Chapter 7 - Identifying Market Segments and Targets

A market segment is a group of customers who share a similar set of needs and wants.  Marketers usually break customer segments into two broad groups:  descriptive characteristics and behavioral characteristics.  Regardless of the segmentation system used, the main focus is to adjust the marketing program to recognize customer differences.

Marketers who look at descriptive characteristics of segments look at the geographic segmentation, demographic segmentation, and psychographic segmentation.  The geographic segmentation divides the market into geographical sections.  Businesses can operate in one, few, or many areas which gives it the ability to tailor marketing programs to the needs and wants of local customer groups in trading areas, neighborhoods, or individual stores.  In the demographic segmentation, markets are divided using variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality, and social class.  They are often associated with consumer needs and wants and are easy to measure.  Psychographic segmentation divides buyers into different groups on the basis of psychological/personality traits, lifestyle, or values.  Consumers within the same demographic group can demonstrate very different psychographic profiles.

Marketers who look at behavioral characteristics look at how a consumer responds to benefits, usage occasions, or brands.  Buyers are divided into groups on the basis of their knowledge of, attitude toward, use of, or response to a product.  One behavioral feature includes needs and benefits.  This identifies distinct segments with clear marketing implications because not everyone who buys a product has the same needs or wants the same benefits from it.  Another behavioral feature is decision roles.   People can play five roles when it comes to making a buying decision:  initiator, influencer, decider, buyer, and user.  A third behavioral feature is user and usage.  Marketers believe variables related to various aspects of users or usage are good starting points for constructing market segments.  These variables include occasions, user status, usage rate, buyer-readiness stage, loyalty status, and attitude.

Business markets are segmented with some of the same variables used in consumer markets, but they also use other variables needed to identify their customer’s needs and wants.  From the greatest to the least important, the segmentation variables for business markets are demographic, operating variables, purchasing approaches, situational factors, and personal characteristics. 

Once a firm has identified its market segments, it then must decide how many and which ones to target.  Marketers are continuously combining several variables in an effort to identify smaller, better-defined target groups.  However, not all segmentation structures are useful.  To be useful, market segments must rate favorable on five criteria being:  measurable, substantial, accessible, differentiable, and actionable.  The five forces identified by Michael Porter determine the fundamental long-term attractiveness of a market segment.  These include the threat of intense segment rivalry, the threat of potential entrants, the threat of substitutes, threat of buyers’ growing bargaining power, and the threat of suppliers’ growing bargaining power.  Marketers have a range of possible levels of segmentation that can assist in their decisions for a target market.  These include full market coverage, multiple segments, single segments, and individuals as segments. 

As firms evaluate market segments, they must look at the segment’s overall attractiveness and it own objectives and capabilities.  It needs to look at how well the potential segment scores on the five criteria; if it has characteristics that make it attractive, such as size, growth, profitability, scale economies, and low risk; and if investing in the segment make sense given the firm’s objectives, competencies, and resources.

Firms attempt to serve all customer groups with all the products they might need.  Only large firms are able to do this by covering a whole market through undifferentiated or differentiated marketing.  Undifferentiated or mass marketing is where the firm ignores segment differences and goes after the whole market with one offer.  It is suitable when all consumers have generally the same preferences and the market shows no natural segments.  Differentiated marketing is where the firm sells different products to all of the different segments.  It usually leads to higher sales and higher costs and no generalizations about its profitability are valid.

Using selective specialization, a firm selects a subset of all the possible segments.  The multiple segment strategy diversifies the firm’s risk and each segment promises to be a moneymaker with little or no collaboration among the segments.  Companies can try to operate in supersegments, which is a set of segments sharing some exploitable similarity.  Firms can also attempt to achieve some synergy with product specialization, selling a certain product to several different market segments, or market specialization, serving many needs of a particular customer group.

In the single-segment concentration the firm markets to only one segment.  This allows the firm to gain deep knowledge of the segment’s needs and achieves a strong market presence. It is also able to specialize its production, distribution, and promotion to that one segment.

Individual marketing is becoming the ultimate level of segmentation.  Customers are able to take more individual initiative in determining what and how to buy, using the Internet to look up product information and evaluations.  They are able to contact suppliers, users, and product critics and are even able to design the product they want. 

A movement toward customerizing the firm is in the future.  This combines operationally driven mass customization with customized marketing in a way that empowers consumers to design the product and service offering of their choice.  A firm is customerized when it can respond to individual customers by customizing its products, services, and messages on a one-to-one basis.

Example:

I have been going to Las Vegas for over 20 years.  When I first started going it was targeted to adults.  Over the years, they have changed their target market to families.  They now have more attractions for kids, small theme parks or the like at the hotels, more shows for families, and even the restaurants and buffets are geared to families.  The hotels have changed to be more family-friendly with their look and atmosphere.