Market segmentation is a concept in economics Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current economic and marketing Marketing is the process by which companies create customer interest in products or services. It generates the strategy that underlies sales techniques, business communication, and business development. It is an integrated process through which companies build strong customer relationships and create value for their customers and for themselves. A market segment is a sub-set of a market made up of people or organizations sharing one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function. A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a market stimulus, and it can be reached by a market intervention. The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting up the market into smaller groups.

While there may be theoretically 'ideal' market segments, in reality every organization engaged in a market will develop different ways of imagining market segments, and create Product differentiation A concept in Economics and Marketing proposed by Edward Chamberlin in his 1933 Theory of Monopolistic Competition strategies to exploit these segments. The market segmentation and corresponding product differentiation strategy can give a firm a temporary commercial advantage.

"Positive" market segmentation

Market segmenting is dividing the market into groups of individual markets with similar wants or needs that a company divides the market into distinct groups who have distinct needs, wants, behavior or who might want different products & services. Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private although industrial market segmentation Industrial market segmentation is a scheme for categorizing industrial and business customers to guide strategic and tactical decision-making, especially in sales and marketing. While government agencies and industry associations use standardized segmentation schemes for statistical surveys, most businesses create their own segmentation scheme to is quite different from consumer market segmentation, both have similar objectives. All of these methods of segmentation are merely proxies for true segments, which don't always fit into convenient demographic boundaries.

Consumer-based market segmentation can be performed on a product specific basis, to provide a close match between specific products and individuals. However, a number of generic market segment systems also exist, e.g. the Nielsen Claritas PRIZM Nielsen Claritas PRIZM is a set of geo-demographic clusters for the United States, developed by Claritas Inc., which was then acquired by The Nielsen Company. It was a widely used customer segmentation system for marketing in the United States in the 1990s and continues to be used today system provides a broad segmentation of the population of the United States based on the statistical analysis of household and geodemographic data.

The process of segmentation is distinct from targeting Targeted advertising is a type of advertising whereby advertisements are placed so as to reach consumers based on various traits such as demographics, purchase history, or observed behavior (choosing which segments to address) and positioning In marketing, positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product, brand, or organization (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to address; to understand their behavior; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved.

Improved segmentation can lead to significantly improved marketing effectiveness Marketing effectiveness is the quality of how marketers go to market with the goal of optimizing their spending to achieve good results for both the short-term and long-term. It is also related to Marketing ROI and Return on Marketing Investment. Distinct segments can have different industry structures and thus have higher or lower attractiveness (Michael Porter Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. A university professorship is the highest professional recognition that can be awarded to a Harvard faculty member. A leading authority on company strategy and the competitiveness of nations and regions, Michael Porter’s work is widely). With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased leading to better reputation.

Positioning

Once a market segment has been identified (via segmentation), and targeted (in which the viability of servicing the market intended), the segment is then subject to positioning. Positioning involves ascertaining how a product or a company is perceived in the minds of consumers.

This part of the segmentation process consists of drawing up a perceptual map, which highlights rival goods within one's industry according to perceived quality and price. After the perceptual map has been devised, a firm would consider the marketing communications mix best suited to the product in question.

Top-Down and Bottom-Up

George S. Day George S. Day is the Professor of Marketing at the Wharton School of Business, Pennsylvania, USA. His primary areas of activity are marketing, the management of new product development, strategic planning, organizational change and competitive strategies in global markets (1980) describes model Scientific modelling is the process of generating abstract, conceptual, graphical and/or mathematical models. Science offers a growing collection of methods, techniques and theory about all kinds of specialized scientific modelling. Also a way to read elements easily which have been broken down to the simplest form 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 Customer relationship management is a broadly recognized, widely-implemented strategy for managing and nurturing a company’s interactions with clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing, customer service, and software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic Demographics or demographic data are the characteristics of a human population as used in government, marketing or opinion research, or the demographic profiles used in such research. Note the distinction from the term "demography" Commonly used demographics include gender, race, age, income, disabilities, mobility (in terms of travel, behavioral Behavior, or behaviour , refers to the actions of a system or organism , usually in relation to its environment, which includes the other systems or organisms around as well as the physical environment. It is the response of the system or organism to various stimuli or inputs, whether internal or external, conscious or subconscious, overt or, and psychographic In the field of marketing, demographics, opinion research, and social research in general, psychographic variables are any attributes relating to personality, values, attitudes, interests, or lifestyles. They are also called IAO variables . They can be contrasted with demographic variables (such as age and gender), behavioral variables (such as patterns A pattern, from the French patron, is a type of theme of recurring events or objects, sometimes referred to as elements of a set. These elements repeat in a predictable manner. It can be a template or model which can be used to generate things or parts of a thing, especially if the things that are created have enough in common for the underlying are built up using techniques such as cluster analysis 'Cluster analysis' is a class of statistical techniques that can be applied to data that exhibit “natural” groupings. Cluster analysis sorts through the raw data and groups them into clusters. A cluster is a group of relatively homogeneous cases or observations. Objects in a cluster are similar to each other. They are also dissimilar to. This process is sometimes called database marketing Database marketing is a form of direct marketing using databases of customers or potential customers to generate personalized communications in order to promote a product or service for marketing purposes. The method of communication can be any addressable medium, as in direct 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 Mass customization, in marketing, manufacturing, call centres and management, is the use of flexible computer-aided manufacturing systems to produce custom output. Those systems combine the low unit costs of mass production processes with the flexibility of individual customization is possible.

Creating a market segment may allow a firm or other organistion to set itself apart from other competitors.

Using Segmentation in Customer Retention

Segmentation is commonly used by organizations to improve their customer retention programs and help ensure that they are:

• Focused on retaining their most profitable customers
• Employing those tactics most likely to retain these customers

The basic approach to retention-based segmentation is that a company tags each of its active customers with 3 values:

Tag #1: Is this customer at high risk of canceling the company's service? (Or becoming a non-user) One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be signaled through a customer's decline in spending on his card.

Tag #2: Is this customer worth retaining? This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer.^[1]

Tag #3: What retention tactics should be used to retain this customer? For customers who are deemed “save-worthy”, it’s essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing “special” customer discounts to sending customers communications that reinforce the value proposition of the given service.

Process for tagging customers

The basic approach to tagging customers is to utilize historical retention data to make predictions about active customers regarding:

• Whether they are at high risk of canceling their service
• Whether they are profitable to retain
• What retention tactics are likely to be most effective

The idea is to match up active customers with customers from historic retention data who share similar attributes. Using the theory that “birds of a feather flock together”, the approach is based on the assumption that active customers will have similar retention outcomes as those of their comparable predecessors.^[2]

From a technical perspective, the segmentation process is commonly performed using a combination of predictive analytics Predictive analytics encompasses a variety of techniques from statistics, data mining and game theory that analyze current and historical facts to make predictions about future events and cluster analysis Cluster analysis or clustering is the assignment of a set of observations into subsets so that observations in the same cluster are similar in some sense. Clustering is a method of unsupervised learning, and a common technique for statistical data analysis used in many fields, including machine learning, data mining, pattern recognition, image.

Illustration of retention-based segmentation process:

Price Discrimination

Where a monopoly In economics, a monopoly (from Greek monos / μονος + polein / πωλειν (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits In a perfectly competitive market, firms are said to be price takers: since a customer can buy widgets from one producer as easily as another, any widget producer on the market faces a horizontal demand curve at the equilibrium price: if the firm tries to sell widgets above the equilibrium price, customers will simply buy their widgets elsewhere for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segments (referred to as price discrimination Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a), charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as. 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 Competition is a contest between individuals, groups, nations, animals, etc. for territory, a niche, or a location of resources. It arises whenever two or more parties strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For example, animals compete over water authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Examples of this exist in the transport industry (a plane or train journey to a particular destination at a particular time is a practical monopoly) where Business Class customers who can afford to pay may be charged prices many times higher than Economy Class customers for essentially the same service. Microsoft and the Video industry generally also price very similar products at widely varying prices depending on the market they are selling to.

See also

• CHAID CHAID is a type of decision tree technique, based upon adjusted significance testing . The technique was developed in South Africa and was published in 1980 by Gordon V. Kass, who had completed a PhD thesis on this topic. CHAID can be used for prediction (in a similar fashion to regression analysis, this version of CHAID being originally known as
• Cluster analysis Cluster analysis or clustering is the assignment of a set of observations into subsets so that observations in the same cluster are similar in some sense. Clustering is a method of unsupervised learning, and a common technique for statistical data analysis used in many fields, including machine learning, data mining, pattern recognition, image
• Consumer behaviour Consumer behaviour is the study of when, why, how, and where people do or do not buy products. It blends elements from psychology, sociology, social anthropology and economics. It attempts to understand the buyer decision making process, both individually and in groups. It studies characteristics of individual consumers such as demographics and
• Customer attrition Banks, telephone service companies, Internet service providers, pay TV companies, insurance firms, and alarm monitoring services, often use customer attrition analysis and customer attrition rates as one of their key business metrics because the "...cost of retaining an existing customer is far less than acquiring a new one."[citation
• Demographics Demographics or demographic data are the characteristics of a human population as used in government, marketing or opinion research, or the demographic profiles used in such research. Note the distinction from the term "demography" Commonly used demographics include gender, race, age, income, disabilities, mobility (in terms of travel
• Fast moving consumer goods Fast Moving Consumer Goods are products that are sold quickly at relatively low cost. Though the absolute profit made on FMCG products is relatively small, they generally sell in large quantities, so the cumulative profit on such products can be large
• Marketing Marketing is the process by which companies create customer interest in products or services. It generates the strategy that underlies sales techniques, business communication, and business development. It is an integrated process through which companies build strong customer relationships and create value for their customers and for themselves
• Market Segmentation Index Market Segmentation Index or Celli Index of Market Segmentation, named after the Italian economist Celli G. GianLuca, is a measure of market segmentation. This Index, is a comparative measure of the degree of monopoly power in two distinctive markets for products that have the same marginal costs.The degree of market segmentation is defined as the
• Overengineering Overengineering is when a product is more robust or complicated than necessary for its application, either (charitably) to ensure sufficient factor of safety, sufficient functionality, or due to design errors. Overengineering is desirable when safety or performance on a particular criterion is critical, or when broad functionality is required, but
• Personalization Personalization involves using technology to accommodate the differences between individuals. Once confined mainly to the Web, it is increasingly becoming a factor in education, health care , television, and in both "business to business" and "business to consumer" settings
• Personalized marketing Personalized marketing is an extreme form of product differentiation. Whereas product differentiation tries to differentiate a product from competing ones, personalization tries to make a unique product offering for each customer
• Personas A persona, in the word's everyday usage, is a social role or a character played by an actor. This is an Italian word that derives from the Latin for a kind of mask made to resonate with the voice of the actor
• Product differentiation A concept in Economics and Marketing proposed by Edward Chamberlin in his 1933 Theory of Monopolistic Competition
• Predictive analytics Predictive analytics encompasses a variety of techniques from statistics, data mining and game theory that analyze current and historical facts to make predictions about future events
• Target market A target market or target audience is a group of customers that the business has decided to aim its marketing efforts and ultimately its merchandise. A well-defined target market is the first element to a marketing strategy. The target market and the marketing mix variables of product, place , promotion and price are the two elements of a
• Target audience In marketing and advertising, a target audience, or target group is the primary group of people that something, usually an advertising campaign, is aimed at appealing to. A target audience can be people of a certain age group, gender, marital status, etc. A certain combination, like men from twenty to thirty is often a target audience. Other
• Terms for market segments Categories: Marketing | Business terms | Acronyms |

References

1. ^ Gupta, Sunil (2005). Managing Customers as Investments. Wharton School Publishing, 2005.
2. ^ Mind of Marketing "What is customer segmentation?"

• Day, G. (1980) "Strategic Market Analysis: Top-down and bottom-up approaches", working paper #80-105, Marketing Science Institute, Cambridge, Mass. 1980.
• Dickson, Peter R. and James L. Ginter 1987 Market Segmentation, Product Differentiation, and Marketing Strategy The Journal of Marketing, Vol. 51, No. 2 (Apr., 1987), pp. 1-10
• McDonald, Malcolm and Dunbar, Ian (2004). Market Segmentation: How to do it, how to profit from it. Butterworth-Heinemann, 2004.
• 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.
• Steenkamp and Ter Hofstede (2002) "International market segmentation: issues and perspectives", Intern. J. of Market Research, vol 19, 185-213
• Wedel, Michel and Wagner A. Kamakura (2000). Market Segmentation: Conceptual and Methodological Foundations. Amsterdam: kluwer.
• Lieberman, Michael. "A beautiful segmentation", Quirk's Marketing Research Review, November 2003.

Categories: Marketing Categories: Business | Service industries | Business economics

What Links Here:

Recently Viewed Pages:

• Home
• Marketing: Images
• Referrers
• Search Terms
• Marketing: Dictionary
• Market: Dictionary
• Business: Marketing and Advertising: Micromarketing: Directory
• Marketing: Encyclopedia
• Marketing: Encyclopedia
• Business: Marketing and Advertising: Salesmanship: Directory

Most Popular Pages:

• Nivea: News
• Search Terms
• Home
• Market Segmentation::Variables Used for Segmentation: Encyclopedia
• Atomic Models: Answers
• Nivea: Blogs
• Advantages of Oligopoly: Answers
• Market Form
• Salesmanship
• Theory Models: Answers

Related 'Market Segmentation' Searches: