Chapter 8: Identifying Market Segments and Targets

CHAPTER
8 IDENTIFYING MARKET
SEGMENTS AND TARGETS

LEARNING OBJECTIVES
After reading this chapter, students should:
 Know what are the different levels of market segmentation
 Know how a company can divide a market into segments
 Know how a company should choose the most attractive target markets
 Know what are the requirements for effective segmentation

CHAPTER SUMMARY
Target marketing involves three activities: market segmentation, market targeting,
and market positioning.
Markets can be targeted at four levels: segments, niches, local areas, and individuals.
Market segments are large identifiable groups within a market. A niche is a more
narrowly defined group. Marketers appeal to local markets through grassroots
marketing for trading areas, neighborhoods, and even individual stores.
More companies now practice individual and mass-customization. The future is
likely to see more self-marketing, a form of individual marketing in which individual
consumers take the initiative in designing products and brands.
There are two bases for segmenting consumer markets: consumer characteristics and
consumer responses. The major segmentation variables for consumer markets are
geographic, demographic, psychographic, and behavioral. These variables can be
used singly or in combination.
Business marketers use all these variables along with operating variables, purchasing
approaches, and situational factors.
To be useful, market segments must be measurable, substantial, accessible,
differentiable, and actionable.
A firm has to evaluate the various segments and decide how many and which ones to
target: a single segment, several segments, a specific product, a specific market, or
the full market. If it serves the full market, it must choose between differentiated and
undifferentiated marketing. Firms must also monitor segment relationships, and seek
economies of scope and the potential for marketing to supersegments. They should
develop segment-by-segment invasion plans.
Marketers must choose target markets in a socially responsible manner.

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OPENING THOUGHT
The first challenges presented in this chapter are the concepts of market segmentation and
the segmentation processes used by marketing firms. Students may have difficulty
understanding the various steps of the segmentation process as well as differentiating
between target markets and market positioning. The instructor is urged to use personal
examples of target markets—the differences between the instructor’s age cohort and that
of his/her students—for example in illustrating the different markets.

Second, the concepts of consumer characteristics and responses may be new to many
students as it applies across different age groups and different consumers. Students who
have little contact with other people outside their sphere of influence may have a hard
time realizing that other consumers hold differing views and have different usages for
product and services.

Suggestions to help the students understand the degree of sophistication used by

marketers include using the Claritas’ PRIZM Web site during the class lecture, pinpointed
by a student’s zip code for example, to show the amount of information available to
marketers. Additional examples for classroom demonstrations include asking students to
research information off the Internet on their particular favorite product and information
by their zip code or other criteria. Many firms provide differing products to different
consumers, Toyota, for example offers the Toyota line of cars and the Lexus family of
cars. Both of these brands can be used to illustrate product differentiation and target
marketing.

TEACHING STRATEGY AND CLASS ORGANIZATION

PROJECTS
1. Students should turn in their market segmentation segment of their semester-long new
product or service report.

2. Students should select a product or service that they are familiar with, such as jeans,
computers, or personal CD players. Once these items are selected, the students must
undertake research into the specific items: target market and market segmentation.
Student reports should contain information as to: How large is the target market, what
is the future growth potential of this target market, how do/does the marketer reach
this target market and so on? The second section of this project is for the students to
“re-position” this product to another market segment. For example, if the students
select personal CD players as there product of choice, and confirm that the target
market for this is Gen Y, then the students should define how the manufacturers of
personal CD players will attempt to re-position the product to attract the baby boomer
generation to increase their purchases of personal CD players.

3. Sonic PDA Marketing Plan Market segmentation is an important part of any

marketing plan. It is the first step in the STP process that precedes any marketing
strategy: segmentation, targeting, and positioning. The purpose of STP is to identify

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and describe distinct market segments, target-specific segments, and then pinpoint the
differentiating benefits to be stressed in marketing.

In your role as Jane Melody’s assistant, you are responsible for market segmentation
and targeting for Sonic’s PDA product. Look at the SWOT Analysis, Market
Description, and Competitive Review sections and then answer:

 Which variables should Sonic use to segment its consumer markets?

 Which variables should Sonic use to segment its business markets?
 How can Sonic evaluate the attractiveness of each identified segment?
 Should Sonic pursue full market coverage, market specialization, product
specialization, selective specialization, or single-segment concentration? Why?

Summarize your conclusions in a written marketing plan or enter them in the market
Demographics and Target Markets sections of Marketing Plan Pro. Also note any
additional research you may need in the Marketing Research Section of Marketing
Plan Pro.

ASSIGNMENTS
Small Group Assignments
1. The opening vignette states that the population of Americans over 50 years of age will
swell to 115 million in the next 25 years. In small groups, have the students detail the
demographic information on this group of Americans (ages, buying power, perception
of themselves, etc.) and suggest some key marketing opportunities mined from this
information. For example, if seniors often make buying decisions based on lifestyle
and not age, as the vignette mentions, does this information present marketing
opportunities for such industries as travel, bio-medical industries, at-home exercise
equipment, and automobiles? If so, who is going to be affected and to what extent?
Student answers should contain detailed demographic information about this target
market and should draw a connection between what the information says and what is
the potential for marketers.

2. Recently a number of drug companies have developed medicines for erectile

dysfunction, for which advertising and promotional expenditures have been
phenomenal. These facts show that there is a very real market out there and it is quite
large and potentially lucrative for the drug companies. In small groups, have the
students examine the value of this target market in terms of population, affected
population, potential income, etc. Secondly, using the information obtained during
their research, challenge the students to answer this question: Did the “discovery” of a
drug for erectile dysfunction prompt the “marketing” or did the results of marketing
research uncover a latent “need” that caused the drug companies to “discover” a cure?

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Individual Assignments
1. The firm Claritas, Inc. has developed a geoclustering system called PRIZM. Assign
students the task of visiting this site and collecting the marketing information
available for their particular zip code (home or school’s). In a report, ask the students
to comment on the accuracy, implications of, and usefulness, of this information for
marketers. How can a marketer “target” his/her audience using PRIZM?

2. Figure 8.4 outlines the major VALS® segmentation (www.sric-bi.com). Students are
asked to characterize either themselves, family members, or others and place them in
one of these groups. How closely does person the student selected, “fit” the profile? If
so, can the marketer rely on these characterizations in mapping out marketing plans?
Are there major differences? If major differences exist, what impact does this have on
marketers’ developing marketing plans?

Think-Pair-Share
1. Marketing Insight, Marketing to Generation Y, is a compilation of thoughts and notes
from a number of sources. Ask the students to read each of these sources and be
prepared to share their thoughts as well as comments about what they have read in
class. Specifically, are these authors “on-target” when it comes to characterizing their
generation? Are these insights an oversimplification of the buying habits of their
generation? Are there any “missing insights” from these readings that will have a
profound impact on future marketing strategies?

2. Effective segmentation criteria are necessary for target market identification. Market
segments must be measurable, substantial, accessible, differentiable, and actionable.
However, not all segmentation schemes are useful—the text uses table salt buyers for
example. Students are to provide three examples of those products or services in
which: segmentation criteria are not necessary and three examples of where
segmentation criteria are an absolute necessity. Students are to exchange their
findings and explain these differences. Additional discussion (or assignment) could be
to have the students devise a segmentation strategy for the products or services that
they found not currently, where segmentation criteria are necessary. In other words, to
“create” a segmentation distinction for—“table salt”!

MARKETING TODAY—CLASS DISCUSSION TOPICS

The marketing of potentially harmful products to vulnerable groups sometimes generates
public outcries. We have seen the banning of all television advertising for tobacco
products and other restrictions on advertising and promotional activities for this industry.

Using the steps in the segmentation process from Table 8.3 identify the segments for the
target markets for one of these potentially harmful industries. Who are the target markets
and what do they “look like”?

Finally, given that we have seen an increase in the “science” of target marketing, should a
firm in a potentially harmful industry (tobacco or alcohol companies for example)

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continue to press its target marketing knowledge? Is the firm taking undue advantage of
vulnerable groups by its continuing development of market segmentation information?

END-OF-CHAPTER SUPPORT
MARKETING DEBATE—Is Mass Marketing Dead?

With marketers, increasingly adopting more and more refined market segmentations
schemes fueled by the Internet and other customization efforts—some critics claim that
mass marketing is dead. Others counter that there will always be room for large brands
that employ marketing programs targeting the mass market.

Take a position: Mass marketing is dead versus mass marketing is still a viable way to
build a profitable brand.

Pro: People are consumers and people have a number of basic personal and societal needs
that transcends individuality. Certain basic human physical needs (food, clothing, and
shelter, for example) can be best met through mass marketing. In addition, consumers
desire low prices and functionality in some of their basic products and services. Mass
marketing allows the firm to foster the lowest price through economies of production,
distribution, and marketing. Additionally, people like to have some degree of un-
complications in their daily life that is best served through mass produced products.
Asking the consumer to make too many choices, can backfire on marketers as it can
overly complicate and stress consumers—for example, the design of a new home can be
both a rewarding and stressful experience; the intended owner(s) is(are) asked to make
literally hundreds of decisions about size, floor plans, colors, and options throughout the
process. Not complicating a consumer’s life, through mass production and mass
marketing of products can create a viable marketing niche for companies.

Con: People are consumers and with the plethora of product and service choices available
to solve their problems today, a firm must produce individual and customized products to
compete. Basic human needs and wants can be delivered to the consumer by a wide range
of choices. Technology has given the consumer the power and ability to interact with
manufacturers in producing the exact product, with the exact features, and at the target
price desired. Consumers are better educated and better informed than previous
generations. Consumers are also more sophisticated than ever before. These increases in
information, technology, and sophistication are causing firms to respond to the
consumers’ wishes for individuality. Accepting the concept of “individuality” in the
production of goods and services is the only option for many firms. Individuality and the
service that that concept demands can lead to a “supplier-consumer” relationship that can
and will build strong brand preferences. Those firms who choose not to compete or fail to
compete in these arenas run the risk of falling behind competition and in experiencing the
subsequent losses in market share and profits.

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MARKETING DISCUSSION—Descriptive Versus Behavioral Market

Segmentation Schemes
Think of various product categories. How would you classify yourself in terms of the
various segmentation schemes? How would marketing be more or less-effective for you
depending on the segment involved? How would you contrast demographic versus
behavioral segment schemes? Which ones do you think would be most effective for
marketers trying to sell to you?

Suggested Response:
Each student’s answer will vary depending upon the product chosen. However, all
answers should contain some of the following terms.
Niche markets
Local marketing
Customerization marketing
Geographic segmentation
Age and life-cycle stage
Life stage
Gender
Income
Generation
Social class
Psychographic segments (VALS)
Behavioral variables
Usage rates
Buyer-readiness stages
Loyalty status

MARKETING SPOTLIGHT—HSBC

Discussion Questions
1) What have been the key success factors for HSBC?
a. Advertising campaigns that illustrate HSBC’s local connection to the
countries and markets that they are doing business.
b. HSBC’s success rests on its ability to understand the local markets and
niche markets in the countries that they reside.
2) Where is HSBC vulnerable?
a. It must continue to understand the local market and to continue to make
the “connection” with local communities.
3) What should they watch out for?
a. Rapid changes to their target markets (demographic changes,
psychological changes, etc.) in the local and national levels.
4) What recommendations would you make to HSBC’s senior marketing
executives going forward?
a. Do not get complacent or overly comfortable with their successes. Avoid
becoming “big” for “bigness sake.”

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5) What should they be sure to do with their marketing?

a. Continue to capitalize on niche markets, local connections to the
communities, and continue to investigate the marketing forces of their
markets on an individual basis. Do not try to create “generalizations” for
the sake of internal efficiencies.

DETAILED CHAPTER OUTLINE

Markets are not homogeneous. A company needs to identify which market segments it
can serve effectively. Such decisions require a keen understanding of consumer
behavior and careful strategic thinking. To compete more effectively companies are
now embracing target marketing. Effective target marketing requires that marketers:
Identify and profile distinct groups of buyers who differ in their needs and preferences.
Select one or more market segments to enter.
For each target market, establish and communicate the distinctive benefit(s) of the
company’s market offering.

Levels of Market Segmentation

The starting point for discussing segmentation is mass marketing. In mass
marketing, the seller engages in the mass production, mass distribution, and mass
promotion of one product for all buyers.

A) The argument for mass marketing is that it creates the largest potential market,
which leads, to the lowest costs that in turn can lead to lower prices or higher
margins.

Segment Marketing
A market segment consists of a group of customers who share a similar set of needs
and wants.

A) The marketer does not create the segments.

B) The marketer’s task is to identify the segments and decide which one(s) to target.
C) A flexible market offering consists of two parts:
1) A naked solution containing the product and service elements that all segment
member’s value.
2) Discretionary options that some segment member’s value.
D) Market segments can be defined in many different ways:
a. One way to carve up a market is to identify preference segments.
b. Homogeneous preferences.
c. Diffused preferences.
d. Clustered preferences.

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Figures 8.1 (a), 8.1 (b), and 8.1 (c) show the differences.

Review Key Definitions here: mass market, flexible market offering, naked
solutions, and discretionary options

Niche Marketing
A niche is a more narrowly defined customer group seeking a distinctive mix of
benefits. Marketers usually identify niches by dividing a segment into sub-
segments.

A) Niche marketers presumably understand their customers’ needs so well that the
customers willingly pay a premium.
B) Globalization has facilitated niche marketing.
C) The low cost of setting up shop on the Internet has led to many small business start-
ups aimed at niches.
Review Key Definition here: niche marketing

Local Marketing
Target marketing is leading to marketing programs tailored to the needs and wants
of local customer groups.

A) Local marketing reflects a growing trend called grassroots marketing.

B) Marketing activities concentrate on getting as close and personally relevant to
individual customers as possible.
C) A large part of local, grassroots marketing is experiential marketing that promotes a
product or service not just by communicating its features and benefits, but by also
connecting it with unique and interesting experiences.
D) Pine and Gilmore have argued that we are on the threshold of the “Experience
Economy” a new economic era in which all businesses must orchestrate memorable
events for their customers.
1) Commodity.
2) Goods.
3) Service.
4) Experience.

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Customerization
The ultimate level of segmentation leads to “segments of one” “customized
marketing,” or “one-to-one marketing.”

A) Today customers are taking more individual initiative in determining what and how to
buy.
B) Wind and Rangaswamy see the Choiceboard as a movement toward “customerizing”
the firm. Customerization combines operationally driven mass customization with
customized marketing in a way that empowers consumers to design the product and
service offering of their choice.
Review Key Definition here: customerization
C) Each business unit will have to decide whether it would gain more by designing its
business system to create offering for segments or for individuals.
D) Customization is certainly not for every company.
Figure 8.2 shows examples of marketing customization.

SEGMENTING CONSUMER MARKETS

Two broad groups of variables are used to segment consumer markets.
A) Descriptive characteristics.
1) Geographic, demographics, and psycho-graphic.
2) Behavioral considerations: such as consumer responses to benefits, use occasions,
or brands.
B) Regardless of which type of segmentation scheme is employed, the key is that the
marketing program can be profitably adjusted to recognize customer differences.
Table 8.1 shows the major segmentations variables.

Geographic Segmentation
Geographic segmentation calls for dividing the market into different geographical
units.
A) More and more, regional marketing means marketing right down to a specific zip
code.
B) Claritas, Inc. has developed a geoclustering approach called PRIZM that classifies
neighborhoods into distinct groups and lifestyle segments called PRIZM Clusters.
C) Marketers can use PRIZM to answer a variety of questions.

Demographic Segmentation
In demographic segmentation the market is divided into groups on the basis of
variables such as age, family size, family life cycle, gender, income, occupation,
education, religion, race, generation, nationality, and social class.

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A) Consumer needs, wants, usage rates, and product and brand preferences are often
associated with demographic variables.
B) Demographic variables are easy to measure.

Age and Life-Cycle Stage

A) Consumer wants and abilities change with age.

Life Stage
A) Persons in the same part of the life cycle may differ in their life stage. Life stage
defines a person’s major concern. These life stages present opportunities for
marketers who can help people cope with their major concerns.

Gender
A) Men and women tend to have different attitudinal and behavioral orientations,
based partly on genetic makeup and partly on socialization.
B) Some traditionally more male-orientated markets, are beginning to recognize
gender segmentation, changing how they design and sell their products.

Income
A) Income segmentation is a long-standing practice in product and service
categories.
B) However, income does not always predict the best customers for a given product.
C) Increasingly, companies are finding that their markets are “hourglass-shaped” as
middle-market Americans migrate toward more premium products.

Generation
A) Each generation is profoundly influenced by the times in which it grows up.
B) Demographers call these groups cohorts.
1) They share similar outlooks and values.
2) Marketers often advertise to a cohort group by using icons and
images prominent in their experiences.
Figure 8.3 depicts six well-established cohort groups.
A) Generational cohorts also influence each other.
B) Meredith, Schewe, and Karlovich developed a framework called the Lifestage
Analytic Matrix that combines information on cohorts, life stages, physiographics,
emotional effects, and socio-economics.

Social Class
A) Social class has a strong influence on preferences for consumers.
B) Many companies design products and services for specific social classes.

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Psychographic Segmentation
Psychographics is the science of using psychology and demographics to better
understand consumers.

In psychographic segmentation, buyers are divided into different groups on the

basis of lifestyle or personality or values.
A) One of the most popular commercially available classification systems is SRI
Consulting Business Intelligence’s VALS framework.
Review Key Definitions here: life stages, cohorts, psychographics, and
psychographic segmentation.
Figure 8.4 illustrates the VALS Segmentation System.

1) The major tendencies of the four groups with high resources are:
a.Innovators.
b.Thinkers.
c.Achievers.
d.Experiencers.
1) The major tendencies of the four groups with lower resources are:
a.Believers.
b.Strivers.
c.Makers.
d.Strugglers

Behavioral Segmentation
In behavioral segmentation, buyers are divided into groups on the basis of their
knowledge, attitude, toward, use of, or response to a product.

Decision Roles
People play five roles in a buying decision.
)A Initiator
)B Influencer
)C Decider
)D Buyer
)E User

Behavioral Variables
Many marketers believe that behavioral variables are the best starting points for
constructing market segments.

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A) Occasions
1) Occasions can be defined in terms of the time of day, week, month, year or in
terms of other well-defined temporal aspects of a consumer’s life.
B) Benefits.
1) Buyers can be classified according to the benefits they seek.
C) User Status.
1) Markets can be segmented into non-users, ex-users, potential users, first-time
users, and regular users of a product.
D) Usage Rates.
1) Markets can be segmented into light, medium, and heavy product users.
2) Heavy users often account for a small percentage of the market but a high
percentage of total consumption.
E) Buyer-Readiness Stage.
1) A market consists of people in different stages of readiness to buy a product.
a. Some are unaware of the product.
b. Some are aware.
c. Some are informed.
d. Some are interested.
e. Some desire.
f. Some intend to buy.
F) Loyalty Status.
1) Buyers can be divided into four groups according to brand loyalty status:
a. Hard-core loyals.
b. Split loyals.
c. Shifting loyals.
d. Switchers.
2) A company can learn a great deal by analyzing the degrees of brand loyalty.
G) Attitude.
1) Five attitude groups can be found in a market:
a. Enthusiastic.
b. Positive.
c. Indifferent.

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d. Negative.
e. Hostile.
H) Combining different behavioral bases can help to provide a more comprehensive and
cohesive view of a market and its segments.
Figure 8.5 depicts one possible way to break down a target market.

The Conversion Model

The conversion Model has been developed to measure the strength of the
psychological commitment between brands, consumers, and their openness to
change.
A) The model segments users of a brand into four groups based on strength of
commitment from high to low:
1) Convertible.
2) Shallow.
3) Average.
4) Entrenched.
B) The model also classifies non-users of a brand into four groups based on their
“balance of disposition” and openness to trying the brand, from low to high:
1) Strongly unavailable.
2) Weakly unavailable.
3) Ambivalent.
4) Available.

BASIS FOR SEGMENTING BUSINESS MARKETS

Business markets can be segmented with some of the variables used in consumer
market segmentation but business marketers also use other variables.

Table 8.2 shows that demographic variables are the most important, followed by
operating variables, down to the personal characteristics of the buyers.
A) The table lists major questions that business marketers should ask in determining
which segments and customers to serve.

Marketing to Small Businesses

A) Small businesses are now responsible for 50 percent of the gross national product.

Sequential Segmentation
Business marketers generally identify segments through a sequential process.

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A) Business buyers seek different benefit bundles based on their stage in the purchase
decision process.
1) First-time prospects.
2) Novices.
3) Sophisticates.
B) One proposed segmentation scheme classifies business buyers into three groups, each
warranting a different type of selling:
1) Price-orientated customers (transactional selling).
2) Solution-orientated customers (consultative selling).
3) Strategic-value customers (enterprise selling).

MARKET TARGETING
Once the firm has identified its market-segment opportunities, it has to decide how
many and which ones to target. Marketers are increasingly combining several
variables in an effort to identify smaller, better-defined target groups.

This has led some market researchers to advocate a needs-based market

segmentation approach.
Table 8.3 shows the seven-step segmentation process.

Effective Segmentation Criteria

To be useful, market segments must rate favorable on five key criteria:
)A Measurable.
)B Substantial.
)C Accessible.
)D Differentiable.
)E Actionable.

Evaluating and Selecting the Market Segments

In evaluating different market segments, the firm must look at two factors: The
segment’s overall attractiveness and the company’s objectives and resources.

After evaluating different segments the company can consider five patterns of target
market selection, shown in Figure 8.6.

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A) Single-segment concentration.
1) Through concentrated marketing, the firm gains a strong knowledge of the
segment’s needs and achieves a strong market presence.
2) However, there are risks, a market segment can turn sour, or a
competitor may invade the segment.
3) For these reasons, many companies prefer to operate in more than
one segment.
4) Companies can try to operate in super-segments rather than in
isolated segments.
a. A super-segment is a set of segments sharing some exploitable similarity.
B) Selective specialization.
1) The firm selects a number of segments, each objectively attractive and
appropriate.
2) This multi-segment strategy has the advantage of diversifying the firm’s risk.
C) Product specialization.
1) The firm makes a certain product that it sells to several different market segments.
D) Market Specialization.
1) The firm concentrates on serving many needs of a particular customer group.
E) Full market coverage.
1) The firm attempts to serve all customer groups with all the products they might
need.
2) In undifferentiated marketing, the firm ignores segment differences and goes after
the whole market with one offer.
3) In differentiated marketing, the firm operates in several market segments and
designs different products for each segment.

Managing Multiple Segments

The best way to manage multiple segments is to appoint segment managers with
sufficient authority and responsibility for building the segment’s business.

Differentiated Marketing Costs

Differentiated marketing typically creates more total sales than undifferentiated
marketing but also increases the cost of doing business.

A) The following costs are likely to be higher:

)1 Product modifications.
)2 Manufacturing costs.

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)3 Administrative costs.
)4 Inventory costs.
)5 Promotion costs.

Additional Considerations
Three other considerations must be taken into account in evaluating and selecting
segments: segment-by-segment invasion plans, updating segmentation schemes,
and ethical choice of market targets.
A) Segment-by-segment invasion plans
1) A company would be wise to enter one segment at a time.
2) A company’s invasion plans can be thwarted when it confronts blocked markets.
3) The problem of entering blocked markets calls for a megamarketing approach.
4) Megamarketing is the strategic coordination of economic, psychological, political,
and public-relations skills, to gain the cooperation of a number of parties in order
to enter or operate in a given market.
5) Once in, a multinational must be on its best behavior. This calls for well-thought-
out civic positioning.
Figure 8.7 illustrates segment-by-segment invasion plans.

Updating Segmentation Schemes

Market segmentation analysis must be done periodically because segments change.
)A One way to discover new segments is to investigate the hierarchy of attributes
consumers examine in choosing a brand if they use phased decision strategies.
)B This process is called market partitioning.
)C The hierarchy of attributes can reveal customer segments.

Ethical Choice of Market Targets

Market targeting generates public controversy. The public is concerned when
marketers take unfair advantage of vulnerable groups or promote potentially
harmful products.

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