Effective Segmentation Criteria

Not all segmentation schemes are useful. We could divide buyers of table salt into blond and brunette custom­ers, but hair color is undoubtedly irrelevant to the purchase of salt. Furthermore, if all salt buyers buy the same amount of salt each month, believe all salt is the same, and would pay only one price for salt, this market is mini­mally segmentable from a marketing point of view.

To be useful, market segments must rate favorably on five key criteria:

• Measurable. The size, purchasing power, and characteristics of the segments can be measured.
• Substantial. The segments are large and profitable enough to serve. A segment should be the largest possible homogeneous group worth going after with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars for people who are under four feet tall.
• Accessible. The segments can be effectively reached and served.
• Differentiable. The segments are conceptually distinguishable and respond differently to different marketing- mix elements and programs. If married and single women respond similarly to a sale on perfume, they do not constitute separate segments.
• Actionable. Effective programs can be formulated for attracting and serving the segments.

Michael Porter has identified five forces that determine the intrinsic long-run attractiveness of a market or mar­ket segment: industry competitors, potential entrants, substitutes, buyers, and suppliers. The threats these forces pose are as follows.⁶⁶

1. Threat of intense segment rivalry—A segment is unattractive if it already contains numerous, strong, or aggressive competitors. It’s even more unattractive if it’s stable or declining, if plant capacity must be added in large increments, if fixed costs or exit barriers are high, or if competitors have high stakes in staying in the seg­ment. These conditions will lead to frequent price wars, advertising battles, and new-product introductions and will make it expensive to compete. The mobile phone market has seen fierce competition due to segment rivalry.
2. Threat of new entrants—The most attractive segment is one in which entry barriers are high and exit bar­riers are low. Few new firms can enter the industry, and poorly performing firms can easily exit. When both entry and exit barriers are high, profit potential is high, but firms face more risk because poorer-performing firms stay in and fight it out. When both entry and exit barriers are low, firms easily enter and leave the in­dustry, and returns are stable but low. The worst case occurs when entry barriers are low and exit barriers are high: Here firms enter during good times but find it hard to leave during bad times. The result is chronic overcapacity and depressed earnings for all. The airline industry has low entry barriers but high exit barriers, leaving all carriers struggling during economic downturns.
3. Threat of substitute products—A segment is unattractive when there are actual or potential substitutes for the product. Substitutes place a limit on prices and on profits. If technology advances or competition increases in these substitute industries, prices and profits are likely to fall. Air travel has severely challenged profitability for Greyhound and Amtrak.

    

4. Threat of buyers’ growing bargaining power—A segment is unattractive if buyers possess strong or growing bargaining power. The rise of retail giants such as Walmart has led some analysts to conclude that the poten­tial profitability of packaged-goods companies will become curtailed. Buyers’ bargaining power grows when they become more concentrated or organized, when the product represents a significant fraction of their costs, when the product is undifferentiated, when buyers’ switching costs are low, or when they can integrate upstream. To protect themselves, sellers might select buyers who have the least power to negotiate or switch suppliers. A better defense is developing superior offers that strong buyers cannot refuse.

    

5. Threat of suppliers’ growing bargaining power—A segment is unattractive if the company’s suppliers are able to raise prices or reduce quantity supplied. Suppliers tend to be powerful when they are concentrated or orga­nized, when they can integrate downstream, when there are few substitutes, when the supplied product is an important input, and when the costs of switching suppliers are high. The best defenses are to build win-win relationships with suppliers or use multiple supply sources

1. EVALUATING AND SELECTING THE MARKET SEGMENTS

In evaluating market segments, the firm must look at two factors: the segment’s overall attractiveness and the company’s objectives and resources. How well does a potential segment score on the five criteria? Does it have characteristics that make it generally attractive, such as size, growth, profitability, scale economies, and low risk? Does investing in it make sense given the firm’s objectives, competencies, and resources? Some attractive seg­ments may not mesh with the company’s long-run objectives, or the company may lack one or more competen­cies necessary to offer superior value.

Marketers have a range or continuum of possible levels of segmentation that can guide their target market deci­sions. As Figure 9.4 shows, at one end is a mass market of essentially one segment; at the other are individuals or segments of one person each. Between lie multiple segments and single segments. We describe approaches to each of the four levels next.

FULL MARKET COVERAGE With full market coverage, a firm attempts to serve all customer groups with all the products they might need. Only very large firms such as Microsoft (software market), General Motors (vehicle market), and Coca-Cola (nonalcoholic beverage market) can undertake a full market coverage strategy. Large firms can cover a whole market in two broad ways: through differentiated or undifferentiated marketing.

In undifferentiated or mass marketing, the firm ignores segment differences and goes after the whole market with one offer. It designs a marketing program for a product with a superior image that can be sold to the broad­est number of buyers via mass distribution and mass communications. Undifferentiated marketing is appropriate when all consumers have roughly the same preferences and the market shows no natural segments. Henry Ford epitomized this strategy when he offered the Model-T Ford in one color, black.

The argument for mass marketing is that it creates the largest potential market, which leads to the lowest costs, which in turn can lead to lower prices or higher margins. The narrow product line keeps down the costs of research and development, production, inventory, transportation, marketing research, advertising, and product management. The undifferentiated communication program also reduces costs. However, many critics point to the increasing splintering of the market and the proliferation of marketing channels and communication, which make it difficult and increasingly expensive to reach a mass audience.

When different groups of consumers have different needs and wants, marketers can define multiple segments. The company can often better design, price, disclose, and deliver the product or service and also fine-tune the mar­keting program and activities to better reflect competitors’ marketing. In differentiated marketing, the firm sells different products to all the different segments of the market. Cosmetics firm Estee Lauder markets brands that appeal to women (and men) of different tastes: The flagship brand, the original Estee Lauder, appeals to older con­sumers; Clinique caters to middle-aged women; M.A.C. to youthful hipsters; Aveda to aromatherapy enthusiasts; and Origins to ecoconscious consumers who want cosmetics made from natural ingredients.⁶⁷ Perhaps no firm practices differentiated marketing like Hallmark Cards, which celebrated its 100th birthday in 2010.⁶⁸

HALLMARK Hallmark’s personal expression products are sold in more than 40,000 retail outlets nation­wide and in 100 countries worldwide. Each year the company produces 10,000 new and redesigned greeting cards, as well as related products including party goods, gift wrap, and ornaments. Its success is due in part to its vigorous seg­mentation of the greeting card business. In addition to popular sub-branded card lines such as the humorous Shoebox Greetings, Hallmark has introduced lines targeting specific market segments. Fresh Ink targets 18- to 39-year-old women. The Simple Motherhood line targets moms with designs featuring fresh photography and simple, relatable sentiments. Hallmark’s three ethnic lines—Mahogany, Sinceramente Hallmark, and Tree of Life—target African American, Hispanic, and Jewish consumers, respectively. Specific greeting cards also benefit charities such as (PRODUCT) RED™, UNICEF, and the Susan G. Komen Race for the Cure. Hallmark has also embraced technology. Musical greeting cards incorporate sound clips from popular movies, TV shows, and songs. Hallmark recently introduced its Magic Prints line of interactive products, with “magic mitt” technology that lets kids leave an imprint of their hand on an insert in a card or other keepsake for parents or grandparents. Online, Hallmark offers e-cards as well as personalized printed greeting cards that it mails for consumers. For business needs, Hallmark Business Expressions offers personalized corporate holiday cards and greeting cards for all occasions and events.

Differentiated marketing typically creates more total sales than undifferentiated marketing. However, it also increases the costs of doing business. Because differentiated marketing leads to both higher sales and higher costs, no generalizations about its profitability are valid.

MULTIPLE SEGMENT SPECIALIZATION With selective specialization, a firm selects a subset of all the possible segments, each objectively attractive and appropriate. There may be little or no synergy among the segments, but each promises to be a moneymaker. When Procter & Gamble launched Crest Whitestrips, initial target segments included newly engaged women and brides-to-be as well as gay males. The multisegment strategy also has the advantage of diversifying the firm’s risk.

Keeping synergies in mind, companies can try to operate in supersegments rather than in isolated segments. A supersegment is a set of segments sharing some exploitable similarity. For example, many symphony orchestras target people who have broad cultural interests, rather than only those who regularly attend concerts. A firm can also attempt to achieve some synergy with product or market specialization.

• With product specialization, the firm sells a certain product to several different market segments. A microscope manufacturer, for instance, sells to university, government, and commercial laboratories, making different instruments for each and building a strong reputation in the specific product area. The downside risk is that the product may be supplanted by an entirely new technology.
• With market specialization, the firm concentrates on serving many needs of a particular customer group, such as by selling an assortment of products only to university laboratories. The firm gains a strong reputation among this customer group and becomes a channel for additional products its members can use. The down­side risk is that the customer group may suffer budget cuts or shrink in size.

SINGLE-SEGMENT CONCENTRATION With single-segment concentration, the firm markets to only one particular segment. Porsche concentrates on the sports car enthusiast and Volkswagen on the small-car market— its foray into the large-car market with the Phaeton was a failure in the United States. Through concentrated marketing, the firm gains deep knowledge of the segment’s needs and achieves a strong market presence. It also enjoys operating economies by specializing its production, distribution, and promotion. If it captures segment leadership, the firm can earn a high return on its investment.

A niche is a more narrowly defined customer group seeking a distinctive mix of benefits within a segment. Marketers usually identify niches by dividing a segment into subsegments. Whereas Hertz, Avis, Alamo, and others specialize in airport rental cars for business and leisure travelers, Enterprise has attacked the low-budget, insurance-replacement market by primarily renting to customers whose cars have been wrecked or stolen. By cre­ating unique associations to low cost and convenience in an overlooked niche market, Enterprise has been highly profitable. Another up-and-coming niche marketer is Allegiant Air.⁶⁹

ALLEGIANT AIR The recent prolonged recession wreaked havoc on the financial performance of all the major U.S. domestic airlines. Up-and-comer Allegiant Air, however, managed to turn a profit quarter after quarter. Founded in Eugene, OR, in 2007, Allegiant has developed a highly successful niche strategy by providing leisure travelers afford­able nonstop flights from smaller markets such as Great Falls, MT; Grand Forks, ND; Knoxville, TN; and Plattsburgh, NY; to popular vacation spots in Florida, California, and Hawaii and to Las Vegas, Phoenix, and Myrtle Beach. By staying off the beaten track, it avoids competition on all but a handful of its 100-plus routes. Much of its passenger traffic is additive and incremental, attracting tourist travel that might not have otherwise even happened. If a market doesn’t seem to be taking hold, Allegiant quickly drops it. The carrier carefully balances revenues and costs. It charges for services—like in-flight bev­erages and overhead storage space—that are free on other airlines. It also generates additional revenue by cross-selling vacation products and packages. Allegiant owns its 64 used MD-80 planes and also cuts costs by flying only a few times a week instead of a few times a day like most airlines. It even fixes its seats at a pitch halfway between fully upright and fully reclined—adjustable seats add weight, burn fuel, and are a “maintenance nightmare.” The formula seems to be working. Passengers in its local markets love the convenience, keeping Allegiant’s planes full and the company profitable.

What does an attractive niche look like? Niche customers have a distinct set of needs; they will pay a premium to the firm that best satisfies them; the niche is fairly small but has size, profit, and growth potential and is unlikely to attract many competitors; and it gains certain economies through specialization. As marketing efficiency increases, niches that seemed too small may become more profitable. See “Marketing Insight: Chasing the Long Tail.”

INDIVIDUAL MARKETING The ultimate level of segmentation leads to “segments of one,” “customized marketing,” or “one-to-one marketing.”⁷⁰ As companies have grown proficient at gathering information about individual customers and business partners (suppliers, distributors, retailers), and as their factories are being designed more flexibly, they have increased their ability to individualize market offerings, messages, and media. Mass customization is the ability of a company to meet each customer’s requirements—to prepare on a mass basis individually designed products, services, programs, and communications.⁷¹

Consumers increasingly value self-expression and the ability to capitalize on user-generated products (UGP) as much as user-generated content (UGC).⁷² MINI Cooper’s online “configurator” allows prospective buyers to virtu­ally select and try out many options for a new MINI. Coke’s Freestyle vending machine allows users to choose from more than 100 Coke brands or custom flavors or to create their own.⁷³

Consumers can buy customized jeans, cowboy boots, and bicycles that cost thousands of dollars.⁷⁴ Peter Wagner started Wagner Custom Skis in Telluride, Colorado, in 2006. His company now makes about 1,000 snowboards and pairs of skis a year, with prices that start at $1,750. Each ski or snowboard is unique and precisely fitted to the preferences and riding style of its owner. Strategies like using NASA-like materials and making adjustments of thousands of an inch send a strong performance message, matched by the attractive aesthetic of the skis.⁷⁵

Services are also a natural setting to apply customized marketing; airlines, hotels, and rental car agencies are at­tempting to offer more individualized experiences. Even political candidates are embracing customized marketing. On Facebook, politicians can find an individual’s preferences by observing the groups or causes he or she joins, and then, using Facebook’s ad platform, the campaign team can test hundreds of ad messages designed to reflect the theme of these other interests. Hikers may get an environmentally themed message; members of particular religious groups may get a Christian-themed message.⁷⁶

Early pioneers in individual marketing Don Peppers and Martha Rogers outlined a four-step framework for what they called one-to-one marketing as follows:⁷⁷

1. Identify your prospects and customers. Don’t go after everyone. Build, maintain, and mine a rich customer database with information from all the channels and customer touch points.
2. Differentiate customers in terms of (1) their needs and (2) their value to your company. Spend propor­tionately more effort on the most valuable customers (MVCs). Apply activity-based costing and calculate customer lifetime value. Estimate net present value of all future profits from purchases, margin levels, and referrals, less customer-specific servicing costs.
3. Interact with individual customers to improve your knowledge about their individual needs and to build stronger relationships. Formulate customized offerings you can communicate in a personalized way.
4. Customize products, services, and messages to each customer. Facilitate customer interaction through the company contact center and Web site.

One-to-one marketing is not for every company. It works best for firms that normally collect a great deal of individual customer information and carry a lot of products that can be cross-sold, need periodic replacement or upgrading, and offer high value. For others, the required investment in information collection, hardware, and software may exceed the payout. The cost of goods is raised beyond what the customer is willing to pay.

Customers must know how to express their personal product preferences, however, or be given assistance to best customize a product.⁷⁸ Some customers don’t know what they want until they see actual products, but they also cannot cancel the order after the company has started to work on it. The product may be hard to repair and have little resale value. In spite of this, customization has worked well for some products.

LEGAL AND ETHICAL ISSUES WiTH MARKET TARGETS Marketers must target carefully to avoid consumer backlash. Some consumers resist being labeled.⁷⁹ Singles may reject single-serve food packaging if they don’t want to be reminded they are eating alone. Elderly consumers who don’t feel their age may not appreciate products that label them “old.”

Market targeting also can generate public controversy when marketers take unfair advantage of vulnerable groups (such as children) or disadvantaged groups (such as inner-city residents) or promote potentially harmful products. The cereal industry has been criticized through the years for marketing efforts directed toward children. Critics worry that high-powered appeals presented by lovable animated characters will overwhelm children’s de­fenses and lead them to want sugared cereals or poorly balanced breakfasts. Toy marketers have been similarly criticized. A key area of concern for many consumer protection advocates is the millions of kids who are online, as discussed in “Marketing Memo: Protecting Kids Online.”

Not all attempts to target children, minorities, or other special segments draw criticism. Colgate-Palmolive’s Colgate Junior toothpaste has special features designed to get children to brush longer and more often. Thus, the issue is not who is targeted, but how and for what purpose. Socially responsible marketing calls for targeting that serves not only the company’s interests but also the interests of those targeted.

This is the case many companies make in marketing to the nation’s preschoolers. With nearly one in four youngsters under the age of five attending some kind of organized child care, they feel the potential market—in­cluding kids and parents—is too great to pass up.⁸⁰ So in addition to standards such as art easels, gerbil cages, and blocks, the nation’s preschools are likely to have Care Bear worksheets, Pizza Hut reading programs, and Nickelodeon magazines.

Teachers and parents are divided about the ethics of this increasingly heavy preschool marketing push. Some side with groups such as Campaign for a Commercial-Free Childhood, whose members feel preschoolers are in­credibly susceptible to advertising and that schools’ endorsements of products make children believe the product is good for them—no matter what it is. Yet many preschools and day care centers operating on tight budgets welcome the free resources marketers offer.⁸¹

2. MARKETING insight Chasing the Long Tail

The advent of online commerce, made possible by technology and epitomized by Amazon.com, eBay, iTunes, and Netflix, has led to a shift in consumer buying patterns, according to Chris Anderson, editor-in­chief of Wired magazine and author of The Long Tail.

In most markets, the distribution of product sales conforms to a curve weighted heavily to one side—the “head”—where the bulk of sales are generated by a few products. The curve falls rapidly toward zero and hovers just above it far along the X-axis—the “long tail”— where the vast majority of products generate very little sales. The mass market traditionally focused on generating “hit” products that occupy the head, disdaining the low-revenue market niches comprising the tail. The Pareto principle-based “80-20” rule—that 80 percent of a firm’s revenue is generated by 20 percent of a firm’s products—epitomizes this thinking.

Anderson asserts that as a result of consumers’ enthusiastic adoption of the Internet as a shopping medium, the long tail holds significantly more value than before. In fact, he argues, the Internet has directly contributed to the shifting of demand “down the tail, from hits to niches” in a number of product categories including music, books, clothing, and movies. According to this view, the rule that now prevails is more like “50-50,” with lower-selling products adding up to half a firm’s revenue.

Anderson’s long-tail theory is based on three premises: (1) Lower costs of distribution make it economically easier to sell products without precise predictions of demand; (2) The more products available for sale, the greater the likelihood of tapping into latent demand for niche tastes unreachable through traditional retail channels; and (3) If enough niche tastes are aggregated, a big new market can result.

Anderson identifies two aspects of Internet shopping that sup­port these premises. First, the increased inventory and variety afforded online permit greater choice. Second, the search costs for relevant new products are lowered due to the wealth of information online, the filtering of product recommendations based on user preferences that vendors can provide, and the word-of-mouth network of Internet users.

Some critics challenge the notion that old business paradigms have changed as much as Anderson suggests. Especially in entertain­ment, they say, the “head” where hits are concentrated is valuable also to consumers, not only to the content creators. One critique argued that “most hits are popular because they are of high quality,” and another noted that the majority of products and services making up the long tail originate from a small concentration of online “long-tail aggregators.”

Although some academic research supports the long-tail theory, other research is more challenging, finding that poor recommendation systems render many very low share products in the tail so obscure and hard to find they disappear before they can be purchased frequently enough to justify their existence. For companies selling physical prod­ucts, inventory, stocking, and handling costs can outweigh any financial benefits of such products.

Harvard’s Anita Elberse provides an especially detailed analysis of various media and entertainment options via sources such as sales data from Nielsen Soundscan and online music service Rhapsody, with some provocative findings. Blockbusters are capturing even more of the market than they used to, which Elberse attributes to humans’ social nature and desire to share experiences. Consumers in the tail tend to be heavier users in the category but actually don’t like niche products as much as they like the hit products.

Elberse concluded that consumer behavior online and offline in the media and entertainment industries was highly similar and favored hit products in both cases. She notes that niche products at the tail end of a distribution can have value, but keeping costs low is critical. The debate over the importance of the long tail is likely to continue; perhaps the answer is that it is not so much either/or, but how hit and niche products can best be created and marketed.

Sources: Chris Anderson, The Long Tail (New York: Hyperion, 2006); “Reading the Tail,” interview with Chris Anderson, Wired, July 8, 2006, p. 30; “Wag the Dog: What the Long Tail Will Do,” The Economist, July 8, 2006, p. 77; John Cassidy, “Going Long,” New Yorker, July 10, 2006; Erik Brynjolfsson, Yu “Jeffrey” Hu, and Michael D. Smith, “From Niches to Riches: Anatomy of a Long Tail,” MIT Sloan Management Review (Summer 2006), p. 67; Anita Elberse, “Should You Invest in the Long Tail,” Harvard Business Review, July-August 2008, pp. 88-96 (with online commentary); Lee Gomes, “Study Refutes Niche Theory Spawned by Web,” Wall Street Journal, July 2, 2008; Erick Schonfeld, “Poking Holes in the Long Tail Theory,” www.techcrunch.com, July 2, 2008; “Rethinking the Long Tail Theory: How to Define ‘Hits’ and ‘Niches,’” Knowledge@Wharton, September 16, 2009.

3. MARKETING MEMO Protecting Kids Online

With the explosion of cell phones, tablets, software apps, and social networking sites, an important concern is protecting unknowing or unsuspecting children in an increasingly complex technological world. The 8-to-12 tween market today is highly mobile and happy to share locations via an app and communicate with others by phone, leading one trendspotting expert to characterize them as “SoLoMo” (Social Local Mobile). Only one in five parents, however, uses basic content control features on smart phones, tablets, and game consoles. Thus, establishing ethical and legal boundaries in marketing to children online—and offline—continues to be a hot topic.

The Children’s Online Privacy Protection Act (COPPA) was designed to better control the online collection of personal information from children under 13. It became law in July 2000 and helped ensure that Web sites targeted to children could not inappropriately collect names, e-mail addresses, and other sensitive information. Updates to the law in 2010 reflect the rapid technological developments that allowed marketers to collect so much more information from kids.

COPPA spells out “what a Web site operator must include in a privacy policy, when and how to seek verifiable consent from a parent and what responsibilities an operator has to protect children’s privacy and safety online.” The act forbids the collection of certain information about children unless a parent first gives permission. That information includes photos, videos, and audio files containing a human image or voice, as well as location data generated by a cell phone. “Personal identifiers” that allow a person to be tracked over time and across Web sites were deemed personal infor­mation and covered by the law. The updated law also outlined how parental consent could be verified through electronically scanned consent forms, video conferencing, and e-mail.

Some software developers were opposed to the amended COPPA, complaining that the cost of compliance and the risk of violations were too great. Penalties can be stiff. In 2008, Sony BMG Music Entertainment agreed to pay $1 million as part of a settlement with the FTC after being charged with improp­erly collecting information from 30,000 children under 13 on its Web sites. Mrs. Fields Cookies and Hershey Foods were fined early on.

Despite the restrictions of COPPA and other regulations, businesses continue to eye the potentially rewarding youth market. eBay has explored allowing consumers under 18 to set up accounts with parental authorization and shop, with some safeguards to prevent access to adult content and products. Facebook’s stated interest in allowing children 12 and under to join its site has met with criticism from consumer, privacy, and child advocacy groups.

Sources: Anton Troianovski, “New Rules on Kids’ Web Ads,” Wall Street Journal, August 1,2012; www.ftc.gov/ogc/coppa1.htm; “How to Comply with the Children’s Online Privacy Protection Rule, www.business.ftc.gov/documents/; Richard Lardner, “Government Issues New Online Child Privacy Rules,” www.news.terra.com, December 19, 2012; Greg Bensinger, “EBay to Target Under-18 Set,” Wall Street Journal, July 26, 2012; Tim Peterson, “Tweenage Wasteland,” Adweek, June 25, 2012, p.11; Sharon M. Goldman, “The Social Tween,” Adweek, June 25, 2012, p. T1; Heather Chaet, “The Tween Machine,” Adweek, June 25, 2012; Bruce Levinson, “Does Technology Change the Ethics of Marketing to Children,” Fast Company, April 11, 2013.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.