CHAPTER SEVEN
MARKET SEGMENTATION
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1. Define market segmentation;
2. Identify and explain market segmentation levels;
3. Identify bases for segmenting a consumer market;
4. Identify the requirement for effective segmentation;
MARKET SEGMENTATION DEFINED
Consumers have diversity of needs that is largely shaped by factors such as religion, culture, level of education, income, age, weather conditions, and psychological variables such as colour and emotions, etc. In fact, no company can boast of having enough resources to serve all customers with diverse needs and wants, and who are often scattered in large and diverse markets. As a result, firms divide the entire consumer markets characterized with heterogeneous needs into large or small consumer market characterized with homogeneous needs. This is what market segmentation entails. Note that when a market is not segmented, it is called mass marketing. Mass marketing involves offering the same product and marketing mix to all consumers. It is the practice of mass production, mass distribution and mass promotion of a particular product to all buyers irrespective of their peculiar needs.
According to Kotler and Armstrong (2006), market segmentation is the process of dividing a market into smaller groups of buyers with distinct needs, characteristics, or behaviours who might require separate product or marketing mixes. Schiffman and Kanuk (2000) regard market segmentation as the process of dividing a market into distinct subset of consumers with common needs or characteristics and selecting one or more segments to target with a distinct marketing mix. Note that a marketer does not create a segment because segments are natural phenomenal. Through segmentation research, a marketer identifies the segments and selects one or more segments to target and satisfy.
MARKET SEGMENTATION FORMS/LEVELS
1. Segment marketing: When a total market is divided into broad consumer groups with common or homogeneous needs, it is called segment market. For example, secondary school leavers may want to have university education but in different fields: technology, agriculture, arts, education, management and social sciences. Based on these identified needs, marketers can go ahead and segment the entire university education into University of Technology, University of Agriculture, and University of Education as shown in Figure 7.1. Each of these universities is established to provide specific university education.
Figure 7.1: Segment Markets
Another good example from business angle is the Mercedes-Benz Automobile Company, which manufactures different vehicles for road transportation – trucks, vans, buses, jeeps, and cars.
2. Niche marketing: Consumers that comprise one segment market may still have slightly different needs. Thus, a segment market can further be divided into groups of consumers with distinct needs. However, each of the niche group must share similar needs. Proceeding with our former example, consumers who need technology education can further be divided into specific areas such as engineering, environmental studies, mining, and applied sciences. On this basis, a university/faculty of technology can be established to meet the needs of the students that want to study engineering, mining and applied sciences as shown in Figure 7.2.
Figure 7.2: Niche Markets
Narrowing the example of Mercedes vehicles to cars only, different models such A-Class, C-Class, E-class and S-class, etc. are designed to accommodate the needs, tastes and preferences of different consumer groups, each with distinct homogeneous needs.
3. Local marketing: Within a niche market are consumers with peculiar needs. Local marketing is aimed at getting very close to few individual consumers who have similar needs that only very experienced and research-minded marketers can identify and satisfy. It also involves tailoring brands and promotions to the needs and wants of local customer groups – cities, neighborhoods, or even specific stores (Kotler and Keller, 2006). For example, among students who desire to study engineering are those who prefer mechanical, chemical, agricultural, electrical or material engineering. A marketer can satisfy the needs of engineering applicants by creating the aforementioned engineering departments, and admitting and training the students as depicted in Figure 7.3.
Note that the major difference between a segment market and a niche market is that the former has several competitors while the later attracts only one or two competitors. Competitors are rare in both local and customized markets (see Figure 7.3).
Figure 7.3: Local Markets
Another example is the establishment of Quranic University in Kano State, Islamic Universities in Katsina State and Kwara State to provide Islamic education and culture to the people of the Northern Nigeria who are predominantly Muslims. In addition, electronics, computers and cars are now being adapted to different local environment; therefore, models such as C-Class (America) and C-Class (UK) are now commonplace.
4. One-to-one marketing: This is the lowest level of segmentation. Here, a company tailors its marketing activities to meet the needs of just one individual customer, thus, the name one-to-one marketing. For example, an electrical engineering department with a professor in networking engineering can admit one PhD student per session or provide special networking services to business organizations, government ministries and private homes. Sterling Bank Plc promotes itself as “one customer bank” in her new advert lunched in 2009. There are two forms of one-to-one marketing: personalization and customization.
i. Personalization: This is the creation and use of database (i.e. data collected on customers’ previous purchases) by a firm to provide a product or marketing mix suitable for an individual customer. That is, personalization is any attempt by the company to design a product that matches the need of an individual customer and no other person(s). This method is often used by the service companies.
Advantages of personalization
a. It surprises the customers at a delight. Everyone wants to be surprised.
b. It provides one with the opportunity of using one-in-town product.
c. It enhances customer satisfaction.
d. It enhances patronage and company’s profit.
Disadvantages of personalization
a. Personalization is expensive to operate. It requires data and expensive software for implementation. Also, producing for each individual customer is devoid of internal economies.
b. It encourages invasion of privacy. Consumers are often bombarded with text and e-mail messages by companies operating personalization, which are considered as invasion of privacy, and could instigate legal actions.
ii. Customization: Customization happens when a customer specifies to the company goods and services (marketing mix) he or she needs. Customized products are often called custom-made. The FRSC special number plates fall into this category.
Advantages of customization
a. It provides one with the opportunity of using one-in-town product.
b. It enhances customer satisfaction.
c. It enhances patronage and company’s profit.
d. It is strategic in the sense that it creates product differentiation and effective positioning.
Disadvantages of customization
a. It is costly to operate.
b. It makes purchase decision difficult by making the choice task very complex.
c. At times customers want everything in a product customized. However, customizing everything in a product is not impossible but very difficult and usually more expensive.
d. Customization raises the expectations of customers which may be difficult to satisfy.
Figure 7.4: Types of Segmentation and Their Differences
Source: Authors conceptualization (2011).
BASES FOR SEGMENTING A CONSUMER MARKET
Generally, descriptive and behavioral variables are used to segment consumer market. When descriptive variables are used, consumer markets can be segmented using geographic, demographic, and psychographic bases. However, if behavioural variables are used, the consumer market can be segmented on the bases of benefit sought, user status, usage rate, loyalty status, etc. At the extreme, two segmentation bases such as geographic and demographic bases can be used to have a deeper understanding of a particular consumer segments. This is called hybrid segmentation. Five major segmentation bases are discussed below.
1. Geographic segmentation: Here, the market is divided into geographic units such as continents (Africa, America, Europe, Asia, Australia), nations (Nigeria, Ghana, Niger, Mali. etc.), regions (North-West, North-East, North-Central, South-West, South-South, and South-East), cities (Lagos, Ibadan, Porthacourt, Abuja, Kano, Kaduna, Maiduguri, Sokoto, etc.) or neighborhoods. The philosophy behind geographic segmentation is that people who live in the same area are bound to share similar culture and experience the same weather which makes them to acquire similar needs and wants over time. Since each geographical location is characterized with unique culture and weather, people living in two different geographical areas will differ seriously or slightly in terms of needs. MTN Nig. Ltd. adopted this segmentation strategy when it first entered Nigeria market in 2001 by targeting cities first, then towns, and later, villages.
2. Demographic Segmentation: Demography is the study of population characteristics such as birth rate, death rate, income levels, age distribution, sex, gender, marital status, family size, occupation, education, religion, nationality and social class. Thus, demographic segmentation is the process of segmenting a consumer market using demographic variables such as age (childhood, adolescence, and adulthood), sex (male and female), marital status (single, married, divorced, widowed), family type/size (nuclear or extended), family life cycle (bachelorhood/spinsterhood, honeymooners, early parenthood, late parenthood, and dissolution), occupation (student, teachers, civil servant, medical doctor, engineer, journalist, lawyer,), etc.
A market can be divided using any of these demographic variables. For example, Friesland foods WAMCO Nig. Plc produces two tin milks – Peak Milk and Three Crown (157ml or 170ge each) – for two income groups. Peak milk (sold at higher retail price) is targeted at high income earners while Three Crown (sold at lower retail price) is aimed at middle income groups. Yet, it produces Peak Milk Powder in small sachets (22 ge) and sold at far lesser retail price to low-income earners.
It is good to note that sex and gender have different meanings in marketing. Sex is a natural construct – male and female. Gender is human construct. For example, some ladies act, behave, talk, and even dress like men. Such ladies are regarded as men by marketers and thus, targeted with men-like products.
3. Psychological segmentation: This is the process of segmenting the consumer market using psychological variables such as motivation (physiological needs, safety needs, social needs, esteem need, self-actualization needs), life style (union-oriented, sport-oriented, culture-oriented, religious-oriented, academic-oriented, political-oriented), attitude (positive and negative attitudes), perception (dogmatic or realist) and personality (achievers, ambitious, authoritarian, gregarious). For example, consumers can be segmented based on three motivational needs: need-for-power, need-for-affiliation, and need-for-achievement. Consumers who have high need-for-achievement can be targeted with expensive but high quality products. This is because people who have high need for achievement tend to be more self-confident, enjoy taking risks, actively research their environments, and value feedback. Those with high need-for-power can be targeted with prestigious or luxurious commodities with colours that portray superiority and authority such as black colour because they always want to exercise power over objects and people. Those with high need-for-affiliation are strongly influenced by the desire for socialization, for friendship, for acceptance and for belongingness. They like attending occasions and sharing gifts. Thus, they can be targeted with well decorated and fanciful products that can be presented as gifts.
4. Socio-cultural segmentation: Here, the marketer segments the consumer market using socio-cultural variables such as religion (Islam, Christianity, Buddhism, or Traditional Religion), language (Hausa, Igbo, Yoruba, and Nupe), marriage (polygamy and monogamy), and social class (lower, middle and upper), etc. Knowing very well that Nigeria is a multi-ethnic country and each ethnic group has its favourite dish, most restaurants segment their markets using major ethnic groups in Nigeria: Hausa, Yoruba and Igbo. ‘Masa’ and ‘Tuwo Masara’ is prepared for Hausa customers, ‘Amala’ for Yorubas and ‘Akpu’ for the Igbos. A good example is Pounded-Yam Restaurant along Yoruba Road, Kaduna, Nigeria.
5. Behavioural segmentation: Behavioural variables such as knowledge (what consumers know about a product), attitude (what consumers belief or expect in a product), uses (who are the users and how often do they consume a product), and responses (nature of consumers repurchase behaviour) can be used to segment a market. These broad behavioural variables can further be divided into more specific behavioural variables and used to segment a consumer market as shown Table 7.1 below:
Table 7.1: Behavioural Segmentation Variables
Behavioural Variable | Segmentation |
Occasion | Regular occasion; special occasion |
Benefits | Quality, service, economy, convenience, speed |
User status | Nonuser, ex-user, potential user, first-time user, regular user |
Usage rates | Light user, medium user, heavy user |
Loyalty status | None, medium, strong, absolute |
Readiness stage | Unaware, aware, informed, interested, desirous, intending to buy |
Attitude | Enthusiastic, positive, indifferent, negative, hostile |
Source: Kotler, P. and Armstrong, G. (2006:216), Principles of Marketing (11th ed.), London: Pearson Education Inc.
6. Hybrid segmentation: In most cases, two or more segmentation variables are combined together to segment a consumer market. This segmentation approach is called hybrid segmentation. The two common hybrid segmentations are
geo-demographic segmentation and psychographic segmentation.
a) Geo-demographic segmentation: This calls for the use of both geographic and demographic variables in dividing a consumer market into smaller groups with common needs, wants, and desires. For example, Nigerian market can first be segmented into cities (geographic segmentation) such as Lagos, Kano, Port-Harcourt, Abuja, etc. The population of each city can be considered in terms of sex (male or female), occupation (civil servant, banker, farmer, teacher, student), income (low, medium, high, unemployed), and age distribution (under 5, 6-10, 11-15, 16-20 years, etc.) and used as the second basis to further segment a market.
b) Psychographic segmentation: Psychographic segmentation requires the combination of either psychological and demographic variable, or psychological and geographical variables to segment consumer market.
CRITERIA FOR EFFECTIVE SEGMENTATION
To segment a market effectively, certain requirements must be fulfilled. These are identification, measurability, accessibility, substantiality, stability, differentiation, and action (IMASSDA).
1. Identification: Relevant characteristics that are used in segmenting a market should be identifiable. Most demographic and geographic factors are easily identifiable. However, psychographic and behavioural characteristics such as benefit sought and life style are difficult to identify.
2. Measurability: This suggests that a segment should be characterized with measurable attributes. Consumer attributes that are easy to identify are also very easy to measure. For example, demographic factors like age, sex, income and occupation can be easily identified and measured. However, psychographic variables like motivation and lifestyle are difficult to identify and even measure.
3. Accessibility: This entails that a target segment should be reachable and appropriately served by marketers in an efficient manner. A market segment that costs too much to reach and serve may be less profitable.
4. Substantial: This requires that a target segment should have sufficient number of consumers. That is, a segment should contain large number of consumers so that companies can enjoy economies of scale from mass production.
5. Stability: This suggests that a target segment should be predictable over a long period of time. Put differently, an effective segment market is one whose needs are not likely to change in the short run but one whose needs and tastes are likely to even grow larger in the long run. For example, the need for primary, secondary and tertiary education is increasing annually in Nigeria.
6. Differentiable: Since no two segments are the same in terms of needs, then each segment is expected to respond differently to the same marketing mix program. When two different market segments respond uniformly to the same marketing offer, then the segmentation is not properly done and the two segments can best be called one segment.
7. Actionable: A target segment should be the type that the company can use its limited resources to design a marketing program for. By so doing, the marketer can attract, serve, satisfy and build lasting relationships with customers in ways that benefit the company and its stakeholders
THEORIES OF MARKET SEGMENTATION
Theory is a set of assumptions about how a particular phenomenon (e.g. an abstract concept or a physical object) behaves, or is related with other concepts or objects in a given situation. A good theory should be applicable, observable, predictive, true most times, explains relationship between/among two or more variables, and guide behavior and practice. Therefore, segmentation theories are sets of assumption and principles explaining ways through which market segments can be identified, accessed and satisfied at any given time by managers. The segmentation theories are explained below:
1. Single-base versus multi-base segmentation theories: The single-base theory assumes that consumers with similar needs are better understood and grouped together as a segment through use of a single segmentation basis at a time. To illustrate, segmentation on the basis of ‘gender’ can easily reveal fashion or cosmetics appropriate for men and female.
In contrast, multi-base theory assumes that consumer needs at a particular time is influenced by multiple factors, therefore a deeper understanding and aggregation of consumers with similar needs should consider two or more segmentation basis at a time. For example, a market segment may evolve through interplay of gender, culture, and age bases; the marketer’s task is to be able to identify such segment through painstaking segmentation research.
2. Breakdown versus Build-up segmentation theories: The breakdown theory assumes that every market consists of consumers who are essentially the same in needs, so the task before managers is to identify groups which share particular differences.
The build-up theory assumes that a market consists of consumers that are all different in terms of needs, so the manager’s task is to find consumers with similar needs. The build-up method is customer oriented as it seeks to determine common customer needs.
3. Push versus pull segmentation theories: The push theory assumes that certain forces or factors create the ‘need and readiness to buy’ among some consumers, and vice versa. That is, consumers are pushed by certain forces to want to buy. Therefore, the responsibility of a marketer is to locate a segment market using the key push factors. The push factors are usually internal or personal (e.g. socio-economic and psychological forces like income, attitudes, personality, etc).
The pull theory assumes that consumers with distinct needs are attracted or pulled to buy by certain forces. Therefore, marketers are required to streamline and distinguish their product and services to make them attractive to group of consumer that require them.
STEPS IN SEGMENTATION PROCESS
Segmentation involves five stages: selecting a market or product category for study, choosing a basis or bases for segmenting the market, selecting segmentation descriptors; profiling and analyzing segments, selecting target markets, and designing and implementing a marketing mix. The stages are explained below:
1. Selecting a market or product category for study: To commence segmentation, a broad market should be considered. For example, a country (e.g. Nigeria, Ghana) or city (e.g. New York, Lagos) can be the focus. Next, a product category (e.g. automobile, beverage, media, deco, and fashion businesses) should be selected.
2. Choosing a basis or bases for segmenting the market: Here, the marketer examines several segmentation bases and selects one or more basis/bases for application. A market may opt for single-base or multiple-base segmentation approaches.
3. Selecting segmentation descriptors: At this stage, the determinants of the selected segmentation bases are listed and defined. For example, if age is used a segmentation bases, the descriptors or determinants can be infants, pre-adolescence, youths, adults, and aged. Age may be re-classified as pre-nursery (0-1 years), nursery (2-4 years), primary (5-11 years), college (12-17), university (18-23 years), working class (24 -65years), and retired (66-100 years). Another segmentation basis, say family, can be classified as bachelorhood/spinsterhood (1 person per household), honeymooners (2 persons per household), early parenthood (2 parents with 1 or 2 children), late parenthood (2 parents with many children), and dissolution (grandparent(s)).
4. Profiling and analyzing segments: At this level, the marketer should evaluate each segment market in terms of market size, expected growth, purchase frequency, current brand usage, and brand loyalty. The sales and profit potentials should also be analyzed.
5. Selecting target market(s): This is usually the end-result of a segmentation research – the stage where a company make a decision to serve certain market segment(s) with peculiar marketing mix and foregoing others.
6. Designing and implementing a marketing mix: Finally, a new product with appropriate price, distribution and promotion is package for the chosen market segment.
SELF-ASSESSMENT QUESTIONS
1. a. Define market segmentation;
b. Identify and explain market segmentation levels.
2. IBB University is interested in offering hotel services in Minna. Given her limited resources and market constraints, the University has decided to segment the Minna market. Requirement:
a. What possible variables can it use in segmenting the market?
b. Choose one of the segmentation variables and do the segmentation for IBB University.
c. Convince the management of IBB University that the segmentation is effectively done.
3. List and explain stages involved in market segmentation.
4. Explain theories of market segmentation.