Lesson 7 & 8: Identify and Segment Market for a Product or

Service and Select the Appropriate Target Market Segment and

its Positioning

Objectives:

1. Identify and segment market for a product or services.

2. Analyze and select the appropriate target market segment and its positioning.

Abstraction:

What Is a Market Segment?

The term market segment refers to people who are grouped together for marketing
purposes. Market segments are part of a larger market, often lumping individuals
together based on one or more similar characteristics. Corporations and their marketing
teams use various criteria to develop a target market for their products and services.
Marketing professionals approach each segment differently, but only after they fully
understand the needs, lifestyles, demographics, and personality of the target consumer.

KEY TAKEAWAYS

A market segment is a group of people who share one or more similar characteristics.

Corporations and marketing teams use various criteria to develop target markets for
their products and services.

The criteria for a market segment include homogeneity among the segment's main
needs, uniqueness, and a common reaction to marketing tactics.

The reaction from market segments to marketing plans or strategies is typically very
predictable.

Common market segment traits include interests, lifestyle, age, and gender.
How Market Segments Work

A market segment is a category of customers who have similar likes and dislikes in an
otherwise homogeneous market. These customers can be individuals, families,
businesses, organizations, or a blend of multiple types.

Market segments are known to respond somewhat predictably to a marketing strategy,

plan, or promotion. This is why marketers use segmentation when deciding on a target
market. As its name suggests, market segmentation is the process of separating a
market into sub-groups, in which its members share common characteristics.

To meet the most basic criteria of a market segment, three characteristics must be
present:

there must be homogeneity among the common needs of the segment

there needs to be a distinction that makes the segment unique from other groups
the presence of a common reaction or a similar and somewhat predictable response to
marketing is required.
Common characteristics of a market segment include interests, lifestyle, age, gender,
etc. Common examples of market segmentation include geographic, demographic,
psychographic, and behavioral.

Fast Fact

Companies that understand market segments can prove themselves to be effective

marketers while earning a greater return on their investments.

Market Segmentation

Market segmentation is an adaptive strategy. It consists of the partition of the market

with the purpose of selecting one or more market segments that the organization can
target through the development of specific marketing mixes that adapt to particular
market needs. But market segmentation need not be a purely adaptive strategy! The
process of market segmentation can also consist of the selection of those segments
for which a firm might be particularly well suited to serve by having competitive
advantages relative to competitors in the segment or reducing the cost of adaptation in
order to gain a niche. This application of market segmentation serves the purpose of
developing a competitive scope which can have a “powerful effect on competitive
advantage because it shapes the configuration of the value chain.” (Porter, 1985, p. 53)

Niche means a place or function or denoting products, services, or interests that appeal
to a small, specialized section of the population.

According to Porter, the fact that segments differ widely in structural attractiveness and
their requirements for competitive advantage brings about two crucial strategic
questions: the determination of (a) where to compete in an industry and (b) in which
segments would focus strategies be sustainable by building barriers between segments
(Porter, 1985, p. 231).

Through market segmentation the firm can provide higher value to customers by
developing a market mix that addresses the specific needs and concerns of the
selected segment. Stated in economic terms, the firm creates monopolistic or
oligopolistic market conditions through the utilization of various curves of demand for a
specific product category (Ferstman, C., & Muller, E., 1993). This is an expanded
application of the microeconomic theory of price discrimination, where the firm seeks to
realize the highest price that each segment is willing to pay. In this case, the theory’s
reliance on price is broadened to include all 4 P’s of the marketing mix (Wilkie, 1990, p.
98). This application of microeconomic theory is particularly applicable to organizations
active in product categories that are cluttered with competition. It is also useful where
sufficiently large markets with distinct sets of value preferences are found, or when the
organization chooses to proactively build a stronghold by creating value preferences
among a set of consumers.

Examples of Market Segments and Market Segmentation

The banking industry provides a very good example of how a company market to
specific market segments. All commercial banks service a wide range of people, many
of whom have relatable life situations and monetary goals. If a bank wants to market to
baby boomers, it conducts research and may find that retirement planning is the most
important aspect of their financial needs. The bank can then market tax-deferred
accounts to this consumer segment.
If the same bank wants to effectively market products and services to millennials, Roth
IRAs and 401(k)s may not be the best option. Instead, the bank may conduct in-depth
market research and discover most millennials are planning to have a family. The bank
uses that data to market college-friendly savings and investment accounts to this
consumer segment.

Sometimes a company already has a product but may not yet have its target consumer
segment. In this scenario, it is up to the business to define its market and cater its
offering to its target group. Restaurants are a good example. If a restaurant is near a
college, it can market its food in such a way as to entice college students to enjoy happy
hour rather than trying to attract high-value business customers.

Identifying the Market Segment for a Product or Service

Identifying the right market segments for a given product is key to attracting customers,
generating revenue and earning optimal profit for your small business. While a number
of approaches are used to target segments for a product, a distinct customer base that
you want to target should be accessible and offer measurable marketing opportunities.

Lifestyle Interests

While demographics are a common way for companies to segment markets, using this
approach isn't always the best way to find the commonality among consumers for a
given product. Identifying target customers based on shared lifestyle interests and
activities might offer you more clarity. A high-quality baseball glove brand, like Wilson's
or Rawling's, for instance, typically targets more serious players at high school, college
and professional levels for their brands.

Benefits

In some cases, your products make segmentation simpler because they offer a few
concrete, unique benefits that appeal to varied customer groups. Cars are a great
example. Typically, people don't expect to get every possible benefit of a car in one
purchase. For instance, high-end luxury buyers understand they will pay a higher price.
Similarly, economy buyers know better fuel efficiency often means limited luxury
features. When car companies target market segments, they normally identify distinct,
major benefits of their products and then outline the main objectives of buyers for each
benefit category.

Usage Rates

You might have a large audience of customers using your products, but in different
levels or frequencies. In this case, usage rates might be your ideal market segmentation
strategy. With this approach, you identify customers who use the product infrequently,
those who are routine or regular users, those who are die-hard loyal customers and
those who haven't tried the product. When you market, you either attempt to present the
benefits of the product as it relates to usage levels, or you try to increase a buyer's
consumption. For instance, Clorox often targets infrequent and routine users with ads
promoting all of the uses of bleach to ramp up buying activity.

Price Impact

Price typically plays a key role in identifying the right segment for your products. If you
develop a high-quality solution and intend to provide elite service, your customers
probably would come from middle to upper class income levels. If you emphasize price
or value as part of your offering, you have a larger pool of budget-conscious buyers in
the lower, lower-middle or middle-income classes.

How Are Market Segments Used?

Commonly used in marketing strategies, market segments help companies optimize

their products and services to suit the needs of a given segment. Market segments are
often used to identify a target market.

How Do You Identify Market Segments?

Broadly speaking, identifying a market segment requires the following three criteria. To
start, the main needs of a sub-group must be homogenous. Second, the segment must
share distinct characteristics. Finally, the segment produces a similar response to
marketing techniques. Prospective buyers are grouped into various segments, often
based on how much value they place on a product or service.

What Is an Example of a Market Segment?

Consider a company that markets health and beauty products to both men and women.
These products, such as razors or skin care, are typically more expensive for women
than they are for men. The product packaging also differs—products targeted to women
having pinks and floral accents that align with gender stereotypes. On the other hand,
the company's male-targeted products are characterized by more rugged blacks and
greys.

What Are the Top Ways to Segment Your Marketing?

Segmentation is a common strategy used in marketing to break down a large target

audience into smaller, more homogenous groups of customers. The point is to make
marketing efforts more efficient by investing in communication that connects with
customers most likely to buy your product, while minimizing wasted spending on those
who won't. Several common techniques are used to segment markets.

Demographics

Demographic segmentation is the most common and traditional form of market

segmentation. This is where customers are targeted based on shared traits. Age, race,
gender, marital status, income, education and occupation are typical identifiers used in
demographic segmentation. This approach works well if you have an easily identifiable
customer profile. Minivans, for instance, are often marketed to couples in their 20s to
40s who have children, middle-class income, and professional occupations. Using
demographics for segmentation doesn't make as much sense if your target market is
more diverse on these qualities.

Lifestyle
In lieu of clear demographic qualities, companies often turn to shared lifestyle interests
and hobbies to target customers. Companies that sell camping equipment, for instance,
might find it difficult to target customers demographically, since a wide range of people
participate in outdoor recreation. Thus, trying to find TV shows, magazines and other
media that camping enthusiasts use in common makes more sense. Outdoor living
magazines or programming provides an efficient communication channel.

Geographic

Companies that have a relatively broad audience concentrated in a specific geographic

location can benefit from geographic segmentation. While regional and national
companies use geographic segments to run regional or national campaigns, this
strategy is especially useful for local businesses. A local supermarket, for instance,
would get more value from targeting the local community through newspapers and
radio than it would trying to hone in on a demographic segment. Geographic focus
helps you increase awareness among the public in particular markets.

Behavioral Traits

Companies with many types of customer groups may benefit from segmenting them
based on behavioral traits, such as level of usage. You could target nonusers to entice
them to buy, prior users to get them back, potential users to convince them to give your
product a try, and current users to strengthen their level of commitment. If you have a
large base of existing customers, you might also build campaigns centered on light,
medium and heavy rates of usage. With light or medium users, you could explain other
ways customers can benefit from your product. With heavy users, you can offer rewards
programs to encourage their ongoing commitment and motivate them to buy even
more.

How to Segment a Target Market

Segmenting your target market is a common step in marketing strategy when you
have multiple types of customers who would have interest in your product or service.
This process involves brainstorming the various types of similar customer groups, or
segments, your brand appeals to, and to effectively position your brand to each one. A
key decision in segmentation is picking the right approach.
Demographics

A common method used to segment target markets is demographics. This is when you
use several personal traits to identify a prototype of a customer in a particular market.
Age, race, gender, marital status, income, education and occupation are among traits
used to segment demographically. As an example, a chain of sports-themed grill and
pub restaurants might identify men 21 to 39 with moderate income as its primary target
market. The point of doing this is to develop marketing and promotions that appeal
specifically to this type of customer and deliver ads through the right media.

Interest and Activities

In some cases, markets are too broad to segment demographically. Momentum has
grown in the early 21st century toward the use of lifestyle interests and psychographics.
The idea here is to discover the shared interest and activities of people in a
demographically diverse market. A fishing gear store might consider the adventurous
spirit, outdoor mentality and appreciation for nature shared by people who buy and use
its products. This helps in developing effective benefit messages and placing them in
media, such as "Outdoor Living" or on outdoor fishing and hunting television and radio
shows.

Product Benefits

In some cases, products provide the basis for segmenting markets. Some products
have two to four significant but distinct benefits that lure customers to the same
product for different reasons. Cars are a great example. Safety and reliability, fuel
economy and low cost, luxury and status, and joy riding are four common but distinct
benefits offered by car dealers through multiple makes and models. Using benefits
segmentation, you want to focus on one particular benefit in promotions and deliver the
message to the customer type who would have most interest. For instance, luxury car
buyers normally have higher incomes and a desire for social status.

Geographic
For businesses with varied or extremely divers target markets, geographic
segmentation may be the most sensible approach. This is when you identify a market
based on geographic location and borders. Local businesses with large product or
service assortments and a varied market commonly target a local audience. Radio and
newspapers are affordable options used by local businesses in geographic
segmentation. Regional companies can segment as well. Stores or chains operating in
a handful of states may use regional newspapers or television stations to reach a
regional audience. Large companies often segment nationally and globally.

Three Stages of Segmentation

Segmentation as a process consists of three stages: 1) segment identification, 2)

segment evaluation, and 3) the creation of marketing mixes for target segments. The
outcome of the segmentation process yields “true market segments.” True market
segments meet three criteria: a) group identity–homogeneous within groups and
heterogeneous across groups; b) systematic behaviors–reacting similarly to a particular
marketing mix; and c) efficiency potential–feasibility and cost of reaching a segment
(Wilkie, 1990). In addition, Gunter (1992) recommends considering the stability of
market segments over time and different market conditions.

Stage One – Segment Identification

The first stage of market analysis consists of segment identification. The analyst has
the option of segmenting the market using different sets of criteria including personal
characteristics of the consumer, benefits sought, and behavioral measures of the
consumer (Wilkie, 1990, p. 101). Within these categories, the options available are truly
overwhelming and in many cases, different segmentation approaches will steer strategy
along very different paths. Utilizing multiple segmentation approaches is recommended
by several authors (Porter, 1985; Gunter, 1992).

There is no recipe for choosing which variables to utilize when segmenting. The
identification of segmentation variables is among the most creative parts of the
segmentation process. It involves conceiving dimensions along which products and
buyers differ and that carry important structural or value chain implications.
Furthermore, “the greatest opportunity for creating competitive advantage often comes
from new ways of segmenting, because a firm can meet buyer needs better than
competitors or improve its relative cost position” (Porter, 1985, p. 247).
Segmentation variables

Wilkie (1990) divides segmentation variables into three categories: 1) personal

characteristics, 2) benefits sought, and 3) behavioral measures. The following explains
each set of variables in broad terms.

1. Personal characteristics

The set of personal characteristics includes all the variables that can be used to
describe or identify particular individuals. They include a vast array of personal
attributes, media exposure, demographic, geographic, geo-demographic, lifestyles
(activities, interests, opinions), and psychographics.

Psycho-demographics and geo-demographics are popular segmentation tools. Because

they originated together, the two concepts have been confused for one another but are
recognized as distinct consumer typology sets (Piirto-Heath, R. 1995).

Geo-demographics

Geo-demographic models are conceptually based on the assumptions that (1)

neighborhoods contain homogeneous groups of individuals, that (2) such groups can be
clustered and share similarities across geographies. The cluster is defined in a well-
rounded “picture” that includes research on media habits, purchasing patterns for many
categories, and the possibility to match an individual’s promotional response to the geo-
demographic classification. In the United States, some commonly known geo-
demographic classification systems are Experian Mosaic USA, and Nielsen PRIZM.

Clusters are identified using census data and geographic information. Current systems
develop a surrogate measure for socioeconomic ranking utilizing a mixture of
educational attainment, income, home value, occupation, and age. This information is
laid over satellite generated data measuring urban, suburban, and rural settings. The
analysis is enriched using other variables and survey data to extract the different
clusters. Households sharing similar education, income, life stage, dwelling type, and
type of community do tend to have similar purchasing habits. This makes geo-
demographic clusters highly actionable and reachable.

Segmenting consumers by geo-demographic clusters enhances the potential for directly

identifying and reaching prospects. The geo-demographic approach permits prospect
identification down to the census block level so the implementation of distribution,
direct marketing, and other strategies are simplified. One of the disadvantages of this
system is that it is a classification of heads of households. The other major
disadvantage of geo-demographic approaches is precisely the reason why
psychographics has become so popular–it describes segments by many of their
characteristics but not by their attitudes, values, beliefs, or personality orientations.

Psychographics

Psychographic models classify consumers by their values and lifestyles. Though

psychographic classifications are now abundant, among the best known is VALS.
Psychographic studies range from the general profiling of lifestyles to the product-
specific segmentation based on psychographic elements. Psychographic variables are
classified into three categories: product attributes, lifestyle attributes, and psychological
attributes.

The study of lifestyles is largely explained in terms of attitudes, interests, and opinions
(AIOs). These are a reflection of a mix of economic, cultural and social values. Values, in
turn, are largely shaped by early-in-life experiences. Among the strongest forces forming
values are the triad of institutions (family, religion, school, media, and government
(Gunter 1992).

The use of psychographics is important not only as a consideration during the initial
segmentation but as an important element for the segment evaluation and marketing
mix formulation phases of the STP (Segmentation, Targeting and Positioning) process.
“Although typically used more in advanced analysis than initial segmentation studies,
psychographics can be very useful in identifying and explaining the behavior of markets.
For example, although the market for cars can be defined in geo-demographic terms,
psychographic a researcher may be able to identify many reasons or motives underlying
car buying behavior which could help to design a more effective promotional and
marketing strategy” (Gunter, B. & Furnham, A., 1992, p. 64).

2. Benefits sought

The second group of variables used to segment consumers includes all those related to
the benefits and needs they seek to fulfill themselves. It includes the nature of their
demand for different products and services. It also encompasses value preferences
such as quality, price, style, image, etc.

3. Behavioral Measures

The third category of segmentation variables is behavioral measures. It includes

product usage and actual behavior such as buying patterns, usage data, channel,
ownership, quantities, brand loyalty, attitudes, etc. Wilkie (1990) explains that variables
in the first category (personal characteristics) are unchangeable by the marketer, so the
segmentation by this level of variables should yield adaptive strategies that recognize
the reality of consumer characteristics and find ways to use them to the firm’s
advantage. The second category (benefits sought) is relatively stable over time since
individuals are not likely to change their values and beliefs as Ries & Trout (1981, 1990,
1996) have categorically stated. However, in the third category (behavioral measures),
change is the norm and so this is where the marketer can influence the target audience
(Wilkie, 1990).

Segmentation techniques

Once segmentation variables have been preselected and the data is collected, it is
necessary to choose the statistical process by which the segments will be identified.
The segmentation technique to be used depends largely on the type of data available
(metric or nonmetric variables) and the kinds of dependence observed — that is,
dependence or interdependence (Cooper D. & Emory, W., 1995, p. 521). Among the most
common segmentation techniques used are factor analysis, cluster analysis,
discriminant analysis, and multiple regression. Increasingly utilized techniques include
chi-squared automatic detection (CHAID), LOGIT, and Log Linear Modeling (Magidson,
J., 1990).

Traditionally cluster analysis had been utilized but its use declined because of
increased criticism of its empirical nature (Mitchell, V. W., 1994) and the emergence of
new methods. Newer systems and algorithms such as CHAID permit the use of chi-
squared analysis which does not force ordinal and nominal data into continuous
variables. CHAID permits not only the identification of segments but also their ranking
by profitability or some other measure of desirability (Magidson, J. 1993). Since the
segmentation process is complex, and thus prone to error, data integrity tests and
validity assessments should be included along the process as well as in the final
outcome review.

Once clusters have been identified, they are described using other variables not
included in forming the clusters. This descriptive process is intended to yield a full-
bodied description of the market segments, which will be useful in the evaluation
process but, most importantly, in the marketing mix creation stage. Multiple
discriminant analysis is often used for this purpose (Gunter, B., & Furnham, A., 1992).

Stage Two – Segment Evaluation

The second stage consists of evaluating the segments. The first element that needs to
be defined is the criteria by which the segments will be evaluated. In a nonprofit setting,
segment desirability is not necessarily determined by profitability and market share
objectives. If a measure of profitability or desirability can be quantified, the markets can
be ranked using tree analysis or gains charts.

Approaches vary with some suggesting a quantitative evaluation of the resulting

segments (Sarabia, 1996), while others highlight other strategies for evaluation. One
way to approach market segment evaluation is through the examination of a market
structure by constructing a spatial model where similarities and dissimilarities are
mapped. This representation of the market is then used in conjunction with demand
estimating and forecasting models to determine possible positioning alternatives for a
product (Johnson, R., 1995). This analysis can be enhanced by using a chi-squared tree
analysis and correspondence analysis to generate compositional perceptual maps,
which are “vital to understanding consumer brand positioning” (Bendixen, M., 1995).

Other elements should also be considered such as simplicity and potential adaptability
of the segmentation structure across national boundaries. Kotler (1990) suggests
considering three key factors: segment size and growth, segment structural
attractiveness, and company objectives and resources. Porter (1985) proposes a similar
approach but also recommends studying the firm’s resources and skills as reflected in
the value chain, and their suitability to target market alternatives. Aaker (1995) bases
his selection criteria on the SWOT analysis produced during the strategic marketing
planning process. Berrigan & Finkbeiner (1992) propose a somewhat similar process
that includes market structure analysis, market opportunity analysis, product portfolio
analysis, resource capabilities analysis, and competitive analysis.

Stage Three – Targeting through Marketing Mix

The third stage of the market segmentation process is the creation of a specific market
mix to fulfill the needs, as well as market conditions of each specific target segment
(Wilkie, 1990; Gunter & Furnham, 1992; Kotler, 1994). Many authors limit the market
segmentation process to market identification rather than focusing on the key elements
of the entire process. This can lead companies to fail to give due importance to other
stages in market segmentation such as product positioning and mix development
(Sarabia, 1996).

Once the firm has chosen a market segment, it must choose a generic competitive
strategy. At this point, it is also necessary to review the selected strategy across
segments and explore general strategic approaches. In some cases, it might become
apparent that a counter-segmentation strategy is applicable. In other cases, the
development of distinct mixes for each segment uncovers inconsistencies or lack of
resources at the corporate level and so it is necessary to revert to the segment
evaluation stage.

According to Kotler (1994, p. 293), the only sustainable generic strategy in a segmented
market is differentiation. Kotler explains that the only other generic competitive strategy
alternative (low cost) is not sustainable in a segmented market. In addition, a strategy
successful at differentiating must generate customer value, provide perceived value,
and be difficult to copy.

At this point in the process, the company selects those ways in which it will distinguish
itself from its competitors. In most cases, differentiation involves multiple elements. In
fact, “most successful differentiation strategies involve the total organization, its
structure, systems, people, and culture” (Aaker, 1996). One way to differentiate is
through brand equity building. A strategy based on brand is likely to be sustainable
because it creates competitive barriers. A brand strategy permits the strategist to work
with complex concepts and not limit the differentiation strategy to just a few
competitive differences. This approach is consistent and reinforces the STP approach.
A successful brand strategy builds barriers to protect the selected position by creating
associations of the positioning variables with the brand name in the prospect’s mind.

Positioning

Gunter and Furnham (1992) prescribe that after selecting target markets, the strategist
should develop positioning objectives to then develop them into a detailed marketing
mix. However, Aaker (1996) recommends developing the positioning objective only after
the brand identity and value proposition have been developed. In exploring the latter, it
is useful to understand Aaker’s definition of positioning is “the part of the brand identity
and value proposition that is to be actively communicated to the target audience and
that demonstrates an advantage over competing brands.” Kotler (1994) refers to it as
the unique selling proposition. Explained in other words, the positioning statement is the
point where the bundle of attributes joins to form one concept which aims at capturing
the essence of that which the target audience seeks in the product category.

The benefit of following Aaker’s recommendation lies in the expanded range of position
alternatives. Three places are suggested in looking for brand position elements: the
core identity (central, timeless, essence of a brand), points of leverage within the
identity structure (an attribute, sub-brand, special feature, or service), and the value
proposition (benefits that drive relationships with target audiences).
According to Brooksbank (1994), the positioning strategy should include three
components: 1) customer targets, which are the product of the segmentation study; 2)
competitor targets, which are a product of the analysis of the external environment; and
3) competitive advantage, which is also a product of the environmental analysis. In
developing the positioning objective, Ries (1996) is concise and clear, “positioning is not
what you do to the product, but what you do to the mind.” Understanding how the mind
receives, stores, or rejects information will improve the chances of making the
positioning objective coincide with actual positioning in the target audience. Although
Ries & Trout have written several works relating to positioning, perhaps the key element
they require of a positioning strategy is simplicity. Simplicity is the search for the
obvious, placing the product at the heart of the category, and working to line up the
strategy with the market’s existing perceptions, attitudes, and beliefs.

Ries & Trout (1990) suggest the position is the mental angle used to enter the
prospect’s mind and the role of the entire strategy is to support that tactic. It appears
that the process as outlined by Porter, Aaker, Kotler, Ries, and Trout for STP is one in
which the different elements interact: strategy points to the markets, research unveils
position alternatives, and the positioning tactic requires a full strategy to support it.

Practical Approaches

Undertaking the segmentation, targeting and positioning process is probably one of the
most important processes management can undertake both at the onset of a new offer
creation as well as part of a periodic revision of the portfolio of offers and strategies
used by the organization. The process can be one that tests one’s ability to think
creatively and so that is one important reason why frequently companies seek the
assistance of an outside researcher to help them through the process. Working in
tandem, marketing analysts/researchers and business executives can achieve effective
STP strategies.

This article is an exploration that can provide you with an understanding of the
theoretical framework within which the STP process can be conducted. We invite you to
explore the rest of our web site and reach out to explore what might be the best fit for
you. Let’s get the conversation started.