What is Market Segmentation?

Market Segmentation

Market segmentation is the process of dividing the market into distinct homogenous sub-groups of consumers with similar needs or characteristics that lead them to respond in similar ways to particular marketing programs.

There exist large heterogeneous markets in which customers are different from one another on various dimensions – by their place of dwelling and also the kind of income they earn in society and the status enjoyed them.

So, the marketer has to identify smaller homogenous markets where customers are more similar or have similar demand patterns and he can develop a differentiated marketing offer for each of these markets. This process of sub-dividing the heterogeneous market into homogeneous sub-sections of customers,

in which each sub-section may conceivably be similar to each others, is called market segmentation. Each selected market can be targeted with a distinct marketing mix. Thus market segmentation consists of taking the total heterogeneous market for a product and dividing it into several sub-markets or segments, each of which tends to be homogeneous in all significant aspects.

Purposes of Market Segmentation

Market segmentation allows a marketer to take a heterogeneous market, a market consisting of customers with diverse characteristics, needs, wants, and behavior, and carve it up into one or more homogeneous markets which are made up of individuals or organizations with similar needs, wants, and behavioral tendencies.

As in the case of differentiated marketing strategy, unless there is a substantial difference among the segments, it will be a duplication of efforts and a waste of resources to launch differentiated marketing programs for each of the segments.

When there exists a clear distinction between segments, the marketing manager can use the resources in an efficient manner by spending more on the segment with higher potential and then building other segments for the future.

A mass marketer needs to create differentiation among his customers and then make his product proposition fit each of the segments so that he can understand the homogeneous customer needs and their evolution better than an undifferentiated marketer.

It also helps in a better understanding of the competitive situation in each of the segments. As the degree of competition will vary across segments, the marketing manager needs to spend accordingly.

The marketing manager can accurately identify, and measure his marketing goals in terms of market share and mind share in each of the segments and regulate his company’s performance in each of the segments.

Segmenting Basis

Market is segmented on several basis, given below are the types of market segmentation.

Geographic Segmentation

This is the simplest form of segmenting the market. Here, the marketer divides the target market into different geographical units such as nations, states, and regions. He may decide to operate in one or more than one geographical area.

Identifying the geographical location of the customers i.e. their place of residence helps in defining the segments. For example, a particular brand may be popular only in North India, then the North Indian market can be divided on the bases of zones, villages, cities, climate, etc.

A classic example of geographic segmentation is Amul, which was initially marketed only in Gujarat, and then by strengthening its distribution network, the company went for a national launch. A retail brand like MTR initially targeted the South Indian market for its products and then moved into other territories.

This method of segmentation is helpful in case the company plans for a regional rollout of the products and decides to enter the market by establishing itself in different territories sequentially.

Companies can match their available resources with market entry strategy if they can segment geographically and then plough back success from one market to other markets. In a country like India, when we move across from one part of the country to another part, we find a number of local yet powerful brands sold in each geographic market.

Demographic Segmentation

While it is easy to find and group people living in one geographic location, there may be a large variation in their demographic characteristics. Demographic variables include factors like age, gender, family size, family life cycle, income, occupation, education, marital status, religion, race, generation, nationality, language, and social class.

Since consumer needs, wants and demand patterns are directly linked with demographic variables, this method of segmentation is popular among marketers. These variables are easier to measure and one needs the help of demographic statistics to estimate the size of the market which serves as a key indicator for distinctive market segments.

Marketers of personal care products like cosmetics, shampoos, and beauty products segment the market on the basis of age and gender. Food marketers segment the marketer on the basis of age and life cycle stage to market various food items.

Age is an important factor while segmenting the market as demand and brand choice of people change with age. Life cycle is also another important variable in segmenting the market. People pass through different stages of life cycles like childhood, bachelorhood, a young and married couple without children, couples with grown-up kids, couples with children living away from parents, and finally a loner where one of the partners is dead.

Customers tend to develop different consumption patterns at different stages of the life cycle. Human beings need to complete the rites of passage throughout their lifetime, which helps the marketer to estimate the likely demand for products and services at different stages of the life cycle.

Segmenting the market on the basis of gender helps the marketer to categorise products specifically targeted for males and females. Marketers use gender differences for marketing garments, personal care products, bikes, cosmetics, and magazines. Lakme is a popular Indian brand, which sells beauty care products to women only.

Though VLCC is a personal grooming brand targeted at women, it has now ventured into the male segment. Bikes like TVS Scooty and Kinetic Honda are targeted towards women only. In the famous book ‘Men are from Mars and Women are from Venus’ the author has identified a significant difference in the behavioural and attitudinal pattern of males and females.

The women segment is more into socialisation and community sharing and males are more goal-driven and individualised. While women are found to be taking data from the environment while making decisions, men use the environment more for achieving their goals.

Some television channels also synchronise their programming by looking at which segment is likely to watch the television programs. Brands like Bajaj Pulsar, Fair and Handsome are exclusively targeted at the male segment.

Income based segmentation has a direct bearing on the brand choice behaviour and lifestyle pattern of consumers. People in similar income brackets are more prone to buy similar products and services. The customer’s social status level is also linked to his source of income.

Automobile majors, fashion garments manufacturers, hospitality and financial services industry players segment the market on the basis of income of consumers. In many instances, income is not a sufficient indicator of product and brand choice.

In the latest round of study conducted by National Council of Applied Economics and Research (NCAER), it was observed that people Below the Poverty Line (BPL) who by strict definition of income classification should not have any purchasing power, are found to be heavy purchasers of consumer durables like pressure cookers, bicycles, wrist watches, table fans and radios.

This segment is also defined as ‘Bottom of Pyramid’ (BOP) market and research indicates a high propensity of consumption in this segment. Marketers are developing different kinds of productmarketing strategy for catering to these markets. Nirma is a successful brand in Indian market, which targeted to the lower income group of the society and delivered a promised value at a lower cost.

A bird’s eye view of the Indian market makes us believe that the Indian market can be classified into a market of four tiers based on income distribution. Tier 1 right at the top, consists of a small and easy to reach segment of customers who are willing to pay high prices to have the latest in the world.

Tier 2 is much larger in volume consisting of consumers who will judiciously balance price and benefit to purchase premium or high-end popular products. Most multinational companies who came in with products at prices catering to the top tier have been forced to move to this tier, the most visible being the liquor majors, sports shoes world leaders and branded apparel makers.

Tier 3 consists of consumers who have a definite ceiling on how much they can spend and look at the best available benefits at that price. Tier 4 is the most populated tier and consists of people who are just entering the arena of consumption – the first-time consumers whose needs and wants are minimal as are their purses.

There is greater value in terms of potential demand in the lower tier of the market than in the top tiers. What is needed is a relentless effort to develop the cost capability and appropriate products, which can appeal to the lower tiers.

Modern market can also segment the market on the basis of cohorts. Each of the generations gets influenced by the events of their time. These events and living patterns are reflected in the fashion, music, movies and thought process.

The icons and their styles have influenced genres and people can be segmented by generation. In emerging economies like India, where a significant majority of the population consists of the below 35 age group, FMCG companies have been focusing on “leveraging the demographic dividend” to market their products. ITC Ltd, HUL, P&G, Pepsi and many other companies are focusing on the young segment.

The members of same cohort share the similar major political, economical and cultural experiences and have similar outlooks and value systems. However, life stage analysis reveals that two customers representing the same cohort vary in their life stages and psychographics.

Another important base for demographic segmentation is social class. Customers in one social class tend to behave in similar patterns and they behave differently across social classes. Social classes are hierarchical in nature and one is placed either above or below another social class.

Though social classification in the West is based on various factors like source of income, profession, possessions, it has a different connotation in the form of caste system in the Indian heartland. Urban India has a social classification similar to the Western world.

Marketers associate their products and services with aspirations of people by projecting the idea of product ownership just above the real class of the customer. Customers for automobiles, holidays, clothing and retail stores are segmented on the basis of social class.

Demographic Variables of SegmentationComponents
Age15-20, 20-25, 25-30, 30-35
Family SizeSingle, Two Member Family, Four Member
Family Life
Bachelorhood, Young Married Couple, Young Married Couple with Small Children, Youngest Child over the Age of Six, Grown Up Children Dependant on Parents, Grown Up Children not Living with Parents, Older and Single People
GenderMale, Female
EducationBelow 10th class, Under Graduates, Graduates,
Professionally Qualified, Technically Qualified
ReligionHindu, Muslim, Christian, Sikh
NationalityIndian, American, Englishman, Pakistani
RaceAryans, Dravidians, Nagas, Blacks, Tribal
Below 5000, 5000-12,000, 12,000-20,000, 20,000, and above
OccupationFarmers, Non-Farm Sector Workers, Salaried Class, Businessman, Retired, Students, Unemployed, and Professionals
GenerationImperial Oldies, Patriotic Indians, Indian Baby Boomers, Generation X, and MTV Generation
Social ClassLower-Lower class, Upper-Lower Class, Lower Middle Class, Upper Middle Class, Working Class, Lower Upper Class and Upper-Upper Class

Psychographic Segmentation

Other than the demographic methods of market segmentation, segmentation on the basis of psychography is another popular method among marketers. Psychographics is the study of the lifestyle of individuals. It involves developing sub-group identification on the basis of psychographical characteristics.

Lifestyle is a person’s entire way of living. It reflects the person’s living as a combination of his actions, interests and opinions. Marketing researchers have tried to measure consumer psychography by undertaking various studies and developing dimensions for mapping the individual lifestyle patterns and using them subsequently for the purpose of segmentation.

One of the popular methods of psychographic study is AIO Framework, which explains the individual’s lifestyle pattern as a combination of his activities, interests and opinions with demographic explanations.

Table represents the AIO Framework variables.

HobbiesHomeSocial issuesEducation
Social eventsJobPoliticsIncome
EntertainmentRecreationEconomicsFamily size
ShoppingMediaFutureCity size
SportsAchievementsCultureLife cycle stage

Stanford Research Institute developed the second popular model popularly known as VALS (Values and Life Style) Model. This model has a preliminary version called VALS-I and an advanced version known as VALS-II.

Though these models have limited application for segmenting the Indian market and are appropriate for western markets, it is important to understand these models and apply them in the Indian context with relevant modifications.

The VALS framework classifies the American adults into eight typologies based over a questionnaire on personality traits and key demographic characteristics. The questionnaire involves four demographic and thirty-five attitudinal questions. As per the survey, the groups are classified into two categories depending on the level of resources available to them.

The following are the characteristics of people with higher resources:

  • Innovators are the people who are successful, sophisticated, active, take charge of situations; they have high self-esteem.

    Their purchasing pattern reflects their taste and they buy relatively upmarket and niche products available in the market as they have plenty of resources and are prone to accept new innovations faster than others.

  • Thinkers are people who are mature, satisfied, and often motivated by values, and ideals. They value knowledge and care for responsibility. They choose durable and functional products, which will give them higher value for their money.

  • Achievers are the people who are successful and are always goal oriented. They focus on career and family. They normally favour premium and high priced products, which reflect their success and achievements in life.

  • Experiencers are people who are typically young, enthusiastic, and subject to whims. They are impulsive and they look for variety and excitement in life. They spend a high proportion of their income on fashion, personal care products, and entertainment.

The rest of the four groups are with lesser resources and their characteristics are as per the following:

  • Believers are people who are conservative, conventional, and traditional in their living and mindset. They always favor popular and familiar products and are often found to be loyal to many brands.

  • Strivers are the people who are trendy and fun-loving. They have limited resources and normally favor stylish products that emulate or copy the products used by the resourceful segments.

  • Makers are the people who are political, down to earth, and selfsufficient and would like to work for their living. They are very nationalistic and favour American brands.

  • Survivors are the people who are elderly, passive and are concerned about change. They are found to be loyal to their age-old brands.

Behavioral Segmentation

In the case of behavioral segmentation, the market is divided on the basis of the purchase decisions and product or brand usage made by consumers. For example, CRITICARE (Medical Instrument Manufacturing Company) has divided its Delhi market into six buyer groups, which are as follows:

Most Modern Hospitals

Escorts Heart and Research Center, Batra Hospital and Research Center, Apollo Hospital, etc. These hospitals are constantly on the lookout for new instruments to become more efficient. As the Purchase Manager of Escorts Heart and Research Center said, “We always want to be the first ones to buy new technologies.”

Autonomous Hospitals

For example the All India Institute of Medical Sciences. Here, the most important influence on the purchase decisions is of the specialist doctors and the heads of the respective departments. Even if they go in for tenders, technical specifications, rather than price alone, influence the purchase decision.

Government Hospitals

Ram Manohar Lohia Hospital, GB Pant Hospital, LNJPN Hospital, etc. Here the Medical Superintendent and the Financial Controller influence the purchase decision. They generally decide in favor of the lowest quote.

Medium-size Private Hospitals

Maharaja Agrasen Hospital, Shanti Mukund Hospital, etc. They use a blend of quality and price considerations. Generally, the choice of Medical Director is final.

Nursing Homes

Kukreja Nursing Home, Giriraj Hospital, etc. Generally, they have one operation room in which they use a pulse oximeter. To get their nursing homes recognized by the Ministry of Health, it is essential for them to have pulse ox meters. They also go for quality, low price, and after-sale service.

Freelancing Anesthetist

Doctor-Anesthetist who are attached to different nursing homes has their own pulse ox meter so that they can use it where this facility is not available in the nursing homes.

In the case of volume segmentation, quantity purchased is the basis for segmentation. It attempts to identify frequent users of a product category or brand. The 80:20 pare suggests that eighty percent of customers buy twenty percent of products and twenty percent of them buy eighty percent of products.

So it is possible to segment the market on the basis of usage rate and classify the buyers as heavy users, moderate users and light users. Products like cigarettes, wine, and personal care categories are classified on the basis of volume segmentation. They can also be grouped as bulk buyers, small-scale buyers, regular buyers, and one-time buyers.

An alternative method of segmentation is brand user segmentation. The marketer tries to identify the user characteristics on the basis of brand usage as brand users, brand triers, and non-users. The non-users are motivated to buy through the introduction of new products appealing to the non-user segment profile.

Buyers of different brands may not be found to be different from one another on certain distinguishable characteristics but a marketer would like to segment the market on the basis of certain distinguishable elements so that he can reach them effectively. The objective of doing a product-based segmentation is to influence generic demand of customers and convert their demand towards selective demand for the brands.

Marketers are also interested in attracting not only brand users but also consistent users of the brand. The repetitive purchase patterns of brands are studied to classify customers into highly loyal, moderately loyal, switchers, disloyal, and fence-sitters.

When the company is able to identify the brand loyal users, he can develop appropriate marketing strategy to attract the customers who are loyal to competing brands. So it is possible to segment the market on the basis of brand loyalty. Companies develop relationship-marketing programs to keep their loyal customers happy.

Many companies have also started key account management programs to attract and keep their loyal customers. This is based on an assumption that the cost to serve loyal customers is lesser than to make new customers.

Marketers also segment the market on the basis of situation segmentation. Many marketers are happy with identifying the segments and profiling the segments and they do not attempt to find out how customers are experiencing the brand and what is their ultimate way of using the brand.

Peter Dickson suggested the person situation method of segmenting the market in which the marketer can go deep into understanding the buying pattern of consumers in different situations and then group customers on the basis of their brand usage situation experience.

This method is based on an assumption that people buy different products and brands in different usage situations. A person may select a business class hotel when he is traveling alone for the purpose of business whereas, in a family holidaying situation, he may prefer to book a leisure tourist resort to spend time with his family.

Benefit Segmentation

All the above methods of segmentation are based on a post facto analysis of the kind of people who make up specific segment of a market. These methods help in describing the characteristics of different segments rather than finding out what causes these segments to develop.

People suggesting benefit segments ground their idea on the assumption that benefits people expect out of the product consumption situation are the basic reason for purchase and customers can be grouped as per the basic reason for their purchase. Benefit segmentation involves classifying buyers according to the benefits they expect (get) from the product.

Let us look at the following list of benefits derived from toothpaste.

(Low price)
MenHeavy usersHigh autonomy
on sale
Medicinal(Decayprevention)Large familiesHeavy usersHypochondriac
young adults
SmokersHigh sociability
(good taste)
ChildrenSpearmint loversHigh self-

Marketers can do benefit segmentation through a three-stage process. The marketer needs to conduct exploratory research to develop a complete listing of benefits of possible value in segmenting the relevant market. Then the marketer develops a sensitive and reliable scale to measure major attitude dimensions.

Finally, the marketer develops quantitative measurements of the market, usually involving a national sample, resulting in the clustering of respondents by their attitudes. Individual clusters are developed and described in terms of their behavior, lifestyles, demographics, and other relevant characteristics.

So each of the segments is discriminated by their attitudes and differences in their behavior are analyzed by developing multiple cross-tables.

  • Tapan K Panda, Marketing Management, Excel Books.

  • Philip Kotler, Marketing Management, Pearson, 2007.

  • V S Ramaswami and S Namakumari, Marketing Management, Macmillan, 2003

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