Market Segmentation

Market segmentation is a process of dividing a larger market of potential customers into smaller segments based on certain characteristics. It is done on the basis of certain segmentation variables such as demographic, psychographic and geographic variables.

In 1978, Paul Green Donald established four basic criteria for market segmentation as mentioned below.

1. Market segments must exist.
2. Market segments must be identifiable.
3. Market segments must be reasonably stable over time.
4. Market segments must be within reach.

Advantages of market segmentation

Market segmentation brings many advantages to a company. Some of these advantages are as follows.

1. Competitive advantages: Segmentation is a very effective tool in a market with competition. For e.g. a mobile manufacture company may design a very suitable products by targeting different segments of customers by adjusting features and price.
2. Niche marketing: A company can identify a niche market that desire a product or services not currently provided by any of the existing company.
3. Customer satisfaction: Different segments have different needs. A supplier can study that needs of a particular segments and design a product that brings more customer satisfaction.
4. Efficiency: A company can identify its core competencies in its relevant market segments and utilise its resources with higher efficiency.
5. Profitability: By dividing market into segments, a company can acknowledge the needs and value perceptions of the customers. The company can grow its profit by determining the maximum amount, different groups of buyers will pay.

Segmentation variables

These are the variables or criteria on which a market is segmented. A customer is represented by a set of these variables or criteria. For e.g. if the market is segmented on the basis of two variables, Age and Gender, than a customer is represented by his or her gender and age. The segmentation variables are broadly of two types:

1. Response variable (dependent variable)
2. Identified variable (Independent variable)

Some examples of response variable are discussed below.

1. Functional variables: It related to products performance, reliability, durability, and quality.
2. Services and Convenience: It is related to time savings, ease of use, ease of purchase and location.
3. Financial variables: It is related to monetary performance, cost savings and potential revenue generation.
4. Usage: how customer will use the product or services, application of the product, service usage pattern.
5. Psychological response: how products and services affects psychology.

Some of the identifier variables are as below:

1. Demographic: Age, Gender, Family size, Income and occupation for consumer, and Industry or company size for businesses.
2. Psychographic: Personality, life-style, values, interest and attitude for customers, and specific applications, order size for businesses.
3. Geographic: Country, Region, City, Density, Climate for customers, and Company’s location, proximity to customers for businesses.

Segmentation types

There are two types of market segmentation.

1. A priori segmentation such as Cross-tabulation or Regression. It occurs when “ a theoretical framework is developed before the research is conducted”.
2. Post hoc segmentation such as Clustering, Conjoint Analysis. It is done on the basis of data collected while studying the market.

Data collection techniques

Few of the data collection techniques for market segmentation are:

1. Pair-wise comparisons
2. Rank ordering
3. Rating scale
4. Survey answers
5. Respondent data

Conclusion

Segmentation is a very effective tools in developing a marketing strategy. Marketers make important decisions based on various segments in the market.