Market segmentation, targeting and positioning

Examples of Segmentation Variables

Demographic variables are probably the most commonly used segmentation bases because these data are often readily available from national census data and other published materials. Furthermore, many managers believe that consumer preferences (e.g., product preferences) and behaviors (e.g., usage rate) are highly correlated with demographic variables. For instance, upper income groups would be more interested in buying luxury items, such as high-fashion designer clothing, expensive vacation, or well regarded wine.

Although convenient, the validity of demographic variables as segmentation bases should not be blindly accepted. They are useful only when they are correlated or associated with the relevant objective function, such as purchase behavior or brand preference. For example, the household income level might not be the most highly correlated variable to the brand preference of Coca-Cola or Pepsi Cola. A better choice may be geographic since Coca-Cola is known to be traditionally strong in the South and Pepsi in the Northeast. Another example of geographical segmentation is Kraft General Foods’ Maxwell House ground coffee that is sold nationally but flavored regionally (i.e., stronger flavor in the West than in the East).ⁱ Obviously, Maxwell House segmented the national market by region because it is a good predictor of flavor preferences.

Psychographic segmentation

Psychographic segmentation is based on attitude, lifestyle, and/or personality. The psychographic segmentation is much pursued by consumer psychologists who wanted to explain why consumers do, feel, think the way they do. In other words, it is an effort to understand people’s motivation, or underlying cause of behavior. For example, the Martha Stewart Living magazine defines its audience by a consumer lifestyle that is characterized by do-it-yourself attitude and good, affluent, suburban tastes. The presence or absence of this do-it-yourself attitude is critical for the lifestyle ideas Martha Stewart sells in her magazine, which is full of how-tos on various domestic affairs such as low fat cooking, crafts, gardening, and interior designs.

However, interesting and intuitively appealing, psychographic segmentation has several major limitations. One danger of using “off-the-bookshelf” segmentation schemes is that they divide the market into segments without regard to the specific product or service. Even though a particular scheme might be valid and correctly classify people for a general purpose, it is entirely another matter whether or not it is useful in predicting people’s behavior in particular situations, such as the intent to purchase Heinz ketchup! Second, often these psychological segmentation schemes are developed based on long interviews and survey questionnaires, which present a great challenge to obtain large scale, representative samples. Third, it takes considerable efforts and training to develop reliable psychological measures. But, even with good measures, self-reported attitude and behavioral intentions tell only an incomplete story about future consumer behavior.

Behavioral segmentation

A more successful approach in market segmentation is behavioral segmentation. It is based on what consumers actually do, rather than what they say they will do, think, or feel. Segmenting by user status, for example, helps marketers to analyze how and why non-users are different from users, why ex-users stop buying the products by comparing them to existing users, and how regular users and occasional users differ. These are all based on actual behavior and are more reliably known (i.e., observable) than psychological states. Many companies also use usage rate segmentation. For example, a laundry detergent company, such as P&G, might be interested in knowing what brand is preferred by heavy users of fabric softeners and why. Perhaps, heavy users are more price sensitive and prefer private brands more than light users. Benefits segmentation is based on what benefits consumers seek from a product. It is behavioral because it is based on what is sought by consumers. For instance, the toothpaste market can be segmented by benefits sought: cavity prevention, social benefits (whitening, brightness, fresh breath), economy (price), gums disease prevention, and flavor. The credit card market can be segmented by such primary benefits as financial flexibility (credit limit), prestige (gold, platinum cards), and acceptance (number of accepting business establishments).

Yoram Wind and Richard Cardozo (1974) suggested industrial market segmentation based on the following classifications:

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  Company / organization size: one of the most practical and easily identifiable criteria, it can also be good rough indicator of the potential business for a company. However, it needs to be combined with other factors to draw a realistic picture.
  

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  Geographic location is equally as feasible as company size. It tells a company a lot about culture and communication requirements. For example a company would adopt a different bidding strategy with an Asian customer than with an American customer. Geographic location also relates to culture, language and business attitudes. For example, Middle Eastern, European, North American, South American and Asian companies will all have different sets of business standards and communication requirements.
  

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  Purchasing situation, i.e. new task, modified re-buy or straight re-buy. This is another relatively theoretical and unused criteria in real life. As a result of increased competition and globalisation in most established industries, companies tend to find focus in a small number of markets, get to know the market well and establish long-term relationship with customers. The general belief is, it is cheaper to keep an existing customer than to find a new one. When this happens, the purchase criteria are more based on relationship, trust, technology and overall cost of purchase, which dilutes the importance of this criteria.
  

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  Benefit segmentation: The product’s economic value to the customer (Hutt & Speh, 2001), which is one of the more helpful criteria in some industries. It “recognises that customers buy the same products for different reasons, and place different values on particular product features. (Webster, 1991) For example, the access control industry markets the same products for two different value sets: Banks, factories and airports install them for security reasons, i.e. to protect their assets against. However, sports stadiums, concert arenas and the London Underground installs similar equipment in order to generate revenue and/or cut costs by eliminating manual ticket-handling.
  

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  Type of institution, e.g. banks would require designer furniture for their customers while government departments would suffice with functional and durable sets. Hospitals would require higher hygiene criteria while buying office equipment than utilities. And airport terminals would need different degrees of access control and security monitoring than shopping centres.
  

Companies must work harder to ensure that their marketing has the greatest impact possible.

Increasing competition makes it difficult for a mass marketing strategy to succeed. Customers are becoming more diversified and firms are constantly differentiating their products relative to competitors.

When the focus is on segmented markets, the company's marketing can better match the needs of that group. Market segmentation allows firms to focus their resources more effectively, and with a greater chance of success. Marketing, product and brand managers are continuously being asked to increase their return on investment. They're constantly searching for new information about their markets, and new ways to approach them.

“A target market consist of a set of buyers who share common needs for characteristics that the company decides serve”. (KotlerandArmstrong2004, p.251)

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  Measurable: The size, purchasing power, and characteristics of the segments can be measured.
  
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  Substantial: The segments are large and profitability potential is good enough to serve. A market segment should be the largest possible homogeneous subset of market, yet worth going after with a tailored marketing effort.
  
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  Accessible: The segment can be effectively reached and served.
  
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  Differentiable: The segments are distinguishable and respond differently to different marketing stimuli and programs (i.e., product, price, promotion, and distribution).
  
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  Actionable: Effective marketing programs can be formulated for attracting and serving the segments.
  

1. 
   Mass marketing
   
2. 
   Differentiation marketing
   
3. 
   Niche marketing
   
4. 
   Localised marketing
   

Mass marketing -- also called undifferentiated marketing -- casts a wide net. Companies use mass marketing to promote a single product or service to as many people as possible without differentiating how various segments of the market might respond. For example, a fast-food chain might offer the same hamburger promotion at all of its franchises to create a demand for its new product. The disadvantage of mass marketing is its limited appeal. Consumers don’t all think alike, so what works well in one geographic region or for one demographic might not work well for others. For example, a hamburger promotion might be a hit in college towns but founder in well-off suburbs.

Differentiated marketing remedies this problem by targeting various market segments with different campaigns. For example, a fast-food chain might offer the hamburger promotion to franchises in college towns while marketing a more health-conscious product -- such as a selection of fresh salads -- to franchises in well-off suburbs.The disadvantage of differentiated marketing is the increased cost of running multiple advertising campaigns. Each campaign might require separate products, packaging, promotional literature and radio and television spots. For companies with sizable budgets, differentiated marketing allows them to compete effectively. But small businesses might have a tough time running multiple campaigns.

Small businesses often use niche, or concentrated, marketing to narrow the scope of their campaign to a specific demographic. It’s an effective way to satisfy the specific needs of a subset of the market. For example, a campaign might promote a product specifically designed for newlyweds. Highly concentrated campaigns are called micromarketing. A hair salon, for example, might buy advertising space in a local magazine that caters to women of a specific age group. Some businesses, such as car dealerships, target individual clients with personalized campaigns. Micromarketing avoids wasting advertising dollars on consumers who are unlikely to use your product or service, but its narrow focus limits your exposure.

Kotler, 2009 describes how a localised marketing strategies advantages are that there is a more direct and simplified approach to pleasing a smaller (local) market. Using a localised strategy, a marketer has less concern about language barriers, due to the fact that they will be marketing in the spoken languages, the only acceptations would be people living in that market area who do not speak the spoken language. Cultural issues would be a much smaller hurdle than marketing globally as the culture divides will be on a lot smaller scale.

Most marketing activities will be more successful when adapted to local conditions and circumstances in the marketplace. In this way a pure global marketing strategy is not ideal as it does not take locally related issues into account. Marketers need to understand how their brand is meeting the needs of customers and how successful their marketing efforts are in individual countries (Kotler, 2009).

 

POSITIONING

“Positioning is a choice of target market in which a company wishes to compete on differential advantage”. (Jobber2007)

Positioning refers to how a firm communicates the essential benefits of its l business to potential customers. Where the firm sells the product, how they make it, where they make it and how it prices all convey subtle messages to the marketplace, even without using any overt advertising, public relations or promotions.

Positioning on Low Price

Some companies position themselves as affordable options for consumers by selling low-priced goods. This may require a corresponding decrease in quality, such as a restaurant spending less on interior design or a car manufacturer offering fewer standard options, such as leather seats. An example of this low-price strategy is the 99-cent menus offered by many fast-food chains. Consumers know they can get a sandwich, side and drink for less than $5.00. This strategy works only if your potential customer is looking for affordability.

Positioning on High Price

Some companies price their products or services higher than their competition to create a perceived value. Consumers wonder why a particular company is able to sell its product for more or why their fellow consumers are willing to pay more for the product. In the end, they may believe that the higher-priced product or service is worth more. An example of this strategy is a personal trainer who charges $10 per hour more than the other trainers in his town

Positioning on Distribution

Where you sell your product says much about its quality. Tennis and golf equipment manufacturers position certain models in their line as higher quality by selling them only in pro shops or specialty stores. Because these rackets and clubs are not available at Gamestores or Target, the public may believe these are the top-of-the-line models and desire them more.

Conclusion

Market definition and segmentation are the foundation of business strategy. Businesses cannot be started, maintained, or grown without defining what market they are in and to which customer group(s) they can deliver superior value. This simple logic is often taken lightly perhaps because it is too obvious. Unfortunately so many organizations, large or small, do not systematically approach these important questions or truncate the process and end up with a segmentation scheme that is largely a biased intuition

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