Chapter 6
Targeting Attractive Market Segments
I. “The Developing World’s Emerging Middles Class” discusses the composition of the
world’s new middle class and the marketing questions and challenges associated with targeting
this new population.
II. Strategic Challenges Addressed in Chapter 6
This chapter draws on the foundation of market knowledge and customer understanding
established in the first five chapters to introduce what are probably the most important and
fundamental tools in the marketer’s tool kit: market segmentation and target marketing.
Learning to apply these tools effectively requires addressing the following important
questions:
oWhy do market segmentation and target marketing make sense?
oWhy not sell the same products or services to everyone?
oHow can potentially attractive market segments be identified and defined?
oHow can these segments be prioritized so the most attractive ones are pursued?
III. Do Market Segmentation and Target Marketing Make Sense in Today’s Global
Economy?
Market segmentation: is the process by which a market is divided into distinct subsets of
customers with similar needs and characteristics that lead them to respond in similar ways
to a particular product offering and marketing program.
Target marketing requires evaluating the relative attractiveness of various segments in
terms of market potential, growth rate, and competitive intensity, and other factors, along
with the firm’s mission and capabilities to deliver what each segment wants, in order to
choose which segments it will serve.
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, in the customer’s mind.
These three decision processes—market segmentation, target marketing, and positioning—
are closely linked and have strong interdependence. All must be well considered and
implemented if the firm is to be successful in managing a product-market relationship.
A. Most Markets Are Heterogeneous
Because markets are rarely homogeneous in benefits wanted, purchase rates, and
price and promotion elasticities, their response rates to products and marketing
programs differ.
oThus, markets are complex entities that can be defined (and segmented) in a
variety of ways.
The critical issue for marketers is to find an appropriate segmentation scheme that
will facilitate target marketing, positioning, and the formulation and
implementation of successful marketing programs.
B. Today’s Market Realities Often Make Segmentation Imperative
Market segmentation has become increasingly important in the development of
marketing strategies for several reasons.
oPopulation growth in developed countries has slowed, and more
product-markets are maturing. This sparks more intense competition in
existing markets as firms seek growth via gains in market share and
encourages companies to find new markets.
oSuch social and economic forces as expanding disposable incomes, higher
educational levels, and more awareness of the world have produced
customers with more varied and sophisticated needs, tastes, and lifestyles
than ever before.
oThere is an increasingly important trend toward microsegmentation in which
extremely small market segments are targeted.
oMany marketing organizations have made it easier to implement sharply
focused marketing programs by more sharply targeting their own services.
IV. How Are Market Segments Best Defined?
There are three important steps in the market segmentation process:
oIdentify a homogeneous segment that differs from other segments
oSpecify criteria that define the segment
oDetermine segment size and potential
A. Who They Are: Segmenting Demographically
While firm demographics (age of firm, size of firm, industry, etc.) are useful in
segmenting organizational markets, demographics is usually thought of in terms of
attributes of individual consumers. Some examples of demographic attributes are as
follows:
oAge
oSex
oIncome
oOccupation
oEducation
oRace and ethnic origin
Demographic descriptors are important in segmentation of industrial markets,
which are typically segmented in two stages:
oMacrosegmentation, divides the market according to the characteristics of the
buying organization using such attributes as age of firm, firm size, and
industry affiliation
oMicrosegmentation, groups customers by the characteristics of the individuals
who influence the purchasing decision—for instance, age, sex, and position
within the organization
B. Where They Are: Segmenting Geographically
Different locations or regions vary in their sales potential, growth rates, customer
needs, cultures, climates, service needs, and competitive structures, as well as
purchase rates for a variety of goods.
Geographic segmentation is used in both consumer and organizational markets and
is particularly important in retailing and many service businesses, where customers
are unwilling to travel very far to obtain the goods or services they require.
The area included within such a geographically defined region is called a trade
area.
C. Geodemographic Segmentation
Marketers targeting emerging markets in the developing world must pay particular
attention to market segmentation within the geographic regions they target.
In emerging and developed markets alike, many segmentation schemes involve
both demographic and geographic factors. Thus, retailers usually want to know
something about the people who live within, perhaps, a two-mile or five-mile radius
of their proposed new store.
Geodemographics also attempts to predict consumer behavior by making
demographic, psychographic, and consumer information available at the block, zip
code, or postal code levels.
D. How They Behave: Behavioral Segmentation
Behavioral attributes can take many forms, including those based on:
oConsumer needs
oProduct usage patterns
oLifestyle
oThe structure of firms’ purchasing activities and the types of buying situations
they encounter
Consumer Needs
oConsumer needs are often expressed in benefits sought from a particular
product or service.
oSince purchasing is a problem-solving process, consumers often evaluate
product alternatives on the basis of desired characteristics and how valuable
each characteristic is to the consumer—choice criteria.
oMarketers can define segments according to the different choice criteria in
terms of presence or absence of certain characteristics and the importance
attached to each.
Product Usage and Purchase Influence
oProduct usage is important because in many markets a small proportion of
potential customers make a high percentage of all purchases.
oMarket segmentation based on sources of purchase influence for the product
category is relevant for both consumer and organizational markets.
Lifestyle
oSegmentation by lifestyle, or psychographics, segments market on the basis
of consumers’ activities, interests, and opinions—in other words, what they
do or believe, rather than who they are in a demographic sense.
oStanford Research Institute has created a U.S. segmentation service (called
VALS 2), which builds on the concept of self-orientation and resources for
the individual.
Organizational Behavioral Attributes
oPurchasing structure and buying situation segmentation attributes are unique
to organizational markets.
oPurchasing structure is the degree to which the purchasing activity is
centralized.
oThe buying situation attribute includes three distinct types of situations:
Straight rebuy, a recurring situation handled on a routine basis
Modified rebuy, which occurs when an element, such as price or
delivery schedule, has changed in a client-supplier relationship
New buying, which is likely to require the customer gathering
considerable information and evaluating alternative suppliers
E. Innovative Segmentation: A Key to Marketing Breakthroughs
Combinations of different attributes are used to more precisely target an attractive
segment.
At the foundation of many a marketing breakthrough one often finds an insightful
segmentation scheme that is sharply focused in a behavioral way.
V. Choosing Attractive Market Segments: A Five-Step Process
Most firms no longer aim a single product and marketing program at the mass market.
Instead, they break that market into homogeneous segments on the basis of meaningful
differences in buyer behavior or in the benefits sought by different groups of customers.
Not all segments represent equally attractive opportunities for the firm
Within an established firm, rather than allowing each business unit or product manager to
develop an approach to evaluate the potential of alternative market segments, it is often
better to apply a common analytical framework across segments.
One useful analytical framework managers or entrepreneurs can use for this purpose is the
market-attractiveness/competitive position matrix.
The steps in constructing a market attractiveness/competitive position matrix for evaluating
potential target markets are as follows:
oChoose criteria to measure market attractiveness and competitive position
oWeight market attractiveness and competitive position factors to reflect their relative
importance
oAssess the current position of each potential target market on each factor
oProject the future position of each market based on expected environmental,
customer, and competitive trends
oEvaluate implications of possible future changes for business strategies and resources
requirements
A. Step 1: Select Market-Attractiveness and Competitive Position Factors
Market-Attractiveness Factors
oAssessing the attractiveness of markets or market segments involves
determining the market’s size and growth rate and assessing various trends—
demographic, sociocultural, economic, political/legal, technological, and
natural—that influence demand in that market.
oAn even more critical factor in determining whether to enter a new market or
market segment, however, is the degree to which unmet customer needs, or
needs that are currently not being well served, can be identified.
Competitive-Position Factors
oThe degree to which the firm’s proposed product entry will be sufficiently
differentiated from competitors is an immediate and salient concern.
oMost new goods or services need to be either better from a consumer point of
view or cheaper than those they hope to replace.
B. Step 2: Weight Each Factor
A numerical weight is assigned to each factor to indicate its relative importance in
the overall assessment.
The task of weighting the factors—as well as determining them in the first place—
gets more complicated as companies reach out to new and different markets, like
the growing middle class in the developing world.
C. Step 3: Rate Segments on Each Factor, Plot Results on Matrices
This step requires that evidence—typically both qualitative and quantitative data—
be collected to objectively assess each of the criteria in step 1.
Once the assessments have been made, the weighted results can be plotted on a
market-attractiveness/competitive position matrix.
D. Step 4: Project Future Position for Each Segment
Managers or entrepreneurs should first determine how the market’s attractiveness is
likely to change over the next three to five years, if not longer.
Once managers have determined any changes likely to occur in market
attractiveness, they must next determine how the business’s competitive position in
the market is likely to change, assuming that it responds effectively to projected
environmental changes but the firm does not undertake any initiatives requiring a
change in basic strategy.
The expected changes in both market attractiveness and competitive position can
then be plotted on the matrix in the form of a vector to reflect the direction and
magnitude of the expected changes.
E. 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.
A business may decide to enter a market that currently falls into one of the middle
cells under these conditions (Exhibit 6.10):
oManagers believe that the market’s attractiveness or their competitive strength
is likely to improve over the next few years
oThey see such markets as steppingstones to entering larger, more attractive
markets in the future
oShared costs or synergies are present, thereby benefiting another entry
The market attractiveness/competitive position matrix offers general guidance for
strategic objectives and allocation of resources for segments currently targeted and
suggests which new segments to enter.
VI. Different Targeting Strategies Suit Different Opportunities
Most successful entrepreneurial ventures target narrowly defined market segments at the
outset for two reasons:
oDoing so puts the nascent firm in position to achieve early success in a market
segment that it understands particularly well.
oSuch a strategy conserves precious resources, both financial and otherwise.
The three common targeting strategies are:
oNiche-market strategy
oMass-market strategy
oGrowth-market strategy
A. Niche-Market Strategy
This strategy involves serving segments that, while not the largest, consist of a
sufficient number of customers seeking somewhat-specialized benefits from a good
or service.
Such a strategy is designed to avoid direct competition with larger firms pursuing
bigger segments.
B. Mass-Market Strategy
A business can pursue a mass-market strategy in two ways.
oIt can ignore any segment differences and design a single
product-and-marketing program that will appeal to the largest number of
consumers.
oIt can design separate products and marketing programs for the differing
segments. This is often called differentiated marketing.
C. Growth-Market Strategy
Businesses pursuing a growth-market strategy often target one or more fast-growth
segments, even though these segments may not currently be very large.
It is a strategy often favored by smaller companies to avoid direct confrontations
with larger firms while building volume and share.
A growth-market strategy usually requires strong R&D and marketing capabilities
to consistently identify and develop products appealing to newly emerging user
segments, plus the resources to finance rapid growth.
VII. 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.
The intercountry segmentation enables a company to develop reasonably standardized
programs requiring little change across local markets, thereby resulting in scale economies.
There are many reasons—beyond mere ambitions to grow—why companies expand
internationally with sharply targeted strategies:
oSome companies go international to defend their home position against global
competitors who are constantly looking for vulnerability.
oAnother reason a firm may go overseas and target a specific country is to service
customers who are also engaging in global expansion.