2. DBM 3110 - Market Segmentation.pdf

MARKET SEGMENTATION A market consists of people or organizations with wants, money to spend, and the willingness to spend it. However, most markets the buyers' needs are not identical. Therefore, a single marketing program for the entire market is unlikely to be succes...

MARKET SEGMENTATION A market consists of people or organizations with wants, money to spend, and the willingness to spend it. However, most markets the buyers' needs are not identical. Therefore, a single marketing program for the entire market is unlikely to be successful. A sound marketing program starts with identifying the differences that exist within a market, a process called, market segmentation, and deciding which segments will be treated as target markets. Market segmentation is customer oriented and consistent with the marketing concept. It enables a company to make more efficient use of its marketing resources. After evaluating the size and potential of each of the identified segments, it targets them with a unique marketing mix. The marketer must somehow persuade the members of each segment that its product will satisfy their needs better than competitive products. To do so, marketers attempt to develop a special image for their products in the consumer's mind relative to competitive products: that is, it positions its product as filling a special niche in the market place. Market segmentation is defined as "the process of taking the total, heterogeneous market for a product and dividing it into several submarkets or segments, each of which tends to be homogeneous in all significance. The markets could be segmented in different ways. For instance, instead of mentioning a single market for 'shoes', it may be segmented into several sub- markets, e.g., shoes for executives, doctors, college students etc. Geographical segmentation on the very similar lines is also possible for certain products. Segmentation allows the firm to better satisfy the needs of its potential customers. The Need for Market Segmentation The marketing concept calls for understanding customers and satisfying their needs better than the competition. But different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike. Mass marketing - refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, and mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, another firm likely would enter the market with a product that serves a specific group, and the incumbant firms would lose those customers. Target marketing - on the other hand recognizes the diversity of customers and does not try to please all of them with the same offering. The first step in target marketing is to identify different market segments and their needs. DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 1 Requirements of Market Segments In addition to having different needs, for segments to be practical they should be evaluated against the following criteria:  Identifiable: the differentiating attributes of the segments must be measurable so that  they can be identified.  Accessible: the segments must be reachable through communication and distribution  channels.  Substantial: the segments should be sufficiently large to justify the resources required to  target them.  Unique needs: to justify separate offerings, the segments must respond differently to the  different marketing mixes.  Durable: The segments should be relatively stable to minimize the cost of frequent changes. A good market segmentation will result in segment members that are internally homogenous and externally heterogeneous; that is, as similar as possible within the segment, and as different as possible between segments. Bases for Segmentation in Consumer Markets Consumer markets can be segmented on the following customer characteristics. Geographic, Demographic, Psychographic and Behavioralistic: 1. Geographic Segmentation: The following are some examples of geographic variables often used in segmentation. Region: by continent, country, state, or even neighborhood, Size of metropolitan area: segmented according to size of population, Population density: often classified as urban, suburban, or rural, Climate: according to weather patterns common to certain geographic regions 2. Demographic Segmentation: Some demographic segmentation variables include: Age, Gender, Family size, Family lifecycle, Generation: baby-boomers, Generation X, etc., Income, Occupation, Education, Ethnicity, Nationality, Religion and Social class. Many of these variables have standard categories for their values. For example, family lifecycle often is expressed as bachelor, married with no children (DINKS: Double Income, No Kids), full-nest, empty-nest, or solitary survivor. Some of these categories have several stages, for example, full-nest I, II, or III depending on the age of the children. 3. Psychographic Segmentation: Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO) surveys are one tool for measuring lifestyle. Some psychographic variables include: E.g. Activities, Interests, Opinions, Attitudes, Values etc. DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 2  4. Behavioralistic Segmentation: Behavioral segmentation is based on actual customer behavior toward products. Some behavioralistic variables include: Benefits sought, Usage rate, Brand loyalty, User status: potential, first-time, regular, etc., Readiness to buy, Occasions: holidays and events that stimulate purchases. Behavioral segmentation has the advantage of using variables that are closely related to the product itself. It is a fairly direct starting point for market segmentation. Bases for Segmentation in Industrial Markets In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They evaluate offerings in more detail, and the decision process usually involves more than one person. These characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments, and institutions. Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets might be segmented on characteristics such as: Location, Company type, Behavioral characteristics, Location In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some industries firms tend to cluster together geographically and therefore may have similar needs within a region. Company Type, Business customers can be classified according to type as follows: Company size, Industry, Decision making unit, Purchase Criteria, Behavioral Characteristics In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristics may include: Usage rate, buying status: potential, first-time, regular, etc., Purchase procedure: sealed bids, negotiations, etc. Benefits of Segmentation 1. The manufacturer is in a better position to find out and compare the marketing potentialities of his products. He is able to judge product acceptance or to assess the resistance to his product. 2. The result obtained from market segmentation is an indicator to adjust the production, using man, materials and other resources in the most profitable manner. In other words, the organization can allocate and appropriate its efforts in a most useful manner. 3. Change required may be studied and implemented without losing markets. As such, as product line could be diversified or even discontinued. DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 3  4. It helps in determining the kinds of promotional devices that are more effective and also their results. 5. Appropriate timing for the introduction of new products, advertising etc., could be easily determined. Selecting the market segments As a result of evaluating different segments, the company hopes to find one or more market segments worth entering. The company must decide which and how many segments to serve. This is the problem of target market selection. A target market consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The company can consider five patterns of target market selection. 1. Single segment concentration: In the simplest case, the company selects a single segment. This company may have limited funds and may want to operate only in one segment, it might be a segment with no competitor, and it might be a segment that is a logical launching pad for further segment expansion. 2. Selective specialization: Here a firm selects a number of segments, each of which is attractive and matches the firm's objectives and resources. This strategy of 'multi-segment coverage' has the advantage over 'single-segment coverage' in terms of diversifying the firm’s risk i.e. even if one segment becomes unattractive, the firm can continue to earn money in other segments. 3. Product specialization: Here the firm concentrates on marketing a certain product that it sells to several segments. Through this strategy, the firm builds a strong reputation in the specific product 4. Market specialization: Here the firm concentrates on serving many needs of a particular customer group. The firm gains a strong reputation for specializing in serving this customer group and becomes a channel agent for all new products that this customer group could feasibly use. 5. Full market coverage: Here the firm attempts to serve all customer groups with all the products that they might need. Only large firms can undertake a full market coverage strategy. e.g. Philips (Electronics), HLL (Consumer non-durables). Large firms going in for whole market can do so in two broad ways— through undifferentiated marketing or differentiated marketing. DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 4 TARGETING Market segmentation reveals the market-segment opportunities facing the firm. The firm now has to evaluate the various segments and decide how many and which ones to serve. Evaluating the market segments In evaluation different market segments, the firm must look at three factors, namely segment size and growth, segment structural attractiveness and company objectives and resources. A. Segment size and growth: The first question that a company should ask is whether a potential segment has the right size and growth characteristics. Large companies prefer segments with large sales volumes and overlook small segments. Small companies in turn avoid large segments because they would require too many resources. Segment growth is a desirable characteristic since companies generally want growing sales and profits. B. Segment structural attractiveness: A segment might have desirable size and growth and still not be attractive from a profitability point of view. The five threats that a company might face are: i. Threat from industry competitors: A segment is unattractive if it already contains numerous and aggressive competitors. This condition may lead to frequent price wars. ii. Threats from potential entrants: i.e. from new competitors who, if enter the segment at a later stage, bring in new capacity, substantial resources and would soon steal a part of the market share. iii. Threat of substitute products: A segment is unattractive if there exists too many substitutive products because it would result in brand switching, price wars, low profits etc. iv. Threat of growing bargaining power of buyers: A segment is unattractive if the buyers possess strong bargaining power. Buyers will try to force price down, demand more quality or services, all at the expense of the seller's profitability. v. Threat of growing bargaining power of suppliers: A segment is unattractive if the company's suppliers of raw materials, equipment, finance etc., are able to raise prices or reduce the quality or quantity of ordered goods. C. Company objectives and resources: Even if a segment has positive size and growth and is structurally attractive, the company needs to consider its own objectives and resources in relation to that segment. Some attractive segments could be dismissed because they do not match with the company's long-run objectives. Even if the segment fits the company's objectives, the company has to consider whether it possesses the requisite skills and resources to succeed in that segment. The segment should be dismissed if the company lacks one or more necessary competences needed to develop superior competitive advantages. DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 5 Selecting the market segments As a result of evaluating different segments, the company hopes to find one or more market segments worth entering. The company must decide which and how many segments to serve. This is the problem of target market selection. A target market consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The company can consider five patterns of target market selection: 1. Single segment concentration: In the simplest case, the company selects a single segment. This company may have limited funds and may want to operate only in one segment, it might be a segment with no competitor, and it might be a segment that is a logical launching pad for further segment expansion. 2. Selective specialization: Here a firm selects a number of segments, each of which is attractive and matches the firm's objectives and resources. This strategy of 'multi-segment coverage' has the advantage over 'single-segment coverage' in terms of diversifying the firm’s risk i.e. even if one segment becomes unattractive, the firm can continue to earn money in other segments. 3. Product specialization: Here the firm concentrates on marketing a certain product that it sells to several segments. Through this strategy, the firm builds a strong reputation in the specific product area. 4. Market specialization: Here the firm concentrates on serving many needs of a particular customer group. The firm gains a strong reputation for specializing in serving this customer group and becomes a channel agent for all new products that this customer group could feasibly use. 5. Full market coverage: Here the firm attempts to serve all customer groups with all the products that they might need. Only large firms can undertake a full market coverage strategy. e.g. Philips (Electronics), HLL (Consumer non-durables). Large firms going in for whole market can do so in two broad ways— through undifferentiated marketing or differentiated marketing. POSITIONING Suppose a company has researched and selected its target market. If it is the only company serving the target market, it will have no problem in selling the product at a price that will yield reasonable profit. However, if several firms pursue this target market and their products are undifferentiated, most buyers will buy from the lowest priced brand. Either, all the firms will have to lower their price or the only alternative is to differentiate its product or service from that of the competitors, thereby securing a competitive advantage and better price and profit. The company must carefully select the ways in which it will distinguish itself from competitors. Suppose a scooter manufacturer, say Bajaj, gets worried that scooter buyers see most scooter brands as similar and, therefore, choose their brand mainly on the basis of price. Realizing this, DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 6 Bajaj may decide to differentiate their scooters physical characteristics. "Differentiation is the act of designing a set of meaningful differences to distinguish the company's offer from competitors' offers. May be Bajaj claims its scooter to be different from others because of its highest fuel efficiency and economy, LML claims-maximum durability and added physical features, whereas Vijay Super may have claimed highest mileage. Thus, all scooters appeal differently to different buyers. If it wishes, any scooter manufacturer can show this comparison chart to potential buyers. Not all buyers will notice or be interested in all the ways one brand differs from another. Such firm will want to promote those few differences that will appeal most strongly to its target market. Positioning is the act of designing the company's offer so that is occupies a distinct and valued place in the target customer's minds. Positioning calls for the company to decide how many differences and which differences to promote to the target customers. How many differences to promote: Many marketers advocate aggressively promoting only one benefit to the target market. Rosser Reeves, e.g. said a company should develop a unique selling proposition (USP) for each brand and stick to it. Thus, Godrej refrigerators claim, automatic defrost, while Rin claims to have dirt-blasters. Each brand should pick an attribute and claim itself to be "number one" on it. What are some of the "number one" positions to promote? The major ones are "best quality", "best service", "best value", “most advanced technology” etc. If a company hammers at any one of these positioning points and delivers it properly, it will probably be best known and recalled for this strength. Besides single benefit positioning, the company can try for double benefit positioning- e.g. Forhans toothpaste claims that it cleans teeth and protects the enamel. There are even cases of successful triple benefit positioning e.g. Videocon Washing machines claims that the machine "washes, rinses and even dries the clothes". Many people want all three benefits, and the challenge is to convince them that the brand delivers all three. What differences to promote: A company should promote its major strengths provided that the target market values these strengths. The company should also recognize that differentiation is a continuous process. It would seem that the company should go after cost or service to improve its market appeal relative to competitors. However, many other considerations arise. 1. How important are improvements in each of these attributes to the target customers? 2. Can the company afford to make the improvements, and how fast can it complete them? 3. Would the competitors also be able to improve service if the company started to do so, and in that case, how would the company react? This type of reasoning can help the company choose or add genuine competitive advantages. Communicating the Company's positioning: The Company must not only develop a clear positioning strategy, it must also communicate it effectively. Suppose a company chooses the "best in quality" positioning strategy. It must then make sure that it can communicate this claim convincingly. Quality is communicated by choosing those physical signs and cuts that people normally use to judge quality. Quality is often communicated through other marketing elements. DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 7 A high price usually signals a premium-quality product to buyers. The product's quality image is also affected by the packaging, distribution, advertising and promotion. The manufacturer’s reputation also contributes to the perception of quality. To make a quality claim credible, the surest way is to offer "satisfaction or your money back". Smart companies try to communicate their quality to buyers and guarantee that this quality will be delivered or their money will be refunded. ***** DBM 3110 – Market Segmentation, Targeting & Positioning – G.R. Page 8