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Levels Of Market Segmentation

May 17, 2008
Market segmentation represents an effort to increase a company's targeting precision. It can be carried out at four levels: segments, niches, local areas, and individuals. Before we discuss these levels, however, we need to say a word about mass marketing.

MASS MARKETING. In mass marketing, the seller engages in the mass production, mass distribution, and mass promotion of one product for all buyers. Henry Ford epitomized this marketing strategy when he offered the Model-T Ford to all buyers; they could have the car "in any color as long as it is black." Coca-Cola also practiced mass marketing for many years when it sold only one size Coke in a 6.5-ounce bottle.

The traditional argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can translate into either lower prices or higher margins. However, many critics point to the increasing splintering of the market, which makes mass marketing more difficult. According to Regis McKenna:

[Consumer]. . . have more ways to shop: at giant malls, specialty shops, and superstores; through mail-order catalogs, home shopping networks, and virtual stores on the Internet. And they are bombarded with messages pitched through a growing number of channels: broadcast and narrow-cast television, radio, on-line computer networks, the Internet, telephone services such as fax and telemarketing, and niche magazines and other print media.

The proliferation of advertising media and distribution channels is making it difficult to practice "one size fits all" marketing. No wonder some have claimed that mass marketing is dying. Not surprisingly, many companies are retreating from mass marketing and turning to micromarketing at one of four levels.

SEGMENT MARKETING. A market segment consists of a large identifiable group within a market. A company that practices segment marketing recognizes that buyers differ in their wants, purchasing power, geographical locations, buying attitudes, and buying habits. At the same time, though, the company is not willing to customize its offer/communication bundle to each individual customer. The company instead tries to isolate some broad segments that make up a market. For example, an auto company may identify four broad segments: car buyers seeking basic transportation, those seeking high performance, those seeking luxury, and those seeking safety.

Thus segmentation is a midpoint between mass marketing and individual marketing. The consumers belonging to a segment are assumed to be quite similar in their wants and needs. Yet they are not identical. Some segment members will want additional features and benefits not included in the offer, while others would gladly give up something that they don't want very much. For example, Ritz-Carlton Hotels target affluent guests and provide many amenities and a lower price. Thus segment marketing is not as precise as individual marketing but is much more precise than mass marketing.

Segment marketing offers several benefits over mass marketing. The company can create a more fine-tuned product/service offer and price it appropriately for the target audience. The choice of distribution channels and communications channels becomes much easier. And the company may face fewer competitors if fewer competitors are focusing on this market segment.

NICHE MARKETING. Market segments are normally large identifiable groups within a market--for example, nonsmokers, occasional smokers, regular smokers, and heavy smokers. A niche is a more narrowly defined group, typically a small market whose needs are not being well served. Marketers usually identify niches by dividing a segment into subsegments or by defining a group with a distinctive set of traits who may seek a special combination of benefits. For example, the sema, and heavy smokers with emphysema who are overweight.

While segments are fairly large and thus normally attract several competitors, niches are fairly small and normally attract only one or a few competitors. Niches typically attract smaller companies. Larger companies, such as IBM, whose lose pieces of their market to nichers; Dalgic labeled this confrontation as "guerrillas against gorillas." As a defense, some larger companies have turned to niche marketing, which has required more decentralization and some changes in the way they do business. For example, Johnson & Johnson consists of 170 affiliates (business units), most of which pursue niche markets.

Niche marketers presumably understand their niches' needs so well that their customers willingly pay a price premium. For example, Ferrari gets a high price for its cars because its loyal buyers feel that no other automobile comes close to offering the product-service-membership benefit bundle that Ferrari does.

An attractive niche is characterized as follows: The customers in the niche have a distinct and complete set of needs; they will pay a premium to the firm best satisfying their needs; the "nicher" has the required skills to serve the niche in a superior fashion; the nicher gains certain economies through specialization; the niche is not likely to attract other competitor or the nicher can depend on itself; and the niche has sufficient size, profit, and growth potential.

An advertising agency executive wrote: "There will be no market for products that everybody likes a little, only for products that somebody likes a lot." A chemical company executive predicted that chemical companies that succeed in the future will be those that can identify niches and specialize their chemicals to serve each niche's needs. According to Linneman and Stanton, niche-pickers will find riches in niches and companies will have to niche or be niched. Blattberg and Deighton claim that "niches too small to be served profitably today will become viable as marketing efficiency improves." In many markets today, niches are the norm.

LOCAL MARKETING. Target marketing is increasingly taking on the character of regional and local marketing, with marketing programs being tailored to the needs and wants of local customer groups (trading areas, neighborhoods, even individual stores). Thus Citibank provides different mixes of banking services in its branches depending on the bank's neighborhood demographics. And Kraft helps supermarket chains identify the cheese assortment and shelf positioning that will optimize cheese sales in low-income, middle-income, and high-income stores, and in different ethnic communities.

Those in favor of localizing a company's marketing point to the pronounced regional differences in communities' demographics and lifestyles. They see national advertising as wasteful because it fails to address local target groups. They also see powerful local and regional retailers who are demanding more fine-tuned product assortments for their neighborhoods.

Those against local marketing argue that it drives up manufacturing and marketing costs by reducing economies of scale. Logistical problems become magnified when companies try to meet different regional and local markets' requirements. And a brand's overall image might be diluted if the product and message differ in different localities.

INDIVIDUAL MARKETING. The ultimate level of segmentation leads to "segments of one," "customized marketing," or "one-to-one marketing." The prevalence of mass marketing has obscured the fact that for centuries consumers were served as individuals: The clothier tailor-made the suit, the cobbler designed shoes for the individual, and so on. And much business-to-business marketing today is customized, in that a manufacturer will customize the offer, logistics, and financial terms for each major account. It is the new technologies--specifically computers, databases, robotic production, and instant communication media such as e-mail and fax--that are permitting companies to consider a return to customized marketing, or what is called "mass customization." Mass customization is the ability to prepare on a mass basis individually designed products and communications to meet each customer's requirements.
About the Author
Jack Vallieres is the professional freelance writer. He's also the webmaster of Marketing-contents.com
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