Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
Chapter 5: Customers, Segmentation, and Target Marketing
Chapter Outline
I. Introduction
A. Beyond the Pages 5.1 discusses how firms use data mining to discover unseen
patterns in customer buying behavior.
B. Customers can be individuals, institutions, or groups of individuals or institutions
that have similar needs that can be met by a particular product offering.
C. Whether the firm aims for the entire market or smaller market segments, the goal
of marketing strategy is to identify specific customer needs, and then design a
marketing program that can satisfy those needs. To do this effectively, the firm
must have a comprehensive understanding of its current and potential customers,
including their motivations, behaviors, needs, and wants.
D. Until a firm has chosen and analyzed a target market, it cannot make effective
decisions regarding other elements of the marketing strategy.
II. Buyer Behavior in Consumer Markets
A. The Consumer Buying Process [Exhibit 5.1]
1. The buying process depicts the possible range of activities that may occur
in making purchase decisions. Consumers, however, do not always follow
these stages in sequence and may even skip stages en route to making a
purchase.
2. The buying process often involves a parallel sequence of activities
associated with finding the most suitable merchant of the product in
question.
3. The choice of a suitable merchant may actually take precedence over the
choice of a specific product. In some cases, consumers are so loyal to a
particular merchant that they will not consider looking elsewhere.
B. Five Stages of the Consumer Buying Process
1. Need Recognition
a) A need occurs when consumers realize that there is a discrepancy
between their existing situation and their desired situation.
b) The typical definition of needs as necessities is limited because
everyone has a different perspective on what constitutes a need.
c) A need occurs when an individual’s current level of satisfaction
does not equal their desired level of satisfaction.
d) A want is a consumer’s desire for a specific product that will
satisfy the need.
e) Understanding basic needs allows the firm to segment markets and
create marketing programs that can translate consumer needs into
wants for their specific products.
f) Wants are not the same thing as demand. Demand occurs only
when the consumer’s ability and willingness to purchase a specific
product backs up their want for the product.
Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
5. Postpurchase Evaluation
a) Postpurchase evaluation is the connection between the buying
process and the development of long-term customer relationships.
b) In the postpurchase stage, buyers will experience one of these four
outcomes:
1) Delight—the product’s performance greatly exceeds the
buyer’s expectations
2) Satisfaction—the product’s performance matches the
buyer’s expectations
3) Dissatisfaction—the product’s performance falls short of
the buyer’s expectations
4) Cognitive Dissonance (Postpurchase Doubt)—the buyer is
unsure of the product’s performance relative to his or her
expectations
c) Consumers are more likely to experience dissatisfaction or
cognitive dissonance when the dollar value of the purchase
increases, the opportunity costs of rejected alternatives are high, or
the purchase decision is emotionally involving.
C. Factors That Affect the Consumer Buying Process
1. Decision-Making Complexity—the primary reason why the buying
process will vary across consumers and with the same consumer in
different situations.
2. Individual Influences—Many individual influences (age, life cycle,
occupation, and socioeconomic status) are fairly easy to understand and
incorporate into the marketing strategy. Other factors (perceptions,
motives, interests, attitudes, opinions, or lifestyles) are much harder to
understand because they do not clearly coincide with demographic
characteristics.
3. Social Influences—Social influences such as culture, subculture, social
class, reference groups, and family have a profound impact on what, why,
and how consumers buy.
4. Situational Influences—typically affect the amount of time and effort that
consumers devote to the purchase task, or they affect specific product
choices. [Exhibit 5.2]
III. Buyer Behavior in Business Markets
A. Four types of business markets:
1. Commercial markets buy raw materials for use in producing finished
goods, and they buy facilitating goods and services used in the production
of finished goods.
2. Reseller markets consist of channel intermediaries such as wholesalers,
retailers, or brokers that buy finished goods from the commercial market
and resell them at a profit.
3. Government markets include federal, state, county, city, and local
governments.
Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
IV. Market Segmentation
A. Market segmentation is the process of dividing the total market for a particular
product or product category into relatively homogeneous segments or groups.
B. The goal of segmentation is to create groups where the members within the group
have similar likes, tastes, needs, wants, or preferences but where the groups
themselves are dissimilar from each other.
C. Beyond the Pages 5.2 examines how cultural differences within the United States
create many challenges and opportunities in finding and serving target markets.
D. Traditional Market Segmentation Approaches
1. Mass Marketing
a) Mass marketing, which involves no segmentation whatsoever,
occurs when companies aim marketing campaigns at the total
(whole) market for a particular product.
b) Companies that adopt mass marketing take an undifferentiated
approach that assumes that all customers in the market have similar
needs and wants that can be reasonably satisfied with a single
marketing program.
c) Mass marketing works best when the needs of an entire market are
relatively homogeneous.
d) Mass marketing is advantageous in terms of production efficiency
and lower marketing costs; however, it is inherently risky.
2. Differentiated Marketing
a) Most firms use some form of market segmentation by:
1) dividing the total market into groups of customers having
relatively common or homogeneous needs, and
2) attempting to develop a marketing program that appeals to
one or more of these groups.
b) Within the differentiated approach there are two options:
1) Firms using the multisegment approach seek to attract
buyers in more than one market segment by offering a
variety of products that appeal to different needs.
2) Firms using the market concentration approach focus on a
single market segment and attempt to gain maximum share
in that segment.
3. Niche Marketing
a) Some companies focus their efforts on one small, well-defined
market segment or niche that has a unique, specific set of needs.
b) Customers in niche markets will typically pay higher prices for
products that match their specialized needs.
c) The key to niche marketing is to understand and meet the needs of
target customers so completely that the firm’s substantial share
makes the segment highly profitable.
E. Individualized Segmentation Approaches
1. One-to-One Marketing
a) Occurs when a company creates an entirely unique product or
marketing program for each customer in the target segment.
Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
b) Historically, one-to-one marketing has been used less often in
consumer markets. However, it is common in luxury and custom-
made products, as well as in services.
c) One–to-one marketing has grown rapidly in electronic commerce
where customers can be targeted very precisely.
2. Mass Customization
a) Mass customization refers to providing unique products and
solutions to individual customers on a mass scale.
b) Along with the Internet, advances in supply chain management
have allowed companies to customize products in ways that are
both cost effective and practical.
3. Permission Marketing
a) Permission marketing occurs when customers choose to become
part of a firm’s market segment by giving companies permission to
specifically target them in their marketing efforts.
b) The most common tool used in permission marketing is the opt-in
e-mail list, where customers permit a firm—or a third-party partner
of the firm—to send periodic e-mail about goods and services.
c) Permission marketing has a major advantage: Customers who opt-
in have already shown interest in the products offered by the firm.
F. Criteria for Successful Segmentation
1. Identifiable and Measurable—The characteristics of the segment’s
members must be easily identifiable.
2. Substantial—The segment must be large and profitable enough to make it
worthwhile for the firm.
3. Accessible—The segment must be accessible in terms of communication
and distribution.
4. Responsive—The segment must respond to the firm’s marketing efforts,
including changes to the marketing program over time.
5. Viable and Sustainable—The segment must meet the basic criteria for
exchange, including being ready, willing, and able to conduct business
with the firm.
V. Identifying Market Segments
A. The target market and the marketing program are interdependent, and changes in
one typically require changes in the other.
B. Beyond the Pages 5.3 discusses the challenges faced by cereal companies as they
reformulate and reposition their products as healthy breakfast choices.
C. Segmenting Consumer Markets [Exhibit 5.3]
1. Behavioral Segmentation
a) Behavioral segmentation is the most powerful approach because it
uses actual consumer behavior or product usage to make
distinctions among market segments.
b) Behavioral segmentation, unlike other types of consumer
segmentation, is most closely associated with consumer needs.
[Exhibit 5.4]
Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
c) The key to successful behavioral segmentation is to clearly
understand the basic needs and benefits sought by different
consumer groups.
2. Demographic Segmentation
a) Demographic segmentation divides markets into segments using
demographic factors such as gender, age, income, and education.
b) Demographic segmentation tends to be the most widely used basis
for segmenting consumer markets because demographic
information is widely available and relatively easy to measure.
c) Demographic segmentation becomes less useful when the firm has
a strong interest in understanding the motives or values that drive
buying behavior.
3. Psychographic Segmentation
a) Psychographic segmentation deals with state-of-mind issues such
as motives, attitudes, opinions, values, lifestyles, interests, and
personality.
b) Psychographic profiles are usually combined with demographic,
geographic, or behavioral segmentation to create fully developed
consumer profiles.
c) One of the most successful and well-known tools of psychographic
segmentation is VALS™, which divides adult U.S. consumers into
one of eight profiles. [Exhibit 5.5]
d) Psychographic segmentation is useful because it transcends purely
descriptive characteristics to help explain personal motives,
attitudes, emotions, and lifestyles.
4. Geographic Segmentation
a) Geographic characteristics often play a large part in developing
market segments, especially when retailers use geography to
develop trade areas.
b) Geographic segmentation is often most useful when combined with
other segmentation variables. One of the best examples is
geodemographic segmentation, or geoclustering.
D. Segmenting Business Markets
1. The most basic method of segmenting business markets involves the four
types of markets: commercial markets, reseller markets, government
markets, and institutional markets.
2. Business buyers can also be segmented on:
a) Type of Organization—Different types of organizations may
require different and specific marketing programs, such as product
modifications, different distribution and delivery structures, or
selling strategies.
b) Organizational Characteristics—The needs of business buyers
often vary based on their size, geographic location, or product
usage.
c) Benefits Sought or Buying Processes—Organizations differ with
respect to the benefits they seek and the buying processes they use.
Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
d) Personal and Psychological Characteristics—The personal
characteristics of the buyers themselves often play a role in
segmentation decisions.
e) Relationship Intensity—Business markets can also be segmented
based on the strength and longevity of the relationship with the
firm.
VI. Target Marketing Strategies
A. Once the firm has completed segmenting a market, it must then evaluate each
segment to determine its attractiveness and whether it offers opportunities that
match the firm’s capabilities and resources.
B. There are five basic strategies for target market selection [Exhibit 5.6]:
1. Single Segment Targeting—Firms use single segment targeting when their
capabilities are intrinsically tied to the needs of a specific market segment.
multiple marketing programs to serve all customer segments
simultaneously.
4. Product Specialization—Firms engage in product specialization when
5. Market Specialization—Firms engage in market specialization when their
intimate knowledge and expertise in one market allows them to offer
customized marketing programs that not only deliver needed products, but
also provide needed solutions to customers’ problems.
C. In addition to targeting a subset of current customers within the product/market,
firms can also take steps to target noncustomers.
1. The key to targeting noncustomers lies in understanding the reasons that
they do not buy and then finding ways to remove these obstacles.
2. Removing obstacles to purchase, whether they exist in product design,
affordability, distribution convenience, or product awareness, is a major
strategic issue in developing an effective marketing program.
Questions for Discussion
1. Many people criticize marketing as being manipulative based on the argument that
marketing activities create needs where none previously existed. Marketers of SUVs,
tobacco products, diet programs, exercise equipment, and luxury products are typically
the most criticized. Given what you now know about the differences between needs and
wants, do you agree with these critics? Explain.
Chapter 5 Lecture Notes
Customers, Segmentation, and Target Marketing
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Most students will argue that marketing does not create needs, but rather it makes
consumers more aware of needs that are not expressed. That is, marketing gives
consumers the appropriate language with which to express their needs. However, most
students do believe that marketing can create wants where none previously existed. This
is especially true with trendy products.
2. Many consumers and consumer advocates are critical of individualized segmentation
approaches due to personal privacy concerns. They argue that technology has made it far
too easy to track buyer behavior and personal information. Marketers counter that
individualized segmentation can lead to privacy abuses, but that the benefits to both
consumers and marketers far outweigh the risks. Where do you stand on this issue? What
are the benefits and risks associated with individualized segmentation?
3. As we have seen thus far, the size of the consuming population over the age of 50
continues to grow. What are some of the current ethical issues involved in targeting this
age group? As this group gets older, will these issues become more or less important?
Explain.
Older populations are less knowledgeable about technology, so the use of any advanced
Exercises
1. Consider the last purchase you made in these categories: personal electronics, clothing,
and vacation destination. To what extent was your purchase decision influenced by
decision-making complexity, individual influences, social influences, and situational
influences? What specific issues were the most influential in making the decision? How
could a marketer have swayed your decision in each case?
