Market is the place where buyers meet respective sellers. While a collection of sellers constitute the industry for a good or service, a collection of buyers constitute the market for that good or service. Neither markets nor buyers are homogeneous in nature (Alderson, 1983; Assael and Roscoe, 1976; Claycamp and Massy, 1968; Smith, 1956; cited in Kara and Kaynak, 1997). Therefore, it is important for marketers to segregate customers with similar needs and wants as well as similar characteristics from others to cater to that particular group’s requirements.
A clear appreciation of customer needs and wants will ultimately lead to an effective segmentation (Grover and Srinivasan, 1987; Ranchhod et al. , 2001: cited in Dibb, 2005). Marketing can be defined, according to the Chartered Institute of Marketing (CIM), UK, as “the management process that identifies, anticipates and satisfies customer requirements (needs and wants) profitably”. Depending on these needs and wants as well as the characteristics, the marketers set the most suitable marketing mix elements for that particular market segment.
A marketer needs to identify which market segment/s could be served effectively and in turn which segment offers the greatest opportunity (Kotler, 2001; Kotler and Keller, 2006) for his marketing efforts. According to Dibb and Simkin (1991) as cited in Kara and Kaynak (1997), the market segmentation exercise usually consists of three main stages; (1) segmentation (2) targeting and (3) positioning. All three stages are fully interrelated and equally important for a successful segmentation strategy. Market segmentationIf needs and characteristics of people in a market are similar, there is little point segmenting such a market.
However, in general it is not easy to find a homogeneous market in nature. The first requirement for segmentation is that the market should be heterogeneous. The diversity in customer needs and buying behaviour is the key prerequisite for segmentation. Once this requirement is recognised, the marketer can proceed with the segmentation strategy (Blois and Dibb, 2000). In this exercise the marketer attempts to aggregate customers with similar requirements, expectations and buying characteristics into a specific group.
Once segmented, it becomes a large identifiable group within a market with similar wants, purchasing power, geographical location, buying attitudes or buying habits. Furthermore, Kotler (2001) has identified several criteria/ bases for segmenting a heterogeneous market. Bases for segmenting consumer marketsVarious bases for segmenting consumer markets as well as industrial markets (B2B markets) can be identified in the literature. As explained in Kotler and Keller (2006), two broad classes of variables are used to segment consumer markets.
Those are called descriptive characteristics and behavioural characteristics. Some of the researchers have made efforts to segment the consumer markets based on descriptive factors such as geographic, demographic and psychographic characteristics. Some other researchers have identified another category which is called behavioural characteristics. For better understanding, some researchers have combined demographic variables together with psychology of the customer and introduced psychographic segmentation.
Kotler (2001) have illustrated the segment variables in detail. In consumer markets, variables related to geography (e. g. : country, region), demography (e. g. : age, sex, income, occupation, nationality), psychography (e. g. : lifestyle, personality) and behaviour (e. g. : occasions, benefits, usage, loyalty, attitude) are commonly used for segmentation. In industrial markets or business to business (B2B) markets, the commonly used variables are linked to demography, operating factors, purchasing approach, situational factors and personal characteristics of buyers.
Market targetingTargeting means selecting the most appropriate segment or segments be served by the company. In this stage, relative importance and attractiveness of the identified segments are determined and assessed and resources are allocated accordingly. The most common targeting strategies are (1) undifferentiated strategy (2) concentrated strategy and (3) differentiated (multi-segment) strategy. The undifferentiated strategy involves targeting the entire market with one marketing mix. It has zero differentiation in the company’s market offerings.
Businesses adopting a concentrated strategy direct their marketing effort towards a single segment separated from several other identified segments. The multi segment strategy, as explained its name itself, focuses on several segments with several marketing mixes depending on the characteristics of these differentiated market segments (Blois and Dibb, 2000). PositioningPositioning is the final stage of market segmentation which involves in the designing of marketing programs matching the requirements of customers in the segments chosen.
It deals with the consumer perceptions, image building in the mind of consumers and designing appropriate marketing strategies to differentiate products or a company from its competitors. It involves in crafting and implementing the marketing mix programs which match the requirements of customers in the targeted segments (Ries and Trout, 1986; cited in Dibb, 2005). The customer will compare the product or services offered by the company with competitive offerings. Therefore, ultimately, the customer perception toward the product or service will link with the success of positioning (Blois and Dibb, 2000).
Ries and Trout (1986); as cited in Blois and Dibb, 2000 confirms that customer perceptions about the product or service are central to its positioning; no doubts that perception is the reality. Benefits of market segmentationMany companies believe that marketing success is linked to how effectively their customer base is segmented. The benefits associated with a segmentation approach have been widely debated (Blattberg and Sen, 1976; Daneels, 1996; Piercy, 2001 and Henderson, 1981; cited in Dibb, 2005).
Some authors argue that segmentation creates a differential advantage in the competitive market (Bonama and Shapiro, 1984 and Sharp, 1995: cited in Dibb, 2005). Others suggest that the result of a segmentation exercise would be greater customer satisfaction (Kara and Kayanak, 1997) and higher level of customer loyalty (Peppers and Rogers, 1997; cited in Dibb, 2005). As cited in Dibb (2005), Choffray and Liliem (1978) endorse the segmentation concept saying that segmentation allows business to deal with diverse customer needs by focusing resources on particular customer groups with relatively homogeneous requirements.
Blattbery and Sen (1976); Beane and Ennis (1987) as cited in Blois and Dibb (2000) further support the segmentation concept mentioning that organisations that apply segmentation to their business are better able to fine tune their customer offerings than those adopting a mass marketing approach. Similarly, Sharp (1995) argues that segmentation approach has been in existence for a long time since it creates various business benefits to marketers. Yet despite this clear-cut rationale, some marketers disagree with the concept.
They argue that it is impossible to identify a direct link between segmentation and business success because of measurement difficulties (Esslemont, 1996; cited in Blois and Dibb, 2000). The debate about segmentation success and the extent to which segmentation benefits can be quantified is ongoing (Goller et al. , 2002; cited in Dibb, 2005). The third group of researchers suggests that “segmentation benefits need to be weighed against the cost of the process and the scale of implementation difficulties” (Dibb and Simkin, 1997; Litter, 1992; McDonald and Dunbar, 1998; cited in Dibb, 2005) to measure the real benefit of segmentation.