The Premise Behind Market Segmentation

    Many optimistic entrepreneurs assume that if they make their product good enough, it can attract anybody and everybody—regardless of age, gender, income, and a whole lot of other factors. Sometimes it does work. Take, for instance, the phenomenal success of Coca-Cola which manages to have a very broad appeal, becoming the favorite beverage of young or old, rich or poor alike.

    But universally successful products such as Coke are few and far between. More often, the typical new product launches into a market that is already saturated with competition and with each business fighting to get a share of the available market.

    If you are planning to launch a product into an already competitive industry, then focusing on a specific market segment may prove to be more effective than simply appealing to all tastes and preferences. 

    In the US market, Pepsi had been struggling to compete with Coke since the 1930s but barely gained any traction. For the longest time, it tried to wrestle market share from the leading beverage by being much cheaper—at one point even promising to be twice the size of a bottle of Coke for half the price! It was not until the 1960s when Pepsi finally decided to just focus on the youth with a campaign that called them “The Pepsi Generation.” Sales finally took off then.

    Colgate has been a strong market leader in the Philippines for decades. A lot of competitors emerged, promising to offer the same benefits and quality at a lower price. None, however, managed to get as far, competition-wise, as Unilever’s Close-Up did. Close-Up succeeded because instead of going head-on with Colgate, which appealed to the family market, Close-Up instead decided to, much like Pepsi in the US, focus just on the youth. In doing so, it effectively broke up the toothpaste market: Colgate was bought by parents for their families, while Close-Up was bought by teenagers for themselves.

    Apple succeeded phenomenally by focusing on satisfying the needs of more upscale buyers who had enough disposable income to spare for well-engineered and well-designed products. The company does not sell low-priced devices and it does not seek to appeal to a broad market. In doing so, it is able to command high-profit margins while still affording to build products at premium quality. 

    To understand the foundation behind market segmentation, it is best to revisit the stages of market maturity.

    In Stage 1, where supply is far less than demand, there really is not any pressing need to segment the market just yet. New producers can enter the market and this would not bother existing players so much because there is more than enough of a market to spare for everyone. While demand is greater than supply, the tendency would be to offer a generic product that will appeal to as wide market as possible.

    Here is a little thought experiment: 

    You are a business person who has landed in a remote island where everyone is barefoot. You believe this is a terrific opportunity to offer sandals. You set up a manufacturing plant there and begin producing sandals. Only, since demand is so high, you decide to simplify production as much as possible. How do you do this? Perhaps you come out with a one-size-fits-all kind of design so that the sandals are easily adjustable, allowing them to fit big feet and small feet alike or both men’s and women’s feet. (You may even opt to no longer distinguish between left feet and right feet and just produce a single sandal design!) But in the end, because the inhabitants urgently want sandals, they do not even care. The basic product is better than nothing.

    As competition grows, however (which is at Stage 2 and up), rivalry begins to heat up. In order to differentiate, a strategic move would be to differentiate your product by increasing the product quality. If the quality is sufficiently and perceptively better than the existing products in the market, then you would have successfully managed to segment the market between the price-conscious buyers and the quality-seekers, with you likely being able to attract the latter.

    Over time, competitors will eventually manage to match your level of quality. When this happens, the market may once again be at a stalemate. Competition will now have to evolve into further specialization toward the needs of particular sub-groups. The question then becomes that of identifying what sub-groups (i.e., market segments) to focus on.

    Traditionally, markets were segmented according to the following variables:

    • Demographic. This refers to quantifiable and factual statistics of the population, such as age, sex, income, occupation, and basically any piece of information that is gathered by the National Statistical Office. Lamoiyan Corporation’s Hapee Toothpaste began by appealing to kids using bright toothpastes with fruity flavors and cartoon imagery.

      Firms that seek to use demographic segmentation would typically look up statistics about their selected demographic criteria to get an idea about how big this segment might be.

    • Psychographic. This refers to how consumers see and feel about themselves—hence psycho or “of the mind.” It includes elements such as social class, lifestyle, and personality. If you are segmenting the market by whether or not they are adventurous, idealistic, how they feel about a particular issue, or who they aspire to be, then these are all factors that reside primarily in the people’s minds. Nike has used psychographics in designing its communications, appealing primarily to people with competitive self-identities. 

      Psychographic data is not captured by the National Statistics Office, so the way to determine how many people fit into a particular psychographic profile is generally through primary research methods such as surveys.
    • Behavioral. Whereas psychographics are about how we think about ourselves, behavioral refers to how we behave when buying a product, whether these actions may be conscious or unconscious in nature. This includes issues such as when do we typically buy a product, what we look for when buying a product, how loyal we tend to be to a brand, how often and how much do we buy, what price point we are comfortable with, how ready we are to buy the product in the first place, and to whom we typically buy the product for. Jollibee originally differentiated its burgers by proclaiming them to be “langhap-sarap,” appealing to a typical Filipino behavior of smelling food to fully appreciate it before eating it.

      To get insights about consumer behaviors, observation and qualitative research methods are most useful. To determine how many people behave in a particular way, surveys may still be the best tool.

    • Geographic. The physical location of a market, including the general characteristics of the location. This includes factors such as climate (e.g., Baguio City offers a cooler overall climate), traffic conditions, cultural characteristics that are inherent in a geographic area, livelihood opportunities, and population density. A typical strategy employed by smaller firms, when faced with tough competition in highly urbanized cities such as Metro Manila, is to bring their products to less densely populated cities so that they have a better chance of dominating these geographically segregated markets because larger firms tend to ignore these. Jaz Cola, for instance, began by focusing primarily in the Visayas, building up popularity there among teenagers in the 1990s. They were effectively competing with Coca-Cola through low price and a localized strategy (at least until Coca-Cola eventually bought it).
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