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  • Market Segmentation

    TEACHER: Hi, Student. Would you like to volunteer some initial comment on the subject of this Module?

    STUDENT: Well, I can mention one of the oldest and most commonly told stories about the need for market segmentation, which involves the early auto industry. By focusing on the economies of mass production, Henry Ford developed the Model T into a car intended to satisfy everyone. Ford is quoted as saying: "They can have it in any color, as long as it's black." In contrast, General Motors came up with several models, designed to satisfy the needs and tastes of a different group of customers. This strategy helped GM become the nation's leading automaker.

    TEACHER: Nice story. And a true one. When Ford finally introduced the A model, it was too late; it had lost its position as market leader forever. Marketers have recognized for many years that a single marketing mix seldom is adequate to address the wants and needs of an entire market for a product. There are important variations among individual and organizational buyers, and these are the main reason for market segmentation.

    The individuals or organizations in each subset, or market segment, have common needs and similar responses to a particular marketing effort. Businesses use this information to decide what segment(s) of the market they can serve most profitably. Nonprofit organizations use the information to determine what segment(s) of the market they can serve most effectively and efficiently.

    STUDENT: Very well, Teacher, but when does an organization use segmentation?

    TEACHER: In some cases, organizations find it advantageous to develop a single marketing mix to serve a single market segment. This approach tends to be least costly and to give potential customers the clearest sense of the organization's specialty.

    Let me mention Fisher-Price, the well known toy-marketer. While the company markets over 400 products, the focus is on moderately priced toys for children six and under -a focus that is well known among toy buyers in the United States and many other countries.

    Now, please take a look at these ads from BOSE:
    BOSE markets a single marketing mix: high quality/price audio equipment, targeted evidently to the upscale market.

    Other organizations find it more beneficial to use their own version of the strategy of developing several marketing mixes to serve several segments. This approach is more complex and more costly, but it can enable the organization to appeal to more customers and therefore generate larger earnings.

    Even when an organization decides to try serving the entire market with a single marketing mix, market segmentation is important. Only when marketers know about the existing market segments can they determine whether their strategy will be the most successful one.

    Single-Product Category Strategies - When an organization has a single type (category) of good or service to sell, it may use market segmentation to find which categories of individuals or organizations are most likely to be interested in the product and to find it superior in some way to any competing products. The most profitable strategy may be to concentrate on selling the product to a single market segment, tailoring the elements of the marketing mix to attract that segment. This approach is known as niche marketing.

    This ad is a good example: a single product (a high school term at sea) targeted to a single very small market segment.
    Because niche marketing can be done successfully with a relatively small investment, it is an attractive strategy for small organizations. It also allows a firm to achieve strong sales from loyal customers by specializing in serving their specific needs.

    STUDENT: Am I right in assuming that niche marketing is relatively risky? I mean, a change in the demand of the single market segment can cause the organization's overall sales to plummet.

    TEACHER: You are right, of course. This may and does happen.

    Multiple-Product Strategies – Most organizations today sell multiple versions of a product, each designed to appeal to a different market segment. There are abundant examples of this strategy. Can you think of at least one?

    STUDENT: Most car models are be marketed with different motors, transmissions, and body forms.

    TEACHER: Right, you grasped the concept. Of course, in addition to selling the same basic model in many version, all automakers sell many different models.

    To support this type of strategies, a company may use different advertising messages and media to reach customers in different market segments. In either case, this strategy is called differentiated marketing.

    Large international airlines are among the leaders in differentiated marketing. For what is essentially the same service (transporting you from A to B in the same airplane, route and time) they offer three classes of service (coach, business, first) at very different prices. The variation of the product in this case is the size of the seats and the food and beverage service. But within exactly the same service, coach, there are many segmentations based on length of stay, request of advance reservation, advance payment, restrictions in changing the date of the trip, etc. etc.

    STUDENT: Yes, I once was on an international flight on coach and started to compare the prices we paid with several other travelers. None of us had paid the same price!

    TEACHER: A common occurrence.

    This ad from British Airways illustrates a double segmentation. It is targeted to the business traveler, offering a very comfortable seat in business class. At the same time the service is segmented by route; this special service is restricted to the New York-London route, where the demand for this type of service is very high.
    Student, in what type of magazine do you think this ad appeared?

    STUDENT: Must have been in a magazine read by members of the target market: medium and high level business executives.

    TEACHER: Correct. Do not expect to see this type of ads in a supermarket newspaper.

    STUDENT: It is apparent that by meeting the needs of various segments, a differentiated strategy should produce greater sales.

    TEACHER: Yes, and in the case of the airlines supplying the differentiated services is not a big problem . However, in the case of manufacturing industries there is a practical limit to differentiation. As many a production manager has been quick to tell the organization's marketing people, serving a variety of market segments is more difficult and expensive than producing a single product intended for everyone. In many instances companies applying an excessive differentiation strategy have seen their profits suffering from the costs of keeping its product line diverse.

    Student, what is the conclusion you can draw?

    STUDENT: I think that when marketers consider a differentiated strategy, they must work closely with production personnel and other functional areas to ensure that the extra costs generate additional profits.

    TEACHER: Right. A very diverse product line has high costs not only for production but also for warehousing and distribution. And resellers, such as supermarket, may react negatively to a very extended product line of similar products.

    Marketers also must be careful to avoid differentiating so much that potential customers aren't clear what a company or its brands stand for. This is the major risk Mercedes-Benz faced when seeking to develop car models to serve segments of the automobile market they had not targeted before. Critics warned that Mercedes could lose its prestigious reputation, and the company was very careful in deciding what new markets to target. Basically it did not change its strategy of making prestige cars for the upscale market; it simply added models for the younger population segment of the same high-income group.

    Marketers can choose from among a variety of ways to segment markets: according to age, gender, race or ethnic origin, socioeconomic variables, place of residence, taste, occupation, culture, etc. etc.

    Segmentation by race or ethnicity - To serve racial or ethnic market segments (as when serving any kind of market segment), marketers need to move beyond relying on assumptions and stereotypes about these groups. They need to do their homework to learn what the consumers in the segment really need. When marketing consultants Don Coleman & Associates developed a database about the car-buying preferences of upscale African-Americans in the US, they found influential new-car buyers with tastes sharply different from those of whites. In the past, decisions on marketing automobiles to African-American had been based on zip codes and guesswork, with frustrating results.

    Segmentation by Socioeconomic Variables - Segmenting by income level helps marketers determine which consumers are likely to respond to a particular combination of price, style, and quality. Presumably, low-income consumers will be especially interested in bargains, whereas high-income consumers will be willing to spend extra for prestigious or high-quality products. Segmenting by education level or occupation are other ways to explore the socioeconomic status of various market segments. American Express does this by marketing its credit card to college students through direct mail and displays in bookstores. In that way, the company reaches a segment that averages substantially higher lifetime earnings than does the general population.

    Segmentation by Family Types – Demographic segmentation can also involve various ways to categorize households by size, composition, or stage in the family life cycle. For example, large families are likely to be attracted to big boxes of laundry detergent or an amusement park with a single admission price for a whole family. People who live alone are apt to prefer smaller packages of many items, especially those that e spoil before they are used up.

    Geographic Segmentation - To use geographic segmentation, the marketer divides the total market into groups according to location. To look at national buying patterns, the marketer might divide a large country into regions, such as Northeast, Southeast, Midwest, Southwest, and West. A marketer who plans to serve a regional market might use geographic segmentation to further divide the market within a single state (provincial) or metropolitan area. Marketers might also segment the market on the basis of counties (departments) or zip codes.

    Psychographic Segmentation - While demographic and geographic segmentation are relatively simple, straightforward ways to segment markets, they do not directly address the needs and wants that lead people to make buying decisions. In an attempt to more specifically identify the consumers who would be interested in particular products, marketers have developed psychographic segmentation. This segmentation is based on consumers' activities, interests, and opinions (their lifestyles) measured through psychographics.

    A variety of psychographic data is available. Advertising agency Backer Spielvogel Bates, now a division of Saatchi & Saatchi, conducts a yearly study it calls Global Scan, which studies the attitudes, lifestyles, and product usage of consumers in 13 countries (using eight languages). Global Scan places international consumers into five psychographic categories it has named Strivers, Achievers, Pressured, Adapters, and Traditional.

    To use psychographic segmentation, the marketer appeals to consumers with particular combinations of activities, interests, and opinions. Student, to what psychographic segment is this add directed?STUDENT: To people with an inclination to literature; writers and persons who like good books. And able to spend a sizable amount of money, I may add!

    TEACHER: Sure. And maybe also targeted, marginally, to people who like to show off by placing good looking volumes of prestigious dictionaries and quality literature books in their homes!

    STUDENT: Are you sure it is just "marginally" targeted to the latter group?

    TEACHER: Well, some people say the latter is the main market for this kind of products. Maybe it is not the main market, but possibly a large percentage!

    Now, we will discuss approached to segmenting "Organization Markets", that is, markets where the customers are companies or other types of organizations.

    In some cases, marketers find it helpful to segment an organizational market geographically. As with marketing to consumers, it is often most profitable to concentrate on areas with high growth rates or where the climate or population creates strong demand for a particular type of product. Thus, a company that supplies the construction industry might want to concentrate on expanding in areas of high growth. Or a start-up consulting firm may want to keep its initial costs down by locating near many businesses that might buy its services.

    Another way to segment organizational markets is by type of customer. Different types of buyers will want different types of products and services.

    STUDENT: I think that also different kinds of users within organizations often have different needs and preferences.

    TEACHER: True. If your company sold equipment to produce dehydrated bullion cubes, you would concentrate on the companies that manufacture this product (NestlĂ© and Unilever’s foods) and within these organizations, you would target the manufacturing manager; others like the Finance or the Personnel manager would not be interested.

    One way to identify different types of organizations is by looking at their size. Thus, the marketer might segment organizations by the amount of their annual sales. IBM surely develops, produces and sells hardware and software targeted in this way.

    STUDENT: Sure, I don’t think the corner drugstore would buy a large mainframe and a huge data base management software!

    TEACHER: True indeed.

    Steps In The Market Segmentation Process

    Formally defined, the process of market segmentation follows these steps:

    * identify possible market segments,
    * determine the size of each segment,
    * qualify the pattern of demand in various segments, and select one or more target markets (segments) to serve.

    Identify Possible Market Segments - First the marketer explores various ways to divide the market into segments. There is no foolproof, scientific way to decide what categories to use for creating market segments. Marketers mostly rely on experience and intuition to decide which approaches to try.

    In identifying segments, marketers should make decisions that support the organization's mission or objectives. For example, at a retailer whose objective is to sell goods at the lowest price in the area, marketers would focus on segmenting in ways that help them identify and learn about customers who value low prices. Their efforts would probably include segmentation on the basis of income level.

    Meaningful Bases for Segmentation: After trying one or more approaches to segmentation, the marketer determines whether the results are meaningful -that is, whether they will help the marketer make a good decision concerning what segments to serve. The marketer can conclude that the basis for segmenting the market is meaningful if the market segments meet the following criteria:

    * The size of the segment can be measured or estimated with acceptable accuracy.
    * The segments are large enough that it is theoretically possible to make a profit serving them.
    * Within each segment, the potential buyers have similar needs.
    * The needs of potential buyers in different segments are different. (If they are not, the segmentation approach may be appropriate, but the marketer may simply have created too many segments.)
    * The organization can reach at least one segment through marketing activities.

    Take a look at this ad promoting a very special Literary Magazine published by Stone Soup.

    We must assume that the publishers have decided that the segment formed by parents of 8- to 13-year-old children who want to stimulate their children's literary inclinations, justified the creation of a specific product.

    STUDENT: I notice a very original approach, because it is not a literary magazine for children, but a magazine by children.

    TEACHER: Yes. Very original.

    Let me add that ultimately, marketers often combine several approaches to segmentation to describe market segments.

    Once the market is divided into segments, the marketer determines the size of each segment. These efforts focus on each segment’s market potential -the total amount of product that buyers in the segment will purchase during a specified period of time.

    STUDENT: Well, I guess the potential market will also depend on what the company does to promote the product, right?

    TEACHER: Naturally, the market potential should be calculated for a specified level of marketing activity.

    The information the marketer has gathered about market segments enables him or her to select one or more market segments to concentrate on. A business using market segmentation would concentrate its efforts on the market segments it can serve most profitably. A nonprofit organization focuses on the market segments it can serve most efficiently or most consistently with its objectives. (Notice that these goals involve profits, efficiency, and effectiveness, rather than necessarily getting the most customers possible.) The market segments on which an organization focuses its efforts are known as the organization's target markets', even though they are technically market segments.

    In segmenting and targeting markets, marketers with a global perspective may use geographic segmentation and identify particular countries to serve. Such an approach can make sense with widely used consumer goods.

    Nike has developed a line of soccer shoes and a special TV promotional campaign for Latin America. In this region it is common for youngsters to play soccer on streets, beaches or vacant lots. The videos shows young Brazilians, Argentines, Mexicans, etc. playing the game on the mentioned places, enjoying themselves... and wearing Nike shoes, of course.

    Global Marketing vs. Multinational Marketing - Using a single marketing strategy is often called global marketing or operating as a global corporation. Organizations that pursue such a strategy include Coca-Cola and Gillette. A global strategy is most effective under certain conditions. First, potential customers in various countries should have the same kinds of needs. The organization should be in basically the same competitive position in each country. The same elements of the marketing mix (including the product's brand name) should be effective in all the countries. In contrast, using different strategies to serve customers in different nations is often called multinational marketing, or operating as a multinational corporation. This strategy works best when customer wants or needs are different from one country to another. Preferences in food and drink are common examples.

    STUDENT: Teacher, the single word most used by marketing people is "positioning". Will you discuss this concept?

    TEACHER: Naturally. A fundamental part of serving a particular target market is product positioning. This involves adapting a marketing mix so that the target market will see that product meeting important wants or needs. The result -the product's position- is the potential customers' view of the product’s attributes. For example, an automobile might positioned as sporty and high performing, as safe and reliable, or as economical and practical. When it added calcium to its Sunny Delight and Hawaiian Punch drinks, Procter & Gamble sought to position them as healthful beverages for growing children and adolescents.

    STUDENT: I suppose that there is a difference between the actual qualities of a product and the customer’s perception of it.

    TEACHER: Certainly, and marketing is at least as concerned with the latter as with the former. Actually, on of the most criticized aspects of marketing is its alleged manipulation of consumer perceptions.

    STUDENT: OK, I remember an example you mentioned, when one giant milk products firm tried to convince doctors and mothers that using formula was better that breast feeding.

    TEACHER: This was an example of inducing an incorrect and potentially harmful perception. But even when a product has actual benefits for certain consumers, it is marketing’s job to induce the potential consumers to perceive those benefits.

    Market research is also concerned in obtaining general information about potential consumer’s perception in a given market.

    Based on what they have learned about their target markets' perceptions, marketers determine whether they must make changes in existing products to satisfy their target markets. Or they may identify a need for a new type of product.

    STUDENT: Any comment on relationship to competition?

    TEACHER: Good point. In positioning a product, the marketer also has to consider the relationship of the product's position to that of competing products. Is the product the market leader or a follower? Or perhaps the product is so innovative (or protected by a patent) that there is little if any close competition. This information influences the kind of marketing strategy that is most likely to succeed.

    STUDENT: And obviously "repositioning" means producing changes in a product’s position. Can you mention an example?

    TEACHER: Let me finish this Module mentioning the Case of the Repositioning of Las Vegas. This city in Nevada, USA is world famous as a gambling paradise. At a certain point the city officials and investors perceived that this specific "position" limited the potential visitors market. The city was "repositioned" as both a "world class gambling" place and a "family vacation destination". I am quoting the Las Vegas Chamber of Commerce website: "While Las Vegas is known as the number one vacation destination in the world for adults, there are many exciting activities the whole family can enjoy in the Entertainment Capital of the World! Activities for children range from fast action video arcades and water parks to magnificent show productions and exploring the natural and man-made wonders in and around Las Vegas."

    And now I say: "That’s All, Student!"


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