Market Segmentation

Week 6 - CHAPTER 6

Segmentation, Targeting, and Positioning: Building the Right Relationships with the Right Customers

CHAPTER OUTLINE

Introduction

Companies today recognize that they cannot appeal to all buyers in the marketplace, or at least not to all buyers in the same way.

1). Buyers are too numerous, too widely scattered, and too varied in their needs and buying practices.

2). Most companies are being more choosy about the customers with whom they wish to connect.

3). Most companies have moved away from mass marketing and toward market segmentation and targeting —identifying market segments, selecting one or more of them, and developing products and marketing programs tailored to each.

4). Instead of scattering their marketing efforts (the “shotgun” approach), firms are focusing on the buyers who have greater interest in the values they create best (the “rifle” approach).

Target marketing involves three major steps:

1). The first step is market segmentation which is dividing a market into distinct groups of buyers with different needs, characteristics, or behaviors who might require separate products or marketing mixes.

2). The second step is market targeting which is evaluating each market segment’s attractiveness and selecting one or more of the market segments to enter.

3). The final step is market positioning which is setting the competitive positioning for a product and creating a detailed marketing mix.

Market Segmentation

Markets consist of buyers and buyers differ in one or more ways. They may differ in their wants, resources, locations, buying attitudes, and buying practices.

Levels of Market Segmentation

Because buyers have unique needs and wants, each buyer is potentially a separate market.

1). Some companies attempt to serve buyers individually.

2). For most companies (which are faced with large numbers of consumers), individual marketing is not practical. These companies must instead look for broader classes of buyers who differ in their product needs or buying responses.

Market segmentation can be carried out at many different levels.

1). Companies can practice no segmentation (mass marketing), complete segmentation (micromarketing), or something in between (segment marketing or niche marketing).

2). Companies have not always practiced target marketing. For most of this century, major consumer products companies held fast to mass marketing —mass producing, mass distributing, and mass promoting about the same product in about the same way to all consumers.

a). Examples included Henry Ford’s policy of producing cars “in any color as long as it is black” and Coca Cola’s one drink for everyone policy.

b). The traditional argument for this approach is that it creates the largest potential market, which leads to the lowest costs, which in turn translate into either lower prices or higher margins.

c). Many factors indicate that this policy has outlived its time.

3). A company that practices segment marketing recognizes that buyers differ in their needs, perceptions, and buying behaviors. The company tries to isolate broad segments that make up a market and adapts its offers to more closely match the needs of one or more segments. Segment marketing offers several benefits:

a). The company can market more efficiently —aim toward those customers it can serve best.

b). The company can market more effectively by fine-tuning to meet the needs of its designated market(s).

c). The company may face fewer competitors if fewer competitors are focusing on this market segment.

4). Niche marketing focuses on subgroups within large segments (such as types of car buyers). A niche is a more narrowly defined group.

a). Niches are smaller and normally do not attract many competitors.

b). Niche marketers understand the needs of their customers very well.

c). Niching offers small companies an opportunity to compete by focusing their limited resources on serving several niches.

d). Niches seem to be the norm in many markets today.

5). Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Two forms emerge:

a). Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups—cities, neighborhoods, and even specific stores.

1]. Drawbacks include higher costs, reduction of economies of scale, logistical problems, and dilution of brand image.

2]. Advantages are more effective marketing in the face of different community lifestyles and demographics, and it meets the needs of local retailers.

6). Individual marketing (the extreme of micromarketing) involves tailoring products and marketing programs to the needs and preferences of individual customers. The tailor custom-made suit is an example. More powerful computers are allowing more firms to pursue this approach.

a). This area is also called one-to-one marketing, customized marketing, and markets-of-one marketing.

b). Many business-to-business firms are adopting this approach.

1]. Mass customization is the process through which firms interact one-to-one with masses of customers to create customer unique value by designing products and services tailor-made to individual needs.

c). This trend in marketing also mirrors the trend in consumer self-marketing. In this form, consumers are taking more responsibility for determining which products and brands to buy.

Segmenting Consumer Markets

There is no single way to segment a market.

Market segmentation is the first step in target marketing. Since markets (as shown above) of buyers differ in one or more ways, any of a variety of variables can be used to segment a market.

Geographic segmentation calls for dividing the market into different geographical units such as nations, states, regions, counties, cities, or neighborhoods.

1). Many marketers operate in more than one geographical area.

2). It is common to localize products, advertising, promotions, and sales efforts to fit the needs of geographical areas (regions, cities, and even neighborhoods).

3). Many firms are looking to cultivate as-yet untapped geographic territory.

Demographic segmentation calls for dividing the market into groups based on variables like age, gender, family size, family life-cycle, income, occupation, education, religion, race, and nationality.

1). Demographic factors are the most popular bases for segmenting customer groups.

2). The popularity of the method is due to the observed relationship that consumer needs, wants, and usage rates often vary closely with demographic variables.

3). Demographic variables are easier to measure than most other types of variables.

Age and life-cycle segmentation consists of offering different products or using different marketing approaches for different age and life-cycle groups.

1). Marketers must guard against stereotypes when using this form of segmentation.

2). While certain age and life-cycle groups do behave similarly, age is often a poor predictor of a person’s life-cycle, health, work or family status, needs, and buying power.

Gender segmentation calls for dividing a market into different groups based on gender.

1). This segmentation form has long been used for clothing, cosmetics, toiletries, and magazines.

2). New opportunities in this area are emerging such as automobiles, deodorants, and financial services.

3). A growing number of Web sites now target women.

Income segmentation consists of dividing a market into different income groups.

1). This form of segmentation has long been used by marketers for automobiles, boats, clothing, cosmetics, financial services, and travel.

2). Using this form, marketers must remember that they do not always have to target the affluent. Other income groups are also viable and profitable market segments.

Psychographic segmentation calls for dividing a market into different groups based on social class, lifestyle, or personality characteristics.

1). People in the same demographic class can exhibit very different psychographic characteristics.

2). As previously seen in Chapter 5, lifestyle also affects people’s interest in various goods, and the goods they buy express those lifestyles. This method of segmentation is gaining in popularity.

3). Personality variables can also be used to segment markets. Marketers will give their products personalities that correspond to consumer personalities. Products such as liquor, cosmetics, cigarettes, and insurance are cited as those that have used personality segmentation.

l. Behavioral segmentation involves dividing a market into groups based on consumer knowledge, attitudes, uses, or responses to a product.

1). Many marketers believe that behavior variables are the best starting point for building market segments.

2). Occasion segmentation consists of dividing the market into groups according to occasions when buyers get the idea to buy, actually make their purchase, or use the purchased item.

3). Benefit segmentation involves dividing the market into groups according to

the different benefits the consumers seek from the product.

a). Companies can use benefit segmentation to clarify the benefit segment to which they are appealing, its characteristics, and the major competing brands.

b). They can also search for new benefits and establish brands that deliver them.

4). User status can also be used to divide the market. Segments of nonusers, ex-users, potential users, first-time users, and regular users of a product are potential ways to segment.

5). Usage rates are another way that marketers segment markets. These categories might be light, medium, and heavy user groups.

6). Loyalty status can also be used to segment markets. Consumers can be loyal to brands, stores, and companies.

a). Consumers can be completely loyal, somewhat loyal, or not loyal at all.

b). An amazing amount of information can be uncovered by studying loyalty patterns.

Today there is a trend toward targeting multiple segments. Very often, companies begin their marketing with one targeted segment, then expand into other segments. This often boosts a company’s competitive advantage and knowledge of the customer base.

1). One of the most promising developments in multivariable segmentation is “geodemographic” segmentation.

2). Such organizations as Claritas help organizations to link U.S. Census data with lifestyle patterns.

Segmenting Business Markets

Consumer and business marketers use many of the same variables to segment their markets.

1). Business buyers can be segmented geographically or by benefits sought, user status, usage rate, or loyalty status.

2). Additional variables unique to this market would be business customer demographics (industry, company size), operating characteristics, purchasing approaches, situational factors, and personal characteristics.

3). By going after segments instead of the whole market, companies have a much better chance to deliver value to consumers and to receive maximum rewards for close attention to customer needs.

Segmenting International Markets

Companies can segment international markets using one or more of a combination of variables. The chief factors that can be used are:

1). Geographic location.

2). Economic factors.

3). Political and legal factors.

4). Cultural factors.

Many companies use an approach called intermarket segmentation. In this approach, companies form segments of consumers who have similar needs and buying behavior even though they are located in different countries.

Requirements for Effective Segmentation

There are many ways to segment, but not all segmentations are effective. To be useful, market segments must have certain characteristics. Among the most significant of these are:

1). Measurability is the degree to which the size, purchasing power, and profiles of a market segment can be measured.

2). Accessibility refers to the degree to which a market segment can be reached and served.

3). Substantiality refers to the degree to which a market segment is sufficiently large or profitable.

4). Differentiation refers to the degree to which a market segment can conceptually be distinguished and has the ability to respond differently to different marketing mix elements and programs.

5). Actionability is the degree to which effective programs can be designed for attracting and serving a given market segment.

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