The Theoretical Basis For Market Segmentation

The theoretical basis for market segmentation comes from economic pricing theory, which indicates that profits can be maximized when prices that differentiate segments are set (Frank et, al., 1972).Market segmentation involves the grouping of customers with similar needs and buying behavior into segments, each of which have more or less similar or related characteristics. The concept attempts to reconcile differing customer needs with limited company resources, and allows product and marketing offerings to be adjusted to suit diverse customer clusters (Wind, 1978). According to Kotler (1994), companies from all industries are increasingly adopting / target marketing. This has followed a normal succession “Mass Marketing”, where one product is produced and sold to all buyers and “Product-differentiated marketing” where more than one product, with different features, styles and distinctiveness are produced for offer to a variety of buyers. The essence of target marketing is that customers are heterogeneous in their buying requirements and behavior, and therefore these companies will be in a stronger position to serve certain specific customer segments.

Rationale

Market segmentation comes about as a result of the study that all potential users of a product are not alike. They are different in the consumption behaviors, in their lifestyles, and in patterns of buying and using. As a result, the same general appeal will not interest all prospects and satisfy every customer’s needs. Therefore, in order to enhance customers’ satisfaction, it is necessary to divide the generic market into segments.

Different marketing strategies and tactics will be developed accordingly by properly considering both the differences among potential consumers and that the firm’s objectives and resources.The psychological variables obtained are of two major types of customer, namely personality profiles and lifestyle profiles (psychographics). When geographic and demographic attributes do not supply an adequate view of the customer behaviour, psychological profiles are often used as an extra source of information. While the usual geographical and demographical bases (sex, age, income etc.) provide the marketer with openness to customer segments, the psychological variables provide additional information about these and improve knowledge of the the indulgent behaviour of present and potential target markets (Gunter and Furnham, 1992: 26).

Evolution

Modern companies seldom try to appeal to all buyers in their market in the same way. The concept of market segmentation dates back to the mid-20th century when the marketers began to accept divergent demand as a fundamental market characteristic and started to adjust product lines and marketing strategies accordingly. According to Smith (1959), the lack of homogeneity on the demand side can be based upon different customs, desire for variety or desire for exclusiveness or may also arise from basic differences in users needs. Through market segmentation, large heterogenous (heterogamous )markets are divided into smaller more homogenous segments that can be more efficiently reached with the products and services, the customers really want and will pay for. Specifically, market segmentation is the process of dividing a market into distinct groups with distinct needs, characteristics, or behaviour who might require separate products or marketing mixes. (Kotler and Amstrong ,2003). A segment is a group of customers with similar needs, sharing characteristics that are strategically relevant as mentioned by Day (1891).

Analytical market segmentation

Analytical market segmentation has two basic approaches. ( Green 1977):

A priori segmentation, in which the researcher chooses some cluster-defining descriptor in advance. Customers are then classified into a predefined number of segments and further examined in terms of other characteristics. For example, segmentation might be formed on the basis of a favourite brand and then any differences between the segments in terms of e.g. demographics or lifestyle could be studied.

Post hoc segmentation, in which the customers are clustered into segments according to the similarity of their multivariate profiles. The segments can then be further examined for differences in other characteristics. The number or relative sizes of the segments is not known before the analysis is completed, only the set of variables on which customers are to be clustered is pre-specified. For example, the initial clustering might be done based on customer profiles that describe benefits sought from a product and then any significant differences between the segments assessed utilizing other segmentation variables.

Consumer behaviour

Consumers choose between products and services on the market based on their assessment of superior value. In other words, they choose the proposition that consists of the benefits they are looking for at a price they perceive as providing superior value for money. The challenge for companies is to understand from a customer’s perspective what these propositions need to be. McDonald & Dunbar (2004) argue that, from this point of view, customers segment themselves and what the companies must do, is understand the motivations that drive the choices made by the customers.

Thus Kotler (2003) has divided the characteristics affecting the consumer behavior into 4 categories and they are defined as follows:

Culture Factor

It is a fundamental determinant of a person’s wants and behavior. Kotler (2003) declares that the cultural factors exercise the broadest and deepest control of consumer behavior. According to him, every people in his/her first stage of life obtains a set of values, awareness, preferences and behaviors which will be held through his or her family, institution or neighborhood which become the basis of cultural value. For example, in Mauritius, growing child is exposed to the values of politeness, harmony, and while growing child in America is exposed to values such as individualism, freedom, youthfulness, and directness. He also extends the cultural factors into influences from subculture and social class. Subcultures provide more specific identification and socialization for their members. Social classes are homogenous and enduring divisions in a society which are hierarchically ordered and whose members share similar values, interests and behavior.

Social Factor

The next factor, which according to Kotler (2003), manipulates consumer behavior is social groups. Social groups consist of reference groups, family and social rules and statuses. A person’s reference groups consist of groups that have direct or indirect influence on the person’s attitudes or behavior. Examples of reference groups are family, friends, neighbors or co-workers who have intense contact with the person him/herself. Family can be also a separate social factor to influence a person buying/using behavior. A person inside family acquires orientation, religion; perception and also sense of personal ambition from their parent thus family roles and relation have certain determinant to a person taste or consumption behavior. Thus a person’s role and status in society affect their behavior and lifestyle.

Personal life-cycle factor

Personal life-cycle stage factors also shaped customer behavior. Such stages might be, for example, young singles, married couples with children, or the recently divorced. Kotler (2003) argues that personal life-cycle stage affect consumer’s taste in products. Moreover, he added also that personal education and income may also affect the choice-making when choosing a product or service.

Psychological Factor

This is last factor that can influence consumer behavior in four major ways.(Kotler,2003). Firstly by motivation which can arouse consumer needs to a sufficient level of power. Secondly perception thorugh the selection, organization and interpretation of information are needed to form a meaningful picture of the world. Thirdly by learning through the changes of behavior caused by previous experiences. Practically, if the experiences of using products from a certain brand are rewarding, the customer will more probably buy other products from them. Lastly by beliefs and attitudes acquired by doing and learning based on the thoughts, feelings and tendencies towards an object or an idea. They influence buying behavior by having an effect on the perceived brand image and are usually difficult or costly to change.

Consumer behavior or understanding a customer is a very difficult task. The consumer may say something but act differently at different point of time. For a while, they might also delay their sincere enthusiasm but has great power on their decision procedure of a product and service. Through these several factors, a marketer is able to have basic picture on how consumer differ between each other.

Characteristics of Segmentation

Kotler and Armstrong (2003) have listed the 5 fundamental characteristics that any useful segmentation scheme and its market segments must possess and they are as follows:

Measurability: The size, purchasing power and profiles of the market segments can be measured.

Accessibility: The market segments can be effectively reached and served with promotional and distributional efforts.

Substantiality: The market segments are large or profitable enough to serve.

Differentiability: The segments are conceptually distinguishable and respond differently to the different marketing mix elements and programs.

Actionability: Effective programs can be designed for attracting and serving the separate segments.

Wedel and Kamakura (2003) alternatively have provided six criteria that have been frequently used to determine the effectiveness and profitability of marketing strategies. They are identifiability, substantiality, accessibility, stability, responsiveness and actionability. Identifiability is the extent to which managers can recognize distinct groups of customers in the marketplace by using specific segmentation bases.

The substantiality criterion is satisfied if the targeted segments represent a large enough portion of the market to ensure the profitability of targeted marketing programs. Accessibility is the degree to which managers are able to reach the targeted segments through promotional or distributional efforts. If segments respond uniquely to marketing efforts targeted at them, they satisfy the responsiveness criterion. Only segments that are stable in time can provide the underlying dimensions for the development of a successful marketing strategy.

Therefore, stability is necessary, at least for a period long enough for identification of the segments, implementation of the segmented marketing strategy, and the strategy to produce results. Segments are actionable if their identification provides guidance for decisions on the effective specification of marketing instruments.

As seen in the previous paragraphs, market segmentation is a concept to find and group specific set of market into smaller groups that each of their members share homogeneous preferences, common needs, characteristic and behavior, and react similarly with products or services that is being introduced to them. A marketer may use different type of procedure to segment a market, but to be effective in the market place, a market segment should fulfill certain criteria. Therefore, a market segmentation is not only a concept to group markets but it is a tool for marketer to understand their consumer or market behavior and characteristic and adjust their strategy by focusing on prospective market segment.

Segmentation Variables

Performing market segmentation requires the selection of a basis for segmentation (the dependent variable) as well as descriptors (the independent variables) of the various segments (Wind, 1978). These variables can be divided into:

General customer characteristics, including demographic and socioeconomic characteristics, personality and lifestyle characteristics, and

Situation specific customer characteristics such as product usage and purchase patterns and benefits sought in a product category. Usually, multiple segmentation variables are used in combination to achieve smaller, better-defined target groups. The most useful techniques have often resulted from practical successes, not as much from theoretical studies. Marketers must identify which of them provide the best view of the market structure currently in question.

Geographic segmentation

Dividing a market into geographic segments is one of the oldest ways to perform market segmentation. The underlying assumption is that people have different needs and wants based on where they live. Commonly, a geographical segmentation scheme divides a market into units such as nations, states, regions, counties, cities or neighbourhoods. A company can decide to operate in only a few of the segments, or in all of them but customize their offering according to the geographical differences in needs and wants said by Kotler & Armstrong (2003). Geographic segmentation is most commonly used by multi-national industrial and high-tech businesses, which alter their marketing mix based on the differing needs of consumers in each of the geographic segments they wish to serve. Simple geographic segmentation is usually an easy, manageable and comparatively inexpensive way to handle a market especially an international one.

The downside of geographical segmentation schemes is the used hypothesis that the customers within an area have homogenous product preferences. Often this is not true even at the most local level. For example, people living on the same street do not generally choose similar groceries, furnishings or clothing. The practicality of geographical differentiation on a multi-national scale has also been criticized by Kotler & Armstrong (2003) and McDonald & Dunbar (2004).

Demographic segmentation

Another widely recognized consumer market segmentation scheme makes use of demographics. Demographic segmentation is defined as the division of a market into groups based on demographic variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation and nationality by Kotler & Armstrong (2003). Demographics have gained much popularity because they are easily measured and often vary closely with consumer needs and usage rates. The complexity and costs of the scheme also stay relatively low.

Demographic variables must, however, be handled carefully. Critique from Cahill (2006) points out that although there generally are behavioural differences between e.g. men and women or teenagers and elders, they are at best displayed by only a large majority of the group. Consequently, the remaining subset whose behaviour does not into the framework of the demographic group (e.g. youngsters acting like elders, or vice versa) might not enjoy being reminded that they do not it with their peers. Reaching the desired segment without offending anyone belonging or not-belonging to the target group can thus prove to be a challenging task. Demographic segmentation has also been criticized, together with geographical segmentation, of the approach of predetermining how the market divides into segments (McDonald & Dunbar, 2004). In reality, customers do not slot themselves into any categories determined beforehand, and this is why companies should rather focus on getting a holistic understanding of their customers’ needs than engaging the market with ready-made pigeonholes for groups of buyers.

Psychographic segmentation

Using a psychographic segmentation scheme means dividing the market into different groups based on various psychological characteristics of the buyers, such as social class, lifestyle or personality.(Kotler & Armstrong, 2003). Marketers have understood that to attract or motivate a particular group of consumers, it is necessary to know how they think and what their values and attitudes are, as well as who they are in terms of the traditional demographic variables Ziff (1971). The power of psychographics is that it identifies basic beliefs and attitudes that influence consumer behaviour in various situations. Ziff’s study(Specify year) suggests that by finding a core of attitudes and values that affects the buying behaviour for a class of products, one can gain general understanding that can be applied to other related products or even completely different classes of products. Because the changes in person, family and occupation throughout life affect buying behaviour, psychographic and demographic segmentation bases are often used in combination to better identify market segments. Behavioural variables, e.g. usage rates, can also be used to complement a psychographic segmentation scheme.

Behavioural segmentation

Behavioural segmentation divides buyers into groups based on their knowledge, attitudes, uses or responses to a product. Common approaches are, for example, usage rate and occasion segmentations.( Kotler & Armstrong,2003). A behavioural segmentation scheme has the advantage that it is rather closely tied to the product or service that the company is offering. However, Dickson (1982) points out that there are also other possible goals that people seek by consuming beverages. The alternative drives can be, for example, relaxing and reducing shyness, sedating, cooling down, warming up, stimulating taste buds, relieving throat irritation or celebrating. Thus, the observed situation-specific preferences can be caused by very different needs.

2.3 Lifestyle Segmentation

A persistent thread through the marketing literature is the notion that lifestyle involves characteristic patterns of behavior (Andreasen 1967; Bernay 1971; Lazer 1963; Moore 1963; Myers and Gutman 1974). Berkman and Gilson’s (1978) definition is only one of several contemporary interpretations of lifestyle but is representative.

Lifestyle may be defined as combined patterns of behavior that both determine and are determined by consumption. The term “unified patterns of behavior” refers to behavior in its broadest sense. Attitude formation and other types of subjective activity are not readily observable, but are behaviors nonetheless. Lifestyle is an integrated system of attitudes, values, opinions and interests as well as overt behavior.

“Lifestyle segmentation” has been a useful concept for marketing and advertising planning purposes (Wells and Tigert, 1977; Kaynak and Kara, 1996). Lifestyle, of course, has been defined simply as “how one lives”. In marketing, “lifestyle”, however, describes the behavior of individuals, a small group of interacting people, and large groups of people (e.g. market segments) acting as potential consumers. Thus, the concept of the lifestyle represents a set of ideas quite distinct from that of personality. The lifestyle relates to the economic level at which people live, how they spend their money, and how they allocate their time (Anderson and Golden, 1984). Lifestyle segmentation research measures people’s activities in terms of:

How they spend their time;

What interests they have and what importance they place on their immediate surroundings;

Their views of themselves and the world around them; and

Some basic demographic characteristics.

The most widely used approach to lifestyle measurements has been activities, interests, and opinions (AlO) rating statements (Wells and Tigert, 1977). The focus of marketers and consumer researchers has generally been on identifying the broad trends that influence how consumers live, work, and play. It allows a population to be viewed as distinct individuals with feeling and tendencies, addressed in compatible groups (segments) to make more efficient use of mass media. In general, researchers tend to equate psychographic with the study of lifestyles. Psychographic research is used by market researchers to describe a consumer segment so as to help an organization better reach and understand its customers. Hence, lifestyle patterns provide broader, more three dimensional views of consumers so that marketers can think about them more intelligently. The basic premise of lifestyle research is that the more marketers know and understand about their customers, the more effectively they can communicate with and serve them (Kaynak and Kara, 1996).

In 1996, Mary Douglas introduced a life style theory. Four different sub-cultures stem from this theory; these are: competition and individualism; isolation and avoidance of social controls; equity and negotiation; and hierarchical communities. Moreover, Thomas Hojrup introduced a similar concept of life-mode in his book “State, Culture, and Life-Modes: Foundations of Life Mode Analysis (2003)”. He argues that our values are constrained by cultural-relational dialectics and are product of cultural life modes. He attempted to address the problem that different cultural values conflict when they are brought together. The three life modes he introduced are: self-employed life mode, wage earner life mode, and career oriented life mode.