LEARNING OBJECTIVES
In this chapter, we will address the following questions:
1. In what ways can a company divide the consumer market into segments?
2. How should business markets be segmented?
3. How should a company choose the most attractive target markets?
4. What are the requirements for effective segmentation?
5. What are the different levels of market segmentation?
CHAPTER SUMMARY
1. Target marketing includes three activities: market segmentation, market targeting, and
market positioning. Market segments are large, identifiable, distinct groups within a
market.
2. The major segmentation variables for consumer markets are geographic, demographic,
psychographic, and behavioral. Marketers use them singly or in combination.
3. Business marketers use all these variables along with operating variables, purchasing
approaches, and situational factors.
4. To be useful, market segments must be measurable, substantial, accessible,
differentiable, and actionable.
5. We can target markets at four main levels: mass, multiple segments, single (or niche)
segment, and individuals.
6. A mass market targeting approach is adopted only by the biggest companies. Many
companies target multiple segments defined in various ways such as various
demographic groups who seek the same product benefit.
7. A niche is a more narrowly defined group. Globalization and the Internet have made
niche marketing more feasible for many.
8. More companies now practice individual and mass customization. The future is likely
to see more individual consumers take the initiative in designing products and brands.
9. Marketers must choose target markets in a socially responsible manner at all times.
C H A P T E
R 9IDENTIFYING MARKET
SEGMENTS AND TARGETS
OPENING THOUGHT
The first challenges presented in this chapter are the concepts of market segmentation and
the segmentation processes used by marketing firms. Students may have difficulty
understanding the various steps of the segmentation process as well as differentiating
between target markets and market positioning. The instructor is urged to use personal
examples of target markets—the differences between the instructor’s age cohort or their
parents’ cohort and that of his/her students—for example in illustrating the different
markets.
Second, the concepts of consumer characteristics and responses may be new to many
students as it applies across different age groups and different consumers. Students who
have little contact with other people outside their sphere of influence may have a hard
time realizing that other consumers hold differing views and have different usages for
products and services. Some students will reject the notion that all consumers can be
categorized. If this idea arises, it would be a good opportunity to talk about
microsegments and real-time marketing based on behavior/predictive analytics.
Suggestions to help students understand the degree of sophistication used by marketers
include using the Claritas’ PRIZM Web site during the class lecture, pinpointed by a
student’s zip code for example, to show the amount of information available to marketers.
Additional examples for classroom demonstrations include asking students to research
information on the Internet on their particular favorite product and information by their
zip code or other criteria. Many firms provide differing products to different consumers,
Toyota, for example offers the Toyota line of cars and the Lexus family of cars. Both of
these brands can be used to illustrate product differentiation and target marketing.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. Students should turn in their market segmentation segment of their semester-long new
product or service report.
2. Students should select a product or service that they are familiar with, such as jeans,
computers, or personal MP3 players. Once these items are selected, the students must
undertake research into the specific items: target market and market segmentation.
Student reports should contain information as to: How large is the target market, what
is the future growth potential of this target market, how do/does the marketer reach
this target market and so on? The second section of this project is for the students to
“re-position” this product to another market segment. For example, if the students
select MP3 players as their product of choice, and confirm that the target market for
this is Millenials, then the students should define how the manufacturers of MP3
players will attempt to re-position the product to attract the baby boomer generation
to increase their purchases of MP3 players.
3. Sonic PDA Marketing Plan Market segmentation is an important part of any
marketing plan. It is the first step in the STP process that precedes any marketing
strategy: segmentation, targeting, and positioning. The purpose of STP is to identify
and describe distinct market segments, target-specific segments, and then pinpoint the
differentiating benefits to being stressed in marketing.
In your role as Jane Melody’s assistant, you are responsible for market segmentation
and targeting for Sonic’s PDA product. Look at the SWOT Analysis, Market
Description, and Competitive Review sections and then answer:
Which variables should Sonic use to segment its consumer markets?
Which variables should Sonic use to segment its business markets?
How can Sonic evaluate the attractiveness of each identified segment?
Should Sonic pursue full market coverage, market specialization, product
specialization, selective specialization, or single-segment concentration? Why?
Summarize your conclusions in a written marketing plan or enter them in the Market
Demographics and Target Markets sections of Marketing Plan Pro. Also note any
additional research you may need in the Marketing Research Section of Marketing Plan
Pro.
DETAILED CHAPTER OUTLINE
Companies need to identify the market segments they can serve effectively.
LinkedIn’s well-targeted and positioned brand has led to much initial success. Effective
target marketing requires that marketers: 1. Identify and profile distinct groups of buyers
who differ in their needs and wants (market segmentation) 2. Select one or more market
segments to enter (market targeting). 3. For each target segment, establish, communicate,
and deliver the right benefit(s) for the company’s market offering (market positioning).
Market segmentation, targeting, and positioning are known as the “STP” of marketing.
I. Bases for Segmenting Consumer Markets
A. Market segment consists of a group of customers who share a similar set of
needs and wants.
B. Two broad groups of variables to segment consumer markets.
i. Descriptive characteristics—geographic, demographic, and
psychographic—ask whether these segments exhibit different needs or
product responses
ii. Behavioral considerations, such as consumer responses to benefits,
usage occasions, or brands – see whether different characteristics are
associated with each consumer-response segment.
C. Key is adjusting marketing program to recognize customer differences.
D. Major segmentation variables for consumer markets
i. Geographic region divides the market into geographical units such as
nations, states, regions, counties, cities, or neighborhoods
1. Customer cloning assumes future customers come from
existing customers’ neighborhoods
2. PRIZM (Potential Rating Index by Zip Markets) NE combines
geographic and demographic data and 39 variables in five
categories:
a. education and affluence
b. family life cycle
c. urbanization
d. race and ethnicity
e. mobility
3. City or metro size
4. Density
5. Climate
ii. Demographics often associated with customer needs
1. Age: Consumer wants and abilities change with age
2. Family size: growth in single person households has created
new demands
3. Family life cycle: Life stage defines a person’s major concern,
such as going through a divorce, going into a second marriage,
taking care of an older parent, deciding to cohabit with another
person, buying a new home, and so on
4. Gender: Men and women have different attitudes and behave
differently, based partly on genetic makeup and partly on
socialization
5. Income: Long-standing practice in such categories as
automobiles, clothing, cosmetics, financial services, and travel
6. Occupation
7. Education
8. Religion
9. Race and culture:
10. Generation: Each generation or cohort is profoundly influenced
by the times in which it grows up—the music, movies, politics,
and defining events of that period
11. Nationality
12. Social class
iii. Psychographic lifestyle
iv. Personality
v. Behavioral occasions
vi. Benefits
vii. User status
viii. Usage rate
ix. Loyalty status
x. Readiness stage
xi. Attitude toward product
E. Generations
i. Millennials (or Gen Y) usually means people born between 1977 and
1994 = 78 million people in the United States, with annual spending
power approaching $200 million.
1. Echo Boomers, “digital natives”, multitaskers, go online to
broadcast their thoughts and experiences and to contribute
user-generated content.
2. They tend to trust friends more than corporate sources of
information.
3. Sense of entitlement and abundance from growing up during
the economic boom and being pampered by their boomer
parents, but highly socially conscious, concerned about
environmental issues, and receptive to cause marketing efforts.
4. In debt, living with parents = boomerang effect.
5. Turned off by overt branding – street teams, events and student
ambassadors useful
ii. Gen X born between 1964 and 1978.
1. Unflattering image of disaffection, short attention spans, and
weak work ethic
2. Working parents relied on day care or left “latchkey kids” on
their own after school and corporate downsizing led to the
threat of layoffs and economic uncertainty.
3. Social and racial diversity were more widely accepted, and
technology changed the way people lived and worked.
4. Prize self-sufficiency and the ability to handle any
circumstance.
5. Technology is an enabler for them, not a barrier.
6. Pragmatic and individualistic.
7. Wary of hype and pitches that seem inauthentic or patronizing.
iii. Baby Boomers are the approximately 76 million U.S. consumers born
between 1946 and 1964.
1. $1.2 trillion in annual spending power and controlling
three-quarters of the country’s wealth, but marketers often
overlook them.
2. Demand has exploded for products to turn back the hands of
time.
3. Willing to change brands, spend on technology, use social
networking sites, and purchase online
iv. Silent Generation born between 1925 and 1945 are redefining what old
age means.
1. Many older consumers lead very active lives.
2. Advertisers have learned that older consumers don’t mind
seeing other older consumers in ads targeting them, as long as
they appear to be leading vibrant lives.
3. Strategies emphasizing seniors’ roles as grandparents are well
received.
4. Need their own products
5. Researchers at the MIT AgeLab use a suit called AGNES (Age
Gain Now Empathy System) to research the changing needs of
the elderly.
F. Multicultural marketing is an approach recognizing that different ethnic and
cultural segments have sufficiently different needs and wants to require
targeted marketing activities and that a mass market approach is not refined
enough for the diversity of the marketplace
i. Growing at two to three times the rate of non-multicultural populations
and buying power is expanding
ii. Need to factor the norms, language nuances, buying habits, and
business practices into marketing strategy and include adequate
representation in research samples
iii. Hispanic American (52.4 million in 2012; 128.8 million in 2060)
1. Projected purchasing power $1.5 trillion in 2015
2. Youthful – median age is 27
3. Geographically concentrated in California, Texas and Florida;
more than 4 million Hispanics live in New York and Los
Angeles
4. Strong family values and ties to country of origin
5. Need to capture nuances of culture and language, as Hispanic
Americans are diverse
6. More active with mobile technology and social media than the
general population
iv. Asian American (15.7 million in 2012; 34.4 million in 2060)
1. US population represented mainly by six countries: China (21
percent), the Philippines (18 percent), India (11 percent),
Vietnam (10 percent), Korea (10 percent), and Japan (9
percent)
2. Differences in food and language; high median incomes, high
computer literacy but “invisible market”
3. More brand-conscious but least loyal to brands
4. Care more about what others think and share core values of
safety and education
v. African American (41.1 million in 2012; 61.8 million in 2060)
1. Projected to have a combined spending power of $1.1 trillion
by 2015
2. Most fashion-conscious of all racial and ethnic groups but are
strongly motivated by quality and selection.
3. More likely to be influenced by their children when selecting a
product and less likely to buy unfamiliar brands
4. Watch television and listen to the radio more than other groups
and are heavy users of mobile data.
5. Cigarette, liquor, and fast-food firms have been criticized for
targeting urban African Americans
vi. Lesbian, Gay, Bisexual, and Transgender: 5 percent to 10 percent of
the population and have approximately $700 billion in buying power
G. Psychographic Segmentation uses psychology and demographics to better
understand consumers.
i. Buyers are divided into groups on the basis of psychological/
personality traits, lifestyle, or values.
ii. VALS is based on psychological traits for people and classifies U.S.
adults into eight primary groups based on responses to a questionnaire
featuring four demographic and 35 attitudinal questions.
1. The main dimensions of the VALS segmentation framework
are consumer motivation (the horizontal dimension) and
consumer resources (the vertical dimension).
2. Consumers are inspired by one of three primary motivations:
ideals, achievement, and self-expression.
3. Those primarily motivated by ideals are guided by knowledge
and principles.
4. Those motivated by achievement look for products and
services that demonstrate success to their peers.
5. Consumers whose motivation is self-expression desire social or
physical activity, variety, and risk.
6. Personality traits such as energy, self-confidence,
intellectualism, novelty seeking, innovativeness,
impulsiveness, leadership, and vanity—in conjunction with key
demographics—determine an individual’s resources.
7. Different levels of resources enhance or constrain a person’s
expression of his or her primary motivation.
H. Behavioral Segmentation divides buyers into groups on the basis of their
knowledge of, attitude toward, use of, or response to a product
i. Needs-based or benefit-based segmentation identifies distinct market
segments with clear marketing implications.
ii. People play five roles in a buying decision:
1. Initiator, Influencer, Decider, Buyer, and User
2. Different people are playing different roles, but all are crucial
in the decision process and ultimate consumer satisfaction
iii. User and Usage-Related Variables include occasions, user status, usage
rate, buyer-readiness stage, and loyalty status
iv. Five consumer attitudes about products are enthusiastic, positive,
indifferent, negative and hostile
II. How should business markets be segmented?
A. Demographic: Which industries should we serve?
B. Company size: What size companies should we serve?
C. Location: What geographical areas should we serve?
D. Operating Variables
i. Technology: What customer technologies should we focus on?
ii. User or nonuser status: Should we serve heavy users, medium users,
light users, or nonusers?
iii. Customer capabilities: Should we serve customers needing many or
few services?
E. Purchasing Approaches
i. Purchasing-function organization: Should we serve companies with a
highly centralized or decentralized purchasing organization?
ii. Power structure: Should we serve companies that are engineering
dominated, financially dominated, and so on?
iii. Nature of existing relationship: Should we serve companies with
which we have strong relationships or simply go after the most
desirable companies?
iv. General purchasing policies: Should we serve companies that prefer
leasing? Service contract? Systems purchases? Sealed bidding?
v. Purchasing criteria: Should we serve companies that are seeking
quality? Service? Price?
F. Situational Factors:
i. Urgency: Should we serve companies that need quick and sudden
delivery or service?
ii. Specific application: Should we focus on a certain application of our
product rather than all applications?
iii. Size of order: Should we focus on large or small orders?
G. Personal Characteristics
i. Buyer-seller similarity: Should we serve companies whose people and
values are similar to ours?
ii. Attitude toward risk: Should we serve risk-taking or risk-avoiding
customers
iii. Loyalty: Should we serve companies that show high loyalty to their
suppliers?
H. A flexible market offering consists of two parts:
i. A naked solution containing the product and service elements that all
segment members value
ii. Discretionary options that some segment members value. Each option
might carry an additional charge.
III. Market Targeting
A. Once the firm has identified its market-segment opportunities, it must decide
how many and which ones to target.
i. Marketers are increasingly combining several variables in an effort to
identify smaller, better-defined target groups.
ii. Seven-step approach
1. Needs-based segmentation
2. Segment identification
3. Segment attractiveness
4. Segment profitability
5. Segment positioning
6. Segment “acid test”
7. Marketing mix strategy
B. Effective Segmentation Criteria
i. Measurable: The size, purchasing power, and characteristics of the
segments can be measured
ii. Substantial: The segments are large and profitable enough to serve. A
segment should be the largest possible homogeneous group worth
going after with a tailored marketing program.
iii. Accessible: The segments can be effectively reached and served.
iv. Differentiable: The segments are conceptually distinguishable and
respond differently to different marketing-mix elements and programs.
v. Actionable: Effective programs can be formulated for attracting and
serving the segments
C. Michael Porter’s five forces that determine the intrinsic long-run
attractiveness of a market or market segment:
i. Industry competitors
ii. Potential entrants
iii. Substitutes
iv. Buyers
v. Suppliers
vi. A segment is unattractive if it already contains numerous, strong, or
aggressive competitors.
1. Unattractive if it’s stable or declining, if plant capacity must be
added in large increments, if fixed costs or exit barriers are
high, or if competitors have high stakes in staying in the
segment
2. Conditions will lead to frequent price wars, advertising battles,
and new-product introductions and will make it expensive to
compete
vii. The most attractive segment is one in which entry barriers are high and
exit barriers are low.
1. Few new firms can enter the industry, and poorly performing
firms can easily exit.
2. When both entry and exit barriers are high, profit potential is
high, but firms face more risk because poorer-performing firms
stay in and fight it out.
3. When both entry and exit barriers are low, firms easily enter
and leave the industry, and returns are stable but low. The worst
case occurs when entry barriers are low and exit barriers are
high
viii. A segment is unattractive when there are actual or potential substitutes
for the product.
1. Substitutes place a limit on prices and on profits.
2. If technology advances or competition increases in these
substitute industries, prices and profits are likely to fall.
ix. A segment is unattractive if buyers possess strong or growing
bargaining power.
1. Buyers’ bargaining power grows when they become more
concentrated or organized, when the product represents a
significant fraction of their costs, when the product is
undifferentiated, when buyers’ switching costs are low, or when
they can integrate upstream.
2. To protect themselves, sellers might select buyers who have the
least power to negotiate or switch suppliers.
3. A better defense is developing superior offers that strong
buyers cannot refuse
x. A segment is unattractive if the company’s suppliers are able to raise
prices or reduce quantity supplied.
1. Suppliers tend to be powerful when they are concentrated or
organized, when they can integrate downstream, when there are
few substitutes, when the supplied product is an important
input, and when the costs of switching suppliers are high.
2. The best defenses are to build win-win relationships with
suppliers or use multiple supply
D. Evaluating and Selecting the Market Segments
i. Two factors: the segment’s overall attractiveness and the company’s
objectives and resources.
ii. How well does a potential segment score on the five criteria?
iii. Does investing in it make sense given the firm’s objectives,
competencies, and resources?
iv. Marketers have a range or continuum of possible levels of
segmentation that can guide their target market decisions.
v. Full Market Coverage: a firm attempts to serve all customer groups
with all the products they might need.
1. Undifferentiated marketing: mass marketing; the firm ignores
segment differences and goes after the whole market with one
offer
a. Product with a superior image that can be sold to the
broadest number of buyers via mass distribution and
mass communications
b. Appropriate when all consumers have roughly the same
preferences and the market shows no natural segments
c. Creates the largest potential market, which leads to the
lowest costs, which in turn can lead to lower prices or
higher margins
d. Narrow product line keeps down the costs of research
and development, production, inventory, transportation,
marketing research, advertising, and product
management
e. Undifferentiated communication program also reduces
costs.
2. Differentiated marketing: marketers define multiple segments
and design, price, disclose, and deliver the product or service
and also fine-tune the marketing program and activities to
better reflect competitors’ marketing.
a. Typically creates more total sales than undifferentiated
marketing
b. Increases the costs of doing business.
vi. Multiple Segment Specialization
1. Selective specialization – a firm selects a subset of all the
possible segments, each objectively attractive and appropriate.
There may be little or no synergy among the segments, but
each promises to be a moneymaker.
2. The multisegment strategy also has the advantage of
diversifying the firm’s risk
3. A supersegment is a set of segments sharing some exploitable
similarity.
4. With product specialization, the firm sells a certain product to
several different market segments.
5. With market specialization, the firm concentrates on serving
many needs of a particular customer group, such as by selling
an assortment of products only to university laboratories.
vii. Single-Segment Concentration: the firm markets to only one particular
segment.
1. Through concentrated marketing, the firm gains deep
knowledge of the segment’s needs and achieves a strong
market presence.
2. It also enjoys operating economies by specializing its
production, distribution, and promotion.
3. If it captures segment leadership, the firm can earn a high
return on its investment
viii. A niche is a more narrowly defined customer group seeking a
distinctive mix of benefits within a segment.
1. Niche customers have a distinct set of needs; they will pay a
premium to the firm that best satisfies them
2. The niche is fairly small but has size, profit, and growth
potential and is unlikely to attract many competitors
3. A niche marketer gains certain economies through
specialization.
ix. Individual Marketing leads to “segments of one,” “customized
marketing,” or “one-to-one marketing
1. Companies use customer information to customize products
and offerings
2. Mass customization is the ability of a company to meet each
customer’s requirements—to prepare on a mass basis
individually designed products, services, programs, and
communications.
3. Consumers increasingly value self-expression and the ability to
capitalize on user-generated products (UGP) as much as
user-generated content (UGC
4. Services are also a natural setting to apply customized
marketing; airlines, hotels, and rental car agencies are
attempting to offer more individualized experiences.
5. One-to-one marketing suggests businesses:
a. Identify your prospects and customers
i. Don’t go after everyone.
ii. Build, maintain, and mine a rich customer
database with information from all the channels
and customer touch points
b. Differentiate customers in terms of (1) their needs and
(2) their value to your company
i. Spend proportionately more effort on the most
valuable customers (MVCs).
ii. Apply activity-based costing and calculate
customer lifetime value. Estimate net present
value of all future profits from purchases,
margin levels, and referrals, less
customer-specific servicing costs
c. Interact with individual customers to improve your
knowledge about their individual needs and to build
stronger relationships
d. Customize products, services, and messages to each
customer
6. One-to-one marketing works best for firms that normally
collect a great deal of individual customer information and
carry a lot of products that can be cross-sold, need periodic
replacement or upgrading, and offer high value
E. Legal and Ethical Issues with Market Targets
i. Some consumers resist being labeled
ii. Market targeting also can generate public controversy when marketers
take unfair advantage of vulnerable groups (such as children) or
disadvantaged groups (such as inner-city residents) or promote
potentially harmful products
iii. Socially responsible marketing calls for targeting that serves not only
the company’s interests but also the interests of those targeted
iv. Campaign for a Commercial-Free Childhood members feel
preschoolers are incredibly susceptible to advertising and that schools’
endorsements of products make children believe the product is good
for them.