Make your own free website on Tripod.com

Aggregate Planning

CHAPTER 7: "TARGET MARKETS: SEGMENTATION AND EVALUATION "

Home

 

Chapter 7 discusses the importance of target market segmentation and evaluation. Markets have certain requirements:

  • They must possess the ability to purchase the product.
  • They must be willing to buy the product.
  • They must have the authority to buy the product.

Consumer market-individuals are those who purchase with the intent to consume or directly benefit from the purchased good. They do not intend to profit from the purchase through resale. Organizational or business-to-business market are individuals or groups that buy a specific kind of product for resale, direct use in producing other products, or use in general, daily operations.

Marketers generally employ a five-step process for target market selection:

  • identifying the appropriate targeting strategy
  • determining which segmentation variables to use
  • developing market segment profiles
  • evaluating relevant market segments
  • and selecting specific target markets

The targeting strategy used is affected by target market characteristics, product attributes, and the organization's objectives and resources. The undifferentiated targeting strategy is one in which an organization defines an entire market for a particular product as its target market, designs a single marketing mix, and directs it at the entire market. The underlying assumption is that the needs of the target market for specific kinds of product are very similar; thus the business can satisfy most customers with a single marketing mix. There are two requirements for effective use of this approach.

  • A homogeneous market is one in whic2h a large proportion of customers have similar needs for a product.
  • The organization must be able to develop and maintain a single marketing mix that satisfies customers' needs.

Heterogeneous markets are markets made up of individuals or organizations with diverse product needs. Market segmentation is the process of dividing the total market into groups or segments that have relatively similar product needs for the purpose of designing a marketing mix that will more precisely match the needs of individuals in a selected segment. A market segment consists of individuals, groups, or organizations with one or more similar characteristics that cause them to have relatively similar product needs. There are five conditions for effective segmentation.

  • Consumers' needs for the product must be heterogeneous.
  • The segments must be identifiable and divisible.
  • The total market should be divided so that segments can be compared with respect to estimated sales potential, costs, and profits.
  • At least one segment must have enough profit potential to justify the development and maintenance of a special marketing mix for that segment.
  • The organization must be able to reach the chosen segment with a particular marketing mix.

Concentrated targeting strategy is a strategy in which an organization targets a single market segment using one marketing mix. Advantages are

  • Specialization gives the firm an opportunity to analyze the characteristics and needs of a distinct customer group carefully and then focus all marketing efforts into satisfying that group's needs.
  • A firm can generate large sales volume by reaching a single segment.
  • A firm with rather restricted resources is able to compete with much larger organizations.

Disadvantages

  • If the segment's demand for the product declines, the company's financial strength also declines.
  • Success in one segment may preclude entry into another segment.
  • Differentiated Strategy through Market Segmentation Differentiated targeting strategy is a strategy in which an organization targets two or more segments by developing a marketing mix for each segment. Advantages are:
    • business can increase its sales in a total market by focusing on more than one segment.
    • Sales to additional market segments may absorb excess production capacity.
    • Disadvantages are:
    • A greater number of production processes, materials, and skills means higher production costs.
    • Several distinct promotion plans and distribution methods are required, resulting in higher marketing costs.

Step Two - Which Segmentation Variables to Use

Segmentation variables are characteristics of individuals, groups, or organizations that are used to divide a market into segments. Marketers consider the following factors when choosing segmentation variables. 1. The segmentation variable should be related to customers' needs for, uses of, or behavior toward the product. 2. The variable must be measurable. 3. The company's resources and capabilities determine the number and size of segment variables used. 4. Choice of segmentation variables is a critical step because an inappropriate variable limits the chances of developing a successful marketing strategy.

Demographic Variables commonly used by marketers include age, gender, race, ethnicity, income, education, occupation, family size, family life cycle, religion, and social class. They are often closely related to customers' product needs and purchasing behavior. They can be readily measured through observation or survey methods.

Geographic variables include climate, terrain, city size, and urban/rural values. Market density refers to the number of potential customers within a unit of land area, such as a square mile. Geodemographic segmentation clusters people in zip code areas and even smaller neighborhood units based on lifestyle and demographic information.

Micromarketing is an approach to market segmentation in which organizations focus precise marketing efforts on very small geographic markets, such as community, and even neighborhood markets. A psychographic variable can be used by itself to segment a market or combined with other types of segmentation variables. The following are the types most commonly used to segment markets.

  • Personality characteristics - These can be useful for segmentation when a product resembles many competing products and consumers' needs are not greatly affected by other segmentation variables.
  • Marketers almost always select personality characteristics that many people view positively. A market is divided according to consumers' reasons (motives) for making a purchase. Personal appearance, affiliation, safety, and status are examples of motives affecting the types of products purchased and the choice of stores in which they are bought.
  • Lifestyle segmentation groups individuals according to how they spend their time, importance of things in their surroundings, beliefs about themselves and broad issues, and some demographic characteristics. This variable encompasses numerous characteristics related to people's activities, interests, and opinions. One of the more popular programs that studies lifestyle is conducted by the Stanford Research Institute's Value and Lifestyle Program (VALS); its research has identified the following.
    • Three broad consumer groups: Outer-Directed, Inner-Directed, and Need-Driven Consumers
    • Five basic lifestyle groups: Strugglers, Action-Oriented, Status-Oriented, Principle-Oriented, and Actualizers
  • There are some limitations of psychographic segmentation 1) They are difficult to measure accurately. 2) Their links to consumers' needs are sometimes obscure and unproven. 3) The firm may be unable to reach segments resulting from psychographic segmentation.

Behavioristic Variables commonly involve consumers' product use. 1) Users and nonusers 2) Heavy, moderate, and light users How consumers use or apply the products may also determine segmentation. Benefit segmentation is the division of a market according to benefits that consumers want from the product.

Variables for Segmenting Organizational Markets include:

  • Geographic Location; Variations in organizations' demands result from differences in climate, terrain, consumer preferences, or similar factors.
  • Type of Organization. Required product features, distribution systems, price structures, and selling strategies may vary among different types of organizations.
  • Customer Size. An organization's size may affect the purchasing procedures and types and quantities of products desired.
  • Product Use. How a firm uses products affects the types and amounts of the products purchased and the manner in which they are purchased.

Step 3: Developing Market Segment Profiles - Market segment profiles describe the similarities among potential customers within a segment and explain the differences among people and organizations in different market segments. A profile can deal with demographic characteristics, geographic factors, product benefits sought, lifestyles, brand preferences, or usage rates. Market segment profiles provide marketers with an understanding of how an organization can use its capabilities to serve potential customer groups.

Potential sales for a segment can be measured along several dimensions, including product, geographic area, time, and level of competition. Market potential is the total amount of a product for all firms in an industry that customers will purchase within a specified period at a specific level of industrywide marketing activity. It can be stated in terms of dollars or units and can refer to a total market or to a market segment. When analyzing market potential, it is important to indicate the time frame and the level of industry marketing activities.

Company sales potential is the maximum percentage of market potential that an individual firm within an industry can expect to obtain for a specific product. Factors that influence a company's sales potential are the size of the market sales potential, the magnitude of industrywide marketing activities, and the intensity and effectiveness of the firm's marketing activities relative to those of its competitors. There are two general approaches to measuring company sales potential: breakdown and buildup.

The breakdown approach measures company sales potential based on a general economic forecast for a specific time period and the sales potential derived from it. The marketing manager starts with broad comprehensive forecasts of general economic activity, estimates market potential, and then estimates the company's sales potential.

The buildup approach measures company sales potential by estimating how much of a product a potential buyer in a specific geographic area will purchase in a given time period, multiplying the estimate by the total number of potential buyers in that area, and adding the totals for each area to calculate market potential.

Sales estimates may be misleading unless they are tempered with competitive information. Several questions must be asked about competitors in the segments being considered.

  • How many competitors are there?
  • What are their strengths and weaknesses?
  • Do several competitors have major market shares and together dominate the segment?
  • Can our company create a marketing mix to compete effectively against competitors' marketing mixes?
  • Is it likely that new competitors will enter this segment? f. If so, how will they affect our firm's ability to compete successfully?

Meeting the needs of a target segment can be expensive. If costs are too high, marketers may treat the segment as being inaccessible.

Step 5: Selecting a Specific Target Market: Marketers must first decide whether there are enough differences in customers' needs to warrant the use of market segmentation. If customer needs are homogeneous, the undifferentiated approach may be the best choice. If customer needs are heterogeneous, then one or more target markets must be selected. The firm's management must consider whether the organization has the financial resources, managerial skills, labor expertise, and facilities to enter and compete effectively in selected segments.

A sales forecast is the amount of a product the firm actually expects to sell during a specific period at a specified level of marketing activities. Businesses use the sales forecast for planning, organizing, implementing, and controlling their activities. Common problems in companies that fail are improper planning and lack of realistic sales forecasts. Sales forecasting techniques fall into five categories.

  • Executive Judgment
    • Executive judgment is based on the intuition of one or more executives.
    • It is inexpensive and expedient.
    • It works reasonably well when product demand is relatively stable.
    • It is based only on past experience.
    • It is unscientific.
  • C. Surveys - A customer forecasting survey is a survey of customers regarding what types and quantities of products that they intend to buy during a specific period. Customers must be willing and able to make accurate estimates of future product requirements. Surveys reflect buying intentions, not actual purchases. Surveys consume much time and money.
    • A sales-force forecasting survey consists of estimates by members of a firm's sales force of the anticipated sales in their territories for a specified period. The sales staff is closer to customers on a daily basis than other company personnel and, therefore, should know more about customers' future product needs. Forecasts can be prepared for single territories, divisions consisting of several territories, regions made up of multiple divisions, or the total geographic market. For the survey to be effective, salespeople as a group must be accurate-or at least consistent estimators. Assuming that the survey is well administered, the sales force can have the satisfaction of helping to establish reasonable sales goals. Salespeople should be assured that their forecasts are not used to set their sales quotas. The expert forecasting survey is a sales forecast prepared by professionals such as economists, management consultants, advertising executives, college professors, or other persons outside the firm with solid experience in a specific market. The Delphi technique is a procedure in which experts create initial forecasts, submit them to the company for averaging, and have the results returned to them so that they can make individual refined forecasts. The ultimate goal is to develop a highly accurate sales forecast.
  • Time Series Analysis - With time series analysis a forecaster uses the firm's historical sales data to discover a pattern, or patterns, in the firm's sales over time and generally involves trend, cycle, seasonal, and random factor analyses. Trend analysis focuses on aggregate sales data from a period of many years to determine whether annual sales are generally rising, falling, or staying about the same. Cycle analysis is examination of sales figures over a period of three to five years to ascertain whether sales fluctuate in a consistent, periodic manner. Seasonal analysis is an analysis of daily, weekly, or monthly sales figures to evaluate the degree to which seasonal factors influence sales. Random factor analysis attempts to attribute erratic sales variations to random, nonrecurrent events.
  • Regression Analysis - Regression analysis is a method of predicting sales based on finding a relationship between past sales and one or more variables such as population or per capita income. Simple regression analysis uses one independent variable, whereas multiple regression analysis includes two or more independent variables. These methods are used only when a precise relationship can be established and are therefore futile when no historical data exists, as with new products.
  • Market Tests - A market test involves making a product available to buyers in one or more test areas and measuring purchases and consumer responses to distribution, promotion, and price. Market tests provide information about consumers' actual rather than intended purchases. They are effective in estimating sales of new products or of existing products in new geographic areas. The chief disadvantages of market tests are that they are time-consuming and expensive.
  • Using Multiple Forecasting Methods - Although some businesses rely on a single sales forecasting method, most use several techniques to attempt to validate the results from one technique. Methods used for short-range forecasts are often inappropriate for long-range forecasting.

Bibliography:
http://www.accd.edu/sac/mgt/mrkg/Chapter%207.htm

Enter supporting content here