What is Segmentation Strategy?
As consumers, we all have different interests, tastes and preferences. Segmentation describes how a market is broken down into these distinct groups such as different demographics or different behaviours (Kotler and Armstrong, 2014, pp. 220-225). Marketers can identify different groups within a population and place us into one or more of these groups to target products and services at our interests.
Without these groups, an unsegmented marketing strategy is referred to as undifferentiated or mass marketing. A segmented marketing strategy allows differentiated marketing to diverse segments of the population (Hammond, Ehrenberg and Goodhardt, 1996).
Is it a good idea for a small company to adopt a differentiated segmentation strategy?
Consider a small company with a limited turnover and only a local presence, such as a trade business (e.g. plumber, gardener, electrician). This business has a finite marketing budget so must carefully choose how they approach their marketing strategy. Indiscriminate mass marketing would be expensive and not necessarily provide the desired return on investment. While a limited amount of unsegmented marketing is possible, for example using a sign on their vehicle to promote their trade as they drive to appointments to complete work, the majority of their marketing is likely to be differentially segmented to direct their limited marketing resources at the people most likely to need their service. In the case of the small trade business, this could be delivering brochures promoting the service to the homes of people who have a garden and are likely to have the finances to employ a gardener.
Athanassopoulos (2000) discusses how market segmentation has improved customer relationships in the banking industry as targeting appropriate products (such as mortgages and savings) to appropriate people improves levels of customer satisfaction. This is one of the benefits of this approach to market segmentation as in our small business there would be little point in putting leaflets through doors of homes on a terraced street with no gardens. The segmented approach allows small businesses to target their limited resources at the people who will give them the maximum return on their investment.
Conversely, Dibb (1998) assesses some of the difficulties marketers face when implementing market segmentation strategies such as the over-reliance on out of date demographic information, the over-segmentation of a market and the potential to miss customers if they do not fit neatly into one of the groups. In the case of the small trade business, there is significant potential to exclude a group of prospective clients by choosing not targeting their properties with literature about the services offered.
What industries does segmentation strategy best suit?
Futterman (2009) observes that the number and type of businesses implementing a segmentation strategy has increased over recent years, citing the examples of Amazon and Netflix that use data mining to analyse our buying patterns and behaviours to target us with appropriate content. However, Dickinson and Ginter (1987) argue that market segmentation has existed since the markets of ancient Greece so although techniques for analysing market segments have improved, there are few if any industries which should not implement such a strategy. Ultimately, marketing is about providing a business with a competitive advantage and Hammond, Ehrenberg and Goodhardt (1996) argue that differentiated segmentation of a market is the only way to achieve this.
Athanassopoulos, A. (2000) ‘Customer Satisfaction Cues To Support Market Segmentation and Explain Switching Behavior’, Journal of Business Research, 47(3), pp. 191-207, ScienceDirect. [Online]. Available from: http://www.sciencedirect.com.ezproxy.liv.ac.uk/science/article/pii/S0148296398000605 (Accessed: 2 February 2014).
Dibb, S. (1988) ‘Market segmentation: strategies for success’, Marketing Intelligence & Planning, 16(7), pp. 394-406. [Online]. Available from: http://www.emeraldinsight.com.ezproxy.liv.ac.uk/case_studies.htm/journals.htm?articleid=854440 (Accessed: 2 February 2014).
Dickson, P. & Ginter, J. (1987) ‘Market Segmentation, Product Differentiation, and Marketing Strategy’, Journal of Marketing, 51(2), pp. 1-10, Jstor. [Online]. Available from: http://www.jstor.org.ezproxy.liv.ac.uk/stable/1251125 (Accessed: 2 February 2014).
Futterman, M. (2009) Using Market Segmentation for Better Customer Service and More Effective Strategic Planning. [Online]. Available from: http://www.businessdecision.info/whitepaper/pdf/BusinessDecisionWhitepaper110909.pdf (Accessed: 2 February 2014).
Hammond, K., Ehrenberg, A., Goodhardt, G. (1996) ‘Market segmentation for competitive brands’, European Journal of Marketing, 30(12), pp. 39-49, Emerald. [Online]. Available from: http://www.emeraldinsight.com.ezproxy.liv.ac.uk/journals.htm?articleid=853476 (Accessed: 1 February 2014).
Kotler, P. & Armstrong, G. (2014) Principles of Marketing, 15th Edition. London: Pearson Education Ltd.