segment

Why Segmentation?
Introduction and Definition
When it comes to marketing strategies, most people spontaneously think about the 4P (Product, Price, Place, Promotion) - maybe extended by three more Ps for marketing services (People, Processes, Physical Evidence).
Market segmentation and the identification of target markets, however, are an important element of each marketing strategy. They are the basis for determining any particular marketing mix. Literature suggests the following steps:
Adapted from Kotler and Doyle
The importance of market segmentation results from the fact that the buyers of a product or a service are no homogenous group. Actually, every buyer has individual needs, preferences, resources and behaviors. Since it is virtually impossible to cater for every customer’s individual characteristics, marketers group customers to market segments by variables they have in common. These common characteristics allow developing a standardized marketing mix for all customers in this segment.
Definition: Market segmentation is the segmentation of markets into homogenous groups of customers, each of them reacting differently to promotion, communication, pricing and other variables of the marketing mix. Market segments should be formed in that way that differences between buyers within each segment are as small as possible. Thus, every segment can be addressed with an individually targeted marketing mix.
Criteria for Market Segmentation
There are a huge number of variables that could be used for market segmentation in theory. They comprise easy to determine demographic factors as well as variables on user behavior or customer preferences. In addition, there are differences between private customers and businesses. The following table shows the most important traditional variables for segmentation.
Consumer Markets
Industrial Markets / Business Markets
Geographic: · Land or region · Rural or metropolitan area Demographic: · Age, sex, marital status · Income, occupation, education · Religion, nationality, ethnical group Psychographic: · Social status · Lifestyle-type · Personal type Behavioral: · Intensity of product use · Brand loyalty · User behaviors
· Industry · Intermediary or final consumer · Type of corporation (public or private sector) · Size of corporation · Geographical location · Intensity of product use · Organization of purchasing function · Centralized or decentralized · Purchasing policies, rules and criteria
Since customer orientation of organizations is growing, segmentation as the basis for establishing customer relationships and customer loyalty gains importance. In this context, the elements of the loyalty ladder model could be used as segmentation variables:
Marketers have to choose those variables that are relevant for segmenting the market for a particular product. The basic rule is to focus on a limited number of important variables. To segment the market into too many small, slightly distinct segments would require splitting up the marketing budget into too many ineffective chunks. Such varied marketing activities in the diverse segments could confuse customers and would lead to cannibalization effects.
Kotler mentions five criteria for an effective segmentation:
· Measurable: It has to be possible to determine the values of the variables used for segmentation with justifiable efforts. This is important especially for demographic and geographic variables. For an organization with direct sales (without intermediaries), the own customer database could deliver valuable information on buying behavior (frequency, volume, product groups, mode of payment etc).
· Relevant: The size and profit potential of a market segment have to be large enough to economically justify separate marketing activities for this segment.
· Accessible: The segment has to be accessible and servable for the organization. That means, for instance, that there are target-group specific advertising media, as magazines or websites the target audience likes to use.
· Distinguishable: The market segments have to be that diverse that they show different reactions to different marketing mixes.
· Feasible: It has to be possible to approach each segment with a particular marketing program and to draw advantages from that.
Reasons for Market Segmentation
As already stated, segmentation is the basis for developing targeted and effective marketing plans. Furthermore, analysis of market segments enables decisions about intensity of marketing activities in particular segments.
A segment-orientated marketing approach generally offers a range of advantages for both, businesses and customers.
Better serving customers needs and wants
It is possible to satisfy a variety of customer needs with a limited product range by using different forms, bundles, incentives and promotional activities. The computer manufacturer Dell, for instance, does not organize its website by product groups (desktops, notebooks, servers, printers etc), but by customer groups (privates, small businesses, large businesses, public/state organizations). They offer the same products to all customer groups. Nevertheless, they suggest product bundles and supporting services that are individually tailored for the needs of each particular group. As an example, Dell offers to take on all IT-administration for companies. This service provides a huge potential for savings for corporate customers. However, it would be absolutely useless for private customers. Thus, segment-specific product bundles increase chances for cross selling.
Higher Profits
It is often difficult to increase prices for the whole market. Nevertheless, it is possible to develop premium segments in which customers accept a higher price level. Such segments could be distinguished from the mass market by features like additional services, exclusive points of sale, product variations and the like. A typical segment-based price variation is by region. The generally higher price level in big cities is evidence for this.
When differentiating prices by segments, organizations have to take care that there is no chance for cannibalization between high-priced products with high margins and budget offers in different segments. This risk is the higher, the less distinguished the segments are.
Opportunities for Growth
Targeted marketing plans for particular segments allow to individually approach customer groups that otherwise would look out for specialized niche players. By segmenting markets, organizations can create their own ‘niche products’ and thus attract additional customer groups.
Moreover, a segmentation strategy that is based on customer loyalty (see loyalty ladder model) offers the chance to attract new customers with starter products and to move these customers on to premium products.
Sustainable customer relationships in all phases of customer life cycle
Customers change their preferences and patterns of behavior over time. Organizations that serve different segments along a customer’s life cycle can guide their customers from stage to stage by always offering them a special solution for their particular needs.
For example, many car manufacturers offer a product range that caters for the needs of all phases of a customer life cycle: first car for early twens, fun-car for young professionals, family car for young families, etc. Skin care cosmetics brands often offer special series for babies, teens, normal skin, and elder skin.
Targeted communication
It is necessary to communicate in a segment-specific way even if product features and brand identity are identical in all market segments. Such a targeted communications allows to stress those criteria that are most relevant for each particular segment (e.g. price vs. reliability vs. prestige).
Stimulating Innovation
An undifferentiated marketing strategy that targets at all customers in the total market necessarily reduces customers’ preferences to the smallest common basis. Segmentations provides information about smaller units in the total market that share particular needs. Only the identification of these needs enables a planned development of new or improved products that better meet the wishes of these customer groups. If a product meets and exceeds a customer’s expectations by adding superior value, the customers normally is willing to pay a higher price for that product. Thus, profit margins and profitability of the innovating organizations increase.
Higher Market Shares
In contrast to an undifferentiated marketing strategy, segmentation supports the development of niche strategies. Thus marketing activities can be targeted at highly attractive market segments in the beginning. Market leadership in selected segments improves the competitive position of the whole organization in its relationship with suppliers, channel partners and customers. It strengthens the brand and ensures profitability. On that basis, organizations have better chances to increase their market shares in the overall market.
Summarizing all these advantages, the need for market segmentation is closely related to strategic decisions:
Market segmentation is the basis for customer orientation and differentiation.
It is well known that suppliers in mass markets mostly compete on price. Demand for those products that are clearly differentiated from competition and that offer a particular value to customers do has a lower price elasticity; hence, only those products can sustain a higher price level and higher margins. The precondition for providing such value added is detailed knowledge about customers’ preferences. These preferences will probably diverse in the total market, but fairly homogenous within distinguishable segments.
Focus on attractive market segments is of special relevance in our fast moving times of Internet economy. Kalakota and Whinston[1] say in their law of differentiation:
As the blurring of distinctions among firms increases in electronic markets, survival requires identifying your unique role in the marketplace in terms of value to the customer.
Following that, Kalakota and Whinston perceive segmentation as the basis for offering superior value to particular customer groups and thus for developing a stable and profitable market position.
© Dagmar Recklies, 2001
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Growth: porridge has come back into fashion
Cereal thrillers
Cereal manufacturers are all stressing their health credentials. John Wood reports
Published: 13 June, 2005
While growth in the overall breakfast cereal market is barely more than static, it is still a hugely important category with 95% of UK households buying the products, and a range of influences means there have been substantial winners and losers among sub categories. Issues such as the Government’s focus on salt and sugar content and the latest GI (glycemic index) dieting fad, have caused big changes in consumers’ buying habits.
One of the big winners in the market has been PepsiCo’s Quaker brand. With porridge classified as a superfood under the glycemic index, because of the way oats slowly release their energy, sales of hot cereals have grown by 30% year on year, according to PepsiCo trading controller Andrew Dixon. The hot cereals market is worth £84m and Quaker has the number one brands in instant and traditional oats, he adds.
Oatso Simple, a convenience product which can be microwaved and is ready in two-and-a-half minutes, has helped to drive growth, but traditional oats are also growing and Dixon says: “Porridge has come back into fashion.”
But it is not just consumer demands that are changing, but also the way Quaker is being marketed to the independent sector. Dixon says: “The wholesale sector is massively important for PepsiCo, with brands such as Walkers, but historically Quaker cereals have not given it the right level of importance and focus.
“But we have recently taken distribution in-house, following the collapse of Food Brokers which used to handle our distribution, and we have been able to give it more attention and focus.”
He adds: “We have to look at what PepsiCo has done with Walkers in the wholesale channel. We have a gold standard – a great benchmark – in-house, and we will look to replicate that in cereals.”
Dixon believes wholesalers generally do a good job segmenting the cereal category, but he feels many do not understand the seasonality of some products. “When it’s cold, between September and March, we actually call it our hot season because sales of hot cereals increase dramatically. Wholesalers need to be aware of that and should flex their space to take account of it,” he says.
The growth in convenience cereals is another area where wholesalers may be missing out on sales, suggets Dixon. He says: “Convenience cereals are driving growth in the category, and wholesalers have been slow to pick up on that. They need to give them more display and visibility and it is our job to educate the independent retailers.”
Quaker’s activity with wholesalers has tended to follow an annual formula, but this is likely to be developed, says Dixon.
“We have done quite a lot of price-marked activity; for instance a Sugar Puffs 99p promotion twice a year on a ‘once it’s gone it’s gone’ basis, and hot cereals activity in September/October and February. Going forward we want to replicate that gold standard achieved by Walkers on crisps, with secondary siting and nice clear POS.”
In advertising Quaker will be looking to exploit the healthy image of oats. “We are using the Quaker man as an umbrella across oats,” says Dixon. “The Quaker man is synonymous with nutrition and trustworthiness. Going forward we will be developing branding and products around nutrition and better for you qualities.”
Current activity includes press adverts in colour supplements promoting the healthy aspect of oats, and in October TV advertising for Oatso Simple will coincide with the launch of a new raspberry variety.
Healthy options are also a focus for another major player in the market, Cereal Partners UK. A partnership between two global players, Nestlé and General Mills, the company owns some of the best known brands in the sector including Shredded Wheat, Shreddies and Cheerios.
Graeme Foster, business controller, wholesale/independent/convenience/foodservice for CPUK, says: “There is strong value growth specifically in the adult and health sector with franchises such as our Fitnesse brands and Special K showing significant growth. The category has also had strong growth through NPD activity in this sector with the introduction of brands such as Triple Berry Shredded Wheat.”
The increased media focus on health and obesity should be beneficial to the cereal sector, according to Foster. “There is of course an increased interest in health issues and this is an area where cereals can play a major role in helping people improve their nutrition as well as manage their weight more effectively. For instance it is a fact that people who eat cereal frequently have a lower body mass index than those who eat cereal less frequently or not at all.”
To capitalise on this, says Foster, a major programme gets under way this month. “Whole grain products such as Shredded Wheat and its variants have all done well over the past 12 months. The company is building on this health trend and the drive to improve the nation’s nutritional profile by introducing a major initiative across all Nestlé brand cereals that will see the entire range containing wholegrain from this month.
“Furthermore, not only has the wholegrain been included in all recipes, but reductions in sugar and salt levels have also been made to many of our breakfast cereal brands without adversely affecting the taste, as has been shown by research with our consumers.
“At the same time, all Nestlé breakfast cereal packs will start to carry ‘calories per serving’ on the front of the pack as well as guideline daily amounts of total fat, sugar and wholegrain per serving.”
CPUK is backing the initiative with one of its biggest marketing campaigns. The two-pronged programme began in April by targeting the media and stakeholder groups, and follow-up activity aimed at consumers begins this month.
Foster says the wholesale channel is important to CPUK as is demonstrated by its provision of smaller cases and packs specifically targeted for smaller convenience customers and the foodservice market. However, he believes that some wholesalers are failing to maximise sales because the ranges they are stocking tend to be too wide. “Generally wholesalers are stocking a diverse range and they should really concentrate on the top selling brands. Plus there should be opportunistic deals and one-offs if and when they become available in order to add variety and spontaneity to the fixture.”
Cereal Partners runs promotional packs every year targeted at wholesale customers with a mixture of short-count price-marked packs and percentage free packs, and it also ran display incentives in the first quarter of the year utilising the Nestlé field sales team. Foster promises: “We will continue to service the wholesale channel differently to the multiple sector by continuing to offer specific smaller cases and packs that are more suited to convenience operators.”
Like CPUK, Kellogg’s has also been reformulating products to reduce salt content, with a 25% reduction in Corn Flakes, Kellogg’s Frosties and Kellogg’s Crunchy Nut Corn Flakes. Shoppers will recognise the new reduced salt recipe by an on-pack ‘flash’.
Alyson Greenhalgh-Ball, health and wellbeing manager at Kellogg’s, comments: “Although breakfast cereals on average contribute a very small amount of salt in the diet – no more than 5% of the average adult intake of salt – we are committed to helping consumers reduce the amount of salt in their diets in line with government policies on salt reduction.”
Additionally, a Guideline Daily Amount (GDA) counter recently appeared on Kellogg’s packs to help shoppers achieve healthy levels of calories, fat, saturated fat, salt, calcium, iron, total sugars and fibre.
The Weetabix Food Company is also highlighting the health message, with a new advertising campaign promoting the portfolio of products: Weetabix, Alpen, Ready Brek and Weetos.
The ‘What Are You Made Of?’ campaign promotes the benefits of wholegrain and marks the first time that Weetabix products have been marketed to consumers as a complete range. To reinforce the wholegrain message the range’s packaging has been redesigned, extending the Weetabix wheatsheaf motif across the entire brand family, and highlighting the individual brands’ nutritional benefits.
The ‘What Are You Made Of?’ campaign begins this month. Initial TV activity will be supported by outdoor, national newspaper and consumer magazine advertisements. The £10m campaign will run until the end of the year.
As the second largest manufacturer in the cereal sector, the Weetabix Food Company has a 14.6% market share, growing up 5.3% year on year with IRI figures showing Weetabix up 1.8%, Alpen growing by 12% and Ready Brek 14.7%up over the past 12 months.
Ken Wood, CEO of The Weetabix Food Company, comments: “The new campaign represents a real step change for the business. We know our consumers love our products, but they are not necessarily aware that they are part of the Weetabix Food Company. As a well-respected and established manufacturer, Weetabix is committed to producing high quality products that can play a key role in helping consumers lead healthier lives.
“As we move further into 2005 and beyond, the ‘What Are You Made Of?’ campaign will continue to work across the entire range and give the Weetabix Food Company an even stronger presence in the minds of our core consumers.”
Jordans is the fifth largest cereal producer in the UK, accounting for a 3.2% value share of the market with brands such as Country Crisp, its best selling cereal product worth £11.2m, and Frusli, its cereal bar, worth £9.6m.
One area Jordans is concentrating on is the cereal bars market and the company sees the trend towards people having fewer meals and more snacking as moving in its favour. It draws a distinction between breakfast bars, which are a breakfast for those not having time to sit down to eat a more traditional breakfast, and snack bars which offer a boost of energy to keep people going between meals.
Nicky Carlyle, marketing manager nutritious snacks, comments: “Consumers are snacking more than ever before, therefore the snack market is an area that Jordans focuses on and invests in. For example, we have relaunched our two popular product ranges, Break and Frusli, over the past month and we have several more bar products in the pipeline.
“Deskfast seems to have become the new way of living, as consumers are increasingly skipping breakfast. Therefore tasty alternatives to the sit-down breakfast are in high demand.”
Buyer's Viewpoint
Steven Hodson, Wholesale trading controller, Nisa-Today’s
The ready to eat market is generally static but the Today’s Group is well ahead.
Adult health is a growth area with brands like Special K and Crunchy Nut doing well, but the children’s market has been in decline due to the bad press over recent months, and a lot of manufacturers are reformulating their products to reduce the amount of salt and sugar they contain.
We get a lot of support from the manufacturers. We’ve worked closely with Kelloggs and Weetabix on activity with our retail clubs.
Price marked packs give confidence to the consumer and enable our customers to compete with the multiples on price.
Buyer's Viewpoint
Shaun Quinton, Trading manager, Musgrave Budgens-Londis
The overall market has picked up slightly since last year, but most of the growth has been down to price increases rather than volume growth.
Weetabix has shown good volume and value growth and hot oats have been doing very well, up 11% in the last year. This has been driven by the newer products like Oatso Simple, but it also seems to have introduced younger consumers to the traditional products so lines like standard 1kg standard oats are also trading up as well.
Promotions are very important and are helping to keep the volume up. Special K multi- buys did particularly well and have been flying.
Top 10 cereal brands by value
1. Weetabix
2. Kellogg’s Special K
3. Kellogg’s Corn Flakes
4. Kellogg’s Crunchy Nut Corn Flakes
5. Kellogg’s Frosties
6. Kellogg’s Rice Crispies
7. Kellogg’s Coco Pops
8. Nestlé Shredded Wheat
9. Nestlé Shreddies
10. Alpen
Source: The Grocer Top Products Survey/ACNielsen 52 W/E Oct 2 2004
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