Unit 2 market segmentation - Class 11 - CBSE - 2016/17
- 1. UNIT II: Market Segmentation and Targeting Let us start with understanding the meaning of the term ‘market’. It stands for a group of buyers and their demands (and not the geographical area). So, the market for a product is nothing but the aggregate of customers of that product. Mostly markets can be divided into two categories: Homogenous Markets: The customers are similar to each other with respect to their prod- uct requirements (e.g. match-box, mineral water, petrol, bricks etc). Customers in such mar- kets require similar type of products, similar availability, price, and information require- ments. Heterogeneous Markets: In such markets customers differ widely from each other in terms of their requirements and their characteristics (e.g. furniture, apparels). The customers vary with respect to price they want to pay, kind of product they want to have, where and how they want to buy it etc. Markets for most of the products are heterogeneous in nature, though they vary in their de- gree of heterogeneity. Companies have limited resources. It is not feasible to produce all the possible products for all the customers. The firm would benefit from the decision of ‘what needs and whose needs” to serve (i.e. selecting one or more sub markets of hetero- geneous markets). Companies need to pick up the sub-markets in a way to have best pos- sible use of their resources (financial, expertise, experience, technology etc). Market segmentation is division of a large group of customers with varied needs and char- acteristics into several smaller groups of customers on the basis of their similarities and dif- ferences. The customers in the smaller groups are more similar in terms of what they seek from the product but different from customers of other groups. Customers may have one or more of requirements from a product. It can be low price, ex- cellent quality, basic functions, aesthetic appeal etc. Buyers of 'Sony TV' seek excellent quality irrespective of the high price, buyers of 'Nirma' washing powder seek low price and basic washing function. Let us consider the example of wrist watch in this context. Customers in lower income groups are similar in their requirements of low price, benefit of accurate time and some de- gree of durability of watch. Whereas, customers in high income groups are different from low income group customers in terms of benefits they seek from wrist watch and their char- acteristic of income, but they are similar in their requirements like fashion, style, prestigious brand name of watch. Marketers break up the heterogeneous market for a product into several sub-units or sub- markets, each relatively more homogeneous within itself, compared to the market as a whole. This process of breaking up the market into number of distinct sub-markets of buyers, each with relatively more homogeneous characteristics is known as ‘market segmentation’, and the sub-market are known as ‘segment’ . 1
- 2. A Market segment consists of group of customers who share similar set of needs and wants. The marketer’s task is to identify the number and nature of market segments and decide which one(s) to target. ! ! Market segmentation and Product Differentiation Market segmentation In market segmentation, product differences are based on differences in the needs of the customers. Different kinds of products are offered to satisfy needs of different segments. In market segmentation, the starting point is customers (e.g. Lifebuoy soap to kill bacteria and Dove soap to moisturize the skin). Product Differentiation In product differentiation, the marketer offers differences in products which are not due to differences in the needs. These differences are to offer variety to customers to choose from (e.g. bathing soap is in different colours and fragrances, custard powder in different flavours, pencil sharpeners in different shapes etc). ! Benefits of Market Segmentation For all the marketing activities to be performed efficiently and effectively, it is important to be able to develop appropriate marketing mix and focus it properly on customers. Along with this ultimate benefit of segmentation, some other benefits of marketing segmentation are discussed below: 1. Identifying Attractive Segments: A marketer can have much clearer picture of market, if it is in smaller segment. By looking at the market in the form of several segments, a firm can have better picture of available opportunities ,growth potential and competitive scenario of each segment (e.g. assessing the market of TV viewers as different groups interested in watching different kinds of channels as compared to assessing TV viewers as a whole, gives better and more useful idea about the available opportunities). 2. Efficient and Effective matching of company resources to target customer groups: As companies have limited resources it is not feasible to produce all possible products for all the people in the markets (e.g. it may not be possible/profitable to produce all kinds of ap- parels, furniture required by all kinds of buyers in the markets). 2
- 3. The best that can be aimed for is to provide selected products for selected segments of customers , this enables the most effective use of a firm’s resources like financial, expertise, experience, technology etc. Market segmentation enables the company to pick up the best and most suitable segments to pursue. The firm would be benefited, if it understands the marketing efforts required for different segments and selecting the segments which show the best fit with the resources of the company. 3. Identification of Gaps in the need satisfaction: Market segmentation helps the mar- keters to evaluate need satisfaction of various customer segments by the existing products in the market. Such an exercise helps in better identification of segments, whose needs are not being sat- isfied well or identifying segments with no product offering to match their needs (e.g. Nir- ma identified the gap of no washing powder being offered for lower income group in the market, Cadbury identified and included older people as new segment of sell chocolates). 4. Developing Appropriate Marketing Mix: Market segmentation enables to get more clarity about characteristics of customers, their needs, purchase behaviour and responses to marketing activities. It helps in better identification of customers with detailed knowledge about their similari- ties. By considering such information, marketer can take more appropriate decisions about products, price, distribution and promotion. The purpose is to ensure best possible match between marketing mix and requirements of its segments. Thus, market segmentation gives advantage of increasing the effectiveness of marketing mix (e.g. various segments of bicycle markets are being served with different marketing mix variables to cater to the differences in the requirements of various segments). 5. Sharp focusing of Market Strategy on Target Customers: Market segmentation en- ables a company to observe customers in smaller groups , which helps in better identifica- tion of customers’ characteristics. Such information helps the companies in better focusing of marketing efforts on its cus- tomers . It also prevents scattering away of marketing efforts, thus improving the efficiency of marketing strategy (e.g. for informing business executives about a management work- shop through advertisements in business TV channels and financial newspapers rather than through general TV channels and newspapers, a company can sharply focus its mes- sage on its potential customers). Requirements of effective Market Segments: Measurability: It should be possible to measure the number and size of customers to some reasonable extent. Substantial: The segment should be large and profitable enough to serve in the long run. Distinctiveness: The segment should be clearly different in their needs and characteristics from other segments (e.g. customer segments in mobile handset market have some clear and important differences from each other to make each segment a distinct one.) 3
- 4. Accessibility: The segment can be effectively reached and served. Bases for Segmentation To segment consumer market, we use certain criteria related with customers. The commonly used bases for segmenting the market are broadly divided into following four categories: 1. Geographic: Customers with different geographical locations vary in their needs for products due to differences in climate, culture, eating habits etc. Geographic segmentation calls for dividing markets into different geographical units such as nation, states, countries, region, cities, or neighbourhood. The company decides to operate in one or few geographical areas or to operate in all but pay attention to variation in geographical needs and preferences (e.g. McDonalds has made modification in its burgers as per the tastes of different countries, e.g. demand for sunscreen varies due to difference in climate.) Table: Geographic Segmentation and Variable ! ! 2. Demographic: Demographic segmentation consists of dividing the markets into groups on the basis of demographic variables such as age, gender, family size, family life cycle, in- come, occupation, education, religion, race, and nationality. Demographic variables are the most popular basis for distinguishing the customer groups. Consumer’s wants, preferences, usage rates, buying practices etc. are often highly associat- ed with demographic variables. Demographic variables are easier to measure as compared to other types of variables. Even when the target market is segmented on non-demographic bases, linking the segments back to demographic characteristics is necessary in order to know the size of the target market and how to reach it efficiently. i. Age: Consumers' wants, purchase preferences and purchase capacities change with age. 4 Geographic Variable Components Country India, China, Canada Region South India, North-East City Delhi, Bangalore Town Ranchi, Jamshedpur
- 5. Some companies offer different products with different marketing approaches for different age groups (e.g. different types of toys, games, clothes, books for children of different age groups). ii. Gender: Segmenting the market on the basis of gender helps the marketer to categorize products specifically for males and females. Gender segmentation is necessary to be used as a base for large number of products (e.g. clothing, cosmetics, foot wear, wristwatch etc.) Hindustan Lever offers ‘Fair and Lovely’ for women and ‘Fair and Handsome for men’ because of the difference in the facial skin of males and females. ! ! Fair and Lovely for Women Fair and Lovely for Men iii. Income: It is one of the most commonly used and important base for segmenting the market for large number of products and services. It has direct bearing on the choice behavior of customers with respect to kind of products and brands. People within a same income group are more likely to buy similar kind of products and brands (e.g. Different models of mobile phones of different companies have income as an important base for their market segments i.e. customer buying ‘Nokia Bar Phones’ are dif- ferent from customers buying ‘Nokia Lumia’ in their income levels). ! ! Nokia C1-01 Nokia Lumia 920 iii. Education: The level of education influences consumer’s preference over wide range of products. It is considered relevant as a base to segment the markets for certain products. (e.g. Kinds of calculators for students of physics, maths, engineering, coaching institutes use education as one of the important base to segment the market, publishers segment their market on the basis of subject areas and level of education). 5
- 6. ! ! Simple Calculator Scientific Calculator iv. Occupation: People with different occupations like farming, technical, health, educa- tion, sports, etc. vary in their requirement for some of the products (e.g. supplement health drinks for sports people, books for teachers, medical equipment for doctors). v. Family size and Family life cycle stage: People pass through different stages of life-cycle like childhood, teenager, youth, married couples without children, couples with teenager children, and so on. Customers tend to have different consumption patterns at different stages of life-cycle. Ac- cordingly, product requirements and purchasing power vary for different stages of family life cycle. Product requirements also vary for different sizes of the family (e.g. different kinds of bank loans based on different life-cycle stages, availability of large family packs of FMCGs, vari- ous sizes of refrigerators for small and large families) Table: Demographic Segmentation and Variables 3. Psychographic: It relates to understanding and using the psychology of the customer as a base for differences in their needs for products. By analysing consumers’ activities, interests and opinions, we can understand the psycho- logical makeup of consumers. Psychographic characteristics influence product choice behaviour of buyers and also help in designing right marketing activities for the buyers. 6 Demographic Variables Components Age 4-10, 15-18, 20-25, 25-35 Gender Male, Females Income High, Medium and Low Education High school, Graduates, Post-graduates Occupation Students, Businessmen, Professionals Family size Single, two members, four members Family Life Cycle Stage Unmarried single, Young married, Married couples with children in teenage group.
- 7. In psychographic segmentation buyers are divided into different groups on the basis of life style and personality characteristics. i. Life style: It is person’s way of living and reflects living as a combination of his actions, interests and opinions. The goods that people consume express their life-style (e.g. clothes for fashionable and modern women or clothes for traditional and conservative women, advertisement of Nero- lac paints by Shahrukh Khan shows his lifestyle and tries to match it with the lifestyles of its customers.) ! ii. Personality: Marketers try to endow their products with brand personality that corre- sponds to consumer personality. Matching the personality of the brand with personality of customer makes strategy more effective (e.g. Godrej launched its advertising campaign for building image of its products with Aamir Khan as its brand ambassador. It was to project the personality of its products and its similarity with personality of customers). ! Behavioural Segmentation Buyers are divided into segments on the basis of factors related with their buying be- haviour. The various kinds of bases in this category are as follows: 1. Benefits sought: Marketing is all about satisfying consumers’ needs and wants. It is clas- sification of buyers according to benefits they seek from products. Benefits can be in tangible form like functional features to provide convenience, safety, durability etc.(e.g. functional features of mobile handsets sought by customers) and/or benefits which are in the intangible form. (e.g. particular brand of car, jeans, bag may have ‘status symbol’ as their intangible benefit.) 7
- 8. A company can choose the product benefit to satisfy a particular need of customers (e.g. toothpaste which also works as a mouthwash) An attempt is made to determine demographic, psychographic and media habits associat- ed with each benefit segment. It enables the company to design appropriate marketing programme and focus it properly on them. (e.g. companies are launching number of prod- ucts with health benefits like atta noodles, whole wheat bread, high fiber biscuits, multigrain flour etc. for health conscious customers, diet ice-cream for caloric watchers, lower price mattresses for people seeking economy, high nutritional value of breakfast cereal for mental growth of children, different toothpastes offer different benefits like cavity prevention, white teeth, sensitive teeth, fresh breath, strong teeth, strong gums etc for different segments ). ! ! ! For Sensitive Teeth For Bad Breath For Gum Care 2. Usage status: Status of customers as ex- users, potential user, current user, competitor’s brand user can be used as one of the criteria for segmenting the market. For example, a company may consider the group of people not consuming the product as an attractive market segment to aim its marketing plans so as to convert them into buyers (e.g. in case of microwave, there is large segment of potential customers who could benefit from using microwave). 3. Loyalty status: Extent of brand loyalty on the part of consumers could also be a basis for segmentation. Buyers segmented on this basis can be in groups like hard-core loyal, soft-core loyal, shift- ing loyalty and switchers. When the company is able to identify the characteristics of customers with high brand loyal- ty, it can develop an appropriate marketing strategy suitable to them or to attract new cus- tomers with similar characteristics or customers of competing brands. Companies can develop marketing programme to hold on to their loyal customers as it is cost effective to keep the existing loyal customers while trying to get more new customers (e.g. airline companies, hotels offer reward programmes to their customers for repeat pur- chase, retail outlets often come out with promotional schemes based on loyalty of their cus- tomers) 4. Usage rate: Many companies segment the customers as light, medium and heavy users of the product. Buyers in such groups may show some common demographic, psychographic characteris- tics and media habits.(e.g. teenagers as heavy users of choclates, older people as light users for chocolate). 8
- 9. It helps the company in selecting suitable segment and developing right marketing ap- proach for it. 5. Occasions: Many products are bought, whenever they are required like tires. But purchase of some of the products is related with occasions. Such products are seg- mented using bases of occasions (e.g. holiday packages by travel agencies during vaca- tions, gift packs during festival seasons, invitation cards printing during wedding sessions). ! Table: Behavioural Segmentation and Variables Multiple Segmentation Bases There is no single way to segment the markets. Although, all segmentation bases are useful, each has its own characteristics. A market can be segmented using only one base or more than one bases. Various bases can be used in different combinations for segmenting markets. Usually differ- ent bases are used in succession and in a suitable order. The only requisite is that the base chosen has to be relevant for the concerned market. Companies may also change the bases with the change in situation. Segmentation in Business Markets Business to Business market segmentation is the identification of group of potential and present business customers with some common characteristics. The variables for segmenting these markets can be broadly grouped in two categories, which are as follows: 1. Organisational Characteristics: Firms differ a lot from each other in terms of their char- acteristics and degree and degrees of these characteristics. 9 Behavioral Variables Components Benefits sought Status, Convenience, Economy etc Usage Status Ex-users, Current users, Potential users Usage Rates Heavy, Medium and Light users Loyalty Status Hard-core loyals, Soft-core loyals, Shifting loyalty, Switchers Occasion Festivals, Wedding, Vacations etc
- 10. Some of the common bases being used for segmenting the organisations are: i. Size of the organization: As the size influences the order size, order frequency, delivery time etc, grouping of the firms on this basis is important. ii. Technology: Within the same industry, organisations may have different technologies. The kind of technology influences the needs of the customers and thus can be important as a base for segmentation. iii. User status: The potential and present customers can also be segmented on the basis of their being non-users, light users, medium users and heavy users. iv. Geographical location: Often the needs of business customers vary due to different ge- ographical areas. v. Industry type: There is very wide range of industries in business scenario. Different indus- tries have different requirement. The differences in their needs have to be considered so as to segment them and develop right marketing mix for them. 2. Buyer characteristics: It refers to purchase related policies and procedures of the organ- isations. Some of the bases in this category are as follows: i. Purchase decision making unit: People with the responsibility to take purchase decision vary across organizations. It can be just one person or committee or a department or a group of people from different departments. As a result, organisations require different kind of marketing approach from seller organisations. Thus, the companies can be segmented on this basis also. ii. Purchase Criteria: It is used as a base for segmenting due to its relevance for designing marketing activities. As different companies have different purchase criteria, it may have in- fluence with respect to kind of product, its price, delivery, after sale service, terms and con- ditions. So, this also can be used as a basis for segmentation. iii. Multiple Bases: Companies can use multiple bases as per the requirements of the situa- tion and may change them with the change in the situation. Market targeting Choosing the right segment(s) out of all the market segments is called market targeting and the segment selected is called “target market”. Once the firm has developed various market segments, it needs to decide: how many seg- ments to cover and which ones. Choosing the market segment requires evaluating different segments on the criteria of (i) attractiveness of various market segments on factors like size, growth, profitability, scale economy, competitive situations etc (ii) company’s capability to compete in various seg- ments on factors like objectives, competencies and resources. 10
- 11. Ways of Targeting The firms have different types of target marketing options to choose from. These have been broadly classified as follows: 1. Undifferentiated Target Marketing (mass marketing): Under this strategy, a firm choos- es not to recognize the different market segments making up the market. It treats the market as an aggregate, focusing on what is ‘common’ in the needs of people rather than on what is ‘different’. It tries to design a product and marketing program that appeals to the largest number of buyers. It uses the policy of same product, distribution channels, pricing, mass advertising and ad- vertising themes, for entire market. This strategy has the advantage of keeping costs low because it develops and applies only one type of marketing mix. It is a suitable strategy when the firm aims to target largest market segment. But, when several firms in the industry do this, the result is hyper competition in the largest target segment selected. Marketers for commodities like sand, wheat, and petrol use this strategy. Broadly the same product is being bought by masses at the same price and at the same places. (e.g. Hamdard is using undifferentiated target marketing for its product ‘Rooh- Afja’ as the product, its price, kinds of retail outlets carrying it and its advertising strategies are same for all the customers). Table: Undifferentiated Marketing Strategy Differentiated Target Marketing: Under this strategy, a firm decides to operate in more than one segments of the same market and designs separate product and marketing pro- grams for each. It brings more total sales volume in a product category. For example: HUL is offering differ- ent soaps for different customers segments in soap category. Offering product in more segments will build more sales volume of soap category as a whole for the company. For example, Nokia is selling mobile phones for number of different segments. It results in bet- ter matching of product with customers’ needs thus resulting in satisfying different customer segments and much larger number of total customers. However this strategy require high 11 Common Marketing Programme Single Undifferentiated Market
- 12. costs (e.g. different cars for different segments by Maruti, different soaps for different seg- ments by HUL). Table: Differentiated Marketing Strategy Maruti Alto Maruti Swift Maruti Ertiga Concentrated Target Marketing: Under this strategy, an organization selects only one of the segments as target market and focuses on its needs through its marketing programs. In this way, a firm has greater understanding of the customer’ needs in one segment and achieves providing quite appropriate product and marketing program for its customer. If the segment is well chosen, the firm can earn high rates of return on its investment. But at the same time, this strategy involves higher than normal risks to its business due to the reasons like: If there is any change in customers’ need/ or a new competitor enters the mar- ket or any other change, it may have decline in its volume and profits or it can just out of the markets (e.g. coaching institute for preparing students for IAS exams only). 12 Marketing Programme A Marketing Programme B Marketing Programme C Segment 1 Segment 2 Segment 3