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According to Loudon and Della Bitta (1993), the concept of a mass market no longer exists, having fragmented in the 1980s into smaller and smaller pieces. Market segmentation is “the process of dividing a potential market into distinct subsets of consumers with common needs or characteristics” (Schiffman, Bednall, Watson and

Kanuk 1997, p. 48). Having segmented the market, an organisation can then identify the segment(s) which gives it the best opportunity to compete in the market, rather than trying to compete across the entire market. The issue, therefore, is not whether the market should be segmented, but rather, what method is the most effective means of conducting this segmentation?

When operating with a ‘production orientation’, there is little need to segment the market because it is expected that all production will be consumed. Consumer needs and expectations are not generally considered, which explains the often cited example of Henry Ford suggesting that consumers could purchase a T-Model Ford in any colour that they liked, provided it was black. This demonstrates the manner in which suppliers can operate when they have market power.

Since not all consumers are alike, it is not effective to treat the entire market as a single entity with single products on offer and a single promotional message. In an ideal world, marketers would focus on the needs of individuals and would develop marketing strategies for each person. Clearly, this is not feasible and marketers must consider groups of individuals who behave in similar ways with respect to their product needs or buying reasons. Marketers are then able to develop strategies appropriate for the different groups. This reflects a consumer oriented approach which, in contrast to the production orientation, focuses on the consumer and requires the development of product strategies based upon consumer needs, albeit with the profitability of the organisation as the ultimate motive.

In segmenting the market, it is important that within a segment there should be no more than minor variations in behaviour between members, but that there should be substantial variations between members of different segments. The key objective, therefore, is to find appropriate dimensions that can be used to segment the market. In order that the segmentation adopted be viable, the market segments should be:

• measurable - so that consumers exhibiting behaviour can be identified,

• accessible - so that such consumers can be reached,

• substantial - to justify pursuing such segments, and

(Engel, Blackwell and Miniard 1995; Loudon and Della Bitta 1993; Soloman 1992; Schiffman, Bednall, Watson and Kanuk 1997).

The major challenge for marketers is to identify the appropriate characteristics to use in segmenting the market such that these characteristics are useful in explaining and predicting behaviour. The segmentation process used should be one that provides meaning for the segments so identified. Not all segmentation approaches enable prediction of consumer behaviour, but they all help to further understand differences between various sectors. In segmentation, it is “important to distinguish between causal and descriptive differences” (Engel, Blackwell and Miniard 1990, p. 663). The causal differences indicate motives for behaviour and are essential for effective segmentation. Once the causal differences have been identified, the descriptive differences are useful for providing additional information about members of the segments. Demographics often provide descriptive differences.

There are two fundamental approaches to market segmentation, these being the ‘a priori approach’ and the ‘post-hoc approach’ (Engel, Blackwell and Miniard 1990; Loudon and Della Bitta 1993). The a priori approach, which has been the most common, requires that the basis to be used for segmentation be selected in advance. For example, if one believes that there are differences based on frequency of product use, purchase frequency could be used as the basis for dividing the market. Segments of the market could then be described in terms of their demographic and psychographic characteristics. A limitation with this approach to segmentation is that the best basis for segmentation may not be selected and thus the segments so defined will not be the most effective. This limitation is overcome with the post-hoc approach in which the basis used for segmentation is determined by the analysis itself. In the post-hoc approach, consumers are clustered into homogeneous groups based on their responses to a wide variety of descriptors. Once these natural clusters are identified, techniques such as demographics and psychographics can be used to profile the members of the clusters and to help explain the buying behaviour of each group.

A variety of approaches has been used to segment various markets, with some of the more common approaches being demographics, personality, psychographics,

personal values, and combinations of various approaches. Demographics has been a popular approach to market segmentation, probably due to the fact that demographic information is more readily available. However, "demographic categories are far less predictive than they used to be" (Plog 1994, p. 210), particularly due to the narrowing gap within developed communities with respect to income, education, and occupational status (Loudon and Della Bitta 1993). Some would argue, however, that the income gap has in fact widened in recent years which would undermine one of the reasons proposed for the decline in the predictive power of demographic segmentation.

After reviewing a large number of segmentation studies that employed many different segmentation bases, Andereck and Caldwell (1994) concluded that demographic characteristics of segments rarely varied. Demographics provided some information that could be used to describe individuals but did little upon which marketing strategies could be based (Andereck and Caldwell 1994). The other approaches to segmentation listed here relate to intrinsic characteristics of the consumer and therefore help to provide information on the needs and motives of the consumer. Although these approaches are more difficult to measure than demographics, they are far more likely to be successful in providing causal differences between segments.

Given the somewhat varied success that the different segmentation techniques have had to date, it is important that the techniques be seen as complementary and some discretion is used as to the technique(s) that are used in any given situation. Failure to do this will reduce the explanatory power of segmentation (Bonn 1991).