Chapter 8: Identifying Market Segments and Targets

CHAPTER 8: IDENTIFYING MARKET SEGMENTS AND TARGETS

By :
Dwi Sampurno

A Company cannot serve all customers in a broad market – customers are too numerous
and diverse in their requirements. The company needs to identify the market segments
that it can serve more effectively.

Many companies embrace target marketing where sellers distinguish the major market
segments, target one or more of those segments, and develop products and marketing
programmes tailored to each. Instead of scattering the marketing effort (shotgun
approach) they focus on the buyers the have the greatest chance of satisfying (Rifle
approach).

Target marketing requires three steps:

1. Identify and profile distinct group of buyers who might require separate products or
marketing mixes – market segmentation.
2. Select one or more market segments to enter – market targeting.
3. Establish and communicate the products’ key distinctive benefits to the target market –
market positioning.

Levels and Patterns of Market Segmentation

Levels of market segmentation

Market segmentation is an effort to increase a company’s precision marketing.

 Mass marketing: In this sellers engages in mass production, mass distribution and mass
promotion of one product for all buyers. Model T-ford, Coca-Cola etc are example of
mass marketing. Mass marketing creates a large potential market, which leads to the
lowest cost, which in turn can lead to lower prices or higher margins. But with the
increasing splintering of the market, mass marketing gets more difficult.

Four levels of marketing:

1. Segment Marketing:

A market segment consists of a large identifiable group within a market with similar
wants, purchasing power, geographical location, buying attitudes or buying habits. For
example, for an auto company might have four broad segments: customers seeking basic
transportation or high performance or luxury or safety.

Each segment buyers are assumed to be quite similar in needs and wants. Anderson and
Narus urge to present flexible market offering instead of a standard offering (“one size
fits all”) to all members within the segment. A flexible market offering consists of two
parts:

1. Naked Solution: Product and service element that all segment members value
2. Options: That some segment members value, each option carries extra chrge.

For example seat, food and drinks offered to the economy class passenger of an airline
are naked Solution while extra amount charged for an alcoholic beverage/Internet
facility to those who are ready to pay for it would be option.

Benefits of Segment Marketing are:

1. The company can create more fine tuned product or services offering and price it
appropriately for target audience
2. Choice of distribution channel and communication channel becomes much easier
3. The company also may face fewer competitions in a particular segment.

1. Niche Marketing:
 A niche is more narrowly defined group, typically a small market whose needs are not
well served. Marketers usually identify niches by dividing a segment into sub segments
or defining a group seeking a distinctive mix of benefits.

Niches are fairly small and attract very few competitors. Large companies loose pieces of
their market to nichers and Dalgic has labelled this confrontation as “Guerrillas against
gorillas”. Niche marketing requires more decentralization and changes in the way
normal business is done. Niche marketers understand their customers so well that
customer’s willingly pay a premium. Attractive niches are characterized as:

1. Customers in the niche have a distinct set of needs

2. They will pay a premium to the firm that best satisfies their needs
3. The niche is not likely to attract other competitors
4. The nichers gain certain economies trough specialization
5. The niche has size, profit and growth potential

Linneman and Santon, “There are riches in the niches” Blattberg and Deighton, “Niches
too small to serve profitably today will become viable as marketing efficiency improves.”

The low cost of setting up shop on the Internet is a key factor on making it more
profitable to serve even more seemingly miniscule niches.

1. Local Marketing:

Marketing programmes being tailored to the needs and wants of local customer groups
– trading areas, neighbourhood, individual stores.

Disadvantages of local marketing are – it drives up the manufacturing and marketing

cost by reducing the economies of scale, logistical problems become magnified and a
brands overall image may be diluted if the product and message differ in different
localities.

1. Individual Marketing:

Ultimate level of marketing – “segment of one”, “customised marketing”, “one-to-one

marketing”. Tailors, cobblers etc. B2B marketing today is customised. Mass
customisation is the ability to prepare on a mass basis individually designed products
and communication to meet each customer’s requirements. New technologies such as
 computers, Internet, databases, robotic production, email, fax etc. permit companies to
adopt mass customisation.

For mass customisation marketers need to set up – toll free phone number and email
ids for customers suggestions, complaints, feed back, involve customer more during the
product specification process, sponsor web pages containing full details about the
products and services offered, guarantees and locations etc.

Patterns of Market Segmentation

Way to build up market segments – preference segments. Three different patterns

1. Homogeneous Preferences: Markets where all customers have roughly same The market
shows no natural segments.
2. Diffused Preferences: Consumer preferences are scattered through out the space –
consumers vary widely in their preferences. The first brand to enter the market is likely
to position itself in the centre to appeal the most people. A brand in the centre
minimizes the total customer dissatisfaction.
3. Clustered Preferences: The market reveals distinct preference clusters – natural market
segments. The first firm to enter the market has three optionso Position in the center to
appeal to all groups. It will develop only one brand, competitors would enter and
introduce brands in the other segments

1. Position in the largest market segment – concentrated marketing

2. Develop several products positioned in a different segment.

Market segmentation procedure

3-step procedure

1. Service stage: the researcher conducts exploratory interviews and focused groups to gain
insights into consumer motivations attitudes and behaviours. Then the researcher
prepares a questionnaire and collects data on attributes and their importance ratings,
brand awareness and brand ratings, product usage patterns, attitudes towards product
category and demographics, geographic, psychographics and media graphics of the
respondents.
2. Analysis Stage: under this he applies factor analysis to the data to remove highly
correlated variables then apply cluster analysis to create specific number of maximally
different segments.
3. Profiling stage: each cluster is profiled according to its distinguishing attitudes,
behaviour, demographics, psychographics and media graphics and media patterns.

Each segment is given a name depending on its dominant characteristics. Market

segmentation should be redone periodically because they change. Way to discover new
segments is to discover the hierarchy of attributes that consumers examine while
choosing a brand. This process is called market partitioning.

The hierarchy of attributes can reveal customer segments. Buyers who first decide on
price are price dominant. Those who first decide on type of car ( eg sports, passenger )
are type dominant. Those who first decide on the car brand are brand dominant. Each
segment may have different demographics, psychographics and media graphics.

SEGEMENTING CONSUMER AND BUSINESS MARKETS

Basis for segmenting consumer markets: 2 broad groups of variables are used to
segment consumer markets. Some researchers try to form segments by looking at
consumer characteristics: demographic, geographic, and psychographic. Then they
examine whether these customer segments exhibit different needs or product responses.

Methods of Segmentation

Geographic segmentation: it calls for dividing the market into different geographic units
such as nations, states, regions, counties, and cities. The company can operate in one or
few geographic areas or operate in all but pay attention to local variations.
Demographic segmentation: in this the market is divided into groups on the basis of
variables such as age, family, size, life cycle, gender, income, occupation, education,
religion, race, generation, nationality, social class. These variables are the most popular
basis for distinguishing customer groups. One reason is that consumer wants,
preferences, usage rates are often associated with demographic variables. Another
reason is that demographic variables are easier to measure even when the target market
is defined in non-demographic terms. The link back to demographic characteristics is
needed in order to estimate the size of the target market and the media that should be
used to reach it efficiently.

Geographic: Region Pacific, mountain, west north central City or metro size Under 5000
etc

Density Urban rural Climate Northern, southern

Demographic: Age, Family size, Family life cycle, Gender, Income, Occupation,
Education, Religion, Race Generation, Nationality, Social class,

Psychographics: Life style, Personality,

Behavioural: Occasions, Benefits, User status, Usage rate, Loyalty status, Readiness
stage Unaware, aware, informed, interested, desirous

Attitude towards product Enthusiastic, positive, indifferent Age and life cycle stage:
consumer wants and abilities change with age. Gerber realized this and began
expanding beyond its baby food lines. Nevertheless age and life cycle can be tricky
variables.

Gender: gender segmentation has been applied to clothing hairstyling cosmetics and
magazines. Other marketers also noticed opportunity for gender segmentation for eg the
cigarette market where brands like Virginia slims was launched to reinforce female
image.

Income: it is a long standing practice in such product and service categories e.g.
Automobile, clothing and cosmetic and travel.
 Generation:

 Baby boomers born between 1946-64

 Generation X born between 1964-84 – more sophisticated in evaluating products, turn
off by advertising that has too much hype or takes itself too seriously
 Cohort segmentation: cohorts are groups of people who share experiences of major
external events that have deeply affected their attitudes and preferences.

Members of cohort groups feel the bonding with each other for having shared the same
major experiences. Advertising to a cohort group should be done using icons and images
prominent in their experiences.

Social Class: has a strong influence on preference in cars clothing home furnishing,
leisure activities reading habits and retailers. The taste of social class can change with
years.

Psychographic segmentation:

Buyers are divided into different groups based on personality and values. People within
the same demographic group can exhibit very different psychographic profiles.

Lifestyle: people generally exhibit more lifestyle than are suggested by social classes
generally the goods they consume express their lifestyle such as cosmetics, alcoholic
beverages, furniture etc.

Personality: Marketers can use personality variables to segment markets. They endow
their products with brand personalities that correspond to consumer personalities.

Values: some marketers segment by core values, the belief systems that underlie
consumer attitudes and behaviours. Core values go much deeper than behaviour or
attitude and determine at a basic level people’s choices and desires over long term.

Marketers who segment by values believe that by appealing to people’s inner selves it is
possible to influence their outer selves- their purchase behaviour.

Behavioral Segmentation

Buyers are divided into groups on the basis of their knowledge of, attitude toward, use
of, or response to a product.
 Starting points for constructing market segments

Ocassions: Distinguish buyers according to the occasions they develop a need, purchase
a product, or use a product

Benefits: Buyers classified on the basis of the benefits they seek

User status: Market segmentation into non-users, ex-users, potential users, first time
users and regular users of a product.

Usage rate: Market segmented into light, medium and heavy product users.

Loyal status: Consumers can be divided into 4 groups according to the brand loyalty
status:

 Hard-core loyals – one brand all the time

 Split loyals – loyal to 2 or 3 brands
 Shifting loyals – consumers who shift from one brand to another
 Switchers – no loyalty to any brand

Markets

 Brand loyal markets – high % of hard-core brand loyal buyers. A company can learn a
great deal by analyzing degrees of brand loyalty Analysis of:
 Hard-core loyals: the company can identify products’ strengths
 Split loyals: company can pinpoint which brands are most competitive with its
 Shifting loyals: company can learn about its marketing weaknesses and attempt to
correct them.

Buyer readiness stage: A market consists of people in different stages if readiness to buy
a product.

Stages of readiness:
 Aware of product
 Informed about product
 Interested in product
 Desirous of buying the product
 Intention to buy product

Attitude: Five attitude groups can be found in the market:

 Enthusiastic
 Positive
 Indifferent
 Negative
 Hostile

Multi-Attribute segmentation (geoclustering)

Marketers no longer talk about the average consumer or even limit their analysis to only
a few market segments. Increasing trend towards combining several variables in an
effort to identify smaller, better defined target groups.

Geoclustering captures the increasing diversity of the population, and marketing to

micro segments has become accessible even to small organisations as database costs
decline, PCs proliferate, software becomes easy to use, data integration increases and as
the Internet grows.

Basis for segmenting business markets

Segmentation variables for business markets:

Demographic

 Industry: which industries to serve

 Company size: what size companies to serve
 Location: what geographical areas to serve
 Operating variables

 Technology: what customer technologies should we focus on

 User or non-user status: should we serve heavy users, medium users, light users, or non-
users?
 Customer capabilities: should we serve customers needing many or few sevices
Purchasing approaches
 Purchasing-function organisation: should we serve companies with centralized or
decentralized
 Power structure: shud we serve companies that are engineering dominated
 Nature of existing relationships: shud we serve companies with which we have a strong
relationships or simply go after the most desirable companies
 General purchase policies: shud we serve companies that prefer leasing or service
contracts or systems purchases or bids?
 Purchasing criteria: shud we serve companies that are seeking quality or service or
price?

Situational factors

 Urgency
 Specific application: focus on specific application rather than all applications
 Size or order

Personal characteristics

 Buyer seller similarity

 Attitudes towards risk
 Loyalty

Business buyer stages

 First-time prospects – prefer to deal with a company rep

 Novices –
 Sophisticates – may want to conduct more of their buying over electronic media
 Business segments among business buyers

 Programmed buyers: view the product as not very important to their operation
 Relationship buyers: regard the product as moderately imp and r knowledgeable abt
competitive offerings
 Transaction buyers: see the product as v imp to their operations. Price, service sensitive
 Bargain hunters: see the product as v important. Demand deep discounts and highest
service.

To be useful market segments must be Measurable Substantial accessible Differentiable

Actionable

Evaluation of market segments: 2 factors to be looked at : (a) segment’s overall

attractiveness (b) company’s objectives and resources

Selecting the market segments

1. Single market concentration: firm gains strong knowledge of segment’s needs and
achieves strong market presence
2. Selective specialization: firm selects a no. of segments, each objectively attractive and
appropriate
3. Product specialization: firm specializes in making a certain product that it sells to
several segments
4. Market specialization: firm concentrates on serving many needs of a specific customer
group
5. Full market coverage: firm attempts to cover all customer groups with all the products
they might need.

1. Undifferentiated marketing: firm ignores market segment differences and goes after the
whole market with one offer
2. Differentiated marketing: firm operates in several market segments and designs
different programs for each segment

Costs expected to be higher in differentiated marketing

 Product modification costs

 Manufacturing costs
 Administrative costs
 Inventory costs
 Promotion costs

Additional considerations: other considerations must be taken into account in

evaluating and selecting segments:

 Ethical choice of target markets

 Segment interrelationships and supersegments
 Segment-by-segment invasion plans
 Intersegment cooperation