Today, marketers are increasingly emphasizing a tiffany/walmart strategy, which is to offer

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When expenses are greater than the potentially increased sales from segmentation, a firm should not attempt to segment its market. Three specific segmentation strategies that illustrate this point are (1) one product and multiple market segments, (2) multiple products and multiple market segments, and (3) segments of one, or mass customization.

One Product and Multiple Market Segments

When an organization produces only a single product or service and attempts to sell it to two or more market segments, it avoids the extra costs of developing and producing additional versions of the product. In this case, the incremental costs of taking the product into new market segments are typically those of a separate promotional campaign or a new channel of distribution.

Magazines are single products frequently directed at two or more distinct market segments. The annual Sporting News Baseball Yearbook uses 17 different covers featuring a baseball star from each of its regions in the United States. Yet each regional issue has the same magazine content.

Other examples of a single offering for multiple segments include books, movies, and many services. Book series such as Harry Potter, The Twilight Saga, and The Hunger Games have phenomenal success in part due to the publishers’ creativity in marketing to preteen, teen, and adult segments. Movies have a similar challenge, particularly since different segments are reached through different channels such as movie theaters, streaming services, and pay-per-view cable

These different covers for the same magazine issue show a very effective market segmentation strategy. For which strategy it is and why it works, see the text. © McGraw-Hill Education/Editorial Image, LLC, photographer

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channels. Finally, services such as Disney’s resorts offer the same basic experience to at least three distinct segments—children, parents, and grandparents. Although separate advertising, promotion, and distribution for these offerings can be expensive, these expenses are minor compared with the costs of producing a different version of the offerings for each segment.

Multiple Products and Multiple Market Segments

Ford’s different lines of cars, SUVs, and pickup trucks are each targeted at a different type of customer—examples of multiple products aimed at multiple market segments. Producing these different vehicles is clearly more expensive than producing only a single vehicle. But this strategy is very effective if it meets customers’ needs better, doesn’t reduce quality or increase price, and adds to Ford’s sales revenues and profits.

Unfortunately, this product differentiation strategy in the auto industry has a huge potential downside: The proliferation of different models and options can reduce quality and raise prices— especially in relation to foreign imports. Perhaps the extreme was in 1982, when the Ford Thunderbird had exactly 69,120 options compared with 32 (including colors) on the 1982 Honda Accord.

More than three decades later Ford is relearning its models and options lessons. Its current successful turnaround is partly related to a reduction in the number of frames, engines, and brands offered. As a result, Ford has reduced its number of

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models from 97 to 36 and sold off the Jaguar, Land Rover, and Volvo brands, and discontinued the Mercury brand. Although there are fewer choices, Ford’s simplified product line provides two benefits to consumers: (1) lower prices through producing a higher volume of fewer models and (2) higher quality because of the ability to debug fewer basic designs.

Segments of One: Mass Customization

American marketers are rediscovering today what their ancestors running the corner general store knew a century ago: Each customer has unique needs and wants and desires special tender loving care. Economies of scale in manufacturing and marketing during the past century made mass- produced products so affordable that most customers were willing to compromise their individual tastes and settle for standardized products. Today’s Internet ordering and flexible manufacturing and marketing processes have made mass customization possible, which means tailoring products or services to the tastes of individual customers on a high-volume scale.

Mass customization is the next step beyond build-to-order (BTO), manufacturing a product only when there is an order from a customer. Apple uses BTO systems that trim work-in-progress inventories and shorten delivery times to customers. To do this, Apple restricts its computer manufacturing line to only a few basic models that can be assembled in four minutes. This gives customers a good choice with quick delivery. But even this system falls a bit short of total mass customization because customers do not have an unlimited number of features from which to choose.

The Segmentation Trade-Off: Synergies versus Cannibalization

The key to successful product differentiation and market segmentation strategies is finding the ideal balance between satisfying a customer’s individual wants and achieving organizational synergy, the increased customer value achieved through performing organizational functions such as marketing or manufacturing more efficiently. The “increased customer value” can take many forms: more products, improved quality of existing products, lower prices, easier access to products through improved distribution, and so on. So the ultimate criterion for an organization’s marketing success is that customers should be better off as a result of the increased synergies.

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The organization should also achieve increased revenues and profits from the product differentiation and market segmentation strategies it uses. When the increased customer value involves adding new products or a new chain of stores, the product differentiation–market segmentation trade-off raises a critical issue: Are the new products or new chain simply stealing customers and sales from the older, existing ones? This is known as cannibalization.

Marketers increasingly emphasize a two-tier, “Tiffany/Walmart” strategy. Many firms now offer different variations of the same basic offering to high-end and low-end segments. Gap’s Banana Republic chain sells blue jeans for $58, whereas Old Navy stores sell a slightly different version for $22.

Unfortunately, the lines between customer segments can often blur and lead to problems. For example, consider the competition within the ANN INC. organization between stores in its two chains—Ann Taylor and LOFT. The Ann Taylor chain targets “successful, relatively affluent, fashion-conscious women,” while its sister Ann Taylor LOFT chain targets “value- conscious women who want a casual lifestyle at work and home.” The LOFT stores wound up stealing sales from the Ann Taylor chain. The result: More than 100 stores from both chains were recently closed. Both chains are now aggressively targeting their customers by stressing online sales and opening new factory outlet stores.

Walmart has been opening Walmart Neighborhood Market stores that are about one-fifth the size of its supercenters. These smaller stores are intended to compete for the segments that shop at discount chains such as Dollar General. Walmart

ANN INC.’s LOFT chain tries to reach younger and value-conscious women with a casual lifestyle, while its Ann Taylor chain targets more sophisticated and relatively affluent women. For the potential dangers of this two-segment strategy, see the text. © McGraw-Hill Education/Jill Braaten, photographer

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The smaller Walmart Neighborhood Market format offers convenient locations to discount shoppers. © Scott Olson/Getty Images

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LO 9-2

Identify the five steps involved in segmenting and targeting markets.

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Neighborhood Markets are designed to meet a range of needs by offering fresh produce, health and beauty supplies, household items, gasoline, and a pharmacy. Walmart plans to open between 180 and 200 of the new format stores this year. Will its own Tiffany/Walmart strategy—or perhaps “Walmart/Dollar General” strategy—prove successful or lead to cannibalization of the larger stores? Watch for new stores near you during the next few years to determine the answer.

learning review

9- 1.

Market segmentation involves aggregating prospective buyers into groups that have two key characteristics. What are they?

9- 2.

In terms of market segments and products, what are the three market segmentation strategies?

STEPS IN SEGMENTING AND TARGETING MARKETS Figure 9–3 identifies the five-step process used to segment a market and select the target segments on which an organization wants to focus. Segmenting a market requires both detailed analysis and large doses of common sense and managerial judgment. So market segmentation is both science and art!

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For the purposes of our discussion, assume that you have just purchased a Wendy’s restaurant. Your Wendy’s is located next to a large urban university, one that offers both day and evening classes. Your restaurant offers the basic Wendy’s fare: hamburgers, chicken and deli sandwiches, salads, french fries, and Frosty desserts. Even though you are

part of a chain that has some restrictions on menu and decor, you are free to set your hours of business and to develop local advertising. How can market segmentation help? In the sections that follow, you will apply the five-step process for segmenting and targeting markets to arrive at marketing actions for your Wendy’s restaurant.

Step 1: Group Potential Buyers into Segments

It’s not always a good idea to segment a market. Grouping potential buyers into meaningful segments involves meeting some specific criteria that answer the questions,

Figure 9–3 The five key steps in segmenting and targeting markets link the market needs of customers to the organization’s marketing program.

A local Wendy’s restaurant—like yours! © Reed Saxon/AP Images

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“Would segmentation be worth doing?” and “Is it possible?” If so, a marketer must find specific variables that can be used to create these various segments.

Criteria to Use in Forming the Segments

A marketing manager should develop market segments that meet five essential criteria:

Ways to Segment Consumer Markets

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Simplicity and cost-effectiveness of assigning potential buyers to segments. A marketing manager must be able to put a market segmentation plan into effect. This means identifying the characteristics of potential buyers in a market and then cost-effectively assigning them to a segment.

Potential for increased profit. The best segmentation approach is the one that maximizes the opportunity for future profit and return on investment (ROI). If this potential is maximized without segmentation, don’t segment. For nonprofit organizations, the criterion is the potential for serving clients more effectively. Similarity of needs of potential buyers within a segment. Potential buyers within a segment should be similar in terms of common needs that, in turn, lead to common marketing actions, such as product features sought or advertising media used.

Difference of needs of buyers among segments. If the needs of the various segments aren’t very different, combine them into fewer segments. A different segment usually requires a different marketing action that, in turn, means greater costs. If increased sales don’t offset extra costs, combine segments and reduce the number of marketing actions. Potential of a marketing action to reach a segment. Reaching a segment requires a simple but effective marketing action. If no such action exists, don’t segment.

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LO 9-3

Recognize the bases used to segment consumer and organizational (business) markets.

Figure 9–4 shows four general bases of segmentation and the typical variables that can be used to segment U.S. consumer markets. These four segmentation bases are (1) geographic segmentation, which is based on where prospective customers live or work (region, city size); (2) demographic segmentation, which is based on some objective physical (gender, race), measurable (age, income), or other classification attribute

(birth era, occupation) of prospective customers; (3) psychographic segmentation, which is based on some subjective mental or emotional attributes (personality), aspirations (lifestyle), or needs of prospective customers; and (4) behavioral segmentation, which is based on some observable actions or attitudes by prospective customers—such as where they buy, what benefits they seek, how frequently they buy, and why they buy. Some examples are:

This MicroFridge appliance includes everything from a small refrigerator, freezer, and microwave oven to a charging station for laptops and mobile phones. To which market segment might this appeal? The answer appears in the text. Source: Intirion Corporation

Geographic segmentation: Region. Campbell Soup Company found that its canned nacho cheese sauce, which could be heated and poured directly onto nacho chips, was too spicy for Americans in the East and not spicy enough for those in the West and Southwest. The result: Campbell’s plants in Texas and California now produce a hotter nacho cheese sauce to serve their regions better.

Demographic segmentation: Household size. More than half of all U.S. households are made up of only one or two persons, so Campbell packages meals with

only one or two servings for this market segment. Psychographic segmentation: Lifestyle. Nielsen’s lifestyle segmentation is based on the belief that “birds of a feather flock together.” Thus, people of similar lifestyles tend to live near one another, have similar interests, and buy similar offerings. This is of great value to marketers. Nielsen PRIZM® classifies every

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household in the United States into

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one of 66 unique market segments. See the Marketing Insights About Me box for a profile of where you live.

Behavioral segmentation: Product features. Understanding what features are important to different customers is a useful way to segment markets because it can lead directly to specific marketing actions, such as a new product, an ad campaign, or a distribution channel. For example, college dorm residents frequently want to keep and prepare their own food to save money or have a late-night snack. However, their dorm rooms are often woefully short of space. MicroFridge understands this and markets a combination microwave, refrigerator, freezer, and charging station appliance targeted to these students. Behavioral segmentation: Usage rate. Usage rate is the quantity consumed or patronage—store visits—during a specific period. It varies significantly among different customer groups. Airlines have developed frequent-flyer programs to encourage passengers to use the same airline repeatedly to create loyal customers. This technique, sometimes called frequency marketing, focuses on usage rate. One key conclusion emerges about usage: In market segmentation studies, some measurement of usage by, or sales obtained from, various segments is central to the analysis.

***

Basis of Segmentation

Segmentation Variables Typical Breakdowns

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Geographic

Demographic

Region Northeast; Midwest; South; West; etc.

City size Under 10,000; 10,000–24,999; 25,000– 49,999; 50,000–99,999; etc.

Statistical area Metropolitan and micropolitan statistical areas; Census tract; etc.

Media-television 210 designated market areas (DMA) in the U.S. (Nielsen)

Density Urban; suburban; small town; rural

Gender Male; female

Age Under 6 yrs; 6–11 yrs; 12–17 yrs; 18–24 yrs; 25–34 yrs; etc.

Race/ethnicity African American; Asian; Hispanic; White/Caucasian; etc.

Life stage Infant; preschool; child; youth; collegiate; adult; senior

Birth era Baby boomer (1946–1964); Generation X (1965–1976); etc.

Household size 1; 2; 3–4; 5 or more

Marital status Never married; married; separated; divorced; widowed; domestic partner

Income Under $15,000; $15,000–$24,999;

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Psychographic

Behavioral

$25,000–$34,999; etc.

Education Some high school or less; high school graduate (or GED); etc.

Occupation Managerial & professional; technical, sales; farming; etc.

Personality Gregarious; compulsive; extroverted; aggressive; ambitious; etc.

Values (VALS2) Innovators; Thinkers; Achievers; Experiencers; Believers; Strivers; etc.

Lifestyle (Nielsen PRIZM)

Blue Blood Estates; Single City Blues; etc. (66 total neighborhood clusters)

Needs Quality; service; price/value; health; convenience; etc.

Retail store type Department; specialty; outlet; convenience; mass merchandiser; etc.

Direct marketing Mail order/catalog; door-to-door; direct response; Internet

Product features Situation-specific; general

Usage rate Light user; medium user; heavy user

User status Nonuser; ex-user; prospect; first-time user; regular user

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Marketing Insights About Me

To Which “Flock” Do You Belong?

There is an old saying that “birds of a feather flock together.” This also applies to the formation of market segments and gives rise to the following questions marketers must ask and answer: Who are your target customers? What are they like? Where do they live? How can you reach them?

These questions are answered in part by Nielsen, whose PRIZM consumer segmentation system classifies every household into one of 66 demographically and behaviorally distinct neighborhood segments to identify lifestyles and purchase behavior within a defined geographic market area, such as zip code. Many organizations today use these neighborhood segments, especially with social media.

Want to know what your neighborhood is like? Go to www.claritas.com/MyBestSegments/ Default.jsp and click the “ZIP Code Look-up” link or “Enter ZIP Code” button on the MyBestSegments home page. Then, type in your five-digit zip code and security code. Last, click the “Submit” button to find out what the most common segments are in your neighborhood.

*** Figure 9–4 Segmentation bases, variables, and breakdowns for U.S. consumer markets. Marketing managers should select segmentation variables that lead to marketing actions.

Awareness/intentions Unaware; aware; interested; intending to buy; purchaser; rejection

Source: The Nielsen Company

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For a description of these segments, click the “Segment Explorer” tab. Is this your “flock”? What specific product or service organizations might be interested in targeting these segments?

The Aberdeen Group recently analyzed which segmentation bases were used by the 20 percent most profitable organizations of the 220 surveyed. From highest to lowest, these were the segmentation bases they used:

Geographic bases—88 percent.

Behavioral bases—65 percent. Demographic bases—53 percent.

Psychographic bases—43 percent.

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The top 20 percent often use more than one of these bases in their market segmentation studies, plus measures such as purchase histories and usage rates of customers.

Experian Simmons continuously surveys over 25,000 adults each year to obtain quarterly, projectable usage rate data from the U.S. national population for more than 500 consumer product categories and 8,000-plus brands. Its purpose is to discover how the products and services they buy and the media they use relate to their behavioral, psychographic, and demographic characteristics.

Patronage of Fast-Food Restaurants

Figure 9–5 shows the results of a question Experian Simmons asked about adult respondents’ frequency of use (or patronage)

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of fast-food restaurants. As shown by the arrow in the far right column of Figure 9–5, the importance of the segment increases as we move up the table. Among nonusers of these restaurants, prospects (who might become users) are more important than nonprospects (who are never likely to become users). Moving up the rows to users, it seems logical that light users of these restaurants (0 to 5 times per month) are important but less so than medium users (6 to 13 times per month), who, in turn, are a less important segment than the critical group: heavy users (14 or more times per month). The Actual Consumption column in Figure 9–5 shows how much of the total monthly usage of these restaurants is accounted for by heavy, medium, and light users.

Usage rate is sometimes referred to in terms of the 80/20 rule , a concept that suggests 80 percent of a firm’s sales are obtained from 20 percent of its customers. The percentages in the 80/20 rule

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Figure 9–5 Patronage of fast-food restaurants by adults 18 years and older. The table shows the critical importance of attracting heavy users and medium users to a fast-food restaurant. Source: Experian Marketing Services Simmons Winter 2013 NHCS Full-Year Adult Survey 12-Month OneView Crosstabulation Report, Experian Marketing Services, 2013. See http://www.experian.com/marketing-services/consumer-insights.html.

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are not really fixed at exactly 80 percent and 20 percent, but they suggest that a small fraction of customers provides most of a firm’s sales. For example, the orange shading in Figure 9–5 shows that the 36.1 percent of the U.S. population who are heavy users of fast-food restaurants provide 63.6 percent of the actual consumption volume. This high percentage illustrates the situation where one group of customers is responsible for a disproportionately high percentage of sales.

The Usage Index per Person column in Figure 9–5 emphasizes the importance of the heavy-user segment even more. Giving the light users (0 to 5 restaurant visits per month) an index of 100, the heavy users have an index of 640. In other words, for every $1.00 spent by a light user in one of these restaurants in a month, each heavy user spends $6.40. This is the reason that as a Wendy’s restaurant owner, you want to focus most of your marketing efforts on reaching the highly attractive heavy-user market segment.

As part of its survey, Experian Simmons asked adults which fast-food restaurant(s) was (were) (1) the sole or only restaurant, (2) the primary one, or (3) one of several secondary ones they patronized. As a Wendy’s restaurant owner, the information depicted in Figure 9–6 should give you some ideas in developing a marketing

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program for your local market. For example, the Wendy’s bar graph in Figure 9–6 shows that your sole (0.7 percent) and primary (12.5 percent) user segments are somewhat behind Burger King and far behind McDonald’s. Thus, your challenge is to look at these two competitors and devise a marketing program to win customers from them.

The nonusers part of the Wendy’s bar graph in Figure 9–6 shows that 14.6 percent of adult Americans don’t go to fast-food restaurants in a typical month and are really nonprospects— unlikely to ever patronize any fast-food restaurant. However, 57.0 percent of nonusers are prospects who may be worth a targeted marketing program. These adults use the product category

Figure 9–6 Comparison of various kinds of users and nonusers for Wendy’s, Burger King, and McDonald’s fast- food restaurants. This figure gives Wendy’s restaurants a snapshot of its customers compared to those of its major competitors. Source: Experian Marketing Services Simmons Winter 2013 NHCS Full-Year Adult Survey 12-Month OneView Crosstabulation Report, Experian Marketing Services, 2013. See http://www.experian.com/marketing-services/consumer-insights.html.

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(fast food) but do not yet patronize Wendy’s. New menu items or promotional strategies may succeed in converting these prospects into users that patronize Wendy’s.

Variables to Use in Forming Segments for Wendy’s

To analyze your Wendy’s customers, you need to identify which variables to use to segment them. Because the restaurant is located near a large urban university, the most logical starting point for segmentation is really behavioral: Are the prospective customers students or nonstudents?

To segment the students, you could try a variety of (1) geographic variables, such as city or zip code; (2) demographic variables, such as gender, age, year in school, or college major; or (3) psychographic variables, such as personality or needs. But none of these variables really meets the five criteria listed previously—particularly, the fifth criterion about leading to a doable marketing action to reach the various segments. The behavioral basis of segmentation for the “students” segment really combines two variables: (1) where students live and (2) when they are on campus. This results in four “student” segments:

The three main segments of “nonstudents” include: