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CHAPTER5
Market Segmentation and Segmentation Strategies
Market segmentation is a natural result of the vast
differences among people.
— Donald Norman
Cognitive Scientist and Author
Donald Norman’s comment could be used to open a discussion on how differences in customer demographics,
lifestyles, and product usage lead to differences in product preference. Needs-based segments are the result of
“the vast differences among people.” It is because the differences among people are so great that it is better to
start with a customer’s needs and then find which of the vast differences give this customer a unique identity.
You could use cars, computers, cellphones, or another product to make this discussion more focused.
Introductory Discussion
A study of small businesses that advertise in Yellow Pages directories uncovered two distinct needs-based
market segments:
1. Manager Segment― Small businesses that want to grow and would use the Yellow Pages if it brought them
more customers. The businesses are not price sensitive but results sensitive.
2. Owner-Operator Segment― Small businesses that are trying to maintain a market presence but are not
interested in attracting more customers. These businesses are very price sensitive and do not want to spend
much on Yellow Pages advertising.
Discuss how a provider of a Yellow Pages directory would use this market segmentation to develop
segment-specific product-positioning strategies.
Discuss how a Yellow Pages business could develop segment-specific pricing strategies to better meet the
needs of segment customers.
Discuss how successfully implemented segment strategies would impact revenue per customer, customer
satisfaction, and customer retention.
Teaching Note: One Yellow Pages directory did segment the market as described above. The directory’s
company developed separate segment strategies, as briefly summarized here:
Segment Identification― The sales force was trained to ask several questions related to how the
small-business potential advertisers thought about their businesses and the need for new customers.
Depending on the answers to the questions, the potential advertisers were identified as in the manager
segment or the owner-operator segment, and the sales force then presented the appropriate strategy.
Strategy for the Manager Segment― Businesses in this segment were shown how they could grow sales
with multiple listings, the use of color in their ads, and larger layouts.The revenue and margin per customer
were high, but so were the stakes.The value proposition was, “We’ll make your phone ring.” The strategy
was a success for the Yellow Pages company, resulting in increased customer satisfaction, retention, and
profitability.
Strategy for the Owner-Operator Segment― Businesses in this segment were offered ways to lower their
total cost of purchase by buying early (2 months in advance) and providing their own artwork. Most
customers liked the idea, and the directory’s customer satisfaction rating went up (even in the area of
pricing). The value proposition was, “Maintaining a market presence at an affordable cost.” It turned out,
however, that these advertisers were generally disorganized and seldom met the target dates for the price
discounts. As a result, most of them ended up paying the regular price, and revenue and margin per
customer stayed roughly the same.
Market-Based Management Copyright © 2012
Sixth Edition –39– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
Teaching Objectives
Discuss the importance of market segmentation and its role in the development of meaningful marketing
strategies.
Discuss needs-based segmentation and a process for developing needs-based segmentation strategies.
Discuss the various segmentation strategies and when a business might pursue one type of segmentation
strategy over another.
Discuss the circumstances under which market segmentation could be extended to sub-segment strategies
and customer relationship marketing.
Harvard Business SchoolCase Materials
Bankinter: Growing Through Small and Medium Enterprises.HBS Case 107075. This case surveys the
overall sequence of processes needed for the success of a strategy based on customer analyses. In
particular, the case charts the formulation and implementation of a strategy by a Spanish bank that decided
to expand into a new segment consisting of small and medium-sized enterprises. Starting with the creation
of information necessary for the bank to compete in this segment, the case describes the strategic selection
of the target customer group, the definition of the product offering, and the organizational changes needed to
implement the strategy. 26 pages.
Colgate-Palmolive: The Precision Toothbrush.HBS Case 9-593-064. This is an excellent case built
around the segmentation of the toothbrush market. The case covers market segmentation and competing
market segmentation strategies. It also includes a discussion of product positioning and branding.
Eastman Kodak Co.: Funtime Film.HBS Case 9-594-111. Eastman Kodak has suffered significant declines
in its share of the film market at the hands of lower-priced branded producers and private-label products. The
case presents Kodak’s proposal to launch a new economy brand of film to combat its rivals. Teaching
purpose: To allow students to consider issues of market segmentation, positioning, and pricing as
mechanisms for dealing with a declining differentiation of goods in an industry.
Sealed Air Corp.HBS Case 0-582-103. Market leadership and technological innovations have marked
Sealed Air’s participation in the U.S. protective packaging market. Several small regional producers have
introduced products that cheaper and similar in appearance to Sealed Air’s, but less effective. The company
must determine its response to this new competition. Feasible options range from doing nothing to
introducing a new product. The case raises product line management issues, particularly cannibalization,
and affords the opportunity for the development of a marketing plan for any new product introduction. Two
Teaching Notes: 5-585-110 and 5-590-078. Software: 9-587-513.
Harper Chemical Co., Inc.HBS Case 9-590-027. A company acquires the rights to a mineral with potential
uses in the ceramic and paint industries. After many years, sales are still far below expectations, and the
company is considering a proposal to sell the whole operation. Rewritten version of an earlier case. Teaching
Note: 5-590-029. Addendum: 9-590-028.
Market-Based Strategic Thinking
1. Why are Millennials important to a company like Apple or Campbell’s Soup?
Millennials and the age groups they influence account for about one-third of the world population, ranging
in age from 14 to 35. For Apple and Campbell’s Soup, this is a large market of potential customers who
2. How have the lifestyles of Millennials influenced the use of social media and iPhones among older
consumers?
Millennials and the adjacent age groups they influence are the early adopters of social media and iPhones.
Market-Based Management Copyright © 2012
Sixth Edition –40– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
3. Why would Coca-Cola advertise in magazine read byMillennials?
A shown in Figure 5-1, there are 840 million Millennials in the world (age 18- 24). They comprise a large,
4. Why should customer needs be the driving force in segmenting the toothpaste market?
Ultimately customers buy, and are satisfied, based upon how well a toothpaste fulfills their needs in the
5. What kind of problems could occur if a manufacturer of large machine tools segments its market
based on firm demographics?
There is an endless number of demographic combinations to consider in segmenting the large machine
as first identified by its set of needs.
6. For an automobile purchase, how are customer needs shaped, and what role do these forces play
in the segmentation process?
Customer needs for an automobile purchase are shaped by personal and household demographics,
lifestyle forces, and usage behaviors, as outlined in Figure 5-4. The unique needs of a segment do not just
7. What happens when an insurance company is able to segment a market on the basis of needs for
automobile insurance but unable to identify the segments by demography or behavior?
For a segmentation strategy to work, an insurance companymust have a clear understanding of customer
needs for each insurance segment and the demographics that make the customer needs identifiable.
Market-Based Management Copyright © 2012
Sixth Edition –41– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
8. How do firm demographics help shape business-to-business customer needs for commercial
printers?
The needs of commercial printers for business customers are unique to their usage situations and are
shaped by firm demographics (such as a business-to-business customer’s number of employees, its sales,
9. What forces shape market attractiveness for the iPad, and how should they be measured in order
to develop an overall index of market attractiveness?
While many forces shape the attractiveness of a market segment, the three basic forces are market
growth, competitive intensity, and market access, as illustrated in Figure 5-10. Using these factors, the
10. What criteria should be used in determining the segments that an insurance company should
pursue for its automobile insurance policies?
Every business should determine its own criteria for success when evaluating the attractiveness of a
market, since every industry has its own unique circumstances. The criteria listed in Figure 5-10 are
11. How did market segmentation help James Hardie in its marketing strategy?
Prior to the use of a needs-based market segmentation strategy, James Hardie used a mass marketing
strategy centered on one product, price, promotion, and place strategy. The market segmentation revealed
12. What would be a segment value proposition for the quality segment served by James Hardie (see
Figure 5-16)? Why is it a crucial part of the segmentation process?
A value proposition is a short, preferably one-line statement of how a customer would benefit from the use
Market-Based Management Copyright © 2012
Sixth Edition –42– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
13. How would you develop a value proposition for a retail gasoline segment presented in Figure 5-18?
To build a value proposition for a retail gasoline business’s target customers, we would create a short
14. How does the marketing mix strategy differ for each of the three segments of the female investor
services market presented in Figure 5-9?
A segment marketing mix is a combination of product positioning, price, distribution channels, marketing
communications, and services that are customized around target customers’ needs, demographics,
15. How would you conduct a segment strategy “acid test” using the three storyboards presented in
Figure 5-13? What are the advantages of applying the test?
From among three different storyboards (value propositions and positioning strategies), target customers
are requested to select the one that best meets their needs. If the segment positioning strategy has been
16. How did DuPont create an effective multi-segment strategy for Kevlar?
DuPont’s multi-segment strategy for Kevlar was built around the unique customer benefits, demographics,
17. What would be an adjacent-segment strategy in the toothpaste market (see Figure 5-5)?
An adjacent-segment strategy is one in which a business enters a given segment and over time enters
similar segments as current segments are fully penetrated and target profits obtained. A brand well
18. Why would a business pursue an adjacent-segment strategy when several other segments are also
attractive and offer good profit potential?
The adjacent segment is the one most similar to a company’s core segment with regard to customers and
the needs being served. For example, Toyota entered the U.S. car market in 1964 with the low-priced
Market-Based Management Copyright © 2012
Sixth Edition –43– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
19. Why would a new business pursue a single-segment strategy?
When resources are limited, or when first entering a new market, it is more efficient to pursue a
20. Why is it often difficult for competitors to outperform a niche strategy as used by Pajamagram
(pajamagram.com) or Vermont Teddy Bear (vermontteddybear.com)?
With a niche strategy, these companies are able to create a unique product focus and devotetheir
market positions.
21. Why does Dell use mass customization? How could a large company using a mass-customization
strategy match the effectiveness of a niche competitor?
Dell builds computers that match the individual specifications of customers. This is mass customization.
Many car makers now have a build-your-own-carfeature on their web sites that allows potential customers
22. How could customer relationship marketing be used by a travel agency, and why would it likely
improve the travel agency’s customer satisfaction and retention?
Customer relationship marketing should be a no-brainer for a travel agency. All customers who are
attracted to a travel agency’s value proposition, if they are profitable customers,should be inthe travel
23. Why is market segmentation a critical first step in building a customer relationship marketing
program for Lexus?
If Lexus did not have a good profile of its target customers (those who fit the business and are profitable),
the Lexus brandcould waste a tremendous amount of money attracting the wrong customers.These “wrong
24. What are customer touch points for a regional bank, and what role do they play in customer
relationship marketing?
Customer touch points are opportunities to build one-on-one customer relationships. For a regional bank
Market-Based Management Copyright © 2012
Sixth Edition –44– Pearson Education, Inc.
Instructor’s Manual– Chapter 4 Publishing as Prentice Hall
