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Chapter 3:Strategic Market
Segmentation
Prepared by:
Ma. Anna Corina G. KagaoanInstructor
College of Business and Accountancy
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Strategic Market Segmentation
Segmenting markets is a foundation for superiorperformance.
Understanding how buyers needs and wants vary isessential in designing effective marketing strategies.
The need to improve understanding of buyers is escalatingbecause ofbuyersdemands for uniqueness and an array oftechnologies available to generate products to satisfy thesedemands.
Buyers vary according to how they use products, the needsand preferences that the products satisfy, and theirconsumption patterns.
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Strategic Market Segmentation
Market segmentation is the process of identifying andanalyzing subgroups of buyers in a product-market withsimilar response characteristics.
Even for consumer products, the concept of a one-size-fits-all mass marketis increasingly less relevant.
The most specific form of market segmentation is to
consider each buyer as a market segmentbasis forone-to-one marketing.
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Levels and Types of
Market Segmentation Segmentation is an important capability in strategic
marketing, which is linked to choosing market targets andpositioning against alternatives to build competitiveadvantage.
Many traditional views emphasize segmentation as anoperational toolfor example, to aim advertising effectivelyat different types of customers.
While advertising-oriented segmentation identifies targets
that differ in responses to messages, strategic segmentationtries to identify market segments that differ in purchasingpower, goals, aspirations and behavior, in ways relevant toidentifying new product and value opportunities.
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Levels and Types of
Market SegmentationVisionStrategic intentProduct benefits
Resource allocationAlignment
PlanningMarketing programs:- Advertising-Sales- Distribution
StrategicSegmentation
ManagerialSegmentation
OperationalSegmentation
Exhibit 1.Levels of MarketSegmentation
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Levels and Types of
Market Segmentation Strategic segmentation. Links to the management vision
and strategic intent of corporate strategy and emphasizesproduct benefits that different types of buyers seek.
Managerial segmentation. Concerned with allocatingresources around segment targets, including them inmarketing plans and aligning organizational processesaround them.
Operational segmentation. Concerned with the marketingprogram changes needed to reach segment targets withadvertising and promotions, and with distribution systems.
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Levels and Types of
Market Segmentation In considering the role of segmentation, the deepest
decisions are whether to revise the business model inresponse to how social forces are changing the lives ofdifferent types of customer, how to position a brand, whichsegments to pursue, and whether to make fundamentalchanges to the product or to develop an entirely newproduct.
The shallowest decisions are concerned with issues like
whether to make small improvements in existing products,how to select targets of a media campaign, or whether toadjust prices.
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Market-Driven Strategy andSegmentation
Segments
Value opportunities
New market space
Matching value opportunitiesand capabilities
Market targeting
Strategic positioning
Exhibit 2.Segmentation inthe Market-DrivenStrategy Process
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Market-Driven Strategy and
SegmentationMarket segmentation:
Placing buyers in a product-market into subgroups so that
members of each segment display similar responsiveness toa particular positioning strategy.
Identification process aimed at finding subgroups of buyerswithin a total market. The termmarketnicheis sometimes
used to refer to a marketing segment that represents arelatively small portion of the buyers in the total market.
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Market-Driven Strategy and
SegmentationValue opportunities:
Buyers in a segment have similar value requirementsconcerning specific product/brand attributes.
Segmentation offers a company an opportunity to bettermatch its products and capabilities to buyers valuerequirements.
Customer satisfaction can be improved by providing a valueoffering that matches the value proposition consideredimportant by the buyer in a segment.
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Market-Driven Strategy and
SegmentationNew market space:
Market analysis may identify segments not recognized or
served effectively by competitors.
There may be new opportunities to tap into new areas ofvalue and create a unique space in the market.
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Market-Driven Strategy and
SegmentationMatching value opportunities and capabilities:
Examining specific market segments helps to identify how
to (1) attain a closer match between buyers valuepreferences and organizations capabilities, and (2) comparethe organizations strengths (and weaknesses) to the keycompetition in each segment.
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Market-Driven Strategy and
SegmentationMarket targeting:
Consists of evaluating and selecting one or more segments
whose value requirements provide a good match with theorganizations capabilities.
When segmentation is employed, it should be by design,and the underlying analyses should lead to the selection of
one or more promising segments to target.
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Market-Driven Strategy and
SegmentationPositioning strategy:
Combination of the actions management takes to meet the
needs and wants of each market target.
Consists of product(s), and supporting services, distribution,pricing, and promotion componentsmanagements choicesabout how to influence target buyers by favorably
positioning the product in their eyes and minds help indesigning the positioning strategy.
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Defining the marketto be segmented
Identifying marketsegments
Forming marketsegmentsFiner segmentationstrategiesSelecting thesegmentation strategy
Exhibit 3.Activities and Decisions
in Market Segmentation
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Activities and Decisions in
Market Segmentation It is necessary to decide how to segment the market, identifying
segments, which involves selecting the variable(s) to use as thebasis for identifying segmentsfrequency (frequent, moderate,and occasional) of use of a product may be a possible basis of
segmentation. Method of forming market segments is decided. This may consist
of managers using judgment and experience to divide the marketinto segments. Segments may also be formed using statisticalanalysis. Customer purchase behavior by CRM systems provides
base for this analysis. Decide whether finer (smaller) segments should be used.
Strategic analysis is conducted on each segment determine whichsegment to target.
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Defining the Market to be Segmented
Level of
Competition
Product
Definition
Illustrative
Competitors
Need/Want
Satisfied
Generic Health and beauty
aids
Consumer products
companies
Enhancement of
health and beauty
Product type Shaving equipment Gillete, Bic, Rubie Shaving
Product variant Electric razors Braun, Panasonic,
Remington, Norelco
Electric shaving
Exhibit 4. Segmentation in the Health and Beauty Supplies Market
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Defining the Market to be Segmented
Generic-level segmentation is illustrated by segmentingsupermarket buyers based on shopper types (like availableshopping time).
Product-type segmentation is shown by the differences in
price, quality, and features. Product-variant segmentation considers the segments within
a category. It is important to consider in defining the market to be
segmented estimating the variation in buyers needs andrequirements at the different product-market levels andidentifying the types of buyers included in the market.These change rapidly so it needs frequent re-evaluation.
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Identifying Market SegmentsSegmentation Variables: Characteristics of People and Organizations: Consumer Markets.Characteristics of people fall into two
categories: (1) geographic and demographic; and (2)psychographic (lifestyle and personality).
Organizational Markets. Includes types of industry(vertical market), company size, stage of industrydevelopment, and the stage of the value-added system(producer, distribution, retailer). Aided by examining (1)extent of market concentration which considers numberof customers and relative buying power, and (2) degreeof product customization determines the extent to whichsupplier must tailor the product.
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Identifying Market SegmentsSegmentation Variables:
Product Use Situation Segmentation. Markets may besegmented based on how the product is used.
Buyers Needs and Preference. Brands may used assegmentation bases and segment descriptors. Brand loyalty. Consumer Needs.Important in (1) determining how well a brand
may satisfy need; and/or (2) indicating what change(s) arenecessary to provide a better solution to a buyers needs.
Attitudes. Enduring systems of evaluation about brands. Reflectbuyers overall liking or preference for a brand.
Perceptions. The process by which an individual selects,organizes, and interprets information inputs (marketing stimulisuch as advertising, personal selling, price, and the product) tocreate a meaningful picture of the world. Perceptions formattitudes.
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Identifying Market Segments
Segmentation Variables:
Purchase Behavior. Size and frequency of purchases areuseful in segmenting consumer and business markets.
Volume of the purchase.
Frequency
Buyer decisions. Can be classified according to the extent
to which the buyer is involved in the decision (high or low).
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Identifying Market SegmentsConsumer Markets Industrial/Organizational
Markets
Characteristics ofpeople/organizations
Age, gender, raceIncomeFamily sizeLifecycle stageGeographic locationLifestyle
Type of industrySizeGeographic locationCorporate cultureStage of developmentProducer/intermediary
Use situation OccasionImportance of purchasePrior experience with productUser status
ApplicationPurchasing procedureNew task, modified rebuy,straight rebuy
Buyers needs/preferences Brand loyalty statusBrand preferenceQuality
Proneness to make a deal
Performance requirementsBrand preferencesDesired features
Service requirementsPurchase behavior Size of purchase
Frequency of purchaseVolumeFrequency of purchase
Exhibit 5. Illustrative Segmentation Variables
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Forming Market SegmentsRequirements for Segmentation. It is important to decide if it is
worthwhile to segment a product. Five criteria are useful forevaluating a potential segmentation strategy: Response Differences. Determining differences in the
responsiveness of the buyers in the product market topositioning strategy is a key segment identification requirement.
Identifiable Segments. Descriptive differences among buyers in aproduct-market must be matched to response differences.
Actionable Segments.A business must be able to aim a marketingprogram strategy at each segment selected as a market target.
Cost/Benefit of Segmentation. Evaluate the benefits vs. cost.
Stability over Time. Needs should not change too fast.Product Differentiation and Market Segmentation. Product
differentiation occurs when buyers perceive an offering asdifferent from its competition.
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Forming Market SegmentsApproaches to Segment Identification. Segments are formed
by: (A) grouping customers using descriptive characteristics andthen comparing response differences across the groups; or (B)forming groups based on response differences (e.g. frequency ofpurchase) and determining if the groups can be identified based ondifferences in their characteristics.
Segment
identification
A Start with identifiers ofcustomer groups:Characteristics of people andorganizations, e.g., income,family size, industrial sector
B Start with customerresponse profile:Form groups based onresponse patterns, e.g.,frequency of purchaseExhibit 6. Approaches to
Segment Identification
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Forming Market Segments
Customer Group Identification. It is necessary to select one ormore of the characteristics of people or organizations as thebasis of segmentation. Using these variables, segments areformed by: (1) management judgment and experience; or (2)supporting statistical analyses. The objective is to finddifferences in responsiveness among the customer groups.Customer grouping methods that show how segments areformed: Management Insight and Available Information.
Managements knowledge of customer needs is often auseful guide to segmentation. This includes experience andanalysis of published information.
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Forming Market Segments
Customer Group Identification:
Cross Classification Analysis. Identify customer groups usingdescriptive characteristics and compare response rates byplacing the information in a table.
Data Mining for Segmentation. The availability ofcomputerized databases offers a wide range ofsegmentation analysis capabilities.
Segmentation Illustrations.
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Forming Market SegmentsForming Groups Based on Response Differences. An
alternative to selecting groups based on characteristics is toidentify groups based on response differences. The widespreadadoption of CRM systems offers greater opportunity for timelyand detailed analysis of response differences between
customers. Additional applications would be: Cluster Analysis. A statistical technique that groups people
according to the similarity of their answers to questions such asbrand preferences or product attributes.
Perceptual Maps. Use of consumer research data to constructperceptual maps ofbuyersperceptions of products and brands.The information helps select market-target strategies, and decidehow to position a product for a market target.
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Finer Segmentation StrategiesLogic of Finer Segments: Customized Offerings. Capabilities of organizations to offer
customized products is feasible because of extensiveinformation flow and comprehensive databases,computerized manufacturing systems, and integrated value
chains. Diverse Customer Base. Allowing the buyer to specify the
detail and design choices. Example is the automobileindustry
Close Customer Relationships. By identifying customer
value opportunities and developing cost effective customizedofferings, relationships can be profitable and effective increating competitive barriers.
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Finer Segmentation StrategiesFiner Segmentation Strategies. Three approaches:
Micro-segmentation. Seeks to identify narrowly definedsegments using one or more of the variables. It differs frommore aggregate segment formations in that it results in alarge number of very small segments.
Mass Customization. Providing customized products atprices not much higher than mass produced items isfeasible. Through computer-aided designs andmanufacturing software, flexible manufacturing techniques,and flexible supply systems.
Variety-Seeking Strategy. Intended to offer buyersopportunities to vary their choices in contrast to makingunique choices. The logic is that buyers offered alternativesmay increase total purchases of a brand.
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Finer Segmentation Strategies
Finer Segmentation Issues: How much variety should be offered to buyers? What
attributes are important in buyers choices and to whatextent do they need to be varied?
Will too much variety have negative effects on buyers? It ispossible that buyers will become confused and frustratedwhen offered too many choices?
Is it possible to increase buyersdesire for variety, creating acompetitive advantage?
What processes should be used to learn about customerpreferences? This may involve indirect methods (e.g.,database analysis), or involving buyers in the process.
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Selecting theSegmentation Strategy
Deciding How to Segment. The choice of asegmentation method depends on such factors as thematurity of market, the competitive structure, and the
organizations experience in the market. An essentialfirst step in segmentation is analyzing the existingcustomer base to identify groups of buyers withdifferent response behavior.
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Selecting theSegmentation Strategy
Strategic Analysis of Market Segments:
Customer Analysis. Find out as much as possible about thecustomers in each segment. An essential part of customeranalysis is determining how well the buyers in the segmentare satisfied.
Competitor Analysis. It is also important to anticipate thefuture strategies of key competitors.
Positioning Analysis. Obtain guidelines for positioningstrategy which should meet the needs and requirements ofthe targeted buyers at a cost that yields a profitable marginfor the organization.
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Selecting theSegmentation Strategy
Strategic Analysis of Market Segments: Estimating Segment Attractiveness. Financial and market
attractiveness of each segment needs to be evaluated. Includedare the specific estimates of revenue, cost, and segment profit
contribution over the planning horizon. Segmentation and Fit and Implementation. One important
aspect of evaluating segment attractiveness is how well thesegment match company capabilities and the ability to implementmarketing strategies around those segments. It is important to
realistic in balancing attractiveness of segment against the abilityof organization.
Segment Attractiveness Analysis. Estimate sales, costs,contribution margin, and market share.