Marketing Module 2: Market Segmentation

• Study notes for Marketing Module 2

Chapter 5: Market Segmentation

• Market segmentation is important because not all consumers are equal, some are more interested, can afford, or are more profitable
• Companies can focus resources due to limitation.
• Avoid trying to be all things to all people

Segmentation

• Dividing or segmenting people and organizations into different groups of potential buyers with similar characteristics to tailor products for these groups defines marketing segments.
• Targeting segments means selecting market segments to pursue with plans to build loyalty and greater impact
• Positioning involves creating a preferred position for the company's products in the minds of consumers.

Targeted vs. Mass Marketing

• Targeted marketing differentiates some aspects of marketing for selected customer groups and is a relatively new phenomenon.
• Mass marketing involves undifferentiated selling of the same products to everybody and evolved alongside mass production.

Targeting

• Finding and attracting new customers is more difficult and costly than retaining current ones.
• Some customers are highly profitable, while others are not, and some may cost money to serve.
• Some firms deliberately avoid targeting unprofitable customers.
• Many firms use one-to-one marketing.
• This process outlines the steps companies take to target their most valuable customers, form close, personal relationships with them, and provide products that meet their needs.

Key Takeaways

• Market segmentation breaks down all customers into groups of potential customers with similar characteristics.
• Target marketing or differentiated marketing are terms for when select groups of people are specifically targeted.
• Targeting can be based on price, product, promotion, or place.
• Mass or undifferentiated marketing involves marketing the same product to everyone, while targeted marketing is more precise.
• Acquiring new customers is generally more difficult and costly than customer retention
• Organizations strive to interact with and form relationships with their existing customers to retain them.
• Firms aim to do as much business as possible with their most valuable customers and form close personal relationships, and provide customers exactly what they want which defines one-to-one marketing.
• Mass marketing opposes one-to-one marketing.

Segmentation Bases

• Behavioral segmentation considers what benefits customers want and how they use the product.
• Demographic segmentation profiles customers by age, gender, income, race, and ethnicity.
• Geographic segmentation considers where customers are located and how they can be reached.
• Psychographic segmentation considers what customers think about and value, and how they live their lives.
• Firms use multiple bases to understand customers better and create value for them.
• Marketing professionals gather quantitative and qualitative information to develop consumer insight.

Targeting Criteria

• Key criteria include whether the market is large enough to be profitable and growing.
• Consider if there is room for a new competitor and if the market is accessible.
• It is important to assess if the company has the necessary resources to compete in the market.
• Ensure the market aligns with the current business mission and objectives.

Concentrated Marketing

• Concentrated marketing focuses on targeting a highly select group of customers.
• Niche marketing targets an even more select group of consumers.
• Microtargeting gathers all available data on individuals to create highly personalized communications.

Positioning

• Focuses on how consumers perceive a product relative to the competition.
• The goal is to establish a distinctive image and offering that stands out in the minds of consumers.
• A perceptual map is a two-dimensional graph that visually shows where a product stands relative to competitors, based on criteria important to buyers.
• Key aspects include taglines designed to sum up a product’s essence and repositioning efforts to "move" a product in the minds of consumers.

Customer Lifetime Value

• Represents the financial worth of a customer to a company over the course of their relationship.
• CLV assesses the value of heavy vs. lighter users and loyal customers vs. switchers.
• Loyal users typically have a higher lifetime value, consistent with the 80/20 rule.
• CLV considers usage rate, loyalty (retention), and cost to serve.
• CLV is calculated as monthly spending x 12 months, then multiplied by the number of years of product use.

Chapter 6: Product and Service Decisions

• A product is a tangible good that can be bought, sold, and owned, while a feature is a physical characteristic of a product.
• The value equation determines how features matter differently to different users.
• Benefit is the degree to which a feature satisfies a buyer's need or desire.
• Price is the amount exchanged for a product or service.
• Total Cost of Ownership (TCO) includes the time and money spent to acquire, use, and dispose of an offering.
• TCO matters differently to different users based on their value equation.
• A service is an intangible component of the offering that requires is perishable and often requires the consumer's presence, creating marketing challenges.

Product or Service Dominant?

• Product dominance began during the Industrial Revolution with a focus on lower cost products.
• Capital is the most frequently used barrier to entry for competition.
• Advantages exist in economies of scale, producing the product and investing in proprietary technology.
• Focuses on creating barriers to entry through economies of scale, capital, brand recognition, and proprietary technology.
• Service dominance integrates the product, price, and services of an offering.
• Marketers should consider the services required for customers to acquire, enjoy, and dispose of their offerings.
• Location decisions are important and can serve as barriers to entry.
• Key barriers to entry include location, technology, advertising, reputation, and proprietary technology.

Product Levels and Lines

• Product lines are groups of related offerings created to make marketing strategies efficient.
• Line depth is the number of offerings in a product line.
• Line extension involves adding a new but similar product to a line.
• Line breadth is the number of different or distinct product lines a company has.
• Product mix is the entire assortment of products that a firm offers.

Branding

• Branding involves a name, picture, design, or combination of elements used to identify and differentiate a seller's offerings from competitors.
• It includes activities designed to create a brand and position it in the minds of consumers.
• Brand name is the spoken part of the brand's identity.
• Brand mark/logo is the symbol associated with a brand.
• Brand extension utilizes an existing brand name or brand mark for a new product category.
• Cannibalization occurs when a firm's new offering eats into the sales of one of its older offerings.

Packaging

• Packaging decisions must fulfill several functions.
• Communicating the brand and its benefits.
• Protecting the product from damage and contamination during shipment.
• Safeguarding the product from damage and tampering in retail outlets.
• Preventing leakage and displaying required information.
• Primary packaging holds a single retail unit of a product.
• Secondary packaging holds a single wholesale unit.
• Tertiary packaging is designed for shipping and handling large quantities efficiently.

Managing Brands by Expanding Users and Usage

• Goal: Increase usage and frequency of use.
• Sales Volume = # of Brand Users x Usage Rate per User.
• Strategies to expand the number of brand users include entering new market segments and winning competitor's customers.
• Usage strategies include encouraging more frequent use and introducing new and varied uses.
• Optimize usage per occasion.

Chapter 7: Developing and Managing Offerings

• New products are important because consumers want choices and have evolving needs.
• Companies require growth, and retailers want new items to keep things fresh and interesting.
• New products fail if they target the wrong consumer, lack a point of differentiation (POD), have insufficient shelf space, or have poorly executed marketing efforts.

Degrees of Newness

• A continuous innovation requires no new learning by consumers, emphasizing consumer awareness and wide distribution.
• A discontinuous innovation establishes new consumption patterns, focusing on educating consumers through product trial and personal selling.
• A dynamically continuous innovation disrupts a consumer's routine but does not require totally new learning, emphasizing advertising points of difference, benefits, and advantages.

Offerings - Development Steps

• Developing new products is a constant process for most companies, including improvements.
• 7 Steps:
  • Idea generation
  • Idea screening
  • Feature specification
  • Development
  • Testing
  • Launch
  • Evaluation.

Step 1: Idea Generation

• Develop a pool of ideas and concepts for new product candidates.
• Ideas for products can come from employees, customers, and suppliers.
• Companies get ideas by watching competitors.
• Line extension is developing a product/service based on one of the other products.
• Some ideas are protected from duplication by copyrights or patents.

Step 2: Idea Screening

• Includes asking:
  • Does the consumer need the product?
  • Can the company make and sell the product within budget and still make money?
  • Is there long-term viability?
• Concept testing runs the idea by potential customers.
• Focus groups have 8-12 consumers reacting to the concept.
• Depth interviews mean individuals react individually to the concept.
• The degree to which the company can feasibly make and service a product is process feasibility.
• The ability of the new offering to make money is financial feasibility.
• Potential exists that the company will not earn an appropriate is known as investment risk.
• Opportunity Risk: A better idea gets ignored because the company has invested in the idea at hand.

Steps 3 and 4: Product Features and Design

• The company designs an offering that delivers benefits customers desire through quality Function Development (QFD).
• The actual offering is designed, specifications are written, and a prototype is created.
• Propose the strategy for promotion, distribution, pricing, and the manufacturing process.

Step 5: Testing

• Alpha: Testing in a lab to ensure that the offering is working according to specifications.
• Beta: Testing involves actual customers ensuring that it works in real-life conditions and that the delivery mechanism and other aspects work as advertised.
• This test is expensive.
• Market: Testing Companies test the strategy to ensure that the offering reaches buyers, receives positive feedback, and generates sales.

Step 6: Launch

• Rolling Launch: Offering is available to certain markets initially, then to others, to address any challenges with the launch.
• Sometimes companies opt for this launch due to budget constraints.

Step 7: Evaluation

• Once an product is launched, the progress and strategy will be evaluated.
• Consider the following:
  • High Trial, High Repurchase Rate: Go
  • High Trial, Low Repurchase: Redesign or Drop
  • Low Trial, High Repurchase: Increase Advertising
  • Low Trial, Low Repurchase: Drop

Product Life Cycle

• Life cycles vary for different categories of products, with some never experiencing success or remaining in certain phases longer.
• Examples:
  • Jewelry
  • Computers
• How products are marketed can vary throughout the life cycle.
• Global differences may also affect the phases in the life cycle.

Introduction Stage

• Marketing costs are higher.
• Profits are low or non-existent due to R&D and other costs.
• Distribution channels may be limited to early adopters.
• Pricing strategies can vary and may be based on skimming or penetration objectives.
• Build awareness through trial.

Growth Stage

• Product accepted by the market, entering the growth stage and attracting more competition.
• Increase distribution and production to ensure availability.
• Continue increasing awareness, trial, AND repeat purchases.
• Pricing typically remains constant during this phase.
• Aiming to increase profits from increased sales.
• Competitors may reduce prices to gain market share, which may have to be followed.
• Plan new products.
• Increase promotions.

Maturity Stage

• Reach a stage of maturity or leveling-off of growth.
• Sales plateau as demand erodes, with sales primarily driven by replacement or repeat users rather than new customers.
• Phases can last longer, and only the strongest suppliers will survive.
• Focus on building loyalty and entering new markets.

Decline Stage

• Product sales decrease at an increasing rate as technology makes products obsolete.
• Fads generally have short lifespans, and fashion trends change rapidly.
• Enter new Target Markets, Modify Markets.
• Harvesting products involves reducing costs to maintain profits.
• Modifying products during maturity may also avoid decline.
• Add new features.

Chapter 15: Pricing

• Price is the only marketing mix variable that generates revenue.
• Buyers often relate value to price, feeling they receive value based on the amount paid.
• Key aspects include understanding the pricing framework, setting objectives, estimating demand, determining costs, analyzing factors, determining strategies/policies, setting initial prices, and adjusting prices as needed.

Pricing Objectives

• Targeted Return on Investment (ROI): Achieving based on the assets or money invested in a product.
• Maximizing Profits: Setting prices to increase revenues relative to costs.
• Maximizing Sales: Pricing products to generate the highest revenue regardless of the firm's profits.
• Maximizing Market Share: Setting prices to capture a larger share of the market.
• Maintaining the Status Quo: Matching or equalling competitors' prices.
• Factors That Affect Pricing include understanding the consumer and considering economic, political, and competitive influences.

Price Impacts on the Demand Curve

• Shifts in the demand curve can be driven by factors other than price.
• Pricing decisions are affected by:
  • How competitors price and sell their products
  • Availability of substitute products.
• Demand may decrease if substitutes are available, even if the price has not changed.

Factors Affecting Price Sensitivity

• The product is high in quality, prestige, or exclusiveness.
• Substitutes are hard to find.
• The total expenditure on the product is low relative to the buyer's income.
• Supply and demand conditions are stable.

Pricing Factors - Economy and Regulations

• The economy impacts pricing; for example, weak economies and high unemployment lead to lower prices.
• Regulations are designed to protect consumers, promote competition, and ensure ethical and fair business practices.
• The Robinson-Patman Act limits price discrimination.
• Practice of charging different prices to different customers for the same product.

Pricing Factors - Economy and Regulations

• The Robinson-Patman Act limits price discrimination.
• Price differences may be justified if needed by market conditions, cost variations, or competitive pricing by other suppliers.
• Other factors:
  • Price fixing, where firms agree to charge the same price, is illegal
  • Predatory pricing is setting excessively low prices to drive out competitors.
  • Bait-and-switch pricing is illegal in many states.

Pricing Factors - Product Costs

• The costs considered in a pricing decision include expenses for product development, testing, packaging, promotion, and distribution.
• Profits exist where the Company's revenue exceeds its costs.
• The break-even is calculated to determine profitability.

Break-Even Point

• Point where total costs equal total revenue.
• Total costs include both fixed and variable.
• Fixed costs are incurred regardless of production or sales levels.
• Variable costs fluctuate with the company's level of production and sales.
• The calculation is Total Fixed Costs/Contribution per Unit which is also Total Fixed Costs/Unit Price - Unit Cost.

Pricing Strategies

• Skimming Pricing Strategy:
• Penetration Pricing Strategy:
• Everyday Low Prices (EDLP) is used where the seller charges price throughout the product life cycle - and in Walmart’s Advertising.
• Cost-Plus Pricing (Markup Pricing) is based on the profit margin for the cost of the product.
• Odd-Even Pricing: Setting the price of a product a few cents below is less than the next dollar amount or a few dollars below a hundred- or thousand-dollar value.
• Price Lining: involves setting different price levels for a group of similar products.
• Leader Pricing: Offering low prices on one or more key items to attract customers.

Key Takeaways

• Price is the only revenue generator for a company.
• Setting a pricing objective, a firm must consider several factors before setting its prices.
• Customer needs, demand elasticity, competition, the economy and regulations, and cost.
• Companies use various pricing strategies to ensure profitability, aiming for revenues to exceed total costs.