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Business Segmentation Essay

The Segmentation and Targeting….
Using the targeting strategy to identify growth opportunities.

“Segmentation is defining the market using certain characteristics which create unique, self-exclusive groups is such a way that the marketer can predict customer purchasing behavior.”

Learning objectives

The initial part of the marketing strategy is to create a segmentation plan. After the lessons the student should be able to: Understand why segmentation is the basis of marketing.
Understand what determines a segment, and the characteristics of a segment. Identify the different variable groups which can be used in a segmentation plan. Understand the difference between descriptive variables and predictive variables Understand the driver of Business-to-Business segmentation

Understand how the different segmentation plans can help a company build customer loyalty Understand the growth strategy associated with the different segmentation plans.

Segmentation

Market analysis allows us to identify variables which are relevant to consumer behavior in our potential markets. The objective of the segmentation strategy is to predict consumer behavior, not only on the level of what product groups will be attractive in the potential market, but what real and perceived benefits are sought by the potential consumers in the market. Grouping the similar benefits sought in a segment is done to create homogenous groups. The greater the

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commonality1 The benefit of homogenous segments is that it is easier to create products which more precisely fit the needs and wants of the segment and therefore command greater brand loyalty.

The segmentation plan will contain both predictive and descriptive variables. Predictive variables are characteristics of the market which will predict behavior, interest preference, product functions, and motivations. The descriptive variables describe the characteristics of the segment. It is in this manner that the socio-demographic variables are used.

Companies sell Brands, not products, think! Income can predict what a consumer can afford to buy, but not what Brand they will prefer.

What is a segment?

A segment is a grouping of consumers, businesses or other organizations so that all members of each group are similar, e.g. will have a similar reaction to the marketing mix, and the differences between segments are significant. The two requirements for a segmentation plan, is that the segments must be self-exclusive and exhaustive. This means that all members of the potential market will have a unique segment, and that there will be a unique segment for all members of the potential market.

If segments are not self-exclusive, a member of the potential market can belong to two segments and causing confusion when confronted with different marketing programs. This causes confusion on the market and a duplication of effort by the company leading to ineffective and inefficient marketing.

If the plan is not exhaustive, some members of the potential market will be left outside of the segmentation plan, thus the target market will be under-optimized eventually leading to decreased sales.

Segmentation in B2B markets

Generally buying behavior in business to business (B2B) markets is dependent on the qualities that the purchaser puts on the supplier rather than buying behavior in itself. In which case companies tend to segment on purchasing volume and location.

Geographic segmentation

When using a direct sales force and the customer information needs are similar, customer locations are geographically diverse, and dividing the customers into geographic sales districts makes sense. It increases sales efficiency by avoiding the risk that two sales teams are at the same customer site, and minimizing traveling time which can consume large portions of the sales representatives’ time. Geographic segmentation does require that the sales proposition or product offering is basically to same for all customers.

Segmentation based on customer industry

The value of the sales function to the company is to manage and build strong customer relationships. For the customer the value of their account manager is that he or she fully understands the client’s business environment. If the account manager has the insight into the client’s business environment and can identify where the suppliers products/services can improve the operating efficiency of the client, he has great value to his customer. Additionally if he can present solutions with over time that will improve the customers return ROI a deep relationship can be developed. However, the key to developing this kind of relationship is to understand the customer’s industrial environment. Attaining this level of knowledge and understanding is time consuming therefore a company will segment its customer base on industry and target one sales person or team of sales reps to one segment. If the customer base is large and spread over a large geographic area, the segmentation plan would also implement a geographic segmentation.

Segmentation based on purchasing method

Purchasing method can also require specialization, not only in the level of interaction that the customer organization requires from their suppliers, but also the purchasing method itself. Generally there are three distinguishable purchasing routines:

Large companies where the process is negotiated
Governmental enterprises where the selection is made by secret bidding Small companies where security and services can be more important than the product itself.

The same logic is used, that the sales team should be specialized on the purchasing process, and the segmentation would also be based on the same criteria, the purchasing process.

Segmentation based on size of purchase

Many OEM’s (Original Equipment Manufacturers) will sell through multiple distribution channels. Each channel will be distinguished by size and frequency of purchase, as these two criteria determine the kind of discounts that the buyer will receive from the producer. The discounts reflect the services that the distributor assumes from the OEM. It is only logical that smile, medium sized and large companies will be treated differently, and treated as unique segments.

Segmentation of Consumer markets

Variable sets used for segmentation
1. Geographic
2. Demographic
3. Geo-demographic
4. Benefit-sought
5. Psychographic
6. Behavioral
7. Ethnic

Geographic segmentation

Geographic segmentation depends on the ability to keep product in a geographical area, this assumes there are restrictions on the movement of products between segments, or geographical areas. In some areas this natural market differences create geographic segments, for example electrical current variations 110 volts are standard in the US and 220 in Europe, to complicate things even more, 210 volts is used in the UK! The colder climate in Scandinavia requires that additives are added to petrol to eliminate the risk of ice particles developing in the automobiles’ tank. However these natural differences generally are consumer neutral, as the consumer is unaware of these, and they have no influence on the purchasing decision.

Demographic segmentation variables

This variable set describes such characteristics which are quantifiable, such as age, gender, education etc. Their usefulness is limited to mass marketed products with universal appeal whereas standardized targeting is used. Demographics are often used to describe the segment after other variables have determined the primary characteristics. For example, if a music producer wants to know who is buying a certain artists’ recordings, he can conduct marketing research which will allow him to determine a

Geo-demographic variables

These are a combination of geographic and demographic variables which are used when a company wants to know what the purchasing power is of a defined geographic area. Used primarily by companies to establish retail outlets, or post-order companies to mail their direct-mail offers.

Benefits sought segmentation

This is the oldest and first segmentation strategy which focuses on the product, particularly product functions which provide the benefits. In feature-benefit segmentation assumes that individual consumers will want different sets of product features giving real2 benefits, and are willing to pay for them. Generally the more features the higher the price of the product.

Because the segmentation plan is product focused, the similarity in the segment are based on what the consumer needs from the product, but tells the marketer little about the consumer. Consequently homogeneity in terms of the personal characteristics of the segment is low. If then products can offer the same features, then the primary element of a purchasing decision is price. Given two products with the same features and benefits, the consumer will choose the product with the lower price.

The key success factor in when using a feature-benefit segmentation is to have plc’s which are shorter, or at least at the industry standard. The primary determinate of a purchasing decision is based on product value which is heavily influenced by price. For example, BS GmbH has a washer priced at € 400, their competitor Electrolux has a similar product priced at €375. In this situation Electrolux has a price benefit. BS GmbH introduces a new machine with a lower energy consumption improving the product benefit. This new machine is prices at €420. An Electrolux customer is in the market for a new washer and compares the Electrolux machine and the new BS GmbH machine which is €45 more expensive, but in terms of value, he can save €45 on his electricity bill in 24 months. Which offering has greater value? Generally if the consumer can afford it, in this case he would choose the more expensive machine. Consequently if a company which can’t continually introduce new products onto the market they will lose to companies which can offer a better price/value proposition.

Companies which use benefit sought tend to be mass marketers in markets where product features are easily copied leading. Thus price becomes both a benefit sought, and the focus of competition. Meaning, to encourage brand switching competitors will make offerings of better value.

Psychographic segmentation variables

When the segmentation plan is primarily based on psychographic variables, the plan is called Lifestyle segmentation. This is because the test battery that market researches use to describe the different lifestyles is heavily based on asking the respondent about their preferences, what is most important to
them, how they like to spent their free time etc. Because the resulting lifestyle segments groups people who are similar in their outlooks, and these same segments can be used by multiple product groups, the segmentation can be bought from market research companies.

To experience how the segmentation works, review the VALS segmentation and go to the website: http://www.strategicbusinessinsights.com/vals/ This website allows you to take the test and assigns you to one of the 8 predetermined segments.

The key success factor of the Lifestyle segmentation plans is that the segment is smaller, more homogenous and therefore the company can make an offering with delivers a product which is closer to the needs and wants of the segment. This differentiates the product from others of its class because there is an intangible benefit that is difficult to copy. Compare the Audi and BMW brands, the segments served by comparable models have the same demographics, but the purchasing patterns of Audi drivers differs widely from the purchasing patterns of BMW drivers.

Motivational segmentation variables

Motivation is measured using a disguised method and projection techniques. The objective of the study is to understand the underlying cause of the purchase, or what motivates people to use a product. Toothpaste has close to a 100% penetration in developed markets, yet there are clear difference is what consumers are looking for when they choose a toothpaste.

Motivational segmentation is common in fast-moving-consumer goods, typically in this market the buying situation is seen as stressful. While it might be fun to spend a Saturday test driving cars before making a purchasing decision, spending the morning at the grocery store is time that could be better spent (for most people). Therefore when the product group has low involvement the producer will try to attract consumers and then depend on consumers reaching for the product out of habit and an aversion to making a conscience decision.

Behavioral segmentation variables

This variable set identifies user rate, non-user, heavy user etc. Obviously the company will used different marketing mixes as the user is at different stages in the purchasing decision making process. Heavy users of a product tend to differ significantly in other behavioral tendencies than light users. For example, heavy purchasers of vacation holidays (package tours) tend to be more social able, less home bound, verbal and adventurous then those who only purchase a holiday every few years. The travel companies will obviously use different marketing mixes to attract new customers and sell more to their existing customers.

Success in this market is recognizing behavior patterns, is the people showing similar behavior patterns, also have other similar characteristic, the this information can be used to design the marketing mix which will yield the best revenues.

Ethnic segmentation

This method of segmentation looks at groups of consumers who have a common ethic background and look for similar products. Often they are immigrant groups who seek products and services that they know and trust from their home countries.

The fundamental difference between the benefit sought segmentation and all other segmentation plans is that the former is highly dependent on choosing their products because of the features, e.g. it is product focused rather than market focused.

Application of the segmentation plan
After having chosen the variable set which best will identify the potential customers, the plan is applied to the whole market.

A cosmetic company, would use both age and gender as variables, though women of almost all ages over 13 use cosmetics or personal care products, they choose their products for different reasons. Having identified the male segment of the market, does not mean that the company will also try to sell them cosmetics. It is in the targeting strategy that identifies the segments which will make up the target market. As segments become more mature and show more potential, the firm might choose to target them as a part of their growth strategy, e.g. market development.

Identifying and describing a segment

In the definition of a segment we made clear that the individuals in the segment should share the same characteristics. When using a feature-benefit segmentation which is based on product attributes, the commonality of the segment is what the consumer wants from the product. When using lifestyle segmentation, the commonality of the segment is that the consumers are similar as consumers, and have common preferences in the choices that they make in life. The third segmentation, behavioral, finds people who are similar in why they want the product, or in how they use.

Here the student should differentiate between the segmentation plan, e.g. the variables used to segment the market. Often these are a combination of variables from the complete range of variables including socio-demographic, psychographic, behavioral and motivational variables. After applying the segmentation plan, groups of similar individuals or organizations will be found. These groups can then be describes using the so called ”Segment Descriptors”. Very often the segment descriptors will be confused with the segmentation plan.

For example, in a benefits sought segmentation , a segment will be formed by individuals or companies with the need to wash large washes of similar character, e.g. sports clothes, or linens. After applying the segmentation variable: need for large (not frequent) loads of similar articles, the segment might have a large number of families with more than three children, but also “Bed and Breakfast” establishments. Family size is not the segmentation variable, it is a descriptor of the resulting segment.

Naturally when addressing the segments individually, the message must be geared to the common denominator of the segment:

Segmentation planMessage contentPrimary competitive element

Feature-benefitReal benefits of the productPrice

LifestyleIntangible benefits of the Styling, designwhich project the user’sconsumers’ values
Self-perception

BehavioralWhy the consumer wants theProduct values
product reflect the consumers’
values

Usage rateUse more, get more benefitDiscounting

How the segmentations plan directs market growth

Targeting is the area of the marketing strategy which directs growth. After having segmented the whole market, then the segments with the most potential are targeted. At some point the targeted market has reached a penetration that makes further penetration more expensive that looking for new market segments, or product extension to generate growth, and cash flows. Each of the segmentation plans has an associated targeting strategy:

Feature/benefit: because the strategy is so tied up to the product, the targeting strategy generally looks for new segments which want either more features at a higher value, or less at a lower value. The types of companies which use the segmentation plan product products which are mass marketed, therefore the targeting strategy is standardized, and the objective of the targeting strategy is to cover as much of the value curve as possible.

Lifestyle segmentation is based on finding people who have a common set of preferences; therefore growth can be achieved by adding products with more or less features within a lifestyle segment, or to target a new lifestyle group.

Behavioral and usage, usually there is only one product in the segment with its unique set of features and benefits, targeting a segment are unrelated to other segments in the target market.

Key success factors of the segmentation and targeting plan

Marketing success is always derived from the companies’ ability to differentiate their products and associate them with a unique set of values. The choice of the segmentation plan offers different opportunities to make the product unique.

When using a feature-benefit plan, the uniqueness of the product is the product itself, particularly the real benefits of the product. As this is traditionally markets with mass marketed goods, managing the product life cycle (plc) is critical to success. If a competitor can launch a product with a better price/value proposition then there is a strong motivation for the consumer to switch brands.

One the strongest effect of the lifestyle segmentation is that brand loyalty is based more of the values that the project projects, rather than the tangible benefits themselves. This intangible benefit is much more difficult to reproduce, thus more difficult to entice a consumer to switch brands based on the bias of product features alone.

The same reasoning partially applies to both behavioral and motivational segmentation plans, however, both behavioral and motivational segmentation plans the company will attempt to attract the potential consumer, instill a liking for the product, and build on the fact that for low involvement products, consumers will reach for a known brand which they trust simple to avoid making a conscience decision. Promotional activities will try to force
more products into the consumer’s home to build trust and the ultimate: reaching for the brand out of habit.

Study questions

1. What two criteria must be fulfilled for geographic segmentation to be successful in the B2B and consumer markets respectively? 2. What are the three primary segmentation plans?
3. What are the benefits respective the disadvantages?
4. Using the segmentation plan as your starting point, explain how a company grows using a market-development strategy; market penetration strategy. 5. What is the difference in targeting strategy if a company uses a feature/benefit respectively a lifestyle segmentation plan? 6. When is behavioral segmentation used?

7. What is the influence of price in the different segmentation plans? 8. What is the basis of customer loyalty in the different segmentation plans? 9. The choice of variables which make up the segmentation plan tend to reflect whether the product is a mass marketed product or niche product, and if the product group is in the premium range, value of economy. What market characteristics are generally associated with each of the three main segmentation plans?

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