Targeting Attractive Market Segments 6 Targeting Attractive Market Segments

Discussion Questions 1. What’s a market? 2. What’s a market segment? A group of individuals or organizations (i.e., buyers) having the willingness and ability to buy goods and services to satisfy a class of want or need What’s a market segment? A group of potential customers in a market who share similar wants and needs that are different from the wants and needs of consumers in other segments

Discussion Questions 3. Why should we segment markets and target certain segments? Are there benefits in doing so? Are there drawbacks? Segmentation is important because markets are rarely homogeneous in benefits wanted, purchase rates, and price and promotion elasticities, and their response rates to products and marketing programs 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. Market segmentation has become increasingly important in the development of marketing strategies for the following reasons. Population growth has slowed, and more product-markets are maturing. This sparks more intense competition as firms seek growth via gains in market share as well as in an increase in brand extensions. Such social and economic forces as expanding disposable incomes, higher educational levels, and more awareness of the world have produced customers with more varied and sophisticated needs, tastes, and lifestyles than ever before. This has led to an outpouring of goods and services that compete with one another for the opportunity of satisfying some group of consumers. There is an increasingly important trend toward microsegmentation, in which extremely small segments are targeted. Many marketing organizations have made it easier to implement sharply focused marketing programs by more sharply targeting their own services. Benefits of market segmentation: It identifies opportunities for new product development. It helps in the design of marketing programs that are most effective for reaching homogeneous groups of customers. It improves the strategic allocation of marketing resources. Drawbacks of market segmentation: Potential customers who do not fit into the target segment are missed. Marketers may misjudge who their target market is, which could result in product failure or poor sales.

Objectives of Market Segmentation Identify a homogeneous segment that differs from other segments Specify criteria that define the segment Determine segment size and potential

Discussion Question 4. How should market segments be defined? Three good ways to do it. Who the customers are Where they are How they behave Ask, for each approach, “What tools do we have to define segments this way? Can you think of examples of markets typically segmented this way?” Who? Tools: demographic descriptors (age, income, gender, education, etc.): cereal, clothing, cosmetics, some magazines Where? Tools: geographic descriptors: suntan lotion, snow blowers, trade areas for retail stores How they behave? Tools: Benefits sought: bicycles of various types, computers of various types Product usage: key accounts among organizational buyers Lifestyle/psychographics: health clubs, automobiles/SUVs Social class: jewelry, automobiles

Discussion Question 5.What are some commonly used demographic, geographic and behavioral descriptors? Demographic Descriptors Examples of categories Age Under 2, 2-5, 6-11, 12-17, 18-24, 25-34, 35-49, 50-64, 65 and over Sex Male, female Household Lifecycle Young, single; newly married, no children; youngest child under 6; youngest child 6 or over; older couples with dependent children; older couples without dependent children; older couples retired; older, single Income Under $15,000, $15,000-24,999; $25,000- 74,999, etc. Occupation Professional, manager, clerical, sales, supervisor, blue collar, homemaker, student, unemployed Education Some high school, graduated high school, some college, graduated college Events Birthdays, graduations, anniversaries, national holidays, sporting events Race and ethnic origin Anglo-Saxon, African-American, Italian, Jewish, Scandinavian, etc. Geographic Descriptors Examples of categories Geographically region Country, trade area Behavioral Descriptors Examples of categories Consumer needs Benefits sought, choice criteria Product-related Product usage, purchase influence

SAGA segmentation of UK grandparents, where a complete description of each category can be found in this SAGA press release.

Pharmaceutical industry segmentation

Inline skating segmentation

Discussion Question 6. Do these same approaches apply to organizational markets? Examples? Who? Demographic descriptors: company age, size, etc. Example: different software versions for small and large businesses. Where? Geographic descriptors: Example: B2B Websites in different languages to reach different geographical markets. How they behave? Benefits sought by different industries: Example: software tailored to different vertical markets. Product usage: Example: treating key accounts among organizational buyers differently Lifestyle/psychographics: Example: marketing corporate wellness programs/corporate health club memberships to different kinds of firms Social class: Example: company vehicles differ for different job levels

How should we Decide Which Segments to Target How should we Decide Which Segments to Target? - Steps in Constructing a Market-Attractiveness/Competitive-Position Matrix 1. Choose criteria to measure market attractiveness and competitive position. 2. Weigh market attractiveness and competitive position factors to reflect their relative importance. 3. Assess the current position of each potential target market on each factor. 4. Project the future position of each market based on expected environmental, customer, and competitive trends 5. Evaluate implications of possible future changes for business strategies and resources requirements. 7

A Useful Tool for Assessing Market Segments: Segment Rating Chart WEIGHT RATING (0-10) TOTAL Market attractiveness factors Customer needs and behavior .5 10 5.0 Segment size and growth rate .3 7 2.1 Macro trends .2 8 1.6 Total: Market attractiveness 1.0 8.7 Competitive position factors Opportunity for competitive advantage .6 4.2 Capabilities and resources 5 Industry attractiveness 1.4 Total: Competitive position 6.6 Where does the necessary data come from to support the factor ratings? Primary and secondary marketing research Analytical frameworks from earlier chapters

The Market Attractiveness/ Competitive Position Matrix l Market Attractiveness High (8-10) Moderate (4-7) Low (0-3) Company’s Competitive Position = Market attractiveness and competitive position of distance runners segment How can these factors be assessed? Market attractiveness factors Customer needs and behavior: unmet needs? Segment size and growth rate Macro trends Competitive position factors Opportunities for competitive advantage Capabilities and resources Industry attractiveness

Implications of Alternative Positions Within the Market-Attractiveness/ Competitive-Position Matrix Weak Medium Strong Build selectively: Spec. in limited strengths Seek to overcome weak. Withdraw if indications of sustainable growth are lacking Desirable Potential Target Invest to build: Challenge for leadership Build selectively on strengths Reinforce vulnerable areas Desirable Potential Target Protect position: Invest to grow at max. digestible rate Concentrate on maintaining strength High Limited expansion or harvest: Look for ways to expand w/out high risk; otherwise min. invest. and focus operations Desirable Potential Target Build selectively: Emphasize profitability by increasing productivity Build up ability to counter competition Manage for earnings: Protect existing strengths Invest to improve position only in areas where risk is low Med. Market Attractiveness Divest: Sell when possible to maximize cash value Meantime, cut fixed costs & avoid further investment Manage for earnings: Protect position Minimize investment Protect and refocus: Defend strengths Seek ways to increase current earnings without speeding market’s decline Low Sources: Adapted from George S. Day, Analysis for Strategic Market Decisions (St. Paul: West, 1986), p. 204; D. F. Abell and J. S. Hammond, Strategic Market Planning Problems and Analytical Approaches (Englewood Cliffs, NJ: Prentice Hall, 1979); and S. J. Robinson, R. E. Hitchens, and D. P. Wade, “The Directional Policy Matrix: Tool for Strategic Planning,” Long Range Planning 11 (1978), pp. 8-15. 14

Discussion Questions 7. What targeting strategies are available? When should each be used? Niche-market strategy One or more segments with substantial number of customers seeking somewhat specialized benefits from a product or service Strategy is designed to avoid direct competition with larger firms that are pursuing bigger segments Mass-market strategy Ignore any segment differences and design a single product-and-marketing program that will appeal to the largest number of consumers Objective of strategy is to capture sufficient volume to gain economies of scale and a cost advantage 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 Growth-market strategy Often target one or more fast-growth segments A strategy often favored by smaller competitors to avoid direct confrontations with larger firms while building volume and share

Niche-Market Strategy Mass-Market Strategy Growth-Market Strategy Differentiated Marketing Growth-Market Strategy