There are two major segmentation strategies followed by marketing organizations: a concentration strategy and a multisegment strategy.
An organization that adopts a concentration strategy chooses to focus its marketing efforts on only one market segment. Only one marketing mix is developed. For example, the manufacturer of Rolex watches has chosen to concentrate on the luxury segment of the watch market. An organization that adopts a concentration strategy gains an advantage by being able to analyze the needs and wants of only one segment and then focusing all its efforts on that segment. This can provide a differential advantage over other organizations that market to this segment but do not concentrate all their efforts on it. The primary disadvantage of concentration is related to the demand of the segment. As long as demand is strong, the organization's financial position will be strong. If demand declines, the organization's financial position will also decline.
The other segmentation strategy is a multisegment strategy. When an organization adopts this strategy, it focuses its marketing efforts on two or more distinct market segments. The organization does so by developing a distinct marketing mix for each segment. They then develop marketing programs tailored to each of these segments. Organizations that follow a multisegment strategy usually realize an increase in total sales as more marketing programs are focused at more customers. However, the organization will most likely experience higher costs because of the need for more than one marketing program.6
Bases of segmentation
There are many different ways by which a company can segment its market, and the chosen process varies from one product to another. Further, the segmentation process should be an ongoing activity. Since markets are very dynamic, and products change over time, the bases for segmentation must likewise change. (See Capsule 4.)
Capsule 4: Review
1. Defining the market
• the market is people
• the market is a place
• the market is an economic entity
2. Types of markets
• consumer markets
• industrial markets
• institutional markets
• reseller markets
• 3. Approaching the market
• the undifferentiated market (market aggregation)
• product differentiation
• the segmented market
(a) strategies: concentration, multisegment
In line with these basic differences we will first discuss the bases for segmenting ultimate consumers followed by a discussion of the factors used to segment industrial users.
Segmenting ultimate consumers
Geographic segments. Geography probably represents the oldest basis for segmentation. Regional differences in consumer tastes for products as a whole are well-known. Markets according to location are easily identified and large amounts of data are usually available. Many companies simply do not have the resources to expand beyond local or regional levels; thus, they must focus on one geographic segment only. Domestic and foreign segments are the broadest type of geographical segment.
Closely associated with geographic location are inherent characteristics of that location: weather, topography, and physical factors such as rivers, mountains, or ocean proximity. Conditions of high humidity, excessive rain or drought, snow or cold all influence the purchase of a wide spectrum of products. While marketers no longer segment markets as being east or west of the Mississippi River in the US, people living near the Mississippi river may constitute a viable segment for several products, such as flood insurance, fishing equipment, and dredging machinery.
Population density can also place people in unique market segments. High-density states in the US such as California and New York and cities such as New York City, Hong Kong, and London create the need for products such as security systems, fast-food restaurants, and public transportation.
Geographic segmentation offers some important advantages. There is very little waste in the marketing effort, in that the product and supporting activities such as advertising, physical distribution, and repair can all be directed at the customer. Further, geography provides a convenient organizational framework. Products, salespeople, and distribution networks can all be organized around a central, specific location.
The drawbacks in using a geographic basis of segmentation are also notable. There is always the obvious possibility that consumer preferences may (unexpectedly) bear no relationship to location. Other factors, such as ethnic origin or income, may overshadow location. The stereotypical Texan from the USA, for example, is hard to find in Houston, where one-third of the population has immigrated from other states. Another problem is that most geographic areas are very large, regional locations. It is evident that the Eastern seaboard market in the US contains many subsegments. Members of a geographic segment often tend to be too heterogeneous to qualify as a meaningful target for marketing action.