Session 5 - Targeting Attractive Market Segments

Why Segmentation

• customers are different

• provide different offering for different segments

• happier customers leads to more profits

• less competition leads to more profits

Market Segmentation

process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead them to respond in similar ways to a particular product offering and marketing program.

Steps - STP

1) segmentation

2) targeting

3) positioning

Targeting

Evaluating the relative attractiveness of various segments and choosing the most attractive one

Positioning

creating a unique brand image, or position

Market Segmentation (3 components)

1) Criteria for segmenting customers

2) Identifying a homogenous segment that is different from others on those criteria

3) Segment size and potential.

Segmentation Criteria

1) who are the customers (demographical)

2) where they are (geographical)

3) how they behave (behavioral)

market segmentation (demographical)

Age

Gender

Income

Occupation; education

market segmentation (geographical)

People in the same geographical regions tend to be relatively homogenous

Different regions vary in their sales potential, growth rates, customer needs, competitive structure

Particularly important in retailing and many services businesses.

market segmentation (geo-demographical segmentation)

Segmenting market demographically within the geographic regions.

Useful in assessing the size and market potential of a market segment defined by a particular trade area.

Behavioral Segmentation (How)

Focus on what a specific segment of consumers do

Behavioral attributes can be classified in terms of:

Consumer needs

• Expressed in benefits sought

• Similarity in choice criteria

• Product usage

• Amount of consumption

Lifestyle (sometimes referred to as segmentation by psychographics)

Consumer’s activities, interests, and opinions

Example Lifestyle Segmentation Scheme: VALS2

Based on how consumers pursue and acquire both products and services that provide satisfaction and shape their identities.

Behavioral Examples

Examples:

Innovators: sophisticated, high self-esteem, upscale and image is important

Thinkers: conservative, practical, income allows many choices, look for value

Makers: practical people, do it yourself, unimpressed by material possessions, prefer value to luxury

Gathers data on what each segment bought, what their media habits are, etc.

Targeting Effective Market Segments (2 things to think of)

1) The segment’s current and future attractiveness

2) The firm’s ability to effectively and competitively meet the needs of the segment

Targeting Defined

evaluating the attractiveness of each market segment, selecting one or more segments to pursue, and then designing marketing programs to serve them.

Targeting (5 step process)

Targeting Step 1

Selecting marketing attractiveness factors and competitive-position factors

Market attractiveness factors

• Most critical is the presence of unmet or underserved needs within the segment

• Market potential

• Growth rate

• Macro trends

Competitive-position factors

• Extent to which firm’s product or service in the segment will be different from competitors.

• Firm capabilities relative to competitors

• Industry macro level factors (e.g., Porter’s Five Forces)

Targeting Step 2

Weight the Selected Factors

Assign a numerical score to each of the factors from Step 1

In terms of their relative importance

e.g., rating on a 0 -10 scale

both market attractiveness and competitive position should add up to 1

Targeting Step 3

Rate Segments on Each Factor

Assign a rating to each the factors identified in Step 1

Evidence-based approach

Both quantitative and qualitative data

Targeting Step 4

Project the Future Position of Each Segment

Harder to predict the future than assess the present

Need to get a sense of how factors viewed as important for each segment will change in the next 3 to 5 years:

• Market Attractiveness

• Competitive-Position

Targeting Step 5

Choose Segments to Target and Determine Resource Allocation

General rule of thumb is that you should only target a segment if:

• One of the dimensions is rated as “Strong”

• The other dimension is at least rated as “Moderate”

A few exceptions may justify targeting a segment (in spite of this rule of thumb):

• Either of the two dimensions (Market Attractiveness, Competitive-Position) are expected to improve in time

• Segments are viewed as initial steps towards more attractive opportunities

• Existence of synergies with current targeted segments or planned ones

Niche-market Strategy

Involves serving one or more segments that, while not the largest, consist of a sufficient number of customers seeking somewhat-specialized benefits from a good or service

Mass-market Strategy

• A business can pursue a mass-market strategy in two ways

• Ignore any segment differences and design a single product-and-marketing program that will appeal to the largest number of consumers.

• Design separate products and marketing programs for the differing segments (differentiated marketing)

Growth-market Strategy

• Businesses pursuing this strategy target one or more fast-growth segments, even though these segments may not currently be very large.

• Usually requires strong R&D and marketing capabilities, plus the resources to finance rapid growth.