Through market segmentation, large heterogeneous markets are divided into smaller groups; thus enabling the marketers to reach these groups more efficiently and effectively with products and services that match their unique needs. Since, the characteristics of consumer and organizational markets are different; basis for segmentation for consumer goods is different from that of organizational markets.
Following are some of the bases used for segmenting the markets:
Market Segmentation of Consumer Goods:
To have a best view of the market structure, the marketer has to use different variables of market segmentation in combination with each other or in isolation.
The different bases for consumer market segmentation are:
a. Geographic Segmentation
b. Demographic Segmentation
c. Behavioural Segmentation
d. Psychographic Segmentation
a. Geographic Segmentation:
Under geographic segmentation the markets are divided on the basis of different geographical units such as nations, regions, states, provinces, cities, or even neighbourhoods. The decision whether to cater to needs of one or few geographical segments or all the geographical segments are at the sole discretion of the marketer.
The marketers have to pay attention to geographical differences in needs and wants of these segments. In order to offer the best suited product to a particular area, the marketer needs to have thorough demographic knowledge about the region as well as knowledge of taste and preferences of the people belonging to that segment.
In this type of segmentation, either the company may introduce customized product for a particular region or they may make slight adjustments in the standardized product as per need of that geographical segment.
Today, many companies are trying to localize their products, advertising, and sales efforts in order to fit to the needs of individual regions, cities, and even neighbourhoods. Also some companies are trying to venture through untapped markets. Eg. Some retail companies are trying to enter the semi-urban and rural areas wherein the market potential is still huge for these companies.
b. Demographic Segmentation:
Under demographic segmentation, the markets are divided into groups based on various demographic factors such as age, gender, family size, family life cycle, income, occupation, religion, race, generation, education, and nationality.
In this type of segmentation, it is believed that the taste and preferences of a particular demographic group is believed to be similar and thus the products are positioned accordingly.
Demographic factors are the most popular bases for segmentation and are easier to measure than most other types of variables:
i. Age and Life-Cycle Stage:
Consumer needs and wants vary as per the age as well as with changes in the life-cycles. Companies offer different products or use different marketing strategies based on different age and/or life- cycle groups. Eg. Companies prepare special products for higher age group consumers by considering their special needs. However, marketers must be careful regarding stereotyping when segmenting the markets on the basis of age and life-cycle.
ii. Gender:
Many products are segmented on the basis of gender; wherein either companies design their product exclusively on the basis of gender or they position their products on the basis of gender. Gender segmentation has long been used in clothing, cosmetics, toiletries, and magazines.
iii. Income:
Consumer’s tastes and preferences vary with change in income level. Income segmentation is usually used by those marketers who are in the business of automobiles, clothing, cosmetics, financial services, and travels. Eg. Companies providing luxury branded goods and convenience services usually target affluent consumers.
iv. Generation:
The buying pattern of the customers changes as per the succeeding generations. Earlier due to fewer options in the market, the customer used to buy whatever was available in the market; however, the newer generations, being tech-savvy, analyzes and evaluates products on the basis of features and prices before making the buying decision.
c. Behavioural Segmentation:
Behavioural segmentation is usually carried out for existing customers since segmentation is done on the basis of buying pattern of the customers. However, in case of new customers, their buying pattern has to be observed while they are making the purchase. This segmentation is done on the basis of the usage of the product. Under behavioural segmentation, the buyers are segmented on the basis of their knowledge, attitudes, uses, or response towards a product.
i. Occasions:
Markets can be segmented on the basis of the occasions for which the product is used. Different products are best suited for different occasions. Customers can be grouped on the basis of when they get an idea to buy the product, when they actually make their purchase, or when do they use the purchased items.
ii. Benefits Sought:
Consumer market is segmented on the basis of benefits that the customers seek from the product. Each segment seeks a different mix of benefits. Under benefit segmentation, the marketers needs to look into: the major benefits that people look for in the product, the kind of people who look for each benefit, and the major brands that deliver each benefit.
iii. User Rate:
The frequency of product usage by different customers is different. Thus on the basis of usage frequency, the customers can be grouped as those who use the product rarely, intermittently, or regularly.
Segmentation can also be done on the basis of light, medium, and heavy product users. Usually, heavy users constitute a small percentage of the market but account for high percentage of total consumption. Therefore, marketers target the customer with heavy usage of products or those who use the product very frequently.
iv. Usage Status:
Markets can be segmented on the basis of non-users, ex-users, potential users, first-time users, and regular users of a product. In this type of segmentation, the marketers reinforce and retain regular users, try to attract targeted non-users, and revive relationships with ex-users. Some of the potential user groups can be consumers facing life-stage changes such as newlyweds, new parents, etc.
v. Loyalty Status:
Customers can be grouped on the basis of their loyalty towards the company. They can be classified into groups according to their degree of loyalty viz. completely loyal, somewhat loyal, not at all loyal. Completely loyal customers buy only one brand all the time; while somewhat loyal customers prefer two or three brands at a time or might favour one brand but sometimes buy other brands.
However; not at all loyal customers, do not show loyalty to any of the brands. These types of customers either buy whatever is on sale or seek something new each time they buy. Based on the intensity of loyalty of the customers, they can be classified into four type’s viz. staunch loyalist, split loyals, shifting loyals, and switchers.
Staunch loyalists are those customers who do not switch brands under any circumstances since they are emotionally attached with the brand. They are not attracted towards other brands even if these other brands offer extra features or attractive discounts. Split loyals are those customers who are loyal to two or three brands at a time. They alternatively use these brands; however, do not like to try out the newer ones.
Shifting loyals are those customers who remain loyal to a particular brand for a particular period of time. After that they again switch brands and remain loyal with the other brand for some time and so on. This kind of behaviour is usually observed in case of convenience goods. Switchers are those customers who are not loyal to any particular brand and frequently keep on changing brands based on availability, discounts, and added features of the product.
vi. Attitude:
On the basis of attitude, the customers can be classified as positive, negative, enthusiastic, indifferent, and hostile. Marketers try to develop strategies keeping in mind the attitude of the target customers.
vii. Use of Multiple Segmentation Bases:
Multiple segmentation bases are often used by the marketers for identifying and defining the groups in a better way, target them more efficiently, and tailor market offerings and messages to their specific needs.
Many information services companies provide multivariable segmentation which is a combination of geographic, demographic, lifestyle, and behavioural segmentation. Such segmentation helps the marketers to divide people and locations into marketable groups of similar-minded consumers.
d. Psychographic Segmentation:
Psychographic make up of people within the same demographic group may vary. Under psychographic segmentation the market is segmented on the basis of social class, lifestyles, beliefs, motivation, values, and personality characteristics.
i. Lifestyle:
Lifestyle segmentation involves classifying people on the basis of their activities, interests, opinions, and attitudes. Lifestyles study therefore helps make sense of what people do, why they do it, and what doing it means to them and others. It determines the overall manner in which people live, and spend time and money.
ii. Values:
Values and beliefs are used by the marketers to determine the buying behaviour of groups. Since values influence the buying decision in the long run; it is believed that if the values of customers are taken care of then the chances of the customers becoming loyal and profitable to the company increases.
iii. Personality:
It is considered that the personality traits such as masculinity, sportsmanship, and aggression are important buying motivators. It is also observed that customers get attracted to the product with which they are able to connect. Therefore, while designing or communicating the product, the company should keep in mind the personality traits of the target groups.
Market Segmentation of Industrial Goods:
Purchasing behaviour and benefits sought are considered to be the best basis for organizational markets segmentation. Through organizational segmentation, companies can deliver the right value proposition to each segment and serve them better since it is relatively much easier for the companies to design their offerings as per the segment’s requirements as compared to the fulfilling the requirement of the market as a whole. Though bases for consumer goods segmentation are altogether different from that of organizational goods segmentation, the variables used for segmentation are somewhat similar.
In Organisational goods segmentation, there are two types of approaches:
[I] Bonoma and Shapiro segmentation model
[II] Wind and Cardozo’s two stage market segmentation model
[I] Bonoma and Shapiro Segmentation Model:
This type of segmentation uses demographic segmentation, purchasing approaches, operating characteristics, situational factors, and personal characteristics as variables.
(a) Demographic Segmentation:
Demographics is used to segment both the consumer and industrial goods; however the demographic variable used to segment the consumer markets differ from those of the industrial markets. The variables used to segment organisational markets on the basis of demographics are company size, industry, and customer location.
(i) Company Size:
Company size matter’s during the organizational markets segmentation. If the company size is small and its manufacturing capacity is less, then it will not be feasible for this company to target huge firms since the order size of the latter will be large and the former might not be able to complete and supply the order in time.
(ii) Industry:
Industries differ in their functioning. Thorough knowledge of functioning of these industries enables the marketer to segment the market effectively. The marketer should not only have full knowledge of these industries but should also have knowledge of various categories of sub-industries operating under these industries.
(iii) Customer Location:
Proximity to the customer location also plays an important role in industrial markets segmentation. The companies will mostly prefer to have their vendors in the vicinity of their companies and vice-versa.
(b) Purchasing Approaches:
(i) Organization’s Purchasing Approach:
Marketer should segment the companies on the basis of their purchasing approach since it vary from company to company viz. centralized purchasing approach or de-centralized purchasing approach.
(ii) Power Structure:
Company can segment its organizational market on the basis of former’s power structure for purchasing. Eg. If the company is controlled more by the technical department then it can be said that members of that department will be more influential while taking buying decisions.
(iii) Relationship among Buyers and Sellers:
The marketer can segment the markets on the basis of its relationship with the buyers-viz. having good relations with buyers or not having equally good relationship with the buyers. Company makes strategies to attract those buyers with whom it does not have good relations; however, in those cases where the company has good relationship with its buyers, it will prepare strategies to strengthen its relationship with these buyers and gain maximum output from it.
(iv) General Purchasing Policies of Companies:
Companies can be segmented on the basis of their purchasing policies. Purchasing policies of companies differ from company to company. Some companies might adopt bidding process for purchasing while others might go for selecting the best suppliers.
Some companies may buy product while others may prefer to take it on lease. Some companies may opt for purchasing the complete manufacturing set-up while others may go for purchasing individual components which are further assembled at the plant.
c. Operating Variables:
Organizational markets can be segmented on the basis of operating variables which include technology used by the company, product and brand-use status, and customer capabilities.
(i) Company Technology:
Segmentation can be done on the basis of companies having manual production lines, or semi-automated lines, or fully automated lines. In this case, purchasing decisions made by companies falling in each of the above categories will differ as per the requirement of their technologies.
(ii) Product and Brand-Use Status:
All users of a particular brand or product have similar experience with the product or brand. So the markets can be segmented based on the product and brand-use status. The segment of existing customers is different from that of the prospective customers. The existing customers have got some experience with the product and brand of the company and the company also has some knowledge about the expectations of these customers.
Thus, in this case, companies try to capitalize on the existing customer segment. However, the prospective customers’ segment can be lured towards the product by both explaining to them the benefits and features of the product and/or with the help of free trials.
(iii) Customer Capabilities:
Marketers should be aware of the operating, technical, and financial strengths and weaknesses of its clients. A customer with less sophisticated technology might be willing to pay extra for product testing to be done at the supplier’s premises itself. Many software companies provide after sales services like technical support, installation, and maintenance to its clients.
d. Situational Factors:
Situational factors are temporary in nature. Variables under situational factors are urgency of order fulfillment, product application, and size of the order.
(i) Urgency of Order Fulfillment:
Seller of industrial goods can differentiate the markets on the basis of urgency of order fulfillment. The markets are categorized on the basis of immediate replacement products, regularly used products, and products used for building a new plant. Companies often pay premium prices for those products which are needed to be replaced immediately.
(ii) Product Application:
The way in which the product is used by the company is also one of the bases for segmentation. Same product might be used by different companies in different manner and/or for different purposes. Robustness and reliability is important for those machines which are operated continuously (say 24 hours); however, price and product features are important for those customers who use the same machine for relatively lower time say 8 hours a day.
(iii) Size of Order:
Companies can be segmented on the basis of size of the order-viz. bulk orders or small orders. Automated companies capable of delivering huge amount in short time span usually opts for bulk orders; while companies with manual processes will take up small orders which they can easily fulfill within short time span.
e. Personal Characteristics of Buyers:
In every organization, the purchase decisions are made by either a person or a group of people; therefore marketers may segment the market on the basis of the personal characteristics of these deciders. A risk averse decision maker in the company may not prefer new product or service as risks involved in the product are more as compared to benefits offered; however, risk taking decision maker would take the risk of testing the benefits of the new product even in the presence of risk involved.
[II] Wind and Cardozo’s Two Stage Market Segmentation Model:
Wind and Cardozo’s two stage market segmentation model is widely adopted in today’s market. This model of business segmentation is based on two- step classifications-viz. micro-segmentation and macro-segmentation.
A. Micro Segmentation:
The important micro-segmentation variables are buying decision criteria, decision-making unit structure, and attitude towards suppliers.
(i) Buying Decision Criteria:
Different companies set different criteria for purchasing a product. Criteria of selection may be quality, or technical support and maintenance, or price. Segmentation is done on the basis of the criteria adopted by the company.
(ii) Decision-Making Unit Structure:
Purchase decision in any company is influenced by large number of people. Which product is being bought and whether the product was bought earlier are the two bases for segmentation under decision-making unit (DMU). It is imperative for the company to understand the decision-making unit structure of its client in order to maintain good relations with the people who take the decisions; and thus to try and win contracts from these clients.
(iii) Attitudes towards the Supplier:
Attitude of the decision maker towards a particular supplier is also an important factor for segmentation. Attitude of a decision maker towards a supplier is formed on the basis of age, education, job title, and decision style of the supplier. Segmentation variables under this can be neutral attitude, positive attitude, negative attitude, adversarial attitude, or opponent attitude towards a supplier.
B. Macro Segmentation:
(i) Company Size:
Market segmentation can be done on the basis of size of the organizations present in the market. On the basis of company size, the marketer can determine the formers’ business potential. However, most of the times, market size is needed to be combined with something else in order to have more realistic results.
(ii) Geographic Locations:
Under geographic location, the companies are segmented on the basis of culture, language, and business attitudes of the people prevailing in the company. Culture and communication requirements of the company are considered to be important while segmenting the market. Eg. Advertising strategy of a company for different countries will be different and should be aligned with the cultural practices in that country.
(iii) Purchasing Situation:
Companies can be segmented on the basis of existing customers, or new and potential customers. More emphasis needs to be given on attracting the potential customers while the cost for retaining old customers is relatively lower. The potential or new customers can be attracted by focusing on excellent delivery and services.
(iv) Decision Making Stage:
Companies can be segmented on the basis of their decision making stage. Under this, the marketer has to determine at which stage of decision making process the buyer company is in. This type of segmentation is mainly done for the new/potential clients of the company.
(v) Benefit Segmentation:
Many companies use same product for completely different purposes. Under benefit segmentation, companies can be segmented on the basis of the benefit they seek from the product or how the product is utilized by them.
(vi) Type of Institution:
The requirements of different organizations are different. They also differ as per the industry in which they are working. Therefore, under this type of segmentation, the markets need to be segmented on the basis of their requirements and as per the need of the industry in which they are working.
(vii) Purchasing Strategies:
Segmentation can be done on the basis of purchasing strategies of the companies which differ from company to company. Segmentation can be done on the basis of either global or local decision-making structure. Decision-making power of purchasing officers or the engineers or technical specialist can also be the bases for power structure segmentation.
(viii) Business Model of the Purchasing Company:
Buyer business model affects the segmentation decision. The decisions regarding where and what to buy depends upon the business model. Companies can be segmented on the basis of cost leadership strategy or differentiation strategy.
Companies having cost leadership strategy prefer high- volume manufacturing and thus require high-volume purchases; therefore in these types of clients, the marketer will have to focus more on price pressure and precise delivery.
However, in case of differentiation strategy, since the client company gives customized products and services to its end customers; these companies also expect that their suppliers should provide specialized products to them. In this case volume purchases also decreases.