A Note on Market Definition, Sementation, and Targeting PDF

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UV7286 Rev. Oct. 23, 2017

A Note on Market Definition, Segmentation, and Targeting: Three (of Four) Steps in Developing Marketing Strategy

Marketing Strategy

Marketing strategy, part of the marketing planning process, flows directly from a company’s goals and helps define how the marketing organization will help the firm achieve its objectives. 1 As a result, marketing strategy is guided by the goals and objectives of the organization, the business unit, or the particular product or service for which the plan is developed. The choice of which marketing strategy (or strategies) to pursue then guides the marketing mix decisions (i.e., the product, distribution, promotion, and price decisions), which, taken together, become the value proposition offered to the target market segment(s). Understanding how the plan impacts the firm financially is the last step in the marketing planning process. 2 Marketing strategy, within the broader marketing planning process, involves four steps: (1) defining the market (also referred to as establishing a frame of reference), (2) segmenting the market, (3) choosing the segments to target, and (4) positioning for target customers vis-à-vis competitors within each chosen segment (see Figure 1). This note addresses the first three steps in marketing strategy. Positioning is addressed in a separate note.3

Figure 1. The marketing planning process.

Source: All figures created by author unless otherwise noted.

1 In this note, the term “firm” is used to designate the entity for which a brand strategy is being developed, regardless of whether it is a company, a brand, a business unit, an idea, or a person. 2 Robert E. Spekman, “Marketing Plan Development,” UVA-M-0848 (Charlottesville, VA: Darden Business Publishing, 2013). 3 Marian Chapman Moore and Richard F. Helstein, “Positioning: The Essence of Marketing Strategy,” UVA-M-0754 (Charlottesville, VA: Darden Business Publishing, 2007).

This technical note was prepared by Marian Chapman Moore, Professor Emeritus of Business Administration, and Kimberly A. Whitler, Assistant Professor of Business Administration. Copyright  2016 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to [email protected].

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Step 1: Market Definition

The first step in developing a marketing strategy is to define the market within which the firm wishes to compete. This choice is important because defining a market identifies the consumers and competitors of interest and establishes the frame of reference within which marketing goals and objectives are determined and evaluated. Ideally, the market will be defined in terms of customer needs rather than particular products or services. Market definition has been called the Achilles’ heel of strategy because of the tension that exists in defining a market either too broadly or too narrowly. A narrow definition of who the firm’s consumers are (or could be), what benefit the firm is providing (or could provide), and what products and services the firm can offer to meet consumers’ needs can cause the firm to ignore competitors in adjacent markets or segments and may see the same customers as potential growth opportunities. On the other hand, if the firm uses too broad a definition, there is the possibility that the firm may lose focus and appeal directly to no one or may overlook significant niche-market opportunities. While a market definition that is too narrow may fail to identify key competitors and potential consumers, a market definition that is too broad will lack focus and clarity, resulting in the inability to understand key competitors/consumers and therefore preventing the firm from effectively marketing to the target. Defining the market broadly

In perhaps the first version of the “job to be done”4 notion, Theodore Levitt wrote: The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes, even telephones), but because it was not filled by the railroads themselves...They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. “Transportation” is a very broad definition of a market, focusing on consumer needs without any reference to a particular way to do so.5 Levitt implored managers to answer the question “what business are we in?” in terms of customer needs being satisfied without any reference to particular products or services as the means to satisfy those needs. A broad market definition ensures that the marketer stays attuned to environmental shifts and trends that may eventually lead to shifts in the competitive landscape. Southwest Airlines provides a legendary example of the benefits of such broad thinking about a market. Southwest’s entry into the airline market was not based on serving existing airline customers who were flying between Texas cities on existing airlines. Rather, Southwest looked at the market from a “transportation” perspective and found a set of potential customers who were not being served by the existing airline competitors—travelers with a need for convenient, affordable, reliable, efficient travel between a few cities in Texas. Perhaps those travelers would fly if the price were right. Southwest entered the market as a low-cost, no-frills airline designed to serve a specific niche of travelers; the rest is history.

4 Clayton M. Christensen, Scott D. Anthony, Gerald Berstell, and Denise Nitterhouse, “Finding the Right Job for Your Product,” MIT: Sloan Management Review (Spring 2007): 38–47. 5 Theodore Levitt, “Marketing Myopia,” Harvard Business Review 38 (July–August 1960): 45–56.

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Defining the market more narrowly

In order to plan effectively, marketers often limit themselves to a narrower, more practical definition of the market: “those who currently engage in exchange...with us or with our direct competitors.”6 A specific way of doing so is to use the “served market” metric. Farris et al. explain served market as “…that portion of the total market for which the firm competes. This may exclude geographic regions or product types. In the airline industry, for example, as of mid-2005, Ryanair did not fly to the United States. Consequently, the U.S. would not be considered part of its served market.”7 Again, care is advised. While a more narrow definition of the market allows the marketer to focus on customers more specifically, too narrow a definition of the market could mean missing out on the many ways consumers may seek to satisfy a need. See Figure 2 for an example of how to think about defining a market using Lender’s Bagels. Figure 2. Defining the market for Lender’s Bagels. Consider Lender’s Bagels, a company that has been offering fresh refrigerated and frozen bagels since 1927. Imagine you are the brand manager for Lender’s Bagels. How should you define your market? Anyone who purchases bagels from a grocery store? Anyone who purchases breakfast products from a grocery store? Anyone who purchases ready-to-eat breakfast products from a grocery store? Anyone who eats breakfast products purchased at a grocery store? Anyone who eats breakfast? Anyone who eats bagels? Anyone who eats snacks? Anyone who eats food? Should you limit the market to consumers who want “premium” bagels with “authentic” taste as part of their breakfast diet, as Lender’s Bagels has described itself? Should you limit your competitive set to those who also offer premium, authentic bagels in grocery stores? There are many potential ways to define a market. Working through the options is something teams should spend time trying to get right. Oatmeal Muffins/ Bread Bodo’s Bagels

Breakfast Items in Grocery Store

BB’s Bagels Breakfast Bar

Bagels in Grocery Store

Thomas’

Cereal Murray’s Bagels

Lender’s Sara Lee

Granola Bagels in Eateries

Bagel Hole

Private Label Kaufman’s Bagels

Yogurt The Bagel Factory Breakfast Sandwich

Smoothies

Market Definition Options for Lender’s Bagels

As firms work through the process of determining how to define their markets, they may narrow or broaden their frames of reference—or both. Marketers should consider several definitions and the implications of each. Some companies choose to use a very broad definition for strategic thinking and strategy formulation and a narrower definition for strategic planning and implementation. For instance, Southwest Airlines might include Harley-Davidson or Amtrak when thinking strategically about consumers’ transportation needs but limit itself to other airlines (or other no-frills airlines) when actually planning its marketing strategy and measuring its market share (see Figure 3). Defining the market is a useful process, requiring both internal strategic insight as well as insight anchored in understanding both consumers and competitors. The discussions can be very 6 When a “market definition” includes competitors, the term “industry” or “market space” is often used rather than market. For instance, “the market is growing at 10%” usually refers to the rate of growth in sales across the entire marketplace, including all competitors. “The industry is very competitive” usually refers to the actions of competitors. In context, the intent is generally clear. 7 Paul W. Farris, Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein, Marketing Metrics: The Definitive Guide to Measuring Marketing Performance, 2nd ed. (Upper Saddle River, NJ: Pearson Education, 2010), 34.

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illuminating. Spending time to “get it right” is not wasted time! After all, the “market” is the divisor in the market-share metric. Figure 3. Market definition: The Achilles’ heel of marketing strategy.

Step 2: Market Segmentation

Now that the market of interest has been defined, we turn to market segmentation—dividing the market into groups of consumers who share similar characteristics. It’s rare that a market is homogeneous (i.e., that everyone in the market is the same and has identical needs, wants, habits, and practices). Segmenting a market into smaller subsegments enables a marketer to understand the characteristics that differentiate consumers within a market and to identify the potential segments that may be a good fit for the company, given its capabilities and goals. The process of segmenting a market forces marketers to recognize that not everyone who purchases a particular product or service wants or needs the same thing to satisfy their need. 8 In addition, not everyone responds to marketing activities in exactly the same way (e.g., not everyone responds to marketing communications in the same way, wants to pay the same price, or wants to shop for the product/service in the same place and in the same manner). Note the references to the four elements of the marketing mix in Figure 4. Figure 4. Segmenting the market for Lender’s Bagels. Continuing the Lender’s Bagels example from above: (1) There are many dimensions on which one might segment bagel consumers. There may be consumers who consider themselves bagel aficionados and who want a true, authentic, New York bagel (i.e., it must be large; it must be boiled and then baked; it must be fresh and not frozen; it should be crunchy on the outside but chewy on the inside). (2) There may be a health-conscious segment for whom the size of the bagel, calories, and perhaps the ingredients are as or more important attributes than the style of bagel. (3) There may be a segment of bagel eaters who prioritize price over any other attribute. (4) There may be a segment of parents who want convenient, small(er)-size bagels that don’t lose their freshness (i.e., prefer frozen bagels) for their family; and so forth. Which is the best way to divide the market into segments?

Segmenting a market is critical because it enables firms to compare and contrast each of the potential segments and then choose the segment(s) of the market the firm is best able to satisfy given its skills, resources, and capabilities. Consider an automobile manufacturing company. Imagine the cost associated with trying to serve all consumer needs: energy-efficient vehicles, safe vehicles, high-performance vehicles, industrial vehicles, family-oriented vehicles, and so on. Very few companies have the ability and resources to be all things to all people, so a firm must identify the segment(s) of consumers (1) that fit the company’s competencies best, 8 For guidance on one way to identify needs, see Marian Chapman Moore, “Linking Products and Consumers: The Consumer Benefit Ladder Approach,” UVA-M-0750 (Charlottesville, VA: Darden Business Publishing, 2007).

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(2) whose needs the firm believes it can do a better job of addressing than its competitors, and (3) that will ensure the firm can achieve its financial goals. Segmenting the market well is a prerequisite to making good targeting decisions (Step 3), positioning decisions (Step 4), and marketing-mix decisions. There are three important steps in a segmentation analysis: dividing the market into segments, profiling the segments, and then determining the attractiveness of each segment. Divide the market into meaningful segments

Segments are meaningful if the variable(s) chosen to divide the market make a difference in how consumers make choices among products within the frame of reference defined earlier. If Lender’s Bagels segments the bagel market on flavors but the consumer makes decisions based on type of bagel (preferring, say, an authentic bagel or a bagel for the health-conscious consumer) or on the basis of price, the flavor-based segmentation scheme is flawed. To reiterate, just as the market definition should be anchored on an understanding of the consumer, so should a firm’s segmentation scheme. There are many bases for segmenting markets: geography, demographics (e.g., age, income, life-cycle stage, or gender), psychographics (e.g., lifestyle, personality, values, and attitudes), benefits sought, and usage pattern (e.g., heavy users, light users, nonusers, and users’ loyalty status). The long list of possible segmentation bases can be partitioned into two general categories: a.

Characteristics that define/describe a consumer or customer independent of their relationship with the product/service (e.g., demographics, geography, psychographics—lifestyle, personality, activities, interests, and opinions).

b. Characteristics that describe the consumers or customers with respect to the product or service (e.g., usage patterns, loyalty status, benefits desired from using the product or service, involvement with product and category, stage in the buying process, and role in the decision-making process). The best segmentation schemes result from considering elements of both categories. In practice, companies regularly combine different methods of segmenting a market to better understand different customer groups in detail. Each method of segmentation tends to offer useful information, so when aggregated, the marketer has a stronger understanding of the consumers based on an integration of consumers’ demographic, psychographic, and usage characteristics as well as their needs. For instance, bagel eaters in New York City may prefer authentic bagels, while those in California prefer a healthier bagel. Those who consume bagels more than average may be more concerned about price. Nevertheless, there is usually a primary segmentation variable, which should be as directly related as possible to the customer need to be satisfied. For example, Procter & Gamble (P&G) had multiple laundry detergent brands in the 1990s. Tide was for consumers who wanted superior performance; Cheer was designed for consumers who were concerned about the color integrity of their clothes; Bold went beyond cleaning to help soften clothing; Era was designed to provide good cleaning at a great value; Ivory was designed to provide gentle cleaning of fine washables; Gain was designed to provide cleaning reinforced with stronger perfumes for scent-seeking consumers; Dreft was designed to provide specialized cleaning for baby clothes (see Appendix 1). Each product in the company’s laundry portfolio was designed to address a unique consumer need. In addition to addressing different needs, the target consumers were different (e.g., moms with older kids versus moms with younger kids), the amount of laundry they did each week differed (i.e., usage patterns), where they lived differed (e.g., some brands skewed to Northeastern consumers, some to Southern consumers), and consumer habits and practices differed (e.g., the media they consumed and the hobbies they participated in). Similarly, Marriott has segmented the lodging industry by identifying a diverse range of customer needs and then designing an appropriate offering for each: from luxurious retreats (e.g., Ritz-Carlton and Bulgari) to

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specific lifestyles (e.g., Edition and Moxy) to extended-stay hotels (e.g., Residence Inn and Marriott Executive Apartments)9 The more completely a marketer can define the segment, the better he or she is able to design and market products that create real value for the target. For segments to be truly meaningful, the needs of consumers in one segment must be distinct from those in other segments on dimensions that affect the purchase or use of a given product. If consumers in one segment would respond just as well to an offering made to a different segment, the benefits of segmenting will not be realized. In fact, designing two different market offerings will likely waste money when one would satisfy both segments of consumers. The P&G example demonstrates how critical it is to effectively segment a marketplace when competing within the firm for market share, not just with other companies. The more distinctive the segments are, the less likely it is that marketers will cannibalize their own firm’s brands. The acid test of a good segmentation scheme is whether the customers are homogeneous within a segment and heterogeneous across segments on dimensions that are meaningful to their purchase decision. And, importantly, the segmentation scheme must make it easy for the firm to find the consumers. For example, if an attribute that differentiates laundry consumers is their love of nature, this isn’t useful unless the firm can effectively find the target consumers. A segmentation scheme that passes these tests will result in meaningful segments. A final caveat: for marketing purposes, market segments are segments of consumers, not products, although, in practice, marketers often use product-based language when referring to a segment. Marketers must remember that P&G’s detergent purchasers are people who do laundry; Marriott’s market consists of hotel guests, not hotels. Importantly, any one person can fall into more than one segment depending on the need being addressed. For instance, a customer may want to clean the kids’ grimy soccer clothes (with Tide) one day and a baby’s bedding (with Dreft) the next day. The same consumer may stay at the Courtyard by Marriott while on a business trip and at the Ritz-Carlton when on vacation. This is an important and often-overlooked aspect of segmentation. Profile the segments

The next step in segmentation is to profile the segments in order to better understand the opportunities in each segment. The objective is to estimate the size of each seg...