Chapter 5 Target Markets Segmentation and Evaluation Objectives

Chapter 5 Target Markets: Segmentation and Evaluation

Objectives • Learn what a market is • Understand differences among targeting strategies • Become familiar with segmentation variables • Know what segment profiles are and how they are used • Evaluate market segments • Identify factors that influence selection of specific market segments • Understand positioning • Become familiar with sales forecasting methods Copyright © Houghton Mifflin Company. All rights reserved. 10 | 2

What are Markets • Market: Market a group of people who, as individuals or organizations, have needs for products in a product category and have the ability, willingness, and authority to purchase such products. • Market Requirements: four conditions for a market (group of people) to exist: üNeed/desire for a particular product üHave ability to buy it üWilling to use buying power üHave authority to buy it Copyright © Houghton Mifflin Company. All rights reserved. 10 | 3

Target Market Selection Process (Five-step process) Copyright © Houghton Mifflin Company. All rights reserved.

Step 1: Targeting Strategy • The targeting strategy to be used depends on: – target market characteristics – product attributes – organization’s objectives and resources There are three targeting strategies: 1. Undifferentiated Strategy 2. Concentrated strategy 3. Differentiated strategy • 1. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 5

Step 1: Targeting Strategy: (1) Undifferentiated strategy • The undifferentiated targeting strategy is one in which an organization (1) defines an entire market for a particular product as its target market, (2) designs a single marketing mix, and (3) directs it at the entire market. • The underlying assumption is that the needs of the target market for specific product are very similar; thus the business can satisfy most customers with a single marketing mix. • There are two requirements for effective use of this strategy: a) The market must be homogeneous (i. e. a large proportion of customers have similar needs for the product). b) The organization must be able to develop and maintain a single marketing mix that satisfies customers’ needs. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 6

Step 1: Targeting Strategy: (1) Undifferentiated strategy (cont. ) Copyright © Houghton Mifflin Company.

Step 1: Targeting Strategy: (2) Concentrated strategy (through market segmentation) When the total market is heterogeneous (a market with diverse product needs), market segmentation must be used. Market segmentation: the process of dividing the total market into groups or segments that have relatively similar product needs to design a marketing mix that matches those needs in a selected market segment. Market segment: Individuals, groups, or organizations sharing one or more similar characteristics that cause them to have similar product needs. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 8

Step 1: Targeting Strategy: (2) Concentrated strategy (through market segmentation) (cont. ) Conditions For Successful Market Segmentation: • Customer product needs are heterogeneous • Segments must be identifiable and divisible • Total market should be divided so that segments can be compared on sales potential, costs, and profits • At least one segment has profit potential to justify a special marketing mix for that segment • Segment must be reachable with a particular marketing mix Copyright © Houghton Mifflin Company. All rights reserved. 10 | 9

Step 1: Targeting Strategy: (2) Concentrated strategy (through market segmentation) (cont. ) Concentrated targeting strategy: a strategy in which an organization targets a single market segment using one marketing mix (specialize in a market segment). Advantages: (1) Specialization helps the firm analyze and understand market needs carefully and then focus all marketing efforts to satisfy those needs. (2) A firm with limited resources can compete with much larger firms (due to specialization in the market). Disadvantages: (1) If market demand for the product declines, the company’s financial strength also declines. (2) Success in one segment may preclude (restrict) entry into another segment. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 10

Step 1: Targeting Strategy: (2) Concentrated strategy (through market segmentation) Copyright © Houghton Mifflin

Step 1: Targeting Strategy: (3) Differentiated strategy (through market segmentation) Differentiated targeting strategy: A strategy in which an organization targets two or more segments by developing a marketing mix for each segment. Advantages: 1) A firm can increase its sales by serving more than one segment. 2) Sales to additional market segments may absorb excess production capacity. Disadvantages: 1) Higher production cost (i. e. more production processes, materials, skills) 2) Higher marketing cost (i. e. several promotion plans, distribution methods) Copyright © Houghton Mifflin Company. All rights reserved. 10 | 12

Step 1: Targeting Strategy: (3) Differentiated strategy (through market segmentation) (cont. ) Copyright ©

Step 2: Determine Which Segmentation Variables to Use Segmentation Variable: characteristics of individuals, groups, or organizations used to divide a market into segments Important criteria: – A segmentation variable should be related to customers’ needs for, uses of, or behavior toward the product. – The variable must be measurable. Notes: – The company’s resources and capabilities determine the number and size of segment variables used. – Type of product and degree of variation in consumer needs also affect the choice of segmentation variables. – Choice of segmenting variables is a critical step (i. e. it affects chances for success in the market). Copyright © Houghton Mifflin Company. All rights reserved. 10 | 14

Variables for Segmenting Consumer Markets Copyright © Houghton Mifflin Company. All rights reserved. 10

(A) Demographic characteristics Marketers rely on these demographic characteristics because they are often closely linked to customers’ needs and purchasing behavior and can be readily measured. Examples: – Marketers need to be aware of age distribution and how that distribution is changing (i. e. children often have greater influence over spending patterns) – Gender is commonly used to segment markets (i. e. markets for clothing, soft drinks, nonprescription medications, toiletries, magazines, perfumes). – Marketers also use race and ethnicity for segmenting markets (i. e. products as food, music, clothing, and cosmetics, banking). – Income affects people’s ability to buy and their desires for certain lifestyles. – Marital status and family life cycle are also used by marketers for products like housing, holiday packages, appliances, food and beverages, automobiles, and recreational equipments. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 16

(B) Geographic variables Markets may be divided into geographic regions because customer product needs may differ from one region to another. Notes: – Marketers may focus efforts on cities of a certain size or market density, use geodemographics, or micromarketing. – Market density: refers to the number of customers within a unit of land area, such as a square mile. – Geodemographic segmentation can also be used (using both demographic and geographic variables to segment markets) – Micromarketing focuses precise marketing efforts on very small geographic markets (such as community or neighborhood markets). Copyright © Houghton Mifflin Company. All rights reserved. 10 | 17

(C) Psychographic variables can be used by themselves to segment a market or combined with other types of segmentation variables. They are three types: 1. Personality characteristics: personality traits that can be used when a product resembles many competing products and consumers’ needs are not greatly affected by other segmentation variables (i. e. Marketers select personality characteristics that many people view positively). 2. Motives: consumers’ reasons for making a purchase. (i. e. 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). 3. Lifestyle: a way of living. That is, grouping individuals according to their activities, interests, and opinions. (i. e. how people spend their time, importance of things in their surroundings, beliefs about themselves and broad issues). Copyright © Houghton Mifflin Company. All rights reserved. 10 | 18

(D) Behaviouristic variables Firms can divide a market according consumer behavior involving some aspect of product use (i. e. how consumers use the products). One common type of this is benefit segmentation Benefit segmentation: is the division of a market according to benefits that consumers want from the product. The effectiveness of benefit segmentation depends on three conditions: 1. The benefits sought must be identifiable. 2. The market must be divided into recognizable segments. 3. One or more of the resulting segments must be accessible to the firm’s marketing efforts. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 19

Variables for Segmenting: Business Markets 1. Geographic Location. (i. e. climate, terrain). 2. Type of Organization. (i. e. chemical firms, … etc. ) 3. Customer Size. (i. e. big firms with large buying orders may require different procedures). 4. Product Use. How a firm uses products may affect the types and amounts of products purchased and the manner in which they are purchased. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 20

Step 3: Develop Market Segment Profiles • Market segment profile describes: – similarities among potential customers within a segment – differences among people and organizations in different market segments. • A profile can deal with demographic characteristics, geographic factors, product benefits sought, lifestyles, brand preferences, or usage rates. • Market segment profiles help a marketers understand how to use his capabilities to serve potential customers. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 21

Step 4: Evaluate Relevant Market Segments The following techniques can be used: 1. Sales Estimates • Market potential • Company sales potential (breakdown and buildup) 2. Competitive Assessment 3. Cost Estimates © Microsoft Copyright © Houghton Mifflin Company. All rights reserved. 10 | 22

1. Sales Estimates • potential sales for a segment (either for total market or a specific company) can be measured along several dimensions, including: – product (one item or entire product line) – geographic area – Time (S-R of L-R ), and – level of competition. • Market potential: is the total amount of a product for all firms in an industry that customers will purchase within a specified period at a specific level of industry-wide marketing activity. (It can be stated in terms of dollars or units) • Company sales potential: is the maximum percentage of market potential that an individual firm within an industry can expect to obtain for a specific product. It can be influenced by: – size of the market sales potential – the magnitude of industry-wide marketing activities – the intensity and effectiveness of the firm’s marketing activities relative to those of competitors. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 23

Market Potential Company Market Share Rest of Industry Copyright © Houghton Mifflin Company.

approaches for measuring company sales potential: There are two approaches: breakdown and buildup – Breakdown: measures company sales potential based on a general economic forecast for a specific time period and the sales potential derived from it. The marketing manager starts with broad comprehensive forecasts of general economic activity, estimates market potential, and then estimates the company’s sales potential. – Buildup: measures company sales potential by estimating how much of a product a potential buyer in a specific geographic area will purchase in a given time period, multiplying the estimate by the total number of potential buyers in that area, and adding the totals for each area to calculate sales potential. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 25

2. Competitive Assessment • Sales estimates may be misleading without competitive information. • Several questions must be asked about competitors in the segments being considered: for example, – How many competitors exist? – What are their strengths and weaknesses? – Do several competitors have major market shares and together dominate the segment? – Can our company create a marketing mix to compete effectively against competitors’ marketing mixes? – Is it likely that new competitors will enter this segment? – If so, how will they affect our firm’s ability to compete successfully? Copyright © Houghton Mifflin Company. All rights reserved. 10 | 26

3. Cost Estimates • Meeting the needs of a target segment can be expensive. • If costs are too high, marketers may treat the segment as being inaccessible. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 27

Step 5: Select Specific Target Markets • The marketer must consider whether the organization has the followings to enter and compete effectively in the selected segment/s: ü required financial resources ü managerial skills ü employee expertise ü facilities • The marketer must also consider long-term growth of the market segment/s. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 28

Developing Sales Forecast • Sales forecast: The amount of a product a company expects to sell during a specific period at a specified level of marketing activities. • Sales forecasting techniques fall into five categories: 1. Executive Judgment 2. Surveys 3. Time Series Analysis 4. Regression Analysis 5. Market Tests Copyright © Houghton Mifflin Company. All rights reserved. 10 | 29

1. Executive Judgment A sales forecasting method based on the intuition of one or more executives. Characteristics: ü It is simple convenient and inexpensive. ü It works reasonably well when product demand is relatively stable and the forecaster has years of market-related experience. ü But it is unscientific. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 30

2. Surveys: four types: 1. 2. 3. 4. Customer Forecasting survey Sales Force Forecasting survey Expert Forecasting survey The Delphi technique 1. Customer Forecasting survey: survey of customers regarding how much they intend to buy during a specific period Characteristics: ü ü ü Customers must be willing and able to participate buying intentions (not actual purchases) are usually inaccurate. Surveys consume much time and money. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 31

2. Surveys (continued) 2. Sales Force Forecasting survey: estimates by a firm’s salespeople of their anticipated sales in their territories for a specified period. Characteristics ü Salespeople are closer to customers, on a daily basis, than other company personnel and, therefore, should know more about customers’ future product needs. ü Forecasts can be prepared for single territories, divisions consisting of several territories, regions made up of multiple divisions, or the total geographic market. ü For the survey to be effective, salespeople as a group must be accurate, or at least consistent estimators. ü Assuming that the survey is well administered, the sales force can help establish reasonable sales goals. ü Salespeople should be assured that their forecasts are not used to set their sales quotas. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 32

2. Surveys (continued) 3. Expert Forecasting survey: is a sales forecast prepared by professionals such as economists, management consultants, advertising executives, college professors, or other persons outside the firm with solid experience in a specific market. 4. The Delphi technique: is a procedure in which experts create initial forecasts, submit them to the company for averaging, and have the results returned to them so that they can make individual refined forecasts. The ultimate goal is to develop a highly accurate sales forecast. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 33

3. Time Series Analysis Time series analysis – historical sales data used to discover patterns in sales over time. It involves: 1. Trend analysis – aggregate sales data over many years to determine trends in annual sales 2. Cycle analysis – analysis over 3 -5 years to ascertain whether sales fluctuate in a consistent manner 3. Seasonal analysis – daily, weekly, or monthly sales figure to evaluate sales influences of seasonal factors 4. Random factor analysis – attributing erratic sales variations to random, nonrecurrent events. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 34

4. Regression Analysis: predicting sales based on finding a relationship between past sales and one or more independent variables, such as population or income Characteristics: ü Simple regression analysis uses one independent variable, whereas multiple regression analysis includes two or more independent variables. ü These methods are useful only when a precise relationship can be established with historical data. ü Therefore, they are not useful if there is no historical data (i. e. can not predict sales for new products). Copyright © Houghton Mifflin Company. All rights reserved. 10 | 35

5. Market Test: Making a product available to buyers in one or more test areas and measuring purchases and consumer responses to marketing efforts. Characteristics: ü Market tests provide information about consumers’ actual rather than intended purchases. ü Effective in estimating sales of new products or of existing products in new geographic areas. ü The chief disadvantages of market tests are that they are time-consuming and expensive. Copyright © Houghton Mifflin Company. All rights reserved. 10 | 36

Using Multiple Forecasting Methods most marketers use several techniques to attempt to validate the results from one technique. Other reasons include: – Diverse product lines – Product sold to different market segments – Variation in length of needed forecasts Copyright © Houghton Mifflin Company. All rights reserved. 10 | 37