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Market Segmentation | Data Clustering

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Market segmentation is the process in marketing of dividing a market into distinct subsets (segments) that behave in the same way or have similar needs. Because each segment is fairly homogeneous in its needs and attitudes, each is likely to respond similarly to a given marketing strategy. That is, each is likely to have similar feelings and ideas about a marketing mix comprised of a given product or service, sold at a given price, distributed in a certain way, and promoted in a certain way

The process of segmentation is distinct from targeting (choosing which segments to address) and positioning (designing an appropriate marketing mix for each segment). The overallgoals are to identify groups of similar customers and potential customers to prioritize the groups to address, to understand their behavior, and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues can be thus improved.

Improved segmentation can lead to significantly improved marketing effectiveness. With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased.

By using statistical techniques, data set can be partitioned into subsets whose elements share a common behavior.

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The Requirements For Successful Segmentation
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The Requirements For Successful Segmentation

  • Homogeneity within the segment
  • Heterogeneity between segments
  • Segments are measurable and identifiable
  • Segments are accessible and actionable
  • Segment is large enough to be profitable

These criteria can be summarized by the word DAMAS:

  • D - Differential: it must respond differently to a different marketing mix
  • A - Actionable: you must have a product for this segment
  • M - Measurable: size and purchasing power can be measured
  • A - Accessible: it must be possible to reach it efficiently
  • S - Substantial: the segment has to be large and profitable enough

Currently a college student studying the marketing mix is introduced to the Four Ps of the Marketing Mix; Product, Place, Promotion, Price.

  • Product (service) is whatever it may be that is being sold/marketed.
  • Price refers to not only the actual price but also price elasticity.
  • Place has evidently replaced distribution simply by where or what area the marketing campaign is going to cover, as well as what types of distribution channel (retail, wholesale, online, etc) will be used. Today the idea of place is not limited to geographic profiling but also demographics and other categorizing variables. This has only occurred over the last ten years with the expansion of internet use and its ability to target specific types of people and not just people in a geographic area.
  • Promotion simply refers to what medium will deliver the message and what the overall marketing strategy is offering as a benefit.
The Variables Used For Segmentation
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The Variables Used For Segmentation

Geographic Variables

  • Region of the world or country, east, west, south, north, central, coastal, hilly, etc.
  • Country size/country size : Metropolitian Cities, small cities, towns.
  • Censity of area urban, semi-urban, rural.
  • Climate hot, cold, humid,rainy.

Demographic Variables

  • Age
  • Gender male and female
  • Sexual orientation
  • Family size
  • Family life cycle
  • Education primary, high school, secondary, college, universities.
  • Income
  • Occupation
  • Education
  • Socioeconomic status
  • Religion
  • Nationality/race
  • Language

Psychographic Variables

  • Personality
  • Life style
  • Value
  • Attitude

Behavioural Variables

  • Benefit sought
  • Product usage rate
  • Brand loyalty
  • Product end use
  • Readiness-to-buy stage
  • Decision making unit

When numerous variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. When the profile is limited to demographic variables it is called a demographic profile (typically shortened to "a demographic"). A statistical technique commonly used in determining a profile is cluster analysis.
Top-Down And Bottom-Up Approach
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Top-Down And Bottom-Up Approach

George Day (1980) describes model of segmentation as the top-down approach: You start with the total population and divide it into segments. He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship management software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioural, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called database marketing or micro-marketing. Its use is most appropriate in highly fragmented markets.

* Source: wikipedia.org