Market Segmentation. Strategies for Selecting the Target Market

Market Segmentation

Different consumers have different product needs and use products differently. Segmentation seeks to group different demands and needs into clusters with similar demand patterns. The groups are called market segments and the process of dividing a market into segments is called market segmentation.

Market Managers segment markets on the basis of four different dimensions:

• demographic,
• geographic,
• psychographic,
• and behavior.

Marketing managers use multiple variables within each dimension as the actual basis for segmentation. One of the key applications of marketing research in marketing management is determining a combination of four dimensions that works best for the purposes of market segmentation.

The selection of the target markets is based on different criteria.

Organization's Objectives: What are the financial goals of the firm and its market objectives? Is the firm seeking to pursue a global or a domestic strategy? This is the starting point for the selection evaluation.

Cost of Serving the Market Segments : Particular attention is paid to the economies of scale that might be accomplished by serving multiple market segments. Once the cost of serving market segments is identified, the next step for marketing managers is to identify the organizational resources available for serving the different market segments.

Organizational Resources : Organizational resources include not only financial resources but also product experience, market knowledge, and distribution channels. These resources are then matched to specific market segments to determine the best match.

Market Size : The final step in the process is to determine the market size. This looks at not only the profit potential of the market segment but also its growth potential and the level of its competition. Segments having the potential to expand or deliver high-profit levels are the most desirable.

Strategies for Selecting the Target Market

There are three strategies for selecting a target market

Undifferentiated Targeting Strategy - In this strategy, an organization selects customers within one segment that have the same wants and needs, for example, the business traveler. In the hospitality industry, a hotel organization might focus on the business traveler and business meetings and develop a conference hotel within a market that has a need for such services.

A Concentrated Targeting Strategy - In this strategy, an organization selects one group within a market segment, for example, the basic business traveler at Microtel versus the upscale executive business traveler at the Ritz-Carlton.

A Differentiated Multi-target Marketing - In this strategy, an organization offers several brands with varying services to a multitude of target markets. An example would be Marriott, which provides Fairfield Inn for economy class, Courtyard for business clientele, Marriott Hotels for full service, and Residence Inn for extended-stay guests, all within the business segment.

Buying Behavior

Both qualitative and quantitative research may be applied to marketing. In place of focus groups and surveys, marketing managers use secondary information about an organization's strategies, finances, and markets to understand its buying behavior. Marketing managers may then contact key purchasers or other personnel with a role in decision making to determine what their needs are. Often, this research is done informally by the organization's salespersons who service those accounts. The goal, as with marketing research, is to better understand the needs of the customers.

There are five important stages of buyer behavior:

1. Information Search,
2. Purchase Decision,
3. Need or Want Recognition,
4. Evaluation of Alternatives,
5. Post purchase Evaluation.

There are also four basic markets based on the buying mechanism and customer needs.  All four markets may be local or global, depending on the size of the firm and its product mix. 

The four basic markets are:

1. Government,
2. Business,
3. Consumer,
4. Nonprofit.

For the purpose of understanding buying behavior, the markets are further clustered into:

Consumer markets: In the consumer markets, consumers use their own money to purchase goods they utilize for their own purposes. For consumers, the process is internal and is often applied unconsciously.

Organization markets: Organization markets, by contrast, use money belonging to other people (stockholders, taxpayers, and donors) to buy products they need to produce the goods and services consistent with their organization's mission. The buyer decision process is common to both consumer and organization markets. For organizations, the buyer decision process is often spelled out in detail in policy manuals and procurement regulations.

Factors Affecting Consumer Behavior

Brand Advocates - These customers enhance your brand's market position by sponsoring and supporting the actions of the brand's organization. For example, some customers go out of their way to promote the services of an organization. The customers might communicate this through means such as electronic blogs or testimonials for the organization.

Word of Mouth - This may be positive or negative depending on the customers' experiences. It is difficult for an organization to control this factor because the organization does not know where the customer stands (being neutral in his or her opinion). It could help or hurt an organization depending on what the customer says.

Trial Purchase - This takes place when customers want to try products or services to see if they would like to purchase similar items or services in the future. Here, customers are looking to purchase products or services to meet only short-term needs.

Purchasing Barriers - These may be created naturally or artificially to block present or future purchase of products or services by customers. An example of this is when customers cannot reserve a hotel's rooms because all rooms are already booked.

Need Recognition - This leads a customer to purchase a brand only if it enhances his or her status. For example, customers may use high-end hospitality services such as luxury spas and resorts to enhance their status.

Brand Protestors - These are deterrents to the actions of the brand itself. These are customers who had a bad experience with the brand or have adverse feelings toward the brand. These customers go out of their way to discourage others from using the brand.

Organizational VS Consumer Buying

Marketing managers need to be aware of the various factors affecting consumer buying.

Cultural Factors: Culture is a powerful influence based on where people were raised and their family heritage. It greatly influences their choices in food, clothing, and entertainment.

Social Influences: Social factors greatly influence a buyer's behavior as relationships influence individual's decisions related to purchases.

Personal Experience: A close relationship exists between personal experience and buying behavior. For example, if people have a bad experience with a brand, they are unlikely to buy any product of that brand again. On the other hand, if they think that a brand will give them status, they may buy a product of that particular brand.

Psychological Factors: Psychological factors are about what motivates a purchase. Therefore, these factors affect the buying decision. You may buy one brand of clothing for yourself but another brand when buying a gift. Therefore, marketing managers must consider the psychological factors when they are developing a marketing plan.

Generally, business markets have few large buyers. Marketing targets professional buyers, and close relationships often develop between marketers and buyers.

Three basic buying situations involving organizational buyers.

Straight Rebuy: A firm orders more products from the same supplier. It is the most common buying situation.

Modified Rebuy: A routine purchase order is modified for some reason, such as a change in product features.

New Task Buying: Identifies an unmet need and goes through a process of vendor identification, selection, and purchase. This is the most complex of the buying situations.

There are four major influences on organizational buying:

• The economic environment of the market, which influences demand
• The organization and its culture
• The interpersonal relationship between the buyer and the seller
• Factors associated with the individual buying on behalf of the organization

The organizational buying decision process has the same five steps as the consumer buying decision process.

Need Recognition - The main difference between the two processes at the first stage of decision making is in the number of people who are involved in the recognition of the need (problem). The decision-making unit (DMU) in the organization is more complex and is usually influenced by many people across the organization.

Information Search - An information search is more complicated for an organizational buyer than for a consumer. Depending on whether the organization is doing a straight rebuy or new task buying, the amount of time, effort, and money invested in the search for information is much higher. Another difference is that the demand for (or purchase of) products by organizations is more strongly influenced by environmental and economic conditions and changes in demographics.

Evaluation of Alternatives - The main difference between consumers and organizations here is that an organizational buyer's evaluation criteria are more elaborate and stringent than a consumer's. There is an emphasis on obtaining good post purchase services. Another difference is that an organizational buyer is more concerned about the financial stability of its vendors than a consumer buyer.

Purchase Decision -An established organizational buyer typically has contracts already worked out with vendors. Therefore, the purchase process for an organizational buyer tends to be less complicated than that for a new buyer. When the purchase is a straight rebuy, the organizational buyer would just place an open-ended purchase requisition, where the amount of product needed is called in by a procurement agent or automatically reordered when inventory levels are down to the acceptable minimum. When the purchase is a modified rebuy, the organizational buyer needs to evaluate purchase options every year.

Post-purchase Behavior –Post-purchase evaluations of a product are more formal for an organizational buyer than for a household consumer. A major component of a post-purchase evaluation is the service provided by the vendor.