Except where noted, these notes are taken from Chapter 9 of Principles of Marketing - European Edition by Kotler, Armstrong, Saunders, Wong (Prentice Hall Europe 1996) ISBN 0131659030
market segments are portions of the market which behave similarly to each other - members of the group have similar characteristics (eg. needs/likes, resources, locations, buying patterns, expections)
market segmentation is the process of finding a balance between a one-size-fits-all approach, and an approach which customises the product for each customer (which is impractical to provide, except for large or special customers) - segmentation allows a product to be customised to suit the group of customers within the segment
segmentation is performed by identifying characteristics that are common between customers, and shaping products that contain the required "combination of benefits"
within a given group, additional segmentation can be performed; eg. shoppers might be segmented by age, then by gender, then by income
segmentation characteristics vary, depending on whether the customer is a person (not covered here) or another business
Business-to-Business (B2B) segmentation variables are as follows:
segmentation variables can be identified by surveying existing or prospective customers to establish their attributes, usage patterns, attitudes, demographics, psychology and habits. The results of the survey are then analysed using factor analysis and cluster analysis. After validation, the segment is profiled (has a broad description created). The profile should broadly answer this: WHO are these customers, WHERE they are located, WHAT will they buy, WHY, HOW, and through WHICH channels will they be reached?
once profiled, segments can be evaluated on their merits; there are two main factors, the attractiveness of the segment, and its fit with the company
segment attractiveness is defined by:
size of the segment (total current customers, total sales value)
growth characteristics (sales-growth rates and projected profit margins)
competitiveness of the segment: Porter's Five Forces (the threat of new and existing competitors, the threat of substitutes, and the relative power of suppliers and buyers)
company fit is defined by:
is there a specific set of competitive advantages the company could use? (low costs, underutilised capacity, technology)
does the company have the resources to compete and succeed in that segment?
would competing in that segment be convergent with organisational goals?
maybe a SWOT analysis would help?
once segment attractiveness and company fit have been defined, a "directional policy matrix" (courtesy Royal Dutch Shell) can be used to select the best segments. Along the X axis of the matrix is segment attractiveness, and along the Y axis is business fit:
| A F
In the above example, segment C is ideal, as it is very attractive and has a good fit. Segment E should be avoided
as it has very poor fit, while segment A should be avoided as it is very unattractive (despite being a good fit). Generally,
only segments in the upper-right quadrant of the chart should be considered.
To summarise, the market segmentation process is as follows:
survey the marketplace and identify appropriate segmentation variables
analyse the survey results to find clusters or groups of customers - these are the segments
profile (describe) the segments
rate the segments based on two main factors: their attractiveness and organisational compatibility
select the best segments - these become the company's target markets
methods of promotion:
cold-calling (telephone, in person)
promotions during quiet periods
loyalty programs ("frequent flyer" or discount cards)