By Sudam Chandima Kaluarachchi
Market is the place where buyers meet respective sellers. While a collection of sellers constitute the industry for a good or service, a collection of buyers constitute the market for that good or service.
Neither markets nor buyers are homogeneous in nature (Alderson, 1983; Assael and Roscoe, 1976; Claycamp and Massy, 1968; Smith, 1956; cited in Kara and Kaynak, 1997). Therefore, it is important for marketers to segregate customers with similar needs and wants as well as similar characteristics from others to cater to that particular group’s requirements.
A clear appreciation of customer needs and wants will ultimately lead to an effective segmentation (Grover and Srinivasan, 1987; Ranchhod et al., 2001: cited in Dibb, 2005).
Marketing can be defined, according to the Chartered Institute of Marketing (CIM), UK, as “the management process that identifies, anticipates and satisfies customer requirements (needs and wants) profitably”.
Depending on these needs and wants as well as the characteristics, the marketers set the most suitable marketing mix elements for that particular market segment. A marketer needs to identify which market segment/s could be served effectively and in turn which segment offers the greatest opportunity (Kotler, 2001; Kotler and Keller, 2006) for his marketing efforts.
According to Dibb and Simkin (1991) as cited in Kara and Kaynak (1997), the market segmentation exercise usually consists of three main stages; (1) segmentation (2) targeting and (3) positioning. All three stages are fully interrelated and equally important for a successful segmentation strategy.
If needs and characteristics of people in a market are similar, there is little point segmenting such a market. However, in general it is not easy to find a homogeneous market in nature.
The first requirement for segmentation is that the market should be heterogeneous. The diversity in customer needs and buying behaviour is the key prerequisite for segmentation. Once this requirement is recognised, the marketer can proceed with the segmentation strategy (Blois and Dibb, 2000).
In this exercise the marketer attempts to aggregate customers with similar requirements, expectations and buying characteristics into a specific group. Once segmented, it becomes a large identifiable group within a market with similar wants, purchasing power, geographical location, buying attitudes or buying habits. Furthermore, Kotler (2001) has identified several criteria/ bases for segmenting a heterogeneous market.
Bases for segmenting consumer markets
Various bases for segmenting consumer markets as well as industrial markets (B2B markets) can be identified in the literature. As explained in Kotler and Keller (2006), two broad classes of variables are used to segment consumer markets. Those are called descriptive characteristics and behavioural characteristics.
Some of the researchers have made efforts to segment the consumer markets based on descriptive factors such as geographic, demographic and psychographic characteristics. Some other researchers have identified another category which is called behavioural characteristics.
For better understanding, some researchers have combined demographic variables together with psychology of the customer and introduced psychographic segmentation.
Kotler (2001) have illustrated the segment variables in detail. In consumer markets, variables related to geography (e.g.: country, region), demography (e.g.: age, sex, income, occupation, nationality), psychography (e.g.: lifestyle, personality) and behaviour (e.g.: occasions, benefits, usage, loyalty, attitude) are commonly used for segmentation.
In industrial markets or business to business (B2B) markets, the commonly used variables are linked to demography, operating factors, purchasing approach, situational factors and personal characteristics of buyers.
Targeting means selecting the most appropriate segment or segments be served by the company. In this stage, relative importance and attractiveness of the identified segments are determined and assessed and resources are allocated accordingly.
The most common targeting strategies are (1) undifferentiated strategy (2) concentrated strategy and (3) differentiated (multi-segment) strategy. The undifferentiated strategy involves targeting the entire market with one marketing mix. It has zero differentiation in the company’s market offerings.
Businesses adopting a concentrated strategy direct their marketing effort towards a single segment separated from several other identified segments. The multi segment strategy, as explained its name itself, focuses on several segments with several marketing mixes depending on the characteristics of these differentiated market segments (Blois and Dibb, 2000).
Positioning is the final stage of market segmentation which involves in the designing of marketing programs matching the requirements of customers in the segments chosen. It deals with the consumer perceptions, image building in the mind of consumers and designing appropriate marketing strategies to differentiate products or a company from its competitors.
It involves in crafting and implementing the marketing mix programs which match the requirements of customers in the targeted segments (Ries and Trout, 1986; cited in Dibb, 2005).
The customer will compare the product or services offered by the company with competitive offerings. Therefore, ultimately, the customer perception toward the product or service will link with the success of positioning (Blois and Dibb, 2000). Ries and Trout (1986); as cited in Blois and Dibb, 2000 confirms that customer perceptions about the product or service are central to its positioning; no doubts that perception is the reality.
Benefits of market segmentation
Many companies believe that marketing success is linked to how effectively their customer base is segmented. The benefits associated with a segmentation approach have been widely debated (Blattberg and Sen, 1976; Daneels, 1996; Piercy, 2001 and Henderson, 1981; cited in Dibb, 2005).
Some authors argue that segmentation creates a differential advantage in the competitive market (Bonama and Shapiro, 1984 and Sharp, 1995: cited in Dibb, 2005). Others suggest that the result of a segmentation exercise would be greater customer satisfaction (Kara and Kayanak, 1997) and higher level of customer loyalty (Peppers and Rogers, 1997; cited in Dibb, 2005).
As cited in Dibb (2005), Choffray and Liliem (1978) endorse the segmentation concept saying that segmentation allows business to deal with diverse customer needs by focusing resources on particular customer groups with relatively homogeneous requirements.
Blattbery and Sen (1976); Beane and Ennis (1987) as cited in Blois and Dibb (2000) further support the segmentation concept mentioning that organisations that apply segmentation to their business are better able to fine tune their customer offerings than those adopting a mass marketing approach.
Similarly, Sharp (1995) argues that segmentation approach has been in existence for a long time since it creates various business benefits to marketers.
Yet despite this clear-cut rationale, some marketers disagree with the concept. They argue that it is impossible to identify a direct link between segmentation and business success because of measurement difficulties (Esslemont, 1996; cited in Blois and Dibb, 2000).
The debate about segmentation success and the extent to which segmentation benefits can be quantified is ongoing (Goller et al., 2002; cited in Dibb, 2005). The third group of researchers suggests that “segmentation benefits need to be weighed against the cost of the process and the scale of implementation difficulties” (Dibb and Simkin, 1997; Litter, 1992; McDonald and Dunbar, 1998; cited in Dibb, 2005) to measure the real benefit of segmentation.
Similarly, Kotler (2001) argues that the market segmentation exercise creates favourable results only if the market segment is measurable, substantial, accessible, actionable and stable.
Implementation of market segmentation strategy
The success of market segmentation depends upon many factors as mentioned below. When these factors are not in their optimum level, they are becoming issues and barriers in segmentation and affecting the success of the outcome.
As mentioned in Dibb (2005), the segmentation barriers can be classified into “hard” and “soft” categories depending on their tangibility. Hard barriers would be more tangible issues related to data, finance, personnel and time.
On the other hand, soft barriers would be the intangible issues linked with corporate culture, structure in terms of inter functional or departmental coordination and leadership style. These hard and soft barriers can be identified in three areas of segmentation exercise such as (1) infrastructure (2) process and (3) implementation. The table illustrates the factors affecting the successful segmentation strategy in detail.
It is difficult to gauge the scale and scope of infrastructure barriers. The hard barriers are usually first to emerge, with shortfalls in data (Dibb, 2005). Weinstein (2004) as cited in Dibb (2005) has mentioned that the effectiveness of segmentation exercise can be hindered when the organisation does not have access to appropriately skilled personnel.
According to Dibb and Simkin (2001); Doyle (1995); Doyle et al., (1986): cited in Dibb (2005), insufficient staff, lack of seniority and shortage of the required skills or experience can all hamper the start of the process.
The soft factors such as leadership style, the degree of organisational flexibility and levels of internal communication also affect segmentation progress. Even though, an organisation has relevant expertise, segmentation can suffer if strong senior management involvement and representation at Board level are not available (Berrigan and Finkbeiner, 1992).
So many new challenges occur, once the segmentation process is underway (Dibb, 2005). Lack of data affects the effectiveness of segmentation process. Another factor is not availability of skilled personal sufficiently, especially with required analytical skills.
Though the organisation has some employees with the marketing background, lack of data analysis and statistical expertise can affect the process. Though there is a strong leadership enriched with marketing vision, lack of interdepartmental integration can hinder the segmentation process and hamper the progress of the segmentation.
The next step after the segmentation analysis is implementation. To achieve proper implementation, required changes in the business system should be made. Implementing a segmentation strategy has ramifications for the organisation, its sales force and the distribution network (Dibb, 2005).
The prominent problems faced by organisations in the implementation stage are poor client network, lack of professional customer care at grass root level and inconsistent communication. The product knowledge of staff at operational level is very important for an effective implementation.
Sufficient time should allocate for the implementation process. Some brands may not be successful at the implementation stage if proper bases are not chosen or not given attention to features of an attractive market segment such as measurability, sustainability, accessibility and stability at planning stage.
Lack of delegated authority and repercussions for individual roles and responsibilities can be major setbacks at implementation stage. Poor demarcation of roles and responsibilities can also lead to bad implementation of segmentation strategy.
Overcoming the difficulties
Creative and careful planning can resolve most of the problems (Bell and Vincze, 1988; Lin et al., 2004: cited in Dibb, 2005). Current data with good quality are central to the success of any segmentation process (Lin et al., 2004: cited in Dibb, 2005).
A systematic review of existing data and marketing intelligence before starting collection of additional data is the starting point. It is important to introduce a proper system for recording and storing collected data for future use as well.
The staff can be trained to collect relevant and proper data. It is vital to scope out the needs for relevant skills and expertise, especially the segmentation knowledge, from the highest level involved through to grass root level.
“The progression of segmentation is contingent upon a sound understanding of the workings of the process and the required analytical/ statistical tools” (Dibb, 2005). Training designed by qualified professionals to demonstrate the principles and process of segmentation together with success factors and examples of organisations which have made successful segmentation exercises can be identified and presented details of them to the staff for their evaluation.
Studies have revealed that soft barriers are more difficult to be rectified and fixed (Dibb, 2005). Supportive and favourable culture and structure would always support the segmentation process. The leadership is vital to support the segmentation exercise because a strong leadership is instrumental in allocating roles and responsibilities (Meredity and Mantel, 1995) in planning and implementation stages.
Organisation should have a Management Information System (MIS) for an efficient idea sharing with lower levels in the organisational structure and motivating them. Data gaps can be identified and bridged by getting personnel involved from different functions and the same will improve the internal communication and fosters a greater sense of involvement in the segmentation process (Greenberg and McDonald, 1989; Weinstein, 1994: cited in Dibb, 2005).
The organisation may prepare a program to keep the staff involved in the distribution network and inform them about the progress and outcome of the segmentation exercise.
Similarly, understanding and commitment towards the segmentation exercise are crucial in all 3 levels. Without the commitment in the corporate planning stage and the segmentation roll-out stage, the chances of segmentation success are considerably low (McDonald, 2001: cited in Dibb, 2005).
Careful control of the implementation phase is vital to the success of any segmentation scheme (Dibb, 2005). Roles and responsibilities should be clearly and carefully defined and allocated among the staff involved. Delegation of authority with the responsibility and accountability is in paramount importance in the successful implementation of the segmentation strategy.
These responsibilities should cover all marketing activities carried out in designing the marketing mix. Further, a performance measurement exercise should be designed and carried out to control the process and evaluate the success of the process.
Despite a well established conceptual basis and strong anecdotal evidence supporting market segmentation, practitioners of market segmentation strategy continue to report various implementation difficulties.
However, researchers have found that many segmentation barriers can be successfully addressed before they become major impediments to the process. An early treatment may prevent post implementation knock-on effects and help keeping the implementation costs down.
Segmentation barriers are interlinked and if ignored, subsequently affect the next stage of the exercise. Process barriers can prop up due to total ignorance of infrastructure barriers. If ignored, process barriers can cause the total breakdown of the segmentation strategy. Not only identification, it is also important to prioritise the problems.
An early anticipation of these barriers will ease the subsequent correction. It is generally easier to tackle the hard barriers than the soft. The segmentation exercise would become a myth if not managed the implementation process effectively and efficiently in line with the set objectives.
(Sudam Chandima Kaluarachchi – MBA (Finance) (UK), BSc (Agri) Hons, MCIM (UK), MICM (UK), AIB (SL), MSLIM, MAAT (SL), Chartered Marketer – is Director, College of Banking & Finance – Institute of Bankers of Sri Lanka.)