Market Segmentation

Ch11-H8566.qxd 8/8/07 2:04 PM Page 222 CHAPTER 11 Market segmentation YORAM (JERRY) WIND and DAVID R. BELL All markets are heterogeneous. This is evident from the focus of a significant part of the marketing observation and from the proliferation of popular research literature. The basic concept of segmenta- books describing the heterogeneity of local and tion (as articulated, e.g. in Frank et al., 1972) has global markets. Consider, for example, The Nine not been greatly altered. And many of the funda- Nations of North America (Garreau, 1982), Latitudes mental approaches to segmentation research are and Attitudes: An Atlas of American Tastes, Trends, still valid today, albeit implemented with greater Politics and Passions (Weiss, 1994) and Mastering volumes of data and some increased sophistica- Global Markets: Strategies for Today’s Trade Globalist tion in the modelling method. To see this, consider (Czinkota et al., 2003). When reflecting on the nature the most compelling and widely used approach to of markets, consumer behaviour and competitive product design and market segmentation – con- activities, it is obvious that no product or service joint analysis. The essence of the approach out- appeals to all consumers and even those who pur- lined in Wind (1978) is still evident in recent work chase the same product may do so for diverse rea- by Toubia et al. (2007) that uses sophisticated geo- sons. The Coca Cola Company, for example, varies metric arguments and algorithms to improve the levels of sweetness, effervescence and package size efficiency of the method. Other advances use for- according to local tastes and conditions. Effective mal economic theory to specify optimal consumer marketing and business strategy therefore requires trade-offs – see Iyengar et al. (2007) for an applica- a segmentation of the market into homogeneous tion to non-linear pricing. segments, an understanding of the needs and wants Despite the underlying stability of the basic of these segments, the design of products and serv- concept, recent advances in information technology ices that meet those needs and development of and the trend towards globalization are introducing marketing strategies, to effectively reach the target a discontinuous change to the adoption and imple- segments. Thus focusing on segments is at the mentation of segmentation strategies. The revolu- core of organizations’ efforts to become customer tion in information technology and strategy makes driven; it is also the key to effective resource alloca- possible the creation of databases on the entire uni- tion and deployment. The level of segment aggre- verse and enormous advances in database market- gation is an increasingly important issue. In today’s ing and innovative distribution approaches. It has global economy, the ability to customize products also facilitated much of the development in flexible and services often calls for the most micro of seg- manufacturing with the consequent emergence of ments: the segment of one. Following and imple- mass customization. In addition, the Internet has menting a market segmentation strategy allows the expanded not only the ability to implement market firm to increase its profitability, as suggested by the segmentation research more effectively, but also classic price discrimination model which provides expanded the portfolio of segmentation methods the theoretical rationale for segmentation. available for use (see, e.g. Dahan and Srinivasan, Since the early 1960s, segmentation has been 2000). These changes are leading to the creation of viewed as a key marketing concept and has been ‘one-on-one marketing’ or segments of one. The Ch11-H8566.qxd 8/8/07 2:04 PM Page 223 Market segmentation 223 globalization of business expands the scope of allocation and differential action based on seg- operations and requires a new approach to local, ment (customer) value. The chapter concludes regional and global segments. Moreover, busi- with a set of critical issues that provide the guide- nesses that have not traditionally embraced mar- lines for research agenda in this area. keting in general or segmentation in particular, see it as imperative for success and even survival. Consider the current enormous effort by the lead- Use of segmentation in marketing ing financial services firms to understand how to segment the global at-retirement market fuelled by and business strategy the baby boomers in North America and Western Europe. Finally, it is important to recognize a subtle Conceptually any business strategy should be but pervasive shift in the bases for segmentation. based on understanding, meeting and even Historically, marketers segment the market accord- exceeding the needs of target segments. Figure 11.1 ing to characteristics (e.g. demographics), prefer- illustrates the centrality of segmentation and the ences, usage rates, etc. Increasingly, it is difficult to progression of fundamental questions to address. fully articulate a segmentation strategy without an At the core is the identification of the existing and accompanying discussion of customer lifetime potential customer base, an understanding of value (CLV) and a thought process that makes the underlying heterogeneity and the evolving needs CLV calculation explicit (see Gupta and Lehmann, and wants of target segments. Next is the response 2003). to segmentation, namely guidelines for the devel- These changes require not only an appraisal opment of products and services, and their associ- of what we know about segmentation, and what ated positioning to meet the evolving needs of the works and does not work, but also a review of the target segments. Finally, the product positioning segmentation area as part of an entirely new mar- provides the foundation for the rest of the market- keting and management paradigm. ing strategy and the processes, resource allocation Therefore, the purpose of this chapter is to decisions and other activities of the firm. introduce the reader to both the ‘best practice’ in Numerous published and unpublished case the segmentation area and the likely new develop- studies attest to the value of segmentation. For ments. These observations are based on advances example, Bell et al. (1998) show how segmentation in marketing concepts, marketing science research of store choice decisions of supermarket shoppers and modelling tools, generalizations from empir- reveals fundamental differences in store attractive- ical studies, successful practices of leading firms ness, conditional on a shoppers preferred shopping and the conceptual implications of operating in style. The model illustrates how one store format the global information age. This discussion of the can capture market share from another. It is import- best segmentation practices and likely advances ant to recognize that applications of segmentation encompasses five areas: cover a diversity of business contexts. In an industrial buying setting, Gensch et al. (1990) provide 1 Use of segmentation in marketing and business compelling evidence of the positive consequences strategy. of segmentation of electrical equipment buyers. In 2 Decisions required for the implementation of a a 1-year test segmentation applied in two of three segmentation strategy. geographic districts, sales increased 18 and 12 per 3 Advances in segmentation research. cent – while sales declined 10 per cent in the district 4 Impact of operating in the global information age in which model-based segmentation was not on segmentation theory, practice and research. applied and 15 per cent for the industry. The firm 5 Expansion of segmentation to other stakeholders. reports continuous market share increases from the application of the segmentation approach. This is Thus, this chapter is based on the premise that not an isolated case. The popular business press segmentation is the firm’s response to a funda- and the conference circuit are full of anecdotal cases mental market feature – heterogeneity. The likely in which creative segmentation has paid off. In fact success (or otherwise) of the firm’s segmentation a growing number of firms do use segmentation as strategy is assessed through a segmentation audit the basis of their marketing strategy. discussed next. The firm enacts the segmentation Yet despite the general acceptability of seg- strategy through: (1) data collection, (2) applica- mentation and its value, too many firms are not tion of models and frameworks and (3) resource segmenting their markets effectively and are not Ch11-H8566.qxd 8/8/07 2:04 PM Page 224 224 The Marketing Book 1. Who are the customers and what are their needs and wants? 2. What product/service offerings will meet the target segments’ needs and offer us a sustainable competitive advantage? 3. What strategies and programmes, resources, capabilities, and processes are required to develop and effectively implement the product/service solutions? Figure 11.1 Focus on market-driven strategy basing their strategies on the evolving needs of tar- identity the observable characteristics of get segments. The experience of the more success- individuals or firms thought to be in the target ful firms in consumer and industrial markets alike market segments.A firm unable to effectively suggests, however, that effective segmentation is a answer this question is likely to have considerable must. The likelihood of a positive response to the trouble not only locating existing segments, but firm’s offerings is increased, the cost of reaching also predicting the evolution

Load more