David Aaker (2008) defined marketing strategy as a process that guides an organization to focus its resources on the prime opportunities in the market with the objectives of increasing sales and achieving a sustainable competitive advantage. Marketing strategy includes activities such as the analysis of the strategic conditions of the company, and creation; evaluation and selection of strategies for marketing that contribute to the goals of the company and its marketing objectives.
Marketing strategy has several functions; of which segmentation is one of the major functions. Market segmentation is part of marketing strategy that divides a broad target market into smaller units of consumers who have common needs, wants, product usage, characteristics and priorities. A market segment comprises of individuals, families or organizations with one or more common features that cause them to behave in a similar manner with respect to their product / service needs. Market segmentation is used to identify the target customers, and collect relevant data for positioning the product / service. Depending on the prevailing demand and features of the segment, the organizations can develop product differentiation strategies linking specific products or product categories.
Goals of Segmentation
The best way to segment the market / customers is first define the objective of the segmentation. In other words, first define what the segmentation needs to achieve for the business. Common segmentation goals include:
- Development of new products
- Creation of advertisements & marketing communications
- Development of differentiated services & customer retention strategies
- Targeting of right prospects that are likely to buy the products / services
- Optimization of sales-channel, etc.
Criteria for Market Segmentation
Market segments need to be worthy of offering products or services, the market size, potential for growth and chances to earn profitability needs to be good. The following five market segmentation criteria need to be verified before applying marketing efforts.
Segment must be Measurable: The size of the segment is generally represented in numbers. The probable sales figure and the computable characteristics of the segment must be quantifiable. A market research would provide the data on the probable sales and thereby an approximate number of individuals within a segment can be reckoned.
Segment must be Substantial: The segment must have an identical crowd, with similar characteristics and buying behavior. The segment must have adequate numbers or substantial enough for taking up marketing efforts.
Segment must be Accessible: The segments chosen need to be accessible, for example, soldiers fighting in remote and war packed area cannot be accessed easily or there are locations were internet is not accessible.
Segments must be Differentiable: A particular segment must respond differently to different promotions or products, and distinct marketing tools may be used to target the identical customers in a segment.
Segments must be Actionable: The segments must have characteristics of making specific action as expected by the marketer. For example if promotions are targeted to five year old kids, the kids may not be able to make decisions or make purchases; instead the marketer should target the parents or caretakers, so that the segment can take some action. Ultimately the segment must help the company to grow in a particular market.
Variables of Market segmentation
Variables for segmenting Consumer Markets include geographical segmentation, Demographical segmentation, psychographic segmentation and behavioral segmentation.
When marketers segment the market according to specific geographic locations such as countries, states, districts, cities, neighborhoods, population density, climates, regions or even postal codes, it is geographic segmentation. This segmentation identifies hubs or areas in which markets are divided into geographic units. A company can target one or more geographic locations and must be aware of the fact that data may vary due to population shifts (Pickton and Broderick, 2005).
Demographic segmentation is considered as the most common type of segmentation. It is classifying the markets into sets based on age, gender, income, occupation, religion, race, level of education, etc. (Armstrong and Kotler, 2005). This segmentation is frequently used because that these variables are easy to identify and determine.
The psychological variables arise from two major types of customer profiles; personality (attitudes, risk, motivation, traits etc.) and lifestyle profiles (activities, interests, opinions, needs, values, motivations, etc.). Psychological variables are used when geographic and demographics do not provide a sufficient understanding of the customer behavior. While the traditional geographical and demographical bases (sex, age, education, class, income etc.) provide the marketer with approachability to customer segments, the psychological variables provide certain other information about these and enhance the understanding of the behavior of present and potential target markets (Gunter and Furnham, 1992). So, Psychographic segmentation classifies people according to their attitudes, values, lifestyles, interests and opinions (Pickton and Broderick, 2005: 377).
Behavioral bases of segmentation include brand loyalty, usage rate, benefits sought, use occasions, customers’ attitude, etc. Many marketers believe that the behavioral variables are the best starting points for constructing market segments (Kotler and Keller, 2009: 263).Steps in Market segmentation
Most textbooks present five different steps for effective market segmentation. They are .
- Grouping prospective buyers into segments
- Grouping products to be sold into categories
- Developing a market-product grid and estimate the size of the markets
- Selecting target markets
- Taking appropriate actions to reach target markets
The first four steps will be discussed in this article with respect to the segmentation of GEICO’s Car insurance.
Product for Segmentation: GEICO Car Insurance
Car insurance is not that simple to understand. With complex legal requirements, optional coverage, deductible selections, and different coverage levels, it's not easy to work out the best auto insurance policy. GEICO tries to simplify the complications by educating the customer. GEICO calls their auto insurance coverage as ‘The Magnificent Seven’.
Here is the list of the seven primary coverage that comes with GEICO’s car insurance.
- Bodily injury liability provides protection if the policy holder injures or kills someone while driving a car. The policy also offers for a legal defense if the other party in the accident files a lawsuit against the policy holder. In the event of a serious accident, enough insurance is needed to cover a judgment against the driver / vehicle owner in a lawsuit, without jeopardizing the policy holder’s personal assets.
Policy for bodily injuries covers only people, not the vehicle. It is a good idea to have the matching coverage for all the cars.
- In the case of medical payments, usually with no-fault or personal injury protection, the coverage bears the medical expenses of the injured driver and passengers in the car. There may also be coverage if the policy holder is injured by a running vehicle as a pedestrian.
- Uninsured motorists’ coverage pays for policy holder’s injuries caused by an uninsured driver, even by a hit-and-run driver. In some states, there is also uninsured motorist coverage for damage to the vehicle. In the context of a large number of uninsured motorists driving on the roads, this is very important coverage to have, even in regions with no-fault insurance.
- Comprehensive corporal damage coverage pays for losses caused by events other than collision. For example, GEICO’s comprehensive insurance protects damaged the car if it is stolen, or damaged by natural calamity, fire or animals. For keeping the premiums low, select high tax deductible as much as possible.
- Collision coverage pays for damage to the car when the policy holder’s car hits, or is hit by, another vehicle or another object. To keep the premiums low, select as large a deductible as possible. For older cars, it is better to skip this coverage, since the coverage is typically limited to the value of the car.
- Property loss / harm liability protects the policy holder if his / her car damage other’s property. It also offers legal services if another party files a lawsuit. It is a good idea to purchase adequate value of insurance to cover the amount of impairment that the car is likely to damage another vehicle or object.
GEICO’s auto insurance offers Rental reimbursement coverage. That means a policy holder is eligible to get paid for a rental vehicle (usually up to $25 a day) when the damaged vehicle is out of service as a result of a loss covered under comprehensive or crash coverage.
Further Coverage related to auto insurance is1. Emergency Roadside Service (ERS) which offers protection for problems that are not typically handled by the auto insurance, such as being waylaid or, jump starting a weak battery, or changing a punctured tire, etc. 2. Mechanical Breakdown Insurance includes those mechanical problems that always seem to pop up right after the new car warranty runs out.
With these product characteristics, GEICOs segmentation can be made as follows.
Companies segment their markets to improve their competitiveness and profitability. What makes segmentation effective and valuable is difficult to answer. Market segmentation seems to be an art rather than a science.
Insurance is a service that is not bought voluntarily. Car insurance is bought because there is compliance pressure from the government authorities. Those types of people who are buying insurance they have to buy it to avoid penalties from the authorities can term as ‘Ignorants’. The likely customers in this category can be uneducated taxi owners and the segmentation is based on the demographics and the behavioral. These customers are expected to be indifferent towards auto insurance and may not require advice or brand awareness.
On the other extreme there are customers who are aware of their circumstances and value their car and their reputation, such customers can be termed as ‘active shoppers’. They research various options that suits their situations, they may be price conscious but do not make compromise on the coverage for the sake of reduced premiums. Such customers are likely to own cars that have a sentimental attachment or maintain the car as status symbol. They may seek more information and advice before choosing an insurance. The segmentation here is a combination of demographic, psychographic and behavioral.
Some insurance customers may prefer to talk to a local agent who can instill confidence with respect to the service. They may not be conscious of price but very likely to be evaluating the insurance agent and the relationship the agent is maintaining. Such kind of customers can be termed as ‘Loyalists”. Once they form a relationship with an agent, they may not switch to other products, until the agent suggests them to do so. This type of customers can be segmented again with hybrid of behavioral and psychographic.
There is a group of customers who are not at all conscious of the price but want a perfect protection for their vehicle. Such customers may be rich and be owners of luxury cars / collectible cars. They may not take policy from any agent, but would choose an agent whom they are comfortable to work with and who gives them the exact solution to their concerns. Such customers may be termed as ‘high end customers’. These customers seek tailored coverage and precise protection terms. They shall be willing to pay a higher price if they get what they require. The segmentation here is a combination of demographic and psychographic variables.
Developing product categories
Insurance is a complex product and can be categorized into several ways. A product category is a way to organize products by the type of products that is offered to the customer. GEICO’s car insurance can be classified in terms of low premium – limited coverage policies. Such policies may be sold to ‘ignorants’. Similarly, high premium – large coverage policies may be clustered for the high income and luxury car owners. For the car fleet owners, comprehensive policies for a complete fleet will make sense and would be cost effective to them. A special type of policy for the youth who drive recklessly for the thrill of driving may also be created. The segmentation and product categorization are linked to each other very much. It is possible to categorize products based on the segments and developing segments based on the product categories.
Product – Market Grid for GEICO Car insurance
Product – Market grid otherwise known as Ansoff matrix can be used in product development as well as in marketing strategy. This grid gives very intuitive insights in charting out the marketing strategy. The above matrix gives a possible course of marketing initiatives for GEICO’s car insurance. Market size for all the four quadrants seems to be very high, and if GEICO offers the products with innovative offers, it can increase its market share. The number of cranes operating across the US will be huge, and GEICO presence in almost all states of USA can develop a market for crane insurance very easily. Offering a special insurance to women can strengthen the competitive position of GEICO and it is likely to yield better profitability, because it can be priced at a premium. GEICO can also come up with a low priced policy for the taxi drivers, which can strengthen its presence in the bottom of the pyramid.
The point of all of this exercise is more than just creating an analytical insight into customers and market; it’s to generate results for the business. After developing a segmentation that allows finding and targeting customers, it is also much easier to bring into line the entire organization as it runs to market and to grow your top-line revenues and bottom-line earnings.
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