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Lecture 4Chapter 10 to p. 364

Market segmentation and targeting

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Chapter Objectives

1. Explain market segmentation, and identify several possible bases for segmenting consumer markets and international markets

2. Distinguish between the requirements for effective segmentation: measurability, accessibility, substantiality, actionability

3. Outline the process of evaluating market segments and suggest some methods for selecting market segments

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Markets – key points

1. Maybe you cannot appeal to all buyers2. Buyers are numerous, widely scattered and

varied in their needs and buying practices3. Different companies vary widely in their

abilities to serve different segments of the market

4. So …rather than trying to compete in an entire market, sometimes against superior competitors, each company must identify the parts of the market that it can serve best

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Clarifying some terms

• Mass marketing: one product for all buyers

• Product-variety marketing: two or more products with different features.

• Target marketing: identify segments, select one or more, different marketing mix for each

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Segmentation is the first step

1. Market segmentation• Dividing a market into distinct groups of buyers with

different needs, characteristics or behaviour who might require separate products or marketing mixes

2. Market targeting• Evaluating each market segment’s attractiveness

and selecting one or more of the market segments to enter

3. Market positioning• Setting the competitive positioning for the product

and creating a detailed marketing mix (not this lecture)

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Figure 10.1: Steps in Segmentation, Targeting and Positioning

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Market Segmentation• Markets consist of buyers, and buyers that

differ in one or more ways – They may differ in their wants, resources, locations,

buying attitudes and buying practices and preferences for buying channels such as ordering by mail, phone, the Internet or from a physical location.

– Because buyers have unique needs and wants, each buyer is potentially a separate market. Ideally, then, a seller might design a separate marketing program for each buyer.

– But this is very costly so we look for broad classes who differ in needs or response

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Segmenting Consumer Markets

GeographicGeographic

DemographicDemographic

PsychographicPsychographic

BehavioralBehavioral

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Geographic segmentation

• Dividing the market into nations, regions, states ..cities, neighbourhoods

• When would you do this …. ?

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Demographic Segmentation

Age and Life CycleAge and Life Cycle

GenderGender

IncomeIncome

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Psychographics

• What are ‘psychographics’ ?– Group people based on social class, lifestyle, or personality

• Rationale is that people who are the same in geographic / demographic terms may differ in psychographics

• If psychographics relate to some behaviour of interest .. maybe it could be useful to marketers …

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Behavioral Segmentation

Behavioral Variables:

• Purchase occasion

• Benefits

• User Status

• Usage Rate

• Loyalty Status

• Buyer readiness stage• Attitude (maybe only for politics) ?

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Ehrenberg and the Dirichlet Model of Buyer behaviour (not in your book)

• Buyers are not loyal to one brand, but normally buy from a group of brands (the repertoire, or ‘evoked set’)– Usually main brand and 4 or so minor brands.– Sets up a series of empirical patterns:

• Heavy buyers/light buyers- shared by brands • loyal buyers ~10% of total customers• Market share relationships: big brands-small brands• Advertising awareness: follows same trends as market

share• Salience and lack of differentiation between brands

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Segmenting Business Markets (p. 355)

Basesfor Segmenting

BusinessMarkets

Basesfor Segmenting

BusinessMarkets

DemographicsPersonalCharacteristics

SituationalFactors

OperatingVariables

PurchasingApproaches

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Segmenting International Markets

• Companies segment international markets using a combination of several variables:– Geographic location.– Economic factors.– Political and legal factors.– Intermarket segmentation.

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Requirements for Effective Segmentation• There are many ways to segment a market — but not all

segmentation schemes are effective. To be useful, market segments must have the following characteristics: – Measurability The degree to which the size and

purchasing power of the segments can be measured. Certain segmentation variables are difficult to measure.

– Accessibility The degree to which the segments can be reached and served.

– Substantiality The degree to which the segments are large or profitable enough. A segment should be the largest possible homogeneous group worth going after with a tailored marketing program.

– Actionability The degree to which effective programs can be designed for attracting and serving the segments.

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Evaluating Market Segments

• Marketing segmentation reveals the market segment opportunities facing a firm.

• The firm now has to evaluate the various segments and decide the number of segments to cover and the ones to serve.

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• Segment size and growth– The company must first collect and analyse data on current

dollar sales, projected sales growth rates and expected profit margins for the various segments. It wants to select segments that have the right size and growth characteristics, but ‘right size and growth’ is a relative matter.

• Segment structural attractiveness– A segment might have desirable size and growth and still not be

attractive from a profitability point of view. The company must examine several major structural factors that affect long-run segment attractiveness. (eg competitor strengths, margins)

Evaluating Market Segments

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• Company objectives and resources

– Even if a segment has positive size & growth and is structurally attractive, the company must consider its own objectives and resources in relation to that segment.

– Some attractive segments could be quickly dismissed because they do not mesh with the company’s long-run objectives.

– (example again – Ikea)

Evaluating Market Segments

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Selecting Market Segments

• After evaluating different segments, a company hopes to find one or more market segments worth entering. It must then decide which and how many segments to serve.

• A target market consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The company can adopt one of three market-coverage strategies: – Undifferentiated marketing (go after all) – Differentiated marketing (separate offer for each) – Concentrated marketing (focus on one or couple segments)

• Which is most typical in practice?

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Younger person

Small business

Example: three segments for mobile telecommunications

Undifferentiated (go after all)

Middle Australia

Differentiated (separate offer

for each)Concentrated (go after one)

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Choosing a Market-Coverage Strategy

• Trade-off – focusing on a segment you think you can really go after … but that means you are going after a smaller part of the market.

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Costs of Targeting

• Possibly higher sales … but higher costs using targeted marketing include:– Product modification cost– Manufacturing cost– Administrative cost– Inventory cost– Promotion cost (3 segments - coverage ?)