Smith (1957) provided an early definition of segmentation:
“Segmentation is based on the observation of evolution in demand and represents a more precise and rational adaptation of the product and the marketing effort to meet customer or user demands”.
Everyone is prepared to purchase products and services (depending on their financial status) as long as the products or services meet a particular need or desire. As Wright (2004) suggests, segmentation is thus the ability to 'divide the markets into groups, or clusters, of customers based upon realistic and meaningful criteria so as to offer clear, targeted benefits to every customer'.
Kotler (2000) suggests that market segmentation is:
“The subdividing of a market into homogeneous (or similar) subsets of customers, where any subset may conceivably be selected as a target market to be reached with a distinct marketing mix.”
Figure 1.1
Source: adapted from Dibb (1998)
The STP is schematic. This is based upon the work of Dibb (1998) but a feedback loop has been added. While STP is portrayed as top-down model, it is important to consider feedback to the point of origin. Information learnt in positioning a product or a service in the minds of consumers could provide valuable insight into the segmenting of particular groups.
It is clear from both Kotler and Wright's definitions that in order to deliver real value to both their customers and the organisation, marketers must seek effective and efficient segmentation. Figure 1.2 illustrates in broad terms how a mass market needs to be subdivided, and that this subdivision can be at many levels. The degree of subdivision will depend on the product or service on offer and the dynamic of the market itself.
In order to gain a better understanding of the segmentation processes it is worth briefly considering the scope and scale of markets. These are outlined in Table 1.3.They are broad definitions, but they are important in creating the platform for segmenting markets. The rationale for, and structure of, B2B and B2C segmented markets are different.
Figure 1.2
“A diagrammic representation of how mass market can be divided into several sections or segments”
Figure 1.3
“The Scope and Scale of Markets”
| Broad market type | Description |
| Undifferentiated mass market | The organisation seeks to market a single mass-produced, mass-distributed and mass-promoted item to all buyers. A classic example of this is the launch of the Model T Ford car in 1908. Ford himself referred to it as 'the universal' car (Ford and Crowther 1926), implying that it had to meet mass-market conditions, or in other words appeal to the greater American population without any customisation. However with increasing fragmentation of markets, distribution channels and promotion, the 'one size fits all' approach is difficult to maintain within the majority of markets. |
| Segments | Kotler (2000) suggests that this 'consists of a large identifiable group within a market with similar wants, purchasing power, geographical location, buying attitudes or buying habits'. Such an approach provides the opportunity to deliver a product or service with the matching marketing mix variables to an appropriate audience. |
| Niche (single segment specialization) | This can be described as a sub-segment. It is normally a small narrowly defined market where there are only a few suppliers. Niche markets are 'normally' only of interest to small or medium-sized organisations because of the level of returns and overall profitability. However, there are clear examples where strategic business units (SBUs) of much larger organisations have operated in highly profitable niche or specialist markets. Examples of niche markets include specialist publishing (magazines for specific hobbies such as trainspotting), unusual vacation destinations (such as trekking across North African deserts or a polar expedition) and soft-top luxury sports cars such as the UK-built Morgan which are very much aimed at the connoisseur segment of the car-buying market. However not all niche markets are profitable, even if there is only one player in the market. |
| Multiple segments | An organisation seeks to supply several segments. However it differentiates its products or services to meet the needs of each of the segments. The Hilton® Hotel group illustrates this with a range of separate brands: Hilton® Hotels, Conrad Hotels® (an international luxury brand of hotels and resorts), Doubletree® (an upscale chain of hotels, resorts, suites and clubs). Embassy Suite Hotels® (a pioneer in the all-suite segment of the hotel market in the United States), Hampton Inn and Hampton Inns and Resorts® (accommodation for both business and leisure travellers), Hilton Garden® (mid-priced brand) and Homeward Suites® (an upscale all-suite residential/extended stay hotel chain). |
| Customised or individual segments or markets | The focus is on one-to-one marketing (also known as micro marketing).This is far from new. For centuries both B2B and B2C customers have been treated as individuals. Consider, for instance, tailored clothing, hairdressing and management consultancy. Increasingly companies have sought mass customisation to achieve economies of scope and scale. The objective here is to produce on a large scale products that meet the individual needs of customers. An excellent example is Dell Computers. |
| Local customer groups | This is specific to a particular place or location. For instance, the manager of a local supermarket may order in additional qualities of particular products because he or she knows they sell well within that community. Equally, a restaurant might specialise in local delicacies because the owners know this meets the needs of the local community. However, for large supermarket chains there is a risk of diluting their economies of scale and scope by 'localizing'. They will have to balance that against the turnover at the local store |
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