CHAPTER 4MARKET SEGMENTATION

MARKET SEGMENTATION PROCEDURE Understand Markets: Heterogeneity of Markets Segment Markets Evaluate and Select Target Markets Choose a Target Market Approach Product Positioning

SEGMENTATION VARIABLES Demographic Segmentation Psychographic (Lifestyle) Segmentation Geographic Segmentation Behavioral Segmentation

TARGET MARKET APPROACHES Niche Marketing Multi Segment Marketing ‐ Mass Marketing

PRODUCT POSITIONING Relative to Leader Product Attributes Price Emphasis Innovation Against the Trend Repositioning

1. MARKET SEGMENTATION PROCEDURE

The process of dividing the market into groups of buyers with similar needs is known as market segmentation. The group, or segment, at which a particular product is aimed is referred to as the target market or the target segment.

1.1. Determine Heterogeneity (Diversity) of the Market

A heterogeneous market consists of buyers with diverse needs and requirements. There are degrees of heterogeneity, with the wristwatch market being one of the most heterogeneous

Homogeneous markets, on the other hand, include most grocery items, men’s haircuts, telephone services, banking services. Where there isn’t much separating the buyers. Markets may begin as homogenous at the early stage where buyers have few product choices. (Mobile Phones)

1.2. Segment Markets

The heterogeneous market can be divided or segmented into more homogeneous sub markets‐ based on a combination of the following variables (next section)

1. Demographic variables2. Psychographic variables3. Geographic variables4. Behavioral variables

1.3. Evaluate and Select Target MarketsBefore selection each segment should be evaluated. Each segment should be evaluated against the following criteria, assuming, of course, the business has the ability and resources to satisfy the chosen segment:

Identifiable: Chosen segment should be identifiable. This is less of a problem if demographic variables are used — it’s easier to identify customers based on age, gender, income, occupation. Identifying buyers based on lifestyle or personality is harder or impossible. Businesses can often approximate by predicting that a combination of demographic characteristics contributes to a certain lifestyle. For example, older, wealthy, professionals tend to be status seekers.‐

Measurable. The target market’s potential should be measurable, especially in terms of size and profit. (Number of buyers, Frequency of purchase). Hopefully, the target market is large or substantial enough to be profitable. These figures are important for production and planning purposes. (Is there a substantial market for large men’s shoes, size 12 and above?)

Accessible. The target market must be accessible. A considerable amount of resources are spent on marketing mixes, especially Promotion and Distribution. The company must be able to access or reach its chosen segment with the appropriate promotion, and deliver the products at the right place. Understanding the buyers’ media habits and shopping behavior would help.

1.4. Choose a Target Market Approach (later section)1. Niche Marketing2. Multi Segment Marketing‐3. Mass Marketing

1.5. Product Positioning Strategy

Buyers can respond differently to the product or brand depending on how it is marketed. Product positioning is an integral part of the marketing strategy — effectively linking the marketing mix (4Ps) to the target market. In other words, connecting the product to the buyer.

2. SEGMENTATION VARIABLES

These variables are characteristics of buyers that are used for dividing the total market into segments or sub markets. The variables can be‐ broadly classified into four categories, namely, demographic, psychographic, geographic and behavioral variables.

2.1 Demographic Segmentation

Market is segmented using primarily demographic variables such as age, gender, family size, family lifecycle, income, occupation, education level and ethnic group.It is all too convenient and logical to use demographic variables, but assumes that the consumer’s purchases are mostly rational. Rational behavior suggests that buyers will act their age, live within their means, buy rationally, make objective decisions, etc. Ex: A low priced air conditioner for a low income customer, a 2 month round the world cruise‐ ‐ ‐ ‐ ‐ designed for retirees, Car makers: Family size (station wagons), age (affordable sports cars for young adults), income (luxury cars) and gender (For women).A combination of some demographic variables can lead to the identification of some rather interesting but meaningful segments.

SWELLS : Single Women Earning Lots and LotsSNAGS : Sensitive New Age Guys DINKS : Double Income with No KidsDIAMONDS : Double Income with an Awesome Mortgage and No DoughYUPPIES : Young Urban Professionals

2.2 Psychographic (Lifestyle) Segmentation

Mainly lifestyle and personality variables to segment the market. It recognizes the fact that not all consumers act rationally all the time. Today, many purchases are emotion oriented or lifestyle‐ ‐driven. Consider two buyers with a similar demographic background in relation to age and income. They may not share the same interest in clothing because of their lifestyle or personality differences.

In this respect, demographic segmentation alone will fail. Lifestyle marketing is the marketing of goods & services that are designed to meet the actual (or aspired) lifestyle needs of the buyer. In practice, it is common to group and label these buyers as:

1. Status Seekers — opting for well recognized, prestige brands (Rolex, BMW)‐2. Trendsetters —go for trendy (Pure fashion) and cool brands like (Roxy, Bacardi Breezes)3. Conservatives — well established, “safe” brands that never “go out of fashion. (Seiko, Levi’s)‐

2.3 Geographic Segmentation

Identify sub market characteristics based mainly on where the customers live. There are regional‐ differences in population, climate, socio economic status, ethnic–group concentration and so on. The‐ highest ownership of swimming pools is found in Western Australia and Queensland simply because of the hotter climate and longer summers.

2.4 Behavioral Segmentation

Some markets can be segmented based on the customer’s relationship with the product. Segmentation can also be based on the product’s characteristics. Here, demographic, psychographic or geographic differences are irrelevant. Ex: An affordable small car targeting young women on an income of $30,000 pa. (Demographic segmentation) VS an affordable small car targeting whoever wants an affordable small car and its benefits (behavioral segmentation)! There are many possibilities and combinations under this method. Typically, these variables include:

Benefits sought — customers wanting specific product benefits such as easy spread butter,‐ toothpaste with tartar controlA mobile phone with internet access is marketed to anyone who wants such a feature — and who cares whether the buyer is male or female, rich or poor

Usage rate or status — customers who are heavy users, regular users, light users, first-time users, or non users of a particular product. Some surfboards are designed for first-time surfers. US, the top‐ selling rice is Uncle Ben’s Ready Rice™, “cooks” in 90 seconds. Targeted at the occasional rice eater

End–use — customers who buy for personal use versus gift giving. The gift giving segment is‐ ‐ substantial for jewellery products, watches, greeting cards, gift vouchers and wine. The majority of these types of pens are marketed as gifts

Loyalty status — some marketing strategies are aimed specifically at the loyal customers in order to keep them. Keeping customers is quite different from attracting customers — a business may deliberately target non customers for the purpose of attracting them.‐Airlines’ frequent flyer programs target the loyal customers and in the process, retain them. ‐Special marketing “deals” targeting non customers in order to recruit them can backfire if existing‐ customers feel that they have been left out.

3. TARGET MARKET APPROACHESShould all markets be precisely segmented or divided? Should all businesses try to satisfy everyone? Must a company have a wide range of products, just in case? Should every emerging opportunity be sought? Must a business be big to succeed? From the study of business successes, the obvious answer to all these questions is no.A company may “specialise” with a narrow range of products aimed at one well defined segment (niche‐ marketing), or may “generalise” with a broad range of products for several segments (multi segment‐ marketing).

3.1 Niche MarketingThis approach is also known as concentrated marketing, focus marketing or specialized marketing. Realistically, most new businesses have limited resources.

They would rather focus available resources on a well defined segment. ‐ Even long running companies can remain a niche business ‐ Compete in a small but high value market segment‐ It involves the marketing of a narrow range of products to a single well defined target market.‐ The products are usually very high quality and innovative.

Ex: Basketball shoes for serious player, “Jeep” is legendary because the company produces only 4WDs.

Advantages: A strong market position in that segment can be achieved because the buyers' specific needs

are satisfied. Ex: In the high performance sports car category, Porsche and Ferrari are unquestionably the most well known and respected marques largely due to their niche strategy‐

The specialist can normally maintain a higher profit margin through charging a premium price and the fact that there is usually less competition in those market segments.

Customers also tend to be more loyal. Ex: Some high profile defense lawyers charge as much as $5000 a day. They are extremely skilled at what they do because they choose to only practice

Relatively fewer resources are required. Ideal for new or small businesses where they can focus their limited resources at a small but profitable market segment. Costs are also more easily managed in small businesses.

EX: 19 year old Michael Dell started with $1000 selling computers directly to customers.‐ Today, Dell is the largest direct marketer of PCs in the world.

Negatives: The whole business is dependent on the viability of a single segment or a narrow range of

products. Ex: KFC worldwide business is dependent on the demand for chicken meat.

Long term growth is poor from serving just one segment. ‐

3.2 Multi Segment Marketing‐With this multiple segment approach, the business directs its marketing efforts towards two or

more target markets by developing a marketing mix for each, resulting in a wide range of products or variants. Most established and/or large businesses pursue this strategy because of the unrestricted growth potential. Remember, many of them may have started off as niche marketers.

Ex: Gillette could modify its existing razors for use by women, by hospitals, and even for pet grooming! There are single blade razors, double blade razors, triple blade razors and even 5 blade‐ ‐ ‐ ‐ razors (Fusion).

Advantages: Higher sales — this approach will result in higher combined or overall sales because of income

from the many segments, and a larger market share for the business. Its production capacity can be fully utilized, thereby, reducing unit costs.

Transfer or extension of reputation — the reputation associated with the company or its brand can “spill–over” or transfer to the new products aimed at other segments, thereby saving marketing and promotional costs.

Spread risk — multi segment marketing also allows the business to spread risk across the‐ many segments. Should one segment fail, it may not be the end of the business.

Disadvantages or concerns: The costs associated with such a large operation can be extremely high. Marketing costs can be

higher as a result of the company having to maintain separate marketing mixes for its target markets.

Having too many closely positioned products may result in “cannibalization”. Cannibalization occurs when the sale of the company’s (new) product affects the sale of its other (existing) products. However, the argument is that it is better to lose sales to your other products, than to lose them to your competitors. Ex: A university’s new course may be designed to attract new additional students but may end up, the student numbers in the current courses fall as some switch to the new course. Again, the rationale is that at least the students are all still with the university

One way to minimize cannibalization is to ensure that the new product is very distinct from the current ones

Niche marketers were able to build a strong brand reputation as a result of their focus. By overextending its market segments, the once strong brand association may be diluted — (master of none)

3.3 Mass MarketingThis is not exactly “one size fits all” but rather “one size fits many”. In such cases, the market is

usually not segmented and the company could mass market its product. This approach, also known as undifferentiated marketingA company marketing a limited range of products to the majority of buyers in a given market. The idea is to satisfy as many buyers as possible, and cheaply too. Fringe or marginal buyers are ignored. Ex: A soft drink maker may choose to sell only regular soft drinks to 70% of the market, ignoring the‐ ‐ rest, by not having diet or caffeine free versions. Many basic quality grocery products and brands are‐ marketed to the masses, while gourmet varieties are left to the niche marketers.

The idea is to gain economies of scale (by limiting the range) and high sales volume through low prices. This approach is only feasible if the market is fairly homogeneous, and a majority of buyers are price driven.‐

4. PRODUCT POSITIONING

Product positioning refers to the brand’s association with some key attributes that distinguish it from other competing brands. Competing brands may have similar (or even identical) physical features, but the consumer perceives (See, Distinguish) them to be different.

The association is durable or sustainable (long term). It is very difficult to change, suggesting that the brand “owns” that attribute. Consider Volvo’s association with safety and reliability. Unfortunately, it is also strongly perceived as old fashioned. Therefore, product positioning is more about perception (mental) than “reality”. Most marketers accept that, “perception is the consumer’s reality”. The positioning objective is to achieve a competitive advantage in the minds of the consumers.

Relative to Leader

Pepsi Cola and Burger King (Hungry Jack’s) are the world’s most successful No. 2 brands. They are‐ pitched directly against to the respective leaders: Coca Cola and McDonald’s, providing customers‐ with a viable alternative. In the consumer mind, there is little or no “place” for the third brand.

Product Attributes (Features)

Brands can be positioned according to their distinct features. Colgate is positioned on decay prevention, whereas Close–Up is on breath freshening qualities. Toyota’s Land Cruiser is the “king” of 4WDs.

Price Emphasis

Big W discount store sells famous brands at everyday low prices. The term discount stores is constantly being redefined by the growth of the super discounters like Gone Bazaar, Red Dot and‐ Crazy Clark’s. New Chinese brands like Lenovo (computers) and Haier (home appliances) are even‐ cheaper. Recently, Chinese made cars (Chery and Geely) have hit the Australian market with their‐ sub $11,000 cars!‐

Innovation

Pioneers (first on the market) can have a competitive head start of months or even years. These registered trademarks are usually associated with being the original and, therefore, the best. EX: Colgate® is toothpaste. Levi's® is jeans. Hoover® is vacuum cleaners. iPod® is personal MP3 player. Windows® is computer operating system. Intel® is computer chips.

Against the Trend Products and brands that go against the trend risk massive business failure. However, those who make it quickly get noticed (stand out from the crowd) and become almost legendary.

Repositioning

A brand — although still in use — may suffer from negative perception (outdated, dull, unfashionable, etc.). It’s common to attempt to “modernize” by changing the image of the brand or company.

Ex: Consider Volvo’s attempt to correct its staid image with radically redesigned cars including turbo‐charged and convertible models. The world’s second largest banking group, HSBC, had a humble beginning as the Hong Kong & Shanghai Banking Corporation way back in 1865. Now it’s simply HSBC, a repositioned global brand.

Repositioning a whole product category? Recall the examples of popular compact 4WDs such as the CRV and RAV4? These were originally considered “junior/baby” 4WDs especially when compared with the Land Cruisers and Pajeros — a no respect alternative. But really, they were more an alternative to the regular passenger car. Today, this

type of vehicles has been repositioned as a versatile, multi purpose, soft roader alternative to the car‐ ‐ — a sport utility vehicle or SUV. Nissan X Trail, Volvo’s XC90, BMW X1‐