Keywords: segmentation strategy, global markets, business strategy, market segmentation, marketing strategies, global economy, financial needs, investment needs,business decisions, Yoram (Jerry) Wind, David R. Bell
While poor segmentation can result from flawed thinking or conceptions of segmentation, it is our experience that many segmentation efforts fall flat because of poor execution and implementation.
By Yoram (Jerry) Wind and David R. Bell
All markets are heterogeneous. This is evident from observation and from the proliferation of popular books describing the heterogeneity of local and global markets. Consider, for example, The Nine Nations of North America (Garreau, 1982), Latitudes and Attitudes: An Atlas of American Tastes, Trends, Politics and Passions (Weiss, 1994) and Mastering Global Markets: Strategies for Today’s Trade Globalist (Czinkota et al., 2003). When reflecting on the nature of markets, consumer behaviour and competitive activities, it is obvious that no product or service appeals to all consumers and even those who purchase the same product may do so for diverse reasons. The Coca Cola Company, for example, varies levels of sweetness, effervescence and package size according to local tastes and conditions. Effective marketing and business strategy therefore requires a segmentation of the market into homogeneous segments, an understanding of the needs and wants of these segments, the design of products and services that meet those needs and development of marketing strategies, to effectively reach the target segments. Thus focusing on segments is at the core of organizations’ efforts to become customer driven; it is also the key to effective resource allocation and deployment. The level of segment aggregation is an increasingly important issue. In today’s global economy, the ability to customize products and services often calls for the most micro of segments: the segment of one. Following and implementing a market segmentation strategy allows the firm to increase its profitability, as suggested by the classic price discrimination model which provides the theoretical rationale for segmentation.
Effective segmentation strategy requires detailed answers to the following sets of questions:
- How to segment the market?
- What research procedure to use to develop a segmentation strategy?
- What segment(s) to target?
- How to allocate resources among the segments?
- How to implement the segmentation strategy?
Segment identification decision
The determination of which set of variables – basis – to use for segmentation of the market is critical. Conceptually, the guiding principle is fairly obvious. A good segmentation variable is one that explains variation in use of the firm’s products and services. If a proposed segmentation variable has no correlation to choice or other important behaviours, it is clearly of little value. Practically, the approach is quite involved and requires consideration of the following issues. Should we segment on product usage patterns (e.g. users versus non-users or heavy versus light users)? Should we segment based on benefits sought (e.g. product performance versus convenience versus price sensitivity)? Should we use some other measure of consumer response to marketing variables (e.g. likelihood of buying a new product concept, response to price promotion, participation in a loyalty programme)? The ‘best practice’ in this area suggests three propositions:
- An effective basis for segmentation should allow one to differentiate among segments based on their response to marketing variables; thus buyers versus non-buyers or price sensitive versus nonprice sensitive are possible bases for segmentation. Age, sex, marital status, psychographic characteristics or other general characteristics of the consumer may not be good bases for segmentation since they do not assure differential response to marketing variables.
- The selected basis for segmentation should be directly related to the strategic purpose of the segmentation effort. In general, there are two types of segmentation with two different underlying rationales:
- A general segmentation of the market which allows the organization to organize itself around the selected target segments. As an increasing number of companies shift from a product management organization to a market-driven organization or a matrix organization of product by market (as might be implied by the PSM analysis), it is critical to identify relatively stable and large segments which could serve as strategic business units. Examples of such segments, in the case of a financial service firm, are the ‘Delegators’ – individuals who prefer to have a money manager take complete control over the management of their financial affairs, and the ‘Electronic DIY’ – who prefer to do it themselves using direct computer trading. To reach these two segments effectively the firm needs distinctly different strategies. Members of each of these strategic segments share some common financial/investment needs, yet each of these segments may still be quite heterogeneous with respect to other needs and, thus, could benefit from further subsegmentation into more homogeneous groups.
- Specific segments for specific marketing and business decisions. For example, in the introduction of a new product, this may mean a focus on the segment that has the highest likelihood of buying the product. In the launch of a new online electronic shopping service, it could involve a focus on time-constrained individuals with high-speed Internet access at home. Other specific segments and their associated characteristics can be developed for each of the marketing mix decisions. Notice that in the following examples the ... Read more
