Market segmentation

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Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs, and then designing and implementing strategies to target their needs and desires using media channels and other touch-points that best allow to reach them. Market segments allow companies to create product differentiation strategies to target them.
Contents
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1 Criteria for segmenting 2 Methods for segmenting consumer markets

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2.1 Geographic segmentation 2.2 Psychographic segmentation 2.3 Behavioral segmentation 2.4 Segmentation by occasions 2.5 Segmentation by benefits

3 Using segmentation in customer retention 4 Price discrimination 5 Algorithms and approaches 6 See also 7 References

Criteria for segmenting[edit]

An ideal market segment meets all of the following criteria:

It is possible to measure. It must be large enough to earn profit. It must be stable enough that it does not vanish after some time. It is possible to reach potential customers via the organization's promotion and distribution channel.

It is internally homogeneous (potential customers in the same segment prefer the same product qualities). It is externally heterogeneous, that is, potential customers from different segments have different quality preferences.

It responds consistently to a given market stimulus. It can be reached by market intervention in a cost-effective manner. It is useful in deciding on the marketing mix.

Methods for segmenting consumer markets[edit]

Geographic segmentation[edit]
Marketers may segment according to geographic criterianations, states, regions, countries, cities, neighborhoods, or postal codes. The geo-cluster approach combines demographic data with geographic data to create a more accurate or specific profile.[1] With respect to region, in rainy regions merchants can sell things like raincoats, umbrellas and gumboots. In hot regions, one can sell summer wear. In cold regions, someone can sell warm clothes. A small business commodity store may target only customers from the local neighborhood, while a larger department store can target its marketing towards several neighborhoods in a larger city or area, while ignoring customers in other continents.

Psychographic segmentation[edit]
Psychographics involves using sciences like psychology and demographics to better understand consumers. Psychographic segmentation divides consumers according to their lifestyles, personality, values and social class. Consumers within the same demographic group can exhibit very different psychographic profiles.

Behavioral segmentation[edit]
Behavioral segmentation divides consumers into groups according to their knowledge of, attitude towards, use of or response to a product.

Segmentation by occasions[edit]
Segmentation according to occasions relies on the special needs and desires of consumers on various occasions - for example, for products for use in relation with a certain holiday. Products such as Christmas decorations or Diwali lamps are marketed almost exclusively in the time leading up to the related event, and will not generally be available all year round. Another type of occasional market segments are people preparing for a wedding or a funeral, occasions which only occur a few times in a person's lifetime, but which happen so often in a large population that ongoing general demand makes for a worthwhile market segment.

Segmentation by benefits[edit]

Segmentation can take place according to benefits sought by the consumer[2] or according to perceived benefits which a product/service may provide.

Using segmentation in customer retention[edit]

The basic approach to retention-based segmentation is that a company tags each of its active customers with three values: Is this customer at high risk of canceling the company's service? One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be signaled through a customer's decline in spending on his or her card. Is this customer worth retaining? This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer.[3][4] What retention tactics should be used to retain this customer? For customers who are deemed worthy of saving, it is essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing special customer discounts to sending customers communications that reinforce the value proposition of the given service.

Consumer behaviour is the study of individuals, groups, or organizations and the processes they use to select, secure, and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society.[1] It blends elements from psychology, sociology, social anthropology and economics. It attempts to understand the decision-making processes of buyers, both individually and in groups. It studies characteristics of individual consumers such as demographics and behavioural variables in an attempt to understand people's wants. It also tries to assess influences on the consumer from groups such as family, friends, reference groups, and society in general.

Customer behaviour study is based on consumer buying behaviour, with the customer playing the three distinct roles of user, payer and buyer. Research has shown that consumer behaviour is difficult to predict, even for experts in the field.[2] Relationship marketing is an influential asset for customer behaviour analysis as it has a keen interest in the re-discovery of the true meaning of marketing through the reaffirmation of the importance of the customer or buyer. A greater importance is also placed on consumer retention, customer relationship management, personalisation, customisation and one-to-one marketing. Social functions can be categorized into social choice and welfare functions. Each method for vote counting is assumed as social function but if Arrows possibility theorem is used for a social function, social welfare function is achieved. Some specifications of the social functions are decisiveness, neutrality, anonymity, monotonicity, unanimity, homogeneity and weak and strong Pareto optimality. No social choice function meets these requirements in an ordinal scale simultaneously. The most important characteristic of a social function is identification of the interactive effect of alternatives and creating a logical relation with the ranks. Marketing provides services in order to satisfy customers. With that in mind the productive system is considered from its beginning at the production level, to the end of the cycle, the consumer (Kioumarsi et al., 2009).

Decision making can be regarded as the cognitive process resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a [1] final choice. The output can be an action or an opinion of choice.

Everyday techniques[edit]
Decision making techniques can be separated into two broad categories: Group decision making techniques and individual decision making techniques: Group decision making techniques Consensus decision-making tries to avoid "winners" and "losers". Consensus requires that a majority approve a given course of action, but that the minority agree to go along with the course of action. In other words, if the minority opposes the course of action, consensus requires that the course of action be modified to remove objectionable features.

Voting-based methods Range voting lets each member score one or more of the available options. The option with the highest average is chosen. This method has experimentally been shown to produce the lowest Bayesian regret among common voting methods, even when voters are strategic.
[citation needed]

Majority requires support from more than 50% of the members of the group. Thus, the bar for action is lower than with unanimity and a group of "losers" is implicit to this rule.
needed] [citation

Plurality, where the largest block in a group decides, even if it falls short of a majority.

Delphi method is structured communication technique for groups, originally developed for collaborative forecasting but has also been used for policy making

Dotmocracy is a facilitation method that relies on the use of special forms called Dotmocracy Sheets to allow large groups to collectively brainstorm and recognize agreement on an unlimited number of ideas they have authored.

Individual decision making techniques Pros and cons: listing the advantages and disadvantages of each option, popularized by Plato and Benjamin Franklin.
[14][15]

Contrast the costs and benefits of all alternatives. Also

called Rational decision making. Simple prioritization: choosing the alternative with the highest probability-weighted utility for each alternative (see Decision analysis) Satisficing: examining alternatives only until an acceptable one is found. Elimination by Aspects: choosing between alternatives using Mathematical psychology
[16]

Technique was introduced by Amos Tversky in 1972. It is a covert elimination

process that involves comparing all available alternatives by aspects. The decision-maker chooses an aspect; any alternatives without that aspect are eliminated. The decision-maker repeats this process with as many aspects as needed until there remains only one alternative Preference Trees: In 1979 Amos Tversky and Shmuel Sattach updated the elimination by aspects technique by presenting a more ordered and structured way of comparing the available alternatives. This technique compared the alternatives by presenting the aspects in a decided and sequential order. It became a more hierarchical system in which the aspects are ordered from general to specific
[18] [17]

Acquiesce to a person in authority or an "expert", just following orders Flipism: flipping a coin, cutting a deck of playing cards, and other random or coincidence methods
[19]

Prayer, tarot cards, astrology, augurs, revelation, or other forms of divination

Taking the most opposite action compared to the advice of mistrusted authorities (parents, police officers, partners ...)

Opportunity cost: calculating the opportunity cost of each options and decide the decision Bureaucratic: set up criteria for automated decisions Political: negotiate choices among interest groups Participative decision-making (PDM): a methodology in which a single decision maker opens up the decision making process to a group for a collaborative effort in order to take advantage of additional input.

Use of a structured decision making method

[20]

Individual decision making techniques can often be applied by a group as part of a group decision making technique.

Decision making stages[edit]

Developed by B. Aubrey Fisher, there are four stages that should be involved in all group decision making. These stages, or sometimes called phases, are important for the decision making process to begin Orientation stage This phase is where members meet for the first time and start to get to know each other. Conflict stage Once group members become familiar with each other, disputes, little fights and arguments occur. Group members eventually work it out. Emergence stage The group begins to clear up vague opinions by talking about them. Reinforcement stage Members finally make a decision, while justifying themselves that it was the right decision. It is said that critical norms in a group improves the quality of decisions, while the majority of opinions (called consensus norms) do not. This is due to collaboration between one another, and when group members get used to, and familiar with, each other, they will tend to argue and create more of a dispute to agree upon one decision. This does not mean that all group members fully agree they may not want [21] argue further just to be liked by other group members or to "fit in".

Decision making steps[edit]

Each step in the decision making process may include social, cognitive and cultural obstacles to successfully negotiating dilemmas. It has been suggested that becoming more aware of these obstacles [22] allows one to better anticipate and overcome them. The Arkansas Program presents eight stages of moral decision making based on the work of James Rest:

1. Establishing community: creating and nurturing the relationships, norms, and procedures that will influence how problems are understood and communicated. This stage takes place prior to and during a moral dilemma 2. Perception: recognizing that a problem exists 3. Interpretation: identifying competing explanations for the problem, and evaluating the drivers behind those interpretations 4. Judgment: sifting through various possible actions or responses and determining which is more justifiable 5. Motivation: examining the competing commitments which may distract from a more moral course of action and then prioritizing and committing to moral values over other personal, institutional or social values 6. Action: following through with action that supports the more justified decision. Integrity is supported by the ability to overcome distractions and obstacles, developing implementing skills, and ego strength 7. Reflection in action 8. Reflection on action

Other decision making processes have also been proposed. One such process, proposed by Dr. Pam [23] Brown of Singleton Hospital in Swansea, Wales, breaks decision making down into seven steps: 1. Outline your goal and outcome. 2. Gather data. 3. Develop alternatives (i.e., brainstorming) 4. List pros and cons of each alternative. 5. Make the decision. 6. Immediately take action to implement it. 7. Learn from and reflect on the decision.