Chapter 3 - Strategic Market Segmentation
Decision makers face renewed dilemmas in making segmentation choices, driven by escalating
market complexity and turbulence. Many traditional assumptions about markets are becoming
obsolete. Clinging to inaccurate assumptions that markets are simple and stable is likely to
critically undermine the ability of an organization to develop and implement effective marketdriven strategy.
This unit, we will explore the role of market segmentation in marketing strategy, followed by a
discussion of the variables used to identify segments. Next, we will explain the methods for
forming segments, followed by a review of high-variety strategies. Finally, we will consider the
issues and guidelines involved in selecting the segmentation strategy and its
implementation. The purpose of this chapter is to familiarize the student with market
segmentation.
To get started, please read Chapter 3, Strategic Market Segmentation in order to understand the
concepts that we will be discussing.
Levels and Types of Market Segmentation
Segmentation is an important tool in strategic marketing, which is linked to choosing market
targets and positioning against alternatives to build competitive advantage. Importantly,
segmentation may serve several purposes at levels which range from the strategic to operational.
Many traditional views emphasize segmentation as an operational tool-for instance, to aim
advertising effectively at different types of customers.
However, segmentation models appropriate to developing advertising programs may be quite
different to those used to develop marketing strategy. While advertising-oriented segmentation
aims to identify targets that differ in their responses to a given message, strategic segmentation
has the goal of identifying market segments that differ in their purchasing power, goals,
aspirations and behavior, in ways relevant to identifying new product and value opportunities.
It is useful to examine segmentation as operating at several decision-making levels in the way
suggested by Exhibit 3.1 (page 74). Strategic segmentation links to the management vision and
strategic intent of corporate strategy, and emphasizes product benefits that different types of
buyers seek. Managerial segmentation is concerned with allocating resources around segment
targets, including them in marketing plans, and aligning organizational processes around them.
Operational segmentation issues are concerned with the marketing program changes needed to
reach segment targets with advertising and promotions, and with distribution systems.
Market-Driven Strategy and Segmentation
Market segmentation needs to be considered early in the development of market-driven strategy.
Segments are identified; customer value opportunities and new market spaces are explored in
each segment, organizational capabilities are matched to promising segment opportunities,
market target(s) are selected from the segment(s) of interest, and a positioning strategy is
developed and implemented for each market target Exhibit 3.2 (page 74).
Thus, market segmentation is the process of placing the buyers in a product-market into
subgroups so that the members of each segment display similar responsiveness to a particular
positioning strategy. Buyer similarities are indicated by the amount and frequency of purchase,
loyalty to a particular brand, how the product is used, and other measures of
responsiveness. Segmentation identifies customer groups within a product-market, each
containing buyers with similar value requirements concerning specific product/brand attributes.
Market targeting consists of evaluating and selecting one or more segments whose value
requirements provide a good match with the organization's capabilities. Companies typically
appeal to only a portion of the people or organizations in a product-market, regardless of how
many segments are targeted.
An important consideration in defining the market to be segmented is estimating the variation in
buyer's needs and requirements at the different product-market levels and identifying the types of
buyers included in the market. In contemporary markets, boundaries and definitions can change
rapidly, underlining the strategic importance of market definition and selection, and the need for
frequent reevaluation.
Identifying Market Segments
One or more variables may be used to divide the product-market into segments. Demographic
and psychographic characteristics of buyers are of interest, since this information is available
from the U.S. Census reports and many other sources including electronic databases.
The characteristics of people fall into two major categories: (1) geographic and demographic,
and (2) psychographic (lifestyle and personality). Demographics are often more useful to
describe consumer segments after they have been formed rather than to identify
them. Demographic variables describe buyers according to their age, income, education,
occupation, and many other characteristics.
Lifestyle variables indicate what people do, their interests, their opinions, and their buying
behavior. Lifestyle characteristics extend beyond demographics and offer a more penetrating
description of the consumer.
Markets can be segmented based on how the product is used. As an illustration, Nikon, the
Japanese camera company, offers a line of high performance sunglasses designed for activities
and light conditions when skiing, driving, hiking, flying, shooting, and participating in water
sports. For more information on Nikon, click on Nikon (Links to an external
site.) http://www.nikondigital.com/index.page (Links to an external site.)
Buyers’ Needs, Tastes and Preferences
Needs, tastes and preferences that are specific to products and brands can be used as
segmentation bases and segment descriptions. Marketing research shows that needs and tastes
motivate people to act. Understanding how buyers satisfy their needs provides guidelines for
marketing actions. Buyers’ attitudes toward brands are important because experience and
research findings indicate that attitudes influence behavior. Perception is defined as "the process
by which an individual selects, organizes, and interprets information inputs to create a
meaningful picture of the world.
Since buying decisions vary in importance and complexity, it is useful to classify them to better
understand their characteristics, the products to which they apply, and the marketing strategy
implications of each type of purchase behavior. Buyer decisions can be classified according to
the extent to which the buyer is involved in the decision.
Forming Market Segments
An important question is deciding if it is worthwhile to segment a product-market. Determining
differences in the responsiveness of the buyers in the product-market to positioning strategies is a
key segment identification requirement. It must be possible to identify the customer groups that
exhibit response differences and sometimes finding the correct groups may be
difficult. Segmentation must be financially attractive in terms of revenues generated and costs
incurred. Segments must show adequate stability over time so that the firm's marketing efforts
will have enough time to produce favorable results.
Segments are formed by: (A) grouping customers using descriptive characteristics and then
comparing response differences across the groups, or (B) forming groups based on response
differences and determining if the groups can be identified based on differences in their
characteristics. By identifying customer groups using descriptive characteristics and comparing
them to a measure of customer responsiveness to a marketing mix such as product usage rate,
potential segments can be identified. The alternative to selecting customer groups based on
descriptive characteristics is to identify groups of buyers by using response differences to form
the segments.
Chapter 4 - Strategic Customer Management: Systems,
Ethics, and Corporate Social Responsibility
In this chapter we examine that building effective customer relationships is widely recognized by
executives as a high priority business initiative. A study of 960 international executives rated
customer relationship management (CRM) and strategic planning highest among 10 priority
strategic initiatives for improving organizational performance. So, it is important to learn about
the pivotal role of customer relationship management by developing CRM strategies such as
value creation process and the CRM and strategic marketing concepts.
What is the CRM? CRM is a cross-functional core business process concerned with achieving
improved shareholder value through the development of effective relationships with key
customers and customer segments. Customer Relationship Management recognizes that
customers vary in their economic value to the company; and differ in their expectations toward
the firm. Other characteristic is the customer lifetime value.
It is also very important to state that the customer lifetime value (CVL) calculates past profit
produced by the customer for the firm-the sum of all the margins of all the products purchased
over time, less the cost of reaching that customer.
Sources: Sridhar N. Ramaswani, Mukesh Bhargava, and Rajendra Srivastava, “Market based
Assets and Capabilities, Business Process, and Financial Performance.” MSI Working Paper
Series, N0. 04-001, 2004
Developing a CRM Strategy
CRM can be viewed from company-wide, customer-facing, and functional levels. Each level has
important but different implications for strategic marketing. All three perspectives are important,
although the company-wide or strategic level provides the most complete view of CRM. The
functional perspective considers the processes that are needed to fulfill required marketing
functions. The customer-facing level offers a single view of the customer across all of the
organization’s access channels to the customer. This level of CRM is concerned with
coordinating information across all contact channels on a continuing basis.
The company-wide level provides a strategic focus for CRM. It considers the implications of
knowledge about customers and their preferences across the entire company. The intent is to
guide the interactions between the organization and its customers in seeking to maximize the
lifetime value of customers for the firm. Importantly, the strategic perspective acknowledges
that (1) customers vary in their economic value to the company and (2) customers differ in their
expectations toward the firm.
The strategic use of CRM resources reflects the shift in focus by marketing executives to the
customer who delivers long-term profits, that is, an emphasis on customer retention rather than
acquisition. As CRM evolves and offers executives deeper insights into their customer base, the
new information may challenge strategic assumptions in important ways. Just because a group
of customers were profitable in the past, this may not always be true in the future. The following
are steps in developing a CRM strategy:
•
•
•
•
Gain enterprise commitment
Build a CRM Project Team
Business Needs Analysis
Define the CRM Strategy
Source: V. Kuman and Werner J. Reinartz, Customer Relationship Management (John Wiley and
Sons, Inc.) 2006, 39
Value Creation Process
Payne and Frow define the value creation process in CRM as (1) the value the customer receives;
and (2) the value the organization receives. Successfully managing the value exchange between
the customer and the firm is essential in achieving effective CRM. Continue to read about value
creation process on page 113.
Source: Payne and Frow, “A Strategic Framework for Customer Relationship Management, 170172
Ethics and Social Responsibility in Strategic Marketing
Interest and concerns about ethics and social responsibility are rising rapidly. Large numbers of
business organizations throughout the world are directing attention and efforts to these important
concerns. In part, the issues are driven by the belief that businesses should behave in an ethical
way, because it is the right thing to do, and that they should deliver social benefits as well as
meeting their business goals. However, it is also the case that perceptions of a seller’s ethical
standing and social contribution can have a direct impact on its attractiveness to customers and
their willingness to buy. Ethics and social responsibility questions are increasingly significant to
the creation of effective customer relationships, in part because of the impact on corporate
reputation; continue your readings from pages 118-127.
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