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Chapter 05 – Market Segmentation

Chapter 5

Market Segmentation

High-Level Chapter Outline

I. Introduction

II. Delineate the Firm’s Current Situation

III. Determine Consumer Needs and Wants

IV. Divide Markets on Relevant Dimensions

A. A Priori versus Post Hoc Segmentation

B. Relevance of Segmentation Dimensions

C. Bases for Segmentation

Benefit Segmentation

Psychographic Segmentation

Geodemographic Segmentation

V. Develop Product Positioning

VI. Decide Segmentation Strategy

VII. Design Marketing Mix Strategy

Detailed Chapter Outline

I. Introduction

Market segmentation is the process of dividing a market into groups of similar consumers and

selecting the most appropriate group(s) for the firm to serve.

The group or market segment that a company selects to focus on is called a target market.

Figure 5.1 represents a model of the market segmentation process.

Market segmentation analysis is a cornerstone of sound marketing planning and decision making.

II. Delineate the Firm’s Current Situation



A firm must do a complete situational analysis when embarking on a new or modified marketing

program.

At the marketing planning level, such an analysis aids in determining objectives, opportunities,

and constraints to be considered when selecting target markets and developing marketing mixes.

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Chapter 05 – Market Segmentation

Marketing managers must have a clear idea of the amount of financial and other resources that will

be available for developing and executing a marketing plan.

The inclusion of this first step in the market segmentation process is intended to be a reminder of

tasks to be performed prior to marketing planning.

III. Determine Consumer Needs and Wants

Successful marketing strategies depend on discovering and satisfying consumer needs and wants.

As a practical matter, new technology often brings about an investigation of consumer needs and

wants for new or modified products and services.

In these situations, the firm is seeking the group of consumers whose needs could best be satisfied

by the new or modified product.

At a strategic level, consumer needs and wants usually are translated into more operational

concepts.

IV. Divide Markets on Relevant Dimensions

In a narrow sense, this step is often considered to be the whole of market segmentation.



Three important questions should be considered here:

oShould the segmentation be a priori or post hoc?

oHow does one determine the relevant dimensions or bases to use for segmentation?

oWhat are some bases for segmenting consumer and organizational buyer markets?

A. A Priori versus Post Hoc Segmentation



An a priori segmentation approach is one in which the marketing manager has decided on the

appropriate basis for segmentation in advance of doing any research on a market.



Post hoc segmentation is an approach in which people are grouped into segments on the basis

of research findings.



Both of these approaches are valuable, and the question of which to use depends in part on

how well the firm knows the market for a particular product class.

If through previous research and experience a marketing manager has successfully isolated a

number of key market dimensions, then an a priori approach based on them may provide more

useful information.



In the case of segmentation for entirely new products, a post hoc approach may be useful for

determining key market dimensions.

However, even when using a post hoc approach, some consideration must be given to the

variables to be included in the research design.

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B. Relevance of Segmentation Dimensions

Unfortunately, there is no simple solution for determining the relevant dimensions for

segmenting markets.

Managerial expertise and experience are needed for selecting the appropriate dimensions or

bases on which to segment particular markets.

In most cases, however, at least some initial dimensions can be determined from previous

research, purchase trends, and managerial judgment.

The most market-oriented approach to segmentation is on the basis of what benefits the

potential consumer is seeking. Thus, consideration and research of sought benefits are a

strongly recommended approach in the marketing literature.

C. Bases for Segmentation

A number of useful bases for segmenting consumer and organizational markets are presented

in Figure 5.2.

Two commonly used approaches for segmenting markets include benefit segmentation and

psychographic segmentation.

Geodemographic segmentation, a recent development with a number of advantages for

marketers, is another approach for segmenting markets.

Benefit Segmentation

The belief underlying this segmentation approach is that the benefits people are seeking

in consuming a given product are the basic reasons for the existence of true market

segments.

This approach attempts to measure consumer value systems and consumer perceptions of

various brands in a product class.

oTo illustrate, Russell Haley provided the classic example of a benefit segmentation in

terms of the toothpaste market.

oHaley identified five basic segments, which are presented in Figure 5.3.

Benefit segmentation is clearly a market-oriented approach that seeks to identify

consumer needs and wants and to satisfy them by providing products and services with

the desired benefits.

Psychographic Segmentation

Psychographic segmentation focuses on consumer lifestyles.

Consumers are first asked a variety of questions about their lifestyles and then grouped on

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Chapter 05 – Market Segmentation

the basis of the similarity of their responses.

Lifestyles are measured by asking consumers about their activities, interests, and

opinions (AIO).

The best-known psychographic segmentation is called VALSTM (values and lifestyles).

The VALSTM framework has eight psychographic groups arranged in a rectangle based on

two dimensions (see Figure 5.4).

The vertical dimension segments people based on the degree to which they are innovative

and have resources such as income, education, self-confidence, intelligence, leadership

skills, and energy.



The horizontal dimension represents primary motivations for buying and includes three

different types.

Consumers driven by knowledge and principles are motivated primarily by ideals. These

consumers include the Thinkers and Believers groups.

Consumers driven by a goal of demonstrating success to their peers are motivated

primarily by achievement. These consumers include Achievers and Strivers.

Consumers driven by a desire for social or physical activity, variety, and risk taking are

motivated primarily by self-expression. These consumers include both the Experiencers

and Makers.

At the top of the rectangle are the Innovators, who have such high resources that they

may express any of the three motivations.

At the bottom of the rectangle are the Survivors, who live complacently and within their

means without a strong primary motivation.

Geodemographic Segmentation

Geodemographic segmentation identifies specific households in a market by focusing on

local neighborhood geography to create classifications of actual, addressable, mappable

neighborhoods where consumers live and shop.

One geodemographic system, is called Nielsen PRIZM, which stands for consumers

“Potential Ranking Index of ZIP Markets.”

oThe system classifies every U.S. neighborhood into one of 14 groups.

The PRIZM segmentation is available on major marketing databases from leading

providers.



The PRIZM system is based on the assumptions that consumers in particular

neighborhoods are similar in many respects and that the best prospects are those who

actually use a product or other consumers like them.



Marketers use PRIZM to better understand consumers in various markets, what they are

like, where they live, and how to reach them.

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V. Develop Product Positioning

Product positioning is concerned with positioning the product favorably in the minds of customers

relative to competitive products.

Several different positioning strategies can be used:

oProducts can be positioned by focusing on their superiority to competitive products based on

one or more attributes.

oProducts can be positioned by use or application.

oProducts can be positioned in terms of particular types of product users.

oProducts can be positioned relative to a product class.

oProducts can be positioned directly against particular competitors.

One way to investigate how to position a product is by using a positioning map, which is a visual

depiction of customer perceptions of competitive products, brands, or models (Figure 5.6)

Some experts argue that different positioning strategies should be used depending on whether the

firm is a market leader or follower and that followers usually should not attempt to position

directly against the industry leader.

VI. Decide Segmentation Strategy

There are four basic alternatives in segmentation strategy.

oThe firm may decide not to enter the market.

oThe firm may decide not to segment but to be a mass marketer.

There are at least three situations when this may be the appropriate decision for the

firm:

The market is so small that marketing to a portion of it is not profitable.

Heavy users make up such a large proportion of the sales volume that they are

the only relevant target.

The brand is the dominant brand in the market, and targeting to a few segments

would not benefit sales and profits.

oThe firm may decide to market to one segment.

oThe firm may decide to market to more than one segment and design a separate marketing

mix for each.

Three important criteria on which to base such decisions are that a viable segment

must be:

Measurable—for a segment to be selected, the firm must be capable of

measuring its size and characteristics.

Meaningful—a meaningful segment is one that is large enough to have sufficient

sales and growth potential to offer long-run profits for the firm.

Marketable—a marketable segment is one that can be reached and served by the

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firm in an efficient manner.

Figure 5.7 offers a list of questions marketing managers should answer when deciding whether a

market segment meets these criteria.

VII. Design Marketing Mix Strategy

The firm is now in a position to complete its marketing plan by finalizing the marketing mix or

mixes to be used for each segment.

While marketing mix design is placed at the end of the model, many of these decisions are made in

conjunction with target market selection.

KEY TERMS

A priori segmentation: Approach in which the marketing manager has decided on the appropriate basis

for segmentation in advance of doing any research on the market.

Benefit segmentation: Approach that focuses on satisfying needs and wants by grouping consumers on

the basis of the benefits they are seeking in a product.

Geodemographic segmentation: Approach that identifies specific households in a market by focusing

on local neighborhood geography (such as zip codes) to create classifications of actual, addressable,

mappable neighborhoods where consumers live and shop.

Market segmentation: The process of dividing a market into groups of similar consumers and selecting

the most appropriate group(s) for the firm to serve.

Post hoc segmentation: Approach that groups people into segments on the basis of research findings

rather than determining the basis prior to any research.

Positioning map: A visual depiction of consumer perceptions of competitive products, brands, or

models.

Psychographic segmentation: Approach that focuses on consumer lifestyles as the basis for

segmentation. Consumers are asked a variety of questions about their lifestyles (commonly, their

activities, interests, and opinions) and then grouped on the basis of the similarity of their responses.

Target market: The group or market segment that a company selects to serve.

VALS: A product of SRI Consulting Business Intelligence; the best known psychographic approach;

stands for “values and lifestyles.”

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ADDITIONAL RESOURCES

Bolton, Ruth N., and Matthew B. Myers. “Price-Based Global Market Segmentation for Services,”

Journal of Marketing, July 2003, pp. 108-28.

Dickson, Peter R., and James L. Ginter. “Market Segmentation, Product Differentiation, and Marketing

Strategy.” Journal of Marketing, April 1987, pp. 1-10.

Myers, James H. Segmentation and Positioning for Strategic Marketing Decisions. Chicago: American

Marketing Association, 1996.

Yankelovich, Daniel, and David Meer. “Rediscovering Market Segmentation,” Harvard Business

Review, February 2006, pp. 122-31.

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