Understanding of Market Segmentation - Report Example

Segmentation Report “Understanding of Market Segmentation” Submitted by To Marketing May 3, Table of contents Abstract 2 1. Introduction 3 2. Definition 4 3. Significance of market segmentation 4 4. Process of market segmentation 5 5. Compare and Contrast segmentation bases 6 5.l. Geographic segmentation 7 5.2 Demographic segmentation 7 5.3 Psychographic segmentation 8 5.4 Behavioral segmentation 8 5.5 Benefit 8 6. Advantages and limitations 9 7. Conclusion 11 References 12 Understanding of Market Segmentation Abstract This report focuses on marketing segmentation. It discusses its concepts, bases of segmentation. The advantages of the each bases of segmentation as well as its limitations are presented. Study found out that in some areas, there are limitations such that there is a need for several segmentations to meet the needs of the market. The five categories of market segments are described, which are geographic, demographic, psychographic, behavioral, and benefit. Bases of segmentation differ. Each has advantages and limitations. These information when properly utilized by businesses would serve as guide in making their marketing strategies. Understanding Market Segmentation 1.Introduction Companies recognize the difficulties of reaching wider markets because of differences of cultures, lifestyle and competition. Buyers are unique, they live in different areas, have different backgrounds, goals and interests. Competition has been fierce and increasing. Because of this it is not surprising to find companies turning to segmentation. In order to have a share of the market, companies must find market segments where their products can be competitive and profitable. This report is designed to discuss concept and process of market segmentation. It includes comparison of the criteria in segmenting the consumer markets. 2. Definitions Web definition of the term market segmentation is the “aggregating of prospective buyers into groups that have common needs and will respond similarly to a marketing action.” Market segmentation was first described in the middle of 1950s by Wendell.R.Smith, an American professor who said: “Market segmentation is to divide a market into smaller groups of buyers with distinct needs, characteristics” (Shi Lin, 2009). To describe it in other way, as Shi Lin (2009, p. 64) puts it, it is splitting up of a whole market into smaller, identical group. 3. Significance of market segmentation Since the market is composed of different people with different needs, market segmentation has become an important marketing tool. Market segmentation helps company to know what are the needs and wants of customers more accurately. An example is people who want cars, but we all know there are different types of cars; we have luxury, sports or SUVS. Not all companies can supply the needs of the whole market, so they need to find out who will buy their products. Lack of information may lead to wrong decisions that may cause company’s downfall . Market segmentation is also one way of knowing market opportunities. Thru market segmentation, marketers will have a way of knowing if the needs of the target market have been fully met or satisfied, or in the process discover potentials. A lot of information may also be recovered during the procedure so that it can design the correct marketing plan that considers product, price, sales promotion, selling place, plus other issues. 4. The Steps in segmenting markets (Process of market segmentation) In order to avoid failing in reaching the business objectives, market segmentation becomes absolutely necessary. Why, because the market is comprised of millions of people and organizations are so different from each other. This diversity requires dividing the market so that a company can aim its efforts and marketing resources in the most profitable way. As segmentations have become important marketing consideration, understanding how it evolves is necessary. Shi,(2009,p. 65), describes six steps to segmentation. The first step is to select a market or product for study; the market maybe a new one, or a related one. The second step is to choose the bases for segmentation. The third step is selecting market descriptors. Fourth step is to profile and analyze the segments. Profiling and analysis should include segment size, expected growth, purchase frequency, brand loyalty, long term sales and profit potentials. The fifth step is selecting the target market. The last one is designing and implementing the right marketing mix. Other Marketers used three criteria in determining market segments. The International Marketing Blog (IMB) distinguishes these as homogeneity (common needs within a segment), Distinction (unique from other groups) and Reaction (similar response to market). Accordingly, the criteria to be used in developing segments are age, gender, education, marital status, lifestyle, income, family life cycle, social class, opinion, attitudes and beliefs, activities and interests. A trend of internet marketing such as B2B is fast developing, and at this instant, segmenting this market, as suggested by the IMB, should by industries, company stability, sales volume, location, etc. As soon as all the information is acquired, a picture of potential customers can be drawn. Through research, it may be possible to locate them, or to estimate their number. After this point, it is the time to let prospective customers know of the company’s existence. 5. Compare and contrast differing segmentation bases For the purpose of this report, segmentation base is defined as A definable characteristic, identity or behavior of an individual consumer that can be utilized to classify consumers into related groups.(Segmentation Guide). Bases of segmentation according to SG are geographic demographic, psychographic, benefit and behavioural. Each bases are described below: 5.1. Geographic Segmentation. Geographic segmentation is the division of the whole market by region, city, or other geographic region or units. The segmentation base for geographic could be country, region, city, urban or rural, or climate. Due to the fact that regions have different customs, the company must adopt its marketing strategy in accordance to the local customs. By climate, products segmented arer seasonal, such as coats, winter gears and swim suits. Winter gears are promoted in areas where there is extreme cold weather conditions and swim wear in tropical areas where there is plenty of beaches and sun. 5.2 Demographic segmentation Demographic segmentation is the dividing of the market into different groups on the basis of age, gender, income, occupation, education, religion and nationality. Shi, (p. 65), states that “Demographic variable is commonly used to identify consumer groups since it is easy variable to measure”. Demographics is best used for regional distribution of foods, local retailing where different varieties are offered in stores, and when covering a new territory. Food chains like McDonalds and KFC offer specialty food in select market. In some cases, companies uses geographic selection in opening new territories where they think product is acceptable. An example is Star Bucks, Wal-Mart, etc.2 5.3 Psychographic segmentation. This type of segmentation takes into account the lifestyles, interests and opinions of prospective customers. Psychographic segmentation divides customers into different groups according to lifestyles, values, social class, activities, and personality. Lifestyles cover the interest of family on education, travel, and education. Values are classified as to values and lifestyles, while social class is further segmented as to upper class middle and lower class; personality are subdivided into ongoing, creative, and serious; and last, activity classifies market groups as to sports, hobbies and interests. 5.4. Behavioral Segmentation Segmentation base of behavioral is according to occasion, buying stage, user status, loyalty, brand knowledge, shopping style and customer involvement. Occasions are birthdays, holidays, anniversaries, etc. Buying stage means buyer is ready to buy but is just gathering information. Loyalty status is being loyal to the brand, switcher, etc. Brand knowledge could be strong or none; Shopping style is segmented as someone who enjoys shopping, functional or one who avoids and last, customer involvement is broken down into high, medium involvement of customers. 5.5. Benefit segmentation The segmentation base for this are needs and motivations. Examples are convenience, esteem and safety. An illustration of type of firm segmentation bases and possible market segment is presented to enlighten us on how market segmentation really works. If your firm is in banking, segmentation base is demographic, market segments are young families, older families, and retired families. If the product is mobile phone carrier, segmentation base is the benefit segment, and possible market segments are work oriented, highly social, or safety contact people. If product is frozen food, segmentation base is a mix of demographic, psychographic, and behavioral. Target markets are the variety conscious budget conscious, diet-conscious, single households, and family dining. Firm is a restaurant, segmentation base is behavioral, and target markets are regular eaters, special occasion, business lunch, etc. 6. Advantages and limitations of bases of criteria for segmentation (comparison) Although the bases of criteria for segmentation look sound, the advantages and limitations are worth considering. Section below describes each segment categor, its advantages and corresponding limitations. Comparison/Contrast bases of segmentation Category Advantages Bases of segmentation Geographic Useful for large companies that operates globally. Also effective for small firms with limited resources who needs to operate in a defined area. This segmentation base is quite limited as it assumes that all consumers in a geographic area are similar in needs. Needs to be used in conjunction with another segmentation base. Demographic Country Data is easily available from government websites. Data is understandable ; can be used in any marketing plan. Ex. Perfume product could use demographic or benefit. Assumption is based that that all consumers in a geographic area are similar in needs. Needs to be used in conjunction with another segmentation base. Very little understanding of consumer needs. Ex. Perfume product could use demographic or benefit Psychographic Psychographic segmentation gives a much better insight into the consumer as a person, which more likely lead to the identification of underlying needs and motives. As a result, psychographic segmentation delivers a much better understanding of the consumer, which in turn creates more valid and responsive segments and subsequent marketing programs Needs detailed data research on consumer that is beyond scope of small business. Data interpretation is difficult. Benefits sought This is very effective segmentation method for companies that offer products that have unique features, as this will allow them to identify which products/ design they should offer and which benefits they should promote. It is also an effective tool for large companies who want to fragment the market and create multiple market segments, in order to reduce the threat from competitive rivalry Firms too reliant on benefit segmentation may end up being lacking in innovation, as they could end up focusing on existing needs/benefits rather than look at other opportunities and other ways of meeting customer needs Source: Market Segmentation Guide (2012) 7. Conclusion Market segmentation has been a very important tool of marketers. It allows them to adapt their products according to the needs of customers in one or smaller segments. Understanding how the system of segmentation operates gives us an insight on the type of segmentation the company needs for every specific product. On comparing bases of segmentation, I found out that each segment has limitation so that it may be necessary to use combined segments in marketing a products. In summary, market segmentation provides a better solution to satisfy customers’ needs. In so doing, market segmentation increases profitability of the business, and provide opportunities for business growth because it creates awareness of prospective buyers. Efficiency of communication is arrived because it reduces the sales promotion and advertising costs since it is aimed to a smaller audience. REFERENCES International Marketing Blog. (August 2011)The importance of Marketing Segmentation. http://www.theinternationalmarketingblog.com/?m=201108. Viewed 02 May 2014 Market Segmentation Guide.(2012 ) Choice of Consumer Segmentation Bases. http://www.segmentationstudyguide.com/segmentation-bases/choice-of-segmentation-bases/. Viewed 02 May 2014 Shili Sun (February 2009), An Analysis on the Conditions and methods of market segmentations. International Journal of BusinessManagement. Vol. 4. No. 2 Viewed 02 May 2014 Read More