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Defining Markets & Market Segments

General Approaches for Creating & Profiling Segments

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I've spent enough time discussing the different segmentation bases that are available to marketing managers. Let's move on to a quick examination of how market segments are created using these bases and subsequently profiled. 

Methods for Creating Market Segments

We have already examined in some detail two of the statistical methods that are available for helping us create and then profile market segments. Cluster analysis was employed to create market segments based on consumers' responses to survey questions that reflected a range of consumers' needs with respect to health clubs.  This was an example of creating "benefit segments." We also talked about how cross tabulation or cross tabs was employed to identify light, moderate, and heavy exercisers in the health club example. In  both examples, the emerging market segments were exhaustively profiled using table-building procedures that cross-tabulated each market segment with other questions from the survey.  These questions included the items from other sections of the survey questionnaire that assessed demographics, attitudes on various issues, desired facilities and services, and motives for exercising, among others.

In addition to cluster analysis and cross tabulations, there are a range of other statistical tools that can be employed for creating segments. It is beyond the scope of this course to examine these tools in any detail.   I think you already have a good feel for how survey-based statistical techniques can be used and how valuable they can be. Sometimes, however, we do not have these tools available or we can not conduct surveys to collect the data required to apply the tools. Sometimes we simply have to rely on managerial judgment. There are some simple judgment-based techniques that we can use to help us create market segments. One technique that I find useful is called "hierarchical structures analysis" or HSA. There are two basic approaches for applying this technique: (1) the "customer-based approach;" and, (2) the "product-based approach". Let’s briefly examine each approach.

The Customer-Based Approach -- Hierarchical Structures Analysis

Exhibit 1
Customer-Based HSA

The customer-based approach to HSA is illustrated in Exhibit 1. With this technique, marketing managers employ their own judgment to decide how larger aggregate markets should be broken up into smaller sub-markets or market segments. The example above focuses on the computer software market. In our example, the process begins by segmenting the overall computer software market (employing a geographic segmentation base) into foreign and domestic software markets. The domestic market is then further segmented (using a usage occasion segmentation base) into "business users" and "home users." The "home user" segment is further broken down into two additional segments by applying a "behavioral segmentation base" - in this case the consumer's knowledge of computer hardware and software (i.e. "experienced" and "novice" users). Experienced users are likely to be very knowledgeable, while the novice may need extensive help in selecting and using both hardware and software.

This example, although very simplistic, illustrates how easily this approach can be applied to provide managers with a working segmentation scheme.  The specific segmentation bases employed to create market segments are those that managers feel will produce the most useful set of segments for further analysis and ultimate targeting.  Note also that the approach focused on identifying market segments from the customer’s perspective. This is generally the preferred approach.  The next example of hierarchical structures uses a product-based approach to segment markets.

The Product-Based Approach 

Exhibit 2
Product-Based HSA

The product-based approach to HSA focuses on products rather than customers.  Let's segment the beverage product - market to illustrate how it works.   We begin with the overall, generic beverage market at the top of the figure in Exhibit 2.  This "generic beverage market" is broken down into finer levels of product categories as we progress down the figure.  The diverse generic product-market is first divided into the product classes of "non-alcoholic" and "alcoholic" beverages. These two product classes comprise the first level of market segments. The alcoholic beverage segment can then be further sub-divided into distinct product forms. For example, possible product forms are wine, beers, liquor and specialty alcoholic beverages.  Each product form is considered as a distinct market segment within the "alcoholic beverage" product class. In turn, each of these product forms can then be sub-divided into additional product forms. Let’s focus on the beer product form (market segment). There are multiple types of beers (additional product forms): light beers, premium beers, specialty beers and popular beers. At the next level  are a series of branded product-markets.  These are the specific brands of beers in each product form category.  For example, the light beer segment can be broken up into specific brands such as Miller Lite, Tecate Lite, Coors Lite, and so on.

When we use this approach to hierarchical structures analysis, we normally equate market segments with specific product forms. For example, we might talk about the "lite beer segment" or the "premium beer segment." The assumption, of course, is that each product form segment will have a unique group of consumers exhibiting similar wants and needs, as well as similar demographic and psychographic characteristics. And these will be somewhat different from one segment to the next.

Many marketing managers employ this approach to creating market segments in order to define their "competitive set." For example, if market segments are defined in terms of lite beers, premium beers, specialty beers (and so on), then that immediately identifies the specific brands in each category that managers should consider as their direct competitors. In the lite beer segment, Coors Lite, Tecate Lite, Miller Lite may be considered, more or less, as direct competitors with one another.  

Methods for Profiling Market Segments

Once market segments have been created or identified, the customer in these segments must then be exhaustively profiled or characterized. 

Characteristics Used to Profile Segments

The major dimensions used to characterize consumers include demographics, psychographics, customer attitudes, geographic location, mediagraphics, and finally customers' needs. 

Demographics include the standard demographic traits that we have discussed in the past such as age, income, education, and occupation. These variables generally are the primary variables that we use to help us profile customers in our segments.
Psychographics consist of lifestyle traits and personality traits. When we conduct surveys in which activities, interests, and opinion data are collected (AIO data), we are profiling customers based on lifestyle characteristics. We are building the segments' psychographic profiles.
Attitudes can take in a lot of ground. We can measure attitudes about most anything. Attitudes that are usually employed for profiling market segments include attitudes about products, brands, and companies.  The specific attitude dimensions used depend upon the nature and purpose of the segmentation study. 
Geographic data typically are used to tell us where customers live, where they shop, where the people in one market segment live compared to individuals in a different market segments.
Mediagraphics is a rather new term for the marketing literature describing the media viewing habits and media preferences of consumers. Mediagraphics attempt to identify the types of promotional media consumers prefer (e.g. do they watch TV, listen to the radio, read magazines and /or newspapers), when or under what circumstances do they tend to view a specific medium, and what aspects of the medium do they prefer (e.g. which TV shows, which magazines, which newspapers). All of this information is important in characterizing the media preferences and habits of market segments.

Techniques Used to Profile Segments

The basic approaches for identifying the characteristics of customers in market segments are: (1)  managerial judgment; (2) surveys; and, (3) secondary data sources. 

You have already seen an example of survey-based approaches for profiling market segments from the health club study.  The health club questionnaire included a large number of questions concerning customer demographics and psychographics. I then showed you how cross-tabulation -- building simple data tables -- could be used to associate these characteristics with each market segment. 

Secondary data sources of various types can also be used to help us profile our customers in market segments. We might be lucky enough to find prior research that has been conducted that tells us what the characteristics are of customers in one segment versus another. Sometimes we can use census data to tell us a little bit about some of the demographic characteristics in particular of market segments. This is particularly true when we have segmented markets based on geographic boundaries, such as zip codes.  

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Page last modified: January 24, 2001