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, we saw that the essential building blocks for creating a strong marketing program rests with marketing research and a deep understanding of customers. With this groundwork in place, it is now time to turn our attention to strategic decisions undertaken by the marketer to address customers’ needs and help the organization meet its objectives.
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 mindset 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?
With this groundwork in place, it is now time to turn our attention to strategic decisions undertaken by the marketer to address customers’ needs and help the organization meet its objectives. 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, and
- Can be reached by the marketer.
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 organization’s ability to service the market. To an organization, a market can only exist if the solutions sought by customers are ones that the organization 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.
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Target Markets and Market Segmentation
The markets selected by an organization as the target for their marketing efforts (i.e., target markets) 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 organization 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 manufactured 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.
Because people are different and seek different ways to satisfy their needs, nearly all organizations, whether for-profits or not-for-profits, industrial or consumer, domestic or international, must use a market segmentation approach to target marketing. This approach divides broad markets, consisting of customers possessing different characteristics, into smaller market segments in which customers are grouped by characteristic shared by others in the segment.
To successfully target markets using a segmentation approach, organizations should engage in the following three-step process.
- Identify segments within the overall market
- Choose the segment(s) that fits best with the organization’s objectives and goals
- Develop a marketing strategy that appeals to the selected target market(s)
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 who: 1) possess specific needs (e.g., seek electric-powered automobiles), and 2) who 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 marketing 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 skills and other 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 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.
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 generally benefits from accomplishing the segmentation task in a short time frame and at lower cost.
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Stage 2 Segmentation Variables
Some firms, especially organizations with limited funds or those who feel they need to move quickly to get their product to market, will stop the search for segmentation variables at the Stage 1 level. However, moving beyond Stage 1 segmentation offers a rich amount of customer information that will allow marketers to more effectively and efficiently target customers’ needs.
To segment using Stage 2 variables, marketers must use research techniques that help gain insight into customers’ current purchase situation and the environment in which the customer operates. Information at this stage includes learning what options customers have chosen to satisfy their needs, what circumstances within customers’ environment could affect how purchases are made, and understanding local conditions that could impact purchase decisions. Marketers might locate some of this information through the same sources used in Stage 1 (e.g., may find out brands most frequently purchased) but most variables in Stage 2 require the marketer to engage in at least casual contact with customers in the market. This can be done through primary research methods, such as surveying the market, having sales personnel contact customers, purchasing research reports from commercial research firms, or hiring consultants to undertake research projects. The cost and time needed to acquire this information may be significantly greater than that of Stage 1 segmentation.
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Stage 3 Segmentation Variables
Marketers choosing to segment at the Stage 3 level face an enormous challenge in gathering useful segmentation information but, for those who do commit to segmenting at this level, the rewards may include gaining competitive advantage over rivals whose segmentation efforts have not dug this deep. However, to reach the reward the marketer must invest significant time and money to amass the detailed market intelligence needed to achieve Stage 3 segmentation. Additionally much of what is needed at Stage 3 is information that is often well protected and not easily shared by customers. In fact, many customers are unwilling to share certain personal information (e.g., psychological) with marketers with whom they are not familiar.
Consequently, segmenting on Stage 3 variables is often not an option for marketers new to a market unless they acquire this via other means (e.g., hire a consultant who knows the market). To get access to this information, marketers who already serve the market with other products may be able to use primary research such as focus groups, in-depth interviews, observation research and other high-level marketing research techniques. Additionally, companies with existing customer relationship management (CRM) technologies may be in position to tap into their customer information in order to identify customer characteristics that may potentially lead to new segments.
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Step 2: Choosing Market Segments
The second step in selecting target markets requires the marketer to evaluate critically the segments identified in Step 1 in order to select those which are most attractive. For small firms, this step may not be very involving since they may lack the resources needed to do it effectively. Consequently, these firms are often left with using their own intuition or judgment to determine which segments are the most promising. For organizations with the time and money to commit to this step, the results may identify the segments that are primary candidates for current marketing efforts and also present segments that are future targets for the marketer’s offerings.
In determining whether a segment is worthy of being a target market, the marketer needs to address the following questions:
Is the segment large enough to support the marketer’s objectives? This is an especially critical question if the marketer is entering a market served by many competitors.
Is the segment showing signs of growth? One of the worst situations for a marketer is to enter a market whose growth is flat or declining, especially if competitors already exist.
Does the segment meet the mission of the organization? The segment should not extend too far beyond the direction the organization has chosen to meet its marketing objectives.
Does the organization have the necessary skills, knowledge, and expertise to service the segment? The marketer should understand and be able to communicate with customers in the segment, otherwise they may face a significant learning curve in understanding how to effectively market to a segment.
Once one or more segments have been identified the marketer must choose the most attractive option(s) for their marketing efforts. At this point the choice becomes the firm’s target market(s).
Step 3: Develop Marketing Strategy
The results of analyzing market segments leads the marketer to consider one of the following target marketing strategies.
Undifferentiated or Mass Marketing
Under this strategy, the marketer attempts to appeal to one large market with a single marketing strategy. While this approach offers advantages in terms of lowering development and production costs since only one product is marketed, there are few markets in which all customers seek the same benefits. This approach was very popular in the early days of marketing (e.g., Ford Model-T), but today few companies now view this as a feasible strategy.
Differentiated or Segmentation Marketing
Marketers choosing this strategy try to appeal to multiple smaller markets with a unique marketing strategy for each market. The underlying concept is that bigger markets can be divided into many sub-markets and an organization chooses different marketing strategies to reach each sub-market it targets. Most large consumer products firms follow this strategy as they offer multiple products (e.g., running shoes, basketball shoes) within a larger product category (e.g., footwear).
This strategy combines mass and segmentation marketing by using a single marketing strategy to appeal to one or more very small markets. It is primarily used by smaller marketers who have identified small sub-segments of a larger segment that are not served well by larger firms that follow a segmentation marketing approach. In these situations, a smaller company can do quite well marketing a single product to a narrowly defined target market.
Customized or Micro Marketing
This target marketing strategy attempts to appeal to targeted customers with individualized marketing programs. For micro marketing segmentation to be effective, the marketer must, to some degree, allow customers to “build-their-own” products. This approach requires extensive technical capability for marketers to reach individual customers and allow customers to interact with the marketer. Digital networks, in particular internet and mobile technologies, have been catalysts for micro-marketing strategy. As more companies become comfortable utilizing these technologies, micro marketing is expected to flourish.
No matter which target marketing strategy is selected, the overall marketing strategy should involve the process of positioning the firm’s offerings in ways that will appeal to targeted customers. Positioning is concerned with the perception customers hold regarding a product or company. In particular, it relates to marketing decisions an organization undertakes to get customers to think about a product or company in a certain way compared to its competitors.
The goal of positioning is to convince customers to believe the marketer’s offerings are different in some way from its competitors on an important benefit sought by the market. For instance, if a customer has discovered she has a need for an affordable tablet computer, a company, such as Google, may come to mind since its marketing efforts position its products as offering good value at a reasonable cost.
To position successfully the marketer must have thorough knowledge of the key benefits sought by the market. Obviously, the more effort the marketer expends on segmentation (i.e., reached Stage 3 segmentation) the more likely they will know the benefits sought by the market. Once known, the marketer must:
- Tailor marketing efforts to ensure their offerings satisfy the most sought after benefits, and
- Communicate to the market in a way that differentiates the marketer’s offerings from competitors.
For firms that seek to appeal to multiple target markets (i.e., segmentation marketing), positioning strategies may differ for each market. For example, a marketer may sell the same product to two different target markets, but in one market the emphasis is on styling while in another market the emphasis is on ease-of-use benefits. The important point is that the overall market strategy must be evaluated for each target market since what works well in one market may not work as well in another market.