Market Segmentation Method - Essay Example

1. Segmentation Theory 1 What is segmentation? By definition, a market segment is a group of people with the same characteristics in the market. Other terms that are used in place of market segmentation are focus strategy, target markets and market niche. Market segmentation is a strategy by the company to divide the entire market into niches or small groups of customers and to strive to concentrate on those groups and to find out their needs and produce goods and services according to their tastes.1 1.2 Why is segmentation used? Michael Eugene Porter is celebrated for the invention of market segmentation. According to porter, for a company to gain a competitive advantage over other firms, it has to come up with three kinds of strategies. These strategies are divided broadly into strategic scope and strategic strength. 2 A strategic scope relates to the demand of the products or the services that the company deals in and it focuses on the demand size and the component of the market. Strategic strength focuses on the supply of the products or services. Porter then came up with three strategies that reduced the broadness and the ambiguity of the previous strategies; these strategies included cost leadership, differentiation and market segmentation. The three strategies are drawn in a cube with the focus strategy being in the narrow segment and the other two being relatively broad.3 According to Porter, companies that gain a competitive advantage are those that strive to combine the three strategies effectively. Market segmentation can be combined with the differentiation strategy and ripe the company very effective results. Combinations of the strategies that are grouped in the broad category of the cube are a bit difficult to combine but that does not mean that they do not take place. 1.3 What are the benefits of a multi-dimensional approach? Segmenting the market into niches helps the company to scope itself, increase the concept of demand and increase the company’s market share. Market segments also affect the strategies that relate to innovation and give the company the edge technology. This is because reducing the size of the market gives the company the specialization of the market and therefore, a chance to concentrate on aspects of improved technology. This presents the company as the pioneers of innovation. A multi-dimensional approach is a kind of approach where the company incorporates all the variables of market segmentation in coming up with its niches. These variables are broadly divided into; geographic variables, demographic variables, psychographic variables and behavioral variables.4 2.0 Target Market Identification Segmentation can be divided into two: customer segmentation and industry segmentation. There are four kinds of variables that companies use as frameworks for the evaluation of the market segments. 2.1 Geographic Variables – this is the division of the market in the basis of region in such a case as the country’s position and the continent among others; the size of the population; urban, rural and finally according to the weather conditions in the place. This kind of a variable to market segmentation is usually adopted by most companies since it is easier to segment. It does not require so much attention on the individual customer needs.5 2.2 Demographic Variables – this segmentation is done in response to factors such as age, gender, family, income, lifestyle, occupation, ethnicity, religion and nationality among others. Most of these demographic qualities are often subdivided into smaller subgroups depending on the company. This gives the company a broader dimension in knowing the customers need in comparison with the other variables. This is a cheaper method since it does not require a lot of research and they are easily identifiable.6 2.3 Psychographic Variables – these variables are based on the concept of AIO. AIO is an abbreviation that stands for Activities, Interests and Opinions. This is the framework that is mainly used for this category. Group attitudes and values are also included in the category. Compared to the variables that have been mentioned above, this variable is difficult to access and is more centered on the needs of the customers. 2.4 Behavioral Variables – this is focused on the customer’s behavior towards the products and the services that are offered by the company. The question of how the customers respond to the products and the services is asked and the answer results into the segmentation. 7 The framework used in the evaluation of the industrial markets includes the following although; the framework that is used for the customer segmentation can also be applied in this case. Companies that are involved in industry segmentation are companies that deal in manufacturing, governments, hospitals, and providers of services exclusively. This framework includes: the location, company type and behavior. Location – in production and distribution, the location of the customer becomes an essential factor. This is because the company tends to reduce the distance for the distribution as a means to reduce the overall cost. Customer type – a company that distributes or whose major customers are other companies. In other cases, it is important that the company makes a choice between the different companies by using concepts such as the company size and the criteria for purchase among others. Behavioral Characteristics – these characteristics include the duration that the purchasing company takes to buy the product once it has bought it the first time, are the customers’ first time customers or have they been purchasing from the company for some time? Do they take long to buy and waste more time in the negotiation practices? 3.0 Rationale of the Target Market Collage Geographic Variables –The company started out in Switzerland. Switzerland is one of the richest countries in the world with a per capita Gross Domestic Product of approximately $67,500. The cities in Switzerland such as Zurich and Geneva have actually been ranked as the 2nd and 3rd highest lifestyle. The targeted geographical segments are the urban upper class groups of people. As indicated in the collage, they are celebrities, those in the upper class. The watch is water resistant making it very favorable for even the wet weather conditions. Demographic Variables – this segmentation is done in response to factors such as age, gender, family, income, lifestyle, occupation, ethnicity, religion, nationality among others. The age group that is targeted by the company is the older generation. It is clear from the collage that the photos for example of the gentleman look about 30 years of age. Therefore, the age group could be 30-40. The gender targeted by the company is both male and female. They have products for both male and female customers. The income group that is targeted by the company is the high income earners since the products themselves are of very high prices. One example of the brand is Tag Heuer Formula 1 Chronograph CAH1111.BA0850 which costs about $688-$871. Psychographic Variables – these variables are based on activities, interests and opinions. The group that is targeted by Tag Heuer is a group of individuals whose activities are of the high status. On the collage, one of the pictures depicts a luxurious set of seats which shows the level of interests and opinions. Behavioral Variables – the company customers are absolutely loyal to the company product; this is due to the attribution the individuals have about the quality. The customers are enthusiastic but since the product is durable, the users are therefore not regular. The company is aimed at looking for new users’ day in day out. 4.0 Target Market Collage REFERENCES Day, G (1980): Strategic Market Analysis: Top-Down and Bottom-Up Approaches, Marketing Science Institute, Cambridge, Mass. Derrick S Boone and Michelle Roehm (2004): Evaluating the Appropriateness of Marketing Segmentation Solutions Using Artificial Neural Networks and the Membership Clustering Criterion: Springer Netherlands. Francisco J Sarabia (1996): Model for Market Segments Evaluation and Selection: European Journal of Marketing: MCB UP Ltd. McDonald, Malcolm and Dunbar, Ian (2004): Market Segmentation: How To Do It, How To Profit From It. Butterworth-Heinemann, 2004. McKenna, R (1988): Marketing in The Age of Diversity, Harvard Business Review, volume number 66. Pine, J (1993): Mass Customizing Products and Services, Planning Review, volume 22. Read More