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MBA – MARKETING MANAGEMENTMarketing Segmentation

Lecture Overview

• Introduction• Marketing targeting• Market segmentation

- Why segment markets?- Bases for segmentation- Criteria for segmentation

• Market targeting- Evaluating market segments- Selecting market segments (market coverage

strategies)• Positioning

- Differential advantage- Market positioning- Positioning alternatives and strategies

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Introduction

While marketing as a business philosophy makes the customer central to the objectives

of an organisation, it is the concepts of marketing that have been developed from this

philosophy which has made marketing so relevant to business and other organisations.

In the 1950’s the pioneers of mass-marketing, multinational firms such as Proctor&Gamble,

Ford and Coca Cola, had the power to sell large quantities of standardised goods to a

‘homogeneous’ mass market, using the promotional attraction of mass media, especially

television. But, times have changed and to be successful Coca Cola now offer caffeine free,

diet, cherry, vanilla and other variants. Ford make many cars, from the Ka retailing at just

over £7,000, to the Explorer, a four wheel drive vehicle retailing at around £30,000 all of

which are available in a host of colours, finishes and specifications. The reason for this

explosion of product choice, is an attempt to meet customer needs more precisely.

If the marketing task is to satisfy the needs and wants of customers then those wants must

be established, even if they are found to be different from every single consumer. While it is

recognised that customers do not always form a homogeneous group, nevertheless.

Marketing is a 2 way exchange process which involves profitable and beneficial exchanges.

As such, part of the marketing process is to identify wants that groups of individuals share

such that it can offer to meet these group needs profitably.

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Introduction

In the previous session it was suggested that buying decisions should be linked to

relevant characteristics associated with individual buyers e.g. New mothers buy baby

food, or business suits are purchased by white collar workers.

These examples illustrate how one specific group or segment could be more likely to buy

a particular product from another.

This process if called ‘Target Marketing’ – which seeks to identify market

segments, selecting one more of them and developing the right product for each target

market.

Because no organisation ever really is without competition, the 4P’s of product,

price, place and promotion are adjusted (like the sights on a rifle) to ensure the offer hits

its target market such that the customer prefers the offer to that of its competitors.

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MARKET TARGETING

Market Segmentation Market Targeting Market Positioning

1. Identify the bases for segmenting the market

2. Develop profiles of resulting segments

3. Evaluate attractiveness of each market segment

4. Select the target segment(s)

5. Identify differential advantage for each segment

6. Develop marketing mix for each target segment

6 Steps in Market Segmentation, Targeting and Positioning

A market consists of customers with similar needs. But, customers in a market are never homogeneous in that they differ in terms of the benefits wanted, the amount they can afford or are willing to pay, the media they see and the quantities they buy.

It therefore makes sense for marketers to segment the market and target one or more of these segments with specialised, tailored offerings.

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MARKET SEGMENTATIONA market segment is a customer group within the market that has special characteristics

which are significant for marketing strategy. In most markets the need for segmented

offerings is obvious because a single product will not satisfy all the customers. For

example – acute asthma patients need different drugs to mild or infrequent

sufferers, rich people want more luxurious hotel accommodation that that of poorer

people.

Segmentation increases profit opportunities because different groups of customers attach

different economic or psychological values to the solution offered.

Airline Demonstration

British Airways did not always segment their market. But, it became clear to them that

passengers differ in their expectations of flight travel.

Business travellers valued convenience, comfort and efficient service, while leisure

passengers were more interested in low price.

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The table below illustrates the pricing and cost options for a carrier flying from London to New York using a 300 seater plane and anticipating an average load factor of 80%.

If it pursued an undifferentiated strategy (i.e. one class plane) a price of £250 was deemed to be the highest price chargeable to achieve an 80% occupancy load. The budgeted profit from the trip was calculated at £5200. However, to marketers it was obvious that, while a price of £250 begins to lose the business of low-budget travellers, business people and more affluent customers would be willing to pay much more for a superior service and comfort. The result the airline moved to a differentiated strategy whereby they offer three levels of service on the plane – economy, business and first class at very different price levels.

SEGMENTATION OF AIRLINE PASSENGERS

Class Passengers Price £

Variable cost £

Revenue £

Variable cost £

Fixed cost £

Profit £

Undifferentiated strategy

240 250 20 60,000 4,800 50,000 5,200

Differentiated strategy

Economy 144 250 20 36,000 2,800

Business 72 500 40 36,000 2,880

First 24 1000 100 24,000 2,400

240 96,000 8,160 50,000 37,840

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The consequence is -

Massively increased revenues and profitability. The differentiated service better meets the needs of all customers by offering different

values that the type of passenger groups prefer.

Another Example -

Scotch whiskey – until the 1980’s Scotch was an undifferentiated market. When

Guinness bought out United Distillers, the main brand leader Johnnie Walker Red was

priced at £9 per litre. The new company decided to launch a deluxe version called

Johnnie Walker Black at 80% price premium (£16 per litre) selling to status orientated

customers. Later it added Johnnie Walker Swing (£30), Premier (£70), Blue (£90) and

Johnnie Walker Honour (£129). In a market which is static in volume terms, United

Distillers profits exploded.

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WHY SEGMENT MARKETS?

Better matching of customer needs – offering one service or one product invariably

means someone will be unhappy. Enhanced profits – customers differ in their price sensitivities and by segmenting

the market, we can raise average prices. Enhanced opportunities for growth – segmentation can build sales growth. By not

offering premium services or brands allows specialist competitors to cream off your customers.

Retention of customers – as individual circumstances change with age, family and income so buying patterns change. By offering products say to reflect the family life cycle stages, marketers can retain their customer base.

Targeted Communications – difficult to have one message to meet all needs.

Warning

Unless a brand is the biggest, or second biggest, in terms of share, it is unlikely to be

profitable.. Minor brands suffer from lack of scale economies in production and marketing

and pressures from intermediaries with limited space.

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BASES OF SEGMENTATION

We start by segmenting markets into Consumer and Industrial markets:

Consumer segmentation There are 2 different approaches to segmenting consumer markets.

1. Characteristics of the buyer Demographic Geographic Psychographic and lifestyle

2. Buyer behaviour Benefits sought Behavioural

Demographic segmentation – these are the most commonly used segmentation classifications of market segments. The traditional demographic bases are:

Gender Marital status Occupation Income levels Education levels

Age Socioeconomic Family size Ethnic origins Life cycle stages

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Geographic segmentationIssues relating to rural vs. urban, warm vs. cold, north vs. south can be considered here. Geo-demographic bases such as ACORN, MOSSAIC etc have used this approach in location planning for new retail outlets.

Psychographic and Lifestyle segmentation This approach is to classify people according to their personality traits such as socialibility, self-reliance, conservativeness or their social class. They are often used in relation to consumer products. Lifestyle on the other hand, covers attitudes interests and opinions which is useful to marketers because it provides a simple link to the variables used in buyer behaviour e.g. attitudes, perception and social influences.

Benefit segmentation This approach depends on casual relationships rather than descriptive criteria. Product features sought by a motorist will be different based on the benefits they seek. For example, a family person may seek a large car with plenty of seats, whereas for an older less well of person, a smaller car offering economy may be sought. (e.g. Trust House Group – next to Little Chef restaurants)

Behavioural This is often based on usage of a product/service, level of loyalty and occasions.

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Industrial segmentation

Here management must segment the market by benefits sought, then they have to describe the characteristics of these customers.The most common profiles in organisational markets are as follows.

Industry or end user (e.g. agriculture, aerospace, construction)Organisational type (e.g. public or private sector)Size of organisation (e.g. big or small, national, multinational)Geographic locations (e.g. region, urban, rural)Application (e.g. heavy or light use)Usage (e.g. heavy or light user, loyal or non-loyal)Purchasing organisation (e.g. centralised or decentralised, nature of decision making unit, (DMU)

Criteria for segmentation

Measurability – the size, buying power and profits of the segment need measuring.Accessibility – can the markets be effectively reached and served?Profitable – are the market segments large enough to be profitable?Actionable – can you actually serve the markets identified using the resources you have?

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MARKET TARGETINGMarket segmentation reveals the firms market segment opportunities. We now need to

evaluate the various segments and decide which, if any, to serve.

Evaluating market segments

There are a number of factors to consider here:

Segmentation attractiveness – is the segment big? Is it growing? What are the

projected sales and profit margins for each segment? What degree of competition exists? Is there a threat of substitute products? What is the relative power of buyers?

Business strengths – do the firm have the energy and resources to match the

requirements of the market segment? Do they have the skills superior to the competition in order to build market share?

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Selecting market segment

A firm can adopt one of the market coverage strategies when deciding how many markets to serve as show below.

Company marketing mix Market

A. Undifferentiated Marketing

Company marketing mix 1

Marketing mix 2

Marketing mix 3

Segment 1

Segment 2

Segment 3B. Differentiated Marketing

C. Concentrated Marketing

Company marketing mix

Segment 1

Segment 2

Segment 3

Ma

rke

t Co

vera

ge S

trate

gie

s

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• Undifferentiated marketing

Here the company ignores market segment differences and goes after the whole market

with one offer. The offer is seen to focus on what is common in the needs of consumers

rather than what is different. The approach relies on on quality, mass distribution and

mass advertising to give the product a superior image (e.g. Coca Cola, Polo, Esso). This

approach provides for cost economies while the narrow product line keeps down

production, inventory and transportation costs.

Differentiated marketing

Here the company targets several market segments and designs separate offers for

each. General Motors tries to produce a car for every purse, purpose and personality. By

doing so it hopes to achieve higher sales and stronger position within each segment.

Concentrated marketing

Where resources/skills or both are limited companies can seek to concentrate their

efforts in going after sub-sectors of the markets sometimes called niches. It is a good

way for new entrants into a market to gain a foothold because they can gain strong

market share albeit in the smaller section and focus their expertise where it will be most

effective. The problem is, this approach attracts higher risks. When times are hard,

serving such a small sector could prove a problem - it could just disappear (e.g. Sock

Shop)

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PositioningConsumers typically choose products and services that give them the greatest value. The key to winning and keeping customers is to understand these needs and buying processes better than your competitors do, and to deliver more value. The extent to which a company can position itself as providing superior value to selected target markets is dependent on its competitive advantages. Companies therefore choose target market segments based on their ability to compete.

Differentiated advantageDifferentiated advantage could be based on the buyers perceived product quality,performance, better service support, or lower prices. Searching for differential advantage begins with an understanding of what the customer values. The drivers of value are shown below.

Product drivers – Performance (e.g. speed, capacity accuracy) Features (sunroof, electric windows, stereo) Reliability Standard specification Durability Serviceability

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Service drivers – Credit and finance

Order facilities

Delivery

Installation

Training and consultancy

After sales service

Guarantees

Image drivers – Branding

Association (e.g. sponsorship, wants)

Recognition (e.g. symbols, logos, promotion)

Cost drivers - Economies of scale

Experience

Timing

Capacity

Location

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MARKET POSITIONINGA product’s position is the way the product is defined by the buyers on important

attributes – the place the product occupies in consumers’ minds relative to competing

products. For example, Skoda and Subaru are positioned on economy, , Mercedes and

Jaguar on luxury and Porsche, Saab and BMW on performance.

A company's competitive advantage and its product position can be quite different. A

competitive advantage is the strength of the company, while a product’s position is the

customers perception of a product. Competition advantage like, low costs or high quality

can influence a products position, but in many cases it is not central to it. For example,

low costs and access to Heathrow are two of British Airways competitive advantages, but

its position is based on popularity and its global network. ‘The Worlds favourite Airline’.

Consumers are overloaded with information about products and services. They cannot

re-evaluate products every time they make a buying decision. To simplify the buying

decision process, consumers organise products into categories (i.e. they position

products, services and organisations in their minds.

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A position is in effect a complex set of perceptions, impressions and feelings that the

consumer holds for the product compared with competing products.

Positioning is not something therefore you specifically do to the product, except in its

development stage, rather its what you do to the mind of the prospective consumer.

Ries and Trout demonstrated that in overcrowded markets, where there is so much

advertising that consumers screen out most of the messages, it is important that you

present a unique selling proposition , such that, they can remember and clearly

understand the offer. In the form of a product ladder, consumers can only remember the

top rungs or the main products or brands even if the market is made up of lots more. The

trick is to be at the top of the ladder because people tend to remember No.1. Ask yourself

who won the Football Premiership Title last year – now answer who came second. The

trick as we said is to find a position which your consumers value and make it yours.

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POSITIONING ALTERNATIVES1. Strengthening a brands current position.

(e.g. Avis took its second position in the car rental market and made a strong point about it. ‘We’re number two. We try harder!’

2. Search for an unoccupied position

(e.g. Vidal Sassoon’s Wash and Go was based on recognising that the fashion for exercise meant that people washed their hair frequently, quickly and away from home. By combining shampoo and conditioner the company as able to fulfil a latent market need.)

3. Reposition of the competition

(e.g. most USA buyers of dinnerware thought that Lennox China and Royal Doulton both came from England. Royal Doulton countered with ads showing that Lennox China was from New Jersey, but theirs came from England.)

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POSITIONING STRATEGIESMarketers can follow several positioning strategies all of which use association to change peoples perception of products/services.

Product attributes – product attributes position many technical products (e.g. Breitling – exclusive watch makers, Baure and Mercier position themselves on mechanical movement.) the benefits the attributes offer/or the needs they fill position many products (e.g. Crest toothpaste reduces cavities, Sensodyne toothpaste relieves pain from sensitive teeth). In confectionary, Ferrero Rocher is provided as a gift, but Mars and Snickers satisfy hunger.

Usage Occasions – Kellogg's cornflakes is positioned as a morning breakfast, Kit Kat and After Eight mints are sold alongside Ferreo Rocher and Snickers, but their positioning is on usage occasion. Kit Kat means ‘Have A Break’, while After Eight is an after dinner mint to share.

Users – Johnson&Johnson improved their market share for it’s baby shampoo from 3 to14% by repositioning the product towards a new user category of adults who wash their hair frequently and need a gentle shampoo. Often products are positioned by associating them with their user class. Nescafé Gold Blend increased sales dramatically after showing Ads romancing thirty-somethings.

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Activities – activities also position products (e.g. Omega in sailing and aerospace

‘The first watch on the moon!)

Personalities – prestigious brands are often positioned using successful

personalities who can add to a product’s character. American Express runs ads showing

caricatures of famous business people who are also users, Jameson Whiskey uses

sportsmen, as do Nike.

Origin – again association with a place helps position a product. Perrier’s success

depended on the sophistication of its French origin. Similarly, Audi’s ‘Vorsprung durch

Technik’ positioned its cars as German. Foster’s and Castlemaine XXXX lagers

positioning users their Australian heritage, plus masculine humour.