CHAPTER TWO SEGMENTING THE MARKET

CHAPTER TWO SEGMENTING THE MARKET The Marketing Mixes 45 When marketers break the marketplace into separate target markets, they are segmenting the market, and each segment must meet four criteria in order to be accurate. Any grouping of people that the Promotion Mix marketers claim to be a market segment must be (1) identifiable and measurable, (2) sustainable and with enough potential customers to be profitable for the company, (3) accessible to marketing efforts, and (4) responsive to specific marketing efforts in a way or ways unlike any other segments. LO 1 THE FOUR CRITERIA FOR SEGMENTING THE CONSUMER MARKET Just as segmenting anything means to break it into parts, segmenting the market means to break the marketplace into parts. Each part must meet the proper criteria or it is not a market segment, and marketers cannot use it as such. 1. A segment must be identifiable and measurable. Obviously, marketers must be able to distinguish the group, or groups, of consumers who are most likely to buy their products. Marketers also need to be able to gauge how many of those consumers are in the locales in which they are considering selling their products. Geographic boundaries usually provide the easiest measurements, but often marketers must add data from public records and various agencies, such as schools, to their own research to be able to measure how many people with the characteristics to be in their Primary Target Market (PTM) are actually in the segment. 2. A segment must be sustainable and with enough potential customers to be useful as profitable for the company. A segment must have enough potential buyers of firms products to make it worthwhile for those firms to create a special mix of products and/or services specifically for that segment. The kinds of products the companies offer determine how many purchasers they will need in order for the segment to generate a profit. For example, someone who sells houses or swimming pool installations will not need as many purchasers to make a profit as will someone who sells ball point pens and three-ring binders. 3. A segment must be accessible to marketing efforts. Obviously, product promoters must be able to place their products where consumers can purchase them, or they will not

46 Part One sell those products. In addition, though, they must be able to reach those consumers with advertising and customer service that consumers expect for the types of products that they offer. In the United States, geographic areas are not difficult to reach, but marketers do not always segment solely by geographic location. If, for example, marketers are segmenting by gender, generation, specific types of physical disabilities, or cultural backgrounds, they will spend more time and money providing both promotion for their products, and the products themselves, to the proper locations than if they simply choose a specific geographic area and ship to it. 4. A segment must respond to specific marketing efforts in a way or ways unlike any other segments. How a segment responds to marketing efforts (such as advertising and store openings) is really a measurement of how similar and how dissimilar the reaction of that segment is from the reactions of other segments to activities and products initiated by marketers. If consumers in a segment respond in a manner very similar to that of consumers in other segments, there is no reason for promoters to create a separate way to market to that segment. They will not need different types of advertising, different pricing, or different characteristics built into the products. Because the potential customers in the segment are so like those in other segments, marketers can expect them to react similarly to marketing efforts. If, however, consumers in one segment respond differently to the marketers activities and offers from the way in which consumers in other segments respond, the marketers will create different methods of reaching them from what they use in other segments. LO 2 THE FIVE BASES FOR SEGMENTING CONSUMER MARKETS We ve explained the four criteria that marketers who work in the Promotion Mix use when they segment the market. Each time that they segment the market, they do so based on both who they think the Primary Target Market is and the specific product that they want to sell. Now let s look at the specific kinds of information from which they can choose to determine whether the four criteria are workable for the groups that they think are segments. 1. Geographic Segmentation (Geographics) is the oldest type of segmentation and has been around since long before anyone even thought of trying marketing ploys to entice people to buy products, much less studying marketing as a subject in school. Very simply, since people have lived in groups rather than wandering alone, they have often possessed more than

The Marketing Mixes 47 they needed of various products, and they met with other people and traded with them for products that the other people wanted to exchange. There was no transportation other than walking or, much later, riding on animals, and people could not be away from their families for very long periods of time. So, people who were not traders by profession went only as far as they could comfortably go to meet with others who wanted to trade. As time went on, of course, some people actually grew, raised, or made goods specifically to sell. They let others know specific times when they would be available for trading. Eventually, people devised monetary systems and were able to exchange what to them was valued as currency for the products rather than having to trade products of their own. No matter whether they traded products or money, however, until transportation systems allowed them to travel to distant areas, purchasers stayed close to their own geographic areas. Without knowing it, they were segmenting their markets geographically. Marketers still segment geographically before using other segmenting bases. They know that the nearer to their companies they can sell their products, the less money they will have to spend to ship and store products in order to make them available to consumers. 2. Demographic Segmentation (Demographics) is the most used type of segmentation because it is the most easily measured and thus costs the least amount of money to complete. Demographic Segmentation includes elements that in many instances marketers can measure merely by looking at the people in the segment. For example, when they segment demographically, marketers evaluate age range, gender, and lifestyle, all of which they can easily determine. Demographic Segmentation also includes income level, religious affiliation, marital status, and stage in the family life cycle, which are a bit more difficult to ascertain but which marketers can at least estimate on sight. Of course, marketers in large companies do not simply look at people and determine whether they should be in a specific segment of the market. They use information that is already available such as records of the Bureau of the Census and public records of births, deaths, and marriages. They can also check such online resources as www.referenceusa.com and www.biztoolkit.org. If you want Demographic information but are not inclined to use computers, you can simply spend a few hours on various days and at various times observing consumers as they come and go at locations that you are considering for doing business. Within a very few hours, you will be able to tell who is the PTM of each location, when the largest number of consumers shop there,

48 Part One and whether consumers seem to purchase from each business. You can also observe the drive-by traffic to see what kinds of motorists have opportunity to see the businesses at the sites and how many of them actually stop at the businesses. 3. Psychographic Segmentation (Psychographics) is the most expensive basis for segmenting, but luckily, marketers do not have to use it for all products. Psychographic information deals with values of consumers and the beliefs, motives, and reasons for spending habits. It is also information for which marketers must have permission from consumers before they may gather or use it. The expense of gathering Psychographic information comes from constructing surveys that elicit personal information from consumers about the reasons behind the way that they live and what interests them. Such information gathering takes a great deal of time. Often researchers conducting Psychographic research must conduct personal, one-on-one interviews with people. Organizations spend a great deal of time and money on Psychographic Segmentation, starting when the Promotion Mix people train researchers and assist them as they go through conducting all the interviews necessary. The cost continues through returning, coding, cataloging, and evaluating research data all the way through writing reports to summarize the data and submitting the reports to those who will use the data. Upon completing the reports, the marketers in the Promotion Departments of firms still have to figure out the connection of the data to the marketing questions that began the research the company concerns that they originally decided to address. Then they must determine how to use the data in continuing their attempt to promote their product to a specific segment of consumers. Because of the cost of Psychographic Segmentation in both money and time, marketers use this basis for segmenting very sparingly. For some products, however, they absolutely must have psychographic information if they are to be successful in selling their products. For example, if companies sell products for which consumers must be eighteen or twenty-one years of age to purchase, such as alcoholic beverages or tobacco products, adult movies, and entrance to nightclubs, those companies usually conduct Psychographic research before locating their businesses or stocking stores with such products. In addition, organizations that deal with religious beliefs, such as churches or synagogues, usually conduct some sort of Psychographic research before locating in specific sites. Such religious organizations deal with beliefs and values of people, but also they need to locate near enough to people who share their beliefs that their buildings will be convenient for those people to visit.

The Marketing Mixes 49 In either instance, if people in neighboring areas are adverse to what the organizations are offering, those groups will not be successful should they locate there. 4. Benefit Segmentation As we noted earlier, when marketers in the Promotion Mix create promotion pieces and advertising for their products, they begin by stating the characteristics of those products as benefits for their PTMs (benefitizing). If they choose to segment the market according to the wants and needs of the potential purchasers in that segment, they can put their benefitizing efforts to good use. They are interested in what problems or concerns consumers expect to solve by purchasing and owning the products. Producers of products such as soft drinks, cosmetics, and entertainment, for example, segment the marketplace according to who will benefit from those products (segmenting By Benefit). Consumers who purchase such products and services do so strictly because of their wants or needs, not because of their gender, age, religion, or political affiliation (although these characteristics will influence the needs and wants), and marketers must understand those wants and needs if they want to sell their products. Suppose that you want to sell fruit juice. You will have to determine the benefits that your PTM wants from the product in order to make important decisions before going into production. Should you package the juice in small boxes with straws attached so that young children can drink from them or in three-liter plastic bottles so that entire families can enjoy the juice? Should you offer juice with sugar added, juice with artificial sweetener added, or juice left in its natural form? Just what characteristics should you build into your product and its container to please your PTM? Consumers have different reasons for purchasing, even if they purchase the same products, and you will have to find out which reasons represent the largest number of consumers in order to package and promote your fruit juice profitably. Another example that we see quite often is the facial soap market. Firms in this market may include one segment that is seeking cleansing benefits such as being able to remove all makeup easily and completely but another segment that is seeking cleansing that moisturizes the skin at the same time. Only by understanding the benefits that their consumers desire from products that satisfy needs or wants can marketers build those benefits into their products. Then they can include notice of those benefits in all the promotion pieces and advertising that they produce to promote the products. 5. Usage-Rate Segmentation (or By-Volume Segmentation) Marketers who segment the market by Usage-Rate Segmentation (By-Volume Segmentation), measure how much of a product

50 Part One consumers in particular segments use. They also research whether the purchasers of the product are first-time buyers, frequent users, heavy users, light users, former purchasers, or potential purchasers anything that can help them to forecast how much of their product they will be able to sell to the segment. Often marketers who segment by usage rate focus their efforts on the heavy users of their products because those users represent the majority of their profit on the products. Using the heavy users as their PTM, they can continue to offer what those customers want while developing their promotion activities to try to bring in new customers. NOTE: Marketers and others who segment the consumer market for their companies more and more often combine Usage-Rate and Benefit Segmentation characteristics into what is called Behavioral Segmentation. Behavioral Segmentation is the dividing (segmenting) of the members of a population based on how they respond to or use products. The objective of marketers who use Behavioral Segmentation is to define and to locate highly specific targets, marketing niches, and then to customize their promotion to adress those niches directly. As the number of consumers who use technology (social media) to investigate products, as well as to order them, increases, marketers using Behavioral Segmentation will be able to use technology as well. They will be able to monitor their customers and potential customers and to keep up with changes in their purchasing wants and needs to an unprecedented degree. LEARNING HINT TEN Although Promotion Departments use only one of the bases for segmenting the market as their primary segmentation method, they usually implement other bases as well. Most companies begin by segmenting geographically and demographically. Then they determine which other bases, if any, they should use for the products that they offer. LO 3 MARKET SEGMENTATION STRATEGIES Marketing firms have three strategies from which to choose when they plan how to segment the market: (1) undifferentiated, (2) differentiated, and (3) concentrated. Undifferentiated Marketing Strategy If a firm chooses to use an undifferentiated marketing strategy, it will aim at the entire market with a product it intends to have mass appeal. The promotions and advertising that the firm uses will be the same no matter in what part of the United States the firm runs the promotions or presents the advertisements. In addition, the size, the number of product units

The Marketing Mixes 51 per package, and the types of stores that will sell the product will be the same in every geographic area in which the firm chooses to sell. Most firms used undifferentiated marketing from the end of World War II until about the mid-1960s because consumers did not move around to different parts of the country very much. Because of the lack of consumer mobility, marketers did not have to spend much time researching what types of people lived in what parts of the nation; they already knew. In addition, groups large enough to influence purchasing were few and far between. The population was much more homogeneous than it is today. Watching television became progressively more popular, and marketers knew both what consumers were watching and when they were watching it. As consumers watched the latest television shows, marketers could mass produce advertisements and broadcast them nationwide, secure in the knowledge that the audience was enough alike throughout the nation that the commercials would generate interest in their products in all geographic regions. LEARNING HINT ELEVEN Keep in mind how the creating of products depends on understanding the Primary Target Market (PTM). Major changes in the PTM during the years since the 1960s have necessitated that companies make corresponding changes in the strategies that they use to market their products if they want to stay in business. Differentiated Marketing Strategy As time passed, consumers in the United States changed. No longer did they stay in the same geographic areas in which they were born. They moved away from home for education, for new jobs, for transfers with current jobs, to be with spouses, and sometimes just because they wanted to move to a different area of the country and could afford to do so. In addition, more and more people from cultures outside the United States moved to the U.S. and changed the mix of the population. The population itself changed from undifferentiated to more differentiated than in the past; thus, marketers had to change to differentiated strategies. Firms that use differentiated marketing strategies operate in several segments of the market and offer products and services tailored for each segment. They also carefully construct a specific marketing strategy for each separate segment in which they operate, including advertisements and promotions that fit their PTMs precisely. Concentrated Marketing Strategy Firms that focus on only one or a few segments in the market concentrate on those few segments. Their intention is to capture a large share of each of the few segments on which they concentrate,

52 Part One and they create advertisements and promotions that appeal specifically to consumers in the few segments that they serve. Marketing to only a few segments, such as females from forty-five to fifty-five years of age who work outside the home and whose children have moved out on their own, allows firms to give very close attention to the needs and wants of their highly specific segments. Concentrated Marketing differs from Differentiated Marketing primarily in that concentrated marketing focuses on only a few segments, (Marketing Niches), while differentiated marketing focuses on numerous segments. LO 4 FOUR SEGMENT TYPES IN THE BUSINESS MARKET The business market is a bit different from the consumer market, as you would expect, and businesses divide it into four broad segments: producers, resellers, institutions, and governments. Producers are the same as manufacturers of products, and resellers are the same as retailers. Institutions are organizations that deal with large numbers of consumers or clients at one time, such as schools, hospitals, and prisons while governments include all levels from municipalities through counties and states to the federal government. Marketers who sell Business-to-Business (B2B) usually sell to only one of the business market segments. LO 5 THREE BASES FOR SEGMENTING THE BUSINESS MARKET Just as the segments of the Business Market are different from those in the Consumer Market, the bases for dividing the Business Market are also different. In the business arena, bases for segmenting the market are Company Characteristics, Buying Processes, and Customer Relationships. Segmenting by Company Characteristics means using information about the type of customers that potential purchasing companies have, the companies use of the marketers products, and the size of the companies at whom marketers are aiming. Marketers also include geographic location in this type of segmenting because their firms can benefit by selling to geographically concentrated industries. For example, companies that create, print, and cut fabric often locate in geographic areas near the clothing industry to reduce storage and transportation costs.

The Marketing Mixes 53 Segmenting by customer type, however, helps companies to focus on tailoring merchandise mixes to the unique needs of specific businesses or industries based on who their PTMs are. Firms that segment by customer type center on types of companies whose needs they can address. An example of segmenting by customer type in the business market is doctors offices and pharmacies that purchase specific types of medicines. Generally, the use of the product parallels the type of customer (children s medicines for pediatricians, specialized medicines for elder care, and so forth). Size of company is usually a consideration no matter which other segmenting base a firm uses simply because the size of the client company often dictates the amount of product that a manufacturer will have to make. Firms must be sure not to promise an amount of product that they cannot make and deliver. Segmenting by Buying Processes of client companies requires producers to research how those clients buy. For example, they may determine whether their client companies are most interested in buying from manufacturers who make only high-quality products or who are able to deliver products to them in less time than other manufacturers. Other considerations may be that client companies will do business only with manufacturers who provide technical support or special distribution services. Whatever the characteristics of the buying process, the manufacturing company must provide what the client company wants or lose the client. Paralleling the Customer Orientation Era in marketing, some companies have begun to segment their business markets by the types of relationships that they themselves have with their client companies. Rather than considering the size of a client company, for instance, a firm may evaluate its relationship with the client by how efficiently it can serve the client and how long the client will remain a client because of that efficiency.

LEARNING OUTCOMES EXPLAINED LO 1 EXPLAIN THE FOUR CRITERIA FOR SEGMENTING THE CONSUMER MARKET. Marketers segment (divide) the market using four criteria. (1) Each segment must be identifi able and measurable. Marketers must be able to distinguish consumers who are most likely to buy their products. (2) Each segment must be sustainable and have enough potential customers to be useful as profi table for the company. A segment must have enough potential buyers of marketers products and/or services to make it worthwhile for them to create a special mix of products specifi cally for that segment. (3) Each segment must be accessible to marketing efforts. Marketers must be able to place their products where consumers can purchase them, and they must be able to reach those consumers with advertising and customer service. (4) Each segment must be responsive to specifi c marketing efforts in a way or ways unlike any other segments. If consumers in a segment respond in a manner very similar to that of consumers in 54

other segments, there is no reason for promoters to create a separate way to market to that segment. LO 2 DESCRIBE THE FIVE BASES FOR SEGMENTING CONSUMER MARKETS. Marketers use fi ve bases for dividing consumer markets. (1) Geographic Segmentation is the dividing of an overall market into groups of consumers that are alike based on their locations. (2) Demographic Segmentation is the dividing of an overall market based on the characteristics of the human population in the segment. (3) Psychographic Segmentation uses information about the beliefs and values of consumers to divide the market. (4) Benefi t Segmentation is the grouping of consumers on the basis of the desirable consequences that they seek from specific products. (5) Usage-Rate Segmentation (By-Volume Segmentation) is the dividing of an overall market by the amount of product consumers buy or consume. 55

LO 3 DESCRIBE THE THREE MARKET SEGMENTATION STRATEGIES. Marketing fi rms have three strategies from which to choose when they plan how to segment the market. (1) An Undifferentiated Marketing Strategy aims at the entire market with a product it believes will have mass appeal. (2) A Differentiated Marketing Strategy aims at several segments at the same time with a different strategy for each segment. (3) Firms that use a Concentrated Marketing Strategy focus on only one or a few segments in the market; they concentrate on those segments. LO 4 DESCRIBE THE FOUR SEGMENT TYPES IN THE BUSINESS MARKET. The Business Market has only four different segment types: (1) Producers (or manufacturers), (2) Resellers (or retailers), (3) Institutions (or organizations), and (4) Governments of all levels from municipalities through federal jurisdictions. 56

LO 5 DESCRIBE THE THREE BASES FOR SEGMENTING THE BUSINESS MARKET. Marketers use three bases for segmenting their business markets: (1) Company Characteristics, which means the location of the client company, the type of customer a client company serves, the client company s use of the product, and the size of the client company. (2) Segmenting by Buying Processes means that marketers research how their client companies buy products. For example, they may buy only high-quality products or from manufacturers who can deliver products to them in less time than other manufacturers. (3) Some companies segment their business markets by the types of Customer Relationships they themselves have with their client companies. 57

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ADVERTISING Kheng Guan Toh, 2010. Used under license from Shutterstock, Inc.

LEARNING OUTCOMES LO 1 DEFINE THE TERM ADVERTISING. LO 2 EXPLAIN THE MAJOR PRINT MEDIA. LO 3 DISCUSS THE MAJOR ELECTRONIC MEDIA. LO 4 EXPLAIN OUTSIDE ADVERTISING. LO 5 DISCUSS PUBLIC RELATIONS. 62