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Segmentation, targeting and positioning
Objectives After reading this chapter you should be able to:
- describe the main methods of segmenting markets;
- explain how segmentation aids profitability;
- decide whether a given segment is sufficiently profitable to be worth targeting;
- explain the purpose of segmentation;
- develop ways of assessing the economic viability of segments;
- explain the growth of segmented markets;
- establish strategies for dealing with segmented markets;
- describe perceptual mapping;
- describe the main issues surrounding the positioning of brands.
Reasons for segmenting markets 75
INTRODUCTION
The segmentation concept was first developed by Smith in 1957,^1 and is con- cerned with grouping consumers in terms of their needs. The aim of segmentation is to identify a group of people who have a need or needs that can be met by a single product, in order to concentrate the marketing firm’s efforts most effectively and economically. For example, if a manufacturer produces a standardised product by a mass-production method, the firm would need to be sure that there are sufficient people with a need for the product to make the exer- cise worthwhile. The assumptions underlying segmentation are:
- Not all buyers are alike.
- Sub-groups of people with similar behaviour, backgrounds, values and needs can be identified.
- The sub-groups will be smaller and more homogeneous than the market as a whole.
- It is easier to satisfy a small group of similar customers than to try to satisfy large groups of dissimilar customers.^2
Targeting is concerned with choosing which segments to aim for. Segmentation is essentially about dividing up the market; targeting is about the practicalities of doing business within the market. The two are clearly closely linked, since the segmentation process will usually provide information as to which segments are likely to prove most profitable, or will help the firm achieve its strategic objec- tives in other ways. Positioning is concerned with the brand’s relationship with other brands aimed at the same segment. Positioning is about the place the brand occupies in the minds of the consumers, relative to other brands.
REASONS FOR SEGMENTING MARKETS
Each consumer is an individual with individual needs and wants. On the face of it, this creates a major problem for the marketer, since it would clearly be impossi- ble to tailor-make or customise each product to the exact requirements of each individual. Before the Industrial Revolution most products were individually made. This proved to be expensive, and essentially inefficient once mass-production tech- niques had come into being. Unfortunately, mass-production (taken to the extreme) means a reduction in the available choice of product, since the best way
SEGMENTATION VARIABLES
A segment must fulfil the following requirements if it is to be successfully exploited:
- It must be measurable, or definable. In other words, there must be some way of identi- fying the members of the segment and knowing how many of them there are.
- It must be accessible. This means it must be possible to communicate with the segment as a group, and to get the product to them as a group.
- It must be substantial , i.e. big enough to be worth aiming for.
- It must be congruent , that is to say the members must have a close agreement on their needs.
- It must be stable. The nature and membership of the segment must be reason- ably constant.
The three key criteria are accessibility, substance and measurability,^3 but it is important also to look at the causes underlying the segmentation.^4 This enables the marketer to anticipate changes more easily and sometimes to verify that the segmentation base is correctly defined.
Segmentation variables 77
Advantage Explanation
Customer analysis By segmenting, the firm can get to understand its best customers better.
Competitor analysis It is much easier to recognise and combat competition when concentrating on one small part of the overall market.
Effective resource Companies’ scarce resources can be concentrated more effectively on a few allocation consumers, rather than spread thinly across the masses.
Strategic marketing Planning becomes easier once the firm has a clear picture of its best customers. planning
Expanding the market Good segmentation can increase the overall size of the market by bringing in new customers who fit the profile of the typical customer, but were previously unaware of the product.
TABLE 4.1 Advantages of segmentation
There are many bases for segmenting, but the following are the main ones:
- Geographic. Where the consumers live, the climate, the topology, etc. For exam- ple, cars in California almost always have air-conditioning; cars in Sweden have headlights that stay on constantly because of the poor quality of the light for much of the year. Geographic segmentation is very commonly used in international marketing, but is equally useful within single nations. - Psychographic. Based on the personality type of the individuals in the segment. For example, the home insurance market might segment into those who are afraid of crime, those who are afraid of natural disasters, and those who are afraid of accidental damage to their property. - Behavioural. This approach examines the benefits, usage situation, extent of use and loyalty. For example, the car market might segment into business users and private users. The private market might segment further to encompass those who use their cars primarily for commuting, those who use their cars for hobbies such as surfing or camping, and those who use the car for domestic duties such as shopping or taking children to school. The business market might segment into ‘prestige’ users such as managing directors and senior staff, or high-mileage users such as salespeople. - Demographic. Concerned with the structure of the population in terms of ages, lifestyles, economic factors. For example, the housing market can be divided into first-time buyers, families with children, older retired people, and elderly people in sheltered accommodation; equally, the market could be segmented according to lifestyle, with some accommodation appealing to young profes- sionals, some appealing to country-lovers, and so forth.
Geographic segmentation
Geographic segmentation may be carried out for a number of reasons.
- The nature of the product may be such that it applies only to people living within a specific area, or type of area. Clothing manufacturers know that they will sell more heavy-weather clothing in cold coastal areas than in warm inland areas.
- If the company’s resources are limited, the firm may start out in a small area and later roll out the product nationally.
- It might be that the product itself does not travel well. This is true of sheet glass, wedding cakes and most personal services such as hairdressing.
Markets may be segmented geographically according to the type of housing in the area. Firms that supply products specifically aimed at elderly people may
78 Chapter 4 • Segmentation, targeting and positioning
government statistics. Demographics is the study of how people differ in terms of factors such as age, occupation, salary and lifestyle stage. Typically, demographic segmentation revolves around age. While this is rele- vant in many cases, it is often difficult to see the difference between, say, a 20-year-old’s buying pattern and a 30-year-old’s buying pattern. Equally, it cannot be said with much reliability that all 10-year-olds share the same tastes. There are undoubtedly 10-year-olds who would not want to visit Disneyland or Luna Park, and 10-year-olds who would prefer duck à l’orange to a hamburger. Age is, of course, relevant but it should be included as part of a range of meas- ures, not relied upon on its own. As we saw in Chapter 2, demographic variables are shifting over time, as the birth rate falls and the average age of the population rises. In addition, the number of single-person households is rising as people marry later and divorce rates increase: in 2001, single-person households represented 30% of UK house- holds.^7 The implications of this one change for marketers are far-reaching; here are some of the possibilities:
- Increase in sales of individual packs of food.
- Increase in sales of recipe products and ready meals.
- Decrease in sales of gardening equipment and children’s items.
- Increase in sales of mating-game items.
- Decrease in family-sized cars, packs of breakfast cereal, cleaning products, etc.
In Australia, immigration from South-East Asia is causing major changes in eating habits, religious observances and the linguistic structure of the country. In some cases, marketing activities have themselves contributed to a cross-fertilisa- tion of cultural behaviour, so that individuals from one ethnic group behave in ways more usually associated with another group. This culture swapping means that ethnic and racial segmentation is no longer possible in most cases.^8 Overall, demographic change means that new segments are emerging, some of which offer greater opportunities to marketers than do the segments they replace. Marketers need to monitor these changes in the demography if they are to remain able to segment the market effectively. Not all segmentation variables will be appropriate to all markets. A pizza com- pany might segment a market geographically (locating in a town centre) but would not segment by religion; the situation would be reversed for a wholesale kosher butcher. This is despite the fact that both firms are in the food business. Single-variable segmentation is based on only one variable, for example size of firm. This is the simplest way to segment, but is also the most inaccurate. To achieve multivariable segmentation , several characteristics are taken into account. The more characteristics are used, the greater the accuracy and effective- ness, but the smaller the resulting markets.
80 Chapter 4 • Segmentation, targeting and positioning
SEGMENTING INDUSTRIAL MARKETS
Industrial or organisational markets can be, and are, segmented by marketers according to the following criteria:
- Geographic location. Probably the commonest method, since most organisational markets are serviced by salespeople, and geographical segmentation enables the salesperson to make best use of drive time. Often firms in the same indus- try will locate near each other, perhaps because of availability of raw materials, or for traditional reasons to do with availability of local skilled workers. - Type of organisation. IBM segments its market according to the industry the cus- tomer is in. This means that some IBM salespeople specialise in banking, others in insurance, others perhaps in local government applications of the equipment. - Client company size. Many companies have separate salesforces to deal with large accounts. - Product use. Oil companies have separate strategies (and sometimes separate subsidiaries) for marketing household central-heating oil, for the plastics industry, for petrochemicals and for automotive sales. - Usage rate. Customers who use large quantities of a given product will expect (and get) different treatment from customers who buy only in small quantities. This is partly because their needs are different, and partly because the supplier will tend to value the large buyer over the small buyer.
Bonoma and Shapiro^9 suggest a nested approach to organisational market seg- mentation. This approach entails starting with broad characteristics such as the type of industry and the size of the organisations in it, then narrowing the seg- ment by working through operating variables (processes, product types, etc.), then looking at the purchasing approach of the organisations, followed by situa- tional factors such as delivery lead times and order size, and finally looking at the individual types of buyer in each firm. For example, a glass manufacturer might begin by segmenting according to type of industry (window glass for construction, toughened glass for cars, bottles and jars for food packaging). Within the food packaging market the industry might break down further to pickles and sauces, wines and beers, and soft drinks. The wine and beer bottle market may further break down into major brewers and bottlers who buy in large quantities, and small privately owned vineyards who buy on a once-a-year basis. Some of the brewers may buy by tender, some may prefer to use a regular supplier, and some may have special requirements in terms of bottle shape or design. As in consumer markets, it is not necessarily the case that buyers act from wholly rational motives (see Chapter 3), so it would be unreasonable not to
Segmenting industrial markets 81
the premium is higher than the cost, it may be worthwhile but the firm must still take account of the reduction in unit sales overall.
TARGETING
Having divided the market into segments, managers must decide which segment will be the best to target, given the firm’s overall objectives. Normally managers would choose the most profitable segment, but equally a firm may decide to aim for a particular segment of the market that is currently neglected, on the grounds that competitors are less likely to enter the market. The process of selecting a segment to aim for is called targeting. There are three basic strategic options open to marketers.
1 Concentrated marketing (single segment). This is also known as niche market- ing ; Tie Rack, Sock Shop and Knickerbox follow this approach. The niche marketer concentrates on being the very best within a single tiny segment.
2 Differentiated marketing (multisegmented) means concentrating on two or more segments, offering a differentiated marketing mix for each. Holiday Inn aims to attract business travellers during the week, but aims for the leisure market at the weekend, and promotes to families. At the weekend, the hotels often have events for children and special room rates for families. 3 Undifferentiated marketing is about using a ‘scattergun’ approach. The pro- ducers who do this are usually offering a basic product that would be used by almost all age groups and lifestyles. For example, the market for petrol is largely undifferentiated. Although oil producers occasionally try to differenti- ate their products by the use of various additives and detergents, the use of petrol is much the same for everybody, and there would not appear to be any relationship between segmentation variables and petrol use. It would be diffi- cult to imagine any real adaptation to the product that would meet people’s needs sufficiently well to merit a premium price. Such examples of undifferen- tiated products are increasingly rare; even the producers of such basic commodities as salt and flour have made great strides forward in differentiating their products (i.e. meeting consumers’ needs better).
The decision regarding which strategy to adopt will rest on the following three factors:
- the company’s resources ,
- the product’s features and benefits , and
- the characteristics of the segment(s).
Targeting 83
Clearly if resources are limited the company will tend to adopt a concentrated marketing approach. This is the approach taken by the UK firm High and Mighty, a menswear retailer that specialises in clothing for exceptionally tall and excep- tionally large men, and has become highly successful even though their market (men over 6 ft 4 in [1.9 metres] tall, or over 25 stone [160 kg] in weight) is actually very small in absolute terms. The reason for the success is that men of this size are not catered for at all by the big chain retailers, and the alternative used to be to have everything tailor-made. High and Mighty is able to produce in sufficient quantities to keep prices reasonable (though considerably higher than chain store prices) while still catering for its segment. A higher level of resourcing coupled with a range of segments to approach will lead to a differentiated approach, and a simple made-for-everybody type product will lead to an undifferentiated approach. Table 4.2 shows this in action. Companies with a small resource base are often unable to make their voices heard in mass markets simply because they cannot afford the level of promo- tional spend. They therefore need to segment, perhaps by starting out in a small area of the country (geographical segmentation) and gradually spreading nation- wide as resources become available. Table 4.3 shows the decision matrix for choosing a segment to target. The mar- keting strategy should be tailored to fit the intended audience: this means that each of the seven Ps, and every element of the promotion mix, needs to be built around the segment. Accurate targeting is best achieved by carrying out detailed market research into the needs and wants of the target group (see Chapter 5). In this way the com- pany is able to decide what to offer the target audience to improve on the competitors’ offering. Note that three factors are being taken into account here. Firstly, what do the consumers in the target segment need? Secondly, what is already available to them? Thirdly, what can the firm offer that would be better than what is currently available?
84 Chapter 4 • Segmentation, targeting and positioning
Type of product High-differentiation consumers Low-differentiation consumers
High-resource company Mass market Differentiated Undifferentiated Specialist market Differentiated Concentrated
Low-resource company Mass market Concentrated Differentiated (perhaps geographically) Specialist market Concentrated Concentrated
TABLE 4.2 Resourcing and degree of differentiation
Choosing the right market and then targeting it accurately are possibly the most important activities a marketer carries out. Choosing the wrong segment to target, or still worse not attempting to segment the market at all, leads to lost opportunities and wasted effort. Accessing the target market is another issue that deserves attention. For a seg- ment to be viable, it needs to be accessible via some communications medium or another: the segment may comprise people who read a particular magazine or watch a particular TV station. If there is no way to reach the segment, it cannot become a target market. In some cases the segment is defined by the medium: for example, Cosmopolitan readers represent a group of independently minded women with career aspirations, usually with high disposable incomes or aspira- tions in that direction, and interests that are more likely to run to business issues than to knitting patterns. These women represent a valuable market segment in their own right, but can probably only be easily identified as a group because they read Cosmopolitan.
86 Chapter 4 • Segmentation, targeting and positioning
Strategy Explanation Example
Product/market Niche marketing; the company Tie Rack, Sock Shop concentration takes over one small part of the market.
Product specialisation Firm produces a full line of a Campbell’s Soup specific product type.
Market specialisation Firm produces everything that Titleist golf clubs, golf balls, tees, caddies a specific group of consumers needs.
Selective specialisation Firm enters selective niches British Telecom sells telephone services to that do not relate closely to consumers and industry, but also owns each other, but are profitable. satellite time, which it sells to TV broadcasters and others
Full coverage Firm enters every possible Mitsubishi Industries, which produces segment of its potential market. everything from musical instruments to supertankers
TABLE 4.4 Market coverage strategies
POSITIONING
Positioning has been defined as: ‘The place a product occupies in a given market, as perceived by the relevant group of customers; that group of customers is known as the target segment of the market.’^11 Usually positioning refers to the place the product occupies in the consumer’s perceptual map of the market: for instance as a high-quality item, or as a reliable one, or perhaps as a cheap version. The product is positioned in the perceptual map alongside similar offerings; this is a result of the categorisation and chunking processes (see Chapter 3). Consumers build up a position for a product based on what they expect and believe to be the most pertinent features of the product class. Marketers therefore need to find out first what the pertinent features of the products are in the target consumers’ perceptions. The marketer can then adjust the mix of features and benefits, and the communications mix, to give the product its most effective posi- tion relative to the other brands in the market. Sometimes the positioning process is led by the consumers, sometimes by the marketers. Research shows that consumers use a relatively short list of factors in deter- mining the position of a product.^12 These are as follows:
- Top-of-the-range. This refers to the product which consumers believe to be the most expensive or ‘the best’. In the UK, this is often called ‘the Rolls-Royce of …’ whichever product type is under discussion.
- Service. The service levels which surround the product can be an important factor.
- Value for money. This is the degree to which the product’s benefits represent a fair exchange for the price being asked.
- Reliability. Products are often positioned as being more (or less) reliable than their competitors.
- Attractiveness. This can refer to factors other than appearance, but implies fac- tors other than the purely practical, performance-related factors.
- Country of origin. Some countries have a reputation for producing the best examples of some categories of product. For example, German engineering is highly regarded, whereas the French are known for their food and wine.
- Brand name. Branding is a key issue in positioning, as it identifies the product and conveys an impression of its quality (see Chapter 6).
- Selectivity. The degree to which the consumer can distinguish between brands and select from the range is a factor in positioning.
Ultimately, product positioning depends on the attitudes of the particular target market, so the marketer must either take these attitudes as they are and
Positioning 87
would be a cheap, everyday brand. Brand A has a problem: although tending towards a high price, this product is perceived as being below-average quality. Sales are likely to be low, or will take place only when the consumer has no other choice available. Brand C, on the other hand, enjoys a low price and good quality, so is probably the top-selling brand (value-for-money factor). It should be noted that these positions are based on average responses from consumers in the target groups. They are not objective, nor are they based on the firm’s view of the quality of its products. For this reason, they can sometimes be changed by promotional efforts. Far more commonly, though, the firm will need to do something more practical about changing the product or changing its price to make the necessary changes. In Figure 4.2, the products have been mapped against only two dimensions, but it is perfectly possible (perhaps even advisable) to map the product against more dimensions. This can be done on a computer using multidimensional map- ping software. One of the most useful tactical aspects of positioning maps is that they can be used to identify gaps in the market. Using Figure 4.2 as an example, there is clearly a gap next to Brand A and below Brand B for a medium-to-high quality product at a medium-to-high price. Currently this market seems to be dominated by lower-priced brands; a brand entering this market would need to be perceived as higher quality than Brand C, but at a lower price than Brand B.
SALES FORECASTING
Having segmented the market, targeted the appropriate segments, and decided on a positioning strategy, the firm is in a better position to forecast the expected sales of the product. Two overall strategic approaches to sales forecasting exist: break-down and build-up. The break-down approach begins with the overall market for the product cate- gory and seeks to predict what the firm’s share of that market will be. For example, a bank may have access to government economic forecasts which can be used to calculate the total loans market for the following year. The bank forecast- ers will know what the bank’s share of the market was in previous years, and can use this information to make a reasonable estimate of what the bank’s total lend- ing will be in the ensuing year. The build-up method, on the other hand, begins with the market segments (and even individual consumers) and builds up to a total market share. The bank in the above example might begin with an estimate of how many home loans it might make (based on market research), and how many business loans, how many car loans, and so forth. By adding these figures together, an overall esti- mate of the total sales for the following year is arrived at.
Sales forecasting 89
Sales forecasts help to determine the viability of a segment, and also help the firm to plan its budgets and indeed virtually all of its other activities. Forecasting the future is always difficult; many firms rely on executive judgement , using the skill and experience of its senior people in deciding whether a product is a winner or not. Unfortunately this approach can fail because the executives will favour a product that they would buy as private consumers, rather than a prod- uct that the target market segment would buy. Through a customer survey firms are able to ask potential customers how much of a given product they are likely to buy within the next 12 months or so. These intent-to-buy studies work best for existing product categories; for a radi- cally new product it is much more difficult, since only the most innovative of consumers will be able to say with any certainty that they would be prepared to buy the product early in its launch. The main drawback with this method is that customers may intend to purchase, but change their minds during the course of the year, perhaps owing to a competitor’s actions. Other firms may use a salesforce survey , asking the salesforce how much of a given product they might expect to sell over the next 12 months. This has the advantage that the salespeople, unlike the senior management, are usually close to the customer and are able to make judgements based on this. Also the sales- people will be wary about making rash forecasts that they might later be held to. On the other hand, salespeople generally like to be consulted about their own tar- gets and quotas. A variation on the salesforce survey is the distributor survey , where the company’s distributors are asked how much they expect to sell over a specific period. Since the distributors will be giving the total sales in the product category (e.g. off-licences might be asked how much whisky they expect to sell in the next 12 months) the company will then have to make a judgement regarding the amount of market share they might reasonably expect to capture. The Delphi approach involves taking in the managers’ and salespeople’s fore- casts, combining them centrally, then sending the aggregate forecast back to the individuals concerned for revision. This approach has proved popular with firms because it tends to produce a consensus of opinion that all those concerned can adhere to. A problem with using Delphi might be that individuals will only make forecasts that they are quite sure are achievable: in other words, they might underestimate the possible sales rather than risk being unable to hit targets. Time-series analysis uses the company’s past sales records to predict what will happen in the future. Although this can be quite accurate, it does not take account of the unexpected – a sudden entry by a competitor, a change in legisla- tion, or a change in the company’s fortunes through takeover or merger. Few forecasting methods can take account of these factors, of course, and ultimately the company has to plan in some way. Time-series forecasters usually perform four types of analysis, as shown in Table 4.5.^13 Having carried out each of these analyses, the forecaster is able to combine the results to develop the sales forecast. Time-series analysis works best for well-established products with fairly stable purchasing patterns. It is not suitable for new products or for products with erratic demand cycles.
90 Chapter 4 • Segmentation, targeting and positioning
92 Chapter 4 • Segmentation, targeting and positioning
In the 1950s most British people holidayed within the UK, at resorts such as Blackpool, Brighton, Rhyl, Bognor Regis or Bournemouth. In most cases, these resorts drew their custom from nearby cities – Manchester and Liverpool for Blackpool, London for Bognor Regis and Brighton, and so forth. However, the advent of the jet aircraft made flying much cheaper, and during the late 1950s and early 1960s package holidays to foreign countries began to become popular. Air-inclusive tours (AITs) boomed during the next 20 years, but as travellers became more sophisticated the idea of a package holiday became less appealing
- people wanted to set their own agendas on holiday. During the 1990s cheap airlines became established, and the main advantage of the AIT (low overall cost) was eroded. The range of choice of holiday is now vast, to take account of the variety of cus- tomer needs and customer experiences. At one end of the spectrum, there are holidaymakers who look for an organised tour from a knowledgeable firm, where the holiday experience is managed almost entirely by the tour operator. Examples of this include guided tours of Egyptian antiquities, cruises, or two-centre holi- days where the customers spend part of their time in a major city and part of their time on a beach somewhere. At the other end of the scale, backpackers and independent travellers book themselves a flight, and find their hotels or hostels when they arrive, needing no more than a good guide book and a smattering of the local language. For firms in the holiday industry, segmenting the market is therefore complex. Package holidays might be AIT or non-AIT (mostly self-drive tours to Ireland or France). The market could be segmented by destination (France, Spain, Greece and North America are the most popular destinations for Brits). The market may be segmented by degree of independence of the holidaymakers. It may even segment by income – backpackers are at the budget end, whereas many people in their 50s and 60s have high disposable incomes and take luxurious holidays. Some holidaymakers look for specific activities (skiing, sightseeing, surfing, etc.). There were 954 000 ski trips taken from the UK in the 2001/2002 season alone, according to researchers Mintel. Packages aimed at such customers sometimes include tuition or expert guides. Other holidays aim at relaxation – but even here the market can be segmented. There is a great deal of difference between a relaxing holiday aimed at 18 to 30 year olds and one aimed at families with small children. The final complication for holiday companies is that individuals often shift from one segment to another. The young people looking for a lively night-life five years ago might be looking for a quiet location where their children can be entertained this year. Equally, someone who backpacked across India five years ago might be a rising executive looking for a honeymoon trip on the Orient Express this year. Even within a shorter space of time, it would not be unusual for someone to take a cheap, self-organised holiday for one chunk of leave and take a more organised package holiday later in the same year. Over a longer period of time, backpackers become family people and eventually become well-off older people – people aged
93
This chapter has been about ways of dividing markets up into manageable por- tions. Here are the key points from this chapter:
- There are few, if any, mass markets left untouched.
- If most consumers already own the core benefits of a product, the market must be segmented if success is to follow, since there is otherwise no reason for consumers to switch brands.
- Segments must be measurable, accessible, substantial and congruent.
- The profitability of a segment is calculated as the number of people in the segment multiplied by the premium they are willing to pay.
- The narrower the segment the fewer the customers, but the greater the satisfaction and the greater the premium they are willing to pay (provided the segment has been correctly identified).
- There are many ways to segment a market, in fact as many ways as there are groups with congruent needs.
- Targeting is concerned with selecting an appropriate segment or segments, and approaching it in a consistent and effective way.
Summary
SUMMARY
over 50 are among the most affluent in the country, and also frequently have the most spare time available to enjoy foreign holidays. Undoubtedly the package holiday is not yet dead, but the strongest growth is in the independent sector. How tour operators will counter this trend remains to be seen.
Questions
1 What bases for segmentation might be appropriate in the holiday business? 2 Which segments are likely to show the strongest growth in the next 10 years? 3 Which segments are likely to shrink in the next 10 years? 4 How might tour operators respond to the growth in the independent sector? 5 How might a holiday marketer track people who apparently shift from one segment to another?
