Chapter 3_Strategic Market Segmentation

8/2/2019 Chapter 3_Strategic Market Segmentation

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Chapter 3:Strategic Market

Segmentation

Prepared by:

Ma. Anna Corina G. KagaoanInstructor

College of Business and Accountancy


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Strategic Market Segmentation

Segmenting markets is a foundation for superiorperformance.

Understanding how buyers needs and wants vary isessential in designing effective marketing strategies.

The need to improve understanding of buyers is escalatingbecause ofbuyersdemands for uniqueness and an array oftechnologies available to generate products to satisfy thesedemands.

Buyers vary according to how they use products, the needsand preferences that the products satisfy, and theirconsumption patterns.


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Strategic Market Segmentation

Market segmentation is the process of identifying andanalyzing subgroups of buyers in a product-market withsimilar response characteristics.

Even for consumer products, the concept of a one-size-fits-all mass marketis increasingly less relevant.

The most specific form of market segmentation is to

consider each buyer as a market segmentbasis forone-to-one marketing.


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Levels and Types of

Market Segmentation Segmentation is an important capability in strategic

marketing, which is linked to choosing market targets andpositioning against alternatives to build competitiveadvantage.

Many traditional views emphasize segmentation as anoperational toolfor example, to aim advertising effectivelyat different types of customers.

While advertising-oriented segmentation identifies targets

that differ in responses to messages, strategic segmentationtries to identify market segments that differ in purchasingpower, goals, aspirations and behavior, in ways relevant toidentifying new product and value opportunities.


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Levels and Types of

Market SegmentationVisionStrategic intentProduct benefits

Resource allocationAlignment

PlanningMarketing programs:- Advertising-Sales- Distribution

StrategicSegmentation

ManagerialSegmentation

OperationalSegmentation

Exhibit 1.Levels of MarketSegmentation


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Levels and Types of

Market Segmentation Strategic segmentation. Links to the management vision

and strategic intent of corporate strategy and emphasizesproduct benefits that different types of buyers seek.

Managerial segmentation. Concerned with allocatingresources around segment targets, including them inmarketing plans and aligning organizational processesaround them.

Operational segmentation. Concerned with the marketingprogram changes needed to reach segment targets withadvertising and promotions, and with distribution systems.


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Levels and Types of

Market Segmentation In considering the role of segmentation, the deepest

decisions are whether to revise the business model inresponse to how social forces are changing the lives ofdifferent types of customer, how to position a brand, whichsegments to pursue, and whether to make fundamentalchanges to the product or to develop an entirely newproduct.

The shallowest decisions are concerned with issues like

whether to make small improvements in existing products,how to select targets of a media campaign, or whether toadjust prices.


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Market-Driven Strategy andSegmentation

Segments

Value opportunities

New market space

Matching value opportunitiesand capabilities

Market targeting

Strategic positioning

Exhibit 2.Segmentation inthe Market-DrivenStrategy Process


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Market-Driven Strategy and

SegmentationMarket segmentation:

Placing buyers in a product-market into subgroups so that

members of each segment display similar responsiveness toa particular positioning strategy.

Identification process aimed at finding subgroups of buyerswithin a total market. The termmarketnicheis sometimes

used to refer to a marketing segment that represents arelatively small portion of the buyers in the total market.


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SegmentationValue opportunities:

Buyers in a segment have similar value requirementsconcerning specific product/brand attributes.

Segmentation offers a company an opportunity to bettermatch its products and capabilities to buyers valuerequirements.

Customer satisfaction can be improved by providing a valueoffering that matches the value proposition consideredimportant by the buyer in a segment.


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SegmentationNew market space:

Market analysis may identify segments not recognized or

served effectively by competitors.

There may be new opportunities to tap into new areas ofvalue and create a unique space in the market.


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SegmentationMatching value opportunities and capabilities:

Examining specific market segments helps to identify how

to (1) attain a closer match between buyers valuepreferences and organizations capabilities, and (2) comparethe organizations strengths (and weaknesses) to the keycompetition in each segment.


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SegmentationMarket targeting:

Consists of evaluating and selecting one or more segments

whose value requirements provide a good match with theorganizations capabilities.

When segmentation is employed, it should be by design,and the underlying analyses should lead to the selection of

one or more promising segments to target.


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SegmentationPositioning strategy:

Combination of the actions management takes to meet the

needs and wants of each market target.

Consists of product(s), and supporting services, distribution,pricing, and promotion componentsmanagements choicesabout how to influence target buyers by favorably

positioning the product in their eyes and minds help indesigning the positioning strategy.


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Defining the marketto be segmented

Identifying marketsegments

Forming marketsegmentsFiner segmentationstrategiesSelecting thesegmentation strategy

Exhibit 3.Activities and Decisions

in Market Segmentation


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Activities and Decisions in

Market Segmentation It is necessary to decide how to segment the market, identifying

segments, which involves selecting the variable(s) to use as thebasis for identifying segmentsfrequency (frequent, moderate,and occasional) of use of a product may be a possible basis of

segmentation. Method of forming market segments is decided. This may consist

of managers using judgment and experience to divide the marketinto segments. Segments may also be formed using statisticalanalysis. Customer purchase behavior by CRM systems provides

base for this analysis. Decide whether finer (smaller) segments should be used.

Strategic analysis is conducted on each segment determine whichsegment to target.


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Defining the Market to be Segmented

Level of

Competition

Product

Definition

Illustrative

Competitors

Need/Want

Satisfied

Generic Health and beauty

aids

Consumer products

companies

Enhancement of

health and beauty

Product type Shaving equipment Gillete, Bic, Rubie Shaving

Product variant Electric razors Braun, Panasonic,

Remington, Norelco

Electric shaving

Exhibit 4. Segmentation in the Health and Beauty Supplies Market


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Defining the Market to be Segmented

Generic-level segmentation is illustrated by segmentingsupermarket buyers based on shopper types (like availableshopping time).

Product-type segmentation is shown by the differences in

price, quality, and features. Product-variant segmentation considers the segments within

a category. It is important to consider in defining the market to be

segmented estimating the variation in buyers needs andrequirements at the different product-market levels andidentifying the types of buyers included in the market.These change rapidly so it needs frequent re-evaluation.


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Identifying Market SegmentsSegmentation Variables: Characteristics of People and Organizations: Consumer Markets.Characteristics of people fall into two

categories: (1) geographic and demographic; and (2)psychographic (lifestyle and personality).

Organizational Markets. Includes types of industry(vertical market), company size, stage of industrydevelopment, and the stage of the value-added system(producer, distribution, retailer). Aided by examining (1)extent of market concentration which considers numberof customers and relative buying power, and (2) degreeof product customization determines the extent to whichsupplier must tailor the product.


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Identifying Market SegmentsSegmentation Variables:

Product Use Situation Segmentation. Markets may besegmented based on how the product is used.

Buyers Needs and Preference. Brands may used assegmentation bases and segment descriptors. Brand loyalty. Consumer Needs.Important in (1) determining how well a brand

may satisfy need; and/or (2) indicating what change(s) arenecessary to provide a better solution to a buyers needs.

Attitudes. Enduring systems of evaluation about brands. Reflectbuyers overall liking or preference for a brand.

Perceptions. The process by which an individual selects,organizes, and interprets information inputs (marketing stimulisuch as advertising, personal selling, price, and the product) tocreate a meaningful picture of the world. Perceptions formattitudes.


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Identifying Market Segments

Segmentation Variables:

Purchase Behavior. Size and frequency of purchases areuseful in segmenting consumer and business markets.

Volume of the purchase.

Frequency

Buyer decisions. Can be classified according to the extent

to which the buyer is involved in the decision (high or low).


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Identifying Market SegmentsConsumer Markets Industrial/Organizational

Markets

Characteristics ofpeople/organizations

Age, gender, raceIncomeFamily sizeLifecycle stageGeographic locationLifestyle

Type of industrySizeGeographic locationCorporate cultureStage of developmentProducer/intermediary

Use situation OccasionImportance of purchasePrior experience with productUser status

ApplicationPurchasing procedureNew task, modified rebuy,straight rebuy

Buyers needs/preferences Brand loyalty statusBrand preferenceQuality

Proneness to make a deal

Performance requirementsBrand preferencesDesired features

Service requirementsPurchase behavior Size of purchase

Frequency of purchaseVolumeFrequency of purchase

Exhibit 5. Illustrative Segmentation Variables


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Forming Market SegmentsRequirements for Segmentation. It is important to decide if it is

worthwhile to segment a product. Five criteria are useful forevaluating a potential segmentation strategy: Response Differences. Determining differences in the

responsiveness of the buyers in the product market topositioning strategy is a key segment identification requirement.

Identifiable Segments. Descriptive differences among buyers in aproduct-market must be matched to response differences.

Actionable Segments.A business must be able to aim a marketingprogram strategy at each segment selected as a market target.

Cost/Benefit of Segmentation. Evaluate the benefits vs. cost.

Stability over Time. Needs should not change too fast.Product Differentiation and Market Segmentation. Product

differentiation occurs when buyers perceive an offering asdifferent from its competition.


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Forming Market SegmentsApproaches to Segment Identification. Segments are formed

by: (A) grouping customers using descriptive characteristics andthen comparing response differences across the groups; or (B)forming groups based on response differences (e.g. frequency ofpurchase) and determining if the groups can be identified based ondifferences in their characteristics.

Segment

identification

A Start with identifiers ofcustomer groups:Characteristics of people andorganizations, e.g., income,family size, industrial sector

B Start with customerresponse profile:Form groups based onresponse patterns, e.g.,frequency of purchaseExhibit 6. Approaches to

Segment Identification


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Forming Market Segments

Customer Group Identification. It is necessary to select one ormore of the characteristics of people or organizations as thebasis of segmentation. Using these variables, segments areformed by: (1) management judgment and experience; or (2)supporting statistical analyses. The objective is to finddifferences in responsiveness among the customer groups.Customer grouping methods that show how segments areformed: Management Insight and Available Information.

Managements knowledge of customer needs is often auseful guide to segmentation. This includes experience andanalysis of published information.


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Forming Market Segments

Customer Group Identification:

Cross Classification Analysis. Identify customer groups usingdescriptive characteristics and compare response rates byplacing the information in a table.

Data Mining for Segmentation. The availability ofcomputerized databases offers a wide range ofsegmentation analysis capabilities.

Segmentation Illustrations.


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Forming Market SegmentsForming Groups Based on Response Differences. An

alternative to selecting groups based on characteristics is toidentify groups based on response differences. The widespreadadoption of CRM systems offers greater opportunity for timelyand detailed analysis of response differences between

customers. Additional applications would be: Cluster Analysis. A statistical technique that groups people

according to the similarity of their answers to questions such asbrand preferences or product attributes.

Perceptual Maps. Use of consumer research data to constructperceptual maps ofbuyersperceptions of products and brands.The information helps select market-target strategies, and decidehow to position a product for a market target.


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Finer Segmentation StrategiesLogic of Finer Segments: Customized Offerings. Capabilities of organizations to offer

customized products is feasible because of extensiveinformation flow and comprehensive databases,computerized manufacturing systems, and integrated value

chains. Diverse Customer Base. Allowing the buyer to specify the

detail and design choices. Example is the automobileindustry

Close Customer Relationships. By identifying customer

value opportunities and developing cost effective customizedofferings, relationships can be profitable and effective increating competitive barriers.


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Finer Segmentation StrategiesFiner Segmentation Strategies. Three approaches:

Micro-segmentation. Seeks to identify narrowly definedsegments using one or more of the variables. It differs frommore aggregate segment formations in that it results in alarge number of very small segments.

Mass Customization. Providing customized products atprices not much higher than mass produced items isfeasible. Through computer-aided designs andmanufacturing software, flexible manufacturing techniques,and flexible supply systems.

Variety-Seeking Strategy. Intended to offer buyersopportunities to vary their choices in contrast to makingunique choices. The logic is that buyers offered alternativesmay increase total purchases of a brand.


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Finer Segmentation Strategies

Finer Segmentation Issues: How much variety should be offered to buyers? What

attributes are important in buyers choices and to whatextent do they need to be varied?

Will too much variety have negative effects on buyers? It ispossible that buyers will become confused and frustratedwhen offered too many choices?

Is it possible to increase buyersdesire for variety, creating acompetitive advantage?

What processes should be used to learn about customerpreferences? This may involve indirect methods (e.g.,database analysis), or involving buyers in the process.


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Selecting theSegmentation Strategy

Deciding How to Segment. The choice of asegmentation method depends on such factors as thematurity of market, the competitive structure, and the

organizations experience in the market. An essentialfirst step in segmentation is analyzing the existingcustomer base to identify groups of buyers withdifferent response behavior.


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Strategic Analysis of Market Segments:

Customer Analysis. Find out as much as possible about thecustomers in each segment. An essential part of customeranalysis is determining how well the buyers in the segmentare satisfied.

Competitor Analysis. It is also important to anticipate thefuture strategies of key competitors.

Positioning Analysis. Obtain guidelines for positioningstrategy which should meet the needs and requirements ofthe targeted buyers at a cost that yields a profitable marginfor the organization.


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Strategic Analysis of Market Segments: Estimating Segment Attractiveness. Financial and market

attractiveness of each segment needs to be evaluated. Includedare the specific estimates of revenue, cost, and segment profit

contribution over the planning horizon. Segmentation and Fit and Implementation. One important

aspect of evaluating segment attractiveness is how well thesegment match company capabilities and the ability to implementmarketing strategies around those segments. It is important to

realistic in balancing attractiveness of segment against the abilityof organization.

Segment Attractiveness Analysis. Estimate sales, costs,contribution margin, and market share.

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Chapter 3_Strategic Market Segmentation