3.7. Segmentation and Targeting

Segmentation means dividing the market into smaller, internally homogenous customer groups, which are expected to react equally to marketing cues – meaning they will be drawn to similar products, respond to the same communication strategies etc.

Targeting involves selecting a market segment or multiple segments which the company will focus on.

Regarding the selection and detailed understanding of your target audience (i.e. segmentation and targeting), it is advisable to assess broad groups of potential customers in terms of the substantial differences between them which can impact your business strategy (7P), and whether or not you can cater to the needs of certain groups better than others. Your company should then choose the target audience which it can most efficiently cater to. It is useful to consider potential customers based on various criteria:

• Their socio-demographic characteristics - age, gender, location, education, income etc.

• Which of their needs can you cater to, as well as your customers’ behaviour, lifestyle and value orientation.

• What influences the customer’s decision-making process (the difference between shoppers and buyers - someone pays for/finances the purchase, though the actual user of the product and the one who impacts the purchase can be someone else ), when and how they make their decision (certain types of products cater to impulse shopping, which requires a certain type of marketing and sales strategy, while other times the customer’s decision-making process can be more thought out - the customer finds out information about the product, compares prices etc.) The customer’s decision-making process can then either involve emotions and impulse or follow a more rational approach.

• How loyal the customer is - in certain contexts (type of customer, products, brand characteristics etc.) you can find customers who are more likely to be loyal, as well as customers who are more likely to switch to a competing product etc.

• And others re: Image

Customer segmentation based on aspirations

It is common knowledge that two types of customers take out loans - those, who need help financing certain basic necessities (washing machine or boiler), and are more conservative, careful, less influenced by advertising,  less likely to take risks and have good credit. The second group includes customers who take out loans in order to satisfy their social aspirations - traveling, modern furnishings, clothing etc. These customers significantly differ from the first group - they are easily influenced by advertising, but are also less likely to have good credit. Companies that offer financing for their products must then carefully consider which of these groups it will cater to, as it will impact their marketing tactics and how they will present financing options to their customers.

Criteria for segmenting customers (adapted from Hanzelková et al., 2009).

Although the financial limitations of most small and medium-size businesses make it difficult to accurately determine the size of your potential target audience or market sector (this is possible by way of costly, segmentation research); we do suggest at least intuitively considering whether or not the target audience you have selected can ensure your company’s financial viability in the long term.

Let us summarize a carefully selected market segment:

• Large enough,

• Accessible,

• Suitable given the company’s goals and internally homogenous, allowing for a unified strategy for the given segment.

• Your company can better cater to their needs and prosper financially than its  competition

Segmentation in IKEA, Sears and Sainsbury – positive and negative examples

An example of efficient strategic segmentation and targeting is IKEA’s target audience-the once small Swedish company, currently managed by its founder, used careful targeting of a clearly defined market segment, along with the ability to adapt their strategy to the segment, to become a global player in the industry. IKEA decided to cater to young households with limited financial resources looking for designer furniture. (Pelsmacker, Geuens and Bergh, 2003):

“IKEA’s products are aimed at combining design and function at a reasonable price. We offer furnishing solutions for literally every room in your home. There’s something for everybody - romantics and minimalists alike. You can easily mix and match our products, so whatever your aesthetic, our designers and developers work hard at creating products that meet your everyday needs with no unnecessary bells and whistles.” (www.ikea.com)

Kotler (Kotler, 2004) on the other hand, provides a flagrant example of a backwards understanding of segmentation with the department store Sears, which is under the impression that their target audience is everyone. The company justifies this by claiming that from time to time, everyone comes into their store. In reality, there was a significant difference between visits from working class and blue-collar shoppers. If this company geared their marketing efforts towards a more active target audience, they could markedly increase the efficiency of their marketing investments.

Another example (albeit from a larger company, although it was general enough that we decided to use it), of a strategy faltering in the segmentation process, i.e. it failed to address the significant changes in their target audience’s consumer behaviour, is the English supermarket chain Sainsbury. 

Hanzelková et al. (2009) noted that “In 2004 (HN, 6.7.2004), Hospodářské Noviny (Czech Economic Journal), reported that the supermarket chain Sainsbury exhibited a drastic drop in revenue and profits. The former UK frontrunner had to step aside and make room for Tesco. Chairman, Sir Peter Davis, justified the steady decline of his company in that the 1990s brought about a sales paradigm shift in Britain that Sainsbury failed to respond to in time. Instead of buying groceries to last for one or two weeks, shoppers have begun shopping for their daily needs, resulting in changes in their shopping lists from mainly groceries to include clothes, electronics, music players and other goods. According to surveys, Brits have also started to spend more and more time in supermarkets. Most large chains reacted to this change and started offering their customers more entertainment and a pleasant shopping environment. This resulted in better lighting, atmosphere, and merchandising. As the BBC has stated, this trend has become a battleground for business competition.“

Source: Hanzelková et al., 2009