Definition of market segmentation

Technically, market segmentation is the process of dividing the population of possible customers into distinct groups. Those customers within the same segment share common characteristics that can help a firm in targeting those customers and marketing to them effectively (adapted from Lovelock and Wirtz 2011).

Segmentation is one of the most important concepts in marketing.  Firms vary widely in their abilities to serve different types of customers. Hence, rather than trying to compete in an entire market, firms should segment the market. Through the process of market segmentation, firms will identify those parts, or sections of the market, that they can serve best.

There are many ways to segment the market, including the following common ways and these approaches can be used in combination:

  • Demographic segmentation, such as age, gender, income, has been widely used. That works well, when demographics are highly associated with needs and wants.  However, such an association may often not be the case, as two people with the exact same demographic characteristics may have very different needs and therefore exhibit different buying behaviours.
  • Psychographic segmentation has become more popular as it reflects people’s lifestyles, attitudes and aspirations. Psychographic segmentation can be very useful in strengthening brand identity and creating an emotional connection with the brand, but may not necessarily result in sales.
  • Behavioural segmentation is based on product consumption-related behaviours and can include frequency, volume and type of product usage. This type of segmentation can be very powerful for firms that have a membership-type relationship with customers, for example, via a contract such as banks and telecommunications providers, or via loyalty programmes. Here, firms can exactly observe consumption behaviour.  A drawback is that firms typically can only observe the behaviour with regard to their own products, but not those of their competitors.
  • Needs-based segmentation groups customers based on similar needs and wants, or benefits sought, with regards to a particular product or consumption context. Needs-based segmentation is perhaps the segmentation truest to the marketing concept, that is, satisfying customers’ needs and wants.  For companies to increase their sales, segmentation requires understanding customer needs, including those that are underserved or even unmet.

Example

Contiki Holiday (www.contiki.com ) is an example of a company that focuses on serving a need. Some single people do not want to join tours that include mostly families. They prefer a holiday where they can meet people with similar preferences. Hence, Contiki Holiday serves this group of people. It is a worldwide leader in holidays for those in the 18-35 age group (demographic segmentation). The holiday packages are aimed at the fun-loving youth group (psychographic segmentation). To cater to different lifestyles and budget (a combination of psychographic and demographic segmentation), Contiki further segmented its packages. For example, those going to Continental Europe can choose between:

  • Camping - for people who are very outgoing and do not mind roughing it;
  • Concept/ budget - for those who want more for their time and money such as staying in budget backpacker style accommodation;
  • Time out/ Superior - with lots of sightseeing, free time, extra excursions and stays in superior class tourist hotels. [1]

References
Lovelock, Christopher and Wirtz, Jochen (2011), Services Marketing: People, Technology, Strategy, Upper Saddle River, New Jersey: Prentice Hall.

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