Market Segmentation:  Is it the answer, or does it just create more questions?

            When you go into a clothing store, you often look around, see if you like something, maybe try it on, and if you are lucky, make a purchase.  Every day people shop and every day people make purchases; it’s nothing complicated (usually).  But what many people do not realize is that the retailers that you shop at specifically pick those products in their stores for people like you.  Every item of clothing in the store you went into was picked for a purpose for a specific group of people.  This process, called market segmentation, is how many businesses make their profits.  But what happens when you go into that specific clothing store you find attractive and find no clothes that you like?  This is a huge problem that many retailers deal with when using market segmentation.  Market segmentation does help retailers gain extra profit and allocate their resources appropriately, however many times it fails to look at the individual consumer rather than a lump of consumers.  Retailers are trying to change market segmentation so that it does more accurately reflect the individual, not the group, however there are still many problems that remain to be solved.

            The process of companies using market segmentation to appeal to their consumers is fairly new.  However, there has been discussion about market segmentations since the early 1900s.  In 1912, A.W. Shaw, one of the first business men to analyze markets, stated that markets should meet human wants more accurately than competition and that businesses need to treat economic and social markets as distinct (Dickson & Ginter, 1987).  Shaw emphasized that fact that organizations should not group people together in one lump sum, but instead need to give the individual consumer what he or she wants.  However, Shaw failed to distinguish product differentiation, the process of differentiating your product from competitors’ products, from market segmentation (Dickson & Ginter, 1987).  Wendell R. Smith in 1956, professor and once president of the American Marketing Association, did make this distinction between market segmentation and product differentiation, and pioneered the discussion of market segmentation.  Smith (1956) defined market segmentation as, “Viewing a heterogeneous market as a number of smaller homogenous markets, in response to differing preferences, attributable to the desires of customers for more precise satisfactions of their varying wants.”  Smith suggested that bending the demand to the will of the supply and using market segmentation to adjust products and marketing efforts to these differences in demand would create more successful profit (Dickson & Ginter, 1987).  Smith stressed the importance of finding out what the consumers want first, then differentiating products and marketing efforts to meet these desires.  Another marketing sales executive who discussed the importance of market segmentation was Mark Chamberlin in 1965.  Chamberlin stressed the importance of consumer perceptions and characteristics and recognized that differences in buyer preferences result in different demand curves, which is also what Smith stressed (Dickson & Ginter, 1987).  Because of this fact, Chamberlin suggested that organizations should adjust their products to the needs and tastes of different buyers to be more successful (Dickson & Ginter, 1987).  Vijay Mahajan and Arun Jain (1978), two analysts of marketing, looked at market segmentation as more than just a way to profit, but as a solid tool for research to identify and allocate resources among market segments (Dickson & Ginter, 1987).  This suggestion even furthered the use and advantages of companies using market segmentation to appeal to consumers.

            Since the initial discussions of market segmentation, market specialists have formulated a more general and specific meaning of market segmentation.  Market segmentation can be broken down as a subgroup of people or organizations sharing one or more characteristics that cause them to have relatively similar product needs (Hair, Lamb, & McDaniel, 2006).   Or in other words, market segmentation groups customers with the same buying requirements into segments.  When businesses segment the market, they are aiming to find a target market, or a group of people or organizations for which an organization designs, implements and maintains a specific strategy intended to meet the needs of that group, resulting in mutually satisfying exchanges (Hair, Lamb, & McDaniel, 2006). 

            Traditionally there have been six basic steps in segmenting: 1. select a market or product category, 2. select segmentation basis, 3. select segmentation descriptors, 4. profile and analyze segments, 5. Select target market, 6. Design implement and maintain appropriate marketing mixes (Hair, Lamb, & McDaniel, 2006).  So say for example I want to create a new company.  First I must pick a market to sell my products in; I choose the clothing industry.  Then I must decide which segmentation bases I want to focus in on; I decide that I want to focus on the geographic location I am in and who lives in the area where my company will be.  Thirdly, I pick some of the specific traits within geography and demographics that I am going to analyze such as age, income, or concentration of the population within the city.  After, I decide specifically what I want to look at; I need to analyze and profile the area where my company is, looking especially at the area’s age, income, and concentration of the population.  After my analysis I find that most people living in the area where my corporation is lie between the ages of 18-40, are of high income, and mostly live in urban areas.  From this analysis, I then need to choose specifically who my target market is going to be.  I come to the decision that I want to design clothing for women between the ages of 18-30 who are of high income and live “the city life.”  Now that I have picked who I will target my clothing with, I now must devise a strategy to get these targeted women to buy my clothing.  I decide that I want to design unique, fun fashion forward, New York city style clothing, that are upper price, bust still attainable by the middle class.  Finally I am done with the segmentation process and can start designing my clothing line.

            Companies know the importance of segmenting markets, but what bases do organizations use to put consumers into these segment groups and what constitutes as an adequate market segment?  I already discussed two of the bases in my discussion of the segmentation process, geography and demographics, but there are more to choose from.  Traditionally there are five different segmentation bases, or characteristics of individuals, groups, or organizations used to divide a market into segments.  The first widely used segmentation base is geography.  In geographical segmentation corporations separate consumers based on such things as location in a country or world, market size, market density, or climate.  The second segmentation base, which is often seen as most used, is demographics.  In demographic segmentation businesses segment based on things such as age, gender, income, ethnic background, or family background.  The third segmentation base is psychographic segmentation.  This segmentation puts consumers into groups based on factors such as personality, motives, lifestyles, or preferences.  The fourth segmentation base is benefits sought, where corporations segment consumers based on the benefits they seek from a product.  For example, lets look again at my clothing company.  Say I find that some of my customers are looking for more casual clothing, some are looking for business attire, and some are looking for going out clothing.  So I decide to segment my customers into groups based on what they want from my clothing: “casual girls,”  “working girls”, and “girls that just want to have fun.”  The final traditional segmentation base that corporations widely use is usage rate segmentation, which segments on the basis of the amount of product bought by various consumers (Hair, Lamb, & McDaniel, 2006). 

            With these five traditional segmentation bases, organizations can chose to focus on just one base, or combine numerous bases to try to meet a more specific group of consumers.  Once organizations pick their segmentation bases and the market segments they want to target, companies must determine whether their market segment is adequate for profit.  There are four basic criteria that must be established for a market segment to be successful: substantiality, identifiably and measurability, accessibility, and responsiveness.  For a segment to be substantial, the group must be large enough to warrant a special marketing mix, or marketing strategy, and must be able to be profitable.  For a segment to be identifiable and measurable, the group must be identifiable and their size measurable.  For a segment to be accessible, a group must be reachable by the organization.  Finally for a segment to be responsive, the group must respond to some aspect of the marketing mix differently than other groups (Hair, Lamb, & McDaniel, 2006).  However, even if a particular market segment has all of these qualities, it does not necessarily mean that it will work well for a particular organization. 

            Organizations have been told for many years now to use market segmentation and have been told the basic steps of how to do it.  But why should businesses use market segmentation?  This tool is centered on the belief that consumers buy different products and have different preferences of these products.  So in order to deal with the heterogeneity of consumers, marketers focus on specific groups to balance the variability in customer needs with their available resources (Dibb, 1998).  In simple terms, market segmentation helps marketers have better understanding of customer needs and characteristics, it allows companies to better allocate their resources, and helps businesses to gain competitive advantages over their competitors.  When looking at how market segmentation helps corporations to better understand their customer’s wants and characteristics, marketers have shown that using market segmentation gives them a better look at the competitive situation (Dibb & Simkin, 1997).  Using market segmentation, businesses can identify groups to which individual consumers belong, predict how these groups will react to new products, identify which segments best fit an organization, and tailor their products to meet this particular segment.  When looking at how market segmentation allows companies to better allocate their resources, segmentation allows businesses to balance their marketing activities that contribute market share to profitability (Dibb & Simkin, 1997).  This allows companies to look at different consumer groups, see which ones are most applicable, and focus their resources on these groups, which leads to the highest profits and lowest costs. Businesses know that they cannot satisfy the needs of all consumers, so companies instead concentrate their efforts and resources on groups with similar desires.  This aspect also helps out smaller businesses that have limited resources best focus their assets on groups that will give them the most market share or best profits (Dibb & Simkin, 1997).  When looking at how market segmentation helps businesses gain competitive advantages over their competitors, segmentation can help companies differentiate and specialize their products to meet what a particular group wants.  When companies specialize their products, they have a product that is superior to their competition, and this creates a competitive advantage over their competitors. 

            Marketers segment their customers into groups, to help understand their customers better and make products that their consumers want.  However, the problem with market segmentation is that it is a tool where the marketer views the market in they way he or she wants.  As Michael Wedel and Wagner Kamakura (2002), business professors from the University of Michigan and Duke University, say in their editorial entitled “Introduction to special issue on market segmentation,” “segments are not homogenous groupings of customers naturally occurring in the marketplace, but are determined by the market manager’s perspective or strategic view of the market.”  In other words, the first priority of market segmentation is not to please every individual consumers’ wants and needs in a group that fits them perfectly, but is used to first and foremost meet the wants and needs of the corporation.  Even if marketers did put their consumers first and tried to place customers in segments that meet the customer’s needs, there is the problem that everyone is not the same.  Just because a group of people is the same age or lives in the same area, does not mean that each person in one of these segments will respond similarly to a product, or desire the same attributes from a product. For example, look at my clothing company.  I am targeting women between the ages of 18-30 who are of high income and live “the city life.” But not every woman age 18-30 who are of high income and live “the city life” will necessarily like all of my clothing.  One, 25 year old, high income woman, might not like my selection of party dresses, but instead wants running wear for her high recreational lifestyle.  Jock Bickert, author and market analyst, stressed this problem of market segmentation in his article called “Cohorts II: a new approach to market segmentation.”  Bickert (1997) discussed how people often try to generalize and simplify market segments in order to deal with the complexities of human diversity.  Due to the fact that marketers tend to generalize and simplify their segments, as Bickert (1997) points out, they tend to rush their systems of analysis, which ends in a segment that does not explicitly represent each individual their target market.  Or in other words, my line of casual, business, and party wear, might not represent the wants of all 18-30 high income women living “the city life.”  This problem brings up the question of whether or not marketers should actually segment their consumers into groups of similar attributes.  In fact, there is no real substantial evidence that shows one base of segmentation as superior or inclusive of the needs of every person in a specific market (Esslemont, Gendall, & Hoek, 1996). This leads to the conclusion that perhaps marketers should either change or modify their traditional outlooks on segmentation bases, or do away with segmentation as a whole.

            David Weinberger discussed the negatives of market segmentation in his book entitled, Everything is Miscellaneous.  Weinberger went further than just talking about the problems of market segmentation; he tried to suggest a new way to look at the segmentation process.  In the chapter entitled, “Lumps and splits,” Weinberger (2007) discussed how “we’ve divided our world into major categories that contain smaller categories that contain still smaller ones, branching like a tree” (p. 65). For example, look at my clothing company, you can split the clothing I make into casual, business, and more formal attire, then you can split casual wear into basic tees, camis and tanks, and jeans, and then you can even further split the category of jeans into straight leg, flair, high rise, and boot cut.  The concept of “lumping and splitting” has rules though.  One rules says an item can only be placed on one branch in one leave (p. 70).  For example, jeans cannot be placed in the categories of casual, formal, and business attire all at the same time, they can only be put in the casual section, or else there would be confusion. Another rule states a branch or a category also cannot be too big or too small (p.70).  So if I only created one pair of high-rise jeans, they should probably not have a category of their own.  The thing to remember is that “lumping and splitting is not really a tool of knowledge or a way to look up information, but instead helps us to understand the world around us” (p. 711).  In other words, don’t look to the lumps and splits for answers, only look at them to help you understand.

            As you can tell, this concept of “lumping and splitting” also applies to the marketing world and to market segmentation.  Weinberger (2007), like many other analysts, pointed out how marketers often “acted as if their job is to come up with messages that will appeal to markets segmented by demographics…that define a group susceptible to the same message” (p. 118).  Weinberger stated that by splitting people into markets segmented by demographics, marketers fail to see how customers form real social groups, in places such as the digital world, by simply talking to each other (p.118).  If marketers do not pay attention to groups that customers put themselves in, they could potentially miss profits and miss a better understanding of whom they are actually trying to appeal to.  So how can marketers try to better understand their customers?  Weinberger (2007) pointed out the benefits of the digital world in better understanding who we are, “by pulling together implicit data from multiple sources, marketers can avoid being fooled by our lopsided self-presentation on any one site” (p.163).  But Weinberger in his “95 Theses” warns marketers that although consumers are making relationships and sharing themselves online, if marketers don’t continually check up on their consumers, they will loose them to someone else.

            Weinberger was not the only person to look at new ways to segment a market.  There have been numerous new strategies that have appeared to try to change the way marketers view their customers.  Some companies have started using software programs such as Personicx or Claritas to segment their consumers into markets.  Personicx is a computer software program that divides households into one of seventy clusters based on the “life stage” of the household (Personicx, 2008).  These clusters are updated once a month by gathering information about consumers through such tools such as the Internet, credit card information, and shopping behavior (Personicx, 2008).  Personicx believes their segmentation process is accurate because it is current and more specialized to an individual household rather than a region of a state or country (Personicx, 2008).  Another software company, Claritas, segments their markets based on a combination of demographics, lifestyle preferences, and behaviors, and also puts customers in neighborhood or household segments (Claritas, 2008).  The problem with these computer software programs are, even though they attempt to segment customers more accurately, the programs still segment groups according to demographics, geography, behavior, etc, and attempt to put people in groups that may not accurately represent every household with similar specified traits.

            Another new market segmentation method that has become popular recently, especially due to better technology, is one-to-one marketing.  In one-to-one marketing, a business attempts to build long term, personalized and profitable relationships with individual consumers based on customer information (Peppers & Rogers, 2000).  A business will often customize their services or products to meet the needs of this individual customer with the hope of gaining customer loyalty (Peppers & Rogers, 2000).  This type of segmentation is a step up from traditional segmentation methods because it actually tries to understand consumers on a personal level and collaborate with them, instead of targeting and grouping them (Peppers & Rogers, 2000).  However there are problems with this form of segmentation.  Firstly, this type of segmentation is still not a reality for most companies due to its high expense of customization.  But with new technology and databases, one-to-one marketing is becoming more readily available and cheaper to install.  Secondly, is that although one-to-one marketing does strive to meet the needs of their individual customers, the main purpose of this marketing practice is to create profitable relationships with customers, reduce costs, and increase revenue through customer loyalty (Peppers & Rogers, 2000).  So although companies are trying to pay more attention to the individual needs of each customer, their main focus is still on the business itself and what is best for the business. 

            Kevin Kelly in his book entitled, New Rules for the New Economy, had an even different approach to the business world.  In his novel, Kelly (1998) discussed a new economy that has begun to evolve where old ways of looking at the economy and old connections no longer apply to the world of business.  Kelly (1998) suggested in his eleventh rule, “the Law of Churn,” that companies should no longer rely on the old ways of stability and productivity, but should instead try to sustain disequilibrium, which will lead to much larger success.  This argument can be applied to market segmentation.  Perhaps it is better for marketers not to segment at all, according to traditional bases, and instead just let disequilibrium unwind.  This could possibly lead to a new and better form of market segmentation for companies that they never realized before.

            There is no doubt that market segmentation provides numerous benefits for companies trying to gain a profit and understand their customers more accurately.  However one must remember that the main purpose of market segmentation is not to please the customer, but is instead for companies to make more money off their products.  Companies have tried to better their methods for segmentation, and have come a long way, but they still fail to realize that not every person in a group has the same needs or desires or will react in the same way to a particular product.  One-to-one marketing seems to have the potential to better meet an individual person’s needs and wants and to not lump people into a segment based on a geographic location or stage in life.  However with one-to-one marketing comes controversy.  Many companies use the Internet and complicated software programs to learn more about their customer.  A company is now able to view a customer’s address, age, preferences, and tastes, just by having a customer go onto their website and purchase an item.  Many companies also then sell this information to third party corporations so they too can learn more about potential customers.  The problem with this is that companies do all of these things without the explicit permission of the customers themselves.  As Weinberger (2007) pointed out, “marketers can know far more about customers than customers want; customers’ leaves of information have been raked together without their explicit permission.  How much of the implicit digital metadata people inevitably create should an organization track, keep, and use?” (p. 163).  As of now the legal lines of what companies can sell and exploit about their customers are gray, and companies can obtain and sell quite a lot of information about customers if they state that they do it on their websites.  This creates an issue for people who decide to go on companies’ websites: would you rather have a product customized to what you want with your personal information possibly leaking around companies, or would you rather just buy a product that meets some of your desired needs?  There is no correct answer to this question; it is solely based on the preferences of the individual consumer.