Market segmentation is the process of grouping a market into smaller subgroups. This is not something that is arbitrarily imposed on society: it is derived from the recognition that the total market is often made up of submarkets (called segments). These segments are homogeneous within (i.e. people in the segment are similar to each other in their attitudes about certain variables). Because of this intra-group similarity, they are likely to respond somewhat similarly to a given marketing strategy. That is, they are likely to have similar feelings about a marketing mix comprised of a given product, sold at a given price, distributed in a certain way, and promoted in a certain way.

The requirements for successful segmentation are:

• homogeneity within the segment
• heterogeneity between segments
• stability of segments
• segments are measurable and identifiable
• segments are accessible and actionable
• segment is large enough to be profitable

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The variables used for segmentation include:

• Geographic Variables
  • region of the world or country
  • country size
  • climate
• Demographic Variables
  • age
  • gender
  • sexual orientation
  • family size
  • family life cycle
  • income
  • occupation
  • education
  • socioeconomic status
  • religion
  • nationality
• Psychographic Variables
  • personality
  • life-style
  • values
  • attitudes
• Behavioural Variables
  • benefit sought
  • product usage rate
  • brand loyalty
  • product end use
  • readiness-to-buy stage
  • decision making unit

When numerous variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. When the profile is limited to demographic variables it is called a demographic profile (typically shortened to "a demographic"). A statistical technique commonly used in determining a profile is cluster analysis.

Top-down and bottom-up

George Day (1980) describes this model of segmentation as the top-down approach. You start with the total population and divide it into segments. He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship management software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioural, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called database marketing or micro-marketing. Its use is most appropriate in highly fragmented markets. McKenna (1988) claims that this approach treats every customer as a "micromajority". Pine (1993) used the bottom-up approach in what he called "segment of one marketing". Through this process mass customization is possible.

Price discrimination

Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segements (referred to as price discrimination), charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behaviour is rational on the part of the monopolist, but is often seen by competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned.

See also:

• marketing
• target market
• consumer behaviour
• demographics

References

• Day, G. (1980) "Strategic Market Analysis: Top-down and bottom-up approaches", working paper #80-105, Marketing Science Institute, Cambridge, Mass. 1980.
• McKenna, R. (1988) "Marketing in the age of diversity", Harvard Business Review, vol 66, September-October, 1988.
• Pine, J. (1993) "Mass customizing products and services", Planning Review, vol 22, July-August, 1993.

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