Monday, November 8, 2010

Market Segmentation

The purpose for segmenting a market is to allow your marketing/sales program to focus on the subset of prospects that are "most likely" to purchase your offering. If done properly this will help to insure the highest return for your marketing/sales expenditures. Depending on whether you are selling your offering to individual consumers or a business, there are definite differences in what you will consider when defining market segments.

Category of Need
The first thing you can establish is a category of need that your offering satisfies. The following classifications may help.

For businesses:
  • Strategic - your offering is in some way important to the enterprise mission, objectives and operational oversight. For example, a service that helped evaluate capital investment opportunities would fall into this domain of influence. The purchase decision for this category of offering will be made by the prospect's top level executive management.
  • Operations - your offering affects the general operating policies and procedures. Examples might be, an employee insurance plan or a corporate wide communications system. This purchase decision will be made by the prospect's top level operations management.
  • Functional - your offering deals with a specific function within the enterprise such as data processing, accounting, human resources, plant maintenance, engineering design, manufacturing, inventory control, etc. This is the most likely domain for a product or service, but you must recognize that the other domains may also get involved if the purchase of the product or service becomes a high profile decision. This purchase decision will be made by the prospect's functional management.
For the individual consumer:
  • Social Esteem or Pleasure - your offering satisfies a purely emotional need in the consumer. Examples are a mink coat or a diamond ring. There are some products that are on the boundary between this category and the Functional category such as a Rolex watch (a Timex would satisfy the functional requirement and probably keep time just as well).
  • Functional - your offering meets a functional requirement of the consumer such as a broom, breakfast cereal or lawnmower.
Segmentation of Needs
Then you should establish what the need is and who is most likely to experience that need. Your segmentation will be determined by a match between the benefits offered by your offering and the need of the prospect. Some "need" categories for segmentation include:
Reduction in expenses
Prospects might be businesses that are downsizing (right sizing), businesses that have products in the mature stage of their life cycle or individuals with credit rating problems.
Improved cash flow
Prospects might be businesses that have traditionally low profit margins, businesses that have traditionally high inventory costs or individuals that live in expensive urban areas.
Improved productivity
Prospects might be businesses that have traditionally low profit margins, businesses that have recently experienced depressed earnings or individuals with large families.
Improved manufacturing quality
Prospects might be businesses with complex, multi-discipline manufacturing processes.
Improved service delivery
Prospects might be service businesses in highly competitive markets, product businesses requiring considerable post-sale support or individuals in remote or rural areas.
Improved employee working conditions/benefits
Prospects might be businesses where potential employees are in short supply.
Improvement in market share/competitive position
Prospects might be new entrants to a competitive market.
Need for education
Prospects might be businesses or individuals looking for books on business planning, or seminars on Total Quality Management.
Involvement with social trends
Prospects might be businesses concerned with environmental protection, employee security, etc. or individuals who believe in say 'no' to drugs, anti-crime, etc.
Specific - relating to product/service characteristics
Prospects might be businesses or individuals interested in safety, security, economy, comfort, speed, quality, durability, etc.
Factors that segment prospects
Having determined the more general segmentation characteristics you can proceed to a more detailed analysis of the market. There are literally thousands of ways to segment a market, but the following are some of the more typical segmentation categories.

For businesses:
Industry by SIC code
This is especially beneficial for vertical market offerings.
Size - revenues, # employees, # locations
In general if your offering is highly sophisticated, requires significant resources or provides greater value based on volume, then the target should be the larger enterprises.
Job position/responsibility
Examples of offerings might be planning software for managers or cleaning agents for maintenance managers.
Examples of offerings might be dehumidifiers in areas near the ocean or snow plows in northern areas.
Time related factors
Some services in this category are vacation related industries in summer and tax planners in the spring.
An example of a language specific service is a Spanish TV channel.
Status in the industry
You might want to target businesses that are the technology leader or revenue leader or employee satisfaction leader, etc.
To minimize promotion and sales expense you may want to target urban rather than rural or local rather than national prospects.
Future potential
A good example is how Apple Computer supplied products to schools at all levels to condition students graduating into the marketplace.
Ability to make a quick purchase decision
Targeting individual purchasers versus business committees can significantly reduce marketing expense and increase the probability of a quick close.
Access (or lack of access) to competitive offerings
Cable TV business's significant investment in their service delivery system has allowed a near monopoly for some time. IBM's service reputation insured minimal competition during the mainframe days.
Need for customization
Offerings such as police cars, busses for municipalities and specialized computer systems fall into this category.
Product or service application to a business function
Examples are data processing, accounting, human resources and plant maintenance.
For Individual Consumers:
Physical Size
Offerings might be big men's clothing, golf clubs for shorter players, etc.
Creation of or response to a fad
Examples are hula hoops, Jurassic Park T-shirts, pet rock, physical fitness, etc.
Geographic location
Marketers take advantage of location by selling suntan lotion in Hawaii, fur coats in Alaska, etc.
Time related factors
You may be able to target vacationers in summer, impulse buyers during the holidays or commuters at 7AM.
Ethnic products would fall into this category.
Product examples are scarves for women, ties for men, etc.
Product examples are toys for children, jewelry for women, etc.
Social status
This could include country club memberships, philanthropic contributions, etc.
Product and service examples are encyclopedias, scientific calculators, learning to read tools and financial counseling.
This could include products for hunting, fishing, golf, art work, knitting, etc.
Special Interests
You could target cat lovers, science fiction readers, jazz music collectors, etc.
Because the individual is more difficult to reach you may want to segment by urban versus rural, train commuters, people who read Wall Street Journal, etc.
Access (or lack of access) to competitive offerings
Due to high investment capital requirements or timing of market entry you may be able to capture a significant market share in a specific geographical area. Examples might be a trash service, emergency medical support, etc.
Need for specific information
Based on features or content of your offering you can target a market segment. A product might be books on how to start a business or a service might be seminars on how to quit smoking.
Need for customization
Product/service examples are home decoration, fashion wear, personal portraits, etc.
Need for quality, durability, etc.
Product examples are mountain climbing gear, carpenter's tools, etc.
Degree of a product/service ingredient
Segmentation based on prospect preferences is common. An example is dark chocolate for some tastes, light chocolate for others.
Purchase decision influencers
Once you have isolated a specific segment of the market on which to focus, then you can consider more subtle influences on the purchase decision. Some of these are:
Preference for channel of distribution
Many prospects prefer to buy through a specific distributor or wholesaler. For individuals this may be due to subtle, as well as, economic reasons. For example, an individual prospect may immediately think of Wal-Mart or Home Depot when considering an offering like yours. A business often has a preference so they can have a single communication point for all purchases. This also often results in lower purchase prices.
Number of decision makers
When selling to consumers or businesses, the more individuals or groups involved in the purchase decision, the more difficult the sale. Marketing costs for selling bread can stay low because one person normally makes the purchase decision. Car purchases are more complex because the purchase decision normally involves a husband and wife. Business sales to committees often require months to achieve a decision.
Financial strength of the prospect
Less affluent prospects may desire time payments versus a cash purchase and Chevrolets instead of Cadillacs.
Quantity/volume requirements
Restaurants will want large jars of pickles while individuals want small jars. Businesses use large amounts of electricity at predictable times.
Ability to use the offering
Trying to sell to a prospect who lacks either the knowledge or resources to properly benefit from your offering will result in a 'no sale' situation or an unhappy customer. The prospect should have knowledge and resources such as time, equipment, facilities, personnel and complementary products/services.
Commitment required
If the offering requires a high commitment in terms of time, resources or money by the customer then the target should be prospects who 'really need' the offering rather than prospects who get some, but not a lot, of benefits.
Brand awareness/users
Examples are prospects who ask for IBM compatible PC's or Pitney Bowes mailing machines or Winnebago R.V.s
Attitude toward a personality or enterprise
Reputation helps sell AT&T long distance service, IBM computers, Michael Jordan tennis shoes, etc.
Attitude toward price versus value
For example, purchasers of collectors items aren't price sensitive while purchasers of commodity items are price sensitive.
Experience with other products/services your enterprise has offered
You are looking for a reaction like "I liked your first product so I'll try your second."
Prospect bias
Examples are, 'Buy USA', I want a car with a 'solid' feel, fast cars, sweet wines, large print playing cards, etc.
Affiliation with other organizations
Such as the U.S. Chamber of Commerce, AMA, IEEE, doctors, attorneys, pastors, franchisors, entrepreneurs, etc.
After sale support expectations
It is often beneficial to target prospects who have enough expertise that they will require a minimum of after sale support.
Seller Characteristics that can influence purchase decision:
Another form of influence is how the prospect perceives your offering and/or enterprise. If you can determine the characteristics your prospects most value in an enterprise they purchase from, you can identify those your organization possesses and promote them to the prospect.
Unique employee skills, knowledge
Extensive experience with a specific market segment or field of scientific inquiry can be a powerful promotional tool. For example if an enterprise could sat, "Our scientists knows more about corn silk genetic structures than anyone in the world" they would have a strong sales statement.
Special relationships with distribution channels
Product or service accessibility is a critical factor in sales success. If an enterprise could say, "Due to a unique relationship, the XYZ video stores give us more shelf space than any competitor" prospects will likely respond positively.
Customer service capabilities
Prospects like to know that they can depend on post sale support from the product or service provider. A statement like, "We have more service outlets in New Hampshire than any competitor" will help secure sales.
Unique product forms
Credible uniqueness such as, "Our product is the only one that offers dynamic digi-whirling" is appealing to the market.
Manufacturing expertise
The market is always interested in purchasing from the "best". If an enterprise can confidently state, "We are the only enterprise that can manufacture molecular engineered widgets", they have created an image of being the "best".
Reliability is important. A statement like, "We have been in business for 50 years, so you can count on us to be there when you need us" is usually a strong selling point.
Purchase Decision Makers
Finally, a point to consider is, given the characteristics of your offering, what type of decision maker will most likely be interested in purchasing from you. It may be beneficial to rank your prospects based on the following classifications. While you may not be able to make this classification of the prospect prior to the first contact, if your sales personnel are sensitive to these characteristics it can strongly influence your sales strategy.

Ultra Conservative - don't rock the boat, whatever they purchase must be consistent with their current way of doing things.
  • They are most likely interested in products/services that are improvements to existing offerings rather than something new.
  • Once established as a customer they are seldom inclined to review alternatives.
  • Very negative to technically complex offerings or offerings requiring extensive user education.
  • Cost effective offerings are only of interest if they don't disturb the status quo.
  • They are likely to react positively to any volume purchasing opportunities.
Conservatives - are willing to change, but only in small increments and only in a very cost effective manner.
  • Will consider new products/services but only if related concept has been proven to be effective. More likely to purchase improvements to existing offerings.
  • Will probably want to review competitive offerings, but will gravitate to best known offering with lowest risk decision.
  • Negative to neutral when considering technically complex offerings or offerings requiring extensive user education.
  • Strongly influenced by cost effective offerings and/or 'best price' opportunities
Liberals - regularly looking for new solutions, willing to make change (even major change) if the benefit can be shown.
  • Will usually consider new products/services even if the related concept has not yet been proven to be effective, but only if the potential benefits can be specified and understood.
  • Wants offerings that make effective use of technology, but is not interested in offerings just because they use a certain technology.
  • Will always want to review competitive offerings, but will usually choose the one offering the greatest benefit, even if there is some risk involved.
  • Neutral to positive when considering technically complex offerings or offerings requiring extensive user education.
  • Usually concerned with keeping employees informed and educated, so will often consider educational offerings.
  • Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they are not the most cost effective.
  • Often are on social trend bandwagons so react positively to offerings that address these needs.
Technical Liberals - enamored with the benefits provided by high tech solutions and any purchase decision will be biased by the technical content of the offering.
  • Usually consider new products/services even if the related concept has not yet been proven to be effective.
  • Often consider just because they use a certain technology.
  • Will always want to review competitive offerings, but will usually choose the one offering the most hi-tech features, even if there is some risk involved.
  • Consider themselves technically competent and will expect leading edge use of technology.
  • Positive to fanatic when considering technically complex offerings even when requiring extensive user education.
  • Conversion costs usually not a major concern if technical benefits are there.
  • Not particularly concerned with keeping employees informed and educated, so educational offerings are not of great interest.
  • Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they are not the most cost effective.
Self Helpers - consistently defines/designs solutions to their problems, likes to acquire tools that help in the innovation process.
  • Will usually consider new products/services, but the related concept must have been proven to be effective.
  • Often consider just because they use a certain technology that is relevant to the development program they have underway.
  • Will always want to review competitive offerings, but will usually choose the one offering the most effective 'do it yourself' features.
  • Usually consider themselves technically competent and will expect very effective use of proven technology.
  • Not especially inclined toward technically complex offerings, would rather have user friendly, but thought provoking, offerings.
  • Conversion costs usually not a major concern if offering promises potential for innovation.
  • Usually concerned with keeping employees informed and educated, so educational offerings are of interest.

Marketing concept and orientation

It is a fundamental idea of marketing that organisations survive and prosper through meeting the needs and wants of customers. This important perspective is commonly known as the marketing concept.

The marketing concept is about matching a company's capabilities with customer wants. This matching process takes place in what is called the marketing environment.
Businesses do not undertake marketing activities alone. They face threats from competitors, and changes in the political, economic, social and technological environment. All these factors have to be taken into account as a business tries to match its capabilities with the needs and wants of its target customers.
An organisation that adopts the marketing concept accepts the needs of potential customers as the basis for its operations. Success is dependent on satisfying customer needs.
What are customer needs and wants?
A need is a basic requirement that an individual wishes to satisfy.
People have basic needs for food, shelter, affection, esteem and self-development. Many of these needs are created from human biology and the nature of social relationships. Customer needs are, therefore, very broad.
Whilst customer needs are broad, customer wants are usually quite narrow.
A want is a desire for a specific product or service to satisfy the underlying need.
Consider this example:
Consumers need to eat when they are hungry.
What they want to eat and in what kind of environment will vary enormously. For some, eating at McDonalds satisfies the need to meet hunger. For others a microwaved ready-meal meets the need. Some consumers are never satisfied unless their food comes served with a bottle of fine Chardonnay.
Consumer wants are shaped by social and cultural forces, the media and marketing activities of businesses.
This leads onto another important concept - that of customer demand:
Consumer demand is a want for a specific product supported by an ability and willingness to pay for it.
For example, many consumers around the globe want a Mercedes. But relatively few are able and willing to buy one.
Businesses therefore have not only to make products that consumers want, but they also have to make them affordable to a sufficient number to create profitable demand.
Businesses do not create customer needs or the social status in which customer needs are influenced. It is not McDonalds that makes people hungry. However, businesses do try to influence demand by designing products and services that are
• Attractive
• Work well
• Are affordable
• Are available
Businesses also try to communicate the relevant features of their products through advertising and other marketing promotion.
Which leads us finally to an important summary point.

The Marketing Mix (The 4 P's of Marketing)

Marketing decisions generally fall into the following four controllable categories:
  • Product
  • Price
  • Place (distribution)
  • Promotion
The term "marketing mix" became popularized after Neil H. Borden published his 1964 article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the late 1940's after James Culliton had described the marketing manager as a "mixer of ingredients". The ingredients in Borden's marketing mix included product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding and analysis. E. Jerome McCarthy later grouped these ingredients into the four categories that today are known as the 4 P's of marketing, depicted below:
These four P's are the parameters that the marketing manager can control, subject to the internal and external constraints of the marketing environment. The goal is to make decisions that center the four P's on the customers in the target market in order to create perceived value and generate a positive response.

Product Decisions

The term "product" refers to tangible, physical products as well as services. Here are some examples of the product decisions to be made:
  • Brand name
  • Functionality
  • Styling
  • Quality
  • Safety
  • Packaging
  • Repairs and Support
  • Warranty
  • Accessories and services

Price Decisions

Some examples of pricing decisions to be made include:
  • Pricing strategy (skim, penetration, etc.)
  • Suggested retail price
  • Volume discounts and wholesale pricing
  • Cash and early payment discounts
  • Seasonal pricing
  • Bundling
  • Price flexibility
  • Price discrimination

Distribution (Place) Decisions

Distribution is about getting the products to the customer. Some examples of distribution decisions include:
  • Distribution channels
  • Market coverage (inclusive, selective, or exclusive distribution)
  • Specific channel members
  • Inventory management
  • Warehousing
  • Distribution centers
  • Order processing
  • Transportation
  • Reverse logistics

Promotion Decisions

In the context of the marketing mix, promotion represents the various aspects of marketing communication, that is, the communication of information about the product with the goal of generating a positive customer response. Marketing communication decisions include:
  • Promotional strategy (push, pull, etc.)
  • Advertising
  • Personal selling & sales force
  • Sales promotions
  • Public relations & publicity
  • Marketing communications budget

Limitations of the Marketing Mix Framework

The marketing mix framework was particularly useful in the early days of the marketing concept when physical products represented a larger portion of the economy. Today, with marketing more integrated into organizations and with a wider variety of products and markets, some authors have attempted to extend its usefulness by proposing a fifth P, such as packaging, people, process, etc. Today however, the marketing mix most commonly remains based on the 4 P's. Despite its limitations and perhaps because of its simplicity, the use of this framework remains strong and many marketing textbooks have been organized around it.

Marketing Plan

The information for this article was derived from many sources, including Michael Porter's book Competitive Advantage and the works of Philip Kotler. Concepts addressed include 'generic' strategies and strategies for pricing, distribution, promotion, advertising and market segmentation. Factors such as market penetration, market share, profit margins, budgets, financial analysis, capital investment, government actions, demographic changes, emerging technology and cultural trends are also addressed.

There are two major components to your marketing strategy:
  • how your enterprise will address the competitive marketplace
  • how you will implement and support your day to day operations.
In today's very competitive marketplace a strategy that insures a consistent approach to offering your product or service in a way that will outsell the competition is critical. However, in concert with defining the marketing strategy you must also have a well defined methodology for the day to day process of implementing it. It is of little value to have a strategy if you lack either the resources or the expertise to implement it.

In the process of creating a marketing strategy you must consider many factors. Of those many factors, some are more important than others. Because each strategy must address some unique considerations, it is not reasonable to identify 'every' important factor at a generic level. However, many are common to all marketing strategies. Some of the more critical are described below.

You begin the creation of your strategy by deciding what the overall objective of your enterprise should be. In general this falls into one of four categories:
  • If the market is very attractive and your enterprise is one of the strongest in the industry you will want to invest your best resources in support of your offering.
  • If the market is very attractive but your enterprise is one of the weaker ones in the industry you must concentrate on strengthening the enterprise, using your offering as a stepping stone toward this objective.
  • If the market is not especially attractive, but your enterprise is one of the strongest in the industry then an effective marketing and sales effort for your offering will be good for generating near term profits.
  • If the market is not especially attractive and your enterprise is one of the weaker ones in the industry you should promote this offering only if it supports a more profitable part of your business (for instance, if this segment completes a product line range) or if it absorbs some of the overhead costs of a more profitable segment. Otherwise, you should determine the most cost effective way to divest your enterprise of this offering.
Having selected the direction most beneficial for the overall interests of the enterprise, the next step is to choose a strategy for the offering that will be most effective in the market. This means choosing one of the following 'generic' strategies (first described by Michael Porter in his work, Competitive Advantage).
  • A COST LEADERSHIP STRATEGY is based on the concept that you can produce and market a good quality product or service at a lower cost than your competitors. These low costs should translate to profit margins that are higher than the industry average. Some of the conditions that should exist to support a cost leadership strategy include an on-going availability of operating capital, good process engineering skills, close management of labor, products designed for ease of manufacturing and low cost distribution.
  • A DIFFERENTIATION STRATEGY is one of creating a product or service that is perceived as being unique "throughout the industry". The emphasis can be on brand image, proprietary technology, special features, superior service, a strong distributor network or other aspects that might be specific to your industry. This uniqueness should also translate to profit margins that are higher than the industry average. In addition, some of the conditions that should exist to support a differentiation strategy include strong marketing abilities, effective product engineering, creative personnel, the ability to perform basic research and a good reputation.
  • A FOCUS STRATEGY may be the most sophisticated of the generic strategies, in that it is a more 'intense' form of either the cost leadership or differentiation strategy. It is designed to address a "focused" segment of the marketplace, product form or cost management process and is usually employed when it isn't appropriate to attempt an 'across the board' application of cost leadership or differentiation. It is based on the concept of serving a particular target in such an exceptional manner, that others cannot compete. Usually this means addressing a substantially smaller market segment than others in the industry, but because of minimal competition, profit margins can be very high.

Importance of Marketing

Marketing is a very important aspect in business since it contributes greatly to the success of the organization. Production and distribution depend largely on marketing. Many people think that sales and marketing are basically the same. These two concepts are different in many aspects. Marketing covers advertising, promotions, public relations, and sales. It is the process of introducing and promoting the product or service into the market and encourages sales from the buying public. Sales refer to the act of buying or the actual transaction of customers purchasing the product or service.

Since the goal of marketing is to make the product or service widely known and recognized to the market, marketers must be creative in their marketing activities. In this competitive nature of many businesses, getting the product noticed is not that easy.

Strategically, the business must be centered on the customers more than the products. Although good and quality products are also essential, the buying public still has their personal preferences. If you target more of their needs, they will come back again and again and even bring along recruits. If you push more on the product and disregard their wants and the benefits they can get, you will lose your customers in no time. The sad thing is that getting them back is the hardest part.
From a very small fish to becoming the big one and then the biggest among all. This is how few brands have changed with time e-g: Levis Microsoft and many other "The Big Fish"
The financial success of such brands have been depending on combined efforts of their financial strategies and their marketing efforts. One thing that's been common among all there brands is a high degree of Brand loyalty. They have managed to capture the share of heart and in turn share of customer’s wallet. 
Companies now understand that marketing plays an important roll in their overall success ,so now companies have CMOs (Chief Marketing Officer) along with CFOs and CEOs. They understand that if there are functions close to customers its ether Sales or Marketing. Sales become a direct interface among customs and products offered by companies, and marketing is an indirect function between customer and the company.
But what makes marketing so big? Why is it important? If you have a great product you are bound to succeed then why do u need to spend on marketing / advertising?
The answer to these questions lies deep within the customer’s brain. Customers / consumers are smart and they understand what makes your product different form mine. If you are offering then 1 % more that what I do why should they pay me rather than paying you. That’s the point. And secondly it’s important to communicate the product offerings to the end user. If a marketing team has worked hard on understanding the consumer needs they need to make sure their customers get a feel “This brand knows what I want ”. Trust me this is the only major differentiator between why your 1% more is able to get you more loyal and more number of customers.
The time has changed. To products that are offered by a brand you have "n" number of more  substitutes and consumers get to know which is the better substitute that suites there requirements . So it is important to make sure that marketing efforts are more on understanding the changing needs on today’s customer. We need to understand the minds of customers. It’s rightly said “customer is KING”
Marketing managers need to understand the customer needs and they need to make their major decisions such as the features to include, the price to be offered to customers and what to spend on advertisements.
Marketing today has become a emotional research which helps understanding customer and consumers psychology so that products are developed based on these understanding. The marketing managers need to answer following questions:
  • How do we find the right market segment?
  • How do we differentiate?
  • How can we compete with low cost business models?
  • How do we build a better brand?
  • How do we reduce cost of customer acquisition?
A successful Marketing team can carefully analyze customer needs and carefully monitor there competitors marketing moves. Remember a short term sales driven view does not work in business world today. The C-level managers, the CEO,CFO should communicate importance of marketing in an organization,  how the marketing function plays a great role in organizations success.

What is Marketing?

The term marketing has changed and evolved over a period of time, today marketing is based around providing continual benefits to the customer, these benefits will be provided and a transactional exchange will take place.
The Chartered Institute of Marketing define marketing as 'The management process responsible for identifying , anticipating and satisfying customer requirements profitably'
If we look at this definition in more detail Marketing is a management responsibility and should not be solely left to junior members of staff. Marketing requires co-ordination, planning, implementation of campaigns and a competent manager(s) with the appropriate skills to ensure success.
Marketing objectives, goals and targets have to be monitored and met, competitor strategies analysed, anticipated and exceeded. Through effective use of market and marketing research an organisation should be able to identify the needs and wants of the customer and try to delivers benefits that will enhance or add to the customers lifestyle, while at the same time ensuring that the satisfaction of these needs results in a healthy turnover for the organisation.
Philip Kotler defines marketing as 'satisfying needs and wants through an exchange process'
Within this exchange transaction customers will only exchange what they value (money) if they feel that their needs are being fully satisfied, clearly the greater the benefit provided the higher transactional value an organisation can charge.