Chapter 7 - Identifying Market Segments and Targets
I. Chapter Overview/Objectives/Outline
A. Overview
Sellers can take three approaches to a market. Mass marketing is the decision to mass-produce and mass distribute one product and attempt to attract all kinds of buyers. Product-variety marketing attempts to offer a variety of products to broaden the customer base. Target marketing is the decision to distinguish the different groups that make up a market to develop corresponding products and marketing mixes for each target market. Sellers today are moving away from mass marketing and product differentiation and are moving toward target marketing because the latter is more helpful in spotting market opportunities and developing winning product marketing mixes.
The key steps in target marketing are market segmentation, market targeting, and product positioning. Market segmentation is the act of dividing a market into distinct groups of buyers with different needs or responses. The marketer tries different variables to see which reveal the best segmentation opportunities. For each segment, a customer segment profile is developed.  Segmentation effectiveness depends upon arriving at segments that are measurable, substantial, accessible, and actionable. The primary steps in target marketing are to identify and profile distinct groups of buyers that may require different products or marketing mixes, selecting one or more market segments to enter, and establish and communicate the key distinctive benefits of the product or service to the target market (positioning).
The seller should target the best market segment(s). The seller must evaluate the potential of each segment, which is a function of segment size and growth, segment attractiveness, and company objectives and resources. Then, the seller should determine how and when it can ignore segment differences (undifferentiated marketing), develop different market offers for several segments (differentiated marketing), or go after one or a more market segments (concentrated marketing). In choosing target segments, marketers need to consider the ethical choice of market targets, segment interrelationships and super segments, and potential segment invasion plans.
B. Learning Objectives
• Understand what it means to “segment” a market.
• Know the different levels of market segmentation.
• Understand the bases used to segment consumer and business markets.
• Know how to evaluate and select segments for targeting of marketing programs.
C. Chapter Outline
I. Introduction - Target marketing requires the following: identify and profile distinct groups of buyers with distinct needs/preferences, select one or more market segments, establish and communicate distinctive benefits of the market offering to each target segment. Note the Club Med example

II. Basis for Segmenting Consumer Markets
Market segment defined: Consists of a group of customers who share a similar set of needs and wants. Major segmentation Variables are listed in Table 7.1
A. Geographic - nations, states, regions, counties, cities, neighborhoods, and zip codes. Geocluster approach, such as that used by Claritas corporation, combines demographic data with geographic data to create a more accurate profile of specific geographic areas. Multi-attribute segmentation (geoclustering): assumes people who live near each other and exhibit similar traits from all of the above segmentation bases.  Geoclustering via PRIZM clusters (American dreams, rural industrial, gray power, country squires) - focus on increasing diversity
B. Demographic - break down consumers based upon one or more variables
1. Age and life cycle stage. Changes in these variables may indicate changes in needs
2. Life-stage - taking care of aging parent, divorce, new home
3. Gender - common definition of attitude, behavior, and needs in many cases
4. Income - may not be the best predictor, must verify disposable income, if combined with occupation may predict future income, must determine if income is inferred by spending (i.e., can be misleading)
5. Generation (see cohorts Table 7.2)
6. Race and Culture – A Multi cultural approach recognizes
  different ethnic and cultural segments
C. Psychographic   
Consumers are divided into different groups on the basis of psychological/personality traits, life style or values VALSTM (values and lifestyles) system framework classifies U.S. adult consumers into eight primary groups based upon personality traits and key demographics. Refer to figure 7.1
  D. Behavioral - divide consumers into groups on the basis of their knowledge of,
       attitude toward, use of, or response to a product
                        1.  Needs and Benefits – widely used because it identifies distinct
                                              segments
                        2.  Decision Roles - People play one of five roles in the buying
                                              decision process: Initiator, Influencer, Decider, Buyer, User
                        3. User and Usage
a.  Occasions when need may develop
b.  User status - nonusers, ex-users, potential users, first-time
      users, regular users
c.   Usage rate - light, medium, heavy
d.   Buyer-readiness stage - unaware, aware, informed,
      interested, desire, intend to purchase (refer to Figure 7.2
      for the Brand funnel Concept)
e.   Loyalty status- hard core (never switch), split across
      several brands, shifting from one to another brand,
      switchers (not loyal to any brand)
            f.   Attitude - enthusiastic, positive, indifferent, negative,
                 hostile
III.Bases for segmenting business markets
Business markets can be segmented with some of the same variables used in  consumer market segmentation such as geography, benefits sought and usage rate, Other variables are also used such as demographic (industry, company size or location), Operating variables, Purchasing approaches, Situation factors (urgency, size or order, specific application), Personal characteristics (attitudes toward risk, loyalty, buyer-seller similarity). Refer to Table 7.3 for a list of Major segmentation Variables for the Business market.

IV. Market Targeting
Once the market has been divided into segments, an organization must decide to target one or more of the defined segments.  (Refer to Table 7.4 for Best’s 7-Step approach to segmentation)
A.    Effective segmentation criteria
1.  Rating Segments (segments must rate favorably on 5 key
     criteria
      a.  Measurable – must be able to quantify segment characteristics
      b.  Substantial – must be large and profitable enough to serve
      c.  Accessible – must be effectively reached
      d.  Differentiable – must have different needs and respond to
           marketing efforts differently
      e.  Actionable – effective marketing programs can be formulated
2.  Long Term Segment attractiveness – Porter’s five forces help
     determine long term attractiveness of segments
      a. Threat of intense segment rivalry – segment is unattractive if
           respective market contains numerous strong or aggressive
           competitors
      b. Threat of potential entrants – Segment most attractive with high
          entry barriers and low exit barriers. Worst scenario exists when
          there are low entry barriers and high exit barriers
      c. Threat of substitutes – segment unattractive when actual or
          potential substitutes exist
      d.) Threat of buyer’s growing bargaining power –segment is
           unattractive if buyers have power. Fragmented markets lead to less
           power and concentrated markets increase power.
      e). Threat of suppliers growing bargaining power – suppliers may
           have power when they are concentrated and organized, there are
           few of them, when they can forward integrate, when there are few
           substitutes, when their product/service is critical input to buyer,
           when buyer has high switching costs.

B.  Evaluating and selecting market segments – organization must look at the
     segment’s overall attractiveness and its objectives and resources. It can then
     consider five patterns of target market selection (also refer to Figure 7.3):
1. Full market coverage - firm serves all customer groups with products
   they might need
a.  Undifferentiated marketing - entire market receives the same
     program. Usually mass marketing strategies are used
b.  Differentiated marketing - different programs for different
     segments. Can lead to higher sales but also increases costs
2. Multiple segment specialization
               a. Selective specialization - firm selects a number of attractive
                   and appropriate segments and develops products that appeal to
                   each segment. Little or no synergy across segments
               b. Supersegment – set of segments sharing some exploitable
                   similarity
                   1) Product specialization - firm focus is on a product it can sell
                       to several segments. Risk is product may be supplanted by
                      new technology
                   2) Market specialization - firm satisfies multifaceted needs of
                       one particular group. Risk is customer group may suffer
                       budget cuts or shrink in size.
3. Single-segment concentration - firm concentrates on one market only
    for its one product. Niche is more narrowly defined customer group
    seeking a distinctive mix of benefits within a segment. Also refer to
   Marketing Insight “Chasing the Long Tail”
4. Individual Marketing –
    a) focus is on specific individuals. Also referred to as “segments of
        one”, “customized marketing”, “one-to-one marketing”
     b) “Customerization” approach combines operationally driven mass
     customization with customized marketing in a way that empowers
     consumer to contribute to product or service development. Nike’s
     online site enables customers to design their own gym shoe.
5. Ethical Choice of Market Targets major area of consideration in today’s
    environment is taking unfair advantage of vulnerable groups
     a)  Marketing to the children market requires adherence to current legal
          and ethical guidelines. Refer to FTC.gov/Privacy website for insight
          to current and pending legislation
     b) Taking unfair advantage of other groups such as poor and
         uninformed.

V.  Executive Summary
II.  Lecture  
“Understanding Market Segments”
This discussion begins the teaching/learning process where students begin to understand that marketing and marketers cannot be all things to all people, and there is a need for increasing focus and segmentation.
Teaching Objectives
• To appreciate the value of segmenting and targeting markets.
• To comprehend the process through which marketers engage in segmentation.
• To learn about companies/industries making use of segmentation.

Discussion
UNDERSTANDING THE ISSUE
Market segmentation is a process based on factual information rather than marketer intuition.  The value of market segmentation is obvious.  Customers are different and are likely to be attracted to different products throughout various stages in their lifetimes.  For an illustration of this concept, consider the automobile industry. 
Note to the Instructor: To develop this issue, ask students to offer the names of various brands and models (placed on the board). Then, ask them to identify which brands and models are likely to appeal to specific characteristics - age, income, gender, etc. From this illustration, it will become obvious that not all products appeal to everyone on a mass level.  
The segmentation process involves dividing a market into distinct groups of buyers who might require separate products or marketing mixes, recognizing that all buyers have unique needs and wants. Still, it is usually possible in consumer markets to identify relatively homogeneous portions or segments of the total market according to shared preferences, attitudes, or behaviors that distinguish them from the rest of the market. These segments may require different products and/or separate mixes, and in the contemporary one-to-one marketing approach segmentation is a critical step.
TARGETING AND POSITIONING
Market targeting is the follow-up to the segmentation process and is the process of evaluating each market segment’s attractiveness and selecting one or more segments to enter. Given effective market segmentation, the firm must choose which markets to serve and how to serve them. In targeting markets to serve, the firm must consider its resources and objectives in setting strategy. 
Market positioning is the process of formulating competitive positioning for a product and a detailed marketing mix. The firm must have a plan for how to present the product to the consumer, and the product’s position is defined by how consumers view it on important attributes. The text discusses this concept in detail. 
The consumer market is often segmented according to variables such as: demographics, psychographics, geographic location, behavior, etc.  Major segmentation variables for business markets obviously vary from the consumer market. The important variables here are as follows:
• Demographics. Industry segmentation focuses on which industries buy the product.  Company size can be used. Geographic location may be used to group businesses by proximity.
• Operating Variables. Business markets can be segmented by technology (what customer technologies should we focus on?), user/nonuser status (heavy, medium, light), or customer capabilities (those needing many or few services).
• Purchasing Approaches. Five approaches are possible: 
o Segment. “Segmentation” can be by purchasing function organization (centralized or decentralized).
o Power structure. Selecting companies controlled by a functional specialty.
o The Nature of Existing Relationships. Current desirable customers or new desirable customers.
o General Purchase Policies. Focus on companies that prefer some arrangements over others such as leasing, related support service contracts, sealed bids.
o Purchasing Criteria. Focus on non-compensatory criteria such as price, service, or quality.
In addition, there can be situational factors that influence the business market segmentation effort.  Situational segmentation may be based upon urgency (such as quick delivery needs), specific application (specific uses for the product) or size of order (few large or many small accounts).
     PERSONAL CHARACTERISTICS  
Personal comparisons can lead to segmentation by buyer-seller similarity (companies with similar personnel and values), attitudes toward risk (focus on risk-taking or risk-avoiding companies), or loyalty (focus on companies that show high loyalty to their suppliers).
There are several steps in the segmentation and target marketing process, but first it is necessary to establish that the market can be segmented. As mentioned in the text, some of the questions a company should answer with regard to determining candidates for segmentation are:
• Can the market(s) be identified and measured?
• Is the segment large enough to be profitable? Related issue: Is the segment stable and long-term?
• Is the segment reachable?
• Is the segment responsive?
• Is the segment expected not to change quickly? 
• Can the segment be protected (protectability)? In other words, can competitors choose to target this segment easily and with a high level of success
• Interaction with other segments? Meaning: Will the different messages received cause confusion about the product among different segments? 
• What is the risk with this segment or segmentation action? 
     FINDING “HEALTHY” CUSTOMERS IN THE MEDICAL INDUSTRY
As members of its industry begin to understand the mass-market approach is no longer viable, health care providers are moving from a product orientation to a marketing orientation. Market segmentation has become a tool that is widely used by a financially squeezed health care industry. Aiming their marketing efforts at those segments of the market that are likely to prove most profitable helps to conserve their limited resources. Some of the characteristics health care providers use to choose the proper target markets include underlying needs, demographics, and patterns of behavior. 
Because hospitals maintain detailed information on patients, the information necessary to determine the “typical” patient is available. Through medical and business records, health care marketers have access to usage rates for a predetermined number of years, services received, payment (or nonpayment) history, and, at the simplest level, name and address information.  The search for data also can extend to external sources, such as state agencies, trade associations, and syndicated sources. Once the marketer has gathered this data, he or she can begin the process of analyzing it to determine market share for the various lines of health care services.
Overlaying demographic with psychographic information allows hospitals to learn about the people who compose the market. By combining this information with its own product line mix, and disease incidence rates, segmentation opportunities become readily apparent. For example, one hospital recently recognized the potential for outpatient substance-abuse counseling services among upscale members of the business community. Although a competitor currently offered an in-patient program, the target group most likely to utilize the service found the in-patient option unappealing for many reasons, one of which was that many potential patients lived in close proximity to the hospital. 
Based on an understanding of its target market, the marketing-oriented hospital developed an outpatient program and spoke directly to the target audience via promotional efforts in publications and television. A direct mail effort also targeted the businesses where those upscale patients were likely to be found. As a result, the hospital gained significant market share and won the favor of the community. This was no small feat in today’s competitive health care marketplace.
SENIOR CITIZENS ENJOY SURFING…THE INTERNET
Many members of the older generation are out to dispel beliefs that they are resistant to new technology. Internet clubs, consisting of members who are in their later years, have been formed all over the United States. The seniors use the Internet to obtain many types of new information, order products, and meet and/or “chat” with other seniors throughout the country. A number of marriages have evolved out of these connections. 
Smart marketers realize that this segment of the market represents a substantial audience for products advertised via the Internet. Why? One reason is the information explosion. Consider the amount of information that is available on the Internet. In today’s society, few of us in the work force have the leisure time available to spend learning about the power of the Internet.  We tend to bookmark the information we need on a regular basis but rarely venture out on extensive “surfing” expeditions. Retired persons do have this kind of time, so when they log on to the Internet, they are likely to stay a while. In addition, many of the people in their golden years have physical limitations that may restrict their mobility. The Internet is an ideal way to stay connected to the outside world and beat the loneliness that may ensue from an inability to venture beyond their home. 
Note to the Instructor: It is important to note here that when a marketer considers the needs of one segment over all other segments, controversy is likely to ensue. A good way to begin a discussion in this topic area is to ask students for some of the dangers and/or disadvantages that may result from segmenting and targeting markets.
Optional student exercises: Have students segment the market at a macro level and/or micro level. A point to make is that there are a variety of approaches that can be followed. Some of these approaches may include:
Dish detergent
• Hard water use versus softened water (note this precipitates a discussion on the detergent not being the final product as the detergent is mixed with water to form the actual product used
• Industrial use versus consumer home use
• Machine versus hand
• Suds versus no-suds
• Powder versus liquid
Casino Gambling - This can lead to an interesting discussion as students may gravitate to demographic variables such as income and age. Although the former may be a pre-qualifier, it does not indicate a person’s propensity to take a risk that is a psychographic variable. Now the students can be asked how they would identify  risk takers. Students may suggest stockbrokers or anyone buts and sells stock frequently. The instructor can suggest finding people who subscribe to Sky Diving Magazine. Small business owners many times take the ultimate risk. Discussions at micro levels can precipitate segments choices such as:
• Geographic reach such as in driving versus flying with the latter leading to a discussion of destination objectives
• Table play versus slot machine play (behavioral)
• Property stay versus walk-in and local resident versus someone from a different geographic area
• People who stay on a property but gamble elsewhere versus people who stay elsewhere but gamble in the casino versus people who stay on the property but do not gamble at all
• Length of stay and number of annual stays
• Average play amounts

III.  Background Article
Issue:  Gaining Perspective On Niche Market Segments
Source:  “RTD Coffee: The Little Segment That Could - Convenience Corner,” Beverage Aisle, October 15, 2001, p. 48.

Ready-to-drink coffee (RTD), the cold, refreshing, bottled offshoot of America’s classic hot morning beverage, has found a home in the convenience channel. An up-and-coming category, RTD coffee generated less than $50 million at retail in 1996, but soared to over $100 million in 1997, driven by Frappuccino from Starbucks/PepsiCo, which still owns most of the category.
Today, while the bottled variety represents a tiny fraction of the overall coffee category (3 percent of total coffee sold in grocery, drug, and mass merchandisers combined), an analysis of ACNielsen Convenience Track data shows that the product is selling especially well in convenience stores (c-stores). The convenience channel owns 38 percent of the $175 million segment on a four-channel basis. But while the segment is up just 2.5 percent in grocery, 2.3 percent in drug, and down over 16 percent in mass, it’s up 9.4 percent in the convenience channel.
What accounts for that growth? Part of it may be explained by the product’s appeal to teens and young adults, who prefer to get their caffeine from a cold drink. The product comes in sweet flavors such as mocha and caramel. We know that families with teenagers account for 21 percent of the dollars spent on the bottled coffee category across all channels, whereas they account for just 15.3 percent of the population—for a dollar volume index of 137. Because kids are frequent shoppers in c-stores, they may account for some of the c-store volume.
But kids aren’t the only consumer group fueling RTD coffee growth. The product indexes high with households that are affluent (dual-earners, well educated, employed in white-collar professions) and urban, segments that do not traditionally shop in c-stores as much as their counterparts. The result is an opportunity for convenience retailers to attract new customers to their stores at a time when they could certainly use some.
Based on an analysis of ACNielsen Homescan consumer panel data, c-stores have experienced a decline in shopping penetration, sliding from 52 percent of the population in 1998 to 48 percent in 2000. Other channels have been chipping away at the convenience channel’s main selling proposition, with grocers installing gas pumps and drug stores and selling more food (earning the moniker “the convenience store for women”), video stores selling candy and soft drinks, and everyplace, from coffee shops to clothing stores, selling mints.
Perhaps convenience store operators could use the RTD coffee segment to target more affluent consumers. If the strategy succeeds, it won’t be just the consumers who get a boost from the product.

                                        RTD Coffee Sales by Channel $174,617,058 (*)
 Change from One Year Ago (%)
Grocery +2.5
Convenience +9.4
Drug -16.1

(*)Source: ACNielsen Convenience Track, 52 wks ending 8/4/01. Grocery, Drug, Convenience combined.
 
IV. Case 
Eastman Kodak Co., Funtime Film   
HBS Case: 594-111         TN:  5-597-080

Teaching Perspectives
This is a rather short case, and the issues are fairly clear, leaving time for students to undertake in-depth analysis. It could also be used in the pricing module of a marketing management course since the issue of whether to take a price cut your flagship brand instead of proliferating the line is important. Because of the magnitude of the market is such that one (1) share point in the market is worth $13 million in gross margin dollars per year to Kodak, it captures student interest.  The profitability of the business declined by about $80 million during the last five years. Thus, Kodak must “do something” but figuring out a viable plan for stemming the share loss without loss in profitability is a challenge.
While Eastman Kodak still maintained a dominant position in the U.S. film market in 1993, its share had declined to 70 percent from 76 percent only five years earlier. This erosion was at the hands of Fuji, which held the No. 2 position at 11 percent share, and private label suppliers. Some observers felt the film industry had become more commodity-like as actual performance differences between brands became insignificant. To deal with this eroding share position, Kodak management prepared to launch a “fighting brand” called Funtime to compete with less expensive rivals. Funtime would involve a vertical product line proliferation strategy whereby Kodak would offer a “good, better, best” selection of films for amateur users. The case sets out the market situation and the proposed Funtime strategy. The discussion focuses on diagnosing the source of Kodak’s problems, establishing realistic objectives for the film business going forward, evaluating the Funtime strategy and developing an alternative action plan if the Funtime strategy should fail.
The case is designed to:
• Allow students to ascertain the forces underlying a market’s move to commodity status producing share pressure on the high priced offerings in the market.
• Expose students to the “fighting brand” strategy and more generally the issues involved in managing vertical product line proliferation, e.g. “good, better, best” strategies.
• Provide opportunity for quantitative analysis, such as margin calculations and break-even analysis, in assessing marketing strategy.
• Provide a setting in which to analyze the importance of a “brand name” in consumers’ decision making and how that may vary by customer segment, usage occasion and over time.
Analysis of the case has four major parts:
1. Diagnosis of the reasons for Kodak’s market share loss and assessment of likely development of the market if Kodak maintained the status quo.
2. Specification of what Kodak’s objectives ought to be at this point. This involves possible trade-offs between market share, profitability and brand equity.
3. Evaluation of the general concept of Funtime proposal and its implementation details given consumer behavior.
4. Consideration of other action plan options such as a price cut on the flagship Gold Plus brand.
There are a number of reasons for the market share shift, but they basically all revolve around the idea that the added value that Kodak delivers to consumers, relative to competitors, has declined over time, while Kodak has maintained its 17 percent price premium over Fuji and 30 percent over private label brands. The reasons can be set out along customer, competitor, and company lines. The reason is that customers “tend to view film as a commodity, often buying on price alone. Accordingly, there is a growing body of price-sensitive consumers.”
Evaluating the competition in the film category, the competitors are growing and succeeding.  Fuji is growing in reputation and acceptance in the U.S. market and Polaroid, a well-known entrant into the conventional film market, is operating at low prices. In addition, private label film is becoming more acceptable and no longer perceived as low quality.

Questions:
1. Given the urgency of the matter, with every share point costing $13,000,000 in gross margins, and the digital era approaching, what should be the CEO’s objectives for the Funtime Program?
2. What is the potential conflict between share, profits and brand equity?
3. What are some alternatives to the Funtime program?
4. What will be Fuji’s reaction?
5. What will be the ultimate impact of the plan on Kodak?

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