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Part 2 MARKET RESEARCH AND TARGET MARKETS Dr. Chen, Principle of Marketing 4: Marketing Research and Information Systems 5: Target Markets: Segmentation and Evaluation Dr. Chen, Principle of Marketing Chapter 5 Target Markets: Segmentation and Evaluation Professor Jason C. H. Chen, Ph.D. School of Business Administration Gonzaga University Spokane, WA 99258 [email protected] Dr. Chen, Principle of Marketing Learning Objectives To understand what markets are and how they are generally classified To grasp an overview of the five steps of the target market selection process To understand the differences among general targeting strategies To become familiar with the major segmentation variables To know what segment profiles are and how they are used To understand how to evaluate market segments To identify the factors that influence the selection of specific market segments for use as target markets To become familiar with sales forecasting methods Dr. Chen, Principle of Marketing 4 What are Markets? A market is a group of people, individuals or organizations, who needs for products in a product a desire or ______ class and Have the ability, willingness, and authority to purchase such products Have A group of people that lacks any of the four requirements does not constitute a market Teenagers may have the desire, the money and the willingness to buy alcohol but the law prevents them from having the authority to purchase alcohol Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-5 E-COMMERCE B2C What does “C” stands for? B2B What Dr. Chen, Principle of Marketing does “B” stands for? 6 Two Types of Markets Consumer _________ Market Purchasers and household members who intend to consume or benefit from the purchased products and do not buy products to make profits Also referred to as business-to-consumer (B2C) markets. Business Market _________ Individuals, organizations or groups that purchase a specific kind of product for resale, direct use in producing other products or use in general daily operations Also referred to as business-to-business (B2B), industrial, or organizational markets Sub-classified into producer, reseller, government, and institutional markets Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-7 Figure 5.1 - Target Market Selection Process Dr. Chen, Principle of Marketing 8 Step 1: Identify Appropriate Targeting Strategy Target Market A group of people or organizations for which a mix business creates and maintains a marketing ____ 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 The organization’s objectives and resources Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-9 Marketing Mix Decisions Product Decisions Integrated Marketing Communications Decision (Promotion) Marketing Mix Price Decisions Distribution Decisions Place Time (_______+ ______) Dr. Chen, Principle of Marketing 10 Types of Targeting Strategies Undifferentiated targeting strategy _______________ • Designs a single marketing mix and directs it at the entire market for a particular product • Effective for homogenous markets Concentrated targeting strategy ______________ • Targets a single market segment using one marketing mix Differentiated targeting strategy _____________ • Targets two or more segments by developing a marketing mix for each segment Dr. Chen, Principle of Marketing 11 Figure 5.2 - Targeting Strategies • Designs a single marketing mix and directs it at the entire market for a particular product • Targets a single market segment using one marketing mix Dr. Chen, Principle of Marketing Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED. • Targets two or more segments by developing a marketing mix for each segment 6-12 Undifferentiated targeting strategy means a company designs a single marketing mix and directs it at the entire market Effective for homogeneous markets where a large proportion of people in a target market have similar needs for a product This strategy consists of: One type of product One promotional program Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. One price One distribution channel 6-13 A concentrated targeting strategy means a company targets a single market segment using one marketing mix Advantages Disadvantages Ideal for organization with excess production capacity Profits fall with segment’s demand declines A small firm can compete with larger organizations Difficult to diversify Increases sales in the aggregate market Higher production cost Allows a firm to specialize Dr. Chen, Principle of Marketing 6-14 Types of Market and Market Segmentation Types of market Homogenous Large proportion of customers have _____________: similar needs for a product Heterogeneous Customers have diverse needs for _____________: products in a specific product class Market segmentation: A process of dividing a total market into groups with relatively similar product needs to design marketing mix Market segment: Customer base sharing one or more similar characteristics that cause them to have similar product needs Smaller groups allow a tailored marketing mix Dr. Chen, Principle of Marketing 15 Conditions For Market Segmentation To Succeed For market segmentation to succeed, five conditions must exist Customer’s heterogeneous needs must be _____________ divisible Segments must be identifiable and ________ Segments must be comparable to one another with respect to estimated sales potential, costs and profits profit potential One segment must show enough ______ to justify developing a special marketing mix The firm must be able to reach the chosen segment with a particular marketing mix Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-16 Concentrated Targeting Strategy Both Mont Blanc and Bic use a concentrated targeting strategy to aim at a different, single market segment They are not competing for the same customers Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 176-17 With a differentiated targeting strategy, an organization directs its marketing efforts at two or more segments, developing a marketing mix for each segment Advantages Could mean increased sales Disadvantages Production costs are higher Uses excess production capacity Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-18 Target Market Selection Process Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-19 Step 2 - Determine Which Segmentation Variables to Use Segmentation variables: Characteristics of individuals, groups or organizations used to divide a market into segments relate to the customers’ needs for, uses of or behavior toward the product measurable Must be _________ Company resources and capabilities affect the number and size of the variables Product type and degree variations in customer needs Should Dr. Chen, Principle of Marketing 20 Figure 5.3 - Segmentation Variables for Consumer markets Dr. Chen, Principle of Marketing 21 Fig. 5.4 - Demographic Variables: Age By 2025 Age groups under 55 expected to decrease Age groups 55 and older expected to increase Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 226-22 Figure 5.5 - Family Life Cycle Stages as a Percentage of All Households Dr. Chen, Principle of Marketing 23 Geographic Variables Climate and terrain City size and population density Urban area and rural area Market density: Number of potential customers within a unit of land area Useful segmentation variable for firms because low-density markets require different sales, advertising, and distribution activities than high-density markets Dr. Chen, Principle of Marketing 24 Geodemographic Segmentation Clusters people by zip codes or neighborhood units based on lifestyle and demographic in-formation Micromarketing: Focuses precise marketing efforts on very small geographic markets Climate - Geographic segmentation variable Impacts Dr. Chen, Principle of Marketing people’s behavior and product needs 25 Psychographic Variables Personality characteristics Product resembles many competing products Consumers’ needs are not significantly related to other segmentation variables Motives - Divides the market according to consumers’ reasons for making a purchase Lifestyle analysis - Characteristics related to people’s activities, interests, and opinions Lifestyle segmentation groups people by: How they spend their time The importance of things in their surroundings Beliefs about themselves and broad issues Dr. Chen, Principle of Marketing 26 Psychographic Systems/Variables: VALS Classification Classifies consumers based on psychological characteristics correlated with: Purchase behavior Key demographics Used to determine lifestyle choices Used to create _______ new products as well as segment existing markets ________ Dr. Chen, Principle of Marketing 27 Fig. 5.6 Example of VALS Data Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-28 Behavioristic Variables Dividing a market according to consumer behavior toward a product in terms of its usage Used by marketers to satisfy customers who use a product in a certain way Involves designing certain product features in such a way that makes it easier to use, safer, or more convenient Dr. Chen, Principle of Marketing 29 Benefit Segmentation Division of a market according to benefits consumers want from the product Effectiveness depends on certain conditions Benefits sought must be identifiable Using the benefits, marketers must be able to divide people into recognizable segments One or more of the resulting segments must be accessible to the firm’s marketing efforts Dr. Chen, Principle of Marketing 30 Segmenting Business Markets Like consumer markets, business markets are frequently segmented, often by multiple variables in combination Marketers segment business markets according to location Geographic ________ Type of ____________ organization product features, distribution systems, price structures and selling strategies size Customer ______ Product use Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-31 Target Market Selection Process Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-32 Step 3: Develop Market Segment Profiles A market segment profile similarities of potential customers within a Describes the __________ segment differences among people and organizations in Explains the __________ different segments Profiles benefits marketers in several ways Information included in the profiles can be highly useful in making marketing decision Used to assess the degree to which the firm’s products can match potential customers’ product needs Help marketers understand how a business can use its capabilities to serve potential customer groups Determine which segments are most attractive relative to the firm’s strengths, weaknesses, objectives, and resources Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-33 Target Market Selection Process Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 6-34 Step 4 - Evaluate Relevant Market Segments After analyzing the segment profiles, a marketer has identified several relevant market segments which require further analysis Several factors should be analyzed, including: Market Segment Aspects to be Evaluated Sales Estimates Dr. Chen, Principle of Marketing Competition Estimated Costs 35 Sales Estimates Sales estimates can be measured along several dimensions including Product level Geographic area Time Level of competition Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 366-36 Sales Estimates: Market Potential Market potential is the total amount of a product customers will purchase within a specified period at a specific level of industry wide marketing activity Affected by economic, soiciocultural and other environmental forces Marketers must assume a certain level of marketing effort in the industry Marketers must also consider whether and to what extent industry marketing efforts will change Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 376-37 Sales Estimates: Company Sales Potential Company sales potential is the maximum percentage of market potential a firm can expect for a specific product Influencing factors Market potential places absolute limits on sales potential Industrywide marketing indirectly impacts sales potential Intensity and effectiveness of marketing activities compared to competitors marketing activities Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 386-38 Approaches to Measure Company Sales Potential Two general approaches that measure company sales potential are Breakdown approach – measuring company sales potential based on a general economic forecast for a specific period and the market potential derived from it 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 Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 396-39 Competitive Assessment Without competitive assessment, sales estimates can be misleading The following questions need answered for a competitive assessment How many competitors exist? What are their strengths and weaknesses? Do several competitors have a major market share? Can we create a competitive marketing mix? Will new competitors enter this segment? If so, can we still compete successfully? Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 406-40 Cost Estimates Developing and maintaining a marketing mix that fulfills the needs of the a target segment, is expensive Factors affecting costs include: Distinctive product features Attractive package design Generous product warranties Extensive advertising Attractive promotional offers Competitive prices High quality personal service Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 416-41 Step 5: Select Target Markets After identifying the target market, the company needs a sales forecast which differs from sales potential Sales forecast is the amount of a product a company expects to sell during a specific period at a specific level of marketing activities. Use: Planning, Organizing, Implementing, Controlling activities There are a number of forecasting methods falling into five categories Executive Judgment Time Series Analysis Regression Analysis Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. Surveys Market Tests 426-42 Executive Judgment Executive judgment is a sales forecasting method based on the intuition of one or more executives. This approach is unscientific but fast and cheap Advantages • Expedient and inexpensive approach • Works well when product stable demand is _______ Dr. Chen, Principle of Marketing Disadvantages • Forecast may weight recent sales booms or slumps excessively (too optimistic or pessimistic) • Forecaster has only past experience as a guide for deciding where to go in the future 43 Forecasting Techniques Customer forecasting survey • Asking customers what types and quantities of products they intend to buy during a specific period Sales force forecasting survey • Firm’s salespeople estimate anticipated sales in their territories for a specified period Expert forecasting survey • Hiring professionals to help with sales forecast Delphi technique • Experts create initial forecasts, submit them to the company for averaging, and then refine the forecasts Dr. Chen, Principle of Marketing 44 Time Series Analysis Uses firm’s ________ historical sales data to discover a pattern , or patterns, in sales over time _______ Trend analysis: Focuses on aggregate sales data over a period of many years to determine general trends in annual sales Cycle analysis: Analysis of sales figures for a three- to five-year period to ascertain whether sales fluctuate in a consistent, periodic manner Seasonal analysis: Analysis of daily, weekly, or monthly sales figures to evaluate the degree to which seasonal factors influence sales Random factor analysis: Attempts to attribute erratic sales variations to random, nonrecurrent events Dr. Chen, Principle of Marketing 45 Regression Analysis Regression analysis is a method of predicting relationship between dependent __________ variable and one or more independent ____________ variables. For example, we may predict sales based on finding a relationship between past sales and one or more independent variables, such as population or income/ Two types: Simple regression analysis uses one of the independent variables Multiple regression analysis uses two or more independent variables Useful when: A precise association can be established Available historical sales data are extensive Dr. © Chen, of Marketing Copyright 2014Principle South-Western, Cengage Learning. ALL RIGHTS RESERVED. 466-46 Forecasting Techniques - Market Test Making a product available to buyers in one or more test areas and measuring purchases and consumer responses to marketing effort Advantages Disadvantages • Effective for forecasting sales of new products or of existing products in new geographic areas • Gives a marketer an opportunity to test the success of various elements of the marketing mix • Time consuming and expensive • A marketer cannot be certain that consumer response during a market test represents the total market response, or that the same response will continue in the future Dr. Chen, Principle of Marketing 47 Multiple Forecasting Methods Used for marketing diverse product lines but Required for single product line when sold to different market segments Required due to variation in the length of forecasts Dr. Chen, Principle of Marketing 48 Video Case 5.1 RALEIGH WHEELS INTO A NEW ERA FOR BICYCLE MARKETING Dr. Chen, Principle of Marketing 49 Summary This case discusses bicycle company Raleigh’s long history and its transition from being a company known for its sturdy, high-quality product to a global brand catering to bicycle messengers and commuters. Raleigh noted that many of its customers do not don special gear to go riding, but rather wear their street clothes. n order to familiarize new markets with its bicycles, Raleigh brings samples to cities around the world and lets people ride the bikes. Raleigh takes great strides to remain in touch with its target market and to provide the products that customers want. It has even started to use high-technology in marketing through maintaining a blog and a Twitter account. Dr. Chen, Principle of Marketing 50 1. Of the four categories of variables, which is most important to Raleigh’s segmentation strategy, and why? According to the case, psychographic variables such as the European lifestyle and tradition of getting around on bicycles are most important to Raleigh’s segmentation strategy. These consumers ride for fun, rather than as serious racers. Applying psychographic variables allows Raleigh to identify and focus its marketing on this specific group of consumers Dr. Chen, Principle of Marketing 51 2. How would you describe Raleigh’s positioning for its steel-frame bicycles? In general, Raleigh seems to be positioning its steel-frame bicycles as sturdy, comfortable, light, fast, nimble, easy to steer, and fun to ride. Students may offer additional positioning ideas as well. Raleigh’s positioning helps the company correct misperceptions of steel-frame bicycles as heavy and awkward to ride, and fits with the interests of its target market. Dr. Chen, Principle of Marketing 52 3. Raleigh sells exclusively through retail dealers, not directly to consumers. How does this affect its ability to segment the bicycle market using geographic variables? Raleigh can select dealers in the geographic areas where consumers in its target market live or travel on vacation. This allows the company to sell through multiple dealers in states where riding bicycles is a popular pastime, for example. In this way, Raleigh will be assured of solid marketing distribution coverage when it launches marketing communications or new product demonstrations in those areas. For efficiency, Raleigh can choose fewer dealers (or have no dealers) in areas where the lifestyle is not geared toward bicycling. Dr. Chen, Principle of Marketing 53