Segmentation and Targeting Professor Chip Besio Cox School of Business Southern Methodist University

What Are Markets? Aggregates of people, With the ability to buy, The willingness to buy, The authority to buy.

Two Types of Markets Consumer Markets Business Markets Individuals or households who benefit directly by consumption, rather than to make a profit or to achieve Industrial Markets Business Markets Companies or organizations who purchase for resale, use in production, or use in operations, including both profit-oriented and not-for-profit organizations.

What Is Market Segmentation? Market segmentation is the subdividing of a market into distinct subsets, where any subset may conceivably be selected as a marketing target to be reached with a distinct marketing mix

Everyone Wants Something Different Segmentation Dilemma MASS MARKETING Economies of Scale CUSTOMIZATION Everyone Wants Something Different

Market segmentation—linking market needs to an organization’s marketing program

Segmentation Criteria I. Customer Characteristics II. Benefits Sought III. Customer Behaviors

Customer Characteristics DEMOGRAPHICS Consumer Markets: Gender Age Income Dual income family Industrial Markets: NAICS code Size of company

Customer Characteristics PSYCHOGRAPHICS Consumer Markets: Environmentally-conscious Value and lifestyles VALS (1978); VALS 2 (1989) Distinct patterns based on attitudes and values Business Markets: Corporate culture Purchasing orientation

Customer Characteristics GEOGRAPHY Regional Segmentation Zip Clustering Distinct marketing strategies created for similar types of neighborhoods stretched across the nation Examples include PRIZM, Market Metrics

Segmentation variables and breakdowns for U.S. consumer markets

Benefit Segmentation WHAT BENEFIT DO YOU WANT? Rationale - The benefits people are seeking in consuming a given product are the true reasons for the existence of segments Example - Toothpaste Cavity prevention (e.g., Crest) Fresh breath (e.g., Aquafresh) White teeth (e.g., Rembrandt)

Behavior Segmentation USAGE BEHAVIORS Volume of usage Heavy users, moderate users, light users and nonusers 80/20 rule Brand usage Increase usage among users Get users of competing brand to switch Get nonusers to start Usage occasion

Patronage of fast-food restaurants by adults 18 years and older: Simmons Market Research Bureau NCS/NHCS Spring 2008 Adult Full-Year Choices System Crosstabulation Report

Comparison of various kinds of users and nonusers for Wendy’s, Burger King, and McDonald’s fast-food restaurants

What Is “Targeting” a Market Segment? “You can’t be all things to all people” Therefore, companies typically focus on one or more segments and orient their marketing activities to those (potential) customers 29

Which Are the “Good” Segments to Target? The most attractive market segments are: Large Growing and have: High purchase volume High margins High customer value 30

Which Are the “Good” Segments to Target? However, the most attractive segments are frequently already well-served and so are highly competitive … so you must also consider: Number and strength of competitors Ease of entry into the segment Company’s current positioning

Targeting Dilemma - Segment Attractiveness SEGMENT VALUE More Opportunity COMPETITION More Companies Compete for Valuable Segments

Which Are the “Good” Segments to Target? Additional considerations for targeting: Customers are addressable - you can reach them The company is capable of building a marketing program to target them

Targeting Examples of successful targeting: Wal-Mart - Value-conscious shoppers that do not want to worry about short-term sales Lexus - People with high disposable income who value reliability and service, as well as prestige and luxury Cray - Price insensitive computer users that require maximum computing power Dupont - Less price-sensitive innovators in the use of plastics (skim pricing)

The five key steps in segmenting and targeting markets link market needs of customers to the organization’s marketing program

Market-product grid showing how different Reebok shoes reach segments of customers with different needs

Benefits (+) and drawbacks (-) of a firm’s market-product strategies