Market Segmentation


Market segmentation is the process of dividing the total market into groups whose members have similar wants. Marketers don’t create market segments, they just identify them. When identifying market segments, be sure that you are not merely identifying a sector. If you segment customers based on their age and income, you might find that within that sector customers can have very different wants. At this point you have only identified a sector. You will need to further divide this group to identify segments to be more effective as a marketer. For example you may decide that you need to further divide the sector into male and female groups because there is a difference in their needs and wants for the product or service you are offering. However, if there is no identifiable difference, there is no need to segment further. 

There are different approaches for segmenting markets and the approach you take depends on what you are selling. There are three main types of descriptors, or characteristics: geographic, demographic and psychosocial. This chart shows some of the ways you can segment the market. Not all of these will apply to your business. For example, if you have determined that a person’s occupation has little or no bearing on the amount of bread that they consume, and you sell bread, you do not need to segment the market in this way. Since people within the same demographic group can exhibit very different psychographic profiles, examining psychographic elements is critical.

Segmentation Descriptor

Example of Categories

Geographic
Region Area of the country, whole country, city, multinational, English speaking
Population density Rural, suburban, urban
Climate Cold, warm
Demographic
Age 0-4, 5-9, 10-14 and so on, or 0-10, 11-20, 21-30 and so on, or whichever range fits
Gender Male or Female
Family life cycle Single, married with no children, married with youngest child under 6, married with youngest child over 6, married with children no longer at home, widowed
Family income Under $19000, $20000-29999 and so on or another range set that fits
Occupation Professional, clerical, sales, craftsperson, retired, student, homemaker and so on
Education Some high school, high school graduate, some college, college graduate, some university, university graduate, post-graduate degree
Religion Catholic, Protestant, Jewish, Islam, Buddhist, Other Christian, Other Non-Christian
Race Caucasian, African, Hispanic, Asian
Nationality American, British, Chinese, Japanese, French, German and so on
Social Class Lower, Middle, Upper or Lower, Lower-Middle, Middle, Upper-Middle, Upper
Psychographic
Lifestyle Striver, intimate, altruist, creative, fun seeker, and so on
Personality Aggressive, Assertive, Shy, Reserved, Emotional, Flirtatious
Values Achievement of goals, Status, Loyalty, Duty, Enjoyment, Fun, Justice, Family, Friends and so on
Behavioral
Benefit sought Convenience, social status related, physical health related, education related and so on
Stage in decision process Unaware, aware, informed, interested, intend to buy, bought previously
Perceived risk High, medium, low (how willing are they to take on risk?)
Innovativeness Innovator, early adapter, early majority, late majority, laggard (how interested they are in trying new products will affect how soon they purchase the product after it’s been released)
Loyalty None, some, completely (how loyal are they to retailers, products and services?)
Usage rate None, light, medium, heavy (how much and how often do they use the product or service)
Usage occasion Home, work, vacation, leisure (when do they use the product and where?)
User status Nonuser, ex-user, potential user, first-time, current user


Criteria for Evaluating Market Segments
For a segment to be practical it should be evaluated against the following six criteria.

Explanation
Substantial
A target segment must be large enough for you to make money at it. It costs time and money to run a business. Is it worth it? For example, if you are planning to set up a store that sells products for a very specific little-known hobby, are there enough interested people who will potentially buy from the store?
Some bricks-and-mortar-only retailers are successful selling collectable merchandise to customers in a wide geographic area,
in part, because of their large assortment or expertise.
Identifiable
You must be able to identify the customers in a target segment. You need to know who belongs to what segment. For example, if you are running a convenience store, it makes no sense to segment your market on how tall your customers are. The height of a customer makes no difference. You would not have a section of the store designed for how tall someone is. However, if you are running an apparel store, you might decide to segment customers who are taller than average and then target those customers by offering a wide selection of clothing with taller sizes. In your apparel store you may decide to sell clothing for men and women and not for children. If so, within the store you would have a men's section and a ladies section. You may
decide to decorate each section differently. You might decide to place the men's section closer to the entrance than the women's section speculating that women are more likely to spend more time walking through a store to find what they are looking for than men are.
Accessible
You must be able to reach them discriminately by delivering the appropriate marketing mix to the customers in that segment. For example, are you able to find an appropriate form of advertising that your customers will be exposed to? Are you able to deliver your product to your customers such that they can obtain it?
Measurable
You need to determine how many customers are in the segment or how much money they might potentially spend. The segmentation descriptor must be measurable. For example, you can use census data to determine the age ranges of people in various geographic areas. Some of the other descriptors are more difficult to quantify.
Durable
Things are always changing. You will want to be sure that the segment is relatively stable in order to minimize the costs involved in making marketing mix changes.
Actionable
If all of the above five conditions are met, then the segmentation scheme is actionable. Customers within a segment must have similar needs, seek similar benefits and be satisfied by a similar retail offering. The definition of the segment should clearly indicate what the retailer should do to satisfy the customer’s needs. 


Retail Strategy
A retail strategy is composed of three elements (1) target market (2) retail format and (3) competitive advantage tactics. As outlined in the book Retailing Management, Fifth Edition by Michael Levy and Barton A. Weitz
(McGraw-Hill/Irwin), in the apparel market, the style of the clothes might be segmented into three categories: conservative, traditional (classic) and fashion-forward. From the above chart you might be able to determine that that a person’s age has a bearing on the type of clothing styles they prefer. For example, middle age people might prefer classic styles while a slightly younger group might prefer clothing that is more fashion-forward. The type of customer who is interested in fashion-forward clothing might be more innovative or early adapters who are conscious of social status, and willing to take some risk.

Target Market
Target marketing is marketing directed toward a particular market segment or segments. This is in contrast to mass marketing which offers a product to the entire market. A firm makes a decision to target a particular market segment based on that segment’s attractiveness and the fit between the market segment and the firm itself. The market’s attractiveness depends on it’s size, profitability and growth. The existing competition in the market will influence it’s profitability. Market research is often necessary to obtain the attractiveness of a market segment. How does the market segment fit with the organization’s objectives, resources and capabilities? If there is no fit, then the market segment in question should not be targeted. Perhaps there is another segment that would be more appropriate.

Demographics and Age
In the book, Boom Bust & Echo 2000, David K. Foot and Daniel Stoffman explain the importance of analyzing demographics to help explain many of the trends in consumer behavior, economics, social mores and public policy. The basic premise is that people change as they get older. As time passes, we all get older. The United States and Canada have populations that on average are getting older. These stage of life changes bring about changes in our attitudes, desires, shopping habits and careers. Baby boomers make up a large part of the population. David Foot divides these age groups into cohorts. The first cohort was born in 1914 or earlier. The second cohort was born between 1915 and 1919. The third cohort was born between 1920 and 1929. The forth cohort was born between 1930 and 1939. The fifth cohort was born during the Second World War between 1940 and 1946. The sixth cohort was the baby boom born between 1946 and 1964 in the United States and between 1947 and 1966 in Canada. Generation X (Gen-X) is the group of people born at the end of the baby boom, and are in fact baby boomers, despite the media confusion out there that sometime claims that Generation X are the baby bust generation. The characters of Douglas Copeland’s novel, Generation X, were born in the early 1960’s. In Canada, the seventh cohort was born between 1967 and 1979. This is the baby bust. In the USA, they were born between 1965 and 1979. The baby-boom echo are the children of the boomers. They were born between 1980 and 1995.

Age, Price and Quality in Retail As a retailer, you can target whichever market you decide to target. Regardless of which market you target, it is helpful to take a look at the baby boom and echo markets since they are of a significant size. What does a large group of baby boomers that are in their 40’s, 50’s and early 60’s want? What about the smaller echo generation that is now in their 20’s? As people move through their lives, their consumer needs and wants change. Generally speaking, people in their 20’s want low prices because they don’t have a lot of money. They may have student loans to pay back. After that, they are saving up money to buy real estate, appliances, furniture and cars. They also are starting families. People in their 40’s and 50’s want good quality and good service. They generally already have most of their household needs. In a world of limited resources, it’s not realistic to expect all three: low price, high quality and excellent service. You might expect two out of the three. Baby boomers have more money than time and are willing to pay more than the lowest price for good quality products and good service. Once service aspect that boomers don’t have much patience for is a retailer that wastes their time or a retailer that is not courteous. A person in their 20’s is more willing to shop around for the best price on an item, wait in line to get it, bring it home, assemble it if necessary and return it if it has a defect. Baby boomers aren’t so willing.

Baby Boom
The baby boom and echo cohorts have altered the face of retail. According to David Foot and Daniel Stoffman in their book Boom Bust & Echo 2000, the 1990’s saw a transformation in the retail segment that responded to the general shift from a young market to a middle age market, largely caused by the aging of the baby boomers. The type of stores that the middle aged market frequent began to change. As a result, some stores that competed solely on price began to either disappear completely or make changes. One example of a store that specialized in low prices and had low service levels was Consumers Distributing. Smaller stores that offer experienced, knowledgeable staff, attractive decor and a more relaxed atmosphere began to thrive more than previously. You can expect this trend to continue during the coming years. Since the echo cohort currently is in their 20’s and late teens, they will more likely be shopping in stores that offer the best price. They are more willing to shop around for low prices. There are a couple of significant differences between the echo cohort and the boomers when the boomers were in their 20’s, depending on their situation. Many of the echo generation are much more brand conscious, they are more Internet and computer savvy, and they have more money. They are more brand conscious because of the amount of advertising they have been exposed to. They are more computer savvy because they grew up with home computers, and they have more money because the fertility rate has declined in recent years. The parents of the boomers had more children per family than the boomers had. This leaves more family income available per child. The echo cohort is therefore more likely to know exactly what type and brand of product they want and at which price, than the boomers were. Today, there is even more variety of products to choose from than in previous decades and many of the echo cohort are aware of them. In terms of the apparel industry, many in the echo cohort are interested in brand name products and even designer fashions, more so than their parents were.

Age and Apparel Retailing
As people approach middle age, their tastes and preferences in clothing changes. First of all, most take a larger size than they once did. They have less desire and less time to spend in the shopping malls to find the ultimate outfit. They become more interested in comfort. Clothes that have material that stretches are more appealing. Also, they may be less interested in spending money on clothes than when they were in their late 20’s, depending on their situation. Middle aged people may be less interested in the latest trends in fashion and more interested in classic styles. They are more likely to start shopping in a higher-priced, higher-service boutique than in a large franchised shopping mall store. They are more likely to pay for custom-fit clothing. These changes in taste and preferences happen to many of us when we move into middle age. As a retailer, if you are targeting the baby boom segment of the market, you will sell more merchandise if you paid attention to the wants and needs of your customers than if you just operated on an uninformed trial and error basis. As always, listen to your customers and provide them with what they want.

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