Sunday, February 16, 2014

Segmentation

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Market segmentation is defined as "the process of taking the total, heterogeneous market for a product and dividing it into several submarkets or segments, each of which tends to be homogeneous in all significance. The markets could be segmented in different ways. For instance, instead of mentioning a single market for 'shoes', it may be segmented into several sub-markets, e.g., shoes for executives, bankers, college students or school students etc. Geographical segmentation on the very similar lines is also possible for certain products.
Requirements for markets segmentation
For market segmentation to become effective and result oriented, the following principles are to be observed: (1) Measurability of segments, (2) Accessibility of the segments, and (3) Represent ability of the segments. The main purpose of market segmentation is to measure the changing behaviour patterns of consumers. It should also be remembered that variation in consumer behaviour are both numerous and complex. Therefore, the segments should be capable of giving accurate measurements. But this is often a difficult task and the segments are to be under constant review. The second condition, accessibility, is comparatively easier because of distribution, advertising media, salesmen, etc. Newspaper and magazines also offer some help in this direction. For examples, there are magazines meant exclusively for the youth, for the professional people, etc. The third condition in the represent ability of each segment. The segments should be large and profitable enough to be considered as separate markets. Such segments must have individuality of their own. The segment is usually small in case of industrial markets and comparatively larger in respect of consumer products.
Benefits of segmentation
1. The manufacturer is in a better position to find out and compare the marketing potentialities of his products. He is able to judge product acceptance or to assess the resistance to his product.
2. The result obtained from market segmentation is an indicator to adjust the production, using man, materials and other resources in the most profitable manner. In other words, the organization can allocate and appropriate its efforts in a most useful manner.
3. Change required may be studied and implemented without losing markets. As such, as product line could be diversified or even discontinued.
4. It helps in determining the kinds of promotional devices that are more effective and also their results.
5. Appropriate timing for the introduction of new products, advertising etc., could be easily determined.
Aggregation and segmentation
Market aggregation is just the opposite of segmentation. Aggregation implies the policy of lumping together into one mass all the markets for the products. Production oriented firms usually adopt the method of aggregation instead of segmentation. Under this concept, management having only one product considers the entire buyers as one group. Market aggregation enables an organization to maximize its economies of scale of production, pricing, physical distribution and promotion. However, the applicability of this concept in consumer oriented market is doubtful. The ‘total market’ concept as envisaged by market aggregation may not be realistic in the present-day marketing when consumers fall under heterogeneous groups.
Basis for segmenting markets
As explained above, market segmentation consists in identifying a sufficient number of common buyer characteristics to permit sub division of the total demand for a product into economically viable segments. These segments fall between two extremes of total homogeneity and total heterogeneity. The various segments that are in vogue are as follows:
1. Geographic segmentation: Chronologically this kind of segmentation appeared first, for planning and administrative purposes. The marketer often find it convenient to sub-divide the country into areas in a systematic way. The great advantages of adopting this scheme are that standard regions are widely used by Government and it facilitates collection of statistics. Most of the national manufacturers split up their sales areas into sales territories either state-wise or district-wise.
2. Demographic segmentation: Under this method, the consumers are grouped into homogeneous groups in terms of demographic similarities such as age, sex, education, income level, etc. This is considered to be more purposeful since the emphasis ultimately rests on customers. The variables are easy to recognize and measure than in the case of the first type, as persons of the same group may exhibit more or less similar characteristics. For example, in the case of shoes, the needs and preferences of each group could be measured with maximum accuracy.
(a) Age groups: Usually age groups are considered by manufacturers of certain special products. For example, toys. Even in the purchases made by parents, children exert a profound influence. The market segmented on the basis of the age groups is as follows: (I) children, (ii) teenagers, (iii) adults, (IV) grown-ups.
(b) Family life-cycle: This is yet another method falling under demographic segmentation. The concept of a family life cycle refers to the important stages in the life of an ordinary family. These stages are called ‘decision-making units’ (Dumps). A widely accepted system distinguishes the following eight stages:
(I) Young, single, (ii) Young, married, no children, (iii) Young, married, youngest child under six, (iv) Young, married, youngest child over six, (v) Older, married with children, (vi) Older, married, no children under eighteen, (vii) Older single, (viii) Others. Although the distinction between the young and the old is not explicit the concept provides a useful basis for breaking down the total population into sub-group for a more detailed analysis.
(c) Sex: Sex influences buying motives in consumer market, e.g. in the case of many products women demand special styles. Bicycle is an example. This kind of segmentation is useful in
many respects. The recent studies, however, show that traditional differences are being fast broken down and this kind of segmentation doesn’t hold much water. One reason for this is that women are going in for jobs. This is a blessing in disguise as a number of new products are now being demanded, e.g. frozen food, household appliances, etc. Successful attempts to remove barriers of discrimination against women have generated many market opportunities. Interestingly enough, however, it has not been so easy to get males to accept products traditionally considered feminine. A decade age driving motor vehicles by women was seldom seen but today it has become a common sight. The distinction in dress traditionally maintained by girls and boys has also been considerably reduced. These changes have tremendous marketing implications.
3. Socio-psychological segmentation: The segmentation here is done on the basis of social class, viz., working class, middle income groups, etc. Since marketing potentially is intimately connected with the "ability to buy", this segmentation is meaningful in deciding buying patterns of a particular class.
4. Product segmentation: When the segmentation of markets is done on the basis of product characteristics that are capable of satisfying certain special needs of customers, such a method is known as product segmentation. The products, on this basis, are classified into:
1. Prestige products, e.g. automobiles, clothing.
2. Maturity products, e.g. cigarettes, blades.
3. Status products, e.g. most luxuries.
4. Anxiety products, e.g. medicines, soaps.
5. Functional products, e.g. fruits, vegetables.
The argument in favor of this type of product segmentation is that it is directed towards differences among the products which comprise markets. Where the products involved show great differences, this method is called a rational approach.
5. Benefit segmentation: Russell Hally introduced the concept of benefit segmentation. Under this method, the buyers form the basis of segmentation but not on the demographic principles mentioned above. Here consumers are interviewed to learn the importance of different benefits they may be expecting from a product. These benefits or utilities may be classified into generic or primary utilities and secondary or evolved utilities.
6. Volume segmentation: Another way of segmenting the market is on the basis of volume of purchases. Under this method the buyers are purchasers, and single unit purchasers. This analysis is also capable of showing the buying behaviour of different groups.
7. Marketing-factor segmentation: The responsiveness of buyers to different marketing activities is the basis for these types of segmentation. The price, quality, advertising, promotional devices, etc., are some of the activities involved under this method. This is explained by R.S. Frank as follows: "If a manufacturer knew that one identifiable group of his customers was more responsive to changes in advertising expenditures than others, he might find it advantageous to increase the amount of advertising aimed at them. The same sort of tailoring would also be appropriate if it was found that customers reacted differently to changes in pricing, packaging, product, quality etc. It is pertinent here to ask how these consideration influence marketing. The answer is simple as the present day marketing is consumer-oriented and consumers' psychology, their social and economic characteristic form the corner stone of marketing decisions. It is this recognition accorded to consumers that has given rise to the concept of market segmentation.
Markets on the basis of segmentation
It is now certain that any market could be segmented to a considerable extent because buyers' characteristics are never similar. This, however, does not mean that manufacturers may always try to segment their market. On the basis of the intensity of segmentation, marketing strategies to be adopted may be classified into:
1. Undifferentiated marketing: When the economies of organization do not permit the division of market into segments, they conceive of the total market concept. In the case of fully standardized products and where substitutes are not available, differentiation need not be undertaken. Under such circumstances firms may adopt mass advertising and other mass methods in marketing, e.g., Coca Cola.
2. Differentiated marketing: A firm may decide to operate in several or all segments of the market and devise separate product-marketing programmes. This also helps in developing intimacy between the producer and the consumer. In recent years most firms have preferred a strategy of differentiated marketing, mainly because consumer demand is quite diversified. For example, cigarettes are now manufactured in a variety of lengths and filter types. This provides the customer an opportunity to select his or her choice from filtered, unfiltered, long or short cigarettes. Each kind offers a basis for segmentation also. Though the differentiated marketing is sales-oriented, it should also be borne in mind that it is a costly affair for the organization.
3. Concentrated marketing: Both the concepts explained above imply the approach of total market either with segmentation or without it. Yet another option is to have concentrated efforts in a few markets capable of affording opportunities. Put in another way, 'instead of spreading itself thin in many parts of the market, it concentrates its forces to gain a good market position in a few areas. Then new products are introduced and test marketing is conducted, and this method is adopted. For a consumer product 'Boost' produced by the manufacturers of Horlicks, this method was adopted. The principle involved here is 'specialization' in markets which have real potential. Another notable feature of this method is the advantage of one segment is never offset by the other. But in the case of the first two types, good and poor segments are averaged.
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Market segmentation reveals the market-segment opportunities facing the firm. The firm now has to evaluate the various segments and decide how many and which ones to serve.
Evaluating the market segments
In evaluation different market segments, the firm must look at three factors, namely segment size and growth, segment structural attractiveness and company objectives and resources.
(a) Segment size and growth: The first question that a company should ask is whether a potential segment has the right size and growth characteristics. Large companies prefer segments with large sales volumes and overlook small segments. Small companies in turn avoid large segments because they would require too many resources. Segment growth is a desirable characteristic since companies generally want growing sales and profits.
(b) Segment structural attractiveness: A segment might have desirable size and growth and still not be attractive from a profitability point of view. The five threats that a company might face are:
(i) Threat from industry competitors: A segment is unattractive if it already contains numerous and aggressive competitors. This condition may lead to frequent price wars.
(ii) Threats from potential entrants: i.e. from new competitors who, if enter the segment at a later stage, bring in new capacity, substantial resources and would soon steal a part of the market share.
(iii) Threat of substitute products: A segment is unattractive if there exists too many substitutive products because it would result in brand switching, price wars, low profits etc.
(iv) Threat of growing bargaining power of buyers: A segment is unattractive if the buyers possess strong bargaining power. Buyers will try to force price down, demand more quality or services, all at the expense of the seller's profitability.
(v) Threat of growing bargaining power of suppliers: A segment is unattractive if the company's suppliers of raw materials, equipment, finance etc., are able to raise prices or reduce the quality or quantity of ordered goods.
(c) Company objectives and resources: Even if a segment has positive size and growth and is structurally attractive, the company needs to consider its own objectives and resources in relation to that segment. Some attractive segments could be dismissed because they do not match with the company's long-run objectives. Even if the segment fits the company's objectives, the company has to consider whether it possesses the requisite skills and resources to succeed in that segment. The segment should be dismissed if the company lacks one or more necessary competences needed to develop superior competitive advantages.
Selecting the market segments
As a result of evaluating different segments, the company hopes to find one or more market segments worth entering. The company must decide which and how many segments to serve. This is the problem of target market selection. A target market consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The company can consider five patterns of target market selection.
1. Single segment concentration: In the simplest case, the company selects a single segment. This company may have limited funds and may want to operate only in one segment, it might be a segment with no competitor, and it might be a segment that is a logical launching pad for further segment expansion.
2. Selective specialization: Here a firm selects a number of segments, each of which is attractive and matches the firm's objectives and resources. This strategy of 'multi-segment coverage' has the advantage over 'single-segment coverage' in terms of diversifying the firm’s risk i.e. even if one segment becomes unattractive, the firm can continue to earn money in other
segments.
3. Product specialization: Here the firm concentrates on marketing a certain product that it sells to several segments. Through this strategy, the firm builds a strong reputation in the specific product area.
4. Market specialization: Here the firm concentrates on serving many needs of a particular customer group. The firm gains a strong reputation for specializing in serving this customer grou and becomes a channel agent for all new products that this customer group could feasibly use.
5. Full market coverage: Here the firm attempts to serve all customer groups with all the products that they might need. Only large firms can undertake a full market coverage strategy. e.g. Philips (Electronics), HLL (Consumer non-durables). Large firms going in for whole market can do so in two broad ways— through undifferentiated marketing or differentiated Marketing.