Consumer Segmentation: A Contemporary-Historical Perspective

by: David S.B. Butler, PhD, Professor Internet Marketing Masters Degree Program, Full Sail University©

To be relevant and viable in a competitive market, products and services must satisfy the needs and or wants of consumers within a given

Graphic Credit: Mahmoud Reza Saremi DBA, MBA/MKT

geodemographic and cultural context.  Understanding how and why a promotional offer reinforces the needs and wants satisfied by a product or service is vital in the competitive online marketplace. Today, Internet marketers recognize that Intimate knowledge of a target audience facilitating consumer segmentation provides key information necessary to maximize online marketing efficiency and effectiveness.  Therefore, Internet marketers apply consumer information as qualifying information that clarifies and helps connect promotional content with specific consumer segments.  This process aims to match product attributes (and benefits) with online potential consumers that are most likely to benefit from (and be satisfied by) specific promotional offers.   Rather than assuming that the entire population of consumers accessing the Internet are viable potential customers, Internet marketers should be sure to recognize that only certain portions (segments) of the online population represent potential customers for the products or services they are promoting.

Online consumer segmentation is consistent with traditional segmentation approaches advocating the predictive value of consumer segments.  Internet marketers apply insights gained by collecting and analyzing online consumer behavior toward the formulation of promotional content.  This process is designed to predict consumer behavior relative to what is known about previous and current customers.  The predictive value of consumer segmentation manifests as promotional content is strategically aligned with subsets of consumers (within an overall target market) that are most receptive promotional content.

AN HISTORICAL OVERVIEW OF CONSUMER SEGMENTATION

The concept of segmentation emerged as a formal component of contemporary marketing practice in the 1950’s.  Wedel and Kamakura (2001) clarify that “Since the concept emerged in the late 1950’s, segmentation has been one of the most researched topics in marketing literature” (Wedel and Kamakura, 2001, p. xix).  Likewise, contemporary marketers report that segmentation represents an integral part of contemporary marketing practice.  It is currently recognized that “Market Segmentation is an essential element of marketing in industrialized countries.  Goods can no longer be produced and sold without considering customer needs and recognizing the heterogeneity of those needs” (Wedel and Kamakura, 2001, p. 3).

This increased literary focus has been predicated on a shift in marketing practice aligned with the diversification of industrial production (Wedel and Kamakura 2001).  During the early twentieth century as production efficiency became enhanced and product variation increased, the concept of market segmentation became a formal component of marketing practice “industrial development in various sectors of the economy induced strategies of mass production and marketing.  Those strategies were manufacturing oriented, focusing on reduction of production costs rather than satisfaction of consumers.  But as production processes became more flexible, and consumer affluence led to the diversification of demand, firms that identified the specific needs of groups of customers were able to develop the right offer for one or more sub-markets and thus obtained a competitive advantage” (Wedel and Kamakura, 2001, p. 3).

Chamberlin (1933) laid the foundation for the prioritization of the consumer over the producer by pointing to the significance of aligning products with the needs and wants of consumers.  Later in this decade, Robinson (1938) expanded this concept and formalized the economic theory of imperfect competition (Robinson 1938).   The work of these two scholars set the stage for Smith’s influential work in the 1950’s.  In 1956, he recognized “the existence of heterogeneity in the demand of goods and services, based on the economic theory of imperfect competition” (Wedel and Kamakura, 2000, p. 3) developed by Robinson in the late 1930’s (Robinson 1938).  Smith asserted that “Market segmentation involves viewing a heterogeneous market as a number of smaller homogeneous markets in response to differing preferences, attributable to the desires of consumers for more precise satisfaction of their varying wants” (Smith 1956 p 6).

Smith’s decisive article from 1956 asserted that “segments should be based on consumer/user wants and a company should be better able to serve these needs when it has defined some segments within a larger market” (Anna-Lena 2001).  Consumer segments were defined in Wind and Cardozo’s seminal article “Industrial Market Segmentation” (1974) as “a group of present and potential customers with some common characteristic (s) which is relevant in explaining (and predicting) their response to a supplier’s marketing stimuli” (Wind and Cardozo, 1974).  Therefore, consumer segments should clarify groups of current and previous consumers while serving as predictors identifying the most likely candidates for future consumers.  The predictive value of consumer segments should therefore have a profound impact on strategic Internet Marketing plans taking cognizance of matching promotional content with potential consumers.

This process undertaken to clarify the most receptive groups within a population with the most relevant messaging has been formalized in the literature as consumer segmentation  (Frank, Massy, Wind 1972, McDonald & Dunbar 2004, Anna-Lena 2001, Jiang and Tuzhilin 2006). In 1974, Wind and Cardozo recognized that consumer segmentation (referred to then as market segmentation) “involves appropriate grouping of individual customers into a manageable and efficient (in a cost/benefit sense) number of market segments, for each of which a different marketing strategy is feasible and likely profitable” (Wind and Cardozo 1974 p. 155). A host of marketers since have advocated establishing consumer segments as a means to more closely align products and services with targeted groups (2006 p. 307).  Therefore, the appropriate number of segments for a particular promotion are contextual and are determined based on the variation within a given population of potential and return customers.

The process of consumer segmentation rests on three primary assumptions: 1) the population of potential and return consumers is heterogeneous 2) heterogeneous groups have distinct characteristics that can be identified and analyzed 3) unique promotional content can cater to the varying needs, wants of consumers and perceived benefits of specific products and services.

Contemporary segmentation approaches recognize six primary criteria applied toward the evaluation of segmentation effectiveness (Kotler and Armstrong 2007, Wedel and Kamakura 2000, Anna-Lena 2001).  These criteria measure effectiveness by evaluating segment formation and profitability and assert that consumer segments should be: identifiable/measurable, substantial, accessible, stable actionable, and differentiable (Anna-Lena 2001 p. 5).

What we should be sure to glean from this overview of segmentation is that we are not the first generation of marketers to recognize the importance of presenting the right offer to the most receptive audience.  Therefore Internet Marketers must not to loose focus on who customers are and remember that just because our messaging CAN reach a global audience, this doesn’t mean that they are all interested in becoming a customer.  Remember to take a sequential, hierarchical approach (first suggested in marketing literature in the early 1970’s) that prioritizes defining your target market (i.e. apply geotargeting tactics to clarify where your audience located and remember to consider why do they need your product/service).  Also endeavor to clarify as many characteristics of your target audience as possible (who is your target audience and how can you describe variation within the overall group to establish consumer segments) and match product offers with the most relevant audience (i.e. match distinct consumer segments with specific promotional offers that satisfy their needs as a subset of consumers within your overall target audience).

REFERENCES

Anna-Lena M. (2001). Industrial Segmentation: A Review. Retrieved July 24, 2009, from the Åbo Akademi School of Business Web Site:

http://web.abo.fi/fak/esf/fei/wrkpaper/ms208/memostencil208.pdf

Cardozo, R. N. 1974. Situational Segmentation of Industrial Markets. European Journal of Marketing, 14(5/6), 264-276.

Chamberlin E. (1933). Theory of Monopolistic Competition. Cambridge, Massachusetts: Harvard University Press.

Frank R., Massy W., Wind Y. (1972). Market Segmentation. Englewood Cliffs, Prentice-Hall.

Jiang, T. and Tuzhilin, A. (2006). Improving Personalization Solutions through Optimal Segmentation of Customer Bases. Data Mining, December 2006, 307-318. doi: 10.1109/ICDM.2006.87

Kotler, P. & Arsmstrong, G. (2007). Why do we Study Buying Behavior in Marketing? In Kotler P. & Armstrong G., Principles of Marketing (pp. 94-127). Upper Saddle River, NJ: Prentice Hall.  from PrinciplesofMarketing.com Web site: http://www.principlesofmarketing.com/htm/Chapter-Four.htm

McDonald M., Dunbar I. (2004) Market Segmentation: how to do it, how to profit from it. Elsevier Butterworth-Heinemann Linacre House.

Robinson H.W. (1938). The Equilibrium Price in a Perfect Inter-Temporal Market,

Econometrica, 6(1), 48-62.

Smith, W. (1956). Product Differentiation and Market Segmentation as Alternative Marketing Strategies. Journal of Marketing, 21(1), 3-8.

Wedel, Michel and Wagner A. Kamakura (2000) Market Segmentation: Conceptual Methodological Foundations, Second Edition. Boston: Kluwer Academic Publishers.

Wind, Y. and Cardozo, R.N.. Industrial Market Segmentation. Industrial Marketing Management, 3. 153-166.

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