Chapter 5 Target Markets: Segmentation and Evaluation TEACHING RESOURCES QUICK REFERENCE GUIDE Resource Location Purpose and Perspective IRM, p. 100 Lecture Outline IRM, p. 101 Discussion Starters IRM, p. 111 Class Exercises IRM, p. 112 Chapter Quiz IRM, p. 114 Answers to Issues for Discussion and Review IRM, p. 115 Answers to Marketing Applications IRM, p. 121 Answers to Internet Exercise IRM, p. 123 Answers to Developing Your Marketing Plan IRM, p. 124 Comments on Video Case 5 IRM, p. 125 PowerPoint Slides Instructor’s website Note: Additional resources may be found on the accompanying student and instructor websites at www.cengagebrain.com. PURPOSE AND PERSPECTIVE This chapter covers the definition of a market, how organizations identify target markets, and how to estimate market potential and forecast sales. First, the chapter defines a market and discusses the characteristics groups must possess to be considered a market. Then, it describes in detail the five steps in the target market selection process. In discussing the process, it describes three targeting strategies—undifferentiated, concentrated, and differentiated. It examines in some detail the process of choosing segmentation variables and the types of variables that marketers use. It also seeks to make students understand how marketers analyze these market segments and to help them be able to identify the factors that influence the selection of specific marketing segments for use as target markets. Finally, it considers how to evaluate market potential and how to forecast sales. LECTURE OUTLINE I. What Are Markets? A. Market is a group of individuals and/or organizations that have desire or needs for products in a product class and have the ability, willingness, and authority to purchase those products. B. Individuals may have the desire, willingness, and ability to buy certain products but, they may not have the authority to do so. C. Markets fall into one of two categories: 1. Consumer market—a consumer market consists of purchaser and household members who intend to consume or benefit from the purchased products and do not buy products for the main purpose of making a profit. a. Consumer markets are sometimes also referred to as business-to-consumer (B2C) markets. 2. Business market—a business market consists of individuals or groups that purchase a specific kind of product for one of three purposes: a. Resale b. Direct use in producing other products c. Use in general daily operations (1) Business markets may be called business-to-business (B2B), industrial, or organizational markets and can be sub-classified into producer, reseller, government, and institutional markets. II. Target Market Selection Process A. Although marketers may employ several methods for target market selection, they generally follow a five-step process—identifying the appropriate targeting strategy, determining which segmentation variables to use, developing market segment profiles, evaluating relevant market segments, and selecting specific target markets. III. Step 1: Identify the Appropriate Targeting Strategy A. A target market is a group of people or organizations for which a business creates and maintains a marketing mix specifically designed to satisfy the needs of group members. B. The strategy used to select a target market is affected by target market characteristics, product attributes, and the organization’s objectives and resources. C. Figure 5.2 illustrates the three basic targeting strategies—undifferentiated, concentrated, and differentiated. D. Undifferentiated Targeting Strategy 1. When a company designs a single marketing mix and directs it at the entire market for a particular product, it is using an undifferentiated targeting strategy. 2. The strategy assumes that all customers in the target market have similar needs, and thus the organization can satisfy most customers with a single marketing mix with little or no variation. 3. The undifferentiated targeting strategy is effective under two conditions: a. A large proportion of customers in a total market must have similar needs for the product, a situation termed a homogeneous market. b. The organization must have the resources to develop a single marketing mix that satisfies customers’ needs in a large portion of a total market and the managerial skills to maintain it. E. Concentrated Targeting Strategy through Market Segmentation 1. A market comprised of individuals or organizations with diverse product needs is called a heterogeneous market. 2. Market segmentation is the process of dividing a total market into groups, or segments, that consist of people or organizations with relatively similar product needs. a. The purpose is to enable a marketer to design a marketing mix that more precisely matches the needs of customers in the selected market segment. It is appropriate for heterogeneous markets. 3. A market segment consists of individuals, groups, or organizations that share one or more similar characteristics that cause them to have relatively similar product needs. 4. The rationale for segmenting heterogeneous markets is that a company will be most successful in developing a satisfying marketing mix for a portion of a total market, since customer’s needs tend to vary. 5. For market segmentation to succeed, five conditions must exist: a. Customers’ needs for the product must be heterogeneous. b. Segments must be identifiable and divisible. c. The marketer must be able to compare the different market segments with respect to estimated sales potential, costs, and profits. d. At least one segment must have enough profit potential to justify developing and maintaining a special marketing mix for it. e. The company must be able to reach the chosen segment with a particular marketing mix. 6. When an organization directs its marketing efforts toward a single market segment using one marketing mix, it is employing a concentrated targeting strategy. 7. The chief advantage of the concentrated strategy is that it allows a firm to specialize. a. The firm analyze analyzes the characteristics and needs of a distinct customer group and then focuses all its energies on satisfying that group’s needs. b. If the group is big enough, a firm may generate large sales volume by reaching a single segment. c. Concentrating on a single segment can also permit a firm with limited resources to compete with larger organizations that have overlooked smaller market segments. 8. However, if a company’s sales depend on a single segment and the segment’s demand for the product declines, the company’s financial health also deteriorates. a. The strategy can also prevent a firm from targeting segments that might be successful because, when a firm penetrates one segment its popularity may keep it from extending its marketing efforts into other segments. F. Differentiated Targeting Strategy through Market Segmentation 1. With a differentiated targeting strategy, an organization directs its marketing efforts at two or more segments by developing a marketing mix for each segment. 2. A benefit of a differentiated approach is that a firm may increase sales in the aggregate market because its marketing mixes are aimed at more customers. a. For this reason, a company with excess production capacity may find a differentiated strategy advantageous because the sale of products to additional segments may absorb excess capacity. 3. On the other hand, a differentiated strategy often demands more production processes, materials, and people because the different ingredients in each marketing mix will vary a. Thus, production costs may be higher than with a concentrated strategy. IV. Step 2: Determine Which Segmentation Variables to Use A. Segmentation variables are the characteristics of individuals, groups, or organizations used to divide a market into segments. 1. The segmentation variable should relate to customers’ needs for, uses of, or behavior toward the product. 2. Marketers must select measurable segmentation variables, such as age, location, or gender, if individuals or organizations in a total market are to be classified accurately. 3. A company’s resources and capabilities affect the number and size of segment variables used. 4. The type of product and degree of variation in customers’ needs also dictate the number and size of segments targeted. B. No matter what approach is used, choosing one or more segmentation variables is a critical step in effectively targeting a market. 1. Selecting an inappropriate variable limits the chances of developing a successful marketing strategy. C. Variables for Segmenting Consumer Markets 1. Segmentation variables can be grouped into four major categories: demographic, geographic, psychographic, and behavioristic (Figure 5.3). 2. Demographic Variables a. Demographic characteristics that marketers commonly use include age, gender, race, ethnicity, income, education, occupation, family size, family life cycle, religion, and social class. b. Marketers segment markets by demographic characteristics because they are often closely linked to customers’ needs and purchasing behaviors and can be readily measured. c. If considering segmenting by age, marketers need to be aware of age distribution, how that distribution is changing, and how it will affect the demand for different types of products. d. Gender is another demographic variable that is commonly used to segment markets for many products, including clothing, soft drinks, nonprescription medications, magazines, some food items, and personal care products. e. Marketers also use race and ethnicity as variables for segmenting markets for many products. (1) Cosmetics, for example, is an industry where it is important to match the shade of the products with the skin color of customers. f. Because income strongly influences people’s product purchases, it often provides a way to divide markets. (1) Income affects customers’ lifestyles and what they can afford to buy. g. Among the factors that influence household income and product needs are marital status and the presence and age of children. (1) These characteristics, often combined and called the family life cycle, affect consumers’ needs for housing, appliances, food and beverages, automobiles, and recreational equipment. (a) The composition of the U.S. household in relation to the family life cycle has changed considerably over the last several decades. (b) Single-parent families are on the rise, meaning that the “typical” family no longer necessarily consists of a married couple with children. (c) Tracking demographic shifts such as these helps marketers be informed and prepared to satisfy the needs of target markets through new marketing mixes that address their changing lifestyles. 3. Geographic Variables a. Geographic variables—climate, terrain, city size, population density, and urban/rural areas—also influence consumer product needs. (1) Markets may be divided using geographic variables, because differences in location, climate, and terrain will influence consumers’ needs. (a) City size can be an important segmentation variable. (2) Many firms choose to limit marketing efforts to cities above a certain size because small populations have been calculated to generate inadequate profits. (a) Market density refers to the number of potential customers within a unit of land area, such as a square mile. (3) Although market density relates generally to population density, the correlation is not exact. (a) Marketers may also use geodemographic segmentation. (4) Geodemographic segmentation clusters people by ZIP codes or neighborhood units based on lifestyle and demographic information. (a) Geodemographic segmentation allows marketers to engage in micromarketing. (5) Micromarketing involves focusing precise marketing efforts on very small geographic markets, such as communities and even individual neighborhoods. (a) Climate is commonly used as a geographic segmentation variable because of its broad impact on people’s behavior and product needs. (6) Product markets affected by climate include air-conditioning and heating equipment, fireplace accessories, etc. 4. Psychographic Variables a. Marketers sometimes use psychographic variables, such as personality characteristics, motives, and lifestyles, to segment markets. b. A psychographic variable can be used by itself to segment a market or combine with other types of segmentation variables. c. Personality characteristics can be a useful means of segmentation when a product resembles many competing products and consumers’ needs are not significantly related to other segmentation variables. (1) When appealing to a personality characteristic, a marketer almost always selects one that many people view positively. d. When motives are used to segment a market, the market is divided according to consumers’ reasons for making a purchase. (1) Personal appearance, affiliation, status, safety, and health are examples of motives affecting the types of products purchased and the choice of stores in which they are bought. e. Lifestyle segmentation groups individuals according to how they spend their time, importance of things in their surroundings, beliefs about themselves and broader issues, and some demographic characteristics. (1) Lifestyle analysis provides a broad view of buyers because it encompasses numerous characteristics related to people’s activities, interests, and opinions. (2) One of the most popular lifestyle frameworks is VALS™ from Strategic Business In-sights (SBI). (a) VALS classifies consumers based on psychological characteristics (personality characteristics) that are correlated with purchase behavior and key demographics. 5. Behavioristic Variables a. Firms can divide a market according to consumer behavior toward a product, which commonly involves an aspect of consumer’s product use. (1) For example, a market may be separated into users—classified as heavy, moderate, or light—and nonusers. b. Benefit segmentation is the division of a market according to benefits that consumers want from the product. (1) The effectiveness of such segmentation depends on three conditions: (a) The benefits sought must be identifiable. (b) Using these benefits, marketers must be able to divide people into recognizable segments. (c) One or more of the resulting segments must be accessible to the organization’s marketing efforts. D. Variables for Segmenting Business Markets 1. Marketers segment business markets according to geographic location, type of organization, customer size, and product use. 2. Geographic Location a. Demand for business products varies due to differences in climate, terrain, or regional customer preferences. b. Geographic segmentation may be especially appropriate for producers seeking to reach industries concentrated in certain locations. 3. Type of Organization a. A company sometimes segments a market by types of organization within that market because they often require different product features, distribution systems, price structures, and selling strategies. b. Given these variations, a firm may either concentrate on a single segment with one marketing mix or focus on several groups with multiple mixes. 4. Customer Size a. An organization’s size may affect its purchasing procedures and the types and quantities of products it needs. b. To reach a segment of a specific size, marketers may have to adjust one or more marketing mix ingredients. 5. Product Use a. Certain products can be used in numerous ways in the production of goods. (1) These variations will affect the types and amounts of products purchased, as well as the purchasing method. V. Step 3: Develop Market Segment Profiles A. A market segment profile describes the similarities among potential customers within a segment and explains the differences among people and organizations in different market segments. B. A profile may cover such aspects as demographic characteristics, geographic factors, product benefits sought, lifestyles, brand preferences, and usage rates. C. Market segment profiles help marketers understand how a business can use its capabilities to serve potential customer groups. 1. It helps a marketer determine which segment or segments are most attractive relative to the firm’s strengths, weaknesses, objectives, and resources. 2. It can be useful in helping a firm make marketing decisions relating to a specific market segment or segments. VI. Step 4: Evaluate Relevant Market Segments A. After analyzing the market segment profiles, a marketer should be able to narrow his or her focus to several promising segments that warrant further analysis. 1. Marketers should examine sales estimates, competition, and estimated costs associated with each of these segments. B. Sales Estimates 1. Potential sales for a market segment can be measured along several dimensions, including: a. Product level—potential sales can be estimated for a specific product item or an entire product line b. Geographic area c. Time—sales estimates can be short range, medium range, or long range d. Level of competition—specifies whether sales are being estimated for a single firm, or for an entire industry 2. Market potential is the total amount of a product that customers will purchase within a specified period at a specific level of industry-wide marketing activity. a. Market potential can be stated in terms of dollars or units. b. A segment’s market potential is affected by economic, sociocultural, and other environmental forces. c. The specific level of marketing effort will vary from one firm to another, but each firms’ marketing activities together add up to the industry-wide marketing effort total. d. A marketing manager must also estimate whether and to what extent industry marketing efforts will change over time. 3. Company sales potential is the maximum percentage share of a market that an individual firm within an industry can expect to capture for a specific product. a. Several factors influence company sales potential for a market segment—the market potential, the magnitude of industry-wide marketing activities, and the intensity and effectiveness of the company’s marketing activities relative to competitors’ activities. b. Two general approaches that measure company sales potential are: (1) Breakdown approach—the marketing manager first develops a general economic forecast for a specific time period. Next, the manager estimates market potential based on this forecast. The manager derives the company’s sales potential from the forecast and an estimate of market potential. (2) Buildup approach—the marketing manager begins by estimating how much of a product a potential buyer in a specific geographic area will purchase in a given period. The manager then multiplies that amount by the total number of potential buyers in that area. The manager performs the same calculation for each geographic area in which the firm sells products and then adds the totals to calculate market potential. C. Competitive Assessment 1. Besides obtaining sales estimates, it is crucial to assess competitors that are already operating in the segments being considered. 2. Competitive assessment should ask several questions about competitors: a. How many exist? b. What are their strengths and weaknesses? c. Do several competitors already have major market shares and together dominate the segment? d. Can our company create a marketing mix to compete effectively against competitors’ marketing mixes? e. Is it likely that new competitors will enter this segment? If so, how will they affect our firm’s ability to compete successfully? D. Cost Estimates 1. To fulfill the needs of a target segment, an organization must develop and maintain a marketing mix that precisely meets the wants and needs of that segment, which can be expensive. 2. In some cases marketers may conclude that the costs to reach some segments are so high that they are basically inaccessible. VII. Step 5: Select Specific Target Markets A. The firm’s management must investigate whether the organization has sufficient financial resources, managerial skills, employee expertise, and facilities to compete effectively in selected segments. 1. The firm must also consider the possibility that the requirements of some market segments are at odds with the firm’s overall objectives, and that possible legal problems, conflicts with interest groups, and technological advancements will render certain segments unattractive. B. Identifying the right target market is the key to implementing a successful marketing strategy. 1. Failure to do so can lead to low sales, high costs, and severe financial losses. VIII. Developing Sales Forecasts A. After a company selects a target market or markets, it must develop a sales forecast—the amount of a product the company expects to sell during a specific period at a specified level of marketing activity. B. The sales forecast differs from the company sales potential in that it concentrates on what actual sales will be at a certain level of company marketing effort. 1. The company sales potential assesses what sales are possible at various levels of marketing activities, assuming certain environmental conditions exist. C. To forecast sales, a marketer can choose from a number of forecasting methods, some arbitrary and quick and others more scientific, complex, and time consuming. 1. A firm’s choice of method, or methods, depends on the: a. Costs involved b. Type of product c. Market characteristics d. Time span and purpose of the forecast e. Stability of the historical sales data f. Availability of required information g. Managerial preferences h. Forecasters’ areas of expertise and experience D. Common forecasting techniques fall into five categories—executive judgment, surveys, time series analysis, regression analysis, and market tests. E. Executive Judgment 1. Executive judgment is the intuition of one or more executives. a. This is an unscientific but expedient and inexpensive approach to sales forecasting. b. It is not a very accurate method, but executive judgment may work reasonably well when product demand is relatively stable and the forecaster has years of market-related experience. c. However, because intuition is heavily influenced by recent experience, weight recent sales booms or slumps excessively. d. Another drawback to intuition is that the forecaster has only past experience as a guide for deciding where to go in the future. F. Surveys 1. Another way to forecast sales is to question customers, sales personnel, or experts regarding their expectations about future purchases. 2. In a customer forecasting survey, marketers ask customers what types and quantities of products they intend to buy during a specific period. a. This approach may be useful to a business with relatively few customers. 3. In a sales force forecasting survey, the firm’s salespeople estimate anticipated sales in their territories for a specified period. a. A marketer may survey sales staff for several reasons, the most important being that the sales staff is the company personnel closest to customers on a daily basis. (1) They therefore, have first-hand knowledge about customers’ future product needs. b. When sales representatives assist in developing the forecast, they are invested in the process and are more likely to work toward its achievement. 4. When a company wants an expert forecasting survey, it hires professionals to help pre-pare the sales forecast. a. Using experts is a quick way to get information and is relatively inexpensive. (1) However, because they work outside the firm, these forecasters may be less motivated than company personnel to do an effective job. 5. In the Delphi technique, experts create initial forecasts, submit them to the company for averaging, and have the results returned to them so they can make individual refined forecasts. a. Because this technique gets rid of extreme data, the ultimate goal in using the Delphi technique is to develop a highly reliable sales forecast. G. Time series Analysis 1. With time series analysis, the forecaster uses the firm’s historical sales data to discover a pattern, or patterns, in sales over time. a. This forecasting method assumes that past sales patterns will continue into the future. 2. In a time series analysis, a forecaster usually performs four types of analyses: a. Trend analysis—focuses on aggregate sales data, such as the company’s annual sales figures, covering a period of many years to determine whether annual sales are generally rising, falling, or staying about the same. b. Cycle analysis—forecaster analyzes sales figures for a three- to five-year period to ascertain whether sales fluctuate in a consistent, periodic manner. c. Seasonal analysis—the analyst studies daily, weekly, or monthly sales figures to evaluate the degree to which seasonal factors influence sales. d. Random factor analysis—the forecaster attempts to attribute erratic sales variations to random, nonrecurrent events, such as a regional power failure or a natural disaster. 3. Time series analysis is an effective forecasting method for products with reasonably stable demand, but not for products with erratic demand. H. Regression Analysis 1. In regression analysis, the forecaster seeks to find a relationship between past sales (the dependent variable) and one or more independent variables, such as population, per capita income, etc. a. The objective of regression analysis is to develop a mathematical formula that accurately describes a relationship between the firm’s sales and one or more variables. 2. Regression analysis is useful when a precise association can be established. a. This method can be used only when available historical sales data are extensive. b. Regression analysis is not useful for forecasting sales of new products. I. Market Tests 1. A market test involves making a product available to buyers in one or more test areas and measuring purchases and consumer responses to the product distribution, promotion, and price. a. Test areas are chosen for their representativeness of a firm’s target markets. 2. A market test provides information about consumers’ actual, rather than intended, purchases. a. Purchase volume can be evaluated in relation to the intensity of other marketing activities such as advertising, in-store promotions, pricing, packaging, and distribution. 3. Because it does not require historical sales data, a market test is effective for forecasting sales of new products or of existing products in new geographic areas. a. A market test also gives a marketer an opportunity to test the success of various elements of the marketing mix. 4. These tests are often time consuming and expensive. 5. In addition, a market cannot be certain that consumer response during a market test represents the total market response, or that the same response will continue in the future. J. Using Multiple Forecasting Methods 1. Although some businesses depend on a single sales forecasting method, most firms use several techniques. 2. Sometimes a company is forced to use multiple methods when marketing diverse product lines, but even a single product line may require several forecasts, especially when the product is sold to different market segments. DISCUSSION STARTERS Discussion Starter 1: How Many Markets? This exercise involves a series of questions. Ask the students to stand or remain standing if the statement is true for them. (1) Are you a University/College student? (2) Are you a University/College student in the state of __________? (3) Are you a University/College student in (insert your University/College name)? (4) Are you a student in the College of Business at (insert your University/College name)? (5) Are you a marketing major in the College of Business at (insert your University/College name)? (6) Are you brown haired? (7) Are you brown eyed? (8) Are you taller than 5’7”? (9) Are you male? ASK: What happened to the number standing as I went through these questions? Why did the number standing get smaller? Each of these questions represents a different level of market aggregation. We began with the broadest market, the market of college students and then began narrowing the group until we had the market of males, 5’7” or taller with brown hair and brown eyes, who are marketing majors, in the College of Business at a particular university. Now it is doubtful that marketers would ever target this particular segment, but there are instances where segments are extremely narrowly defined. Discussion Starter 2: Understanding Segments The 10 minute video segment is part of a Frontline series called “The Merchants of Cool.” While this program aired years ago, it is still relevant. Frontline is an excellent program and all of its episodes are available online at the PBS website. You may want to consider previewing other episodes and using them later in the semester. However, some episodes contain content which may not be appropriate for all classes. ASK: How do marketers know what is “cool” for a particular segment? Today the teen market is a very desirable market segment since they set trends and have high levels of disposable income. This video (Part 1: Hunting for Cool) demonstrates some of the research techniques used to identify what is cool to the various segments of teen culture. http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02p70&continuous=1 CLASS EXERCISES Class Exercise 1: Segmentation Variables The objective of this class exercise is to gain a thorough understanding of segmentation variables by designing a target market for a new retail operation. Prompt for Students: You have just received a sizable inheritance. After giving part of it to charity, you have $500,000 remaining to begin a new retail operation in your local area. What kind of operation will you open? 1. What market or segment of a market exists in your area with unfulfilled needs or wants? 2. Briefly describe the nature of the operation you would open to meet the needs of a specific market segment(s). a. Product or service? b. Price range? c. Location? 3. Will you use a concentrated or a differentiated targeting strategy? Why? 4. What segmentation variables will be useful in describing your target market(s)? Why? Answers: 1. Other ways of asking this question are “What kinds of retail stores do you wish were available here?” and “What kinds of restaurants or retail outlets have you seen in other places that might work here?” Students can usually think of successful operations in their hometowns that are not available locally. It is important to stress the necessity of the market being large enough or the segment being profitable enough to support their choice of retail operations. 2. Students could spend the entire class period on this question, so encourage them to be brief. An example might be this: Open an upscale restaurant and bar that serves dinners ($7–$12) and drinks, located on the corner of University Avenue and First Street. 3. The answer to this question will depend on the type of product or service being offered, but students often assume a concentrated strategy is best when a differentiated targeting strategy is more appropriate. For instance, most restaurants have breakfast, lunch, dinner, and perhaps late night segments, each having different needs. 4. This question should take up the majority of the exercise time. Ask students to look carefully at each variable to determine if it will help develop a better marketing mix to meet customer needs. Most students will define their target markets by demographic or geographic variables because psychographic and behavioristic variables are harder to understand. Push them by asking, “Why would people go to your store?” (Motives) and “What are they really buying at your store besides the product?” (Benefits). Class Exercise 2: Segmentation Variables in Different Industries This exercise is designed to get students to think in terms of segmentation variables discussed in the chapter. For example, what demographic, geographic, psychographic, or lifestyle variables could have been used to segment the market for baby food (variable 2)? Lifestyle segmentation variables could include: 1. Consumers who want nothing but all-natural ingredients 2. Upscale consumers who want gourmet baby food 3. Time-conscious consumers who need instant or quick meals for their babies Many other combinations are possible. Encourage students to be creative and imaginative. As with most exercises, there are no right or wrong answers. The following list includes variables or characteristics that could be used to segment markets for specific products. Question Answers 1. Recreational vehicles (RVs) Age, income 2. Baby food Family life cycle, age 3. Rolls Royce automobiles Income, social class 4. Snow tires Climate 5. Hotel rooms Income, business vs. tourism 6. Magazines Age, job, education, ethnicity, gender 7. Soft drinks Age, gender 8. Movies Age, family life cycle 9. Shoes Age, income, lifestyle 10. Bicycles Income, age, lifestyle 11. Air passenger service Income, business vs. tourism 12. Cameras Lifestyle, occupation, income 13. Swimsuits Age, climate, gender 14. Restaurants Income, age, city size, lifestyle 15. Snowboards Age, climate Class Exercise 3: Demographics Go to: http://www.claritas.com/MyBestSegments/Default.jsp?ID=20&SubID=&pageName=ZIP%2BCode%2BLook-up Enter the 5 digit zip code for your school. Take students through a review of the area as seen through the Prizm at claritas.com. As an optional homework assignment, students could profile their hometowns through this free service and discuss the findings. Students could discuss whether they think the findings are valid or not and why. CHAPTER QUIZ 1. Miller Brewing does not consider teenagers to be a part of the beer market because they lack the __________ to buy beer. a. money b. desire c. interest d. authority e. willingness 2. Soft Shave is a shaving cream aimed primarily at women. The activities and decisions involved in developing and maintaining Soft Shave’s product concept in buyers; minds are called a. the product mix. b. the product life cycle. c. product positioning. d. product promotion. e. product development. 3. If a company markets its products to different countries, it is using a(n) __________ targeting strategy to segment the total market. a. undifferentiated b. concentrated c. stratified d. differentiated e. homogeneous 4. Occupation, family size, and family life cycle are all __________ variables for segmenting consumer markets. a. behavioristic b. demographic c. geographic d. psychographic e. usage Answers to Chapter Quiz: 1. d; 2. c; 3. d; 4. b. ANSWERS TO ISSUES FOR DISCUSSION AND REVIEW 1. What is a market? What are the requirements for a market? A market is a group of individuals and/or organizations that have desire or needs for products in a product class and have the ability, willingness, and authority to purchase those products. For a group of individuals and/or organizations to be a market, they must have the desire, willingness, ability, and authority to buy a product. 2. In your local area, identify a group of people with unsatisfied product needs who represent a market. Could this market be reached by a business organization? Why or why not? In answering this question, students should demonstrate that their suggested markets meet the requirements of a market as discussed in question one. 3. Outline the five major steps in the target market selection process. Although marketers may employ several methods for target market selection, they generally follow a five-step process: • Identifying the appropriate targeting strategy • Determining which segmentation variables to use • Developing market segment profiles • Evaluating relevant market segments • Selecting specific target markets 4. What is an undifferentiated strategy? Under what conditions is it most useful? Describe a present market situation in which a company is using an undifferentiated strategy. Is the business successful? Why or why not? When a company designs a single marketing mix and directs it at the entire market for a particular product, it is using an undifferentiated targeting strategy. This strategy is effective under two conditions: • A large proportion of customers in a total market must have similar needs for the product, a situation termed a homogeneous market. A marketer using a single marketing mix for a total market of customers with a variety of needs would find that the marketing mix satisfies very few people. • The organization must have the resources to develop a single marketing mix that satisfies customers’ needs in a large portion of a total market and the managerial skills to maintain it. Students’ answers to the rest of the question may vary. 5. What is market segmentation? Describe the basic conditions required for effective segmentation. Identify several firms which use market segmentation. Market segmentation is the process of dividing a total market into groups, or segments, that consist of people or organizations with relatively similar product needs. The purpose is to enable a marketer to design a marketing mix that more precisely matches the needs of customers in the selected market segment. For market segmentation to succeed, five conditions must exist: • Customers’ needs for the product must be heterogeneous, otherwise there is no reason to waste resources segmenting the market. • Segments must be identifiable and divisible. • The marketer must be able to compare the different market segments with respect to estimated sales potential, costs, and profits. • At least one segment must have enough profit potential to justify developing and maintaining a special marketing mix for it. • The company must be able to reach the chosen segment with a particular marketing mix. Students’ answers to the rest of the question may vary. 6. List the differences between concentrated and differentiated strategies, and describe the advantages and disadvantages of each. The main difference between the concentrated strategy and the differentiated strategy of market segmentation is that the concentrated strategy directs marketing efforts toward a single market using one marketing mix, whereas the differentiated strategy directs marketing efforts at two or more market segments by developing a marketing mix for each segment. The chief advantage of the concentrated strategy is that it allows a firm to specialize. The firm analyzes the characteristics and needs of a distinct customer group and then focuses all its energies on satisfying that group’s needs. If the group is big enough, a firm may generate a large sales volume by reaching a single segment. Concentrating on a single segment can also permit a firm with limited resources to compete with larger organizations that have overlooked smaller market segments. Specialization, however, means that a company allocates all its resources on one target segment, which can be hazardous. If a company’s sales depend on a single segment and the segment’s demand for the product declines, the company’s financial health also deteriorates. The strategy can also prevent a firm from targeting segments that might be successful be-cause, when a firm penetrates one segment its popularity may keep it from extending its marketing efforts into other segments. A benefit of a differentiated approach is that a firm may increase sales in the aggregate market because its marketing mixes are aimed at more customers. For this reason, a company with excess production capacity may find a differentiated strategy advantageous because the sale of products to additional segments may absorb excess capacity. On the other hand, a differentiated strategy often demands more production processes, materials, and people because the different ingredients in each marketing mix will vary. Thus, production costs may be higher than with a concentrated strategy. 7. Identify and describe four major categories of variables that can be used to segment consumer markets. Give examples of product markets that are segmented by variables in each category. The four major categories of variables that can be used to segment consumer markets are: • Demographic variables—demographic characteristics that marketers commonly use include age, gender, race, ethnicity, income, education, occupation, family size, family life cycle, religion, and social class. Marketers segment markets by demographic characteristics because they are often closely linked to customers’ needs and purchasing behaviors and can be readily measured. • Geographic variables—geographic characteristics that marketers commonly use include climate, terrain, city size, population density, and urban/rural areas. Markets may be divided using geographic variables, because differences in location, climate, and terrain will influence consumers’ needs. • Psychographic variables—psychographic characteristics that marketers commonly use include personality characteristics, motives, and lifestyles. Psychographic variables can be used be used by itself or in combination with other types of segmentation variables. • Behavioristic variables—firms can divide the market according to consumer behavior toward a product, which commonly involves an aspect of consumers’ product use. When discussing examples, students should be encouraged to use local and regional as well as national examples. 8. What dimensions are used to segment business markets? Business markets may be segmented according to geographic location, type of organization, customer size, and product use. 9. Define geodemographic segmentation. Identify several types of firms that might employ this type of market segmentation, and explain why. Geodemographic segmentation clusters people by zip codes or neighborhood units based on lifestyle and demographic information. Geodemographic segmentation allows marketers to engage in micromarketing. Students’ answers to the rest of the question may vary. For example, financial and health-care service providers might want to use geodemographic segmentation. A neighborhood composed mostly of senior citizens on fixed incomes, for example, would require particular health care services. Another composed of upper-income professionals might be an appropriate target for certain financial services. 10. What is a market segment profile? Why is it an important step in the target market selection process? A market segment profile describes the similarities among potential customers within a segment and explains the differences among people and organizations in different segments. A profile may cover such aspects as demographic characteristics, geographic factors, product benefits sought, lifestyles, brand preferences, and usage rates. Marketers use market segment profiles to assess the degree to which their products fit potential customers’ product needs. Market segment profiles help marketers understand how a business can use its capabilities to serve potential customer groups. Market segment profiles help a marketer determine which segment or segments are most attractive relative to the firm’s strengths, weaknesses, objectives, and resources. Although marketers may initially believe certain segments are attractive, a market segment profile may yield contrary information. Market segment profiles can be useful in helping a firm make marketing decisions relating to a specific market segment or segments. 11. Describe the important factors marketers should analyze to evaluate market segments. After analyzing the market segment profiles, a marketer should be able to narrow his or her focus to several promising segments that warrant further analysis. Marketers should examine sales estimates, competition, and estimated costs associated with each of these segments. Potential sales for a market segment can be measured along several dimensions, including product level, geographic area, time, and level of competition. With respect to product level, potential sales can be estimated for a specific product item or an entire product line. A manager must also determine the geographic area to include in the estimate. In relation to time, sales estimates can be short range, medium range, or long range. The competitive level specifies whether sales are being estimated for a single firm, or for an entire industry. Market potential is the total amount of a product that customers will purchase within a specified period at a specific level of industry-wide marketing activity. Market potential can be stated in terms of dollars or units. Company sales potential is the maximum percentage share of a market that an individual firm within an industry can expect to capture for a specific product. Several factors influence company sales potential for a market segment—the market potential, the magnitude of industry-wide marketing activities, and the intensity and effectiveness of the company’s marketing activities relative to competitors’ activities. Besides obtaining sales estimates, it is crucial to assess competitors that are already operating in the segments being considered. A market segment that initially seems attractive based on sales estimates may turn out to be much less so after a competitive assessment. To fulfill the needs of a target segment, an organization must develop and maintain a marketing mix that precisely meets the wants and needs of that segment, which can be expensive. Distinctive product features, attractive package design, generous product warranties, extensive advertising, attractive promotional offers, competitive prices, and high-quality personal service use considerable organizational resources. 12. Why is a marketer concerned about sales potential when trying to select a target market? Sales potential is important to a marketer because the firm incurs a certain cost in developing and maintaining a marketing mix. To achieve long-term survival, the firm must be able to recover these costs and make at least a reasonable profit. By estimating the sales potential of possible target markets, a marketer is in a better position to achieve long-term survival. Estimates of sales potential are necessary to determine which market segments are substantial enough to justify the development of marketing mixes. 13. Why is selecting appropriate target markets important for an organization that wants to adopt the marketing concept philosophy? According to the marketing concept philosophy, an organization should attempt to provide products which satisfy customers’ needs through a coordinated set of activities, allowing the organization to achieve its goals. Customer satisfaction is the major aim of the marketing concept. Therefore, selecting appropriate target markets is important to an organization’s effective adoption and use of the marketing concept philosophy. Identifying the right target market is the key to implementing a successful marketing strategy. Failure to do so can lead to low sales, high costs, and severe financial losses. A careful target market analysis places an organization in a strong position to serve customers’ needs and achieve its objectives. 14. What is a sales forecast? Why is it important? A sales forecast is the amount of a product the company expects to sell during a specific period at a specified level of marketing activities. The development of a sales forecast is important because it assesses what sales are possible at various levels of marketing activities, assuming certain environmental conditions exist. Businesses use the sales forecast for planning, organizing, implementing, and controlling activities. The success of numerous activities depends on the forecast’s accuracy. 15. What are the two primary types of surveys a company might use to forecast sales? Why would a company use an outside expert forecasting survey? The two primary types of surveys a company might use to forecast sales are the customer forecasting survey and the sales force forecasting survey. In the first type, marketers ask customers what types and quantities of products they plan to purchase during a specific period. In the second type, the sales force estimates anticipated sales in their territories for a specified period of time. Sometimes companies decide to use a forecasting survey conducted by an outside expert instead of conducting their own survey. These experts are usually economists, management consultants, advertising executives, college professors, or other individuals outside the firm with experience in a specific market and, as outsiders, can remain more objective. In addition, outside-expert surveys avoid some of the potential drawbacks of sales-force surveys, such as biases based on recent sales experience, intentional underestimation of sales potential because of the belief sales goals are determined by the forecast, or dislike of paperwork. Therefore, an outside survey is likely more objective than those conducted by inside personnel and possibly more accurate. 16. Under what conditions are market tests useful for sales forecasting? What are the advantages and disadvantages of 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 the product, distribution, promotion, and price. A market test provides information about consumers’ actual, rather than intended, purchases. In addition, purchase volume can be evaluated in relation to the intensity of other marketing activities such as advertising, in-store promotions, pricing, packaging, and distribution. Because it does not require historical sales data, a market test is effective for forecasting sales of new products or of existing products in new geographic areas. A market test also gives a marketer an opportunity to test the success of various elements of the marketing mix. However, these tests are often time consuming and expensive. In addition, a marketer cannot be certain that consumer response during a market test represents the total market response, or that the same response will continue in the future. 17. Under what conditions might a firm use multiple forecasting methods? Although some businesses depend on a single sales forecasting method, most firms use several techniques. Sometimes a company is forced to use multiple methods when marketing di-verse product lines, but even a single product line may require several forecasts, especially when the product is sold to different market segments. Variation in the length of forecasts may call for several forecasting methods as well. A firm that employs one method for a short-range forecast may find it inappropriate for long-range forecasting. Sometimes a marketer verifies results of one method by using one or more other methods and comparing outcomes. ANSWERS TO MARKETING APPLICATIONS 1. A new watch company that manufactures classic American watches in the style of the Elgin and Hamilton brands has identified five main segments in the U.S watch market, using a combination of demographic, psychographic, and behavioristic variables. Using the profiles in the textbook, develop a rating scale of 1–5, with 1 as the most desirable market segment and 5 as the least desirable. If you decided to market a watch that was under $100 and would compete against lower-priced Swatch or Timex watches, rate the attractiveness of each market based on these criteria. What will be the unique features that will give your watch a competitive advantage? What if you wanted to develop a higher-priced watch that targets those individuals with an active lifestyle? Which market segment would you choose, and why? Student answers will vary, but they should base their ratings on whether or not they plan to compete with high-end watches or low-end watches. Students may also want to do some rough sales calculations to justify their choice of market and prove that selling fewer watches at a higher price or more watches at a lower price will be profitable. 2. Cable channels, such as Lifetime and Spike TV, each target a specific market segment. Identify another product marketed to a distinct target market. Describe the target market, and explain how the marketing mix appeals specifically to that group. Student answers will vary based on the product and target market. Students should support their responses with specific examples. 3. Generally, marketers use one of three basic targeting strategies to focus on a target market: undifferentiated, concentrated, or differentiated. Locate an article that discusses the target market for a specific product. Describe the target market, and explain the targeting strategy used to reach that target market. This question provides an opportunity for students to practice their online and/or library research skills. Student answers will vary, but they should support their answers with examples from the article. The following links may be used: • http://www.applepirate.com/iphone-marketing-strategy/ • http://www.digitalsparkmarketing.com/creative-marketing/samsung-galaxy-s-4g/ 4. The car market may be segmented according to income and age. Discuss two ways the market for each of the following products might be segmented. a. Candy bars b. Travel services c. Bicycles d. Cell phones Student answers will vary. Students may also find other ways to segment the market in addition to income and age. 5. If you were using a time series analysis to forecast sales for your company for the next year, how would you use the following sets of sales figures? a. The sales figures could be used for a trend analysis. b. The sales figures could be used for a cycle analysis or seasonal analysis. c. The sales figures could be used to for a random factor analysis (attribute sales variations to new store). 6. Develop your analytical and communication skills using the Role-Play Exercises Online at www.cengagebrain.com. Students can visit the website and develop their analytical and communication skills. ANSWERS TO INTERNET EXERCISE iExplore iExplore is an Internet company that offers a variety of travel and adventure products. Learn more about its goods, services, and travel advice through its website at www.iexplore.com. a. Based on the information provided at the website, what are some of iExplore’s basic products? iExplore offers Trip Finder, Travel Guides (by activity and destination), Experiences (inspiration, ideas, and tips), Lodging (hotels and rentals), and Deals (and specials). The website says that its Adventure Experts travel the world to uncover the very best hotels, destinations and off-the-beaten path sites to ensure that the viewers’ trip is unique and a once-in-a-lifetime experience. b. What market segments does iExplore appear to be targeting with its website? What segmentation variables is the company using to segment these markets? Student answers will vary, although the company is obviously targeting people who travel. They segment the market primarily by activity and destination, as well as by income. c. How does iExplore appeal to comparison shoppers? The company offers travel deals for shoppers looking to save money. The site also prominently features prices and benefits for lodging and trips and aggregates listings. ANSWERS TO DEVELOPING YOUR MARKETING PLAN The information obtained from the following questions should assist you in developing various aspects of your marketing plan. Develop your marketing plan online using the Interactive Marketing Plan at www.cengagebrain.com. 1. What type of targeting strategy is being used for your product? Should a different targeting strategy be employed? At this point, students should feel prepared to become more targeted in their approach to their marketing plan. This question asks them to discuss the targeting strategy that is currently being used for their product, and to think about what type of targeting strategy would be best for their product. It is possible that students will approach the issue of marketing their products in a different way than marketers currently are. They may find that they have ideas on how to change or improve on targeting strategies. 2. Select and justify the segmentation variables that are most appropriate for segmenting the market for your product. If your product is a consumer product, use Figure 5.3 for ideas regarding the most appropriate segmentation variables. If your marketing plan focuses on a business product, review the information in the section entitled “Variables for Segmenting Business Markets.” Students should consider segmentation variables (if the market is not totally homogeneous) that would be best for marketing their product. They can consult Figure 5.3 for consumer market segmentation variables. Business market variables are covered in the section “Variables for Segmenting Business Markets.” 3. Discuss how your product should be positioned in the minds of customers in the target market relative to the product positions of competitors. Whatever position students choose, they should explain their reasoning. COMMENTS ON VIDEO CASE 5: RALEIGH WHEELS INTO A NEW ERA FOR BICYCLE MARKETING Summary This case discusses bicycle company Raleigh’s long history and its transition from being a company known for its sturdy, high-quality product to a global brand catering to bicycle messengers and commuters. Raleigh noted that many of its customers do not don special gear to go riding, but rather wear their street clothes. In order to familiarize new markets with its bicycles, Raleigh brings samples to cities around the world and lets people ride the bikes. Raleigh takes great strides to remain in touch with its target market and to provide the products that customers want. It has even started to use high-technology in marketing through maintaining a blog and a Twitter account. Questions for Discussion 1. Of the four categories of variables, which is most important to Raleigh’s segmentation strategy, and why? According to the case, psychographic variables such as the European lifestyle and tradition of getting around on bicycles are most important to Raleigh’s segmentation strategy. These consumers ride for fun, rather than as serious racers. Applying psychographic variables allows Raleigh to identify and focus its marketing on this specific group of consumers. 2. How would you describe Raleigh’s positioning for its steel-frame bicycles? In general, Raleigh seems to be positioning its steel-frame bicycles as sturdy, comfortable, light, fast, nimble, easy to steer, and fun to ride. Students may offer additional positioning ideas as well. Raleigh’s positioning helps the company correct misperceptions of steel-frame bicycles as heavy and awkward to ride, and fits with the interests of its target market. 3. Raleigh sells exclusively through retail dealers, not directly to consumers. How does this affect its ability to segment the bicycle market using geographic variables? Raleigh can select dealers in the geographic areas where consumers in its target market live or travel on vacation. This allows the company to sell through multiple dealers in states where riding bicycles is a popular pastime, for example. In this way, Raleigh will be assured of solid marketing distribution coverage when it launches marketing communications or new product demonstrations in those areas. For efficiency, Raleigh can choose fewer dealers (or have no dealers) in areas where the lifestyle is not geared toward bicycling. Solution Manual for Foundations of Marketing William M. Pride, O. C. Ferrell 9781305361867, 9781305405769, 9780357033760
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