Targeting Attractive Market Segments

1. Targeting Attractive Market Segments 6

2. Discussion Questions 1. What’s a market? 2. What’s a market segment?

3. What’s a market? • 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

4. Discussion Questions 3. Why should we segment markets and target certain segments? Are there benefits in doing so? Are there drawbacks?

5. Market Segmentation 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.

6. Market Segmentation • Market segmentation has become increasingly important in setting marketing strategies. • 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.

7. Market Segmentation • Market segmentation has become increasingly important in setting marketing strategies. • 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.

8. Market Segmentation • 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.

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

10. 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

11. 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: (location) 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

12. Discussion Question 5.What are some commonly used demographic, geographic and behavioral descriptors?

13. Geographic: Region New England, Middle Atlantic, and other census regions City or MSA size Under 25,000; 25,001-100,000; 100,001- 500,000; 500,001-1,000,000; etc. Urban-rural Urban, suburban, rural Climate Hot, cold, sunny, rainy, cloudy Demographic: Income Under $10,000; $10,001-$25,000; $25,001- $35,000; $35,001-$50,000; over $50,000 Age Under 6, 6-12, 13-19, 20-34, 35-49, 50-64, 65 and over Gender Male, female Family life cycle Young, single; young, married, no children, etc. Social class Upper class, upper middle, lower middle, upper lower, etc. Segmentation basis Typical market segments

14. Segmentation basis Typical market segments (cont.) Demographic (cont.): Education Grade school only, high school graduate, college graduate Occupation Professional, manager, clerical, sales, student, homemaker, unemployed Ethnic background African, Asian, European, Hispanic, Middle Eastern, etc. Psychographic: Personality Ambitious, self-confident, aggressive, introverted, extroverted, sociable Life-style Activities (golf, travel); interests (politics, modern art); opinions (conservation, capitalism) Values Values and Life-Styles 2 (VALS2), List of Values (LOV)

15. Segmentation basis Typical market segments (cont.) Behavioral: Benefits desired Examples vary widely depending on product: appliance — cost, quality, operating life; toothpaste — no cavities, plaque control, bright teeth, good taste, low price Usage rate Nonuser, light user, heavy user

16. A SEGMENTATION EXAMPLE Female department store shoppers have been classified into 5 types, based on demographics, values, and attitudes. The groups and their descriptive names are: • 1. Fashion Statements—most affluent and educated, use credit cards, expect to be treated well by retail personnel. • 2. Wanna-buys—similar to Fashion Statements but with less income. Enjoy buying on impulse. • 3. Family Values—represent large families, often are professionals, buying focuses on children or the home. • 4. Down to Basics—most likely to have children, not college educated, careful spenders, prefer not to use credit, like coupons. • 5. Matriarchs—older, often retired, they like department stores but are risk averse and have few purchase plans.

17. Discussion Question 6. Do these same approaches apply to organizational markets? Examples?

18. 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

19. BUSINESS MARKETS ARE OFTEN SEGMENTED ON THE BASIS OF: • Customer location. • Type of business customer, including: • Size • Industry • Purchase organization • Purchase criteria • Transaction conditions, including: • Type of buying situation • Straight rebuy • Modified rebuy • New buy • Usage rate—heavy, light, nonusers. • Purchase procedure.

20. Customer location: Region Southeast Asia, Central America, Upper Midwest, Atlantic Seaboard Locations Single buying site, multiple buying sites Customer type: Size Sales volume, number of employees Industry SIC code, NAICS code Organization structure Centralized or decentralized; group or individual decision Purchase criteria Quality, price, durability, lead time Type of use Resale, component part, ornamental Transaction conditions: Buying situation Straight rebuy, modified rebuy, new buy Usage rate Nonuser, light user, heavy user Purchasing procedure Competitive bidding, lease, svc. contracts Order size Small, medium, large Service requirements Light, moderate, heavy Segmentation basis Typical market segments

21. How should we Decide Which Segments to Target? - Steps in Constructing a Market-Attractiveness/Competitive-Position Matrix (Exhibit 6.7) 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.

22. A Useful Tool for Assessing Market Segments: Segment Rating Chart

23. Market Attractiveness High (8-10) l Moderate (4-7) Low (0-3) Low (0-3) Moderate (4-7) High (8-10) Company’s Competitive Position l = Market attractiveness and competitive position of distance runners segment The Market Attractiveness/ Competitive Position Matrix Exhibit 6.10

25. Implications of Alternative Positions Within the Market-Attractiveness/Competitive-Position Matrix Exhibit 6.11 Competitive Position Strong Weak Medium • Desirable Potential Target • Protect position: • Invest to grow at max. digestible rate • Concentrate on maintaining strength • 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 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. MarketAttractiveness • 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.

26. Discussion Questions 7. What targeting strategies are available? When should each be used?

27. 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 • (undifferentiated marketing) • 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 (differentiated marketing)

28. 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