub-markets offers a wide range of advantages for customers and the company.

 

Better service to customer wants and needs

Due to the different design, bundling and marketing, very different customer needs can be satisfied with a limited range of products / services. This strategy is pursued, for example, by the computer manufacturer Dell, which does not structure its website according to products (desktops, notebooks, printers), but according to customer groups (private users, small companies, large companies, public / state companies). In this way, each customer group can be offered product packages and services that are individually tailored to their special needs. For example, companies can handle the entire management of their IT equipment on the Dell server. This service may offer companies considerable savings potential, but would be completely useless for private users.

Such segment-specific product packages also increase the cross-selling potential.

 

Greater profits

It is often difficult to enforce price increases for the entire market. On the other hand, it is possible to develop certain premium segments in which a higher price level is accepted by customers. Such segments can be delimited by additional services, an exclusive sales environment, product variations and the like. Geographical price differences are also common for many products, which are reflected, for example, in the generally higher price level in large cities.

With such segment-wise price differentiation, however, care must be taken to ensure that the higher-priced and thus higher-margin products are not cannibalized by the cheaper offers for another segment. The more similar the segments are, the more likely this is.

 

Growth opportunities

Targeted marketing plans for individual market segments enable a broad range of customers to be addressed individually, who would otherwise turn to specialized niche providers. By segmenting the market, companies can create their own niche products and thus reach additional customer groups.

A segmentation strategy based on customer loyalty also offers the possibility of acquiring new customers via entry-level products and then introducing them to premium products.

 

Long-term customer loyalty over all development phases of the customer

A customer changes his preferences and behavior patterns over time. If a company serves different market segments along the typical development stages, it can guide its customers from stage to stage in a targeted manner and always offer them solutions that are appropriate to their respective situation. (Example: Cosmetic brands often offer care products for babies, teenagers, normal skin, and older skin.)

 

Targeted communication

Even if the product characteristics and the personality of the market are identical for all market segments, it is often necessary to communicate these characteristics on a segment-specific basis. The most important criteria for the respective segment (price vs. performance vs. prestige) can be conveyed in a targeted manner.

 

Stimulation of innovation

An undifferentiated marketing strategy for all customers in the overall market reduces customer preferences in terms of product features and price to the lowest common denominator. A segmentation provides information about sub-markets with special needs. Only when these needs have been identified is it possible to further develop the products in a targeted manner in such a way that they meet the needs of individual customer groups even better. If the product offers the customer such added value, he is usually also prepared to pay a higher price for it, which in turn affects the profit margins and profitability of the company.

 

Higher market shares

In contrast to an undifferentiated approach, market segmentation enables niche strategies to be worked out. In this way, marketing activities can initially be concentrated on particularly lucrative sub-markets. Market leadership in certain segments usually improves the market position of the entire company vis-à-vis suppliers, sales partners and end users, strengthens the brand and ensures high profitability.

 

 

If all these advantages are brought together again, the need for market segmentation is closely linked to strategic decisions:

 

Market segmentation is the basis for customer orientation and differentiation

 

It is well known that competition in mass markets today is almost entirely based on price. Only products that stand out from competitive offers and offer the customer a very special benefit are less price-sensitive. Precondition for such customer benefit is precise knowledge of the customer's preferences. These in turn are very different in the overall market, but homogeneous within certain segments.

 

Concentrating on lucrative market segments is of particular importance in the fast-moving times of the Internet economy. Kalakota and Whinston [1] describe this with the law of differentiation:

"As electronic markets soften the differences between companies, finding one's unique position in the market for customer benefit becomes a question of survival."

On this basis, Kalakota and Whinston also see segmentation as the basis for being able to offer individual customer groups an excellent service and in this way to build a stable and profitable market position.

 

© Dagmar Recklies, March 2001

 

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