To succeed, a new firm must know who its customers are and how to reach them. A firm uses a three-step process to determine who its customers are. These steps, which are shown in Figure 11.1, include segmenting the market, se- lecting a target market, and crafting a unique position within the target market.
As noted in Chapter 3, a firm’s target market is the limited group of individu- als or businesses that it tries to appeal to. It is important that a new venture choose its target market and position inside in its target market quickly because virtually all of its marketing choices hinge on these critical initial choices. For example, GreatCall makes cell phones designed specifically for older people. If GreatCall had designed a distribution strategy, for example, prior to determining that it would target older people, it might have designed a strategy that placed its phones in retail outlets not frequented by older people. Its decision to target older people will have a bearing on every element of its marketing plan.
1. Segmenting the Market
The first step in selecting a target market is to study the industry in which the firm intends to compete and determine the different potential target markets in that industry. This process is called market segmentation, as explained in Chapter 6. Market segmentation is important because a new firm typically has only enough resources to target one market segment, at least initially.4 Markets can be segmented in many ways, such as by geography (city, state, coun- try), demographic variables (age, gender, family size, income), psychographic variables (personality, lifestyle, values), behavioral variables (benefits sought, product usage rates, brand loyalty), and product type (varies by product). For example, the computer industry can be segmented by product type (i.e., hand- held computers, tablet computers, laptops, PCs, work stations, minicomputers, mainframes, and super computers) or customers served (i.e., individuals, busi- nesses, schools, and government).
Sometimes a firm segments its market on more than one dimension to drill down to a specific market segment that the firm thinks it is uniquely capable of serving. For example, GreatCall probably segmented its market by age and benefits sought. Its ideal customer is someone who is older (age) and is looking for a cell phone that’s easy to use (benefits sought).
To test whether you have segmented your market successfully, consider these requirements for successful market segmentation:
■ Homogeneity of needs and wants appears within the segment.
■ Heterogeneity of needs and wants exists between the segments.
■ Differences within the segment should be small compared to differences across segments.
■ The segment should be distinct enough so that its members can be easily identified.
■ It should be possible to determine the size of the segment.
■ The segment should be large enough for the firm to earn profits.
If an entrepreneur is not familiar with how to segment a particular market, IBISWorld, Mintel, and BizMiner, which are online databases often available through large university libraries, provide suggestions. They even show the size of the segments. For example, IBISWorld segments the gym, health, and fitness club industry (NAICS 71394) by service provided. The $26.5 billion industry is 65 percent gyms and fitness centers, 10 percent other, 7 percent dance centers, 7 percent swimming pools, 6 percent ice and roller rinks, and 5 percent tennis centers.5
Despite its importance, market segmentation is a process entrepreneurs commonly overlook. Overlooking this step can result in a faulty assessment of the size of the potential market for a new product or service. If a start-up planned to open a chain of tennis centers, for example, it would be incorrect to say that the total market potential is $26.5 billion. Tennis centers are 5 percent of the larger $26.5 billion gym, health, and fitness club industry, which equates to a $1.3 billion market. This doesn’t mean that a tennis center business couldn’t be profitable or that the new business couldn’t expand the market for tennis. It’s just that the entrepreneur should enter the business with a realistic assessment of the size of its market.
2. Selecting a target Market
Once a firm has segmented the market, the next step is to select a target mar- ket. As discussed in previous chapters, the market must be sufficiently attrac- tive, and the firm must be able to serve it well. Typically, a firm (especially a start-up venture) doesn’t target an entire segment of a market because many market segments are too large to target successfully. Instead, most firms tar- get a niche market within the segment. For example, within the dance studio market, there are several small niche markets that companies can choose to target. A niche market is a place within a market segment that represents a narrow group of customers with similar interests. For example, Broadway Dance Center in New York City targets serious dancers who aspire to earn a liv- ing dancing in Broadway plays.6 That’s an entirely different niche than a studio teaching ballroom dancing or a studio teaching ballet to young girls. By focus- ing on a clearly defined market, a firm can become an expert in that market and then be able to provide its customers with high levels of value and service. Focusing on a clearly defined market requires a firm to know what not to do along with what to do. An example of a company that’s successfully sorted this out is MailFinch, a company specializing in managing other companies’ direct mail campaigns. According to its founder, Paul Singh:
Looking back at the recent growth of MailFinch, most of the success can be at- tributed to what the product can’t do. We do very few things, but we do those things better than anyone else in the game and we make it drop-dead simple to get started (with the MailFinch service).7
A firm’s choice of target markets must also be in sync with its business model and the backgrounds and skills of its founders and other employees. A firm must also continually monitor the attractiveness of its target market. Societal preferences change, a fact that sometimes causes a target market to lose its attractiveness for a firm and the product or service it has to offer customers.
3. Crafting a unique Market position
After selecting a target market, the firm’s next step is to establish a “posi- tion” within it that differentiates it from its competitors. As we discussed in Chapter 5, position is concerned with how the firm is situated relative to com- petitors. For example, in Pittsburgh, Pennsylvania, Art & Style Dance Studio specializes in Latin and Ballroom dancing.8 That’s a different position than the Arthur Murray Dance Studio in Pittsburgh that offers instruction in Fox Trot, Waltz, Tango, Viennese Waltz, Quickstep, and Salsa.9 A firm’s market position is defined by its products or services. Determining which position in a market to occupy and compete in is a strategic call on the part of a company based on its mission, its overall approach to the marketplace, and its competi- tive landscape.
Once a company has identified its position and primary points of differ- entiation, a helpful technique is to develop a product attribute map, which illustrates a firm’s positioning strategy relative to its major rivals. A product attribute map for Snap Fitness is shown in Figure 11.2. Snap Fitness oper- ates small gyms that are located near residential areas and are open 24 hours a day. The centers offer weights, treadmills, and exercise machines. They’re staffed during the day and are available to members at night by swiping a key card at the main door. The equipment is start-of-the-art, and the centers are very clean and secure. They do not offer a wide range of amenities, such as swimming pools, locker rooms, exercise classes, racquetball courts, and mas- sages. The centers offer their members a fast, convenient, and affordable way to develop and maintain fitness. A membership costs around $35 a month for a single membership, $50 for a couple, and $60 for a family.
This firm’s product attribute map is based on the two primary attributes that people look for in a fitness center—range of amenities provided and the extent to which the center is both affordable and convenient. The point is to assess Snap Fitness’s strengths and/or weaknesses in each of these categories and plot it on the map. The same is done for Snap Fitness’s major competitors. The results are shown in Figure 11.2. While Snap Fitness does not rank high in terms of amenities provided, it outranks its competitors by a wide margin in terms of being convenient and affordable. As a result, it stresses its conve- nience and affordability in its promotions, rather than drawing attention to its lack of amenities. Snap Fitness’s tagline is “fast convenient affordable.”10 Any firm can develop a similar product attribute map to illustrate its position in an industry and help direct its marketing plan.
To support their positioning strategy, firms often develop a tagline, just like Snap Fitness has done, to reinforce the position they have staked out in the marketplace. A tagline is a catchy phrase that’s used consistently in a company’s literature, advertisements, stationery, and even invoices, and thus becomes associated with that company—to reinforce the position it has staked out in the market. Table 11.1 is a short matching quiz that asks you to match companies featured in this book with their taglines. A company has created a successful tagline if the message makes you think of its products or services and the position it has established in its market.
Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.