Segmenting and targeting the market | Management Optional Notes for UPSC PDF Download

Introduction

Presently, companies selling products and services understand that it's not feasible to cater to all buyers in an entire market for a specific product or service category. This is because buyers in a particular product market are numerous, widely spread, and have diverse needs and motives, known as buyer heterogeneity. For instance, not all pants-wearing consumers prefer jeans; some opt for designer jeans, while others choose more affordable ones. Similarly, businesses using computers may have varying preferences for memory or speed.

• Instead of competing in the entire market, companies must identify specific parts where they can serve meaningfully. Within the general market, there are groups with different needs, preferences, or product-use behavior. Some product markets have minor differences, allowing a single marketing mix to satisfy consumers, while others require alternative or multiple marketing mixes.
• For example, in India, various car brands are serving the "small car market," "mid-size car market," and "luxury car market." Whether large or small, the group of consumers for whom a seller designs a specific marketing mix is the target market.

Historically, companies went through three stages in marketing their products:

Mass Marketing:

• Producing a single product on a large scale and promoting it widely.
• Advocated for economies of scale and lower prices, known as the "shotgun approach."
• Less used now due to market differences in buying preferences and needs.

Target Marketing:

• Views the total market as consisting of smaller segments.
• Identifies different submarkets, selects one or more, and tailors products and marketing mixes for each, using a "rifle" approach.
• Most companies are now moving away from mass marketing to adopt target marketing.

Steps in Target Marketing (STP):

• Involves market segmentation, targeting, and positioning.
• Market segmentation divides the total market into smaller, similar groups with respect to influencing factors.

Market Segmentation Definition:

• Process of dividing the total market into smaller groups with similar characteristics.
• Allows companies to reach smaller segments more efficiently with products and services matching their unique needs.

Strategy of Market Segmentation:

• Involves developing two or more marketing programs for a product, each aimed at a different market segment.
• Requires clear definition of the number and nature of customer groupings (market segments).

Criticisms Clarification:

• Some criticize marketers for creating segments, but they actually identify existing segments and decide to focus on them with different marketing mixes.

Importance of Market segmentation

Market segmentation, aligning with the marketing concept philosophy, involves a company identifying consumer needs within a segment before deciding on the practicality of developing a product and marketing mix to meet those needs. This approach offers several advantages and benefits:

• Enhanced Marketing Effectiveness: Tailoring marketing programs to each market segment enables a company to conduct a more effective marketing campaign and optimize the use of its resources.
• Strategic Competition for Small Companies: Smaller companies with limited resources can compete more effectively in one or two small market segments, avoiding overwhelming competition from larger companies targeting major segments.
• Fine-Tuned Product and Pricing Strategies: Companies with an effective market segmentation strategy can create more precisely tailored products or services and price them appropriately for the specific target segment.
• Optimized Distribution and Communication: Selection of the most suitable distribution network and communication strategy becomes easier, and understanding competitors serving the same segment improves.
• Rapid Growth for Medium-Sized Companies: Medium-sized companies can experience rapid growth by developing a strong position in specialized market segments.
• Adoption by Large Companies: Even large companies with vast resources are shifting away from mass marketing strategies in favor of market segmentation to effectively reach various market segments within broad product markets.

Example of Hindustan Lever Ltd (HLL):

• Hindustan Lever Ltd adopted market segmentation by developing various detergent brands to cater to diverse needs within the detergent market.
• In response to competition from a smaller player, Nirma Chemicals Ltd, HLL introduced the economical brand "Wheel" to meet the needs of middle-class and budget-conscious detergent buyers.
• Due to these factors and the evident benefits of market segmentation, both companies in consumer and industrial markets are widely adopting this strategy. Even retailers have embraced market segmentation. Many experts believe that the era of mass marketing is over, and companies today use market segmentation to maintain focus and optimize their marketing resources, as opposed to scattering them.

Requirements of Effective Market Segmentation 

The objective of segmentation is to divide a market in a way that each segment responds uniquely to a distinct marketing mix. The variables used for segmentation should be measurable and quantifiable rather than subjective. Adequate data must be available or collectible for effective measurement; otherwise, segmentation becomes challenging and unscientific. Not all segmentation approaches are equally effective, and for segmentation to be efficient, the chosen segments should be identifiable, measurable, sufficient in size, stable, reachable, differentiable, and actionable.

Identifiable and Measurable:

• Marketers need to be able to identify relevant characteristics or variables to divide the market based on common needs.
• Variables like geography or demographics are relatively easy to identify, while others, like benefits sought or lifestyle, may be more challenging.
• Measurement of resulting segments in terms of size, purchasing power, and profile is crucial.

Sufficient (in terms of size):

• A worthwhile market segment should not only be large but also profitable enough to justify tailoring a specific marketing mix.
• Marketers estimate segment size using secondary demographic data or probability-based surveys that can be projected to the total market.

Stability:

• Marketers prefer targeting stable consumer segments in terms of demographic and psychographic variables.
• Stability is crucial, especially for products susceptible to fashion and fads.

Reachable (accessible) in Terms of Media and Costs:

• Accessibility refers to the degree to which segments can be effectively reached and served economically.
• Marketers constantly seek new media options to reach target markets with minimal waste circulation and competition.

Differentiable:

• Resultant segments should be conceptually distinguishable and respond differently to various marketing mix elements.
• If segments respond similarly to marketing efforts, they may not constitute separate segments.

Actionability:

• It pertains to the degree to which effective programs can be formulated for attracting and serving the segments.
• A practical consideration, ensuring that the resources available are sufficient for developing distinct marketing programs for each segment.

Bases for Market Segmentation 

The initial step in developing a market segmentation strategy involves choosing the most suitable bases for segmenting the market. Due to the inherent disparities between consumer and organizational markets, marketers employ distinct variables for segmentation in each. This discussion will delve into the bases for segmenting consumer markets and subsequently address those for business markets. It's important to note that while there are numerous ways to segment a market, not every base is universally applicable for every product category. The appropriateness of a segmentation base depends on the specific product or service.

Market segmentation entails dividing the market into homogeneous submarkets or segments. The choice of segmentation variables varies, and marketers must experiment with different variables, either alone or in combination, to discern the optimal way to understand the market structure. The market can broadly be categorized into consumer and organizational or business markets. Let's explore some widely used bases for segmenting these two broad market types, starting with consumer markets.

Bases for Segmenting Consumer Markets

• As mentioned earlier, there is no singular method for segmenting a market. A marketer needs to experiment with various segmentation variables, both independently and in combination, to identify the most effective way to comprehend the market structure. Consumer market segmentation primarily relies on eight major categories of consumer characteristics. 
• These encompass geographic factors, demographic factors, psychological factors, sociocultural variables, use-related characteristics, use-situation factors, benefit sought, and hybrid segmentation forms such as demographic/psychographic profiles, geodemographic factors, and values and lifestyles. Hybrid segmentation involves integrating multiple segmentation bases to craft detailed and comprehensive profiles of specific consumer segments. Each of these eight segmentation bases further breaks down into specific variables, as illustrated in Figure.

• Geographic Segmentation: This involves dividing the market based on location. Companies may categorize the market into different geographical areas such as nations, regions, states, cities, urban/rural areas, or neighborhoods. They can then decide to operate in specific areas or pay attention to geographical differences in consumer needs and wants. Geographic segmentation is driven by the notion that people in the same area share similar needs and wants that differ from those in other areas. For instance, certain food and beverages may sell better in one region than in others. A company marketing coffee might consider regional taste and flavor preferences, tailoring variants accordingly.
• Demographic Segmentation: This entails dividing the market into groups based on demographic characteristics such as age, sex, family size, income, occupation, education, religion, and nationality. Demographic variables are popular for distinguishing customer groups because consumer wants, preferences, and usage rates are often associated with these characteristics. Demographics are also relatively easy to measure. For instance, age and life cycle stages are crucial for product differentiation, considering that product needs and interests often vary with consumer age. Additionally, gender has long been used to segment markets for products like clothing, cosmetics, and magazines.
• Psychographic Segmentation: This goes beyond demographic attributes to examine psychological characteristics like personality and lifestyle. Lifestyle segmentation, focusing on activities, interests, and opinions, reflects how individuals spend their time and what they believe in. This approach helps create richer consumer profiles. Personality segmentation involves using personality variables to understand and influence consumer behavior. However, measuring and accessing specific personality traits can be challenging.
• Value Segmentation: This involves segmenting markets based on consumers' values, reflecting their belief systems underlying attitudes and behaviors. For instance, the List of Values (LOV) identifies nine basic values related to purchase behavior, such as self-respect, sense of accomplishment, and security. Marketers using this approach aim to appeal to consumers' inner values, influencing their purchasing decisions.
• Sociocultural Segmentation: Sociological and anthropological variables provide bases for segmentation, including family life cycle, social class, and culture. Family life cycle segmentation assumes that families go through similar phases, each requiring different products and services. Social class segmentation suggests that people from different social classes vary in values, product preferences, and buying habits. Cultural segmentation is based on cultural heritage, where members of the same culture share similar values, beliefs, and customs.
• Use-Related Segmentation: This involves segmenting based on user-related variables, including user rate, awareness status, and loyalty status. User rate segmentation distinguishes among heavy, medium, light users, and non-users of a product. Awareness status segmentation focuses on buyers' readiness stages, determining awareness, interest, and information needs. Loyalty status segmentation categorizes buyers into hard-core loyals, soft-core loyals, shifting loyals, and switchers based on brand loyalty.
• Usage-Related Segmentation: Recognizing that occasions or situations determine consumer choices, marketers focus on usage situations as a segmentation variable. Occasion segmentation involves distinguishing buyers based on occasions when they develop a need, purchase a product, or use a product. For example, hotels may offer different stay packages for various occasions, such as vacations or honeymoons.
• Benefit Segmentation: This involves isolating specific benefits that should be communicated to consumers. Marketers segment the market based on the benefits sought by consumers, tailoring their marketing mixes accordingly. For example, motorcycle manufacturers segment the market based on benefits like fuel consumption, power, and style.
• Hybrid Segmentation: Marketers often combine several segmentation variables for more accurately defined consumer segments. Psychographic-demographic profiles combine demographic and psychographic information to create powerful customer profiles. Geodemographic segmentation is based on the idea that people living close to one another have similar financial means, tastes, preferences, lifestyles, and consumption habits.

Segmentation of Organizational Markets

• Organizational markets can undergo segmentation using many of the same variables employed in consumer markets. For instance, geographic segmentation can be applied, especially in industries with geographical concentrations. A notable example is the textile industry in India, primarily located in Maharashtra and Gujarat, allowing companies to use geographic segmentation when selling to this industry.
• Similarly, businesses exhibit demographics that enable market segmentation. Factors such as a company's size (measured by sales volume or number of employees), the type of business it engages in (e.g., advertising agencies focusing on clients targeting consumers or other businesses), and the company's procurement methods (some emphasizing price, selecting the lowest bidder, while others prioritize criteria like quality or delivery time) can all serve as segmentation bases. Organizational markets can also be segmented based on the benefits desired by the buyer and product usage rates.

Let's briefly explore three commonly used bases for segmentation in organizational markets:

• Type of Customer Segmentation: An effective way to segment industrial markets is by considering end users. Different end users often have varied needs and seek different benefits. For instance, a company selling small electric motors could potentially target various industries like automobiles, electrical appliances, and government departments. However, better market performance can be achieved by segmenting the market based on the type of customer and specializing to meet the specific needs of businesses in a limited number of these segments.
• Customer Size Segmentation: Organizational markets can be segmented based on the size of customers. Many companies establish distinct systems for dealing with major and minor customers. For example, a company manufacturing office furniture might categorize customers into major accounts and minor accounts. Major accounts, typically comprising large and reputable companies, are managed by national account managers collaborating with district field managers. Smaller accounts, known as dealer accounts, are handled by field personnel working with franchised dealers who sell the company's products.
• Type of Buying Situations Segmentation: In the realm of organizational markets, three types of buying situations have been identified: new buy, modified rebuy, and straight rebuy. These situations differ significantly from each other. An industrial seller can segment the market based on these buying situations, allowing for the adoption of marketing strategies tailored to each specific situation.

Micro-segmentation and Mass Customization 

In the discussion of market segmentation, we have explored the process of dividing a product market into distinct submarkets or segments. Market segments typically represent sizable, identifiable groups within a market. While many companies concentrate their marketing efforts on these subgroups, there is a focus on smaller, specialized segments known as niches. Beyond niche marketing, marketers may further subdivide the market into micro-segments.
Micro-segmentation takes the form of micromarketing and mass customization, which will be elaborated on below:

Micromarketing: Segment and niche marketers tailor their offerings and marketing strategies to cater to the needs of various market segments. However, they do not customize their offers to each individual customer. Micromarketing, on the other hand, involves the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Micro marketing encompasses local marketing and individual marketing, also known as mass customization.

• Local Marketing: Local marketing revolves around customizing brands and promotions to align with the needs and wants of local customer groups, such as cities, neighborhoods, and specific stores. Major retailers routinely adapt each store's merchandise and promotions to cater to its specific clientele. While local marketing has some drawbacks, including increased manufacturing and marketing costs and potential logistics challenges, it proves effective in addressing regional and local differences in community demographics and lifestyles. Additionally, it meets the preferences of retailers who prefer more tailored product assortments for their neighborhoods.
• Individual Customer Marketing or Mass Customization: In its extreme form, micromarketing transforms into individual customer marketing or mass customization. This entails tailoring products and marketing programs to the unique needs and preferences of individual customers. Mass customization, often referred to as one-to-one marketing, customized marketing, or markets-of-one marketing, reflects a company's ability to mass-produce individually designed products, services, programs, and communication to meet each customer's specific requirements. While not every company can adopt this approach in the consumer market, those that successfully achieve mass customization may gain a competitive advantage. Business-to-business marketers are also exploring ways to customize their offerings, with companies like Dell Computers, Mattel (manufacturer of Barbie Dolls), Levi's (the jean maker), Acumins (an internet-based vitamin company), and DeBeers (maker of diamond jewelry) successfully practicing mass customization.