Market segmentation is a marketing term that refers to aggregating prospective buyers into groups or segments with common needs and who respond similarly to a marketing action. Typical demographic variables and their descriptors are as follows: In practice, most demographic segmentation utilises a combination of demographic variables. [3], The business historian, Richard S. Tedlow, identifies four stages in the evolution of market segmentation:[4], The practice of market segmentation emerged well before marketers thought about it at a theoretical level. In contrast, post-hoc segmentation makes no assumptions about the optimal theoretical framework. Thus, this chapter is based on the premise that segmentation is the firm’s response to a funda-mental market feature – heterogeneity. Positioning comprises the identification of optimal position and development of the marketing program. A number of factors are likely to affect a company's segmentation strategy:[31]. Rural farmers, Urban professionals, 'sea-changers', 'tree-changers', Lifestyle, social or personality characteristics. Given that psychographics includes demographic variables such as age, gender, and income as well as attitudinal and behavioural variables, it makes little logical sense to combine psychographics with demographics or other bases. For existing products and services, estimating the size and value of the market potential is relatively straightforward. Physical location or region ( country, state, region, city, suburb, postcode). Marketers using benefit segmentation might develop products with different quality levels, performance, customer service, special features, or any other meaningful benefit and pitch different products at each of the segments identified. Market segmentation splits up a market into different types (segments) to enable a business to better target its products to the relevant customers. In this article a normative theory of market segmentation is developed that takes account of major implementation problems. Their main characteristic is that they need easy (one-click) access to information and products as well as easy and quickly available service regarding products. Tourism Marketing Boards often segment international visitors based on their country of origin. Geographic segmentation divides markets according to geographic criteria. Market Segmentation Theory. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Labor Market Segmentation Theory Labor market segmentation (Garnsey & Zabłocka, pp. A basic approach is to first assess the size of the broad population, then estimate the percentage likely to use the product or service and finally to estimate the revenue potential. Demographic and purchasing data were available for groups but rarely for individuals and secondly, advertising and distribution channels were available for groups, but rarely for single consumers. 5p. The preferred habitat theory suggests that bond investors are willing to buy bonds outside of their maturity preference if a risk premium is available. The yield curve is a direct result of the market segmentation theory. According to advertising guru, David Ogilvy, "Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the minds of the target market. If the market is small, it may make it smaller. Is this market segment aligned with our company's operating philosophy? Business-to-business (B2B) sellers might segment the market into different types of businesses or countries. Furthermore, short and long term markets fall into two different categories. For example, a person's hair color may be a relevant base for a shampoo manufacturer, but it would not be relevant for a seller of financial services. However, with the advent of digital communications and mass data storage, it has been possible for marketers to conceive of segmenting at the level of the individual consumer. How to Conduct Segmentation Research [50][51][52] These include the following:[53][54]. The advantage to marketing management is that this technique divides total demand into relatively homogeneous segments which are identified by some common characteristics. McKinsey Quarterly. A normative theory of market segmentation is presented as a multistage mathematical model of the full range of segmentation possibilities from the perfectly discriminating monopolist to the mass marketer. There are no formulas for evaluating the attractiveness of market segments and a good deal of judgment must be exercised. "Segmentation Based on Affinity for Advertising,", Albaum, G. and Hawkins, D. I., "Geographic Mobility and Demographic and Socioeconomic Market Segmentation,", Blocker, C. P. and Flint, D. J., 2007. One simple technique was to have a window opening out onto the street from which customers could be served. Generational segmentation assumes that people's values and attitudes are shaped by the key events that occurred during their lives and that these attitudes translate into product and brand preferences. A more robust technique for estimating the market potential is known as the Bass diffusion model, the equation for which follows:[34]. Positioning is the final step in the S-T-P planning approach; Segmentation → Targeting → Positioning; a core framework for developing marketing plans and setting objectives. For example, geographics and demographics are often combined, but other bases are rarely combined. To support this type of analysis, data for household penetration of TV, Radio, PCs, and other communications technologies is readily available from government statistics departments. Samuel Pepys, for example, writing in 1660, describes being invited to the home of a retailer to view a wooden jack. The secondary target market is likely to be a segment that is not as large as the primary market, but has growth potential. Perbert, F., Stenger, B. and Maki, A., "Random Forest Clustering and Application to Video Segmentation," [Research Paper], Toshiba Europe, 2009, Online: Minhas, R.S. [17], Until relatively recently, most segmentation approaches have retained a tactical perspective in that they address immediate short-term decisions; such as describing the current “market served” and are concerned with informing marketing mix decisions. 2 The hypothesis that traders on a financial market tend to specialize in different parts of the market, thereby effectively creating a number of distinct markets. The economic theory of segmented markets does not deal with these problems. Psychographics is a very widely used basis for segmentation, because it enables marketers to identify tightly defined market segments and better understand consumer motivations for product or brand choice. In an undifferentiated approach, the marketer ignores segmentation and develops a product that meets the needs of the largest number of buyers. The primary market is the target market selected as the main focus of marketing activities. Product variability: For highly uniform products (such as sugar or steel) undifferentiated marketing may be more appropriate. Contemporary market segmentation emerged in the first decades of the twentieth century as marketers responded to two pressing issues. Eight Benefits of Market Segmentation a luxury brand or premium brand. Another solution, that came into vogue from the late sixteenth century, was to invite favored customers into a back-room of the store, where goods were permanently on display. Green, P.E., Carmone, F.J. and Wachspress, D.P., Swait, J., "A structural equation model of latent segmentation and product choice for cross-sectional revealed preference choice data,", Kelly E Fish, K.E., Barnes, J.H. Tech-savvy (aka tech-heads); Heavy users, Enthusiasts; Early adopters, Opinion Leaders, Luxury-seekers, Price-conscious, Quality-conscious, Time-poor, The same consumer changes in their attractiveness to marketers based on context and situation. and Bonoma, T.V., "How to Segment Industrial Markets,". The time they spend actively viewing each page. An example of attitudinal segmentation comes from the UK's Department of Environment which segmented the British population into six segments, based on attitudes that drive behaviour relating to environmental protection:[64]. Selecting the right base requires a good deal of thought and a basic understanding of the market to be segmented. [58] Typical behavioural variables and their descriptors include:[59]. With the customer population and preferences becoming more wider, and the competitive options becoming more available, market segmentation has become critical in any business or marketing plan. The goal is to locate the brand in the minds of consumers to maximise the potential benefit to the firm. That is, a market is segmented, one or more segments are selected for targeting, and products or services are positioned in a way that resonates with the selected target market or markets. active members, lapsed members, length of membership, Customer relationship management (CRM) databases, Customer self-completed questionnaires or feedback forms, Commissioned research (where the business commissions a research study and maintains exclusive rights to the data; typically the most expensive means of data collection), Census data (population and business census), Government statistics and surveys (e.g. Moutinho, L., "Segmentation, Targeting, Positioning and Strategic Marketing," Chapter 5 in Strategic Management in Tourism, Moutinho, L. (ed), CAB International, 2000, pp. Preferred habitat theory is a theory that tells more about market segmentation theory. Market segmentation is the process of dividing a target market into smaller, more defined categories. The Market Segmentation Theory tries to describe the relation of the yield of a debt instrument with its maturity period. The Segmented Markets Theory was introduced by American economist John Mathew Culbertson (1921-2001) in his 1957 paper titled “The Term Structure of Interest Rates.” In his paper, Culbertson argued against Irving Fisher’s expectations driven model of the term structure and developed his own theory of how fixed income securities are priced by the market. Results are averaged across all respondents, and results are plotted on a graph, as illustrated in the figure. [18] Some scholars have argued that the fragmentation of markets has rendered traditional approaches to market segmentation less useful.[19]. McKendrick, N., Brewer, J. and Plumb, J.H., Fullerton, R.A., "Segmentation Strategies and Practices in the 19th-Century German Book Trade: A Case Study in the Development of a Major Marketing Technique", in. Simkin, L., "Segmentation," in Baker, M.J. and Hart, S.. Gretchen Gavett, July 09/2014, What You Need to Know About Segmentation, Harvard Business Review, accessed online 3/04/2017: Forsyth, John E.; Lavoie, Johanne; McGuire, Tim. Some segmentation, especially post-hoc analysis, relies on sophisticated statistical analysis. Cultural symbols e.g. The market segmentation theory is a contemporary concept that states there is no direct relationship between the interest rates that prevail within short-term and long-term markets. Many marketers believe that behavioural variables are superior to demographics and geographics for building market segments[57] and some analysts have suggested that behavioural segmentation is killing off demographics. The likely success (or otherwise) of the firm’s segmentation strategy is assessed through a segmentation audit discussed next. market segmentation theory. In practice, markets can be segmented as broadly as continents and as narrowly as neighborhoods or postal codes. The theory suggests that an investor earns the same interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today. Cultural segmentation can be applied to existing customer data to measure market penetration in key cultural segments by product, brand, channel as well as traditional measures of recency, frequency, and monetary value. Thus, segmentation was essentially a brand-driven process. Under market segmentation theory, it is acknowledged that securities of different terms are attractive to different investors. However, analogous product adoption and growth rates can provide the analyst with benchmark estimates, and can be used to cross-validate other methods that might be used to forecast sales or market size. We argue that Labor Market Segmentation theory is a good alternative to standard views of the labor market. and Enis, B.M., "Recycling the Family Life Cycle: a Proposal For Redefinition", in, Burrows, D., "Is behavioural data killing off demographics?". Geo-cluster segmentation is widely used by Governments and public sector departments such as urban planning, health authorities, police, criminal justice departments, telecommunications, and public utility organisations such as water boards.[42]. Segmenting the e-market. Market segmentation enables a business to conduct strong market research into customers. This theory brings together potential buyers into segments with common needs, that will respond to a marketing action. For example, although dress size is not a standard base for segmenting a market, some fashion houses have successfully segmented the market using women's dress size as a variable. Lehmann, Donald R. Managing Customers as Investments: The Strategic Value of Customers in the Long Run, pp. "[16] As Schwarzkopf points out, Smith was codifying implicit knowledge that had been used in advertising and brand management since at least the 1920s. For this reason, many companies purchase data from commercial market research firms, many of whom develop proprietary software to interrogate the data. Culture is a major dimension of consumer behaviour and can be used to enhance customer insight and as a component of predictive models. Beane and D.M. Based on Belch, G., Belch, M.A, Kerr, G. and Powell, I., Shapiro, B.P. Market segmentation is the process of dividing prospective consumers into different groups depending on factors like … Is the market segment substantial enough to be profitable? Sugars marketed to consumers appeal to different usage segments – refined sugar is primarily for use on the table, while caster sugar and icing sugar are primarily designed for use in home-baked goods. Pride, W., Ferrell, O.C., Lukas, B.A., Schembri, S., Niininen, O. and Cassidy, R., Madhavaram, S., & Hunt, S. D., "The Service-dominant Logic and a Hierarchy of Operant Resources: Developing Masterful Operant Resources and Implications for Marketing Strategy, ", Dickson, Peter R.; Ginter, James L., "Market Segmentation, Product Differentiation, and Marketing Strategy, ". Yankelovich, D., Meer, D. "Rediscovering Market Segmentation". Census data is a valuable source of cultural data but cannot meaningfully be applied to individuals. The use of multiple segmentation variables normally requires analysis of databases using sophisticated statistical techniques such as cluster analysis or principal components analysis. (i.e., with respect to distribution and promotion). 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