Market Segmentation and Target Marketing
Why Do Market Segmentation and Target Marketing Make Sense?
Market segmentation is the process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead them to respond in similar ways to a particular product offering and marketing program. Target marketing requires evaluating the relative attractiveness of various segments (in terms of market potential, growth rate, competitive intensity, and other factors) and the firm’s mission and capabilities to deliver what each segment wants, in order to choose which segments it will serve.
These three decision processes – market segmentation, target marketing, and positioning – are closely linked and have strong interdependence. All must be well considered and implemented if the firm is to be successful in managing a given product market relationship.
Most Markets Are Heterogeneous
Because markets are rarely homogeneous in benefits wanted, purchase rates, and price and promotion elasticity’s, their response rates to products and marketing program differ. Variation among market segments in product preferences, size and growth in demand, media habits, and competitive structures further affect the differences and response rates. Thus, markets are complex entities that can be defined (segmented) in a variety of ways. The critical issue is to find an appropriate segmentation scheme that will facilitate target marketing, product positioning, and the formulation of successful marketing strategies and programs.
Today’s Market Realities Often Make Segmentation Imperative
Market segmentation has become increasingly important in the development of marketing strategies for several reasons. Finally, many marketing organizations have made it easier to implement sharply focused marketing programs by more sharply targeting their own services.
How Market Segments Are Best Defined?
There are many ways of dividing a market into segments
• Identify a homogeneous segment that differs from other segments. The process should identify one or more relatively homogeneous groups of prospective buyers with regard to their wants and needs and/or their likely responses to differences in the elements of the marketing mix – the 4 Ps (product, price, promotion, and place
• Specify criteria that define the segment. The segmentation criteria should measure or describe the segments clearly enough so that members can be readily identified and accessed, in order for the marketer to know whether a given prospective customer is or is not in the target market and in order to reach the prospective customer with advertising or other marketing communication messages.
• Determine segment size and potential. Finally, the segmentation process should determine the size and market potential of each segment for use in prioritizing which segments to pursue. Given these objectives, what kinds of segmentation criteria, or descriptors, are most useful? Marketers divide segmentation descriptors into three major categories for both consumer and organizational markets: demographic descriptors (which reflect who the target customers are), geographic descriptors (where they are), and behavioral descriptors of various kinds (how they behave with regard to their use and/or purchases of a given category of goods or services).
While firm demographics (age of firm, size of firm, industry, etc.) are useful in segmenting organizational markets, we usually think of demographics in terms of attributes of individual consumers. The second stage, micro segmentation , groups customers by the characteristics of the individuals who influence the purchasing decision – for instance, age, sex, and position within the organization. International markets are segmented in a similar hierarchical fashion, starting with countries, followed by groups of individuals or buying organizations.
Different locations vary in their sales potential, growth rates, customer needs, cultures, climates, service needs, and competitive structures, as well as purchase rates for a variety of goods.
Many segmentation schemes involve both demographic and geographic factors. Thus, retailers usually want to know something about the people who live within, say, a two-mile or five mile radius of their proposed new store.
There is no limit to the number of insightful ways successful marketers have segmented markets in behavioral terms.
Customer needs are expressed in benefits sought from a particular product or service. Different customers have different needs and thus attach different degrees of importance to the benefits offered by different products. In the end, the product that provides the best bundle of benefits – given the customer’s particular needs – is most likely to be purchased.
Product-Related Behavioral Descriptors
In addition to highly specific behavioral descriptors such as those just discussed, there are more general product related descriptors as well. They include product usage, loyalty, purchase predisposition, and purchase influence, all of which can be used to segment both consumer and industrial markets. Product usage is important because in many markets a small proportion of potential customers make a high percentage of all purchases.
General Behavioral Descriptors
More general behavioral descriptors, including lifestyle and social class, are also commonly used in consumer markets. In organizational markets, prospective customers differ in how they structure their purchasing activities and in the nature of the buying situations they are engaged in.
Segmentation by lifestyle, or psychographics, group’s consumers on the basis of their activities, interest, and opinions. From such information it is possible to infer what types of products and services appeal to a particular group, as well as how best to communicate with individuals in the group.
Every society has its status groupings based largely on similarities in income, education, and occupation. Because researchers have long documented the values of the various classes, it is possible to infer certain behavior concerning a given product.
Organizational or Firm Behavioral Descriptors
Purchasing structure and buying situation segmentation descriptors are unique to organizational markets. Purchasing structure is the degree to which the purchasing activity is centralized.
Innovative Segmentation: A Key to Marketing Breakthroughs
Objectives of the market segmentation process are as below.
• Identify a homogeneous segment that differs from others
• Specify criteria that define the segment
• Determine segment size and potential
Step 1: Select Market-Attractiveness and Competitive-Position Factors
Step 2: Weight Each Factor
Step 3: Rate Segments on Each Factor, Plot Results on Matrices
Market attractiveness factors
• Unmet customer needs for lateral stability, cushioning, and lightweight shoe have been identified. Score: 10.
• The distance runner segment is quite small, though growing, but it might lead to other segments in the future. Score: 7.
• Macro trends are largely favorable: fitness is ‘in,’ number of people in demographic groups likely to run is growing, global trade is increasing. Score 8.
Competitive position factors
• Opportunity for competitive advantage is somewhat favorable; proposed shoes will be differentiated, but shoe category seems mature, and Blue Ribbon Sports, as a new firm, has no track record. Score: 7.
• Resources are extremely limited, though management knows runners and distance running; n has strong reputation. Score: 5.
• Five forces are largely favorable (low buyer and supplier power, little threat of substitutes, low rivalry among existing firms), driving forces attractive. Score: 7.
Step 4: Project Future Position for Each Segment
Forecasting a market’s future is more difficult than assessing its current state. Managers or entrepreneurs should first determine how the market’s attractiveness is likely to change over the next three to five years. The starting point for this assessment is to consider possible shifts in customer needs and behavior, the entry or exit of competitors, and changes in their strategies.
Step 5: Choose Segments to Target, Allocate Resources
Managers should consider a market to be a desirable target only if it is strongly positive on at least one of the two dimensions of market attractiveness and potential competitive position and at least moderately positive on the other. The market attractiveness/ competitive position matrix offers general guidance for strategic objectives and allocation of resources for segments currently targeted and suggests which new segments to enter.
Different Targeting Strategies Suit Different Opportunities
Most successful entrepreneurial ventures target narrowly defined market segments at the outset.Three common targeting strategies are niche market, mass market and growth market strategies.
This strategy involves serving one or more segments that, while not the largest, consist of substantial numbers of customers seeking somewhat specialized benefits from a product or service. Such a strategy is designed to avoid direct competition with larger firms that are pursuing the bigger segments.
A business can pursue a mass market strategy in two ways. First, it can ignore any segment differences and design a single product and marketing program that will appeal to the largest number of consumers. The primary object of this strategy is to capture sufficient volume to gain economies of scale and a cost advantage. This strategy requires substantial resources, including production capacity, and good mass marketing capabilities. Consequently, it is favored by larger business units or by those whose parent corporation provides substantial support. A second approach to the mass market is to design separate products and marketing programs for the differing segments. This is often called differentiated marketing.
Businesses pursuing a growth market strategy often target one or more fast growth segments, even though they may not currently be very large. It is a strategy often favored by smaller competitors to avoid direct confrontations with larger firms while building volume and share.
Global Market Segmentation and Target Marketing
The traditional approach to global market segmentation has been to view a country or a group of countries as a single segment comprising all consumers. This approach is seriously flawed because it relies on country variables rather than consumer behavior, assumes homogeneity within the country segment, and ignores the possibility of the existence of homogeneous groups of consumers across country segments.