Chapter 10 Target Markets: Segmentation, Evaluation, and Positioning

Chapter 10Target Markets:

Segmentation, Evaluation, and Positioning

10 | 3Copyright © Houghton Mifflin Company. All rights reserved.

Objectives

• Learn what a market is

• Understand differences among targeting strategies

• Become familiar with segmentation variables

• Know what segment profiles are and how theyare used

• Evaluate market segments

• Identify factors that influence selection of specific market segments

• Understand positioning

• Become familiar with sales forecasting methods


What are Markets

• Group of people seeking products in a specific product category (see Ch. 2 definition)

• Can be…– specific location (flea market)

– large geographic area

– relationship between supply and demand (market for given product)

– action word, as in market a product


Market Requirements

for a market to exist, the people in the aggregate must meet the following four requirements:

Need/desire for a particular product Have ability to purchase product Willing to use buying power Have authority to buy specific products


Types of market

• Consumer Markets: Purchasers and household members who intend to consume or benefit from the purchased products and do not buy products to make products. (B2C)

• Business Markets: markets in which buyers buy products for business purposes (B2B)


Target Market Selection Process


Target Market

• Is a group of people or organizations for which a business creates and maintains a marketing mix specifically designed to satisfy the needs of group members.

• The strategy used to select a target market is affected by target market characteristics, products attributes, and the organizations objectives and resources.


Step 1: Targeting Strategy


UndifferentiatedTargeting Strategy

• A strategy in which an organization defines an entire market for a particular product as its target market, designs a single market mix, and directs it at that market.

• The undifferentiated strategy is effective under two conditions. First, a large proportion of customers in a total market must have similar needs for the product (Homogenous). Second, the org must be able to develop and maintain a single marketing mix that satisfies customers’ needs.


Homogeneous Market

A market in which a large portion of customers have similar needs for a product.


Concentrated Targeting Strategy Through Market Segmentation


Heterogeneous Market

A market made up of individuals or organizations with diverse needs for products in a specific product class.

Not everyone wants the same type of car, furniture, or clothes. For such heterogeneous markets, market segmentation is appropriate.

Market segmentation is the process of dividing a total market into groups, or segments, consisting of people or organizations with relatively similar products needs.


Market Segment

Individuals, groups, or organizations sharing one or more similar characteristics that cause them to have similar product needs.


Conditions For Successful Market Segmentation

1. Customer product needs are heterogeneous

2. Segments identifiable and divisible

3. Market divided so segments can be compared on sales potential, costs, and profits

4. At least one segment has potential to justify marketing expense

5. Segment can be reached with a particular marketing mix


Concentrated Target Strategy

Market segmentation strategy in which an organization targets a single market segment using one marketing mix.

The main advantage of the concentrated strategy is that it allows a firm to specialize.

Specialization means that the company is putting all its eggs in one basket, which can be hazardous.

Moreover, when a firm penetrates one segment and becomes well entrenched, its popularity may keep it form moving into other segments.

Example on page 107


Differentiated Targeting Strategy Through Market Segmentation


Differentiated Targeting Strategy

A strategy in which an organization targets two or more segments by developing a marketing mix for each segment.

A company with excess production capacity may find a differentiated strategy advantageous because the sale of products to additional segments may absorb excess capacity.


Step 2: Determine Which Segmentation Variables to Use

• Segmentation Variable: characteristics of individuals, groups, or organizations used to divide a market into segments. For example, location, age gender, or rate of product usage can all be bases for segmenting markets.

• To select segmentation variable, several factors are considered. 1-The segmentation variable should relate to customers’ needs for, uses of, or behavior toward the product. For example, Stereo marketers might segment the stereo market based on income and age, but not on religion because people stereo needs do not differ due to religion.


Factors concerning segmentation variables

• 2- if individual or organization in a total market are to be classified accurately, the segmentation variable must be measurable. Age, location, and gender are measurable because such information can be obtained through observation or questioning.

• 3- a company resources and capabilities affect the number and size of segment variable used. The type of product and degree of variation in customers' needs also dictate the number and size of segments targeted.


Variables for Segmenting Consumer Markets


Demographic Variables

• Age

• Gender

• Race

• Ethnicity

• Income

• Education

• Occupation• Family size• Family life cycle• Religion• Social class


Age Group Spending Levels


Life Cycle Stages


Family Life Cycle Stages

Source: Jason Fields, “America’s Families and Living Arrangements: 2003,” Current Population Reports, U.S. Census

Bureau, 2003.



• Marketers rely on these demographic characteristics because they are often linked to customers’ needs and purchasing behaviors and can be readily measured. Example on page 109.

• Age is commonly used variable for segmentation purposes. Marketers need to be aware of age distribution and how that distribution is changing.

• Many marketers recognize the purchase influence of children and are targeting more marketing efforts at them.



• Gender is another demographic variable commonly used to segment markets, including the markets of clothing, soft drinks, nonprescription, toiletries, magazine, and even cigarettes. Example, Some deodorant marketers use gender segmentation.

• Marketers also use race and ethnicity as variable for segmenting markets and for such products as food, music, clothing, and cosmetics and for services.



• Because income strongly influences people’s product needs, it often provides a way to divide markets. Product markets segmented by income include sporting goods, housing , jewelry, clothing.

• Marketers also use many other demographic variables. For instance, dictionary publishing companies segment the market by educational level.

insurance companies segment markets using occupation.


Geographic Variables

• Climate

• Terrain

• City size

• Population density

• Urban/rural areas


Market Density

The number of potential customers within a unit of land area.

Market density may be useful segmentation variable because low-density markets often require different sales, advertising, and distribution activities than do high-density markets.


Geodemographic Segmentation

A method of market segmentation that clusters people in zip code areas and smaller neighborhood units based on lifestyle and demographic information.

Geodemographic segmentation allows marketers to engage in micromarketing.

Micromarketing is the focusing of precise marketing efforts on very small geographic markets, such as community and even neighborhood markets.


Micromarketing

An approach to market segmentation in which organizations focus precise marketing efforts on very small geographic markets.


Geographic variables

• Climate is commonly used as geographic segmentation variable because of its broad impact on people’s behavior and products needs. Product markets affected by climate include air-conditioning and heating equipment, clothing, gardening equipment, recreational products, and building materials.


Psychographic Variables

• Personality characteristics

• Motives

• Lifestyles


Psychographic Variables

• When appealing to personality characteristics, a marketer almost always selects one that many people view positively. Individual with this characteristics, as well as those who would like to have it, may be influenced to buy that marketer's brand.

• When motives are used to segment a market, the marketer is divided according to consumers' reasons for making purchase. Personal appearance, affiliation, status, safety, and health are examples of motives affecting the types of products purchased and the choice of stores in which they are bought.


Psychographic variables

• Lifestyle analysis provide a view of buyers because it encompasses numerous characteristics related to people’s activities (Work, hobbies, entertainment, sports), interests (Family, home, fashion, food, technology), and opinions (politics, social issues, education, the future).


Behavioristic Variables

• Dividing a market according to some feature of consumer behavior toward a product.

• For example, a market may be separated into users-classified as heavy, moderate, or light, and non users. To satisfy a specific group, such as heavy users, marketers may create a distinctive product, set special prices, or initiate special promotion and distribution activities.


Benefit Segmentation

-The division of a market according to benefits that consumers want from the product.

-By determining the desired benefits, marketers may be able to divide people into groups seeking certain sets of benefits.

- The effectiveness of such segmentation depends on three conditions: 1- the benefit sought must be identifiable 2- by using these benefits marketers must be able to divide people into segments. And 3- one or more of the resulting segments must be accessible to the firm’s marketing efforts.


Segmenting Business Markets

Geographic Location Ex. Lumber.

Type of Organization

Customer Size

Product Use (Raw materials)


Step 3: Develop MarketSegment Profiles

• A market segments profile describes the similarities among potential customers within a segment and explains the differences among people and organizations in different segments.

• A profile may cover such aspects as demographic characteristics, geographic factors, product benefits sought, lifestyle, brand preferences, and usage rates.

• Marketers use market segments profiles to assess the degree to which their possible products can match or fit potential customers' product needs.


Benefits of segments profile

• The use of market segment profile benefits marketers in several ways:

1-It helps a marketer determine which segment or segments are most attractive to the organization relative to the firms strengths, weaknesses, objectives, and resources.

2-While marketer may initially believe certain segments are quite attractive, development of market segment profile may yield information that indicates the opposite.

3-The information included in market segment profile can be highly useful in making marketing decision.


Step 4: Evaluate RelevantMarket Segments

© Microsoft

• Sales Estimates

– Market potential

– Company sales potential (breakdown and buildup)

• Competitive Assessment

• Cost Estimates


Product Level

• Potential sales for a market segment can be measured along several dimensions, including product level, geographic area, time, and level of competition.

• With respect to product level, potential sales can be estimated for specific product item ( for example Diet Coke) or an entire product line ( Coca cola Classic, Caffeine free Coke, Vanilla Coke…etc.

• A manager must also determine the geographic area to include in the estimates. In relation to time, sales estimates can be short range ( one year or less), medium range ( one to five years), or longer range ( longer than five years).

• The competitive level specifies whether sales are being estimated for single firm or for an entire industry.


Market Potential

• Market potential: is the total amount of a product that customers will purchase within a specific level of industry wide marketing activity. Market potential can be stated in terms of dollars or units.

• A segment’s market potential is affected by economic, sociocultural, and other environmental forces.

• Marketers must assume a certain general level of marketing effort in the industry when they estimate market potential.


Company sales potential

• Company sales potential: is the maximum percentage of market potential that an individual firm within an industry can expect to obtain for a specific product.

• There are several factors influence a company’s sales potential for a market segment: First, the market potential places absolute limits on the size of the company’s sales potential. Second, the magnitude of industry wide marketing activities has an indirect but definite impact on the company’s sales potential. (Example on page 118).Third, the intensity and effectiveness of a company’s marketing activities relative to competitors‘ marketing activities affect the size of the company’s sales potential.


Approaches to measure company sales potential

• There are two general approaches to measuring company sales potential: break down and buildup.

• In the breakdown approach, the marketing manager first develops a general economic forecast for specific time period.

• Next, the manager estimates market potential based on this economic forecast.

• Then the manager derives the company’s sales potential from the general economic forecast and estimate of market potential.


Approaches to measure company sales potential

• In the buildup approach, the marketing begins by estimating how much of a product a potential buyer in a specific geographic area, such as sales territory, will purchase in a given period.

• The manager then multiplies that amount by the total number of potential buyers in that area.

• The manager perform the same calculations for each area in which the firm sells products and then adds the total for each area to calculate market potential.

• To determine company sales potential, the manager must estimate based on planned levels of company marketing activities the proportion of the total market potential the company can obtain.


Competitive assessment

• Besides obtaining sales estimates, it is crucial to assess competitors already operating in the segments being considered. A market segment seems attractive based on sales estimates may prove much less so following a competitive assessment.

• Such an assessment should ask several questions about competitors:

• How many exist?• what are the strength and weaknesses?• Do several competitors have major market share and

together dominate the segment?


Competitive Assessment

• Can our company create a marketing mix to compete effectively against competitors marketing mix ?

• Is it likely that new competitors will enter this segment?

• If so, how will they affect our firm’s ability to compete successfully?

answers to such questions are important for proper assessment of the competition on potential market segment.


Cost Estimates

• An important cost consideration is whether the organization can effectively reach segment at cost equal or below competitors' cost. If the firm costs are likely to be higher, it will be unable to compete in that segment in the long run.


Step 5: Select SpecificTarget Markets

• Choose market segmentation

• Available resources to compete in market segmentation

• Confirm requirements of market segment

• Long-term growth of market segment



• If segmentation analysis shows customer needs to be fairly homogeneous, the firm’s management may decide to use the undifferentiated approach. However, if customers needs are heterogeneous, which is more likely, one or more target market must be selected. On the other hand, marketers may decide not to enter and compete in any of the segment.



• The firm’s management must investigate whether the organization has the financial resources, managerial skills, employee expertise, and facilities to enter and compete effectively in selected segments.

• Furthermore, the requirements of some markets segments may be at odds with the firm’s overall objectives, and the possibility of legal problems, conflicts with interests groups, and technological advancements could make certain segment unattractive.

• In addition when prospects for long-term growth are taken into account, some segments may appear very attractive and other less attractive.


Developing Sales Forecast

Sales forecast:

- The amount of a product a company expects to sell during a specific period at a specified level of marketing activities.

Company sales potential:

- An assessment of what sales are possible at various levels of marketing activities, assuming certain environmental conditions will exist.


Executive Judgment

A sales forecasting method based on the intuition of one or more executives.

Executive judgment may work reasonably well when product demand is relatively stable and forecaster has years of market related experience.

However, because intuition is swayed most heavily by recent experience. The forecaster may be overly optimistic or overly pessimistic.


Surveys

Customer Forecasting

Sales Force Forecasting

Expert Forecasting

Delphi Technique

Time Series Analysis

Trend Analysis

Regression Analysis


Survey

• In a customer forecasting survey, marketers ask customers what types and quantities of products they intend to buy during a specific period.

• This approach may be useful to a business with relatively few customers. intel example page 120.


Sales force forecasting survey

• In a sales force forecasting survey, the firm’s salespeople estimate anticipated sales in their territories for a specified period.

• The forecaster combines these territorial estimates to arrive at a tentative forecast.

• Look at a marketer’s reasons to survey the sales staff on page 120.


Expert Forecasting Survey

• Sales forecast prepared by experts outside the firm, such as economists, management consultants, advertising executives, or college professors.

• Using experts is expedient and relatively inexpensive. However, because they work outside the firm, these forecasts may be less motivated than company personnel to do an effective job.


Delphi Technique

• Delphi technique: a procedure in which experts create initial forecasts, submit them to the company for averaging, and then refine the forecast.

• The premise is that the experts will use the averaged results when making refined forecasts and these forecasts will be in a narrower range.

• The procedure may be repeated several times several times until the experts, each working separately, reach a consensus on the forecasts.

• The ultimate goal in using the Delphi technique is to develop a highly accurate sales forecasts.


Market Test

Making a product available to buyers in one or more test areas and measuring purchases and consumer responses to marketing efforts.

A market test provides information about customers' actual rather than intended purchases.

In addition, purchase volume can be evaluated in relation to the intensity of other marketing activities such as advertising, in store promotion, pricing, packaging, and distribution.

Forecasters base their sales estimates for larger geographic units on customer response in test areas.


Market Test

• Because it does not require historical sales data, a market test is effective for forecasting sales volume of new products or sales of existing products in new geographic areas.

• A market test also gives a marketer an opportunity to test various elements of the marketing mix.

• These tests are often time consuming and expensive. In addition, marketer cannot be certain that consumers response during a market test represents the total market response or that such a response will continue in the future.


Using MultipleForecasting Methods

• Diverse product lines

• Product sold to different market segments

• Variation in length of needed forecasts

• Verifying results of one method by using others

Documents

Chapter 10 Target Markets: Segmentation, Evaluation, and Positioning