Chapter 7: Segmentation, Targeting and Positioning

Introduction

As markets differ in terms of needs and wants, companies have started to recognize that they cannot serve all market in the same way. On the other hand, companies also vary in terms of capabilities and resources. Therefore, they must design a marketing strategy in order to identify parts of the market they can serve best and profitably. Marketing strategy consists of three major steps; market segmentation, market targeting and positioning which will be discusses in this chapter in turn.

Market Segmentation

In many markets, consumers differ according to their needs, preferences and consumption patterns. These different patterns create subgroups of consumers behaving in a similar way. Market segmentation is the process of placing buyers in a market into subgroups in a way that members of each segment would display similar responsiveness to a particular positioning strategy. Through market segmentation, companies divide large, diverse markets into smaller segments that can be reached more efficiently and effectively through products and services that match their unique needs.

If the needs and other consumption patterns of the entire market were homogeneous, there would be no reason for companies to segment the market. But in reality, there are very few markets with homogeneous consumers. The opportunity for segmentation occurs when differences in buyers’ demand (response) function allow market demand to be divided into segments, each with a distinct demand function. Examining specific market segments, companies can understand the needs and expectations of the customers in that segment profoundly. By this means, the customer can be better served and satisfied within a segment compared to the total market.

Market segmentation consists of several interrelated activities and decisions (see Figure 7.1). The process begins with the definition of market to be segmented . After defining which market to segment, the second step is to decide how to segment this market. The third step in segmentation is to form segments. While forming segments , companies can use descriptive variables to define segments and compare these segments to see if significant response differences arise between the segments. After completing the formation of segments, the company can now utilize finer segmentation strategies. Increasing technological capabilities of customized productions and the need to become closer to their customers make companies turn towards very small segments, in some cases segments of one. Microsegmentation and mass customization are major approaches used in finer segmentation opportunities. At the final step, companies need to decide which segmentation approach they should use and evaluate the segments . There are five criteria used for evaluating the usefulness of segmentation:

• Measurable
• Accessible
• Substantial
• Differentiable
• Actionable

Measurable: The variables such as the size, purchasing power or the profiles of the segments can be measured.

Accessible: It must be possible to identify, reach and serve the market segments. In some cases, the company can describe the differences between the segments and these differences may create different responses, but in practice it may be impossible to identify which customers belong to which segments or reach/serve these customers.

Substantial: The market segments must be financially attractive and should be large or profitable enough to serve. It has no meaning to increase the costs by designing a different marketing mix for a segment that does not promise enough revenue for the company.

Differentiable: The variables used to segment the market should create subgroups that give different responses to different marketing activities of the company. For example, segmenting the market according to different income levels will not be an appropriate segmentation strategy if buyers with different income levels have similar reactions to different products/prices.

Actionable: Company must be able to design effective programs to attract and serve each segment. In other words, company should be able to take action for each of segments considered as a target market.

Ultimately, the chosen segmentation method should be analyzed on the basis of the costs incurred and the benefits gained.

There are four major segmentation variables used in consumer markets (see Table 7.1). These are:

• Geographic Segmentation
• Demographic Segmentation
• Psychographic Segmentation
• Behavioral Segmentation

Geographic Segmentation calls for dividing the market into different geographical units, such as nations, regions, states, counties, cities, or even neighborhoods. The demand for many products or services may differ between the urban and rural inhabitants.

In the last decade, new geographic segmentation methods emerged with the developments in information and communication technologies. Geodemographic segmentation is the statistical classification of people (demographics) based on where they live (geography).

A similar approach is called Geo-Clustering , which is a process of combining several variables with geographic variables to identify better-defined smaller segments. PRIZM is a segmentation tool developed by Claritas. The tool is built around geographic neighborhood data obtained through the United States and the households are grouped into one of 68 segments. All these segments are then grouped into one of 14 Social Groups (see Figure 7.2). PRIZM assumes that people around the same neighborhood have similar demographic characteristics. Moreover, they have similar attitudes and behaviors.

Geo targeting is also a new method used in Internet marketing. Based on the location of an Internet user, companies (web sites) offer different contents to different users. Locations can be determined by using country, region/state, city, metro code/zip code, organization, IP address or ISP etc. For example, Google AdWords and Facebook offer geo-targeting add options to the advertisers for more effective ads.

Geofencing is a location-based service in which an app or other software uses GPS, RFID, Wi-Fi or cellular data to trigger a pre-programmed action when a mobile device or RFID tag enters or exits a virtual boundary set up around a geographical location, known as a geofence. Companies can also use location based data to locate the physical positions of their customers and get the chance to propose the best offer to them.

Demographic Segmentation uses variables such as age, life-cycle stage, gender, income, occupation, education, ethnicity and generation to define segments. Demographic variables can be used for either dividing the market into segments or describing a segment created by using other variables.

As people mature or get older they enter new life stages and naturally their needs also differ or new ones arise. This method assumes that people with similar ages or lifecycle stages will have similar tastes or needs and, therefore, can be grouped based on these differences (see Table 7.2). For example, McDonalds have different menu options for children and adults. Another example is banking needs that can vary according to the stage on the life cycle. A young single person would have less financial needs while young couples with children under six years old would have more financial burdens and for this reason their loan needs are much more (mortgage, credit card, auto or bill consolidation loans etc.).

Gender differences are used as a base to divide a market for many products such as cosmetics, clothes, magazines, automobiles etc. Most women cosmetics brands are now using gender segmentation and focusing on men and promoting their men’s lines. Toys marketers frequently uses gender segmentation and color is one of the ways to differentiate their marketing offers targeting different segments. Blue colors are generally used for boys while pink/purple colors are used for girls.

Many marketers use income segmentation for different products and services. Marketers may prefer to focus on either upper end of the market and target affluent consumers with luxury products or they may prefer to focus on the low or middle income level customers with low cost strategies. For example, in Turkey BİM as a retailer targets low or middle-income segment while Macrocenter targets upper income classes.

Psychographic Segmentation divides consumers into different segments based on their lifestyles and personality variables.

Lifestyle segmentation extends beyond demographics and offers a more penetrating description of the segments. In lifestyle segmentation, different variables are used to segment consumers, such as their activities (how they spend their time), interests (what they place importance on in their immediate surroundings), opinions (how they view themselves and the world around them) and their basic demographics (see Table 7.3). An important and wellknown framework of lifestyle segmentation is VALS Model.

Personality of consumers affects what and how they consume, so it is one of the variables used by marketers segment the markets. A person’s personality reflects his traits, attitudes and habits. Hence, personality tests can be used to segment people across different personality types. Trait theory in psychology is an approach studying human personality that identifies and measures the degree to which certain personality traits – recurring patterns of thought and behavior, such as anxiousness, shyness, and openness to new things – exist from individual to individual. for the last two decades, most psychologists agree on five traits or factors that constitute personality. These factors or traits are called The Big 5 Personality Traits or OCEAN (an acronym): openness to experience, conscientiousness, extraversion, agreeableness and neuroticism.

Behavioral Segmentation divides buyers into segments based on their knowledge, attitudes, uses, or responses to a product. Behavioral segmentation can be classified under three fundamental segmentation variable; use situation, buyer’s needs/preferences and purchase behavior.

Consumer needs and preferences may vary according to product use situations , so marketers’ may prefer to use different variables such as occasions, importance of the purchase, and prior experience with the product or user status for segmentation. By using occasion segmentation, marketers divide the market into segments according to occasions when buyers get the idea to buy, actually make their purchase, or use the purchased item. Marketers can also segment their markets according to user status. For example, regular users, nonusers, potential users or first time users need different marketing strategies. Specific needs and preferences related to a product or a brand, such as brand loyalty or benefits sought can be used as segmentation bases. Through benefit segmentation, markets can be divided into segments according to different benefits that consumers expect from the product. Likewise, loyalty status also differs from customer to customer. Some may be more loyal to a brand, on the other hand, some others may prefer to use more than one brand and have no loyalty to any brand. Hence, marketers can segment their customers according to their loyalty degrees. Variables related to consumption, such as the size and frequency of a purchase are useful in segmenting consumer markets. For example, markets can be segmented into light medium and heavy users. Time of purchase may also be used as a segmentation base. For example, innovators who purchase a new product at the earliest receive much attention from marketers. Therefore, while launching a new product, innovators will become a crucial target segment for companies to diffuse rapidly in the market.

Business markets use many of the same variables used to segment consumer markets. Additionally, they use some other variables related to the characteristics of the organizations or purchasing approaches. For example, business markets can be segmented based on the type of industry, company size, geographic location, company technology, stage of development or being a producer and/or an intermediary. On the other hand, business markets can be segmented by using which purchasing approach they use. In addition, needs and preferences of businesses, such as performance and service requirements, brand preferences or desired features may change and affect segmentation decisions. At last, volume and frequency of the purchases play an important role as segmentation criteria for business markets.

Market Targeting

Once the firm has completed segmenting a market, it must then evaluate each segment to determine its attractiveness and whether it offers opportunities that match the firm’s capabilities and resources. There are so many factors that may affect market segment attractiveness. We can categorize these factors under four main themes (see Figure 7.3):

• Market Factors
• Economic and Technological Factors
• Competitive Factors
• Business Environment Factors

Market Factors: Size of the segment, Segment growth rate, Stage of industry evolution, Predictability, Price elasticity and sensitivity, Bargaining power of customers, Seasonality and cyclicality of demand

Economic and Technological Factors: Barriers to entry, Barriers to exist, Bargaining power of suppliers, Level of technology utilization, Investment required, Margins available

Competitive Factors: Competitive intensity, Quality of competition, Threat of substitution, Degree of differentiation.

Business Environment Factors: Exposure to economic fluctuations, Exposure to political and legal factors, Degree of regulation, Social acceptability and physical environment impact

After evaluation of possible segments, company has to decide which segment or segments to target. Target market is a set of buyers with common needs or characteristics that a company decides to serve. Companies have different target marketing options. They may choose to target very broadly, very narrowly or somewhere in between these two ends (see Figure 7.4). These are:

• Undifferentiated Marketing
• Differentiated Marketing
• Concentrated Marketing
• Micromarketing

Undifferentiated (mass) marketing is a market coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer. This strategy focuses on the common characteristics of a broad (mass) market and try to serve this market with a single product and marketing mix.

Differentiated (segmented) marketing is a marketcoverage strategy in which a firm targets several market segments and designs separate offers for each. This strategy focuses on the different characteristics or expectations of different segments in a bigger market and offer different products and marketing mixes for each segment.

Concentrated (niche) marketing is a market coverage strategy in which a firm goes after a large share of one or a few segments or niches. This approach supports the idea of being a big fish in a small pond instead of being a small fish in a big pond. By focusing on a small and welldefined niche segment, this approach lets the company to market more effectively and efficiently.

Micromarketing is tailoring products and marketing programs to the needs and wants of specific individuals and local customer segments. In segmented and concentrated marketing, marketers tailor their offers to meet the needs of various segments or niches but they don’t customize their offers to each individual customer. Micromarketing includes local marketing and individual marketing.

Local Marketing involves tailoring brands and promotions to the needs and wants of local customers. Cities, neighborhoods and even stores can be used as a basis for local marketing. Geolocation technologies help companies to locate their customers’ position and engage them with localized deals on their mobile devices wherever they are. This is called SoLoMo (social+local+mobile) marketing (see Figure 7.5).

Individual marketing –also labeled as one-to-one marketing, mass customization, and markets-of-one marketing - is tailoring products and marketing programs to the needs and preferences of individual customers.

Market segment analysis helps companies to evaluate the attractiveness of segments. However, while deciding which targeting strategy to choose, companies need to determine several factors that influence their targeting strategy together with attractiveness. These are: Stage of product-market maturity, Extent of diversity in buyer preferences, Industry structure, Organizational capabilities and resources.

Positioning Strategy

Positioning is differentiating the brand from other brands in consumer minds. Positioning is not what you produce in the factory but it is all about what you do in the minds of prospects (consumers). Differentiating a brand from the competitor products is an important part of positioning and identifying possible value differences is essential in this process.

To define the differentiation points, company should examine the entire product or service experiences of a customer. Each contact point with customers can offer differentiation opportunities for brands. Starting from this point of view, a company can differentiate itself along the lines of its products, services, channels, people, or image. Brands can use product differentiation by differentiating their products’ features, style, design or performance. A brand can differentiate the services provided with the product. In services differentiation , a brand can offer a speedy or more convenient service to differentiate their brand. Channel differentiation is gaining competitive advantage with offering different delivery options. Amazon offers different free delivery options such as twoday, same-day or one-day, and 2-hour delivery. A brand can also differentiate itself through hiring and training better workers, which means people differentiation. In many cases, sales or technical service representatives’ performance influences the satisfaction of the customers with the help of the emotional bonds between the representatives and customers. Besides these differentiation points, a company can differentiate itself based on the company or brand image. Image differentiation is setting the brand apart by its image from competitors. Image differentiation is built on the product and services, and managed with the help of the images used in communication tools such as advertising. Symbols, such as the McDonald’s golden arches, the colorful Google logo the Twitter bird, the Nike swoosh, or Apple’s “bite mark” logo, can provide strong company or brand recognition and image differentiation. The most frequently used positioning is using product attributes. For example, Selpak Paper Towel emphasized absorbency and positioned itself as a “Super Absorbent!” using an image of an elephant to support its position. On the other hand, Solo positions itself on both durability and economy. User profiles also can be used for positioning. For example, Johnson & Johnson repositioned its baby oil by showing how mothers can use baby oil for themselves (see Picture 7.7). In positioning by competitors’ strategy a brand uses a competitor as a reference and then positions itself according to this point. A very well-known example of this strategy was Avis, “We’re No. 2, so we try harder” campaign. Lastly, price/quality can be used as a positioning strategy. Different combinations of price and quality can be used for different positions. For example, BIM and A101 are positioning themselves as low price and reasonable quality stores. On the other hand, Macromarket is positioning itself as a high price and high quality store.

In addition, the differences/positions selected should satisfy these criteria in order to be used successfully:

• Important
• Distinctive
• Superior
• Communicable
• Preemptive
• Affordable
• Profitable

Important: The difference must deliver an important and valuable benefit.

Distinctive: Competitors do not offer the same difference.

Superior: The difference must offer a superior way of satisfying a need.

Communicable : The difference must be visible and explainable.

Preemptive: Cannot be coped easily.

Affordable: Buyers can afford to pay for the difference.

Profitable: The company can introduce the difference profitably.

Clear and strong positioning is a very important part of marketing strategy as faulty positioning may damage all the marketing strategy. Marketer must evaluate the effectiveness of their positioning strategies through customer surveys, competitor analysis. There are 4 main positioning errors that companies may face:

• Underpositioning
• Overpositioning
• Confused positioning
• Doubtful positioning

Underpositioning : When customers have only vague ideas about the company and its products and do not perceive anything distinctive about them.

Overpositioning: When customers have too narrow understanding of the company, product, and brand.

Confused positioning: When frequent changes and contradictory messages confuse customers regarding the positioning of the brand.

Doubtful positioning: When the claims made for the product or brand are not regarded as credible by the customer.