Market Segmentation Notes

Market Segmentation

Market segmentation is dividing prospective consumers into groups based on demographics, behavior, and other characteristics. This helps companies understand and market to specific groups with similar interests, needs, and habits. For example, Southwest Airlines focused on short-haul, point-to-point, major-city routes, allowing them to understand and cater to what their target segment valued, such as convenience, low price, and on-time departures.

Types of Market Segmentation

There are four basic types of market segmentation:

• Behavioral Segmentation
• Demographic Segmentation
• Psychographic Segmentation
• Geographic Segmentation

1. Behavioral Segmentation

Behavioral market segmentation focuses on how consumers interact with a product or their knowledge of the product. This includes:

• Brand loyalty: Customers consistently purchasing from the same brand show high loyalty. For example, frequent Starbucks customers.
• Price sensitivity: How much a change in price affects a consumer's willingness to purchase. For example, budget airlines cater to price-sensitive travelers.
• Usage: How often a product is used, like daily vs. occasional users. For example, a coffee shop might target daily coffee drinkers with a loyalty program.
• Decision-making processes: The steps a consumer takes when deciding to buy something. For example, researching online reviews before buying a product.
• Occasion, engagement, and life cycle: When and why consumers buy or use a product. For example, buying flowers for a birthday or anniversary.
  For example, a customer relationship management (CRM) system could include customer profiles of frequent-flyer travelers, revealing information on their past transactions. The frequency of travel often depends on occupation and standard of living. Airlines' marketers should consider these issues to avoid losing return custom and credibility.

2. Demographic Segmentation

Demographic segmentation involves grouping consumers based on:

• Age: Different age groups have different needs and preferences. For example, marketing toys to children and retirement plans to older adults.
• Gender: Tailoring products or marketing to specific genders. For example, marketing makeup to women and shaving products to men.
• Family size: The number of people in a household affects purchasing decisions. For example, families might buy larger-sized products.
• Religion: Religious beliefs can influence purchasing decisions. For example, marketing kosher or halal foods to specific religious groups.
• Nationality: Cultural background affects consumer preferences. For example, different cuisines and traditions influence food choices.
• Income level: Income affects what consumers can afford. For example, luxury brands target high-income consumers.
• Education level: Education can influence preferences and purchasing behavior. For example, marketing educational toys to well-educated parents.
  For example, business travelers may range from their late twenties to mid-fifties. Younger travelers are less likely to book based on loyalty programs and more likely to consider airline service and customer experience. Leisure travel demand increases with personal income, as it is a luxury that may be forgone during financial difficulties.

3. Psychographic Segmentation

Psychographic segmentation examines:

• Consumer's lifestyles: How consumers live their lives, including their activities and interests. For example, marketing organic food to health-conscious consumers.
• Personality: Different personality traits influence purchasing. For example, marketing adventurous activities to thrill-seekers.
• Interests: What consumers are passionate about. For example, marketing sports equipment to sports enthusiasts.
• Opinions: Consumer views on various topics. For example, marketing environmentally friendly products to those concerned about the environment.
• Social class: Social standing influences preferences and purchasing power. For example, luxury goods targeted at upper class.
• Habits and activities: Daily routines and hobbies. For example, marketing fitness trackers to active individuals.
  For example, someone active in outdoor activities like camping, hiking, and skiing is more likely to be interested in related equipment than someone who spends time reading indoors. Lifestyle depends on social status, influenced by occupation. Social grades include:
• A: Higher managerial, administrative, or professional
• B: Intermediate managerial, administrative, or professional
• C1: Supervisory, clerical, and junior managerial, administrative, or professional
• C2: Skilled manual workers
• D: Semi or unskilled manual workers
• E: State pensioners or widows, casual or lowest grade workers

4. Geographic Segmentation

Geographic market segmenting considers the country, region, city, or area where a potential consumer resides. For example, individuals in wet and cold climates may prefer warm, sunny destinations for holidays. This affects competition among airlines, especially during peak holiday seasons.

Concentrated Marketing

Companies with limited resources may target one or a few sub-markets. Successful selection can lead to a high rate of return on investment, but it also involves a high-risk factor if the selected segment fails.
The appropriate market coverage strategy depends on:

• Company resources: Limited resources may dictate concentrated marketing.
• Type of service: Airlines could offer chartered or scheduled service, low-cost or full-service, long-haul or short-haul services, business or leisure services, etc.
• Diversities within the market: Understanding customer requirements. For example, independent business travelers have different needs than corporate business travelers.
• Competitors’ market coverage strategies: If competitors are successfully using segmentation, an undifferentiated marketing strategy may not be suitable.

Benefits of Market Segmentation

• Narrows the message to be more unique for specific consumers.
• Helps identify underserved markets for potential expansion and profit growth.
• A 2008 study by Bain & Company found that 81% of executives attributed market segmentation as essential to growing profits.

Common Market Segmentation Mistakes

1. Defining segments too broadly: May miss certain segments and lose out to competitors targeting more narrowly.
2. Not aligning your business by market segments: Ideally, create market- or segment-focused teams or groups organized into a market-focused business model.
3. Not managing your segments globally: Segmentation should apply beyond local or regional organizations for businesses planning to grow in a dynamic global economy.
4. Not using segmentation to provide a clear, strategic direction: Segmentation should provide a clear idea of which highly profitable and easily identifiable markets to target.

Over Segmentation

Types of business travelers include:

• Hard Money Travelers (independent business travelers): Traveling at their own expense.
• Soft Money Travelers (corporate business travelers): Traveling on an expense account.
• Medium Money Travelers (conference or incentive business travelers): Traveling within a group.
• Interim Travelers: Combining personal travel with a business trip.
• Frequent Short Travelers: Consistently flying a short-haul route.
• Periodic Travelers: Salespersons making a round of stops on a steady route.

Market Segmentation in Airlines

Airlines typically segment customers by class of seating (economy, business, first class). While this indicates willingness to pay and price sensitivity, it doesn't provide much insight into consumers’ needs and motivations for airline travel.
Other segments include:

• We’re off again: Travelers excited to enjoy the world.
• Loyal to loyalty: Seeking to maximize airline and hotel loyalty points.
• Urgent travelers: Last-minute trips taken because of an emergency.
• Business travelers: Traveling to, from, and between work-related appointments.
• Budget conscious: Focused on the absolute lowest price point.

Market Segmentation Variables

Here's a summary table of segmentation variables: