Chapter 8: Target Markets and Channel Design Strategy
A Framework for Market Analysis
Markets, whether consumer or industrial are complex. A myriad of factors may have to be
considered in analyzing particular markets so it is useful to have a framework to help provide some
order to this complexity.
In this chapter, we use framework consisting of four basic dimensions for discussing
markets:
1. Market geography
2. Market size
3. Market density
4. Market behavior
The chapter is structured around these four basic dimensions. Each major section discusses one
of the dimensions. The emphasis will be on showing how these market behavior, is the most
complex. Accordingly, a larger portion of this chapter will be devoted to the market behavior
dimension than to any of the other three dimensions.
Market Market Market
Market size
geography density behavior
Target Markets
Market Geography and Channel Design Strategy
Market geography refers to the geographical extent of markets and where they are located. If
the channel manager asks the questions “What do our markets look like geographically?” and
“How distant are our markets?” the concern is with the market geography dimension.
The channel manager is charged with the task of evaluating market geography relative to
channel structure to make sure that structure is able to serve the markets effectively and
efficiently. Changing market locations resulting from expanding geographical boundaries of
existing markets or the opening up of new, more distant markets should signal the channel
manager that modifications in channel structure may be needed. Starbucks, for example, has in
recent years located coffee shops not only in every state in the U.S., but also all over the world,
including many countries in Europe, Asia and South America. Starbucks is following in the
footsteps of other firms such as McDonald’s, Burger King and Kentucky Fried Chicken, which
have been locating their restaurants throughout the world for many years. These firms have not
let geographical distance stand in the way of reaching their target customers. Rather, they have
developed and adapted their channel structures to serve these distant markets effectively and
efficiently.
Of course, another approach for dealing with distant markets in recent years is through
Internet-based e-commerce channels. Given that Internet provides worldwide reach
electronically, geographical distance becomes less important, at least in theory. In practice, this
has not been the case, especially for firms selling physical products that must be picked, packed
and then shipped over great distances. Fulfillment, logistics and customer service still present
challenges for both consumer and business markets even with the power of Internet technology.
Locating Markets
As part of the firm’s overall marketing strategy, the channel manager may be called on to
delineate the geographical locations of target markets. Generally, this can be done in terms of
one or more commonly accepted geographical units. The Bureau of the Census, for example,
lists data for a number of geographical entities such as states, regions and divisions, counties,
metropolitan statistical areas (MSAs), selected towns and townships and several other special-
purpose designations. Postal ZIP codes are also useful for delineating markets geographically.
Some combination of these geographical entities typically serves as the basis for specifying
the location of markets. More difficult than locating markets is keeping track of geographical
changes in existing markets and forecasting such changes for the future. Given the increasing
mobility of populations, the channel manager cannot expect market geography to remain stable
for an extended time period.
In a global context, market geography has also changed dramatically in recent years. Most
notably, countries in Southeast Asia as well as the former Eastern Bloc countries of Central and
Eastern Europe have become key locations for emerging markets.
Geographic Terms and Definitions Used by U.S. Census Bureau
The Census Bureau produces population estimates for the Nation, the States, the District of
Columbia, Puerto Rico, countries and equivalents, incorporated places, minor civil divisions,
consolidated cities, census regions and divisions, and metropolitan areas.
Census Regions and Divisions
The Census Bureau delineates two sets of sub-national areas that are composed of states. This two-
tiered system of areas consists of 9 census divisions nested in 4 census regions.
Counties (and equivalents)
Counties are the primary legal divisions of most states. Most counties are functioning governmental
units, whose powers and functions vary from state to state. In Louisiana, these primary divisions are
known as parishes. In Alaska, the county equivalents consist of legally organized boroughs or “census
areas” delineated for statistical purposes by the State of Alaska and the Census Bureau (since 1980).
In four states (Maryland, Missouri, Nevada, and Virginia), one or more cities are independent of any
county organization and thus constitute primary divisions of their states; the Census Bureau refers to
these places as “independent cities” and treats them as the equivalents of counties for estimates
purposes. The District of Columbia has no primary divisions and the entire area is considered to be
the equivalent of a county. In Puerto Rico, municipios are the primary divisions and treated as
county equivalents for estimates purposes. Legal changes to county boundaries or names are
typically infrequent.
Minor Civil Divisions
Legally defined county subdivisions are referred to as minor civil divisions (MCDs.) MCDs are the
primary divisions of a county. They comprise both governmentally functioning entities—that is,
those with elected officials who provide services and raise revenues—and nonfunctioning entities
that exists primarily for administrative purposes, such as election districts.
Imported Places
The legal designations, powers, and functions of incorporated places vary from state to state.
Incorporated places include cities, town (except in New England, New York, and Wisconsin where
the Census Bureau recognizes towns as MCDs for census purposes), boroughs (except In Alaska,
where the Census Bureau recognizes boroughs as equivalents of counties, and New York, where the
Census Bureau recognizes five boroughs that constitute New York City as MCDs) and villages.
Incorporated places can cross both country and MCD boundaries. When this occurs, the place name
is followed by the designation “pt” 9which stands for part). The PEP produces estimates of the
unincorporated ‘balance of country” area for counties that are not entirely composed of
incorporated places. Another way to understand this is to think of the “balance of county” as the
county population minus the county population resident within incorporated places.
Consolidated Cities
Consolidated cities are a unit of government for which the functions of an incorporated place and its
country or MCD have merged. The legal aspects of this action may result in both the primary
incorporated place and the county or MCD continuing to exist as legal entities, even though the
county or MCD performs few or no governmental functions. Where one or more other incorporated
places within the consolidated government continue to function as separate governmental units, the
primary incorporated place is referred to as a “consolidated city.”
Metropolitan and Micropolitan Statistical Areas
The general concept of metropolitan or micropolitan statistical area is that of a core area containing
a substantial population nucleus, together with adjacent communities having a high degree of
economic and social integration with that core. Metropolitan and micropolitan statistical area
comprise one or more entire counties.
KEY PUBLISHED SOURCES FOR LOCATING MARKETS
SOURCE DESCRIPTION
Census Bureau’s Metropolitan Map Series Published by U.S. Department of Commerce. Maps
depicting all officially defined Standard Metropolitan
Statistical Areas.
Commercial Atlas and Market Guide Published by Rand McNally. Contains regional, state,
and metropolitan area maps, as well as a vast amount
of economic, transportation, communication, and
population data. Also contains Canadian and world
maps and information.
County and City Data Books Published by U.S. Census Bureau. Convenient summary
of statistics on the social and economic structure of
counties and cities of the U.S.
Published by Editor and Publisher. Contains Market
Editor and Publisher Market Guide
Guide Maps showing locations of all U.S. and Canadian
daily newspaper cities and metropolitan areas in the
United States along with information on population,
housing, industries, newspapers, and other data for
each city and metropolitan area.
Published by ESRI Business Solution (formerly CACI
The Sourcebook of ZIP Codes marketing Systems). All residential and nonresidential
ZIP codes. Spending potential indicated for 20
product/service categories; business date including total
firms and total employees.
Market Size and Channel Design Strategy
He second dimension of the market framework, market size, refers to the number of buyers or
potential buyers (consumer or industrial) in a given market.
Bucklin developed a model relating market size to channel structure, which provides some
insight for using market size data. The insight provided by Bucklin’s model into the possible
relationship between market size and channel structure is of particular use to the channel manager
in Phase 1 of the channel design decision (knowing when a channel design decision is needed). By
keeping this theoretical model in mind, the channel manager seeing data on a changing market size
is likely to be more sensitive to its implications for channel structure. For example, if market forecast
data were to indicate a substantial increase in the number of buyers in a particular market,
questions as the following should emerge:
1. Will the increase in the number of buyers increase or decrease the average cost of serving
our buyers?
2. If an increase in average costs is likely, can our present channel structure be changed to
reduce these costs before the market reaches its forecasted sized?
3. If such structural changes could be made, would this yield a differential advantage to our
firm?
The theory does not provide a clear-cut basis for answering these questions, so a large dose
of judgment that takes into account the peculiarities of particular situations and other variables
is still needed. Take, for example, the case of the firm attempting to reach additional buyers in
new territories. In this situation, a high, positive correlation between the market geography and
the market size dimensions is very likely because the geographical size and the number of buyers
are increasing together. Given this particular situation, the answer to question one could be that
the increasing market size will increase the average cost of serving the buyers in the market. On
the other hand, if the market size dimension is increasing while the market geography dimension
remains constant (that’s is if additional buyers are attracted within the present geographical
territories), the effect on costs may be much less. Such growth in market size within an
essentially fixed geographical market has enabled a very “old-fashioned’ marketing channel—
home delivery of milk—to make something of a comeback recently. Home delivery had, for
many decades, been the dominant channel for milk. But by the early 1960s, this channel had
virtually disappeared. Supermarket and convenience stores became the preferred channels for
most consumers. Supermarkets and convenience stores became the preferred channels for
some small dairies, such as Crescent Ridge Dairy Inc. in Sharon, Mass, have been able to position
their locally produced milk sold in glass bottles and delivered directly to consumers’ doorsteps as
offering a superior customer experience. This positioning strategy, however, could only work if
delivery costs could be kept under control. Fortunately, the growth in consumer demand for
home delivery occurred within a stable geographical area in Sharon, Mass, so drives could cover
their territories quickly and efficiently.
Market Density and Channel Design Strategy
Market density refers to the number of buyers or potential buyers per unit of geographical area.
This market dimension should also be considered in channel design strategy because of its
relationship to channel structure.
A useful concept that helps to illustrate the relationship is that of efficient congestion.
According to this concept, congested (high-density) markets can promote efficiency in the
performance of several basic distribution tasks, particularly those of transportation, shortage,
communication and negotiation.
With respect to transportation and storage, a high geographical concentration of customers enables
good to be transported in large lots to the concentrated markets and stored in a relatively small
number of inventories capable of adequately serving the compact markets. For markets
characterized by low levels of density, smaller quantities of goods have to be transported and
smaller inventories are needed.
In terms of communication and negotiation tasks, dense markets facilitate the flows of
communication and negotiations. This is especially true when face-to-face information and
negotiations are necessary. For example, if a manufacturer’s salesperson must call on 50 account, it
will take much less sales time and effort to call on these accounts if they are located within an area
of 100 square miles instead of 500.
The major strategic implications of this discussion is that the opportunity to achieve a
relatively high level of customer access at low cost is higher in dense markets than in more dispersed
ones. Consequently, manufacturers of a wide array of products including automobiles, consumer
electronics, groceries, sporting goods, clothing, hardware and many others seek out distributors and
retailers that operate in dense markets. Even though dense markets are most often located in major
metropolitan areas and are the most competitive, the large number of customers in close proximity
to huge assortments of products provides the greatest opportunity and highest level of efficiency. In
short, high concentrations of customers foster marketing channels that make high concentrations of
products available to those customers. Thus, customers benefit by having a vast array of products
conveniently available to them at competitive prices. Channel members at the manufacturer,
wholesaler and retailer levels, while often faced with intense competition in dense markets, have
the offsetting advantage of the efficient congestion provided by high-density markets.
Basic product producer
General wholesaler
Basic product
Basic product specialty wholesaler
processor
Finished product
processor Specialty wholesaler
Regional wholesaler
Market Behavior and Channel DesignLocal wholesaler
Strategy
Retailer
This fourth dimension, market behavior, consists of four subdimensions: when the market buys,
where the market buys, how the market buys and who buys:
When Customers Buy
