CHAPTER 2:

TARGET MARKETS:
SEGMENTATION AND EVALUATION
WHAT ARE MARKETS?
Market is defined as a group of individuals
and/or organizations that have a desired or
need in a products class and have the ability,
willingness and authority to purchase those
products.
TWO CATEGORIES OF MARKET:

Consumer Market – consists of purchasers and

household members who intend to consume or
benefit from the purchased products and do not buy
products to make a profit or serve an organizational
need. It is also referred to as business-to-consumer
(B2C) market.
Business Market – consist of individual or groups
that purchases a specific kind of product for resale,
direct use in producing other products or use in
daily general operations. It may also be called
business-to-business (B2B), industrial, or
organizational markets which can be sub classified
into producer, reseller, government and
institutional markets.
 TARGET MARKET SELECTION
PROCESS:
1. Identify the appropriate targeting strategy.
2. Determine which segmentation variables to use.
3. Develop market segment profiles.
4. Evaluate relevant market segment.
5. Select specific target markets.
STEP 1: IDENTIFYING THE
APPROPRIATE TARGET MARKET
Target market – a target market is a group of people or
organizations for which a business creates and maintains
marketing mix specifically designed to satisfy the needs
of group members. The strategy used to select a target
market is affected by target market characteristics,
product attributes, and the organization's objectives and
resources.
THREE BASIC TARGETING
STRATEGIES:

• Undifferentiated
• Concentrated
• Differentiated
 UNDIFFERENTIATED TARGETING
STRATEGY
A strategy in which an organization designs a single marketing
mix and directs it at the entire market for a particular product.
It assumes that all customers in the target market have similar
needs, thus the organization can satisfy most customers with a
single marketing mix with little or no variation.
Products commonly marketed through undifferentiated
strategy include commodities and staple food items, such
as sugar and salt and conventionally raised produce.

The undifferentiated targeting strategy is effective

under two conditions. First, a large proportion of
customers in a total market must have similar needs
for the product, a situation termed a homogeneous
market.
Second, the organization must have the resources to
develop a single marketing mix that satisfies
customers' needs in a large portion of a total market
and the managerial skills to maintain it.
 CONCENTRATED TARGETING STRATEGY
THROUGH MARKET SEGMENTATION
Concentrated Targeting Strategy is a market
segmentation strategy in which an organization targets
a single segment using one marketing mix.
Heterogeneous market is a market made up of
individuals or organizations with diverse needs for
products in a specific product class
Market segmentation is the process of dividing a total
market into groups, or segments, that consist of people,
or organizations with relatively similar product needs.

Market segment is the individuals, groups, or

organizations sharing one or more similar
characteristics that cause them to have similar product
needs.
FOR MARKET SEGMENTATION TO
SUCCEED, FIVE CONDITIONS MUST EXIST:

First, customer’s needs for the product must be heterogenous –

otherwise, there is no reason to waste resources segmenting the market.
Second, segments must be identifiable and divisible, the company must
be able to find a characteristic, or variable, for effectively separating a
total market into groups comprised of individuals with relatively
uniform product needs.
Third, the marketer must be able to compare the
different market segments with respect to estimated
sales potential, costs, and profits.
Fourth, at least one segment must have enough profit
potential to justify developing and maintaining a
special marketing mix for it.
And fifth, the company must be able to teach the
chosen segment with a particular marketing mix.
The chief advantage of the concentrated strategy is that
it allows a firm to specialize. The firm analyzes the
characteristics and needs of a distinct customer group
and then focuses all its energies on satisfying that
group's needs.
Specialization, however, means that a company allocates
all its resources for one target segment, which can be
hazardous. If a company's sales depend on a single segment
and the segment's demand for the product declines, the
company's financial health also deteriorates.
DIFFERENTIATED TARGETING STRATEGY
THROUGH MARKET SEGMENTATION

Differentiated targeting strategy is a strategy in which

an organization targets two or more segments by
developing a marketing mix for each segment.
Benefit of a differentiated approach is that a firm may
increase sales in the total market because its
marketing mixes arc aimed at more customers.
For this reason, a company with excess production
capacity may find a differentiated strategy
advantageous because the sale of products to
additional segments may absorb excess capacity.
On the other hand, a differentiated strategy often
demands more production processes, materials, and
people because the different ingredients in each
marketing mix will vary. Thus, production costs may
be higher than with a concentrated strategy.
 STEP 2: DETERMINE WHICH
SEGMENTATION VARIABLE TO USE

Segmentation variables are the characteristics of

individuals, groups, or organizations used to divide a
market into segments. Location, age, gender, and rate of
product usage can all be bases for segmenting markets.
Marketers may use several variables in combination
when segmenting a market.
Segmentation variables should be used to select the
most attractive segments. The criteria for selection
include areas where there is a sustainable competitive
advantage that creates profitability. Therefore, a
competitive analysis can be a strong predictor in
finding the best segmentation variables.
VARIABLES FOR SEGMENTING CONSUMER
MARKETS

A marketer using segmentation to reach a consumer

market can choose one or several variables. As
Figure 2.3 shows, segmentation variables can be
grouped into four major categories: demographic,
geographic, psychographic, and behavioristic.
DEMOGRAPHIC VARIABLES
Demographers study aggregate population characteristics
such as the distribution of age and gender, fertility rates,
migration patterns, and mortality rates. Demographic
characteristics that marketers commonly use include age,
gender, race, ethnicity, income, education, occupation,
family size, family life cycle, religion, and social class.
Age is a common variable for segmentation purposes. If
considering segmenting by age, marketers need to be
aware of age distribution, how that distribution changing,
and how it will affect the demand for different types of
products.
Gender is another demographic variable that is
commonly used to segment markets for many products,
including clothing, soft drinks, nonprescription
medications, magazines, some food items, and personal
care products.
Marketers also use race and ethnicity as variables for
segmenting markets for many products. Cosmetics, for
example, is an industry where it is important to match the
shade of the products with the skin color of customers.
Income strongly influences people's product purchases, it
often provides a way to divide markets. Income affects
customers lifestyles and what they can afford to buy.
Product markets segmented by income include sporting
goods, housing, furniture, cosmetics, clothing, jewelry,
home appliances, automobiles, and electronics.
Among the factors that influence household income
and product needs are marital status and the presence
and age of children. These characteristics, often
combined and called the family life cycle, affect
consumers’ needs for housing, appliances, food and
beverages, automobiles, and recreational equipment.
Family life cycles can be divide in various ways, as
Figure 2.5 shows. This figure depicts the process
broken down into nine categories.
GEOGRAPHIC VARIABLES

Geographic variables – climate, terrain, city size,

population density, and urban/rural areas also influence
consumer product needs. Markets may be divided
using geographic variables because differences in
location, climate, and terrain will influence consumers'
needs.
City size can be an important segmentation variable.
Many firms choose to limit marketing efforts to cities
above a certain size because small populations have been
calculated to generate inadequate profits.

Market density refers to the number of potential customers

within a unit of land area, such as a square mile. Although
market density relates generally to population density, the
correlation is not exact.
Marketers may also use geodemographic segmentation.
Geodemographic segmentation is a method of market
segmentation that clusters people by zip codes or
neighborhood units based on lifestyle and demographic
information.

Targeting this way can be effective be cause people often

choose to live in an area that shares that basic lifestyle
and political beliefs. It allows marketers to engage in
micromarketing.
Micromarketing is an approach to market segmentation in
which organizations focus precise marketing efforts on
very small geographic markets, such as communities and
even individual neighborhoods.
Climate is commonly used as a geographic segmentation
variable because of its broad impact on people's behavior
and product needs. Product markets affected by climate
include air-conditioning and heating equipment, fireplace
accessories, clothing, gardening equipment, recreational
products, and building materials.
 PSYCHOGRAPHIC VARIABLES
Marketers sometimes use psychographic variables, such as
personality characteristics, motives and lifestyles, to
segment markets. A psychographic variable can be used by
itself or in combination with other types of segmentation
variables.
Personality characteristics can be useful means of
segmentation when a product resembles many competing
products and consumers' needs arc not significantly
related to other segmentation variables.
When appealing to a personality characteristic, a marketer almost
always selects one that many people view positively. Individuals
with this characteristic, as well as those who aspire to have it, may
be influenced to buy the marketer's brand.
When motives are used to segment a market, the market
is divided according to consumers reasons for making a
purchase. Personal appearance, affiliation, status, safety,
and health are examples of motives affecting the types of
products purchased and the choice of stores in which they
are bought. Making efforts based on the particular
motives can be a point of competitive advantage for the
firm
Lifestyle segmentation groups individuals according to how
they spend their time, the importance of things in their
surroundings (homes or jobs, for example), beliefs about
themselves and broad issues, and some demographic
characteristics, such as income and education.
Lifestyle analysis provides a broad view of buyers because it
encompasses numerous characteristics related to people’s
activities (e.g., work, hobbies, entertainment, sports),
interests (e.g., family, home, fashion, food, technology), and
opinions (e.g., politics, social issues, education, the future).
BEHAVIORISTIC VARIABLES

Firms can divide a market according to consumer

behavior toward a product, which commonly involves
an aspect of consumers’ product use. For example, a
market may be separated into users-classified as heavy,
moderate, or light—and nonusers. To satisfy a specific
group, such as heavy users, marketers may create a
distinctive product and price, or initiate special
distribution and promotion activities.
Benefit segmentation is the division of a market
according to benefits that consumers want from the
product. Although most types of market
segmentation assume a relationship between the
variable and customers' needs, benefit segmentation
differs in that the benefits customers seek are their
product needs.
The effectiveness of such segmentation depends on
three conditions: (1) the benefits sought must be
identifiable, (2) using these benefits, marketers must
be able to divide people into recognizable segments,
and (3) one or more of the resulting segments must be
accessible to the firm’s marketing efforts.
 VARIABLES FOR MARKET SEGMENTATION

Like consumer markets, business markets are

frequently segmented for marketing purposes.
Marketers segment business markets according to
geographic location, type of organization, customer
size, and product use.
GEOGRAPHIC LOCATION

Demand for consumer products can vary considerably

among geographic areas due to differences in climate,
terrain, or regional 'customer preferences. Demand for
business products also varies according to geographic
location.
For instance, producers of lumber may divide their
markets geographically because customers vary by
region. Geographic segmentation may be especially
appropriate for producers seeking to reach industries
concentrated in certain locations, such as furniture and
textile producers concentrated in the Southeast.
TYPE OF ORGANIZATIONS
A company sometimes segments a market by types of
organization within that market because they often require
different product features, price structures, distribution
systems, and selling strategies. Given these variations, a
firm may either concentrate on a single segment with one
marketing mix (a concentrated targeting strategy) or focus
on several groups with multiple mixes (a differentiated
targeting strategy).
CUSTOMER SIZE

An organization's size may affect its purchasing

procedures and the types and quantities of products it
needs. Size can thus be an effective variable for
segmenting a business market. To reach a segment of a
specific size, marketers may have to adjust one or more
marketing mix ingredients.
PRODUCT USE

Certain products, particularly basic raw materials such

as steel, petroleum, plastics, and lumber, can be used
numerous ways in the production of goods. These
variations will affect the types and amounts of products
purchased, as well as the purchasing method.
STEP 3: DEVELOP MARKET SEGMENT
PROFILES
A market segment profile describes the similarities
among potential customers within a segment and
explains the differences among people and organizations
in different segments, A profile may cover such aspects
as demographic characteristics, geographic. factors,
product benefits sought, lifestyles, brand preferences,
and usage rates.
STEP 4: EVALUATE RELEVANT MARKET
SEGMENTS

Market potential is the total amount of a product that

customers will purchase within a period at specific level of
industry-wide marketing activity
Company sales potential is the maximum percentage share
of a market that an individual firm within an industry can
expect to capture for a specific product.
FACTORS THAT INFLUENCE COMPANY SALES
POTENTIAL FOR A MARKET SEGMENT

First, the market potential places an absolute limit on the size

of the company's sales potential – a firm cannot exceed the
market potential.
Second, the magnitude of industry-wide marketing activities
has an indirect but definite impact on the company's sales
potential.
Third, the intensity and effectiveness of a company's
marketing activities relative to competitors' activities
affect the size of the company's sales potential
TWO GENERAL APPROACHES TO COMPANY
SALES POTENTIAL:

1. Breakdown Approach
2. Buildup Approach
1. BREAKDOWN APPROACH

Measuring company sales potential based on

a general economic forecast for a specific
period and the market potential derived from
it.
2. BUILDUP APPROACH

Measuring company sales potential by estimating

how much of a product a potential buyer in a
specific geographic area will purchase in a given
period, multiplying the estimate by the number of
potential buyers. and adding the totals of all the
geographic areas considered.
COMPETITIVE ASSESSMENT

It is crucial to assess competitors that are already

operating in the segments being considered. A market
segment that initially seems attractive based economic
forecast for a specific period and the market potential
on sales estimates may turn out to be much less so after
a competitive assessment.
Such assessment should ask several questions about
competitors:
How many exist?
What are they strengths and weaknesses?
Do several competitors already have major market shares and to
gather dominate the segment?
Can our company create a marketing mix to compete effectively
against competitors' marketing mixes?
Is it likely that new competitors will enter this segment? If so,
how will they affect our firm's ability to compete successfully?
COST ESTIMATES
To fulfill the needs of a target segment, an organization
must develop and maintain a marketing mix that precisely
meets the wants and needs of that segment, which can be
expensive.
Distinctive product features, attractive package design,
generous product warranties, extensive advertising,
attractive promotional offers, competitive prices, and high
quality personal service use considerable organizational
resources.
STEP 5: SELECT SPECIFIC TARGET
MARKETS

Selecting appropriate target markets is important to an

organization's effective adoption and use of the
marketing concept philosophy. Identifying the right
target market is the key to implementing a successful
marketing strategy.
DEVELOPING SALES FORECAST

Sales forecast is amount of a product a company expects

to sell during a specific period at a specified level of
marketing activities.
Common forecasting techniques fall into five categories:
executive-judgment, surveys, time series analysis,
regression analysis, and market tests.
EXECUTIVE JUDGEMENT

is the intuition of one or more executives. This is an

unscientific but expedient and inexpensive approach to
sales forecasting. It is not a very accurate method, but
executive judgment may work reasonably well when
product demand is relatively stable and the forecaster has
years of market-related experience.
SURVEYS
Customer forecasting survey – a survey of customers
regarding the types and quantities of products they
intend to buy during a specific period
Sales force forecasting survey – a survey of a firm's
sales force regarding anticipated sales in their territories
for a specified period.
Expert forecasting survey – sales forecasts prepared by
experts outside the firm, such as economists,
management consultants, advertising executives, or
college professors.
Delphi technique – a procedure in which experts create
initial forecasts, submit them to the company for
averaging, and then refine the forecasts.
TIME SERIES ANALYSIS
Is a forecasting method that uses historical sales data to
discover patterns in the firm's sales over time and
generally involves trend, cycle, seasonal, and random
factor analysis.
Trend analysis – an analysis that focuses on aggregate sales
data aver a period of many years to determine general
trends in annual sales.
Cycle analysis – an analysis of sales figures for a three
to five year period to ascertain whether sales fluctuate in
a consistent, periodic manner.

Seasonal analysis – an analysis of daily, weekly, or

monthly sales figures to evaluate the degree to which
seasonal factors influence sales.
Random factor analysis – an analysis attempting to
attribute erratic sales variations to random, nonrecurring
events
REGRESSION ANALYSIS
A method of predicting sales based on finding a
relationship between past sales and one or more
independent variables, such as population or income.

Simple regression analysis uses one independent

variable, whereas multiple regression analysis includes
two or more independent variables.
MARKET TEST
Involves making a product available to buyers in one or
more test areas and measuring purchases and consumer
responses to the product, price, distribution, and promotion.
A market test provides information about consumers' actual,
rather than intended, purchases. In addition, purchase
volume can be evaluated in relation to the intensity of other
marketing activities such as advertising, in-store
promotions, pricing, packaging, and distribution.
USING MULTIPLE FORECASTING METHOD

Some businesses depend on a single sales forecasting

method, most firms use several techniques. Sometimes a
company is forced to use multiple methods when
marketing diverse product lines, but even a single product
line may require several forecasts, especially when the
product is sold to different market segments.
Variation in the length of forecasts may-call for several
forecasting methods s well. A firm that employs one
method for a short-range forecast may find the
inappropriate for long-range forecasting. Sometimes a
marketer verifies results of one method by using one or
more other methods and comparing outcomes.