MARKET SEGMENTATION

Market segmentation is one of two general approaches to
marketing; the other is mass-marketing. In the mass-marketing
approach, businesses look at the total market as
though all of its parts were the same and market accordingly.
In the market-segmentation approach, the total
market is viewed as being made up of several smaller segments,
each different from the other. This approach
enables businesses to identify one or more appealing segments
to which they can profitably target their products
and marketing efforts.
The market-segmentation process involves multiple
steps (Figure 1). The first is to define the market in terms
of the product’s end users and their needs. The second is
to divide the market into groups on the basis of their characteristics
and buying behaviors.
Possible bases for dividing a total market are different
for consumer markets than for industrial markets. The
most common elements used to separate consumer markets
are demographic factors, psychographic characteristics,
geographic location, and perceived product benefits.
Demographic segmentation involves dividing the market
on the basis of statistical differences in personal characteristics,
such as age, gender, race, income, life stage,
A
F
D
Step 1
Step 4
Defining the
market
Picking the
winners
A
F
D
Step 5
Step 2
Developing the
plan of attack
Finding
segments
A
B
C
E
F
D
Step 3
Narrowing down
the choices
The market segmentation process
SOURCE: Compiled from Croft, Michael J. (1994). Market Segmentation: A Step-by-Step Guide to Profitable New Business. London: Routledge.
Figure 1
ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 487

488 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION
Market Segmentation
occupation, and education level. Clothing manufacturers,
for example, segment on the basis of age groups such as
teenagers, young adults, and mature adults. Jewelers use
gender to divide markets. Cosmetics and hair care companies
may use race as a factor; home builders, life stage;
professional periodicals, occupation; and so on.
Psychographic segmentation is based on traits, attitudes,
interests, or lifestyles of potential customer groups.
Companies marketing new products, for instance, seek to
identify customer groups that are positively disposed to
new ideas. Firms marketing environmentally friendly
products single out segments with environmental concerns.
Some financial institutions attempt to isolate and
tap into groups with a strong interest in supporting their
college, favorite sports team, or professional organization
through logoed credit cards. Similarly, marketers of lowfat
or low-calorie products try to identify and match their
products with portions of the market that are health- or
weight-conscious.
Geographic segmentation entails dividing the market
on the basis of where people live. Divisions may be in
terms of neighborhoods, cities, counties, states, regions, or
even countries. Considerations related to geographic
grouping may include the makeup of the areas, that is,
urban, suburban, or rural; size of the area; climate; or population.
For example, manufacturers of snow-removal
equipment focus on identifying potential user segments in
areas of heavy snow accumulation. Because many retail
chains are dependent on high-volume traffic, they search
for, and will only locate in, areas with a certain number of
people per square mile.
Product-benefit segmentation is based on the perceived
value or advantage consumers receive from a good
or service over alternatives. Thus, markets can be partitioned
in terms of the quality, performance, image, service,
special features, or other benefits prospective
consumers seek. A wide spectrum of businesses—from
camera to shampoo to athletic footwear to automobile
marketers—rely on this type of segmentation to match up
with customers. Many companies even market similar
products of different grades or different accompanying
services to different groups on the basis of productbenefit
preference.
Factors used to segment industrial markets are
grouped along different lines than those used for consumer
markets. Some are very different; some are similar.
Industrial markets are often divided on the basis of organizational
variables, such as type of business, company
size, geographic location, or technological base. In other
instances, they are segmented along operational lines such
as products made or sold, related processes used, volume
used, or end-user applications. In still other instances, differences
in purchase practices provide the segmentation
base. These differences include centralized versus decentralized
purchasing; policy regarding number of vendors;
buyer-seller relationships; and similarity of quality, service,
or availability needs.
Although demographic, geographic, and organizational
differences enable marketers to narrow their opportunities,
they rarely provide enough specific information
to make a decision on dividing the market. Psychographic
data, operational lines, and, in particular, perceived consumer
benefits and preferred business practices are better
at pinpointing buyer groupings, but they must be considered
against the broader background. Thus, the key is to
gather information on and consider all pertinent segmentation
bases before making a decision.
Once potential market segments are identified, the
third step in the process is to reduce the pool to those that
are (1) large enough to be worth pursuing, (2) potentially
profitable, (3) reachable, and (4) likely to be responsive.
The fourth step is to zero in on one or more segments
that are the best targets for the company’s product(s) or
capacity to expand. After the selection is made, the business
can then design a separate marketing mix for each
market segment to be targeted.
Adopting a market-segmentation approach can benefit
a company in several specific areas. First, it can give
customer-driven direction to the management of current
products. Second, it can result in more efficient use of
marketing resources. Third, it can help identify new
opportunities for growth and expansion. At the same
time, it can bring a company the broad benefit of a competitive
advantage.
Adopting the market-segmentation approach can also
be accompanied by some drawbacks. Both production
and marketing costs can be more expensive than mass
marketing, particularly when multiple segments are targeted.
Different product models, for example, are required
for each segment. Separate inventories must be maintained
for each version. And different promotion may be
required for each market. In addition, administrative
expenses go up with the planning, implementation, and
control of multiple marketing programs.
During the late 1960s, market segmentation moved
ahead of mass marketing as the predominant marketing
approach. In the following decades, societal changes and
wider economic opportunity continually expanded the
number of groups with specialized product needs and
buying power. In response, businesses increasingly turned
to the segmentation approach to capture and/or hold market
share.