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CHAPTER 5
Target Markets: Segmentation and Evaluation
TEACHING RESOURCES QUICK REFERENCE GUIDE
Resource
Location
Purpose and Perspective
IRM, p. 1
Lecture Outline
IRM, p. 2
Discussion Starters
IRM, p. 12
Class Exercises
IRM, p. 13
Chapter Quiz
IRM, p. 15
Answers to Issues for Discussion and Review
IRM, p. 16
Answers to Developing Your Marketing Plan
IRM, p. 22
Comments on Video Case 5
IRM, p. 23
PowerPoint Slides
Instructor’s website
Note: Additional resources may be found on the accompanying student and instructor websites at
www.cengagebrain.com.
PURPOSE AND PERSPECTIVE
This chapter covers the definition of a market, how organizations identify target markets, and how to
estimate market potential and forecast sales. First, the chapter defines a market and discusses the
characteristics groups must possess to be considered a market. Then, it describes in detail the five steps in
the target market selection process. In discussing the process, it describes three targeting strategies—
undifferentiated, concentrated, and differentiated. It examines in some detail the process of choosing
segmentation variables and the types of variables that marketers use. It also seeks to make students
understand how marketers analyze these market segments and help them to be able to identify the factors
that influence the selection of specific marketing segments for use as target markets. Finally, it considers
how to evaluate market potential and how to forecast sales.
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Chapter 5: Target Markets: Segmentation, Evaluation,
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LECTURE OUTLINE
I. What Are Markets?
A. A market is a group of individuals and/or organizations that have a desire or need for products in a
product class and have the ability, willingness, and authority to purchase those products.
B. Individuals may have the desire, willingness, and ability to buy certain products, but they may not
have the authority to do so.
1. For example, teenagers might be willing to purchase alcohol, but they do not have the
authority to do so as it is against the law.
C. Markets fall into one of two categories:
1. Consumer market—a consumer market consists of purchaser and household members who
intend to consume or benefit from the purchased products and do not buy products for the
main purpose of making a profit or serving an organizational need.
a. Consumer markets are sometimes also referred to as business-to-consumer (B2C)
markets.
2. Business market—a business market consists of individuals or groups that purchase a
specific kind of product for one of three purposes:
a. Resale
b. Direct use in producing other products
c. Use in general daily operations
(1) Business markets may be called business-to-business (B2B), industrial, or
organizational markets and can be sub-classified into producer, reseller,
government, and institutional markets.
II. Target Market Selection Process
A. Although marketers may employ several methods for target market selection, they generally follow
a five-step process—identifying the appropriate targeting strategy, determining which segmentation
variables to use, developing market segment profiles, evaluating relevant market segments, and
selecting specific target markets.
III. Step 1: Identify the Appropriate Targeting Strategy
A. A target market is a group of people or organizations for which a business creates and maintains a
marketing mix specifically designed to satisfy the needs of group members.
B. The strategy used to select a target market is affected by target market characteristics, product
attributes, and the organization’s objectives and resources.
C. Figure 5.2 illustrates the three basic targeting strategies—undifferentiated, concentrated, and
differentiated.
D. Undifferentiated Targeting Strategy
1. When a company designs a single marketing mix and directs it at the entire market for a
particular product, it is using an undifferentiated targeting strategy.
2. The strategy assumes that all customers in the target market have similar needs, and thus the
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Chapter 5: Target Markets: Segmentation, Evaluation, and Positioning
organization can satisfy most customers with a single marketing mix with little or no
variation.
3. The undifferentiated targeting strategy is effective under two conditions:
a. A large proportion of customers in a total market must have similar needs for the
product, a situation termed a homogeneous market.
b. The organization must have the resources to develop a single marketing mix that
satisfies customers’ needs in a large portion of a total market and the managerial skills
to maintain it.
E. Concentrated Targeting Strategy through Market Segmentation
1. A market comprised of individuals or organizations with diverse product needs is called a
heterogeneous market.
2. Market segmentation is the process of dividing a total market into groups, or segments, that
consist of people or organizations with relatively similar product needs.
a. The purpose is to enable a marketer to design a marketing mix that more precisely
matches the needs of customers in the selected market segment. It is appropriate for
heterogeneous markets.
3. A market segment consists of individuals, groups, or organizations that share one or more
similar characteristics that cause them to have relatively similar product needs.
4. The rationale for segmenting heterogeneous markets is that a company will be most
successful in developing a satisfying marketing mix for a portion of a total market, since
customer’s needs tend to vary.
5. For market segmentation to succeed, five conditions must exist:
a. Customers’ needs for the product must be heterogeneous.
b. Segments must be identifiable and divisible.
c. The marketer must be able to compare the different market segments with respect to
estimated sales potential, costs, and profits.
d. At least one segment must have enough profit potential to justify developing and
maintaining a special marketing mix for it.
e. The company must be able to reach the chosen segment with a particular marketing
mix.
6. When an organization directs its marketing efforts toward a single market segment using one
marketing mix, it is employing a concentrated targeting strategy.
7. The chief advantage of the concentrated strategy is that it allows a firm to specialize.
a. The firm analyzes the characteristics and needs of a distinct customer group and then
focuses all its energies on satisfying that group’s needs.
b. If the group is big enough, a firm may generate large sales volume by reaching a
single segment.
c. Concentrating on a single segment can also permit a firm with limited resources to
compete with larger organizations that have overlooked smaller market segments.
8. However, if a company’s sales depend on a single segment and the segment’s demand for the
product declines, the company’s financial health also deteriorates.
a. The strategy can also prevent a firm from targeting segments that might be successful,
because when a firm penetrates one segment, its popularity may keep it from
extending its marketing efforts into other segments.
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F. Differentiated Targeting Strategy through Market Segmentation
1. With a differentiated targeting strategy, an organization directs its marketing efforts at two
or more segments by developing a marketing mix for each segment.
2. A benefit of a differentiated approach is that a firm may increase sales in the aggregate
market because its marketing mixes are aimed at more customers.
a. For this reason, a company with excess production capacity may find a differentiated
strategy advantageous because the sale of products to additional segments may absorb
excess capacity.
3. On the other hand, a differentiated strategy often demands more production processes,
materials, and people because the different ingredients in each marketing mix will vary
a. Thus, production costs may be higher than with a concentrated strategy.
IV. Step 2: Determine Which Segmentation Variables to Use
A. Segmentation variables are the characteristics of individuals, groups, or organizations used to
divide a market into segments.
1. The segmentation variable should relate to customers’ needs for, uses of, or behavior toward
the product.
2. Marketers must select measurable segmentation variables, such as age, location, or gender, if
individuals or organizations in a total market are to be classified accurately.
3. A company’s resources and capabilities affect the number and size of segment variables
used.
4. The type of product and degree of variation in customers’ needs also dictate the number and
size of segments targeted.
B. No matter what approach is used, choosing one or more segmentation variables is a critical step in
effectively targeting a market.
1. Selecting an inappropriate variable limits the chances of developing a successful marketing
strategy.
C. Variables for Segmenting Consumer Markets
1. Segmentation variables can be grouped into four major categories: demographic, geographic,
psychographic, and behavioristic (Figure 5.3).
2. Demographic Variables
a. Demographic characteristics that marketers commonly use include age, gender, race,
ethnicity, income, education, occupation, family size, family life cycle, religion, and
social class.
b. Marketers segment markets by demographic characteristics because they are often
closely linked to customers’ needs and purchasing behaviors and can be readily
measured.
c. If considering segmenting by age, marketers need to be aware of age distribution, how
that distribution is changing, and how it will affect the demand for different types of
products.
d. Gender is another demographic variable that is commonly used to segment markets for
many products, including clothing, soft drinks, nonprescription medications,
magazines, some food items, and personal care products.
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e. Marketers also use race and ethnicity as variables for segmenting markets for many
products.
(1) Cosmetics, for example, is an industry where it is important to match the shade
of the products with the skin color of customers.
f. Because income strongly influences people’s product purchases, it often provides a
way to divide markets.
(1) Income affects customers’ lifestyles and what they can afford to buy.
g. Among the factors that influence household income and product needs are marital
status and the presence and age of children.
(1) These characteristics, often combined and called the family life cycle, affect
consumers’ needs for housing, appliances, food and beverages, automobiles,
and recreational equipment.
(a) The composition of the U.S. household in relation to the family life cycle
has changed considerably over the last several decades.
(b) Single-parent families are on the rise, meaning that the “typical” family
no longer necessarily consists of a married couple with children.
(c) Tracking demographic shifts such as these helps marketers be informed
and prepared to satisfy the needs of target markets through new
marketing mixes that address their changing lifestyles.
3. Geographic Variables
a. Geographic variables—climate, terrain, city size, population density, and urban/rural
areas—also influence consumer product needs.
(1) Markets may be divided using geographic variables, because differences in
location, climate, and terrain will influence consumers’ needs.
(a) City size can be an important segmentation variable.
(2) Many firms choose to limit marketing efforts to cities above a certain size
because small populations have been calculated to generate inadequate profits.
(a) Market density refers to the number of potential customers within a unit
of land area, such as a square mile.
(3) Although market density relates generally to population density, the correlation
is not exact.
(a) Marketers may also use geodemographic segmentation.
(4) Geodemographic segmentation clusters people by ZIP codes or neighborhood
units based on lifestyle and demographic information.
(a) Geodemographic segmentation allows marketers to engage in
micromarketing.
(5) Micromarketing involves focusing precise marketing efforts on very small
geographic markets, such as communities and even individual neighborhoods.
(a) Climate is commonly used as a geographic segmentation variable because
of its broad impact on people’s behavior and product needs.
(6) Product markets affected by climate include air-conditioning and heating
equipment, fireplace accessories, etc.
4. Psychographic Variables
a. Marketers sometimes use psychographic variables, such as personality characteristics,
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motives, and lifestyles, to segment markets.
b. A psychographic variable can be used by itself to segment a market or combine with
other types of segmentation variables.
c. Personality characteristics can be a useful means of segmentation when a product
resembles many competing products and consumers’ needs are not significantly
related to other segmentation variables.
(1) When appealing to a personality characteristic, a marketer almost always selects
one that many people view positively.
d. When motives are used to segment a market, the market is divided according to
consumers’ reasons for making a purchase.
(1) Personal appearance, affiliation, status, safety, and health are examples of
motives affecting the types of products purchased and the choice of stores in
which they are bought.
e. Lifestyle segmentation groups individuals according to how they spend their time,
importance of things in their surroundings, beliefs about themselves and broader
issues, and some demographic characteristics.
(1) Lifestyle analysis provides a broad view of buyers because it encompasses
numerous characteristics related to people’s activities, interests, and opinions.
(2) PRIZM, by Nielsen, is commonly used by marketers to segment by
demographic variables. It can also be used to segment by lifestyles. PRIZM
combines demographics, consumer behavior, and geographic data to help
marketers identify, understand, and reach their customers and prospects,
resulting in a highly robust tool for marketers.
(a) PRIZM divides U.S. households into demographically and
behaviorally distinct segments that take into account such factors as
likes, dislikes, lifestyles, and purchase behaviors.
5. Behavioristic Variables
a. Firms can divide a market according to consumer behavior toward a product, which
commonly involves an aspect of consumer’s product use.
(1) For example, a market may be separated into users—classified as heavy,
moderate, or light—and nonusers.
b. Benefit segmentation is the division of a market according to benefits that consumers
want from the product.
(1) The effectiveness of such segmentation depends on three conditions:
(a) The benefits sought must be identifiable.
(b) Using these benefits, marketers must be able to divide people into
recognizable segments.
(c) One or more of the resulting segments must be accessible to the
organization’s marketing efforts.
D. Variables for Segmenting Business Markets
1. Marketers segment business markets according to geographic location, type of organization,
customer size, and product use.
2. Geographic Location
a. Demand for business products varies due to differences in climate, terrain, or regional
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customer preferences.
b. Geographic segmentation may be especially appropriate for producers seeking to
reach industries concentrated in certain locations.
3. Type of Organization
a. A company sometimes segments a market by types of organization within that market
because they often require different product features, price structures, distribution
systems, and selling strategies.
b. Given these variations, a firm may either concentrate on a single segment with one
marketing mix or focus on several groups with multiple mixes.
4. Customer Size
a. An organization’s size may affect its purchasing procedures and the types and
quantities of products it needs.
b. To reach a segment of a specific size, marketers may have to adjust one or more
marketing mix ingredients.
5. Product Use
a. Certain products can be used in numerous ways in the production of goods.
(1) These variations will affect the types and amounts of products purchased, as
well as the purchasing method.
V. Step 3: Develop Market Segment Profiles
A. A market segment profile describes the similarities among potential customers within a segment
and explains the differences among people and organizations in different market segments.
B. A profile may cover such aspects as demographic characteristics, geographic factors, product
benefits sought, lifestyles, brand preferences, and usage rates.
C. Market segment profiles help marketers understand how a business can use its capabilities to serve
potential customer groups.
1. It helps a marketer determine which segment or segments are most attractive relative to the
firm’s strengths, weaknesses, objectives, and resources.
2. It can be useful in helping a firm make marketing decisions relating to a specific market
segment or segments.
VI. Step 4: Evaluate Relevant Market Segments
A. After analyzing the market segment profiles, a marketer should be able to narrow his or her focus
to several promising segments that warrant further analysis.
1. Marketers should examine sales estimates, competition, and estimated costs associated with
each of these segments.
B. Sales Estimates
1. Potential sales for a market segment can be measured along several dimensions, including:
a. Product level—potential sales can be estimated for a specific product item or an entire
product line
b. Geographic area
c. Time—sales estimates can be short range, medium range, or long range
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d. Level of competition—specifies whether sales are being estimated for a single firm, or
for an entire industry
2. Market potential is the total amount of a product that customers will purchase within a
specified period at a specific level of industry-wide marketing activity.
a. Market potential can be stated in terms of dollars or units.
b. A segment’s market potential is affected by economic, sociocultural, and other
environmental forces.
c. The specific level of marketing effort will vary from one firm to another, but each
firm’s marketing activities together add up to the industry-wide marketing effort total.
d. A marketing manager must also estimate whether and to what extent industry
marketing efforts will change over time.
3. Company sales potential is the maximum percentage share of a market that an individual
firm within an industry can expect to capture for a specific product.
a. Several factors influence company sales potential for a market segment—the market
potential, the magnitude of industry-wide marketing activities, and the intensity and
effectiveness of the company’s marketing activities relative to competitors’ activities.
b. Two general approaches that measure company sales potential are:
(1) Breakdown approach—the marketing manager first develops a general
economic forecast for a specific time period. Next, the manager estimates
market potential based on this forecast. The manager derives the company’s
sales potential from the forecast and an estimate of market potential.
(2) Buildup approach—the marketing manager begins by estimating how much of
a product a potential buyer in a specific geographic area will purchase in a given
period. The manager then multiplies that amount by the total number of
potential buyers in that area. The manager performs the same calculation for
each geographic area in which the firm sells products and then adds the totals to
calculate market potential.
C. Competitive Assessment
1. Besides obtaining sales estimates, it is crucial to assess competitors that are already operating
in the segments being considered.
2. Competitive assessment should ask several questions about competitors:
a. How many exist?
b. What are their strengths and weaknesses?
c. Do several competitors already have major market shares and together dominate the
segment?
d. Can our company create a marketing mix to compete effectively against competitors’
marketing mixes?
e. Is it likely that new competitors will enter this segment? If so, how will they affect our
firm’s ability to compete successfully?
D. Cost Estimates
1. To fulfill the needs of a target segment, an organization must develop and maintain a
marketing mix that precisely meets the wants and needs of that segment, which can be
expensive.
2. In some cases marketers may conclude that the costs to reach some segments are so high that
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Chapter 5: Target Markets: Segmentation, Evaluation, and Positioning
they are basically inaccessible.
VII. Step 5: Select Specific Target Markets
A. The firm’s management must investigate whether the organization has sufficient financial
resources, managerial skills, employee expertise, and facilities to compete effectively in selected
segments.
1. The firm must also consider the possibility that the requirements of some market segments
are at odds with the firm’s overall objectives, and that possible legal problems, conflicts with
interest groups, and technological advancements will render certain segments unattractive.
B. Identifying the right target market is the key to implementing a successful marketing strategy.
1. Failure to do so can lead to low sales, high costs, and severe financial losses.
VIII. Developing Sales Forecasts
A. After a company selects a target market or markets, it must develop a sales forecast—the amount
of a product the company expects to sell during a specific period at a specified level of marketing
activity.
B. The sales forecast differs from the company sales potential in that it concentrates on what actual
sales will be at a certain level of company marketing effort.
1. The company sales potential assesses what sales are possible at various levels of marketing
activities, assuming certain environmental conditions exist.
C. To forecast sales, a marketer can choose from a number of forecasting methods, some arbitrary and
quick and others more scientific, complex, and time consuming.
1. A firm’s choice of method, or methods, depends on the:
a. Costs involved
b. Type of product
c. Market characteristics
d. Time span and purpose of the forecast
e. Stability of the historical sales data
f. Availability of required information
g. Managerial preferences
h. Forecasters’ areas of expertise and experience
D. Common forecasting techniques fall into five categories—executive judgment, surveys, time series
analysis, regression analysis, and market tests.
E. Executive Judgment
1. Executive judgment is the intuition of one or more executives.
a. This is an unscientific but expedient and inexpensive approach to sales forecasting.
b. It is not a very accurate method, but executive judgment may work reasonably well
when product demand is relatively stable and the forecaster has years of market-
related experience.
c. However, because intuition is heavily influenced by recent experience, the forecast
may weigh recent sales booms or slumps excessively.
d. Another drawback to intuition is that the forecaster has only past experience as a guide
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for deciding where to go in the future.
F. Surveys
1. Another way to forecast sales is to question customers, sales personnel, or experts regarding
their expectations about future purchases.
2. In a customer forecasting survey, marketers ask customers what types and quantities of
products they intend to buy during a specific period.
a. This approach may be useful to a business with relatively few customers.
3. In a sales force forecasting survey, the firm’s salespeople estimate anticipated sales in their
territories for a specified period.
a. A marketer may survey sales staff for several reasons, the most important being that
the sales staff is the company personnel closest to customers on a daily basis.
(1) They therefore, have first-hand knowledge about customers’ future product
needs.
b. When sales representatives assist in developing the forecast, they are invested in the
process and are more likely to work toward its achievement.
4. When a company wants an expert forecasting survey, it hires professionals to help prepare
the sales forecast.
a. Using experts is a quick way to get information and is relatively inexpensive.
(1) However, because they work outside the firm, these forecasters may be less
motivated than company personnel to do an effective job.
5. In the Delphi technique, experts create initial forecasts, submit them to the company for
averaging, and have the results returned to them so they can make individual refined
forecasts.
a. Because this technique gets rid of extreme data, the ultimate goal in using the Delphi
technique is to develop a highly reliable sales forecast.
G. Time Series Analysis
1. With time series analysis, the forecaster uses the firm’s historical sales data to discover a
pattern, or patterns, in sales over time.
a. This forecasting method assumes that past sales patterns will continue into the future.
2. In a time series analysis, a forecaster usually performs four types of analyses:
a. Trend analysis—focuses on aggregate sales data, such as the company’s annual sales
figures, covering a period of many years to determine whether annual sales are
generally rising, falling, or staying about the same.
b. Cycle analysis—forecaster analyzes sales figures for a three- to five-year period to
ascertain whether sales fluctuate in a consistent, periodic manner.
c. Seasonal analysis—the analyst studies daily, weekly, or monthly sales figures to
evaluate the degree to which seasonal factors influence sales.
d. Random factor analysis—the forecaster attempts to attribute erratic sales variations
to random, nonrecurrent events, such as a regional power failure or a natural disaster.
3. Time series analysis is an effective forecasting method for products with reasonably stable
demand, but not for products with erratic demand.
H. Regression Analysis
1. In regression analysis, the forecaster seeks to find a relationship between past sales (the
dependent variable) and one or more independent variables, such as population, per capita
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Chapter 5: Target Markets: Segmentation, Evaluation, and Positioning
income, gross domestic product, etc.
a. The objective of regression analysis is to develop a mathematical formula that
accurately describes a relationship between the firm’s sales and one or more variables.
2. Regression analysis is useful when a precise association can be established.
a. This method can be used only when available historical sales data are extensive.
b. Regression analysis is not useful for forecasting sales of new products.
I. Market Tests
1. A market test involves making a product available to buyers in one or more test areas and
measuring purchases and consumer responses to the product, price, distribution, and
promotion.
a. Test areas are chosen for their representativeness of a firm’s target markets.
2. A market test provides information about consumers’ actual, rather than intended, purchases.
a. Purchase volume can be evaluated in relation to the intensity of other marketing
activities such as advertising, in-store promotions, pricing, packaging, and
distribution.
3. Because it does not require historical sales data, a market test is effective for forecasting
sales of new products or of existing products in new geographic areas.
a. A market test also gives a marketer an opportunity to test the success of various
elements of the marketing mix.
4. These tests are often time consuming and expensive.
5. In addition, a market cannot be certain that consumer response during a market test
represents the total market response, or that the same response will continue in the future.
J. Using Multiple Forecasting Methods
1. Although some businesses depend on a single sales forecasting method, most firms use
several techniques.
2. Sometimes a company is forced to use multiple methods when marketing diverse product
lines, but even a single product line may require several forecasts, especially when the
product is sold to different market segments.
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Chapter 5: Target Markets: Segmentation, Evaluation,
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DISCUSSION STARTERS
Discussion Starter 1: How Many Markets?
This exercise involves a series of questions. Ask the students to stand or remain standing if the statement
is true for them.
(1) Are you a University/College student?
(2) Are you a University/College student in the state of __________?
(3) Are you a University/College student in (insert your University/College name)?
(4) Are you a student in the College of Business at (insert your University/College name)?
(5) Are you a marketing major in the College of Business at (insert your University/College name)?
(6) Are you brown haired?
(7) Are you brown eyed?
(8) Are you taller than 5’7”?
(9) Are you male?
ASK: What happened to the number standing as I went through these questions? Why did the number
standing get smaller?
Discussion Starter 2: Understanding Segments
The 10 minute video segment is part of a Frontline series called “The Merchants of Cool.” While this
program aired years ago, it is still relevant. Frontline is an excellent program and all of its episodes
are available online at the PBS website. You may want to consider previewing other episodes and
using them later in the semester. However, some episodes contain content which may not be
appropriate for all classes.
ASK: How do marketers know what is “cool” for a particular segment?