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A market segment is a group of people or organizations sharing one or more characteristics that cause them to have similar product and/or service needs. A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a market stimulus, and it can be reached by a market intervention. The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting up the market into smaller groups.

Contents

"Positive" market segmentation

Market segmenting is dividing the market into groups of individual markets with similar wants or needs that a company divides the market into distinct groups who have distinct needs, wants, behavior or who might want different products & services. Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private although industrial market segmentation is quite different from consumer market segmentation, both have similar objectives. All of these methods of segmentation are merely proxies for true segments, which don't always fit into convenient demographic boundaries.

Consumer-based market segmentation can be performed on a product specific basis, to provide a close match between specific products and individuals. However, a number of generic market segment systems also exist, e.g. the Nielsen Claritas PRIZM system provides a broad segmentation of the population of the United States based on the statistical analysis of household and geodemographic data.

The process of segmentation is distinct from targeting (choosing which segments to address) and positioning (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to address; to understand their behavior; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved.

Improved segmentation can lead to significantly improved marketing effectiveness. Distinct segments can have different industry structures and thus have higher or lower attractiveness (Michael Porter). With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased leading to better reputation.

Positioning

Once a market segment has been identified (via segmentation), and targeted (in which the viability of servicing the market intended), the segment is then subject to positioning. Positioning involves ascertaining how a product or a company is perceived in the minds of consumers.

This part of the segmentation process consists of drawing up a perceptual map, which highlights rival goods within one's industry according to perceived quality and price. After the perceptual map has been devised, a firm would consider the marketing communications mix best suited to the product in question.

Top-Down and Bottom-Up

George S. Day (1980) describes model of segmentation as the top-down approach: You start with the total population and divide it into segments. He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship management software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioral, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called database marketing or micro-marketing. Its use is most appropriate in highly fragmented markets. McKenna (1988) claims that this approach treats every customer as a "micromajority". Pine (1993) used the bottom-up approach in what he called "segment of one marketing". Through this process mass customization is possible.

Creating a market segment will allow you to set yourself apart from other competitors.

Using Segmentation in Customer Retention

Segmentation is commonly used by organizations to improve their customer retention programs and help ensure that they are:

  • Focused on retaining their most profitable customers
  • Employing those tactics most likely to retain these customers

The basic approach to retention-based segmentation is that a company tags each of its active customers with 3 values:

Tag #1: Is this customer at high risk of canceling the company's service? (Or becoming a non-user)
One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be signaled through a customer's decline in spending on his card.

Tag #2: Is this customer worth retaining?
This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer.[1]

Tag #3: What retention tactics should be used to retain this customer?
For customers who are deemed “save-worthy”, it’s essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing “special” customer discounts to sending customers communications that reinforce the value proposition of the given service.

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Process for tagging customers

The basic approach to tagging customers is to utilize historical retention data to make predictions about active customers regarding:

  • Whether they are at high risk of canceling their service
  • Whether they are profitable to retain
  • What retention tactics are likely to be most effective

The idea is to match up active customers with customers from historic retention data who share similar attributes. Using the theory that “birds of a feather flock together”, the approach is based on the assumption that active customers will have similar retention outcomes as those of their comparable predecessors.[2]

From a technical perspective, the segmentation process is commonly performed using a combination of predictive analytics and cluster analysis.

Illustration of retention-based segmentation process:

Market segment diagram wikipedia v6.jpg

Price Discrimination

Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segments (referred to as price discrimination), charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behaviour is rational on the part of the monopolist, but is often seen by competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Examples of this exist in the transport industry (a plane or train journey to a particular destination at a particular time is a practical monopoly) where Business Class customers who can afford to pay may be charged prices many times higher than Economy Class customers for essentially the same service. Microsoft and the Video industry generally also price very similar products at widely varying prices depending on the market they are selling to.

See also

References

  1. ^ Gupta, Sunil (2005). Managing Customers as Investments. Wharton School Publishing, 2005.
  2. ^ Mind of Marketing "What is customer segmentation?"
  • Day, G. (1980) "Strategic Market Analysis: Top-down and bottom-up approaches", working paper #80-105, Marketing Science Institute, Cambridge, Mass. 1980.
  • McDonald, Malcolm and Dunbar, Ian (2004). Market Segmentation: How to do it, how to profit from it. Butterworth-Heinemann, 2004.
  • McKenna, R. (1988) "Marketing in the age of diversity", Harvard Business Review, vol 66, September-October, 1988.
  • Pine, J. (1993) "Mass customizing products and services", Planning Review, vol 22, July-August, 1993.
  • Steenkamp and Ter Hofstede (2002) "International market segmentation: issues and perspectives", Intern. J. of Market Research, vol 19, 185-213
  • Wedel, Michel and Wagner A. Kamakura (2000). Market Segmentation: Conceptual and Methodological Foundations. Amsterdam: kluwer.

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