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Week 4, "Market Segmenting, Targeting, and Positioning" was derived from Principles of Marketing, which was adapted by the Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensee. © 2015, The

Saylor Foundation.

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Week 4 Market Segmenting, Targeting, and Positioning

Suppose you've created a great new offering you hope will become a hot seller. Before you quit

your day job to market it, you'll need to ask yourself, "Who's going to buy my product?" and "Will

there be enough of these people to make it worth my while?"

Certain people will be more interested in what you have to offer than others. Not everyone needs

homeowners' insurance, not everyone needs physical therapy services, and not everyone needs

the latest and greatest cell phone. Among those that do, some will buy a few, and a few will buy

many. In other words, in terms of your potential buyers, not all of them are "created equal." Some

customers are more equal than others, however. A number of people might be interested in your

product if it's priced right. Other people might be interested if they simply are aware of the fact

that your product exists.

Your goal is to figure out who these people are. To do this, you will need to divide them into

different categories. The process of breaking down all consumers into groups of potential buyers

with similar characteristics is called market segmentation. The key question to ask yourself

when segmenting markets: What groups of buyers are similar enough that the same product or

service will appeal to all of them? (Barringer & Ireland, 2010). After all, your marketing budget is

likely to be limited. You need to focus on those people you truly have a shot at selling to and

tailoring your offering toward them.

Once market segments are identified, the next step is to identify which of those segments, if any,

the company wants to pursue with its limited resources and consistency with its mission. This is

called target marketing. A company may decide not to target market, in which case it is mass

marketing. But mass marketing is rare.

4.1 Targeted Marketing vs. Mass Marketing

LEARNING OBJECTIVES

1. Distinguish between targeted marketing and mass marketing and explain what led to the rise of each. 2. Describe how targeted marketing can benefit firms. 3. Explain why companies differentiate among their customers.

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Choosing select groups of people and organizations to sell to is called targeted marketing,

or differentiated marketing. It is a relatively new phenomenon. Mass marketing,

or undifferentiated marketing, came first. It evolved along with mass production and involves

selling the same product to everybody. You didn't need to conduct any market research to know

that a household could use an electric washing machine. Build it and they will come. You can

think of mass marketing as a shotgun approach: you blast out as many marketing messages as

possible on every medium available as often as you can afford (Spellings Jr., 2009). (By contrast,

targeted marketing is more like shooting a rifle; you take careful aim at one type of customer with

your message.)

Automaker Henry Ford was very successful at both mass production and mass marketing. Ford

pioneered the modern-day assembly line early in the twentieth century, which helped him cost-

effectively pump out huge numbers of identical Model T automobiles. They came in only one

color: black. "Any customer can have a car painted any color he wants, so long as it is black," Ford

used to joke. He also advertised in every major newspaper and persuaded all kinds of publications

to carry stories about the new, inexpensive cars. By 1918, half of all cars on America's roads were

Model Ts (Ford, 1922).

Figure 4.1

You could forget about buying a custom Model T from Ford in the early 1900s. The good news?

The price was right.

Source: Unknown. Wikimedia Commons. In the public domain.

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Then Alfred P. Sloan, the head of General Motors (GM), appeared on the scene. Sloan began to

segment consumers in the automobile market—to divide them by the prices they wanted to pay

and the different cars they wanted to buy. His efforts were successful, and in the 1950s, GM

overtook Ford in the as the nation's top automaker (Manzanedo, 2005). (You might be interested

to know that before GM declared bankruptcy in 2009, it was widely believed the automaker

actually had too many car models. Apparently, "old habits die hard," as the saying goes.)

Benefits of Segmenting and Targeting Markets The story of General Motors raises an important point, which is that segmenting and targeting

markets doesn't necessarily mean "skinnying down" the number of your customers. In fact, it can

help you enlarge your customer base by giving you information with which to successfully adjust

some component of your offering—the offering itself, its price, the way you service and market it,

and so on. More specifically, the process can help you do the following:

• Avoid head-on competition with other firms trying to capture the same customers

• Develop new offerings and expand profitable brands and product lines

• Remarket older, less-profitable products and brands

• Identify early adopters

• Redistribute money and sales efforts to focus on your most profitable customers

• Retain "at-risk" customers in danger of defecting to your competitors

The trend today is toward more precise, targeted marketing. Figuring out "who's who" in terms of

your customers involves some detective work, though—often market research. A variety of tools

and research techniques can be used to segment markets. Government agencies, such as the US

Census Bureau, collect and report vast amounts of population information and economic data

that can reveal changing consumption trends.

Technology is also making it easier for even small companies and entrepreneurs to gather

information about potential customers. For example, the online game company GamePUMA.com

originally believed its target market consisted of US customers. But when the firm looked more

closely at who was downloading games from its website, they were people from all over the globe.

The great product idea you had? As we explained in Week 3, "Consumer Behavior: How People

Make Buying Decisions," companies are now using the Internet to track people's web browsing

patterns and segment them into groups that can be marketed to. Even small businesses are able

to do this cost-effectively now because they don't need their own software and programs. They

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can simply sign up online for products like Google's AdSense and AdWords programs. You can

locate potential customers by looking at blog sites and discussion forums on the web. Big-

boards.com has thousands of discussion forums you can mine to find potential customers. Do you

have a blog? Go to BlogPoll.com, and you can embed a survey in your blog to see what people

think of your idea. If you have a website, you can download an application onto your iPhone that

will give you up-to-the-minute information and statistics on your site's visitors.

Getting a read on potential target markets doesn't have to involve technology, though. Your own

experience and talking to would-be buyers is an important part of the puzzle. Go where you think

would-be buyers go—restaurants, malls, gyms, subways, grocery stores, day care centers, and

offices. Ask questions: What do buyers do during the day? What do they talk about? What

products or services do you see them using? Are they having an enjoyable experience when using

those products, or are they frustrated?

Figure 4.2

The Healthy Choice line of frozen dinners was launched by a heart attack victim.

Source: Photo by Ken. (2008). Flickr. Used under the terms of the Creative Commons Attribution-NonCommercial 2.0 Generic license.

Healthy Choice frozen dinners were conceived as a result of questioning potential customers. The

food-maker ConAgra launched the dinners in the late 1980s after its CEO, Charlie Harper,

suffered a heart attack. One day a colleague complimented Harper on his wife's tasty low-fat

turkey stew. That's when Harper realized there were people like him who wanted healthy

convenience foods, so he began talking to them about what they wanted. Two years after the

Healthy Choice line was launched, it controlled 10 percent of the frozen-dinner market (Birchall

[b.], 2009).

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Segmenting and Targeting a Firm's Current Customers Finding and attracting new customers is generally more difficult than retaining your current

customers. People are creatures of habit. Think about how much time and energy you spend when

you switch your business from one firm to another—even when you're buying something as

simple as a haircut. If you aren't happy with your hair and want to find a new hairdresser, you

first have to talk to people with haircuts you like or read reviews of salons. Once you decide to go

to a particular salon, you have to look it up on the Internet or your GPS device and hope you don't

get lost. When you get to the salon, you explain to the new hairdresser how you want your hair cut

and hope he or she gets it right. You might also have to navigate different methods of payment.

Perhaps the new salon won't accept your American Express card or won't let you put the tip on

your card. However, once you have learned how the new salon operates, doing business with it

gets much easier.

The same is true for firms when it comes to finding new customers. Finding customers, getting to

know them, and figuring out what they really want is a difficult process—one that's fraught with

trial and error. That's why it's so important to get to know and form relationships with your

current customers. Broadly speaking, your goal is to do as much business with each one of them

as possible.

The economic downturn of the first decade in the 2000s drove home the point of making the most

of one's current customers. During the downturn, new customers were hard to find, and firms'

advertising and marketing budgets were cut. Expensive, untargeted, shotgun-like marketing

campaigns that would probably produce spotty results were out of the question. Consequently,

many organizations chose to focus their selling efforts on current customers in hopes of retaining

their loyalty once the downturn was over (Birchall [a.], 2009).

This is the situation in which the adventure-based travel firm Backroads found itself in 2009. The

California-based company increased its revenues by creating a personalized marketing campaign

for people who had done business with Backroads in the past. The firm looked at information

such as customers' past purchases, the seasons in which they took their trips, the levels of activity

associated with them, and whether or not the customers tended to vacation with children. The

company then created three relevant trip suggestions for each customer based on the information.

The information was sent to customers via postcards and e-mails with links to customized web

pages reminding them of the trips they had previously booked with Backroads and suggesting

new ones. "In terms of past customers, it was like off-the-charts better [than past campaigns],"

says Massimo Prioreschi, the vice president of Backroads' sales and marketing group

(MarketingSherpa, 2009).

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In addition to studying buying patterns, firms also try to know their customers by surveying them

or hiring marketing research firms to do so. Firms also use loyalty programs to find out about

their customers. For example, if you sign up to become a frequent flier with a certain airline, the

airline will likely ask to you a number of questions about your likes and dislikes. This information

will then be entered into a customer relationship management (CRM) system, and you might be

e-mailed special deals based on the routes you tend to fly. British Airways goes so far as to track

the magazines its most elite fliers like to read so the publications are available on its planes.

Many firms—even small ones—are using Facebook to develop closer relationships with their

customers. At Hansen Cakes, a Beverly Hills (California) bakery, employee Suzi Finer posts "cake

updates" and photos of the goodies she's working on to the company's Facebook page. Along with

information about the cakes, Finer extends special offers to customers and mixes in any gossip

about Hollywood celebrities she's spotted in the area. After Hansen Cakes launched its Facebook

page, the bakery's sales shot up 15–20 percent. "And that's during the recession," noted Finer

(Graham, 2009). Twitter is another way companies are keeping in touch with their customers and

boosting their revenues. For example, when the homemaking maven Martha Stewart schedules a

book signing, she tweets her followers, and voilà—many of them show up at the bookstore she's

appearing at to buy copies. Finding ways to interact with customers that they enjoy—whether it's

meeting or "tweeting" them, or putting on events and tradeshows they want to attend—is the key

to forming relationships with them.

Remember what you learned in Week 2, "Customer Satisfaction, Loyalty, Empowerment , and

Management": not all customers are created equal, including your current customers. Some

customers are highly profitable, and others aren't. Still others will actually end up costing your

company money to serve. Consequently, you will want to interact with some more than others.

Believe it or not, some firms deliberately "untarget" unprofitable customers. That's what Best Buy

did. In 2004, Best Buy got a lot of attention (not all good) when it was discovered the company

had categorized its buyers into "personas," or types of buyers, and created customized sales

approaches for each. For example, an upper-middle-class woman was referred to as a "Jill." A

young urban man was referred to as a "Buzz." And pesky, bargain-hunting customers that Best

Buy couldn't make much of a profit from? They were referred to as "devils" and taken off the

company's mailing lists (Marco, 2009).

The knife cuts both ways, though. Not all firms are equal in the minds of consumers, who will

choose to do business with some companies rather than others. To consumers, market

segmentation means: meet my needs—give me what I want (Market Segmentation, 2009).