Targeting Markets Tutorial
The first few sections of the Principles of Marketing Tutorials have introduced the basic concepts needed as a foundation for building a strong marketing program. In particular, it has emphasized the importance of understanding customers since they are the reason an organization is in business.
With customer knowledge in hand, it is now time to turn our attention to the process of addressing customers’ needs through actions undertaken by the marketer.
As we discussed in the What is Marketing? Tutorial these decisions include:
- Selecting Target Markets
- Developing Products/Services
- Creating Promotions
- Arranging Distribution
- Setting Price
- Adding Support Services
In this tutorial we examine decision #1 - how marketers determine which groups of customers to target. This is a critical point in marketing planning since all additional marketing decisions are going to be directed toward satisfying the markets selected.
For those new to marketing, selecting target markets may seem like a relatively easy decision to make. In fact, many inexperienced marketers will simply conclude that “We will just sell to whoever wants to buy.” However, this mind-set is both ineffective and inefficient as the marketer is likely to drain resources in their quest to locate those willing to buy. Using a target market approach an organization attempts to get the most from its resources by following a planned procedure for identifying customers that appear to be the best candidates to respond to the marketer’s message.
What is a Market?
The simplest way to define a market is to think of it as consisting of all the people or organizations that may have an interest in purchasing a company’s products or services. In other words, a market comprises all customers who have needs that may be fulfilled by an organization’s offerings. Yet just having a need is not enough to define a market. Many people may say they have a need for a California mansion that overlooks the Pacific Ocean but most would not be considered potential customers of a real estate agent who is attempting to sell such a property. So other factors come into play when defining a market.
The first factor is that markets consist of customers who are qualified to make a purchase. Qualified customers are defined as those who:
- Seek a solution to a need, and
- Are eligible to make a purchase, and
- Possess the financial ability to make the purchase, and
- Have the authority to make the decision.
Note that a customer must meet ALL factors listed above, though for some markets the customer may have a surrogate who will handle some of these qualifications for a targeted customer. For instance, a market may consist of pre-teen customers who have a need for certain clothing items but the actual purchase may rest with the pre-teens’ parents. So the parents could possibly assume one or more surrogate roles (e.g., financial ability, authority) that will result in the pre-teen being a qualified customer.
A second factor for defining a market rests with the company’s ability to service the market. To an organization a market can only exist if the solutions sought by customers are ones that the company can satisfy with their offerings. If a company identifies a group of customers who are qualified to make purchases they only become a market for the company once the company is in a position to execute marketing activities designed to service those customers.
Thus, for the purposes of this tutorial, a market is defined as a group of customers who are qualified to make purchases of products or services that a marketer is able to offer. However, even if an organization can offer products and services to a market, not all markets will fit an organization’s goals and objectives. With this in mind, we now turn our attention to examining the process marketers follow to choose which markets are best to target with their marketing effort.
Step 1: Identify Market Segments
The first step in targeting markets is to separate customers who make up large, general markets into smaller groupings based on selected characteristics or variables (also referred to as bases of segmentation) shared by those in the group. General markets are most often associated with basic product groups, such as automobile, beverage, footwear, home entertainment, etc. The purpose of segmentation is to look deeper within the general market in order to locate customers with more specific needs within the product group (e.g., seek hybrid automobiles) AND who also share similar characteristics (e.g., college educated, support environmental issues, etc.). When grouped together these customers may form a smaller segment of the general market. By focusing market research on these smaller segments the marketer can learn a great deal about these customers and with this information can begin to craft highly targeted marketing campaigns.
For this tutorial, we take the approach that the variables used to segment markets can be classified into a three-stage hierarchy with higher stages building on information obtained from lower stages in order to reach greater precision in identifying shared characteristics. Yet, the more precise a marketer wishes to be with their segmentation efforts the more this process requires sufficient funding and strong research capabilities. For instance, a marketer entering a new market may not have the ability to segment beyond the first two stages since the precision available in Stage 3 segmentation may demand an established relationship with customers in the market.
The three-stage segmentation process presented below works for both consumer and business markets (e.g., manufacturers, reseller, etc.), though, as one might expect, the variables used to segment these markets may be different. Each segmentation stage includes an explanation along with suggestions for variables the marketer should consider. This is not meant to be an exhaustive list, as other variables are potentially available, but for marketers who are new to segmentation these will offer a good starting point for segmenting markets.
Target Markets and Market Segmentation
The market selected by a company as the target for their marketing efforts (i.e., target market) is critical since all subsequent marketing decisions will be directed toward satisfying the needs of these customers. But what approach should be taken to select markets the company will target?
One approach is to target at a very broad level by identifying the market as consisting of qualified customers who have a basic need that must be satisfied. For example, one could consider the beverage market as consisting of all customers that want to purchase liquid refreshment products to solve a thirst need. While this may be the largest possible market a company could hope for (it would seem to contain just about everyone in the world!) in reality there are no commercial products that would appeal to everyone in the world since individual nutritional needs, tastes, purchase situations, economic conditions, and many other issues lead to differences in what people seek to satisfy their thirst needs.
Stage 1 Segmentation Variables
Stage 1 segmentation consists of variables that can be easily identified through demographics (i.e., statistics that describe a population), geographics (i.e., location issues) and financial information. For both consumer and business segmentation this information focuses mostly on easy to obtain data from such sources as government data (e.g., census information), examining secondary data sources (e.g., news media), trade associations and financial reporting services. While Stage 1 segmentation does not offer the segmentation benefits available with higher-level stages, the marketer benefits from accomplishing the segmentation task in a short time frame and at lower cost.
age group (e.g., teens, retirees, young adults), gender, education level, ethnicity, income, occupation, social class, marital status
location (e.g., national, regional, urban/suburban/rural, international), climate
type (e.g., manufacturer, retailer, wholesaler), industry, size (e.g., sales volume; number of retail outlets), age (e.g., new; young growth, established growth, mature)
location (e.g., national, regional, urban/suburban/rural, international), climate
ownership (e.g,. private versus public, independent versus chain), financial condition (e.g., credit rating, income growth, stock price, cash flow)