CHAPTE R

IDENTIFYING MARKET SEGMENTS AND TARGETS

LEARNING OBJECTIVES After reading this chapter, students should:

Know what are the different levels of market segmentation Know how a company can divide a market into segments Know how a company should choose the most attractive target markets Know what are the requirements for effective segmentation

CHAPTER SUMMARY Target marketing includes three activities: market segmentation, market targeting, and market positioning. We can target markets at four levels: segments, niches, local areas, and individuals. Market segments are large, identifiable groups within a market. A niche is a more narrowly defined group. Globalization and the Internet have made niche marketing more feasible to many. Marketers appeal to local markets through grassroots marketing for trading areas, neighborhoods, and even individual stores. More companies now practice individual and mass customization. The future is likely to see more self-marketing, a form of marketing in which individual consumers take the initiative in designing products and brands. There are two bases for segmenting consumer markets: consumer characteristics and consumer responses. The major segmentation variables for consumer markets are geographic, demographic, psychographic, and behavioral. Marketers use them singly or in combination. Business marketers use all these variables along with operating variables, purchasing approaches, and situational factors. To be useful, market segments must be measurable, substantial, accessible, differentiable, and actionable. A firm has to evaluate the various segments and decide how many and which ones to target: a single segment, several segments, a specific product, a specific market, or the full market. If it serves the full market, it must choose between differentiated and undifferentiated marketing. Firms must also monitor segment relationships, and seek 228

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economies of scope and the potential for marketing to super segments. Marketers must develop segment-by-segment invasion plans and choose target markets in a socially responsible manner at all times. OPENING THOUGHT The first challenges presented in this chapter are the concepts of market segmentation and the segmentation processes used by marketing firms. Students may have difficulty understanding the various steps of the segmentation process as well as differentiating between target markets and market positioning. The instructor is urged to use personal examples of target marketsthe differences between the instructors age cohort and that of his/her studentsfor example in illustrating the different markets. Second, the concepts of consumer characteristics and responses may be new to many students as it applies across different age groups and different consumers. Students who have little contact with other people outside their sphere of influence may have a hard time realizing that other consumers hold differing views and have different usages for product and services. Suggestions to help the students understand the degree of sophistication used by marketers include using the Claritas PRIZM Web site during the class lecture, pinpointed by a students zip code for example, to show the amount of information available to marketers. Additional examples for classroom demonstrations include asking students to research information off the Internet on their particular favorite product and information by their zip code or other criteria. Many firms provide differing products to different consumers, Toyota, for example offers the Toyota line of cars and the Lexus family of cars. Both of these brands can be used to illustrate product differentiation and target marketing. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS 1. Students should turn in their market segmentation segment of their semester-long new product or service report. 2. Students should select a product or service that they are familiar with, such as jeans, computers, or personal CD players. Once these items are selected, the students must undertake research into the specific items: target market and market segmentation. Student reports should contain information as to: How large is the target market, what is the future growth potential of this target market, how do/does the marketer reach this target market and so on? The second section of this project is for the students to re-position this product to another market segment. For example, if the students select personal CD players as there product of choice, and confirm that the target market for this is Gen Y, then the students should define how the manufacturers of

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personal CD players will attempt to re-position the product to attract the baby boomer generation to increase their purchases of personal CD players. 3. Sonic PDA Marketing Plan Market segmentation is an important part of any marketing plan. It is the first step in the STP process that precedes any marketing strategy: segmentation, targeting, and positioning. The purpose of STP is to identify and describe distinct market segments, target-specific segments, and then pinpoint the differentiating benefits to being stressed in marketing. In your role as Jane Melodys assistant, you are responsible for market segmentation and targeting for Sonics PDA product. Look at the SWOT Analysis, Market Description, and Competitive Review sections and then answer: Which variables should Sonic use to segment its consumer markets? Which variables should Sonic use to segment its business markets? How can Sonic evaluate the attractiveness of each identified segment? Should Sonic pursue full market coverage, market specialization, product specialization, selective specialization, or single-segment concentration? Why?

Summarize your conclusions in a written marketing plan or enter them in the market Demographics and Target Markets sections of Marketing Plan Pro. Also note any additional research you may need in the Marketing Research Section of Marketing Plan Pro. ASSIGNMENTS The population of Americans over 50 years of age will swell to 115 million in the next 25 years. In small groups, have the students detail the demographic information on this group of Americans (ages, buying power, perception of themselves, etc.) and suggest some key marketing opportunities mined from this information. For example, if seniors often make buying decisions based on lifestyle and not age, as the vignette mentions, does this information present marketing opportunities for such industries as travel, biomedical industries, at-home exercise equipment, and automobiles? If so, who is going to be affected and to what extent? Student answers should contain detailed demographic information about this target market and should draw a connection between what the information says and what is the potential for marketers. The upcoming demographic changes for the US population calls for Hispanic to be the largest demographic segment in the US by 2050. Assuming that this is true, either in small groups or individually, ask the students to comment on how will this demographic shift change the segmentation in: a) the grocery industry, b) the fast food industry, and c) the casual dinning industry. Student answers should include key demographic and lifestyle facts and figures about these markets and their consumers. The firm Claritas, Inc. has developed a geoclustering system called PRIZM. Assign students the task of visiting this site and collecting the marketing information available 230

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for their particular zip code (home or schools). In a report, ask the students to comment on the accuracy, implications of, and usefulness, of this information for marketers. How can a marketer target his/her audience using PRIZM? Figure 8.4 outlines the major VALS segmentation (www.sric-bi.com). Students are asked to characterize either themselves, family members, or others and place them in one of these groups. How closely does person the student selected, fit the profile? If so, can the marketer rely on these characterizations in mapping out marketing plans? Are there major differences? If major differences exist, what impact does this have on marketers developing marketing plans? Marketing Insight, Marketing to Generation Y, is a compilation of thoughts and notes from a number of sources. Ask the students to read each of these sources and be prepared to share their thoughts as well as comments about what they have read in class. Specifically, are these authors on-target when it comes to characterizing their generation? Are these insights an oversimplification of the buying habits of their generation? Are there any missing insights from these readings that will have a profound impact on future marketing strategies? Effective segmentation criteria are necessary for target market identification. Market segments must be measurable, substantial, accessible, differentiable, and actionable. However, not all segmentation schemes are usefulthe text uses table salt buyers for example. Students are to provide three examples of those products or services in which: segmentation criteria are not necessary and three examples of where segmentation criteria are an absolute necessity. Students are to exchange their findings and explain these differences. Additional discussion (or assignment) could be to have the students devise a segmentation strategy for the products or services that they found not currently, where segmentation criteria are necessary. In other words, to create a segmentation distinction fortable salt! END-OF-CHAPTER SUPPORT MARKETING DEBATEIs Mass Marketing Dead? With marketers, increasingly adopting more and more refined market segmentations schemes fueled by the Internet and other customization effortssome critics claim that mass marketing is dead. Others counter that there will always be room for large brands that employ marketing programs targeting the mass market. Take a position: Mass marketing is dead versus mass marketing is still a viable way to build a profitable brand. Pro: People are consumers and people have a number of basic personal and societal needs that transcends individuality. Certain basic human physical needs (food, clothing, and shelter, for example) can be best met through mass marketing. In addition, consumers desire low prices and functionality in some of their basic products and services. Mass marketing allows the firm to foster the lowest price through economies of production,

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distribution, and marketing. Additionally, people like to have some degree of uncomplications in their daily life that is best served through mass produced products. Asking the consumer to make too many choices, can backfire on marketers as it can overly complicate and stress consumersfor example, the design of a new home can be both a rewarding and stressful experience; the intended owner(s) is(are) asked to make literally hundreds of decisions about size, floor plans, colors, and options throughout the process. Not complicating a consumers life, through mass production and mass marketing of products can create a viable marketing niche for companies. Con: People are consumers and with the plethora of product and service choices available to solve their problems today, a firm must produce individual and customized products to compete. Basic human needs and wants can be delivered to the consumer by a wide range of choices. Technology has given the consumer the power and ability to interact with manufacturers in producing the exact product, with the exact features, and at the target price desired. Consumers are better educated and better informed than previous generations. Consumers are also more sophisticated than ever before. These increases in information, technology, and sophistication are causing firms to respond to the consumers wishes for individuality. Accepting the concept of individuality in the production of goods and services is the only option for many firms. Individuality and the service that that concept demands can lead to a supplier-consumer relationship that can and will build strong brand preferences. Those firms who choose not to compete or fail to compete in these arenas run the risk of falling behind competition and in experiencing the subsequent losses in market share and profits. MARKETING DISCUSSIONDescriptive Versus Behavioral Market Segmentation Schemes Think of various product categories. How would you classify yourself in terms of the various segmentation schemes? How would marketing be more or less-effective for you depending on the segment involved? How would you contrast demographic versus behavioral segment schemes? Which ones do you think would be most effective for marketers trying to sell to you? Suggested Response: Each students answer will vary depending upon the product chosen. However, all answers should contain some of the following terms. Niche markets Local marketing Customerization marketing Geographic segmentation Age and life-cycle stage Life stage Gender Income Generation Social class Psychographic segments (VALS) 232

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Behavioral variables Usage rates Buyer-readiness stages Loyalty status DETAILED CHAPTER OUTLINE Companies cannot connect with all customers in large, broad, or diverse markets. But they can divide such markets into groups of consumers or segments with distinct needs and wants. A company then needs to identify which market segments it can serve effectively. This decision requires a keen understanding of consumer behavior and careful strategic thinking. To develop the best marketing plans, managers need to understand what makes each segment unique and different. To compete more effectively, many companies are now embracing target marketing. Effective target marketing requires that marketers: A) Identify and profile distinct groups of buyers who differ in their needs and preferences. B) Select one or more market segments to enter. C) For each target market, establish and communicate the distinctive benefit(s) of the companys market offering. Levels of Market Segmentation The starting point for discussing segmentation is mass marketing. In mass marketing, the seller engages in the mass production, mass distribution, and mass promotion of one product for all buyers. A) The argument for mass marketing is that it creates the largest potential market, which leads, to the lowest costs that in turn can lead to lower prices or higher margins. Segment Marketing A market segment consists of a group of customers who share a similar set of needs and wants. A) The marketer does not create the segments. B) The marketers task is to identify the segments and decide which one(s) to target. C) A flexible market offering consists of two parts: 1) A naked solution containing the product and service elements that all segment members value 2) Discretionary options that some segment members value. D) Market segments can be defined in many different ways: a. b. c. d. One way to carve up a market is to identify preference segments Homogeneous preferences Diffused preferences Clustered preferences 233

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Niche Marketing A niche is a more narrowly defined customer group seeking a distinctive mix of benefits. Marketers usually identify niches by dividing a segment into sub-segments. A) Niche marketers presumably understand their customers needs so well that the customers willingly pay a premium. B) Globalization has facilitated niche marketing. C) The low cost of setting up shop on the Internet has led to many small business start-ups aimed at niches. Local Marketing Target marketing is leading to marketing programs tailored to the needs and wants of local customer groups. A) Local marketing reflects a growing trend called grassroots marketing. Marketing Insight: Chasing the long tail The advent of online commerce has led to a shift in consumer buying patterns, contributing to the shifting of demand down the tail, from hits ot niches in a number of product categories. Breakthrough Marketing: HSBC Highlights how HSBC wants to be known as the worlds local bank, and how it pulls its worldwide businesses together under a single global brand. Individual Marketing The ultimate level of segmentation leads to segments of one, customized marketing, or one-to-one marketing A) buy. Today customers are taking more individual initiative in determining what and how to

B) Wind and Rangaswamy see the Choiceboard as a movement toward customerizing the firm. Customerization combines operationally driven mass customization with customized marketing in a way that empowers consumers to design the product and service offering of their choice. A) Each business unit will have to decide whether it would gain more by designing its business system to create offering for segments or for individuals. B) Customization is certainly not for every company.

BASES FOR SEGMENTING CONSUMER MARKETS Two broad groups of variables are used to segment consumer markets. A) Descriptive characteristics: geographic, demographics, and psychographic. B) Behavioral considerations: such as consumer responses to benefits, use occasions, or brands 234

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Regardless of which type of segmentation scheme is employed, the key is that the marketing program can be profitably adjusted to recognize customer differences. Geographic Segmentation Geographic segmentation calls for dividing the market into different geographical units. A) More and more, regional marketing means marketing right down to a specific zip code. B) Claritas, Inc. has developed a geoclustering approach called PRIZM that classifies neighborhoods into distinct groups and lifestyle segments called PRIZM Clusters. Here are four examples of PRIZM clusters: 1. Young Digerati 2. Beltway Boomers 3. The Cosmopolitans 4. Old Milltowns C) Marketers can use PRIZM to answer a variety of questions. Demographic Segmentation In demographic segmentation, the market is divided into groups on the basis of variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality, and social class. A) A) Consumer needs, wants, usage rates, and product and brand preferences are often associated with demographic variables. B) Demographic variables are easy to measure. Age and Life-Cycle Stage A) Consumer wants and abilities change with age. Life Stage A) Persons in the same part of the life cycle may differ in their life stage. Life stage defines a persons major concern. These life stages present opportunities for marketers who can help people cope with their major concerns. Gender A) Men and women tend to have different attitudinal and behavioral orientations, based partly on genetic makeup and partly on socialization. B) Some traditionally more male-orientated markets, are beginning to recognize gender segmentation, changing how they design and sell their products. Income A) Income segmentation is a long-standing practice in product and service categories. B) However, income does not always predict the best customers for a given product. C) Increasingly, companies are finding that their markets are hourglass-shaped as middle-market Americans migrate toward more premium products. Marketing Insight A new pattern in consumer behavior has emerged in recent years: New Luxury and in order to trade up on to these brands that offer emotional benefits, consumers often trade down by shopping at discounters.

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Generation A) up. B) 1)

Each generation is profoundly influenced by the times in which it grows Demographers call these groups cohorts. They share similar outlooks and values. 2) Marketers often advertise to a cohort group by using icons and images prominent in their experiences.

Marketing Insight: Marketing to generation Y The influences that shaped Gen Y are important to marketers because this cohort will shape consumer and business markets for years to come. Members of this cohort are often turned off by overt branding practices and a hard sell marketers must use different and often unconventional approaches to reach them. C) Generational cohorts also influence each other. D) Marketers often advertise to a cohort by using the icons and images prominent in its experiences. Social Class A) for consumers. B) specific social classes. Social class has a strong influence on preferences Many companies design products and services for

Psychographic Segmentation A) Psychographics is the science of using psychology and demographics to better understand consumers. B) In psychographic segmentation, buyers are divided into different groups on the basis of lifestyle or personality or values. C) One of the most popular commercially available classification systems is SRI Consulting Business Intelligences VALS framework. 1) The major tendencies of the four groups with high resources are: a.Innovators b.Thinkers c.Achievers d.Experiencers 2) The major tendencies of the four groups with lower resources are: a.Believers b.Strivers c.Makers 236

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d.Survivors

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Behavioral Segmentation Many marketers believe behavioral variables are the best starting points for constructing market segments: )A Occasions: can be defined in terms of the time of day, week, month, year, or other well-defined temporal aspects of a consumers life. )B Benefits: Not everyone who buys a product wants the same benefits from it. )C User Status: Every product has its nonusers, ex-users, potential users, firsttime users, and regular users. )D Usage rate: Light, medium, and heavy product users. )E Buyer-Readiness stage: unaware, aware, informed, interested, desire, and intend to buy. )F Loyalty status: )1 Hard-core loyals )2 Split loyals )3 Shifting loyals )4 Switchers )G The five attitudes about products are: enthusiastic, positive, indifferent, negative, and hostile The Conversion Model The Conversion Model has been developed to measure the strength of the psychological commitment between brands, consumers, and their openness to change. A) The model segments users of a brand into four groups based on strength of commitment from high to low: 1) Convertible 2) Shallow 3) Average 4) Entrenched B) The model also classifies non-users of a brand into four groups based on their balance of disposition and openness to trying the brand, from low to high: 1) Strongly unavailable 2) Weakly unavailable 3) Ambivalent 4) Available BASIS FOR SEGMENTING BUSINESS MARKETS Business markets can be segmented with some of the variables used in consumer market segmentation but business marketers also use other variables. Within a given target market industry and customer size, a company can segment further by purchase criteria. Business marketers generally identify segments through a sequential process.

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MARKET TARGETING Once a firm has identified its market-segment opportunities, it must decide how many and which ones to target. This has lead some researchers to advocate a needs-based market segmentation approach. Effective Segmentation Criteria To be useful, market segments must rate favorable on five key criteria: )A Measurable )B )C )D )E Substantial Accessible Differentiable Actionable

Evaluating and Selecting the Market Segments In evaluating different market segments, the firm must look at two factors: The segments overall attractiveness and the companys objectives and resources. A) Single-segment concentration 1) Through concentrated marketing, the firm gains a strong knowledge of the segments needs and achieves a strong market presence. 2) However, there are risks, a market segment can turn sour, or a competitor may invade the segment. 3) For these reasons, many companies prefer to operate in more than one segment. 4) Companies can try to operate in super-segments rather than in isolated segments. a. A super-segment is a set of segments sharing some exploitable similarity. B) Selective specialization 1) The firm selects a number of segments, each objectively attractive and appropriate. 2) This multi-segment strategy has the advantage of diversifying the firms risk. C) Product specialization 1) The firm makes a certain product that it sells to several different market segments. D) Market Specialization 1) The firm concentrates on serving many needs of a particular customer group. E) Full market coverage 1) The firm attempts to serve all customer groups with all the products they might need. 2) In undifferentiated marketing, the firm ignores segment differences and goes after the whole market with one offer.

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3) In differentiated marketing, the firm operates in several market segments and designs different products for each segment. F) Differentiated Marketing Costs Differentiated marketing typically creates more total sales than undifferentiated marketing but also increases the cost of doing business. Additional Considerations Three other considerations must be taken into account in evaluating and selecting segments: segment-by-segment invasion plans, updating segmentation schemes, and ethical choice of market targets. A) Segment-by-segment invasion plans 1) A company would be wise to enter one segment at a time. 2) A companys invasion plans can be thwarted when it confronts blocked markets. 3) The problem of entering blocked markets calls for a megamarketing approach. 4) Megamarketing is the strategic coordination of economic, psychological, political, and public-relations skills, to gain the cooperation of a number of parties in order to enter or operate in a given market. 5) Once in, a multinational must be on its best behavior. This calls for wellthought-out civic positioning. Ethical Choice of Market Targets Market targeting generates public controversy. The public is concerned when marketers take unfair advantage of vulnerable groups or promote potentially harmful products.

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