MK0012-Unit-08-Retail Market Segmentation

Unit-08-Retail Market Segmentation Structure 8.1 Introduction Objectives 8.2 Importance of Market Segmentation in Retail 8.3 Criteria for Effective Segmentation 8.4 Dimensions of Segmentation Geographic segmentation Geo-demographic segmentation Demographic segmentation Psychographics segmentation Behaviouristic segmentation Demographic-psychographics segmentation (Hybrid approach) 8.5 Limitations of Market Segmentation 8.6 Summary 8.7 Terminal Questions 8.8 Answers 8.1 Introduction The retail marketing strategies and retail promotions, which you have already studied, are directed towards specific group of customers, known as market segments. The concept of market segmentation emerged as an extension of the marketing concept in the latter part of 1950s. It is based on the simple observation that all the existing and potential consumers are not alike: there are significant differences in their needs, wants, tastes, background, income, education and experience, etc., and these characteristics change over time with lifestyle changes. Had they been alike, it would have eliminated the need to have different variations of the same basic product and one promotional campaign is all that would have been needed. For example, there would have been only one type of soap, one detergent, one car, one computer, one washing machine and so on. Objectives After studying this unit, you should be able to: Explain the importance of market segmentation Discuss the criteria for effective segmentation Identify the dimensions for market segmentation

 State the limitations of market segmentation 8.2 Importance of Market Segmentation in Retail A market segment is a portion of a larger market in which the individuals, groups, or organisations share one or more characteristics that cause them to have relatively similar product needs. Segmentation studies are used to uncover needs and wants of specific groups of consumers for whom the marketer develops especially suitable products and services to satisfy their needs. Marketers also use these studies to guide them in redesigning, repositioning, or targeting new segments for the existing product. For example, the heavy user adult market has been targeted for Johnson baby shampoo. For sensitive skins, Dove has come out with a variant, Dove Gentle Exfoliating Bar (it has a pH range of 6.5 - 7.5, almost neutral, neither acidic nor alkaline). Segmentation studies help in identifying the most appropriate media for promotional messages. Almost all media vehicles use segmentation studies to determine the characteristics of their audience and publish their findings to attract marketers seeking a similar audience. Segmentation is an important input to marketing planning because it can be used to formulate company "product-market" objectives, by which the enterprise may: define its markets, position ranges of brands and product varieties, identify gaps which offer significant opportunities for expansion or new product positioning and rationalize policies for existing brands, products and mixes. Market segmentation plays a dual role, namely as a marketing tool, and as a basic input to business planning. There are three main reasons for the importance of market segmentation. These are: Market fragmentation: it is caused by demographic and lifestyle changes, new product and process developments and intense market competition/some markets, which once had a homogeneous character, has now split into a variety of consumer groups, each with different tastes and preferences. The development of retailer power: with this, the relative advantage obtained from bulk buying, the use of retailers brands, and policy limitations on the merchandise stocked, all combined to put the manufacturer or supplier at a disadvantage. At the same time concentration has occurred amongst retail companies, leaving a small number of very large companies as well as a large number of smaller retailers. The volume trap: this situation occurs when suppliers who are capable of volume production and distribution to retail multiple chains dominate the markets for commodity type products (like plant-baked bread). But to avoid this situation, marketers can use segmentation. For example, value-added or non-standard items are now frequently targeted on customer segments which seek to avoid the purchase of standardized products, whether these are foodstuffs, clothes, computers or industrial machinery. Alternatively, production arrangements may be designed to be flexible enough to supply target markets in a large number of relatively small and specialized niches, such as in the market for industrial or aviation control systems. 8.2.1 Marketing complex Marketing departments use segmentation so they can target their products more accurately. It affects each of the 4Ps in their marketing mix. If the product is effectively segmented a company will be able to promote the right product, at the right price and use the right

distribution to reach the place where the consumers are. Now look at the way the 4Ps are used in market segmentation. Product Companies produce a wide range of products or variations that is meant for different groups or segments. For example, a car manufacturer will often have a range that includes a family model, an executive model and a sports model. Lifestyle segmentation will be used to develop their product line and to target their products. Price There are obvoius linkages between price and quality, but not all customers can afford to buy the most expensive goods. There is a large range of televisions on the market, for example, each with slightly different features. Within this range of products, there will also be a range of prices to cater for varying disposable incomes. Promotion Studying how a product is advertised can reveal its target market. Recently Nokia, a leading mobile phone company, used advertising campaigns that varied for men and women. The male phone was pictured in black and white, and all its features and business applications described. The female phone was in bright colors, and was pictured as a matching accessory to go with a womans lipstick and handbag. You may not agree with this stereotyping, but it is a good example of gender segmentation. Place It is very important for firm to know where its target market is. A producer of automobile parts needs to identify areas where automobile companies are located. The firm would have to consider how best to get its product to these areas. Self Assessment Questions 1. Segmentation often plays a dual role, one as a marketing tool and another as a basic input to ____________ . 2. Market fragmentation is usually caused by _________ and __________ changes. 8.3 Criteria for Effective Segmentation Marketing managers should ensure that the segmentation passes through six criteria based acid tests. As a student of marketing, you need to understand what makes a good segmentation so that in the event of doing segmentation in your workplace, you can test your decisions on these grounds. These six criteria include identity; accessibility, responsiveness, size, measurability and nature of demand. 1. Identity: The marketing manager must have some means of identifying members of the segment i.e. some basis for classifying an individual as being or not being a member of the segment. There must be clear differences between segments. Members of such segments can be readily identified by common characteristics, and display similar behavior. 2. Accessibility: It must be possible to reach the different segments in regard to both promotion and distribution. In other words, the organization must be able to focus its marketing efforts on the chosen segment. Segments must be accessible in two senses. First,

firms must be able to make them aware of products or services. Second, they must get these products to them through the distribution system at a reasonable cost. 3. Responsiveness: A clearly defined segment must react to changes in any of the elements of the marketing mix. For example, if a particular segment is defined as being cost-conscious, it should react negatively to price rises. If it does not, this is an indication that the segment needs to be redefined. 4. Size: The segment must be reasonably large to be a profitable target. It depends upon the number of people in it and their purchasing power. For example, makers of luxury goods may appeal to small but wealthy target markets whereas makers of cheap consumption goods may sell to the large number of persons who are relatively poor. The idea is that enough potential buyers must exist to cover the costs of production and marketing required in that segment. This is often called as substantiality. 5. Nature of Demand: It refers to the different quantities demanded by various segments. Segmentation is required only if there are market differentiation in terms of demand. The marketing manager should not only be able to find out the total demand but also the differences in demand patterns in each of these segments. 6. Measurability: The purpose of segmentation is to measure the changing behavioral pattern of consumers. For example, the segment of a market for a car is determined by a number of considerations, such as economy, status, quality, safety, comforts etc.

Self Assessment Questions 3. The members of a particular segment should posses some _________ features. 4. A segments accessibility is defined in terms of _________ and _________. 8.4 Dimensions of Segmentation Markets are complex entities that can be segmented in a variety of ways. It is an important issue to find an appropriate segmentation scheme that will facilitate target-marketing, product positioning, and developing successful marketing strategies and action programmes. A segmentation variable is a characteristic of individuals, groups or organisations that marketers use to divide and create segments of the total market. One approach to segmentation is on a priority basis. In this case, the marketer may assume that differences must exist among heavy users and light or medium users of a product category. Segmentation descriptors fall under four major categories and include geographic variables, demographic variables, psychographic variables, and behaviouristic variables. Geographic variables focus on where the customers are located. Demographic variables identify who the target customers are. Psychographic variables refer to lifestyle and values. Behaviouristic variables identify benefits customers seek, and product usage rates.

Before collecting any data on the market, the basis for segmentation is analysed. The marketer can also assume that dual-income households are growing in urban areas and then develop a programme for this segment. Selecting the right segmentation variable is critical. For example, small car producers might segment the market on the basis of income but they probably would not segment it on the basis of political beliefs or religion because political leanings or religious beliefs do not normally influence consumers automobile needs. Segmentation variable must also be measurable to segment the market accurately. For example, segmenting the market on the basis of intelligence would be difficult because this characteristic cannot be measured accurately. Marketers can use one or more variables to segment the market. Different variables are used to segment consumer markets. Broadly speaking, segmentation variables fall under two categories: consumer characteristics or consumer responses. The most popular bases for market segmentation include geographic factors, demographic factors, psychological characteristics, social/cultural variables; use related factors, use situation variables, benefits sought and combination of several segmentation bases called hybrid formats, such as demographic/psychographic profiles, geo-demographic variables, values and lifestyles. Table 8.1 lists the variables that can be used to segment the market. Table 8.1: Segmentation Variables

The subsequent sub-sections discuss various bases for market segmentation. 8.4.1 Geographic segmentation Geographic segmentation focuses on dividing markets into different geographic units, such as regions, nations, states, urban, rural, etc. Customers located in different geographic areas vary in terms of climates, terrain, natural resources, population density, culture, service needs, sales potential, growth rates, competitive structure of the market, frequency of purchases for a variety of goods and services. For example, Jeeps are more popular in rural areas in India than in urban areas. Shopping malls are located only in larger cities in India, and raincoats are sold more in rainy areas. Geographic segmentation is used both in consumer and organisational markets, particularly where customers are not willing to travel far to acquire goods and services. 8.4.2 Geo-demographic segmentation Many segmentation approaches involve both geographic and demographic descriptors. This approach is based on the premise that people who live close to one another are likely to have similar economic status, tastes, preferences, lifestyles and consumption behaviour. Geodemographic segmentation is particularly useful when a marketer is capable of isolating its prospects with similar personalities, goals, interests, and in terms of where they live. For products, and services used by a wide cross-section of society, this approach may not be

suitable. For example, some retailers who propose to open new stores are interested in knowing something about the people who live within a defined area whom they aim to attract. 8.4.3 Demographic segmentation Demographic characteristics are commonly used to segment the market. Factors such as age, sex, education, income, marital status, household life cycle, family size, social class, etc., are used singly, or in a combination, to segment a market. Shaving products for women are based on the demographic variable of gender. Toy manufacturers such as Funskool and Mattel Toys segment the market on the basis of age of children. Auto manufacturers segment the market by considering income as an important variable. Producers of refrigerators, washing machines, microwave ovens etc., take income and family size as important variables in segmenting the market. Ready-to-wear garment producers often segment the market on the basis of social class. Examples are Chirag Din, Arrow, Van Heusen, Louis Philippe, Levis and others. In general, the social class can represent lower, middle and upper class depending on education, income, status, etc. For example, an engineer and a clerk are considered as members of different social classes. Figure 8.1 depicts the classification of the Indian population in a pyramid form

Figure 8.1 Socio-economic Pyramid of Indian Population 8.4.4 Psychographics segmentation When segmentation is based on personality or lifestyle characteristics, it is called psychographic segmentation. Consumers have a certain self-image and this describes their personality. There are people who are ambitious, confident, aggressive, impulsive, conservative, modern, gregarious, loners, extrovert, introvert, etc. Some motorcycle manufacturers segment the market on the basis of personality variables such as macho image, independent and impulsive. Some producers of liquor, cigarettes, apparel, etc., segment the market on the basis of personality and self-image. Marketers, are often not concerned about measuring how many people have the characteristic as they assume that a substantial number of consumers in the market either have the characteristic or want to have it. Lifestyle: It is an indicator of how people live and spend their time and money. What people do in their spare time is often a good indicator of their lifestyle. For example, John L. Lastovicka, John P. Murray, Erich A. Joachimsthaler, Gaurav Bhalla and Jim Sheurich in their study, were identified two lifestyle segments that were most likely to drink and drive: good

timers and problem kids. Good timers are partygoers, macho and high on sensation seeking. Problem Kids frequently display troublesome behaviours. According to Morris B. Holbrook, people who have an affinity for nostalgia, or the desire for old things, also represent a lifestyle segment and can be a key market for old movies, antiques and books. Surfing on the Internet has also created a new type of lifestyle. Another study by Rebecca Piirto of fashion consumers found six major groups: yesteryears (older consumers), power purchasers (married households with college degree), fashion foregoers, social strivers, dutifuls (highly practical) and progressive patrons (high-income/quality buyers). Consumers in different countries and cultures may have characteristic lifestyles.For example, Indian women are home focused, less likely to visit restaurants, more price-sensitive, spend time preparing meals at home and fond of movies. AIO inventories are useful additions to demographic data but marketers have found the original AIO inventories as being too narrow. Now, psychographics or lifestyle studies generally include the following: Attitudes include evaluative statements about people, products, ideas, places, etc. Values refer to widely held beliefs about what is right/acceptable/desirable, etc. Activities and interests cover behaviours with respect to activities other than occupation to which consumers devote time and effort, such as hobbies, interests, social service, etc. Demographics cover gender, age, education, occupation, income, family size, geographic location, etc. Media preferences describe which specific media the consumers prefer to use. Usage rate focuses on measurements of consumption level within a particular product category and is generally recorded as heavy, medium, light, or non-user. Table 8.2 lists various lifestyle dimensions that are of interest to the marketers. Table 8.2: Lifestyle Dimensions

The sample size is often 500 or more individuals who provide this information and are placed in groups whose members have similar response patterns. According to F. W. Gilbert and W. E. Warren, most studies use the first two or three dimensions mentioned above to group individuals. The use of other dimensions provides more complete profiling of each group. Generally, the AIO measurements are product or activity specific. For example, W. A. Kamakura and M. Wedel have reported a study related to fashion clothing which included 40 statements and respondents reported their degree of agreement or disagreement. Five of the statements are mentioned here:

 I like parties with music and chatting. I like clothes with a touch of sensuality. I choose clothes that match my age. No matter where I go, I dress the way I want to. I think I spend more time than I should on fashion. In this study, statements relevant to activities and demographics were also included. General lifestyle studies can be used to spot new product opportunities, while product specific lifestyle analysis may help repositioning decisions regarding existing brands. The VALS (Values and Lifestyles) Stanford Research Institute (SRI) developed a popular approach to psychographics segmentation called VALS (Values and Lifestyles). This segmented consumers according to their values and lifestyles in USA. Researchers faced some problems with this method and SRI developed the VALS2 programme in 1978 and significantly revised it in 1989. VALS2 puts less emphasis on activities and interests and more on a psychological base to tap relatively enduring attitudes and values. To measure it, respondents are given 42 statements with which they are required to state a degree of agreement or disagreement. Some examples of the statements are: I am often interested in theories. I often crave excitement. I liked most of the subjects I studied in school. I like working with carpentry and mechanical tools. I must admit that I like to show off. I have little desire to see the world. I like being in charge of a group. I hate getting grease and oil on my hands. VALS2 has two dimensions. The first dimension, self-orientation, determines the type of goals and behaviours that individuals will pursue, and refers to pattern of attitudes and activities which help individuals reinforce, sustain, or modify their social self-image. This is a fundamental human need. The second dimension resources reflects the ability of individuals to pursue their dominant self-orientation that includes the full range of physical, psychological, demographic and material means such as self-confidence, interpersonal skills, inventiveness, intelligence, eagerness to buy, money, position, education, etc. The questions above are designed to classify respondents based on their self-orientation. Stanford Research Institute (SRI) has identified three basic self-orientations: Principle-oriented individuals are guided in their choices by their beliefs and principles and not by feelings, desires and events. Status-oriented individuals are heavily influenced by actions, approval and opinions of others.

 Action-oriented individuals desire physical and social activity, variety and risk taking. Based on the concepts of self-orientation and resources, Values and Lifestyle typology breaks consumers into eight groups. VALS2 suggests that a consumer purchases certain products and services because the individual is a specific type of person. The purchase is believed to reflect a consumers lifestyle, which is a function of self-orientation and resources. People with most resources are at the top and the ones with least resources are at the bottom of this typology. Each of the eight groups exhibits a distinctive behaviour, decision-making approach and product or media usage attributes. VALS2 represents an interconnected network of segments, which means that adjoining segments have many similar characteristics and can be combined to suit particular marketing objectives. 8.4.5 Behaviouristic segmentation Dividing the market on the basis of such variables as use occasion, benefits sought, user status, usage rate, loyalty status, buyer readiness stage and attitude is termed as behaviouristic segmentation. Buyers can be identified according to the use occasion when they develop a need and purchase or use a product. For example, Archies greeting cards are used on many different occasions. User status, such as non-users, potential users, or first time users can be used to segment the market. Markets can also be segmented into light, medium, or heavy users of a product. Brand loyalty of varying degree can be presented among different groups of consumers and may become the basis to segment the market. There are consumers, who are very loyal to cigarette brands, beer and even toothpaste. Markets may also be divided on an imaginary Likert-type scale by considering level of product awareness such as unaware of the product, aware, interested, desirous, or contemplating to purchase the product. Based on attitude, consumers may be enthusiastic, indifferent, or hostile towards the product, and these differences can be used to segment the market. Benefit Segmentation: By purchasing and using products, consumers are trying to satisfy specific needs and wants. In essence, they look for products that provide specific benefits to them. Identifying consumer groups looking for specific benefits from the use of a product or service is known as benefit segmentation and is widely used by marketers. For example, there are distinct groups of auto buyers. One group might be more interested in economy, the other in safety and still other in status. Segmentation bases, such as demographics are descriptive. These variables are useful but do not consider why consumers buy a product. Benefit segmentation has the potential to divide markets according to why consumers buy a product. Benefits sought by consumers are more likely to determine purchase behaviour than are descriptive characteristics. Marketers should also appreciate that many benefits sought by consumers are subject to change with changing technologies, changing social values and competitive offers. This requires that marketers must constantly reassess benefit segments. The present scenario in the computer market is an example. With the introduction of faster and better products, the benefits consumers seek, are constantly changing. Benefit segmentation can be seen in the toothpaste market; fresh breath, decay prevention and whiter teeth are some examples and the leading brands involved are Colgate Total, Close-Up and Promise. Table 8.3 presents the benefit segmentation of the toothpaste market. Table 8.3: Benefit Segmentation of Toothpaste Market

8.4.6 Demographic-psychographics segmentation (Hybrid pproach) Demographic and psychographic profiles work best when combined together because combined characteristics reveal very important information about target markets. Demographicpsychographics information is particularly useful in creating consumer profiles and audience profiles. Combined demographic-psychographic profiles reveal important information for segmenting mass markets, provide meaningful direction as to which type of promotional appeals are best suited and selecting the right kind of advertising media that is most likely to reach the target market.

Self Assessment Questions 5. ___________ variables of market segmentation focuses on lifestyle and values of the customers. 6. ___________ segmentation can be used effectively when the marketers can identify the prospects in terms of the goals and interests and their location. 7. What people do in their past time and how they live their life can be good indicators while segmenting the markets based on behavior. (True/False) 8. The evaluative statements about a product, place or idea reflects the attitude of the person. (True/False) 9. Principal-oriented individuals are guided by the rational benefits and not by feelings and desire. (True/False) 10. Benefit segmentation is a descriptive method of market segmentation. (True/False) 8.5 Limitations of Market Segmentation Market segmentation has certain limitations too. Some of them are as follows:

 Targeting multiple segments increases marketing costs. Segmentation can lead to proliferation of products. Narrowly segmenting a market can hamper the development of broad-brand equity. Self assessment questions 11. Segmenting a market is always a good option. (True/False) 12. Wrong segmentation has adverse effects on stores brand equity. (True/False) 8.6 Summary The concept of market segmentation is based on the fact that all consumers are not alike. They differ in their needs, wants, desires, income, education, lifestyles and so on. Market segmentation is the process of dividing the heterogeneous market into relatively homogenous sub-groups of consumers with somewhat similar characteristics. When a marketer selects one of more segments and develops a distinct marketing programme to accomplish marketing objectives, it is called target marketing. There are certain conditions that must exist for segmentation to be meaningful. Many approaches are used for segmenting the market. Some of the popular bases for segmentation are geographic, demographic, psychographic and behavioural. Other specific approaches have been used and found to be quite effective, such as segmentation based on lifestyles. Lifestyle approach is based on studying how consumers spend their spare time, what they consider important in their surroundings, what are their beliefs on broad issues and their self image. Such data is generally combined with demographic variables to furnish a clearer picture about consumers. The marketer generally has options either to adopt undifferentiated marketing, differentiated marketing, or concentrated marketing. Glossary Market Segmentation: creating groups or sets of people based on common characteristics and homogeneous needs Market Fragmentation: emergence of new segments (in a previously homogeneous market) which have their own distinct needs, requirements, and preferences Geo-demographic Segmentation: segmentation on the basis of both, geography and demography of the population Psychographic Segmentation: segmentation based on personality or lifestyle characteristics of the customers Benefit Segmentation: segmentation based on differences in specific benefits different groups of consumers look-for in a product 8.7 Terminal Questions

1. What is segmentation? What are its benefits? 2. Why has segmentation gained importance in recent years? 3. Discuss the criteria for effective segmentation. 4. When can demographic and benefit segmentation be used to maximum efficiency? 5. Write a short note on- psychographic segmentation. 8.8 Answers Answers to Self Assessment Questions 1. Business Planning 2. Demographic, Lifestyle 3. Common 4. Promotion, distribution 5. Psychological 6. Geo-demographic 7. False 8. True 9. True 10. False 11. False 12. True Answers to Terminal Questions 1. Refer to 8.2 Segmentation involves grouping people with similar needs and characteristics. It plays a dual role- as a marketing tool and as input in business planning. 2. Refer to 8.2 In face of growing competition and changing customer profiles, segmentation helps in promoting the right products to right set of people. 3. Refer to 8.3 The criteria for effective segmentation include identity; accessibility, responsiveness, size, measurability and nature of demand. 4. Refer to 8.4 Demographic segmentation can be used for any product and by any company and benefit segmentation can be used when the product has varied uses or distinctive features. 5. Refer to 8.4 Psychographic segmentation is based on personality or lifestyle of the customers.

Mini-case Divided by Geography Does Wal-Mart tailor its products to specific geographic markets and regions, or do they just sell the same stuff all across the country? They tailor their products to who the consumer is in the region. It is heard that Wal-Mart in Colorado stock a lot more organic items than they do in say, in South Carolina. Since there are so many stores all across the country, it is necessary to do that in order to gain the most profit. You wouldnt want to stock 20 snowblowers in Arizona!! But if you did that in Michigan, it would seem more appropriate. Sometimes the products (that are the same) at different Wal-Mart stores within the same region have different prices. In a region, there are two Wal-Marts in the same county, yet one has generally cheaper prices than the other because of the different neighborhoods that are located around them. This is simply another way to target the general demographic in the area the store is located. Also, on a side note, Wal-Mart also has stores where it "experiments" to see if certain products, visual displays, or policies draw customers in. If the "experiment" is successful, they will expand it to other stores, then eventually nationwide. An example of this is the new $4 generic prescription drug plan. You can learn about this plan on their website. But basically, it began in larger cities in Florida, then spread to the whole state, and now it has spread to other select states. Question Does Wal-Mart practices too much geographic segmentation? Hint Answer: Wal-Mart does practice geographic segmentation to a considerable extent as evident from the case. Source: maciowa.com