Chapter 6: Identifying Market Segments and Target Customers
Learning Objectives for Identifying Market Segments and Target Customers
Explain the essence of targeting: Understanding the fundamental process of selecting specific customer groups to serve.
Define key principles of strategic targeting: Outlining the core logic behind choosing which customers to pursue based on value exchange.
Describe effective communication and delivery: Explaining how companies reach their chosen target customers once identified.
Develop strategies for multiple market segments: Understanding the methods for managing more than one target group simultaneously.
Describe methods for segmenting consumer markets: Detailing the variables used to divide individual-buyer populations.
Describe methods for segmenting business markets: Detailing the variables used to divide professional-buyer populations.
The Process and Logic of Targeting
Definition of Targeting: Targeting is defined as the process of identifying specific customers for whom a company will optimize its offering.
Needs-Based Targeting: This is an approach where the firm identifies customers based on the specific needs they seek to satisfy.
Mass Marketing:
In this approach, the firm ignores segment differences and attempts to reach the entire market with a single offer.
Metaphor/Example: The Model T Ford is cited as the classic example of mass marketing ("You can have any color as long as it's black").
Targeted Marketing: This approach involves selling different products to all the different segments of the market. It often utilizes a "one-to-one" approach to tailor offerings.
Mass Customization:
This is the ability of a company to meet every individual customer's unique requirements.
The goal is to prepare individually designed products, services, programs, and communications on a mass basis.
Strategic versus Tactical Targeting
Strategic Targeting:
Focus: Choosing the right customers whose needs the company is uniquely positioned to fulfill.
Objective: Ensuring the company's offerings are customized to meet the specific requirements of the chosen group.
Tactical Targeting:
Focus: Identifying the specific ways and channels through which the company can reach the strategically important customers identified in the strategic phase.
The Two Pillars of Strategic Targeting:
Target Compatibility: Evaluates if the company can create superior value for the target customers compared to competitors.
Target Attractiveness: Evaluates if the chosen customers can create superior value (monetary or strategic) for the company.
Detailed Breakdown of Target Compatibility
Definition: Target compatibility is a reflection of the company’s ability to outdo the competition in fulfilling the needs of target customers.
Key Factors and Resources:
Business Infrastructure: The physical and organizational structures in place.
Access to Scarce Resources: Exclusive or limited inputs required for production.
Skilled Employees: Human capital with specialized knowledge.
Technological Expertise: Advanced technical capabilities and intellectual property.
Strong Brands: Established reputation and brand equity.
Collaborator Networks: Partnerships and relationships with other entities.
Core Competency: A specific source of competitive advantage characterized by three main traits:
It makes a significant contribution to perceived customer benefits.
It has applications in a wide variety of markets.
It is difficult for competitors to imitate.
Detailed Breakdown of Target Attractiveness
Definition: This is the ability of a specific market segment to generate superior value for the company.
Monetary Value:
Customer Revenues: Total income generated from the segment.
Costs of Serving: The expenses incurred to reach and satisfy the target customers.
Strategic Value:
Social Value: The benefit derived from the customer's social influence or status.
Scale Value: The benefits gained from high volume, allowing for economies of scale.
Information Value: The benefits gained from the data and insights the customers provide to the company.
Tactical Targeting: Profile and Alignment
Defining the Customer Profile: This involves using four primary categories of descriptors:
Demographic factors: Basic population statistics.
Geographic (geolocation) factors: Physical location-based data.
Behavioral factors: Observable actions taken by the customer.
Psychographic factors: Psychological traits and lifestyle choices.
Alignment Goals:
Effectiveness: Ensuring the profile accurately captures the intended strategic segment.
Cost Efficiency: Ensuring the company can reach those customers without prohibitive expense.
Personas: These are detailed profiles of one or a few hypothetical target consumers. They are "brought to life" using specific demographic, psychographic, and behavioral information to help marketers visualize their audience.
Artificial Intelligence in Segmentation and Targeting
AI drives three primary strategies in modern marketing:
Hyper-segmentation: Dividing markets into extremely small, niche groups.
Personalized Targeting: Tailoring messages and offers to individuals.
Self-improving Models: Utilizing algorithms that constantly update and refine segments based on new data.
Targeting Multiple Market Segments
Single-Segment Concentration:
The firm gains deep knowledge of a specific segment's needs.
The firm achieves a strong market presence in that niche.
The firm enjoys operating economies through specialized production, distribution, and promotion.
Multiple Segment Strategies:
Product Specialization: Selling a specific product to several different segments.
Market Specialization: Serving many needs of a specific customer group.
Example (Hallmark Cards): Hallmark uses various platforms (Physical Cards, E-cards, Personalized Cards, Mobile Greetings) to reach diverse segments by product and occasion.
Variables for Segmenting Consumer Markets
Market Segmentation: The process of dividing a market into well-defined "slices" or groups.
Demographic Segmentation Variables:
Age and Life Cycle Stage: Wants and abilities change over time. Critical concerns might include events like divorce.
Gender: Differences in attitudes and shopping behaviors.
Income: A long-standing practice in segmenting luxury vs. value brands.
Family Size and Life Cycle.
Occupation and Education.
Religion, Race, and Nationality: Includes specific outreach to Hispanic Americans, Black Americans, and Asian Americans.
Social Class.
Geographic Segmentation Variables:
Dividing by nations, states, regions, counties, cities, or neighborhoods.
Claritas’ PRIZM Perimeter: A system that combines geographic data with demographics based on factors like education, affluence, family life cycle, urbanization, race, ethnicity, and mobility.
Behavioral Segmentation Variables:
User Status: (e.g., Non-users, ex-users, potential users, first-time users, regular users).
Usage Rate: (e.g., Light, medium, heavy users).
Buyer-Readiness Stage: (e.g., Unaware, aware, informed, interested, desirous, intending to buy).
Loyalty Status: Patterns of brand commitment.
Occasions: Specific times of year or life events.
Psychographic Segmentation: Based on psychological traits, values, or lifestyle.
Variables for Segmenting Business Markets
Demographic Factors: Industry, company size, location.
Operating Variables: Technology, user or non-user status, customer capabilities.
Purchasing Approaches: Purchasing function organization, power structure, nature of existing relationships, general policies.
Situational Factors: Urgency, specific applications, size of order.
Personal Characteristics: Buyer-seller similarity, attitudes toward risk, loyalty.
Questions & Discussion
Question 1: Airline Industry Strategies
Prompt: Consider choices when buying an airline ticket: boarding group, seat assignment, cabin class, baggage charges.
Question: Why do airlines use a mass customization strategy rather than a mass marketing strategy?
Question 2: Grocery Retail Segmentation
Prompt: Grocery stores rely heavily on segmentation.
Question: Compare and contrast how Whole Foods and Trader Joe’s use segmentation compared to traditional chains like Kroger.
Context: Analyze why different chains target different customer profiles and how their offerings reflect those choices.