CH-5 Measuring Market Opportunities: Forecasting and Market Knowledge – Marketing Strategy: A Decision-Focused Approach : Chapter Notes

This document contains Chapters 5 to 6 Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge I. Intel’s Secret Weapon discusses Intel’s efforts to understand what their customers and potential customers care about and if they understood the things to drive new uses of technology. Genevieve Bell, Director of Intel’s User Experience Group, with her team of social scientists, interaction designers and human factors engineers is charged with setting research directions, leading new product strategy and definition, and driving consumer-centric product innovation and thinking across the company. II. Strategic Challenges Addressed in Chapter 5 Chapter 5 deals with issues that enable managers and entrepreneurs to bring life to their dreams. It address challenges in estimating market potential and forecasting sales, for both new and existing products, or businesses. It provides a menu of evidence-based forecasting methods, each of which is useful in some situations, but not others, and their limitations. It also examines the process by which innovative new products diffuse into the market over time. It also addresses several systematic sources of information—internal record systems, marketing addresses, competitive intelligence systems, and systems that organize and track information about client contact—that keep marketers in touch with what’s going on in the marketplace. It briefly touches on marketing research, where data is gathered about a particular marketing challenge or situation. III. Every Forecast Is Wrong Forecasting plays a central role in all kinds of planning and budgeting in all kinds of businesses and other organizations. Given stakes and risks in being wrong with a forecast, some effort to prepare an evidence-based forecast, instead of a wild guess, is almost always called for, even if time and money are scarce. IV.A Forecaster’s Toolkit: A Tool for Every Forecasting Setting Before choosing a method to prepare a forecast, one must know what is to be estimated or forecasted. First, there is the size of the potential market, that is, the likely demand from all actual and potential buyers of a product or product class. An estimate of market potential often serves as a starting point for preparing a sales forecast. Second, there is the size of the currently penetrated market, those who are actually using the product. Third, there is the target market, the size of the potential and penetrated markets for the market segment an organization intends to serve. Established organizations employ two approaches for preparing a sales forecast: Top-down—central person or persons take the responsibility for forecasting and prepare an overall forecast, perhaps using aggregate economic data, current sales trends, or other methods. Bottom-up—each part of the firm prepares its own sales forecast, and the parts are aggregated to create the forecast for the firm as a whole. It is common in decentralized firms. There are numerous evidence-based methods for estimating market potential and forecasting sales—statistical methods, observation, survey or focus groups, analogy, judgment, experiments and market tests, and other mathematical approaches like chain ratios and indices. A. Statistical Methods Statistical methods use past history and various statistical techniques, such as multiple regression or time series analysis, to forecast the future based on an extrapolation of the past. This method is typically not useful for entrepreneurs or new product managers charged with forecasting sales for a new product or new business since there is no history in their venture on which to base a statistical forecast. In established firms, for established products, statistical methods are extremely useful. Statistical methods have important limitations Statistical methods generally assume the future will look very much like the past. Sometimes this is not the case. If product or market characteristics change, statistical methods used without adequate judgment may not keep pace. B. Observation One method for preparing an evidence-based forecast is to directly observe or gather existing data about what real consumers do in the product-market of interest. Observation-based forecasting is attractive because it is based on what people actually do. If behavioral or usage data can be found from existing secondary sources—in company files, at the library, or on the internet—data collection is both faster and cheaper than conducting and designing a new study and carrying it out. C. Surveys or Focus Group Consumers, after being shown a statement of the product concept (concept test) or a prototype or sample of the product, can be asked how likely they are to buy, creating a survey of buyers’ intentions. Buyers can also be asked about their current buying behavior. Salespeople can be asked how much they are likely to sell, completing a survey of salesforce opinion. Experts of various kinds—members of the distribution channel, suppliers, consultants, trade association executives, and so on—can also be surveyed. Surveys and focus groups possess important limitations: For one, what people say is not always what people do. Consumer surveys of buyer intention are always heavily discounted to allow for this fact. The people who are surveyed may not be knowledgeable, but if asked for their opinion they will probably provide it. What people imagine about a product concept in a survey may not be what is actually delivered once the product is launched. In general, statistical and observational methods, where adequate data or settings are available in which to apply them, are superior to survey methods of forecasting because such methods are based, at least in part, on what people have actually done or bought, while survey methods are based on what people say, a less reliable indicator of their future behavior. D. Analogy An approach often used for new product forecasting where neither statistical methods nor observations are possible is to forecast the sales or market potential for a new product or product class by analogy. This method is also used for new-to-the-world high-technology products, for which product prototypes are often either not available or extremely expensive to produce. Rather than conduct surveys to ask consumers about their likelihood to buy a product they can hardly imagine, forecasters consider related product introductions with which the new product may be compared. Limitations: The new product and its pricing are never exactly like that to which the analogy is drawn. Market and competitive conditions may vary from when the analogous product was launched. Such conditions must be taken into account. E. Judgment Since capable and informed judgment is required for all methods, sometimes forecasts are made solely on the basis of experienced judgment, or intuition. Some decision makers, even effective ones, are intuitive in their decision processes and cannot always articulate the basis for their judgments. Decision makers with sufficient experience in a market they know well may be quite accurate in their intuitive forecasts. Unfortunately, it is often difficult for them to defend their forecasts against those prepared by evidence-based methods when the two differ. F. Experiments and Market tests Used largely for new consumer products, market tests such as experimental test markets may be done under controlled experimental conditions in research laboratories or in live test markets with real advertising and promotion and distribution in stores. Use of live test markets has declined over the past few decades. Experimental test markets, on the other hand, are still commonly used. The coming of the Internet has made possible a new kind of market test: an offer directly to consumers on the web. G. Other Mathematical Approaches: Chain ratios and Indices Two additional mathematically-driven approaches to forecasting are the chain ratio calculation or the use of indices. Both approaches begin with an estimate of market potential. The market potential is then multiplied by various fractional factors that, taken together, predict the portion of the overall market potential that one firm or product can expect to obtain. Other quantitative methods, especially useful for new products, have also been developed. These include conjoint analysis, a method to forecast the impact on consumer demand of different combinations of attributes that might be included in a new product, and methods to mathematically model the diffusion of innovation process for consumer durables. V. Rate of Diffusion of Innovations: Another Perspective on Forecasting Before entrepreneurs or established marketers invest in the development and introduction of an innovation, they want to know how rapidly the innovation is likely to be adopted by the target market. Diffusion of innovation theory seeks to explain the adoption of an innovative product or service over time among a group of potential buyers. It is useful to managers in predicting likely adoption rate for new and innovative goods or services. A. The Adoption Process and Rate of Adoption The adoption process involves the attitudinal changes experienced by individuals from the time they first hear about a new product, service, or idea until they adopt it. If plotted on a cumulative basis, the percentage of people adopting a new product over times resembles an S curve. Generally the speed of the adoption process depends heavily on the following factors: The risk (cost of product failure or dissatisfaction) The relative advantage over other products The relative simplicity of the new product the new product’s compatibility with previously adopted ideas and behavior Extent to which the new product’s trial can be accomplished on a small-scale basis The ease with which the central idea of the new product can be communicated The rate at which an innovative new product category passes through the adoption process in also a function of the actions taken by the product’s marketers. B. Adopter Categories If the time of adoption is used as a basis of classifying individuals, five major groups can be distinguished: Innovators Early adopters Early majority Late majority Laggards Because each category comprises individuals who have similar characteristics and because individuals differ substantially across categories, these adopter groups can be considered market segments. Thus, one would use a different set of strategies to market a new product to the early adopter group than to market it to the late majority group. C. Implications of Diffusion of Innovation Theory for Forecasting Sales of New Products and New Firms A good way to estimate how quickly an innovation is likely to move through the diffusion process is to construct a chart that rates the adoption on the six key factors influencing adoption speed: Risk Relative advantage Relative simplicity Compatibility with current behavior Ease of small-scale trial Ease of communication of benefits An innovation that is risky for the prospective user to try or buy, has little competitive advantage, is complex or incompatible with current user behavior, and for which it is difficult or expensive to try or to understand its benefits is likely to face tough sledding, regardless of the attractiveness of the market. VI. Cautions and Caveats in Forecasting A. Psychological Biases to Forecasting To a varying degree, the effectiveness of all of the forecasting methods is often undermined by excessive optimism on the forecaster’s part, especially in new product or new venture settings. Forecasters often fall prey to what Dan Lovallo and Daniel Kahneman call the planning fallacy, a tendency to make decisions based on delusional optimism rather than on a rational weighing of possible gains and losses and the probabilities thereof. B. Common Sources of Error in Forecasting Forecasters are subject to anchoring bias, where forecasts are perhaps inappropriately “anchored” in recent historical figures even, though market conditions have markedly changed, for better or worse. Capacity constraints are sometimes misinterpreted as forecasts. Another source of error in forecasting is incentive pay. Bonus plans can cause managers to artificially inflate or deflate forecasts, whether intentionally or otherwise. “Sandbagging”—setting the forecast or target at an easily achievable figure in order to earn bonuses when that figure is beaten—is common. Unstated but implicit assumptions can overstate a well-intentioned forecast. Assumptions of awareness and distribution coverage at levels less than 100 percent, depending on the nature of the planned marketing program for the product, should be applied to a forecast, using the chain ratio method. C. Keys to Good Forecasting There are two important keys to improve credibility and accuracy of a set of forecasts of sales and market potential. Make explicit the assumptions on which the forecast is based. Use multiple methods. If the results of two or more forecasting methods converge on similar results, that will build your and others’ confidence in what the forecasts say. Contingency plans should be developed to cope with the reality that ultimately unfolds. VII. Why Data? Why Marketing Research? Obtaining market knowledge requires data. Without relevant and timely data, market knowledge is incomplete and often ill-informed, based perhaps on hunches or intuitions that may or may not be correct. Without adequate market knowledge, marketing decisions are likely misguided. VIII. Customer Relationship Management: Charting a Path toward Competitive Advantage There are four commonly used market knowledge systems on which companies rely to keep pace with daily developments: Internal records regarding marketing performance (in terms of sales and the effectiveness and efficiency of marketing programs) Marketing databases Competitive intelligence systems Systems to organize client contact Taken together, these systems lie at the heart of the systematic practice of customer relationship management (CRM). Effective use of CRM is likely to result in happier, higher-volume, more loyal customers. A. Internal Records Systems Marketers need internal records systems to track what is selling, how fast, in which locations, to which customers etc. Providing input on the design of such systems so that the right data are provided to the right people at the right time is a critical marketing responsibility in any company. B. Marketing Databases Make CRM Possible CRM has proved to be very successful in managing marketing campaigns and in serving customers more effectively and more efficiently. The purpose of CRM is to develop a unified and cohesive view of the customer from every touch point within the company. Databases created for CRM purposes typically capture information about most or all of the following for each customer: Transactions Instances of customer contact Customer demographics Customer responses Designing marketing databases that take effective advantage of customer data that companies are in a position to collect requires that several major issues be considered: The cost of collecting the data The economic benefits of using the data The ability of the company to keep the data current in today’s mobile society The rapid advances in technology that permit the data to be used to maximum advantage Building or accessing marketing databases is a small part of any effective CRM effort. Implementing such an effort requires four key steps: Gaining broad-based organizational support for creating and adopting a CRM strategy Forming a cross-functional CRM team with membership from all functions that have customer contact Conducting a needs analysis that identifies customer and business needs Developing a CRM strategy to guide implementation One of the things that some CRM efforts make possible is segmenting markets according to the lifetime value of customers, rather than by more traditional means. Customer lifetime value (CLV) refers to the margins that a customer generates over a lifetime less the cost of serving the customer. The rapid rise in so-called two-sided markets—in which one set of customers who pay little or nothing (for example, Google search users) are essential to attract a completely different and more lucrative set of customers (advertisers who buy ads that are delivered in response to Google searches)—has led to an even more vexing challenge than the calculation of customer lifetime value in a conventional sense. This challenge is to figure out the value of both kinds of customers: Those who search (and are asked not to pay), in Google’s case Those who pay, the advertisers C. Why CRM Efforts Fail Research by Bain & Co. suggests that there are four major pitfalls to watch out for: Implementing CRM without first developing a strategy Putting CRM in place without changing organizational structure and/or processes Assuming that more CRM is better Failure to prioritize which customer relationships are most worth investing in D. Client Contact Systems One good starting point for developing CRM capabilities in companies having limited resources is to put in place salesforce automation software. Such software helps companies disseminate real-time product information to salespeople to enable them to be more productive and more able to satisfy customer needs. Such software also allows companies to effectively capture customer intelligence from salespeople, keep track of it for use on later sales calls, and even transfer it to other salespeople in the event of a salesperson leaving the company. E. Competitive Intelligence Systems Competitive intelligence (CI) is a systematic and ethical approach for gathering and analyzing information about competitors’ activities and related business trends. The critical questions that managers setting up a CI system should ask are: How rapidly does the competitive climate in our industry change? How important is it that we keep abreast of such changes? What are the objectives for CI in our company? Who are the best internal clients for CI? To whom should the CI effort report? What budget should be allocated to CI? Will it be staffed full or part time? IX. Marketing Research: A Foundation for Marketing Decision Making Marketing research task involves the design, collection, analysis, and reporting of research intended to gather data pertinent to a particular marketing challenge or situation. Marketing research is intended to address carefully defined marketing problems or opportunities. Some marketing problems commonly addressed through marketing research include tracking customer satisfaction from unit to unit or year to year (tracking studies); testing consumer responses to elements of marketing programs, such as prices or proposed advertising campaigns; and assessing the likelihood that consumers will buy proposed new products. The marketing research is fraught with numerous opportunities for error. That is why it is very important that all who play influential roles in setting strategy for their firms or use marketing research results for decision making be well-informed and critical users of the information that results from market research studies. X. What Users of Marketing Research Should Ask The informed and critical user of marketing research should ask the following questions, ideally before implementing the research or if necessary subsequent to its completion, to ensure that the research is unbiased and the results are trustworthy: What are the objectives of the research? Will the data to be collected meet those objectives? Are the data sources appropriate? Is cheaper, faster secondary data used where possible? Is qualitative research planned to ensure that quantitative research, if any, is on target? Are the planned qualitative and/or quantitative research approaches suited to the objectives of the research? Qualitative research is generally better for deep insights into consumer behavior, while quantitative research is better for measurement of a population’s attitudes and likely responses to products or marketing programs. Is the research designed well? Will questionnaire scales permit the measurement necessary to meet the research objectives? Are the questions on a survey or in an interview or focus group unbiased? Do the contact method and sampling plan entail any known bias? Is the sample size large enough to meet the research objectives? Are the planned analyses appropriate? They should be specified before the research is conducted. End of Chapter Discussion Questions and Answers Given that absolute market potential almost always exceeds actual industry sales, why do marketers bother to make potential estimates? Discuss four decisions that a marketer of industrial grinding machinery might make based on such potential estimates. Answer: Why Marketers Make Potential Estimates: 1. Strategic Planning: • Potential estimates provide valuable insights for strategic planning and resource allocation. • Marketers use these estimates to identify growth opportunities and develop long-term business strategies. 2. Market Segmentation: • Potential estimates help marketers identify and prioritize market segments with the highest growth potential. • This allows them to tailor their marketing efforts and product offerings to meet the needs of specific market segments. 3. Competitive Analysis: • Potential estimates help marketers assess the size of the market relative to competitors. • This information is crucial for evaluating competitive positioning and developing strategies to gain market share. 4. Investment Decisions: • Marketers use potential estimates to evaluate the feasibility of new product launches or market expansions. • These estimates help justify investment decisions and assess the potential return on investment. Four Decisions for a Marketer of Industrial Grinding Machinery Based on Potential Estimates: 1. Market Expansion: • Identify new geographic markets or industry sectors with high growth potential for industrial grinding machinery. • Allocate resources to penetrate these markets effectively, including sales force expansion and marketing campaigns. 2. Product Development: • Use potential estimates to identify emerging trends and customer needs in the industrial grinding machinery market. • Develop new product features or models to meet evolving customer demands and capture a larger share of the market. 3. Marketing Strategy: • Tailor marketing messages and campaigns to highlight the benefits and competitive advantages of industrial grinding machinery. • Focus marketing efforts on key market segments identified through potential estimates to maximize ROI. 4. Distribution Channel Optimization: • Evaluate existing distribution channels and identify opportunities to expand or optimize distribution networks. • Establish partnerships with distributors and dealers in high-potential markets to increase market penetration and sales. Conclusion: While absolute market potential exceeds actual industry sales, potential estimates are essential for marketers to make informed decisions about strategic planning, market segmentation, competitive analysis, and investment decisions. For a marketer of industrial grinding machinery, potential estimates can guide decisions related to market expansion, product development, marketing strategy, and distribution channel optimization, ultimately driving business growth and profitability. To more effectively allocate promotion expenditures and sales efforts, the marketing manager for a company marketing frozen food entrées would like to know the relative market potential for such products in every county in the United States. What variables would you include in a multi-factor index for measuring relative potential? Explain your rationale for including each variable. Where might you find up-to-date information about each of the variables in your index? Answer: Variables for a Multi-Factor Index to Measure Relative Market Potential for Frozen Food Entrées: 1. Population Density: • Rationale: Areas with higher population density are likely to have greater demand for convenient food options such as frozen food entrées. • Information Source: U.S. Census Bureau, which provides up-to-date population data for every county in the United States. 2. Household Income Levels: • Rationale: Higher household income levels indicate greater purchasing power and willingness to spend on convenience foods like frozen food entrées. • Information Source: U.S. Census Bureau, which provides income data for every county in the United States. 3. Presence of Grocery Stores and Supermarkets: • Rationale: Counties with a higher concentration of grocery stores and supermarkets are likely to have better distribution channels for frozen food entrées. • Information Source: Retail trade reports, industry publications, or commercial databases that track the number and location of grocery stores and supermarkets. 4. Average Commute Time: • Rationale: Areas with longer average commute times may have higher demand for convenient meal options like frozen food entrées. • Information Source: U.S. Census Bureau or transportation department data, which provide commute time statistics for different regions and counties. 5. Age Distribution: • Rationale: Demographic groups such as millennials and working parents, who often have busy lifestyles, are more likely to purchase frozen food entrées for convenience. • Information Source: U.S. Census Bureau, which provides age distribution data for every county in the United States. 6. Household Size: • Rationale: Larger households may prefer the convenience of frozen food entrées for quick and easy meal preparation. • Information Source: U.S. Census Bureau, which provides household size data for every county in the United States. 7. Educational Attainment: • Rationale: Higher levels of educational attainment may be associated with busier lifestyles and greater demand for convenient meal options. • Information Source: U.S. Census Bureau, which provides educational attainment data for every county in the United States. Information Sources for Variables: • U.S. Census Bureau: Provides comprehensive demographic, income, and household data for every county in the United States. • Industry Publications: Sources such as trade publications and market research reports may provide valuable insights into consumer behavior and market trends. • Commercial Databases: Data providers like Nielsen or IRI offer access to detailed consumer and market data, including information on retail locations, consumer behavior, and purchasing patterns. Conclusion: By creating a multi-factor index that considers variables such as population density, household income levels, presence of retail outlets, commute times, demographic factors, and educational attainment, the marketing manager can effectively allocate promotion expenditures and sales efforts to counties with the highest relative market potential for frozen food entrées. Accessing up-to-date information from sources like the U.S. Census Bureau, industry publications, and commercial databases ensures that the index is based on accurate and relevant data. Suppose you are the product manager responsible for General Electric’s line of trash compactors. After many years, the product has yet to gain acceptance by many consumers. Use the diffusion of innovation theory discussed in the text to explain why trash compactors have achieved such poor market penetration. What does this imply concerning the shape of the rest of the trash compactor’s life-cycle curve? What actions might you consider taking to increase the market penetration for this product? Answer: Explanation using Diffusion of Innovation Theory: 1. Innovation Characteristics: • Relative Advantage: Trash compactors may not offer a significant relative advantage over traditional waste disposal methods such as garbage bins or recycling. • Compatibility: They may not be compatible with the existing waste disposal habits and routines of consumers. • Complexity: Consumers may perceive trash compactors as complex or difficult to use, reducing their willingness to adopt the innovation. • Trialability: Limited opportunities for consumers to try out trash compactors before making a purchase may hinder adoption. • Observability: The benefits of using trash compactors may not be easily observable or visible to potential adopters. 2. Market Penetration and Life-Cycle Curve: • Poor market penetration suggests that trash compactors are likely still in the early stages of the product life cycle. • The slow rate of adoption indicates that the product has not yet reached the critical mass needed for widespread acceptance. 3. Actions to Increase Market Penetration: a. Product Design and Features: • Simplify the design and operation of trash compactors to make them more user-friendly and accessible to a wider range of consumers. • Incorporate features that enhance convenience, such as automatic sensors, odor control, and integration with smart home systems. b. Marketing and Promotion: • Educate consumers about the benefits of using trash compactors, emphasizing their cost savings, environmental impact, and convenience. • Offer free trials or money-back guarantees to encourage consumers to try out the product without financial risk. c. Distribution and Availability: • Increase the availability of trash compactors by expanding distribution channels and making them more accessible in retail stores and online platforms. • Partner with home appliance retailers to promote and showcase trash compactors alongside other kitchen appliances. d. Pricing Strategy: • Offer competitive pricing and financing options to make trash compactors more affordable and attractive to price-sensitive consumers. • Use promotional pricing and discounts to incentivize early adoption and generate momentum in the market. e. Customer Support and Service: • Provide excellent customer support, including installation assistance, maintenance services, and troubleshooting guidance. • Address any concerns or barriers to adoption promptly and effectively to build trust and confidence among potential buyers. Conclusion: By addressing the barriers to adoption identified by the diffusion of innovation theory and implementing targeted strategies to increase market penetration, General Electric can improve the acceptance and adoption of its line of trash compactors. By focusing on product design, marketing and promotion, distribution and availability, pricing strategy, and customer support, General Electric can accelerate the product's growth and move it further along the product life-cycle curve towards maturity and eventual market saturation. Chapter 6 Targeting Attractive Market Segments I. “The Developing World’s Emerging Middles Class” discusses the composition of the world’s new middle class and the marketing questions and challenges associated with targeting this new population. II. Strategic Challenges Addressed in Chapter 6 This chapter draws on the foundation of market knowledge and customer understanding established in the first five chapters to introduce what are probably the most important and fundamental tools in the marketer’s tool kit: market segmentation and target marketing. Learning to apply these tools effectively requires addressing the following important questions: Why do market segmentation and target marketing make sense? Why not sell the same products or services to everyone? How can potentially attractive market segments be identified and defined? How can these segments be prioritized so the most attractive ones are pursued? III. Do Market Segmentation and Target Marketing Make Sense in Today’s Global Economy? Market segmentation: is the process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead them to respond in similar ways to a particular product offering and marketing program. Target marketing requires evaluating the relative attractiveness of various segments in terms of market potential, growth rate, and competitive intensity, and other factors, along with the firm’s mission and capabilities to deliver what each segment wants, in order to choose which segments it will serve. Brand positioning entails designing product offerings and marketing programs that can establish an enduring competitive advantage in the target market by creating a unique brand image, or position, in the customer’s mind. These three decision processes—market segmentation, target marketing, and positioning—are closely linked and have strong interdependence. All must be well considered and implemented if the firm is to be successful in managing a product-market relationship. A. Most Markets Are Heterogeneous Because markets are rarely homogeneous in benefits wanted, purchase rates, and price and promotion elasticities, their response rates to products and marketing programs differ. Thus, markets are complex entities that can be defined (and segmented) in a variety of ways. The critical issue for marketers is to find an appropriate segmentation scheme that will facilitate target marketing, positioning, and the formulation and implementation of successful marketing programs. B. Today’s Market Realities Often Make Segmentation Imperative Market segmentation has become increasingly important in the development of marketing strategies for several reasons. Population growth in developed countries has slowed, and more product-markets are maturing. This sparks more intense competition in existing markets as firms seek growth via gains in market share and encourages companies to find new markets. Such social and economic forces as expanding disposable incomes, higher educational levels, and more awareness of the world have produced customers with more varied and sophisticated needs, tastes, and lifestyles than ever before. There is an increasingly important trend toward micro segmentation in which extremely small market segments are targeted. Many marketing organizations have made it easier to implement sharply focused marketing programs by more sharply targeting their own services. IV. How Are Market Segments Best Defined? There are three important steps in the market segmentation process: Identify a homogeneous segment that differs from other segments Specify criteria that define the segment Determine segment size and potential A. Who They Are: Segmenting Demographically While firm demographics (age of firm, size of firm, industry, etc.) are useful in segmenting organizational markets, demographics is usually thought of in terms of attributes of individual consumers. Some examples of demographic attributes are as follows: Age Sex Income Occupation Education Race and ethnic origin Demographic descriptors are important in segmentation of industrial markets, which are typically segmented in two stages: Macrosegmentation, divides the market according to the characteristics of the buying organization using such attributes as age of firm, firm size, and industry affiliation Microsegmentation, groups customers by the characteristics of the individuals who influence the purchasing decision—for instance, age, sex, and position within the organization B. Where They Are: Segmenting Geographically Different locations or regions vary in their sales potential, growth rates, customer needs, cultures, climates, service needs, and competitive structures, as well as purchase rates for a variety of goods. Geographic segmentation is used in both consumer and organizational markets and is particularly important in retailing and many service businesses, where customers are unwilling to travel very far to obtain the goods or services they require. The area included within such a geographically defined region is called a trade area. C. Geodemographic Segmentation Marketers targeting emerging markets in the developing world must pay particular attention to market segmentation within the geographic regions they target. In emerging and developed markets alike, many segmentation schemes involve both demographic and geographic factors. Thus, retailers usually want to know something about the people who live within, perhaps, a two-mile or five-mile radius of their proposed new store. Geodemographics also attempts to predict consumer behavior by making demographic, psychographic, and consumer information available at the block, zip code, or postal code levels. D. How They Behave: Behavioral Segmentation Behavioral attributes can take many forms, including those based on: Consumer needs Product usage patterns Lifestyle The structure of firms’ purchasing activities and the types of buying situations they encounter Consumer Needs Consumer needs are often expressed in benefits sought from a particular product or service. Since purchasing is a problem-solving process, consumers often evaluate product alternatives on the basis of desired characteristics and how valuable each characteristic is to the consumer—choice criteria. Marketers can define segments according to the different choice criteria in terms of presence or absence of certain characteristics and the importance attached to each. Product Usage and Purchase Influence Product usage is important because in many markets a small proportion of potential customers make a high percentage of all purchases. Market segmentation based on sources of purchase influence for the product category is relevant for both consumer and organizational markets. Lifestyle Segmentation by lifestyle, or psychographics, segments market on the basis of consumers’ activities, interests, and opinions—in other words, what they do or believe, rather than who they are in a demographic sense. Stanford Research Institute has created a U.S. segmentation service (called VALS 2), which builds on the concept of self-orientation and resources for the individual. Organizational Behavioral Attributes Purchasing structure and buying situation segmentation attributes are unique to organizational markets. Purchasing structure is the degree to which the purchasing activity is centralized. The buying situation attribute includes three distinct types of situations: Straight rebuy, a recurring situation handled on a routine basis Modified rebuy, which occurs when an element, such as price or delivery schedule, has changed in a client-supplier relationship New buying, which is likely to require the customer gathering considerable information and evaluating alternative suppliers E. Innovative Segmentation: A Key to Marketing Breakthroughs Combinations of different attributes are used to more precisely target an attractive segment. At the foundation of many a marketing breakthrough one often finds an insightful segmentation scheme that is sharply focused in a behavioral way. V. Choosing Attractive Market Segments: A Five-Step Process Most firms no longer aim a single product and marketing program at the mass market. Instead, they break that market into homogeneous segments on the basis of meaningful differences in buyer behavior or in the benefits sought by different groups of customers. Not all segments represent equally attractive opportunities for the firm Within an established firm, rather than allowing each business unit or product manager to develop an approach to evaluate the potential of alternative market segments, it is often better to apply a common analytical framework across segments. One useful analytical framework managers or entrepreneurs can use for this purpose is the market-attractiveness/competitive position matrix. The steps in constructing a market attractiveness/competitive position matrix for evaluating potential target markets are as follows: Choose criteria to measure market attractiveness and competitive position Weight market attractiveness and competitive position factors to reflect their relative importance Assess the current position of each potential target market on each factor Project the future position of each market based on expected environmental, customer, and competitive trends Evaluate implications of possible future changes for business strategies and resources requirements A. Step 1: Select Market-Attractiveness and Competitive Position Factors Market-Attractiveness Factors Assessing the attractiveness of markets or market segments involves determining the market’s size and growth rate and assessing various trends—demographic, sociocultural, economic, political/legal, technological, and natural—that influence demand in that market. An even more critical factor in determining whether to enter a new market or market segment, however, is the degree to which unmet customer needs, or needs that are currently not being well served, can be identified. Competitive-Position Factors The degree to which the firm’s proposed product entry will be sufficiently differentiated from competitors is an immediate and salient concern. Most new goods or services need to be either better from a consumer point of view or cheaper than those they hope to replace. B. Step 2: Weight Each Factor A numerical weight is assigned to each factor to indicate its relative importance in the overall assessment. The task of weighting the factors—as well as determining them in the first place—gets more complicated as companies reach out to new and different markets, like the growing middle class in the developing world. C. Step 3: Rate Segments on Each Factor, Plot Results on Matrices This step requires that evidence—typically both qualitative and quantitative data—be collected to objectively assess each of the criteria in step 1. Once the assessments have been made, the weighted results can be plotted on a market-attractiveness/competitive position matrix. D. Step 4: Project Future Position for Each Segment Managers or entrepreneurs should first determine how the market’s attractiveness is likely to change over the next three to five years, if not longer. Once managers have determined any changes likely to occur in market attractiveness, they must next determine how the business’s competitive position in the market is likely to change, assuming that it responds effectively to projected environmental changes but the firm does not undertake any initiatives requiring a change in basic strategy. The expected changes in both market attractiveness and competitive position can then be plotted on the matrix in the form of a vector to reflect the direction and magnitude of the expected changes. E. Step 5: Choose Segments to Target, Allocate Resources Managers should consider a market segment to be a desirable target only if it is strongly positive on at least one of the two dimensions of market attractiveness and potential competitive position and at least moderately positive on the other. A business may decide to enter a market that currently falls into one of the middle cells under these conditions (Exhibit 6.10): Managers believe that the market’s attractiveness or their competitive strength is likely to improve over the next few years They see such markets as steppingstones to entering larger, more attractive markets in the future Shared costs or synergies are present, thereby benefiting another entry The market attractiveness/competitive position matrix offers general guidance for strategic objectives and allocation of resources for segments currently targeted and suggests which new segments to enter. VI. Different Targeting Strategies Suit Different Opportunities Most successful entrepreneurial ventures target narrowly defined market segments at the outset for two reasons: Doing so puts the nascent firm in position to achieve early success in a market segment that it understands particularly well. Such a strategy conserves precious resources, both financial and otherwise. The three common targeting strategies are: Niche-market strategy Mass-market strategy Growth-market strategy A. Niche-Market Strategy This strategy involves serving segments that, while not the largest, consist of a sufficient number of customers seeking somewhat-specialized benefits from a good or service. Such a strategy is designed to avoid direct competition with larger firms pursuing bigger segments. B. Mass-Market Strategy A business can pursue a mass-market strategy in two ways. It can ignore any segment differences and design a single product-and-marketing program that will appeal to the largest number of consumers. It can design separate products and marketing programs for the differing segments. This is often called differentiated marketing. C. Growth-Market Strategy Businesses pursuing a growth-market strategy often target one or more fast-growth segments, even though these segments may not currently be very large. It is a strategy often favored by smaller companies to avoid direct confrontations with larger firms while building volume and share. A growth-market strategy usually requires strong R&D and marketing capabilities to consistently identify and develop products appealing to newly emerging user segments, plus the resources to finance rapid growth. VII. Global Market Segmentation More and more companies are approaching global market segmentation by attempting to identify consumers with similar needs and wants reflected in their behavior in the marketplace in a range of countries. The intercountry segmentation enables a company to develop reasonably standardized programs requiring little change across local markets, thereby resulting in scale economies. There are many reasons—beyond mere ambitions to grow—why companies expand internationally with sharply targeted strategies: Some companies go international to defend their home position against global competitors who are constantly looking for vulnerability. Another reason a firm may go overseas and target a specific country is to service customers who are also engaging in global expansion. End of Chapter Discussion Questions and Answers Extensive market segmentation is a relatively recent phenomenon. Until about the middle of the 20th century many firms offered a single basic product aimed at the entire mass market (such as Coca-Cola or Levi jeans). But in recent years many firms—including industrial goods manufacturers and services producers as well as consumer products companies—have begun segmenting their markets and developing different products and marketing programs targeted at different segments. Which environmental changes have helped spark this increased interest in market segmentation? What advantages or benefits can a firm gain from properly segmenting its market? Answer: Environmental Changes Sparking Increased Interest in Market Segmentation: 1. Changing Consumer Preferences: • Shift from mass production to mass customization driven by increasing consumer demand for personalized products and services. • Diverse consumer needs and preferences require companies to tailor offerings to specific segments. 2. Technological Advancements: • Growth of digital marketing channels and data analytics enables companies to gather and analyze customer data more effectively. • Technology allows for targeted advertising, personalized messaging, and customization of products and services. 3. Globalization and Increased Competition: • Global markets have become more competitive, necessitating a more targeted approach to attract and retain customers. • Companies need to differentiate themselves from competitors by offering unique value propositions to specific market segments. 4. Fragmentation of Media and Communication Channels: • Fragmentation of media channels (e.g., social media, online forums) has made it easier to reach niche audiences. • Companies can now communicate directly with specific market segments, delivering tailored messages more efficiently. Advantages of Market Segmentation: 1. Better Understanding of Customer Needs: • Allows companies to identify and understand the diverse needs, preferences, and behaviors of different customer segments. • Enables companies to develop products and services that better meet the specific needs of each segment. 2. Improved Targeting and Positioning: • Enables companies to target specific customer segments more effectively, increasing the relevance of marketing efforts. • Helps companies position their products and services more accurately, leading to increased customer satisfaction and loyalty. 3. Increased Profitability: • Allows companies to focus resources on high-potential segments, maximizing return on investment. • Helps companies identify and prioritize profitable market opportunities, leading to increased sales and profitability. 4. Competitive Advantage: • Enables companies to differentiate themselves from competitors by offering unique value propositions to specific market segments. • Helps companies build stronger relationships with customers, increasing brand loyalty and reducing the threat of new entrants. 5. Efficient Resource Allocation: • Allows companies to allocate resources more efficiently by focusing marketing efforts and resources on the most profitable market segments. • Helps companies avoid wasting resources on marketing to customers who are unlikely to purchase their products or services. Conclusion: The increased interest in market segmentation is driven by environmental changes such as changing consumer preferences, technological advancements, globalization, and the fragmentation of media channels. Proper market segmentation allows companies to better understand customer needs, improve targeting and positioning, increase profitability, gain a competitive advantage, and allocate resources more efficiently, ultimately leading to increased sales and profitability. Exactly what is the relationship between market segmentation, target marketing, and positioning? What damage will be done to a company’s target marketing and positioning efforts if markets are incorrectly or not effectively or insightfully segmented? Answer: Relationship between Market Segmentation, Target Marketing, and Positioning: 1. Market Segmentation: • Market segmentation is the process of dividing a heterogeneous market into smaller, more homogeneous segments based on similar characteristics, needs, or behaviors. • It involves identifying distinct groups of customers with specific needs, preferences, and behaviors. 2. Target Marketing: • Target marketing involves evaluating the various market segments identified through segmentation and selecting one or more segments as the focus of marketing efforts. • It entails choosing the most attractive and profitable segments to target with tailored marketing strategies and tactics. 3. Positioning: • Positioning involves creating a distinct image and identity for a product or brand in the minds of consumers within the target market. • It focuses on how the product or brand is perceived relative to competitors and emphasizes its unique value proposition and benefits. Relationship: • Market segmentation identifies the different groups of customers with similar needs and characteristics. • Target marketing involves selecting one or more of these segments as the focus of marketing efforts based on their attractiveness and fit with the company's capabilities and objectives. • Positioning entails developing a unique and compelling brand image and identity within the chosen target segments, emphasizing the product or brand's distinctive benefits and value proposition. Damage from Incorrect or Ineffective Segmentation: 1. Wasted Resources: • Incorrect or ineffective segmentation can result in misallocation of marketing resources. • Targeting the wrong segments may lead to wasted advertising spend, ineffective promotional efforts, and missed sales opportunities. 2. Loss of Competitive Advantage: • Incorrect segmentation may result in the company failing to differentiate its product or brand effectively from competitors. • This can lead to a loss of competitive advantage and decreased market share as the product or brand fails to stand out in the marketplace. 3. Ineffective Targeting: • Incorrect segmentation can result in targeting customers who are not interested in or not likely to purchase the product or brand. • This can lead to low response rates, reduced sales, and decreased return on investment for marketing efforts. 4. Poor Positioning: • Incorrect segmentation may result in ineffective positioning strategies that fail to resonate with the target audience. • This can lead to confusion among consumers about the product or brand's benefits and value proposition, reducing its appeal and relevance. Conclusion: In summary, market segmentation, target marketing, and positioning are closely related concepts that are essential for effective marketing strategy. Incorrect or ineffective segmentation can damage a company's target marketing and positioning efforts by leading to wasted resources, loss of competitive advantage, ineffective targeting, and poor positioning strategies. Therefore, it is crucial for companies to segment their markets effectively and insightfully to ensure that they are targeting the right segments with the right positioning strategies to maximize their marketing effectiveness and achieve their business objectives. Can market segmentation be taken too far? What are the potential disadvantages of over segmenting a market? What strategy might a firm pursue when it believes that the market has been broken into too many small segments? Answer: Can Market Segmentation be Taken Too Far? Yes, market segmentation can be taken too far, leading to potential disadvantages and inefficiencies for a firm. Potential Disadvantages of Over-Segmentation: 1. Resource Intensiveness: • Over-segmentation can result in the allocation of excessive resources to manage and serve numerous small segments. • This can lead to increased costs associated with marketing, distribution, and customer service. 2. Complexity and Confusion: • Managing a large number of small segments can be complex and challenging. • It can lead to confusion within the organization and result in inconsistent marketing strategies and messaging. 3. Dilution of Focus: • Over-segmentation may result in a dilution of the firm's marketing efforts and resources. • Focusing on too many small segments can reduce the effectiveness of marketing campaigns and hinder the firm's ability to achieve its strategic objectives. 4. Difficulty in Positioning: • With too many small segments, it can be challenging for the firm to develop distinct positioning strategies for each segment. • This can result in a lack of clarity and differentiation in the marketplace, making it difficult for the firm to effectively communicate its value proposition. Strategy for Dealing with Over-Segmentation: When a firm believes that the market has been broken into too many small segments, it can pursue the following strategies: 1. Consolidation of Segments: • Identify commonalities among small segments and consolidate them into larger, more manageable segments. • Look for similarities in customer needs, behaviors, and preferences to create broader, more meaningful segments. 2. Focus on Key Segments: • Prioritize key segments that offer the greatest potential for growth and profitability. • Allocate resources strategically to focus on serving these priority segments effectively. 3. Develop Customized Offerings: • Develop customized offerings and marketing programs tailored to the needs of the key segments. • Create targeted marketing campaigns that resonate with the unique characteristics of each segment. 4. Streamline Operations: • Streamline operations and processes to improve efficiency and reduce costs associated with managing multiple segments. • Use technology and data analytics to automate and optimize marketing activities and customer interactions. Conclusion: While market segmentation is essential for effective marketing strategy, over-segmentation can lead to inefficiencies and disadvantages for a firm. To address over-segmentation, a firm can consolidate segments, focus on key segments, develop customized offerings, and streamline operations to improve efficiency and effectiveness in serving its target market. By adopting a more focused and strategic approach to segmentation, the firm can maximize its marketing effectiveness and achieve its business objectives more efficiently. What is the difference between a growth-market targeting strategy and a niche targeting strategy? What capabilities or strengths should a business possess to implement a growth-market targeting strategy effectively? Answer: Difference between Growth-Market Targeting and Niche Targeting Strategies: 1. Growth-Market Targeting Strategy: • Focus: A growth-market targeting strategy involves targeting large, rapidly expanding market segments. • Scope: The focus is on capturing a significant share of a broad market with high growth potential. • Objective: The objective is to achieve high sales volumes and market share by appealing to a large number of customers. • Examples: Targeting emerging markets, expanding product lines to attract new customer segments, or entering new geographic regions with significant growth opportunities. 2. Niche Targeting Strategy: • Focus: A niche targeting strategy involves targeting a small, specialized segment of the market. • Scope: The focus is on serving a narrow market segment with specific needs or preferences. • Objective: The objective is to achieve high profitability by providing unique products or services tailored to the specific needs of the niche market. • Examples: Targeting a specific demographic group, serving a niche industry, or offering highly specialized products or services. Capabilities or Strengths for Implementing a Growth-Market Targeting Strategy: 1. Market Research and Analysis: • The ability to conduct thorough market research to identify high-growth market segments and assess their potential for the business. • Analytical capabilities to evaluate market trends, customer needs, and competitive dynamics in growth markets. 2. Scalability and Capacity: • The capacity to scale operations, production, and distribution to meet the demands of a rapidly growing market. • Robust supply chain and distribution networks capable of handling increased volume and expansion into new geographic regions. 3. Innovation and Product Development: • The capability to innovate and develop new products or services that meet the evolving needs of the growing market. • Flexibility to adapt product offerings and features based on market feedback and changing customer preferences. 4. Marketing and Branding Expertise: • Strong marketing and branding capabilities to effectively position the business and its products in the minds of customers in the growth market. • The ability to develop targeted marketing campaigns and promotional strategies to reach a large audience and drive sales. 5. Financial Resources and Investment Capacity: • Sufficient financial resources and investment capacity to support expansion into growth markets. • The ability to invest in marketing, distribution, and infrastructure to support growth and capture market share. 6. Adaptability and Agility: • The ability to adapt quickly to changes in the market environment and adjust strategies accordingly. • Agility to capitalize on emerging opportunities and address challenges in the rapidly evolving growth market. Conclusion: While a growth-market targeting strategy focuses on capturing a significant share of large, rapidly expanding market segments, a niche targeting strategy involves serving a small, specialized segment of the market. To implement a growth-market targeting strategy effectively, a business should possess capabilities such as market research and analysis, scalability, innovation, marketing expertise, financial resources, and adaptability. By leveraging these capabilities, businesses can successfully enter and compete in high-growth markets, driving sales and capturing market share effectively. Instructor Manual for Marketing Strategy: A Decision-Focused Approach Orville C. Walker, John Mullins 9780078028946