Market Segmentation

Chapter Objectives

1. Explain market segmentation, and identify several possible bases for segmenting markets.

2. Distinguish between the requirements for effective segmentation: measurability, accessibility, substantiality, actionability.

3. Outline the process of evaluating market segments and suggest some methods for selecting market segments.

4. Illustrate the concept of positioning for competitive advantage by offering specific examples.

5. Discuss choosing and implementing a positioning strategy, and contrast positioning based on product, service, personnel and image differentiation.

What is a Market?

• ALL ACTUAL AND POTENTIAL BUYERS WHO HAVE THE ABILITY AND WILLINGNESS TO PAY FOR A PRODUCT THAT WILL SATISFY THEIR NEEDS

Markets• Organisations that sell to consumer and business markets

recognise that they cannot appeal to all buyers in those markets, certainly not in the same way.

• Buyers are too numerous, too widely scattered, and too varied in what they want and in their buying practices to be targeted with a single approach.

• Different marketing firms can vary significantly in their ability to meet the needs of the different parts of the market.

• Therefore, rather than trying to compete across the entire market, often against superior competitors, each company must identify those parts of the market that it believes it can serve best.

Three Stages of Marketing

1. Mass marketing - is where the seller mass produces, mass

distributes and mass promotes the same product to all buyers.

• Aim is for low cost / low price, to achieve bigger share of the potential market

• Outcome - volume marketing, which leads to reduced costs in production and marketing

Cont’d

2. Product-variety marketing

- is where the seller produces two or more products that have different features; styles; quality; sizes etc.

• Aim is to meet changing consumer needs (e.g. different size product for different situations)

• Outcome - to provide purchase choice to retain customers as their tastes and situations change

Cont’d

3. Target marketing

- is where the seller identifies specific market segments, selects one or more of them, and develops a product and a marketing mix to meet the requirements of each segment.

• Outcome - a greater level of focus on those consumers most likely to buy. The solution is more appealing and therefore more competitive.

Cont’d

• The increased fragmentation of markets has led to:

• Micro-marketing, where companies modify their marketing programs to suit the needs and wants of specifically defined geographic; demographic; psychographic; or behavioural segments (the focus is now on an even more narrowly defined target).

• The ultimate form of target marketing is one-to-one, or mass-customised, marketing where a company adapts its product and its marketing program to the needs of a specific consumer or buying organisation.

Three Main Steps in Target Marketing

1. Market segmentation• Dividing a market into distinct groups of buyers with each

group having different needs; characteristics; or behaviour, which might require the development of separate products or marketing mixes for each group.

2. Market targeting• Evaluating each market segment’s attractiveness, and

selecting one or more of the market segments to enter.

3. Market positioning• Setting the competitive positioning for the product, and

creating a detailed marketing mix to achieve the position.

Market Segmentation

• Markets consist of buyers, and buyers differ in one or more ways such as: – In their wants; resources; location; buying attitudes;

and buying practices, and in their preferences for particular buying channels such as ordering by mail; by phone; via the Internet; or at a physical location.

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

A seller could develop a separate marketing program

for each buyer, - this is not usually a practical option.

Viable only for very high value items

Cont’d

Segmentation is the process of identifying specific characteristics of individual consumers or business firms, which are then used to divide a total market into meaningful and ‘targetable’ segments

The more specific the segment, the greater the possibility of developing an effective marketing mix

Market Segmentation, Targeting and Positioning

Bases for segmenting Consumer markets

• Geographic

• Demographic

• Psychographic

• Behavioural

Analysing Consumer Segments

• Geographic segmentation means dividing the market into different geographical units such as:

– Nations– Regions – States– Cities– Municipalities – Neighbourhoods

Cont’d

• Demographic segmentation is dividing the market into groups, based on variables such as:

– Age– Gender– Family size– Family life cycle - marital status/ children– Income/ occupation– Education– Religion– Race and nationality

Cont’d

• Psychographic segmentation divides buyers into different groups based on:

– Socio-economic status (maintain social position)

– Lifestyle (how time is spent)

– Personality characteristics, including what

motivates a consumer to buy

Cont’d

• Behavioural segmentation divides buyers into groups based on their knowledge of the product; their attitude towards it; the way they use it; and their responses to it.

– Occasions– Benefits sought– User status– Usage rate (potential/ regular/ non-user)– Loyalty status– Buyer-readiness stage (aware/ unaware)– Attitude (positive/ negative/ hostile)

Which of the following is an example of a behavioural segmentation variable?

A. generation

B. user status

C. personality

D. religion

E. social class

Which of the following is an example of a psychographic segmentation variable?

A. occupation

B. education level

C. readiness stage

D. lifestyle

E. usage rate

Business Market Segmentation

1. Demographic

2. Operating variables

3. Purchasing approaches

4. Situational factors

5. Personal characteristics

Cont’d

• Some of the variables used to segment consumer markets can also be applied to Business markets, although there are others that are specific only to B2B

• Refer to Table 7.2 on page 239 for the key segmentation variables used for Business markets.

Requirements for Effective Segmentation

• There are many ways to segment a market - but not all segmentations are effective. To be useful, market segments must have the following four characteristics:

– Measurability - the extent to which the size and purchasing power of the segments can be measured - needs to be assessed. However, some segment variables are difficult to measure.

– Accessibility - the extent to which segments can be reached and served. The ability to get the message through and make product available

Cont’d

– Substantiality - the extent to which the segments are large or profitable enough. A segment should be the largest possible homogeneous group worth targeting with a specifically developed marketing program

– Actionability - the extent to which a firm can develop effective programs to attract and serve the selected segments.

Evaluating Market Segments

• Marketing segmentation identifies the particular market segment opportunities available to a firm.

• The firm then needs to evaluate the various possible segments; decide on which segments to cover (the target); and how best to meet specific requirements.

Market Targeting: Evaluating Market Segments

• Segment size and growth– Collect and analyse data on current dollar sales;

projected sales growth rates; and expected profit margins for the various segments. Select segments that have the right size and growth characteristics.

– Size/ growth is relative - select what is best for the firm.

• Segment structural attractiveness– A segment might have desirable size and growth, and

still not be attractive from a profitability point of view. Need to examine the major structural factors that affect long-term segment attractiveness, such as:

strength of competitors; influence of suppliers; threat from substitute products.

Cont’d

• Marketing firm’s objectives and resources

– Even if a segment has positive size and growth, and is structurally attractive, the company must consider its own objectives and resources in relation to that segment. Some seemingly attractive segments could be quickly rejected because they do not fit with the company’s long-term objectives

– Does firm have the necessary resources and skills; can it deliver value, and gain competitive advantage?

Selecting Market Segments

• After evaluating different segments, a company hopes to find one or more market segments worth entering. It must then decide which, and how many, segments to serve.

• A target market consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The company can adopt one of three market-coverage strategies:

– Undifferentiated marketing (mass marketing)

– Differentiated marketing (multi-segment)

– Concentrated marketing (niche)

Cont’d• Undifferentiated marketing = (mass marketing)

– a company decides to ignore differences between segments and go after the whole market with a single market offering. It will focus on what is common in the needs of consumers, rather than worrying about what is different.

• Differentiated marketing = (multi-segment)– a company decides to target several market segments

and designs separate offerings (mix) for each. By providing product and marketing variations, it hopes for higher total sales and a stronger position within each market segment.

Cont’d

• Concentrated marketing = (niche)

– is especially appealing when company resources are limited.

– Instead of going after a small share of a large market, the company goes after a large share of one or a few sub-markets.

Advantages / Disadvantages

• Undifferentiated– Cost economies in production / distribution / inventory– Less likely to totally meet market needs; less competitive

• Differentiated– Can better meet market needs; higher level of repeat sales– Increased cost of production / marketing / inventory

• Concentrated– Better use of scarce resources - specialised approach – Not able to spread the risk; possibly open to attack

Local Marketing

• Local Marketing involves tailoring brands and promotions to the needs and wants of local customer groups; cities; towns; neighbourhoods, or even to specific stores.

• One-to-one (individual) marketing is an extreme form of customisation of both the product and the marketing communications

This is a form of Micromarketing

Choosing a Market-Coverage Strategy

• Many factors must be considered. Which strategy is best depends on the marketing organisation’s resources; product variability; stage in the life cycle; market variability; and competitors’ marketing strategies.

• Permission marketing has come to the fore - the process of converting strangers into friends, and friends into customers.

Cont’d

• Resources of the Organisation– Will influence what can / cannot be done

• Variability of the Product– Specialised products vs. undifferentiated products

• Stage in the Product Life Cycle– New product vs. established / declining product

• Variability of the Market– Degree of variation in consumer tastes / buying habits

• Strategy of Competitors– Will influence what should be done

Differentiation and Positioning

• Once a firm has decided on which segments of the market to enter, it must select a value proposition that differentiates it from competitors & appeals to buyers.

• Product position is the way the product is perceived by consumers on important attributes - the place the product occupies in consumers’ minds, relative to competing products.

• Marketers may follow several positioning strategies. They can position on specific product attributes; benefits; usage occasions; against a competitor; away from competitors; and by product classes.

Choosing and Implementing a Positioning Strategy

• Identifying a positional direction consists of 4 steps:– Identifying a set of possible competitive advantages on

which to build a position

– Selecting the right competitive advantages

– Selecting an overall positioning strategy

– Developing a positioning statement

• Identifying possible value differences– Perceptual mapping: Analysis to identify the ‘position’ of

the brand in the mind of the consumers. This involves consumers, or prospective consumers, rating brands against each other in terms or similarity or dissimilarity

Brand Position of Particular Department Stores

Identifying Possible Competitive Advantage

• Consumers typically choose products and services that give them the greatest value.

• The key to winning and keeping customers is to understand their needs and buying processes better than competitors and then deliver more value.– if a firm can position itself as delivering superior

value to selected target markets either by offering a lower price, or by providing more benefits to justify a higher price, the firm will be able to gain competitive advantage

Brand Repositioning Strategies

Differentiation

• A marketing organisation can differentiate itself or its market offering by:

– Product

– Services

– Personnel

– Image

Choosing the Right Competitive Advantages

• How many differences to promote?

– Some firms promote only one benefit and try to develop a unique selling proposition.

– Others may have to position themselves on more than one differentiating factor, especially if other firms are claiming to be the best on the same specific attribute.

Which Differences to Promote?

• A difference is worth establishing, only to the extent that it satisfies the following criteria:

Important - the difference delivers a highly valued benefit.Distinctive - competitors do not offer the difference.Superior - the difference is superior to other ways in which

consumers are able to obtain the same benefit.Communicable - the difference is communicable and

visible to the targeted buyers.Pre-emptive - competitors cannot easily copy the difference.Affordable - buyers can afford to pay for the difference.Profitable - firm can introduce the difference profitably.

Overall Positioning Strategy

• The full position of a brand is termed the brand’s value proposition.

• ‘More for more’ positioning involves providing the most upscale product or service, and charging a higher price to cover higher costs.

• ‘More for the same’ - companies can attack a competitor’s ‘more for more’ positioning by introducing a product that offers comparable quality, but at a lower price.

Cont’d

• ‘The same for less’ - a powerful value proposition that offers good deals.

• ‘Less for much less’ - meets the demand for products that offer less and cost less.

• ‘More for less’ - a winning value proposition, but may be impossible to maintain long term.

• Company and brand positioning should be summed up in a positioning statement.

Possible Value Propositions

Communicating and Delivering the Chosen Proposition

• Once it has chosen a position, the marketing organisation must take strong steps to deliver and communicate the desired position to target customers.

• Marketing mix efforts must support positioning strategy.

• Designing the marketing mix involves working out the tactical details of the positioning strategy.

• Position must be monitored/ adapted over time to match changes in consumer needs and competitors’ strategies.

• The position should evolve gradually as it adapts to the ever changing marketing environment.