Market Segmentation, Target Marketing, and Positioning
Lecture notes/chapter outline
A. The Basics of Market Segmentation
An organization can choose to sell to everyone in the market or it can choose to segment a large market into smaller groups.
1. Mass Marketing—appropriate strategy when demand is homogeneous, or every potential customer has the same basic need that can be satisfied in the same basic way, and with the same marketing mix.
2. Market Segmentation—process of dividing a large market into smaller groups or clusters of customers with similar wants and needs and responses to marketing activities and programs.
3. Why Subdivide Markets?—globalization, increased numbers of competitors, more diversity among customers, technology, and other factors encourage the use of segmentation strategies to reach more narrowly defined customer segments with highly targeted marketing mixes.
4. Customer Value and Target Marketing—customer satisfaction is related closely to “value” as perceived by the customers themselves; organizations must not only deliver value to their customers but also do so better than the competition.
B. Target Marketing Strategies
The nature of customer demand patterns determines the type of marketing strategy to be pursued, i.e., whether to target the entire market or focus on one or more distinctly different segments.
(Transparency 7A: “A Comparison of Target Marketing Strategies”)
1. A Multi-Segment Marketing Strategy—clustered or selective specialization strategy; each segment is treated as a unique market, with its own unique marketing mix.
2. A Single-Segment Marketing Strategy—concentrated target marketing strategy used for a single-segment market with a distinct set of needs; approaches include niche marketing and one-to-one marketing.
a. Niche marketing—strategy is highly focused on a single segment that seeks special benefits; marketer must have distinct advantage over competitors and be able to satisfy customers with superior goods and services.
b. One-to-one marketing strategy—comprehensive databases and communications technology make it possible to narrow down markets more precisely, resulting in mass customization and micro-marketing strategies where needs of each individual customer are considered.
C. The Market-Segmentation Process
Market segmentation starts with a commitment to satisfy one or more groups of customers, requiring a thorough knowledge of both the targeted customers and the benefits of the goods and services being offered. Segmentation strategies also must be consistent with the organization’s mission, policies, goals, and ability to provide the desired benefits
(Transparency 7B: “The Market Segmentation Process”)
1. Steps in the Segmentation Process
Five major steps are involved in dividing markets into meaningful segments, although these steps and their description may vary from one situation to another.
a. Define and analyze the market—determine market parameters (based on characteristics that may include or exclude customers from a group) within organization’s mission and business definition, as well as its strategic intent.
b. Identify and describe potential segments—decide on the most useful dimensions or variables for selecting members of potential market segments; then aggregate customers into homogeneous groups, develop a profile of the characteristics of each group, etc.
c. Select the segment(s) to be served—select segments by evaluating against predetermined criteria, then rank according to the organization’s ability to serve the market profitably while providing customer satisfaction.
d. Determine the product positioning strategy—determine the best “fit” between a product and a market according to features most desired by customers; consider competitors’ positioning strategies, organizational goals, and the market situation.
e. Design and implement the marketing program—develop a tactical plan (marketing mix) and determine objectives for the marketing program; all elements of the marketing mix must be consistent with the selected positioning strategy.
2. Criteria for Effective Segmentation
Because of the costs associated with the development and implementation of a market segmentation strategy, each segment must meet certain basic criteria.
(Transparency 7C: “Criteria for Effective Segmentation”)
a. The organization must be able to identify and measure each segment. Some variables are easier to identify and measure objectively than others (i.e., demographics such as age, population statistics, etc.), while others are more subjective (i.e., lifestyle dimensions such as attitudes, etc.) Both objective (quantitative) and subjective (qualitative) information about a potential segment should be considered.
b. The market must be substantial enough. The segment must be sufficiently large, with substantial potential to generate desired revenue and profit levels. Multiple criteria are used to measure the size and profitability of an identified segment, and the organization also must consider its ability to serve this segment profitably.
c. The organization must be able to reach customers. A market must be accessible in terms of the availability of distribution channels, advertising media, personal selling, and other aspects of the marketing mix that are used to reach the market. Barriers also may include unfavorable laws and regulations, etc.
d. Customers in the selected segment must be responsive. Customers must have the money and willingness to buy the good or service offered.
e. Characteristics of the segment are relatively stable over a long period. Segmentation is a long-term strategy, consistent with the organization’s mission and long-term corporate objectives. Markets characterized by volatility and uncertainty make it difficult to forecast demand patterns and plan future actions.
D. Selection of Market Segments
Variables used to segment markets should be selected for their usefulness in forecasting sales and predicting customer response to the company’s offer, since a unique target marketing strategy is designed to appeal to the common characteristics shared by individuals within a given segment.
1. Bases for Segmenting Consumer Markets
Dimensions used to divide consumer markets into segments include both objective and subjective dimensions, as noted below.
a. Demographic and socioeconomic descriptors—frequently used demographics include age, gender, marital status, household size and lifecycle stage, religion, race/ethnic group, and nationality; frequently used socioeconomic descriptors include income, occupation, education, social class, and asset ownership.
b. Geographic descriptors—ranging from location of small group of customers to the entire world, including country, region, state, county, metro area, zip code, neighborhood, etc.
c. Behavioral and situational descriptors—based on ways that consumers buy and use goods and services, including consumers’ status as present, past, or future user (or nonuser) of product class, brand, or supplier.
d. Psychological and psychographic descriptors—difficult to measure, but useful for product positioning, promotional messages and media, distribution strategies, etc.; include consumer lifestyles as predictor of buyer behavior.
e. Benefits sought—of particular importance to customers; generally involves quality, value, and service as wanted benefits; emphasis on convenience and self-improvement.
2. Bases for Segmenting Business-to-Business Markets
Many general segmentation variables are used to segment both consumer and business markets. However, the specific dimensions within each category are selected for their predictability and marketing applications for business customers.
a. Demographic descriptors—most widely used dimension is industry classification (NAICS code); others include the size (sales, number of employees or locations), age, etc. of an organization, and how the product will be used by customers (OEM, resale, etc.).
b. Geographic descriptors—many industries are concentrated in one or a few geographic locations; domestic and overseas markets can be segmented on the basis of geography, economic conditions, population size, etc.
c. Behavioral and situational descriptors—frequently used dimensions include technology (high-/low-tech, innovative/conservative, etc.), usage (heavy, medium, light, nonusers), organization-related variables (e.g., buying policies), and purchase situation (nature of purchase, degree of customization needed, readiness to buy, etc.).
d. Psychological and psychographic descriptors—applies to the individual or group that makes the final buying decision (or may reflect the overall organizational culture); includes attitudes toward important factors, personal traits, etc.
e. Benefits sought—some benefits most frequently sought by organizations include value (low price/high quality), service, delivery based on economic motives and price sensitivity, and desire for convenience (logistics, service, etc.).
3. Combining Variables to Identify Segments
No one variable is sufficiently comprehensive to use in identifying market segments. Start with the most important dimension(s), then refine the list of variables until it is no longer useful; focus on combinations of variables that predict purchase for selected segment.
4. International Implications of Market Segmentation
Rather than treating each country as a single segment with similar needs and wants, in today’s global society it is more meaningful to identify similarities among consumers across multiple overseas markets (e.g., lifestyles, leisure activities, etc.).
5. Technology and Marketing Intelligence as Segmentation Tools
Segmentation decisions require in-depth knowledge of the market gained from marketing research and the company’s marketing intelligence (MIS) and decision support (MDSS) systems that make it possible to manage large customer databases.
6. Management Tools
a. VALS2—this values and lifestyle measure is used frequently to classify consumers into eight lifestyle segments, according to lifestyle and psychographics; the focus is on consumer attitudes and values based on self-orientation and resources.
(Transparency 7D: “VALS2 Consumer Lifestyle Segments”)
b. PRIZM and GLOBAL SCAN—two popular systems of geolifestyle and geodemographic analysis; used to segment markets based on people who share similar cultural backgrounds, socioeconomic status, and perspectives. PRIZM can profile U.S. neighborhoods into 62 lifestyle clusters; GLOBAL SCAN identifies five global segments based on nationality, demographics, and values.
E. Ethical Issues in Market Segmentation
The nature of target marketing is such that some customers are “in” and some are “out” of the group, causing a potential ethical dilemma for some marketers (e.g., markets selected or rejected on the basis of age, race, national origin, etc.).
F. Positioning Strategies
Positioning is what you do to the mind of the customer—not what you do to the product.
(Transparency 7E: “Perceptual Mapping and Positioning Decisions”)
1. Positioning versus Differentiation—these concepts are related but not identical. Positioning refers to customer perceptions of a product image or benefits versus competition. Product differentiation refers to the product being sold and the features that differentiate it from competitors’ offerings (e.g., physical differences, services, marketing communications, etc.).
2. The Positioning Process—includes the following steps:
(Transparency 7F: “Steps in the Positioning Process”)
a. Identify the target market.
b. Determine specific customer wants, needs, benefits desired.
c. Analyze attributes and perceived images of present and potential competitors.
d. Compare your position and that of competitors on each dimension valued by customers (perceptual mapping).
e. Identify a unique position that offers desired benefits to target market that are not offered by competitors.
f. Design marketing program to communicate benefits and persuade customers.
g. Continue to assess/reassess present and potential target markets, competitors, and marketing efforts.
3. Customer Value and Positioning—the “value proposition” is the (positioning) statement of how an organization plans to deliver superior value to customers.
a. The positioning statement addresses three questions:
1. Who is the target customer?
2. Why should the customer buy it?
3. What are we selling?
b. Trout and Ries pose six questions for those wanting to position a brand or company:
(Transparency 7G: “Six Questions to Ask When Applying a Positioning Strategy”)
1. What position, if any, do we already own in the prospect’s mind?
2. What position do we want to own?
3. What companies must be outgunned if we are to establish this position?
4. Do we have enough money to occupy and hold the position?
5. Do we have the guts to stick with one consistent positioning concept?
6. Does our creative approach match our positioning strategy?
4. Key Variables for Positioning
Each approach to positioning must take into consideration the nature of the customer, the product, and the unique selling proposition that will set the company’s product apart from its competitors. Some commonly used positioning strategies are based on the following attributes:
a. Positioning on product attributes
b. Positioning on price and quality
c. Positioning on use or application
d. Positioning by product user
e. Positioning on product class
f. Positioning against competitors
g. Positioning by benefits, problem solutions, or basic needs