Chapter 7 - Identifying Market Segments and Targets
I. Learning Objectives
After reading this chapter, students should:
q Know what are the different levels of market segmentation
q Know how a company can divide a market into segments
q Know how a company should choose the most attractive target markets
q Know what are the requirements for effective segmentation

II. Chapter Summary
Target marketing includes three activities: market segmentation, market targeting, and market positioning.

We can target markets at four levels: segments, niches, local areas, and individuals. Market segments are large, identifiable groups within a market; a niche is a more narrowly defined group. Globalization and the Internet have made niche marketing more feasible to many. Marketers appeal to local markets through grassroots marketing for trading areas, neighborhoods, and even individual stores.

More companies now practice individual and mass customization. The future is likely to see more self-marketing, a form of marketing in which individual consumers take the initiative in designing products and brands.

There are two bases for segmenting consumer markets: consumer characteristics and consumer responses. The major segmentation variables for consumer markets are geographic, demographic, psychographic, and behavioral. Marketers use them singly or in combination. Business marketers use all these variables along with operating variables, purchasing approaches, and situational factors.

To be useful, market segments must be measurable, substantial, accessible, differentiable, and actionable.

A firm has to evaluate the various segments and decide how many and which ones to target: a single segment, several segments, a specific product, a specific market, or the full market. If the firm serves the full market, it must choose between differentiated and undifferentiated marketing. Firms must also monitor segment relationships, and seek economies of scope and the potential for marketing to supersegments.

Marketers must develop segment-by-segment “invasion” plans and choose target markets in a socially responsible manner at all times.

III. Chapter Outline
I. Levels of Market Segmentation
A. Introduction
1. Mass marketing - one product/marketing mix available for all buyers
2. Micromarketing - the response to the decline in favor toward mass marketing
B. Segment Marketing
1. A segment is a group of individuals who have similar needs and wants
2. Flexible market offering allows organizations to provide a standard offering to segments and to provide discretionary options within segments to address differences across needs and wants
C. Niche Marketing - a more narrowly defined group who seek a distinct set of benefits. May be a subsegment. Characteristics can include a small market as well as a distinct and unique set of needs; need fulfillment can demand a premium; the Internet has made it easier to serve various needs and has precipitated a variety of niche markets
D. Local Marketing - programs targeted to the needs and wants of local customer groups
1. Advantages: benefits are closely tied to needs, marketing mix is optimally related to positioning
2. Disadvantages: more expensive and increased logistic risk as marketing mix must be customized for each local market, risk of confusion if mass advertising differs from local communication
3. Reflects grassroots marketing, which is the act of getting as close and relevant to individual consumers as possible. Experiential marketing is a large component of the grassroots approach as it connects an offer with a unique and interesting experience
E. Customerization
1. Customers have become more involved in the fulfillment of their needs
2. Organizations use mass customization and “choiceboards” to enable consumers to tailor their solutions. This is called customerization
3. Complex products or services may be more difficult to customize
F. Patterns of Market Segmentation
1. Homogenous - all consumers have similar preferences (e.g. clean air)
2. Diffused - large variance in preferences (e.g. haircut)
3. Clustered preferences - distinct groups (e.g. lite beer, dark beer)

II. Segmenting Consumer and Business Markets
A. Bases for Segmenting Consumer Markets:
1. 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
2. Demographic - break down consumers based upon one or more variables
a) Age and life cycle stage - changes in these variables may indicate changes in needs
b) Life-stage - taking care of aging parent, divorce, shifting to new home
c) Gender - defines attitude, behavior, and needs in many cases
d) Income - may not be the best predictor. Must verify disposable income; if combined with occupation may predict future income; determine if income has been inferred by spending as this can be misleading
e) Generation (see cohorts figure 7.2)
f) Social class - strong influence of preferences
3. Psychographic
a) Lifestyle, personality, and values
b) VALS framework classifies U.S. adult consumers into eight primary groups based upon personality traits and key demographics (refer to figure 7.3)
4. Behavioral - divide consumers into groups on the basis of their knowledge of, attitude toward, use of, or response to a product
a) People play one of five roles in the buying decision process
(1) Initiator
(2) Influencer
(3) Decider
(4) Buyer
(5) User
b) Behavioral variables that can be used to segment
(1) Occasions when need may develop
(2) Benefits sought
(3) User status - nonusers, ex-users, potential users, first-time users, regular users
(4) Usage rate - light, medium, heavy
(5) Buyer-readiness stage - unaware, aware, informed, interested, desire, intend to purchase
(6) Loyalty status - hard core (never switches), split across several brands, shifts from one to another brand, switchers (not loyal to any brand)
(7) Attitude - enthusiastic, positive, indifferent, negative, hostile
5. Multi-Attribute Segmentation (Geoclustering) - assumes people who live near one another and exhibit similar traits from all of the above segmentation bases
a) Targeting multiple segments - because consumers can no longer be neatly pigeonholed into one segment
b) Geoclustering via PRIZM clusters (American dreams, rural industria, gray power, country squires) - focus on increasing diversity
B. Bases for Segmenting Business Markets
1. Marketing to small businesses - represent 50% of GDP
2. Sequential segmentation - segment at a macro level, and then within chosen segment(s) further delineate at a micro level
3. Business buyers can be segmented based on their stage in the decision process
a) First-time prospects that need a partner who understands their business and who they can trust
b) Novices who are on a learning curve and need training and knowledgeable sales reps
c) Sophisticates who may have a need to customize or to expedite, and expect a high-depth of support

III. Market Targeting
Factors: needs-based segmentation, segment identification, segment attractiveness, segment profitability, segment positioning, segment “acid-test”, segment marketing mix strategy
A. Effective Segmentation Criteria
1. Measurable
2. Substantial
3. Accessible
4. Differentiable
5. Actionable
B. Evaluating and Selecting Market Segments
1. Single-segment concentration - firm concentrates on one market only for its one product
2. Selective specialization - firm selects a number of attractive and appropriate segments and develops products that appeal to each segment
3. Product specialization – firm focuses on a product it can sell to several segments
4. Market specialization - firm satisfies multifaceted needs of one particular group
5. Full market coverage - firm serves all customer groups with products they might need
a) Undifferentiated marketing - entire market receives the same program
b) Differentiated marketing - different programs for different segments
6. Managing multiple segments optimally requires segment managers to grow each segment while coordinating individual segment strategy across all segments
C. Additional Considerations
1. Segment-by-segment invasions
a) Enter segments one at a time without alerting competitors
b) Apply megamarketing when blocked from a market
2. Updating segmentation schemes
a) New segments arise, existing segments mature or change with respect to their needs
b) Market partitioning is one way to identify new segments i.e. evaluate hierarchy of attributes consumers use to select a brand
3. Ethical choice of market targets
a) Determine risk with respect to social liability
b) Apply socially responsible marketing techniques to reduce risk of liability
IV. Summary

IV. Opening Thought
The first challenges presented in this chapter are the concept of market segmentation and the segmentation processes used by marketing firms. Students may have difficulty understanding the various steps of the segmentation process as well as differentiating between target markets and market positioning. The instructor is urged to use personal examples to illustrate the different markets (e.g. the differences between the instructor’s age cohort and that of his/her students).

Second, the concepts of consumer characteristics and responses may be new to many students as they apply across different age groups and different consumers. Students who have little contact with others outside their sphere of influence may not initially realize that these consumers hold differing views and have different usages for product and services.

Suggestions to help the students understand the degree of sophistication employed by marketers include using a website that provides marketing information during the class lecture (e.g. pinpointed by a student’s zip code) to show the amount of information available to marketers. Additional examples for classroom demonstrations include asking students to research on their favorite product by their zip code or other criteria. Many firms provide differing products to different consumers; for example, Toyota offers both Toyota and Lexus line of cars. Both of these brands can be used to illustrate product differentiation and target marketing.

V. Teaching Strategy and Class Organization
PROJECTS
1. Students should submit the market segmentation portion of their semester-long new product or service report.

2. Students should select a product or service that they are familiar with, such as jeans, computers, or MP3 players. Research into target market and market segmentation based on these items should be undertaken. Student reports should contain information as to: How large is the target market; what is the future growth potential of this target market; how does the marketer reach this target market; and so on? The second part of this project is for students to “re-position” this product to another market segment. For example, if students select MP3 players as their product and confirm that the target market is for the “only child generation” (born after 1980), then students should describe how manufacturers of MP3 players will attempt to re-position the product to attract the “transform generation” (born between 1970 to 1980) to increase their purchases.

ASSIGNMENTS
Small Group Assignments
1. Many countries in Asia, such as Singapore or Japan, will face significant growth in the aged population segments. In small groups, have students detail the demographic information on this group of customers (ages, buying power, perception of themselves, etc.) and suggest some key marketing opportunities mined from this information. For example, if elderly consumers often make buying decisions based on lifestyle and not age, does this information present marketing opportunities for such industries as travel, bio-medical industries, home exercise equipment, and automobiles? If so, who will be affected and to what extent? Students’ answers should contain detailed demographic information about this target market and draw a connection between the information and the potential for marketers.

2. Recently, a number of drug companies have developed medicines for erectile dysfunction, supported by phenomenal advertising and promotional expenditures. These facts show that a very real market exists, and it is quite large and potentially lucrative for the drug companies. In small groups, have students examine the value of this target market in terms of population, affected population, potential income, etc. Secondly, using the information obtained during their research, challenge the students to answer the following: Did the “discovery” of a drug for erectile dysfunction prompt the marketing or did the results of marketing research uncover a latent need that caused the drug companies to “discover” a cure? 

Individual Assignments
Refer to the major VALS segmentation (www.sric-bi.com). Students are asked to characterize either themselves, family members, or others; and place them in one of these groups. How closely do the persons students have selected fit the profile? If so, can the marketer rely on these characterizations in mapping out marketing plans? Are there major differences? If major differences exist, what impact does this have on marketers developing such plans?

Think-Pair-Share
Effective segmentation criteria are necessary for target market identification. Market segments must be measurable, substantial, accessible, differentiable, and actionable. However, not all segmentation schemes are useful—the text uses table salt buyers as an example. Students are to provide three examples of those products or services in which segmentation criteria are not necessary, and three examples where segmentation criteria are an absolute necessity. Students are to exchange their findings and explain these differences. An additional discussion (or assignment) could be to have students devise a segmentation strategy for the products or services that they found not currently, where segmentation criteria are necessary. In other words, to “create” a segmentation distinction for—“table salt”!

END-OF-CHAPTER SUPPORT
MARKETING DEBATE

How would you contrast demographic versus behavioral segment schemes?

Marketing Insight: Trading Up and Trading Down
Discuss the two co-existing tendencies of “trading up” and “trading down” in the case of Chinese consumers. How can companies keep up with these two different tendencies?

VI. Case Study
1. Mini Case: Master Kan
1) Explain and analyze the segment market strategy of Master Kan.
2. Marketing in China: The Segment Market Decision-making of China Mobile
1) Analyze how the readjustment of China Mobile’s positioning (from “mobile communication expert” to “mobile information expert”) has changed its target markets.
2) What are the problems that exist in the segmentation of China Mobile’s three major consumer markets?
3. Chapter Case: Future Cola   
1) What are the basic strategies for Future Cola to survive and develop as it was confronted by its powerful rivals, Coca-Cola and Pepsi Cola?
2) How did Future Cola balance the two different strategies of innovation and imitation in the competition?

VII. Main Topic(s)
A. “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 to increase focus and segmentation.

1. Marketing Insight: Chasing the Long Tail
2. Marketing Insight: The Cohorts in China
3. Marketing Insight: Regional Differences in China Market

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 that make 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.] 
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 also 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 few or many 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 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, etc.
o Purchasing Criteria. Focus on noncompensatory criteria such as price, service, quality, etc.
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 (a 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)? (I.e. can competitors choose to target this segment easily and with a high level of success?)
· Interaction with other segments? (I.e. 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 the health care 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 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 can also 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 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. 
Savvy 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 properly leverage 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 awhile. 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 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 macrolevel and/or microlevel. 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 soft water use (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 residential 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 prequalifier, it does not indicate a person’s propensity to take a risk that is a psychographic variable. Students can be asked how they would identify risk takers. They may suggest stockbrokers or anyone buys and sells stock frequently; the instructor can suggest finding people who subscribe to Sky Diving Magazine. Small business owners often take the ultimate risk. Discussions at microlevels can precipitate segments choices such as:
· Geographic reach, such as in driving versus flying (the latter leading to a discussion of destination objectives) to the casino
· 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

VIII. Background Article(s)
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 (RTD) coffee, 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% 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% of the $175 million segment on a four-channel basis. But while the segment is up just 2.5% in grocery, 2.3% in drug, and down over 16% in mass merchandisers, it’s up 9.4 % 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% of the dollars spent on the bottled coffee category across all channels, whereas they account for just 15.3% 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% of the population in 1998 to 48% 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 every place, 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 1 Year Ago (%)   
Grocery +2.5   
Convenience +9.4   
Drug -16.1 

(*)Source: ACNielsen Convenience Track, 52 weeks ending 8/4/01. Grocery, Drug, Convenience combined.