Market Segmentation

Introduction
What You Will Learn

When you have completed the section, you will be able to explain market segmentation and
how to capture a particular segment. This information will assist you in helping clients who
are in the planning and development stage of a small business.

Learning Objectives

At the end of this section, you should be able to:

 Discuss how to evaluate the various market segments

 Describe the characteristics used to conduct a structural analysis of an industry
 Describe the characteristics of an industry's life-cycle, used to assess competitive risk

Banker's Challenge
In this exercise, Henry is meeting with Jean-Luc, who is looking for advice regarding a
business proposition. Jean Luc asks Henry how to evaluate a market segment. At the end of
this section, you will revisit the conversation to see Henry’s response.

I want to provide a service that organizes

excursions for healthy, active seniors—
people like my parents, who are in their
seventies, in excellent health and with
disposable income. When people think of
business opportunities around this market
segment, they tend to think of nursing
homes and health care. I think there are a
lot of older people like my parents, who
are healthy and active but somewhat
isolated.

Your idea sounds like it has great

potential. With the number of people
living longer and healthier lives, and the
fact that the boomers are now entering
their retirement years, this market
segment may be underserved.
 Yes, I think it has great business potential.

You’ve done the first step by identifying

your target market. Have you done any
other research? Have you asked the right
questions to evaluate this market
segment?

I’m not sure. What questions should I ask?

Consumer Market Segmentation

Market segmentation is the process of grouping potential customers according to identifiable
traits relevant to their purchasing habits. The motives, moods and personality of buyers all
play a part in their purchasing decisions.

This reading provides insight into the ways the various market segments can be evaluated at
both consumer and industrial levels. Knowing how to use the criteria available and how to
identify the characteristics of a particular segment will assist in you in determining the
feasibility of a business plan. You should also be able to determine whether the plan makes
sense in the context of a given company's unique features.

Market Segmentation
Consumer Market Segmentation

Market segmentation is the process of grouping consumer and industrial buyers according to
identifiable traits relevant to their purchasing habits.

Potential customers have many buying opportunities and are influenced by a wide range of factors.

Segmentation of consumer and industrial markets uses various criteria to identify the many possible
buyer traits that influence buying decisions.

CONSUMER MARKET SEGMENTATION

Consumer market segmentation can be categorized in two ways:

» Segmentation by consumer characteristics:

– Geographic
– Demographic
– Other factors, such as lifestyle and personality
» Segmentation by consumer behaviors:
– Occasions
– Consumption patterns
– Brand familiarity
– Buyer readiness stage
– Attitude
– Buying situation
The two categories of market segmentation are described in detail below.
Consumer Characteristics
What is geographic segmentation?
Geographic segmentation is based on location. The market may be divided as follows:
» Countries
» States or provinces
» Regions
» Cities
» Neighbourhoods
A company may not initially be able to contemplate a national or international market, but may
expand its operations as it grows and becomes successful.
What is demographic segmentation?
Demographic segmentation is based on age, gender and income.
Demographics are used in market segmentation for the following reasons:
» Data is easier to measure and quantify than psychological or socio-cultural variables.
» Data is relatively accessible and cost-effective to gather.
» Demographic information helps to locate a target market. The motives and behavior can be
explained and predicted using psychological or socio-cultural investigations. It identifies potential for
sales and consumption of a product.
» Demographic variables reveal trends relevant to small and medium-sized businesses, such as shifts
in age and income distribution.
Demographics are used in the following ways:
Age
Some age related markets include teenagers, young adults and retirees. Examples of age-related
niche products include baby items, teen fashions and anti-aging skin products. Often, psychological
variables such as self-image, health concerns for the elderly or status consciousness for young adults
are added to the mix. Basing a market solely on chronological age should be avoided, because not all
markets fit perfectly into a particular age bracket. For example, as our older generation has become
healthier and more active, the marketing strategy for this segment has had to change accordingly.
Gender
Gender roles have undergone change and are not as clear-cut as in the past. New market niches have
appeared, such as men’s cosmetics and women’s office accessories, due to the blurring of traditional
gender roles. Marketing strategy has changed as more women are working away from home, and
more men are taking on the homemaker role.
Social class (income, education and occupation)
Consumer attitudes, values and tastes are most accurately reflected by occupation and education.
Combined with income, these characteristics mark social class. Often, income only is used in
segmentation. This has a limited use, as it indicates only the ability to purchase and consume, and
not the criteria for product choice. Income must be matched with other variables to be useful. For
example, a large selection of cars and trucks are available for purchase by high income earners.
Adding education and occupation to the criteria, as well as other factors such as lifestyle and
personality, will help determine which vehicle models fit with which group segmentation.

Consumer Behaviour
In behavioural segmentation, buyers are divided into groups based on their knowledge, attitude and
use of or response to a product. Marketers believe that these variables are a good starting point for
building market segments.

Behavioral variables include occasions, benefits offered, brand familiarity, buyer readiness stage,
attitude and the buying situation.

Some valid questions to ask when analyzing behaviour are:

Occasions
– When does the consumer purchase or use a product?
– Is the purchase or use tied to a particular event?

»Benefits offered
– What type of benefit is being sought from a product or service by the consumer?
– Is there a unique selling proposition benefiting a particular need?
– What benefits is the consumer actually deriving from the product?

»Brand familiarity
– How familiar is the consumer with a brand?
– Is the consumer likely to buy the same brand again?

»Buyer readiness stage

– At what stage is the buyer?
– Is the buyer: Aware of the product? Informed of the product? Interested in the product?
Wanting to buy? Intending to buy?

»Attitude
– What is the degree of the consumer’s enthusiasm for a product?

»Buying situation
– In what kind of situation is the consumer?

Examples of Behavioural Segmentation

Occasions
Air travel is most often triggered by occasions involving business, family or
vacation. Each type of occasion can be broken down further. For example, vacation
travel can emphasize a vacation type such as golfing.
Benefits Offered
Crest toothpaste was able to learn which benefits consumers valued in the
product through market communication. The slogan “anti-cavity protection” became its unique selling
proposition.
Brand Familiarity
The more familiar consumers are with a brand, the more likely they are to buy it
again. The Microsoft brand for computer software and the Intel brand for processing
systems are examples of brand familiarity.
Buyer Readiness Stage
A business introducing new factory automation software may initially concentrate
on advertising to raise awareness of the product. If the campaign is successful,
further advertising can highlight the product’s benefits to convince plant managers
to buy it or to learn more about it.
Attitude
Some people buy whichever brand of household cleaner is on sale and are
indifferent to the brand used. Persuasive marketing may convince such consumers
to buy a specific brand of household cleaner.
Buying Situation
Consumers who rarely eat in restaurants at home will do so while on vacation

How can a small business use behavioural segmentation?

Behavioural segmentation should form the basis of a marketing program. The number of people in
each of the different readiness stages can make a big difference in how the marketing program is
designed.
Shortly after the launch of a product, a business should communicate with the market to learn what
benefits customers are actually deriving from the product.

A rapport should be built from the beginning and developed over time. This enables the
entrepreneur to more easily understand the customer’s needs. This makes the marketing process
more manageable.
Customer loyalty and goodwill enhance a business’s image. It is a powerful advertising tool. Regular
customers will support businesses when times are difficult and provide a reliable income for the
entrepreneur. Competitors will find it harder to attract customers away from their favorite supplier.
Determining customer attitude is helpful in determining how much time to spend with a particular
customer:

» Enthusiastic, positive customers:

– Require less time and effort
– Can be quickly moved to the point of ordering a product

» Indifferent customers:
– May require more time and effort to persuade
– May require sales or technical presentations

» Negative, hostile customers:

– May be firmly entrenched with a competitor’s product
– May be too technologically unsophisticated to appreciate the product
– Not likely worth the time

INDUSTRIAL MARKET SEGMENTATION

Industrial buyers often buy the same products as consumers, but with different reasons. The buying
motivation, the criteria for the purchase and the nature of the buying process are not the same. The
purchase of computers is a prime example. For these reasons, industrial segmentation takes a
different approach.
The differences between the consumer and industrial markets are outlined below:

How is the industrial market segmented?

Due to the way the industrial market is profiled, the market is broadly classified into two major
categories:
1. Macro-segmentation
2. Micro-segmentation
A small business should analyze the broadly defined macro-segments first, and then narrow and
refine the market into micro-segments within each macro-segment. These processes are explained
in detail in the tables Industrial Macro-Level Segmentation and Industrial Micro-Level Segmentation.
EVALUATING SEGMENTATION
Four basic criteria can be used evaluate segmentation:
1. Is it measurable?
2. Is it accessible?
3. Is it substantial?
4. Is it actionable?
Each criterion is described in detail below.
Capturing Market Segmentation
There are several key concepts and characteristics relating to industry structure that allow you
to conduct a structural analysis of an industry and draw up an industry risk profile.

This reading explains how to conduct a structural analysis of an industry and how to assess
competitive risk based on an industry's life cycle. This information will help you to analyze
the competitive structure of a market segment within an industry and provide guidance in
helping your clients assess competitive risk.

ANALYZING THE COMPETITIVE STRUCTURE OF AN INDUSTRY

Michael E. Porter, a leading authority on competitive strategy, developed the five competitive forces
approach to industry analysis and business strategy development.
Porter’s model is the simplest way to examine the competitive structure of an industry. His method
groups all the factors that determine an industry’s competitive structure into five forces:
» Risk of new entrants
» Supplier’s power
» Customer’s power
» Risk of substitute products
» Rivalry among existing firms
The five competitive forces help to determine whether companies within an industry are able to
earn returns on their investments in excess of their costs of capital. This can affect the prices, cost
structures and required amounts of investment for companies within an industry. The directional
effects of the five forces on the durability and uncertainty of a particular industry on profitability
should be taken into consideration.

KEY CONCEPTS IN INDUSTRY STRUCTURAL ANALYSIS

There are several key concepts and characteristics that can aid you in conducting a structural
analysis
of an industry and drawing up an industry risk profile. They include:
1. Economies of scale
2. Entry barriers
3. Exit barriers
4. Product differentiation
5. Industry concentration
What is meant by economies of scale?
The term “economies of scale” refers to the cost savings achieved as volumes increase. This can be
achieved as the result of:
» Technological improvement to the production process
» Increased performance of the work force due to the learning curve effect

When larger companies’ lower product prices:

» Small businesses find it more difficult to compete and maintain a decent level of profitability.
» Major barriers are created for small businesses wanting to enter an industry.
» The risk of failure is extremely high due to the cost advantages of the larger companies.
For a small business entering the computer hardware industry, for example, the risk of failure would
be high. It would be difficult to compete with a larger company that is efficient at the production of
mainframe computers.
What entry barriers could a small business face?
Common entry barriers for small businesses are described below.
Brand loyalties and recognition
Establishing brand recognition and loyalty requires a large investment in marketing to attract
customers and build a customer base. Established firms in an industry experience strong brand
identification and loyalties from their customers. It may take a long time to draw customers away
from their tried-and-true products, even to try a superior product.
Example: It took Apple four years to get Macintosh computers accepted in the market.
Distributions channels
Small and medium-sized firms usually have to rely on their own distribution channels. Many
distributors are reluctant to carry a new product that has no brand recognition and no established
customer base.
Example: Timex had to create its own distribution channels during its entry into the watch market.
Existing channels were reluctant to carry the product of a small, unrecognized company.
Large capital investments in equipment and production facilities
Small and medium-sized companies do not have the funds necessary to compete in certain
industries.
Example: The semi-conductor and main-frame computer industries are two examples of industries
that require a large initial capital investment.
Government regulations and control
Governments regulate entry and the control of certain industries.
Example: Firearms, liquor, and electric and gas utilities are all regulated by the government, limiting
who can enter.
Cost advantages
Cost advantages are usually achieved as a result of economies of scale, enhanced labour
performance as a result of the experience curve effect, and technologically superior production
processes.
Example: The experience curve effect is noticeable in many knowledge-based industries, such as
digital media and biotechnology.
Technological know-how
Companies limit access to competition through the use of intellectual property rights, patents, trade
secrets, lead-times with technological developments, unique designs and functions, compatibility
with proven products, and access to research and development through strategic partners.
Example: Xerox protected its copy machine technology with over 1800 patents to circumvent new
entrants. Allowing customers to rent copiers rather than buy them. The company created another
major entry barrier.

How do entry barriers affect a small business?

High Entry Barriers
Entry barriers enhance the competitive position of firms already in the market and increase the degree
of risk for small businesses attempting to enter the industry.

In the cellular communications industry, the entry barriers are high due to government regulations.
There are a number of players that have already established their markets and customer bases. A
small business trying to enter this market would be a highly risky venture.
Low Entry Barriers
Eliminating entry barriers can change an entire industry, inviting small and medium-sized companies
to compete. It forces large companies to down-size or out-source in order to reduce costs.

In recent years, the printed circuit board (PCB) design industry has experienced a rapid change in
technology. The cost of computing equipment for PCB design has fallen rapidly with the availability
of low-cost software for computer-aided design of circuit boards. As a result, the entry barriers have
fallen away, opening up the industry to small businesses.
What exit barriers could a small business face?
Certain industries are characterized by high exit barriers, which make the cost of closing down very
high.
This often deters a company from exiting the business. High exit barriers include the following:
» Large investments in manufacturing facilities or specialized assets that are difficult to convert to
other uses. (The assets have little or no liquidity value unless the company continues to operate.
Many traditional industries hold little promise in the knowledge-based economy, despite their large
investments in hard assets. Such is the case with large integrated steel mills and glass producers.)
» High costs of closing down the business, including executive compensations and employee
packages
» Emotional attachments to the business by the entrepreneur, founder, family members and other
Employees

What is meant by product differentiation?

Product is important in a developing a company’s competitive advantage. Product differentiation is
prevalent in knowledge-based industries, such as the computer industry, and less prevalent in
traditional
industries, such as the carpet or manufacturing industry.
Attributes of product differentiation include:
» Design
» Features
» Appearance
» Reliability
» Durability
» Quality
What is meant by industry concentration?
Concentration refers to the degree of dominance by a company or a group of companies within a
particular industry. When an industry is dominated by a few large companies, as is the case with the
telecommunications industry in many countries, it is very difficult for a small business entrepreneur
to compete successfully. The entry and exit barriers and economies of scale associated with large-
volume operations dominate.

Different types of competition influence the risk profile of an industry and provide a valuable
predictive tool for assessing the industry in which a small business entrepreneur operates.
What are the stages of the industry life cycle?
An industry usually passes through a life-cycle in the following stages:
» Emerging
» Growing
» Maturing
» Declining
Each stage has distinctive characteristics, which can help you to predict the prospects of a small
business and the magnitude of its risk. In the current economy, knowledge-based industries tend to
be in the emerging and growing stages of the life-cycle, whereas traditional manufacturing industries
tend to be in the maturing and declining stages.
How can the industry life cycle be used to predict risk?
The chart Industry Life Cycle Analysis outlines how the industry life-cycle can be used to assess
competitive risk:
Banker's Challenge Resolved
At the beginning of this section, you met Henry, a small business banker, and his client Jean
Luc, whose business plan is provide services to active seniors. Do you remember Jean Luc’s
question for Henry? Proceed to the next page to revisit the conversation and see Henry’s
response.

Proceed to the next page to revisit the conversation and see Henry’s response.

Good luck!

What questions should I ask to evaluate

my target market?

First, you should ask what geographic

area your business will serve. That
question will bring up related questions.
Maybe you can think of some.

Well, I would ask how many people are

in the seniors’ age group within the area.

That’s right! And what is the median

income of this group?

And what are their common interests?

 Is it a scattered population, or a
concentrated group that is more
accessible?

Would it be cost effective for me to serve

this group? And does my business have
enough resources to serve them?

Very good. Also, is the market large

enough to grow a profitable business over
time? These are all great questions to ask
when you’re targeting a specific segment.

Putting It Together
In this exercise, you will meet with your client Felix, who is thinking about opening a store.
Felix’s primary motivation for starting a business is to be his own boss. He trying to
determine what kind of store has a good chance of success in the small city where he lives.

In the course of your conversation with Felix, you will find that you are faced with more than
one response to his questions. In each case, select the response that you think is most
appropriate.

Good luck!

Hello Felix! How are you? Last time we

spoke, you told me you would like to
open a store of some sort. Have you put
any more thought into this?

Yes, it’s all I think about! I’m really tired

of working for someone else. In fact, I
have an idea for a specialty shop that I’m
excited about, and I’d like to know what
you think.

I’m listening!

I’m crazy about gadgets of any sort,

always have been. I’m also left handed, so
I get frustrated when gadgets are designed
for right-handed people. There are left-
handed gadgets out there, but most stores
don’t stock them. So I was thinking—why
not a store that sells only left-handed
gadgets? Don’t you think that’s a brilliant
idea?

It sounds like fun. Where would the store

be located?

In the downtown area, I suppose.

Well, the population of this city is

approximately 125,000 people. And
approximately 10% of the population is
left handed, would you say?
 Yes, that’s about right.

That’s a very slender number of people

you’re trying to appeal to, considering that
your store would be selling non-necessity
items—probably too slender.

That’s what I call niche marketing! You’ve

got the right idea—identify a gap and then
fill it.