Defining Marketing Segmentation in Business Applications
By: John Errigo, MS
What is market segmentation comparative to design and subsequent evaluation?
Market segmentation is concerned with classification of customers and consumption and when enacted, market segmentation usually turns to or is based upon the relationships which follow” (Tonks, 2009, p. 346). “Conceptually, market segmentation can be defined as the ‘process of subdividing a market into distinct subsets of customers that behave in the same way or have similar needs” (Foedermayr & Diamantopoulos, 2008, p. 223) Given appropriate information or reasonable assumptions about consistency within the segments and differences between them, market segmentation thus allows the organization to locate and tailor its offerings for one or a number of the identified segments in the marketing process (Tonks, 2009). Market segmentation is not simplistic. The theory is approached generally from a managerial perspective using the foundational elements of competitive and diverse markets, a financial impetus, a strategic and operational purpose and the affective priority given to customer satisfaction and using this data as a science (Tonks, 2009). “The scientific resource allocation approach to market segmentation theory was certainly prevalent in the 1960s and 1970s, coinciding with the normative approaches to marketing more generally” (Tonks, 2009, p. 349). The approach continues to the present as resent trends observed by Hunt and Arnett (2004) and they propose segmentation theory and practice can be instrumental in gaining a competitive advantage. “The lack of guidance in the segmentation literature can help explain why companies have problems segmenting their market” (Clarke, 2009, p. 346). Despite what may seem to scholars as an extensive market segmentation literature, applied academic studies which bridge segmentation theory and practice remain a priority for researchers (Dibb & Simkin, 2009).
There are many different ways to carry out market segmentation. Some experts advocate a quantitative survey-based approach, using multivariate analysis to identify segments. A disadvantage of this method bring wholesale changes to customer groups and target markets, demanding a complete realignment of internal structures and personnel. In practice, many organizations seek less radical approaches because various operational constraints affect the level of change which can be achieved (Dibb & Simkin, 2009). “Despite ongoing interest in the notion of marketing portfolios and the emergence of portfolio management tools such as the Boston Matrix, Directional Policy Matrix, and StratPort, risk and return has received relatively little consideration in the marketing literature” (Ryals, Dias, & Berger, 2007). Within a comparison of conceptual models a discussion of evaluation, risks and benefits will be analyzed.
An example of Conceptual Models and evaluating marketing segments
There is a risk and benefit in using customer segmentation within marketing. Customer segmentation has virtually unlimited potential which can be used by firm to guide them toward more effective ways to market products and develop new ones (Cooil, Aksoy, & Keiningham, 2007). There are many methods which can be utilized in customer segmentation. The most important is “deciding on the segmentation method(s) is a useful stage of the segmentation process. Segmentation methods can be classified into a-priori versus post hoc methods and into descriptive versus predictive methods (Foedermayr & Diamantopoulos, 2008).
General approaches to segmentation include both a-priori and post-hoc methods:
1. A-priori segmentation methods require that segments be defined
before data are collected. The segments may be determined using
customer characteristics or product-specific information. Segments
are then studied empirically using data that may provide additional
customer information. In some cases, several alternative
or overlapping segment bases, that were all defined a-priori, are
compared and contrasted. The goal of such an analysis may be primarily descriptive (e.g., cross-tabulation, logistic regression), or it could include the development of models that use the predefined
segments to predict one or more dependent variables.
2. Post-Hoc methods identify segments empirically through data
analysis. Again the ultimate goal may be primarily to study the
groups themselves, or it may be to develop a predictive model for
a set of dependent variables.
3. There are also hybrid approaches that combine a-priori and
post-hoc analyses (Cooil, Aksoy, & Keiningham, 2007, p. 11)
These approaches to the consumer segmentation contribute to the overall complexities of the methods used as well as the diverse data analysis available within market segmentation. One risk is the complexity and how firms may or may not adapt to the usefulness of these methods. A benefit is the data can be analyzed in a manner which can be most advantageous to the practitioner.
Cultural Segmentation (cost verses benefit)
Another risk is using cultural differences within marketing segmentation. This is a risk because it is not only costly; it is limited in the scope of availability research of the potential benefits. The benefit would be how relative to Caucasians “ethnic minorities’ increasing size, purchasing power and geographic concentration provide marketers with a unique opportunity to modify their marketing strategies in the pursuit of increased market share and profitability (Lindridge & Dibbs, 2002, p. 270). As aforementioned, how does a marketer justify the cost in using this attribute in marketing segmentation? “In justifying the additional cost of an ethnic minority marketing activity, an organization must be satisfied that new market segments can contribute to additional profits or increased market share. Market segmentation justification, therefore, lies in identifying sufficient behavioral differences between the ethnic minority and the majority to constitute a distinguishable market segment” (Lindridge & Dibbs, 2002, p. 270).
There is an inherent risk however the benefit may outweigh the risk. “Attempts to market to ethnic minorities will need to address the difficulties in pinpointing a particular minority’s behavior, while accounting for cultural sensitivities to avoid possible accusations of racism. Market segmentation potentially offers one solution to this complex issue” (Lindridge & Dibbs, 2002, p. 282). The solution would be found in the data analysis, where each culture would be identified by behavior. This risk then of possible racism would be elevated.
Beyond this factor of risk, there is another factor to consider before closing the risk and benefits of cultural segmentation. If this method is used within marketing segmentation, one observation noted in the research, was the ongoing nature of the research and subsequent analysis: “marketers specifically striving to serve the needs of an ethnic group will need to properly understand the behavior, expectations, needs and perceptions of their target market’s customers” (Lindridge & Dibbs, 2002, p. 282) these factors alone point to continuous research, evaluation and analysis.
Theoretical frameworks for evaluating market segments “
When such approaches are developed, techniques have ranged from simplistic scoring across various criteria to more sophisticated and logically elegant marginal analyses of cost and revenue, elasticity determination, and identification of response functions for marketing stimuli (Tonks, 2009). Within market segmentation there is an analysis of varied correlations which can strengthen the external validity of the results, but usually, practitioners deal with single markets at a time, and at times, with segments within these markets (Tonks, 2009). In the operational world, where the rubber meets the road, the practitioner “usually operates in specific contexts. Hence, the results obtained by academics may not apply to these niches, these single markets and/or these specific contexts. Still, marketing science can help managers make his/her own decision by identifying the different aspects of a given problem. It can help managers reformulate the problem in a different, perhaps easier way to grasp” (Bemmaor & Franses, 2005). As a theoretical example of how the scholar is expected to contribute to marketing segmentation is presented through an analysis of the Classical Linear Regression:
“Classical linear regression is a tool that is widely used by both academics and practitioners. In our view, the reasons for its widespread
use are as follows: (1) it is quite simple to understand, (2) in principle, it
permits to capture the relationship between a dependent variable
(e.g. sales) and a series of explanatory variables (e.g. prices, promotion),
(3) its parameters can be meaningfully interpreted (see, for example,
the discussion by van Heerde, this issue), (4) there exist standard
computer packages to implement it, and (5) its use can be automated
which is a major advantage to practitioners (consultants)”
(Bemmaor & Franses, 2005, p. 291).
From a scholarly perspective, there are many theoretical frameworks which help evaluate the efficacy of the marketing segmentation strategy. The classical linear regression tool is one of many different models and it’s relation to the marketing strategy as a whole. From a literature review, Cierpicki, Faulkner and Rungie (1998) identified a total of eleven principles which include the generalizability across many goods and services and the cost of the segmentation process” (Tonks, 2009). While the literature has focused on new variable and normative models, few authors have considered segmentation as a process. Goller, Hogg, and Kalafatis (2002) find that segmentation bases are industry-specific and they identify a need to focus on the segmentation process and related activities rather than on creating normative models or suggesting bases (Clarke, 2009, p. 346).
As noted by both Clarke and Tonk (2009) it is relevant in the marketing segmentation process as well as the literature which will be discussed further in the paper, there is a need for further review and collaboration to develop a holistic method of tools and evaluation to both meet the needs of the practitioner as well as the scholar.
All rights reserved (2010) and my not be duplicated or referenced without written permission of author: John Errigo, M.S., by corporate authorization, HODT, Inc. (firstname.lastname@example.org)