Marketing Management: Identifying Market Segments and Target Customers
Learning Objectives for Market Segmentation and Targeting
Targeting Essence: Students must be able to explain the core essence of targeting.
Strategic Leadership Principles: Defining the fundamental principles of strategic leadership in marketing.
Communication and Delivery: Describing the effective methods to communicate and deliver offerings to specific target customers.
Multiple Market Segments: Explaining the development of strategies intended to target more than one market segment simultaneously.
Consumer Market Segmentation: Describing the specific methodologies used to segment consumer-based markets.
Business Market Segmentation: Describing the specific methodologies used to segment business-to-business (B2B) markets.
Identifying Target Customers
Definition of Targeting: Targeting is defined as the process of identifying customers for whom the company will optimize its offering.
Selection Process: Once a firm identifies its market opportunities, it must determine how many and which specific segments to target.
Optimization via Variables: Marketers increasingly combine multiple variables to identify smaller, better-defined target groups. This hyper-definition allows for the development of offerings that fulfill specific customer needs better than competitors can.
The Logic of Targeting: Three Primary Approaches
Mass Marketing:
Strategy: The firm ignores segment differences and pursues the entire market with a single offer.
Marketing Program: It designs a program for a product with a superior image intended for the broadest possible number of buyers.
Distribution and Communication: Relies on mass distribution and mass communications.
Economic Rationale: The argument for this approach is that it creates the largest potential market, leading to the lowest costs. These low costs can translate into lower prices for consumers or higher profit margins for the company.
Targeted Marketing:
Strategy: The firm sells different products to different segments of the market.
Customer Needs: This is used when different groups of consumers have distinct needs and wants.
Operational Benefits: Allows a company to better design, price, disclose, and deliver products/services while fine-tuning marketing activities to counter competition.
One-to-One Approach: This is the ultimate level of targeting where each market segment consists of a single customer. This is made possible by flexible factories and proficient data gathering regarding individual customers and business partners (suppliers, distributors, retailers).
Mass Customization:
Definition: The ability of a company to meet each customer's requirements—to prepare on a mass basis individually designed products, services, programs, and communications.
Strategic versus Tactical Targeting
Strategic Targeting:
Focus: Centers on customers whose needs can be fulfilled by the company specifically through customized offerings.
Trade-offs: It involves a deliberate choice to ignore some customers to better serve others who match the company’s competencies. It emphasizes a better fit between offering benefits and customer needs over sheer market size.
Tactical Targeting:
Focus: Identifies the specific ways a company can reach the customers already identified as strategically important.
Relationship to Strategic Targeting: These two are not mutually exclusive but are integrally related components of the identification process.
Goal: Strives to reach all strategically important customers in an effective and cost-efficient manner without excluding potential segments already deemed strategic.
Evaluating Strategic Targeting: Compatibility and Attractiveness
Key Managerial Questions:
Can the company create superior value for these customers? (Target Compatibility)
Can these customers create superior value for the company? (Target Attractiveness)
Target Compatibility:
Definition: A reflection of the company's ability to outdo the competition in fulfilling the needs of target customers (creating superior customer value).
Dependencies: Based on company resources and the capacity to use them effectively and cost-efficiently.
Key Resource Categories:
Business infrastructure.
Access to scarce resources.
Skilled employees.
Technological expertise.
Strong brands.
Collaborator networks.
Core Competencies:
A core competency must possess three characteristics:
It is a source of competitive advantage and contributes significantly to perceived customer benefits.
It has applications in a wide variety of markets.
It is difficult for competitors to imitate.
Outsourcing Note: Companies often outsource less critical resources but must own and nurture the competencies that form the essence of their business.
Target Attractiveness:
Definition: Reflects the ability of a market segment to create superior value for the company to help reach its goals.
Monetary Value: Includes revenues received from customers minus the costs of serving them (tailoring the offer, communicating, and delivery).
Strategic Value (Nonmonetary):
Social Value: The influence of target customers on other potential buyers (social networks and opinion impact).
Scale Value: Benefits derived from the sheer scale of operations.
Information Value: The worth of data customers provide regarding their needs and profiles.
Tactical Targeting: Customer Profiles and Principles
Defining the Customer Profile:
Demographic Factors: Age, gender, income, occupation, education, religion, ethnicity, nationality, employment status, population density (urban/rural), social class, household size, and life cycle stage.
Geographic Factors: Physical location (geolocation) — this describes "where" they are, whereas demographics describe "who" they are.
Behavioral Factors: Actions such as prior experience (current, competitor, or new-to-category customers), purchase frequency, volume purchased, price sensitivity, promotion sensitivity, loyalty, and patronized retail outlets (online vs. offline).
Psychographic Factors: Personality traits, attitudes, value systems, interests, and lifestyles. These link observable characteristics to unobservable ones and must often be inferred from behavior.
Tactical Targeting Principles:
Effectiveness: Reaching all strategically viable customers, making them aware of the offering, and providing access.
Cost-Efficiency: Ensuring communication and distribution reach only the targeted customers to curtail waste on those whose needs the company cannot address.
Personas: Detailed profiles of hypothetical target consumers (one or a few) imagined with specific demographic, psychographic, and behavioral information to bring segments to life.
Target Adoption and Multiple Segments
Niche Marketing: A form of single-segment targeting where a firm focuses on one particular, well-defined group seeking a distinctive mix of benefits.
Transition to Product Lines: As companies grow and their customer base becomes diverse, they often transition from a single offering to a product line to fit diverse needs.
Specialization Strategies:
Product Specialization: Selling a specific product type to several different market segments.
Market Specialization: Concentrating on serving many different needs of a single particular customer group (e.g., selling various products exclusively to university laboratories).
Segmenting Consumer Markets
Demographic Segmentation Specifics:
Popular due to its association with needs/wants and ease of measurement.
Age and Life Cycle: Wants and abilities change with age, but "psychologically young" segments exist. Life stage defines major concerns (divorce, second marriage, caring for older parents, cohabiting, buying a home).
Gender: Research suggests women tend to be more communal-minded and data-attentive to the environment, while men tend to be more self-expressive and goal-directed.
Income: Does not always predict the best customer (e.g., blue-collar workers were early adopters of color TVs as a cheaper alternative to going out).
Multicultural Marketing: Recognizing that ethnic/cultural segments (Hispanic American, African American, Asian American) have needs that mass marketing cannot fulfill. These markets are growing at to the rate of non-multicultural populations.
Geographic Segmentation Specifics:
Divides by nations, states, regions, etc. Can involve local tailoring.
Geoclustering (PRIZM): Combines geographic and demographic data (education, affluence, urbanization, race, ethnicity, mobility).
Customer Cloning: Assuming best prospects live in the same areas as current customers.
Behavioral Segmentation Specifics: Groups buyers by user status, usage rate, buyer-readiness stage, loyalty status, and occasions.
Psychographic Segmentation Specifics: Groups buyers by psychological traits, lifestyle, or values. Important because demographics do not always reflect underlying needs.
Segmenting Business Markets
Business markets are segmented using a different set of criteria:
Demographic factors.
Operating variables.
Purchasing approaches.
Situational factors.
Personal characteristics of the buyers.
Questions & Discussion
Grocery Store Segmentation: Compare and contrast how different chains use segmentation. Specifically, how have Migros and A101 used segmentation to target their customers?
Airline Ticket Choices: Consider choices like boarding groups, seat assignments, cabin class, and baggage charges. Why do airlines utilize a mass customization strategy rather than a mass marketing strategy?