Topic 7 Identifying Market Segments and Selecting Target Markets

Kotler on Marketing; “Don’t buy market share. Figure out how to earn it.”

In Topic 7 we will look at how can a company identify the segments that make up a market and what criteria can a company use to choose the most attractive target markets?

In a broad market, customers are too numerous or large and diverse in their buying requirement that companies cannot serve all customers with their particular product and services. For example companies that sells computer products & services and those in the soft drinks industries.

 

Mass Marketing creates large potential markets which lead to lower costs and in turns leads to lower prices or higher margin however, companies are finding it difficult to satisfy customers within a splintering market place where customers are bombarded with all sorts of messages through advertising, internets and media. With mass marketing organizations are looking at how to maximize profits and minimize costs and many companies are turning to micro marketing at one of four levels;

segments, niche, local areas and individuals to select target markets that it can serve effectively.

Companies need to identify the market segments it can serve effectively. Thus companies have to examine;

·         Level of segmentation,

·         Patterns of segmentation,

·         Market segmentation procedures,

·         Bases for segmenting consumers and business markets

·         Requirements for effective segmentation

Levels and Patterns of Market Segmentation

Target marketing requires marketers to take three major steps;

Market Segmentation – Identifying and making a profile of distinct group of buyers who differs in their needs & preference.

Market Targeting – Select one or more market segments to enter.

Market Positioning – Establish and communicate the key distinctive benefits of the company’s market offerings.

Benefits of Segment Marketing over Mass Marketing

Company can create more fine-tuned product or service offering and price it appropriately for the target segment.

Company can more easily select the best distribution and communication channels with a clear picture of its competitors within the same market segment.

Segment Marketing – A market segment consists of a group of customers who share a similar set of wants. We must be careful not to confuse a segment and a sector. The marketer does not create market segments; the marketers’ task is to identify the segment and decide which ones to target. Segment Marketing offers several benefits over mass marketing. Companies can create more fine-tuned products or service offering and price it appropriately for the target segment.

Niche Marketing – A niche market is a more narrowly defined group seeking a distinctive mix of benefits. Marketers usually identify niches by dividing a segment into sub segment. Niche market are fairly small, understand their customers so well that customers are willing to pay premiums for their products and services. Niche market is not likely to attract other competitors. Example: Acupuncture clinic in Port Moresby and The Port Moresby Veterinary Clinic.

Local Marketing – Marketing programs tailored to the needs and wants of local customer groups example trading areas, neighborhoods or individual stores. Example: TST Chain of Supermarkets.

Individual Customer Marketing – Every individuals has a unique set of wants and preferences thus companies comes up with customized marketing or one to one marketing e.g. Door to door marketing

Market Segments can be built up in many ways. One way is to identify preference segments;

1.      Homogeneous Preferences – All consumers have roughly the same preference. The market show no natural segment.

2.      Diffused Preferences – Consumers vary greatly in their preferences varies. Various brand of products in different position in the market trying their best to attract consumers.

3.      Clustered Preferences – The market might reveal distinct preference clusters, called natural market segment. The first firm enters the market & position itself in the center hoping to appeal to all groups. It might position in a larger market segment or it might develop several brands positioned in different segment.

How can we identify market segments? One approach would be to classify consumers demographically; however the real question is whether the customers in any one segment really have the same needs, attitudes, and preferences. Market segment do change therefore market segmentation must be done periodically.

Market Segmentation Procedures`

One way to discover new segment is to investigate the hierarchy of attributes consumers examine in choosing a brand. (Market Positioning) example: Buying of Motor Vehicle, Country of origin, Brand of vehicle and Type.

Effective Segmentation

To be useful, market segment must be;

1.      Measurable – the size, purchasing power, characteristic of the segment can be measured.

2.      Substantial – the segments are large and profitable enough to serve

3.      Accessible – the segment can be effectively reached and served

4.      Differentiable – The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs

5.      Actionable – Effective programs can be formulated for attracting and serving the segments.

Two broad groups of variables used to segment consumer markets;

Consumer Characteristics & Consumer Responses to Benefits;

Multi-Attribute Segmentation (Geo-Clustering) – Combination of several variables in an effort to identify smaller, better defined target groups. Example: a Bank Identifying a group of wealthy retired adults but within that group distinguishes several segments depending on current income, assets, savings, and risk references.

Targeting Multiple Segments – Companies start by marketing to one segment then expanding to others. Example: In 1999, Motorola used the result of a 25 nation segmentation research project to create four different sub brand of its mobile phone.

Market Targeting

Once firms has identify its market-segment opportunities, it has to decide how many and which ones to target. Two factors companies look at is the segments overall attractiveness and the company’s objectives and resources.

Attractiveness – Size, Growth, Profitability, Scale economies, Low, Risks.

Objectives & Resources – Does the segment meet the firms’ long term objectives and the available resources?

Evaluating and Selecting the Market Segments

Having evaluated different segments, companies can consider the five patterns of target market selection and these are as follows;

1.      Single-Segment Concentration – In concentrated marketing a firm gains a strong knowledge of the segment’s needs and achieves a strong market presents. There are risks involve in single segment concentration such as loss of customers interest for a particular product.

2.      Selective Specialization – A firm selects a number of segments, each objectively attractive & appropriate, and promises to be a money maker. The multi segment strategy has the advantages of diversifying the firms’ risks.

3.      Product Specialization – A firm makes a certain product that is sold to several segments. The risks are products may be supplanted by a new technology.

4.      Market Specialization – A firm concentrates on serving many needs of a particular customer group. A firm gains a strong reputation that it becomes a channel for additional products. A risk is budget cuts to your customer group.

5.      Full Market Coverage - A firm attempts to serve all customer groups with all the products they might need. Example: Coca Cola (Drink market) & IBM (Computer market) .Full Market Coverage - A firm can cover a whole market in two broad ways through Differentiated and Undifferentiated Marketing.

Differentiated Marketing – The firm operates in several market segments & designs different products for each segment.

Undifferentiated Marketing – The firm ignores segment differences and goes after the whole market with one offer.

Additional Considerations

There are four other considerations that must be taken into account in evaluating and selecting segments;

1.      Ethical Choice of Market Segment – Market targeting sometimes generates public controversy. The public is concerned when marketers take unfair advantage of vulnerable groups such as children.

2.      Segment interrelationships and super segments – A super segment is a set of segments sharing some exploitable similarity.

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3.      Segment by Segment Invasion Plans - A company would be wise to enter one segment at a time without revealing its total expansion plans.

4.      Intersegment Cooperation – The best way to manage segment is to appoint segment managers with sufficient authority and responsibility for building their segment’s business.

Summary and Conclusion

Target Marketing involves three activities: Market Segmentation, Market Targeting and Market Positioning.

Markets can be targeted at four levels – Segments, Niches, Local Area and Individuals.

1.      Market Segments are large identifiable groups within a market.

2.      A Niche market is a more narrowly defined group.

3.      Local Area is markets within the local trading area, neighborhood and individual stores.

4.      Individual takes initiatives in designing products & brands.

Two Bases for segmenting consumer markets;

i) Consumer Characteristics

ii) Consumer Response

The Major Segmentation Variables for Consumer Markets are; Geographic, Demographic & Behavioral. These variables can be used singly or in combination.

Business Markets use all the above variables along with operational variables, purchasing approaches and situational factors.

To be useful, market segment must be Measurable, Substantial, Accessible, Differentiable and  Actionable

Once a firm has identified its market segment opportunities, it has to evaluate the various segments and decide how many and which ones to target. In evaluating segments, a firm must look at the segments attractiveness indicators and the company’s objectives and resources.

In choosing which segments to target, the company can choose to focus on a single segment, several segments, a specific product, a specific market or a full market. For a full market, it must choose between differentiated & undifferentiated marketing.

    

Marketers must choose target markets in a socially responsible manner. Marketers must also monitor segment inter relationships, and seek economies of scope and the potential for marketing to super segments. Marketers should develop segment-by-segment invasion plans.

Finally market segment managers should be prepared to cooperate in the interest of overall company performance.

Source: Marketing Management 11^th Edition, Philip Kotler (2003) Apprentice Hall

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