Targeting Attractive

Market Segments

Chapter 7

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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Market Segmentation and Target Marketing in Today’s Economy

• Market segmentation is the process by which a market is divided into distinct subsets of customers with similar needs and characteristics.

• Target marketing requires evaluating the relative attractiveness of various segments.

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Market Segmentation and Target Marketing in Today’s Economy

• Brand positioning entails designing product offerings and marketing programs that can establish an enduring competitive advantage in the target market by creating a unique brand image, or position.

• These three decision processes are closely linked and have strong interdependence.

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Market Segmentation and Target Marketing in Today’s Economy

• Most markets are heterogeneous– Markets are complex entities that can be

defined in a variety of ways.– Critical issue: Finding an appropriate

segmentation scheme that will facilitate target marketing, positioning, and the formulation of successful marketing strategies and programs.

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Importance of Market Segmentation in the Development of Marketing Strategies

– Slowing population growth in many developed countries, and maturing product-markets.

– Social and economic forces have produced customers with more varied and sophisticated needs, tastes, and lifestyles than ever before.

– Trend toward micro segmentation.– Ease of implementing sharply focused

marketing programs

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How are Market Segments Best Defined?

• Steps in market segmentation:– Identify a homogeneous segment that

differs from other segments.– Specify criteria that define the segment.– Determine segment size and potential.

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How are Market Segments Best Defined?

• Segmentation decisions are best made based on:

– Who the customers are,– Where they are, or – How they behave relevant to the market in

question.

• The three approaches apply in both consumer and organizational markets.

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How are Market Segments Best Defined?

• Segmenting demographically– Demographic attributes used to segment

consumer markets are age; sex; income; occupation; education; race and ethnic origin.

– Industrial markets are segmented in two stages:

• Macrosegmentation • Microsegmentation

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How are Market Segments Best Defined?

• Segmenting geographically– Particularly important in retailing and many

services businesses.– One way to segment retail markets is by

distance or driving time from a particular location.

– The area included within such a geographically defined region is called a trade area.

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How are Market Segments Best Defined?

• Geodemographic segmentation– Market segmentation within the geographic

regions.– Useful in assessing the size and market

potential of a market segment defined by a particular trade area.

– Attempts to predict consumer behavior by making demographic, psychographic, and consumer information available at the block and zip code or postcode levels.

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How are Market Segments Best Defined?

• Behavioral segmentation– Behavioral descriptors are based not on who

the target consumers are or where they live, but based on what they do.

– Behavioral attributes can take many forms.

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How are Market Segments Best Defined?

– Consumer needs:• Customer needs are expressed in benefits

sought from a particular product or service. • Consumers evaluate brand alternatives on the

basis of choice criteria.• In organizational markets, customers consider

relevant benefits that include product performance in different use situations.

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How are Market Segments Best Defined?

– Product usage and purchase influence• Product-related attributes include product usage,

loyalty, purchase predisposition, and purchase influence.

• Product usage is important because in many markets a small proportion of customers makes a high percentage of purchases.

• In organizational markets, customers are better known, and heavy users are easier to identify.

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How are Market Segments Best Defined?

– Lifestyle• Segmentation by lifestyle, or psychographics,

segments markets on the basis of consumers’ activities, interests, and opinions.

• Stanford Research Institute (SRI) has created a U.S. segmentation service (called VALS 2), which builds on the concept of self-orientation and resources for the individual.

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How are Market Segments Best Defined?

– Organizational behavioral attributes• Purchasing structure and buying situation

segmentation attributes are unique to organizational markets.

• Purchasing structure is the degree to which the purchasing activity is centralized.

• The buying situation attribute includes three distinct types of situations: straight rebuy; modified rebuy; and a new buying situation.

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How are Market Segments Best Defined?

• Innovative segmentation– Understanding the demographic profile of a

target market enables the marketer to better choose targeted marketing communication vehicles.

– At the foundation of many a marketing breakthrough one often finds an insightful segmentation scheme that is sharply focused in a behavioral way.

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Choosing Attractive Market Segments: A Five-Step Process

• Within an established firm it is often better to apply a common analytical framework across segments.– Market-attractiveness/competitive-position

matrix

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Steps in Constructing a Market-Attractiveness/Competitive-Position Matrix for Evaluating Potential Target Markets

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• Step 1: Select market-attractiveness and competitive-position factors

– Market-attractiveness factors – Competitive-position factors

• Step 2: Weight each factor– A numerical weight is assigned to each

factor to indicate its relative importance in the overall assessment

Choosing Attractive Market Segments: A Five-Step Process

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Choosing Attractive Market Segments: A Five-Step Process

• Step 3: Rate segments on each factor, plot results on matrices

– This step requires that evidence be collected to objectively assess each of the criteria identified in Step 1.

– Once assessments have been made, the weighted results can be plotted on a market-attractiveness/competitive-position matrix

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Market-Attractiveness/Competitive-Position Matrix

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Choosing Attractive Market Segments: A Five-Step Process

• Step 4: Project future position for each segment

– Determine how the market’s attractiveness is likely to change over the next three to five years.

– For this assessment, start by considering:• Possible shifts in customer needs and behavior.• The entry or exit of competitors and changes in

their strategies.

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Choosing Attractive Market Segments: A Five-Step Process

– Managers must also address several broader issues:

• Possible changes in product or process technology.

• Shifts in the economic climate.• The impact of social or political trends.• Shifts in the bargaining power or vertical

integration of customers.

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Choosing Attractive Market Segments: A Five-Step Process

• Step 5: Choose segments to target, Allocate resources

– Managers should consider a market segment to be a desirable target only if it is strongly positive on at least one of the two dimensions of market attractiveness and potential competitive position and at least moderately positive on the other.

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Implications of Alternative Positions within the Market-Attractiveness/ Competitive-Position Matrix for Target Market Selection, Strategic

Objectives, and Resource Allocation

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Different Targeting Strategies Suit Different Opportunities

• Niche-market strategy– Involves serving one or more segments that,

while not the largest, consist of a sufficient number of customers seeking somewhat-specialized benefits from a good or service.

– Designed to avoid direct competition with larger firms that pursue bigger segments.

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Different Targeting Strategies Suit Different Opportunities

• Mass-market strategy– A business can pursue a mass-market

strategy in two ways:• Ignore any segment differences and design a

single product-and-marketing program that will appeal to the largest number of consumers.

• Design separate products and marketing programs for the differing segments (differentiated marketing).

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Different Targeting Strategies Suit Different Opportunities

• Growth-market strategy– Businesses often target one or more fast-

growth segments, even though these segments may not currently be very large.

– Usually requires strong R&D and marketing capabilities, plus the resources to finance rapid growth.

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Global Market Segmentation

• Traditional approach to global market segmentation is flawed because it:

– Relies on country variables rather than consumer behavior.

– Assumes homogeneity within the country segment.

– Ignores the possibility of the existence of homogeneous groups of consumers across country segments

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Global Market Segmentation

• More and more companies are approaching global market segmentation by attempting to identify consumers with similar needs and wants reflected in their behavior in the marketplace in a range of countries.

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Global Market Segmentation

• Reasons why companies expand internationally:

– To defend their home position against global competitors who are constantly looking for vulnerability.

– To service customers who are also engaging in global expansion.

– To earn foreign exchange.

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Take-Aways

• Marketers and entrepreneurs who find new and insightful ways to segment mature markets often uncover opportunities for uncontested market entry and rapid growth.

• Sharply focused target marketing enables marketers to differentiate from mass-market leaders by giving consumers in a narrowly defined market segment what they want.

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Take-Aways

• Focused market entry strategies conserve resources and facilitate early success.

• The five-step procedure provided in this chapter identifies segments having the highest potential.

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Take-Aways

• The market-attractiveness/competitive-position matrix is a useful analytical framework for deciding which markets or market segments to enter and from which to withdraw.