Chapter 8

Market Segmentation, Targeting, and Positioning

Chapter Outline
You may want to use the following outline as a guide in taking notes.

I. Chapter Overview A market is composed of people or institutions with sufficient purchasing power,
authority, and willingness to buy. The target market for a product is the specific segment of consumers most
likely to purchase a particular product.

II. Types of Markets include business products and consumer products. Consumer products are those bought by
ultimate consumers for personal use. Business products are goods and services purchased for use either
directly or indirectly in the production of other goods and services for resale.

A. Sometimes a single product can serve different uses and be at times a consumer product and at times a
business product. Some authors add another category, commercial products, non-consumer products that
do not contribute directly to the production of other goods.

III. The Role of Market Segmentation is to identify the factors that affect purchase decisions and then group
consumers according to the presence or absence of these factors. Marketing strategies are then adjusted to
meet the needs of each group. The division of the total market into smaller, relatively homogeneous groups is
market segmentation.

A. Criteria for effective segmentation include four basic requirements.

1. The market segment must possess measurable purchasing power and size.
2. There must be a way to promote effectively to and to serve the market segment.
3. Marketers must be able to identify which segments are sufficiently large to give them good profit
potential.
4. The firm must aim for segments that match its marketing capabilities.

IV. Segmenting Consumer Markets attempts to isolate the traits that distinguish a certain group of customers from
the overall market. Each groups characteristics plays a role in the development of a successful marketing
strategy. The four most common bases for segmenting consumer markets are geography, demography,
psychography, and product-related characteristics.

A. Geographic segmentation, which consists of dividing an overall market into homogeneous groups on the
basis of their locations, has been in use for literally hundreds of years. Geographical segmentation does
not guarantee that all consumers in an area will make the same buying decisions, but it does help to
identify some general patterns. Population size alone is not reason enough for a business to expand into a
specific country. Economic factors may argue for a grouping of countries rather than treating each
uniquely. Other geographic indicators such as population growth may influence and guide marketers
depending on the types of products they sell. Population migration patterns may differ from place to place
as well. In the U. S., population is shifting toward the Southeast and Southwest and the West. In
recognition of the change from an urban to suburban economy, the government now classified urban areas
into three categories: the Metropolitan Statistical Aea (MSA), a freestanding urban center with a
population in the urban center of at least 50,000 and a total population of 100,000 or more; the Primary
Metropolitan Statistical Area (PMSA), including a county or a set of counties with close ties and a
population of a million or more; and finally, the Consolidated Metropolitan Statistical Area (CMSA),
which defines the nations 25 or so urban giants and must contain at least two PMSAs.

1. Using geographic segmentation requires that marketers examine several factors that affect sales.
a. Demand for some goods and services is concentrated in core regions where 40 to 80 percent of
their sales originate.

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 b. Residence location within a geographic area is an important segmentation variable.
c. Climate is an important geographic segmentation factor.
d. Geographic segmentation is useful when regional needs or preferences exist. No one wants to
own a snowblower, but some people must.
2. Geographic Information Systems (GIS) simplify the job of analyzing marketing information by
placing data in a special format. The result is a geographical map overlaid with consumer
information. Until recently, GIS systems were prohibitively expensive. They are now much more
reasonably priced, allowing small firms to use them.

B. Demographic segmentation the most common approach to consumer segmentation -- defines consumer
groups according to variables such as age, sex, income, occupation, education, household size, and stage
in the family life cycle.
1. Segmenting by gender is an obvious choice that helps define markets for certain products.
a. Some firms market the same product successfully to people of both sexes.
b. Other firms start by targeting one sex and later switch to both.
c. Occasionally, even though marketers think they have targeted a gender market correctly, a
product may miss its audience.
2. Segmenting by age is appropriate for some products that specifically meet the needs of certain groups.
a. Baby food meets the needs of infants, while retirement communities serve the elderly.
b. Clothing retailers such as Limited Too target girls between the ages of 8 and 17.
c. The cohort effect refers to the tendency of members of a generation to be influenced and bound
together by significant events occurring during their formative years roughly 17 to 22 years of
age.
d. Baby boomers were born between 1946 and 1965 and represent 42 percent of U. S. adults. Their
values were formed by the Vietnam War and the career orientation of the following years.
i. Boomers are now between 37 and 57 years of age and represent a lucrative market with high
disposable incomes, but are not a homogeneous group.
ii. There are many subgroups among the boomers because of their age dispersion.
iii. Boomers have an interest in nostalgic items that remind them of their own childhoods and
adolescence.
e. Seniors are the people above the age of 65 who will, by the year 2025, represent nearly 20 percent
of the population.
i. Seniors are expected to live much longer than was the case in even the recent past, those
currently in the group to well in their 80s.
ii. A powerful economic force, seniors control about three-quarters of the countrys wealth, and
those most affluent are known as WOOFs well-off older folks.
iii. Since the 1950s, many firms have given seniors discounts on their purchases; many of these
discounts are being discontinued as the economy slows.

3. Segmenting by Ethnic Group is becoming more important because the diversity of the U. S.
population is increasing.
a. By 2050, it is estimated that nearly half the U. S. population will belong to nonwhite minority
groups.
b. The three largest and fastest-growing ethnic groups in the U. S. are African-Americans,
Hispanics, and Asian Americans.
c. African-Americans and Hispanics are the largest ethnic minority groups in the United States,
each accounting for around 13 percent of the population.
iv. The Hispanic market has been a serious target for many firms during the last few years.
d. Asian-Americans and Pacific Islanders are the fastest-growing segment of the U. S. population.
e. The Asian-American population is concentrated in fewer geographic areas than are other ethnic
markets.

f. Native Americans, although only 2 million strong, have begun to establish economic and political
clout by developing various entertainment centers and other attractions throughout the United
States.
g. Different ethnic and racial segments of the population exhibit different consumer preferences,
motivations, and buying habits.
4. Segmenting by the stage of the family life cycle the particular section of the process of family

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 formation and dissolution in which one finds oneself is based on the idea that it is not age, but this
phenomenon that affects much buyer behavior.
a. An unmarried person setting up an apartment for the first time is likely to be a good prospect for
inexpensive furniture and small home appliances.
b. The birth of a first child changes any couples consumer profile considerably, cribs, changing
tables, and baby clothes becoming likely products of choice.
c. Divorced people constitute about 8 million Americans whose consumption patterns are affected
by the fact of their divorce.
d. Married couples whose children have left home empty nesters are an attractive life-cycle
segment for marketers because their lifestyles begin to change as a result of their childrens
departure.
e. Adult children who return home, often bringing their children with them, are a new phenomenon
in the family life cycle.
5. Segmenting by household type deals with issues related to number of people in a household, changes
in family structure, and differences in family members roles.
a. The size of the American household is declining due to lower fertility rates, the tendency to
postpone marriage, peoples desire to have no children or few children, the ease and frequency of
divorce, and the tendency to live alone.
b. The traditional family is becoming less common than was the case prior to the past decade.
c. Though the percentage of married-couple families has declined, the number of unmarried
individuals living together has risen, including both people of opposite sexes living together
(POSSLQs), and gay and lesbian couples.
d. DINKs, dual-income couples with no kids are one of the most actively pursued market segments.
6. Segmenting by income and expenditure patterns is a common basis for consumer market
segmentation.
a. Engels laws, now over a century old, supposedly describe the impact of household income
changes on consumer spending behavior. There are three of these laws, all of which relate to
what happens when household income increases. In other words, as family income increases,
according to Engel
i. a smaller percentage of expenditures go for food.
ii. the percentage spent on housing and household operations and clothing remains constant.
iii. the percentage spent on other items such as recreation and education increases.
b. Newer studies say that, despite the passage of time, Engels laws are still largely true, the
differences growing out of the higher absolute levels of income prevailing in the early twenty-first
century.
7. Demographic segmentation abroad is more difficult than is the case in the United States because of
the lack of data from a number of foreign market
a. Many foreign countries do not or seldom conduct censuses of their population, or they may
conduct them at intervals greater or less than those used in the U. S.
b. Some foreign demographic data includes categories, such as religion, not collected in the U. S.
c. The International Programs Center of the U. S. Bureau of the Census is a good source of global
demographic data.

C. Psychographic segmentation is a more recently developed segmentation tool than the previous examples
1. What is psychographic segmentation? It is a process that divides a population into groups that have
similar psychological characteristics, values, and lifestyles (which are peoples modes of living).
a. The most common way to develop the psychological profile of a population is to conduct a large-
scale survey that measures peoples activities, interests, and opinions.

b. Marketing researchers have conducted studies on hundreds of goods and services, from beer to
air travel.
2. VALS 2 is the second generation of a psychographic segmentation system based on the analysis of
values and lifestyles pioneered by consulting firm SRI International a quarter century ago.
a. The VALS2 scheme divides consumers into eight psychographic categories based on resources
and self-orientation.
b. SRI supplies several specialized segmentation systems based on the VALS2 approach.
c. VALS2 is available to marketers on a subscriber/client basis
d. There are services other than VALS2 available to marketers, such as MONITOR, from

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 Yankelovich Partners.
3. Psychographic segmentation of global markets include such efforts as JapanVALS and a recent study
by Roper Starch Worlewide that identified six psychographic consumer segments that exist in 35
nations.
a. The six RoperStarch categories include Strivers, Devouts, Altruists, Intimates, Fun Seekers, and
Creatives, all of whom are present in varying numbers in many cultures.
4. Using psychographic segmentation involves applying tools such as VALS2 to and the Roper
categories to describe target markets much more richly than other techniques allow.
a. Identifying the psychographic segments that prevail in certain markets allows for better planning
and promotion.
b. Psychographic segmentation is a good supplement to demographic and geographic segmentation.

D. Product-Related Segmentation involves dividing a consumer population into homogeneous groups based
on characteristics of their relationships to the product the benefits they seek when they buy it, the rate at
which they use it, or their brand loyalty to it.
1. Segmenting by benefits sought focuses on the attributes that people seek in a good or service and the
benefits they expect to receive from the good or service.
a. Starbucks customers, for example, arent just buying caffeine; theyre seeking a pleasant
experience and the sense of being pampered.
b. Even a one-product-line business must remember to consider product benefits because people buy
the same products for different reasons.
2. Segmenting by usage rates involves grouping people on the basis of the quantity of a product they buy
and use.
a. The 80/20 principle (also known as Praedos Law) says that approximately 80 percent of a
products revenues come from approximately 20 percent of the products buyers the loyal ones.
b. Marketers may choose to target heavy, moderate, or light users or even nonusers.
3. Segmenting by brand loyalty groups customers according to the strength of their attachment to the
product.
a. Airline frequent-flyer programs are classic examples of brand loyalty segmentation.

V. The Market Segmentation Process

A. Stage I: Identify market segmentation processes

1. Segmentation begins when marketers determine the bases on which to identify markets, whether they
use a management-driven method or a market-driven method.
2. Sometimes there is difficulty isolating a preferred segment or may decide to serve a variety of
segments.
B. Stage II: Develop a relevant profile for each segment
1. After identifying promising segments, marketers seek to understand the customers in each one.
2. The task at this stage is to develop a profile of the typical customer in each segment.

C. Stage III: Forecast market potential

1. At this stage, market segmentation and market opportunity analysis combine to produce a forecast of
market potential within each segment.
2. A segment with great potential is U. S. children ages 4 to 12.
3. Clothing retailers have spotted this segment and developed new stores to offer fashions to it.
D. Stage IV: Forecast probable market share
1. Once market potential has been estimated, a firm must forecast its probable market share.
2. Competitors positions in the selected market share must also be evaluated because they will have
some effect on the firms profit potential.

E. Stage V: Select specific market segments

1. The information acquired in stages I through IV is used to assess the likelihood of achieving company
goals and justifying committing resources to one or more market segments.
2. Monetary, organizational, and environmental factors must all be considered and weighed but some
sort of decision ultimately is taken.

VI. Strategies for Reaching Target Markets

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A. Undifferentiated marketing
1. A firm that produces only a single product line and promotes it to all customers with a single
marketing mix is said to practice undifferentiated marketing.

2. This strategy is efficient from a production point of view, but it opens the competitive door to firms
that may choose to offer specialized products to smaller segments of the aggregate market.

B. Differentiated marketing
1. Firms that promote numerous products with different marketing mixes designed to satisfy smaller
segments are said to engage in differentiated marketing.
2. Even though it is more expensive than undifferentiated marketing, an organization may be forced to
practice differentiated marketing to remain competitive.

C. Concentrated marketing
1. The firm that chooses to implement concentrated marketing (also known as niche marketing) focuses
its efforts on profitably satisfying only one market segment.
2. Magazine publishers are among the firms currently using niche marketing strategies to access
desirable market segments.
3. Concentrated marketing possesses the danger of creating a difficulty for the using firm if new
competitors appeal successfully to the same target market.

D. Micromarketing
1. Micromarketing is a strategy even more narrowly focused than concentrated marketing, targeting
potential customers on a very basic level such as by zip code, specific occupation, or lifestyle.
2. Micromarketing, like niche marketing, runs the risk of being subject to losses if firms spend too much
time, effort, and money on a target market that is too small and specialized to be profitable.

E. Selecting and executing a strategy

1. Though most firms choose some type of differentiated strategy, no single best choice suits all firms.
2. A firm with limited resources may have to choose a concentrated marketing strategy because of
financial, sales force, and promotional budget limitations.
3. The firms strategy may change as the product moves through the stages of the product life cycle.
4. The strategies of competitors may affect the choice of segmentation strategy made by a firm.
5. Once a strategy has been chosen, the issue of positioning the product is then raised, and a firm may
choose a number of positioning strategies, such as positioning by attributes, price/quality, application,
product user, or product class.
6. Regardless of strategy, marketers want to emphasize a products unique advantages and differentiate it
from the competition. A positioning map often facilitates this process.
7. Sometimes, changes in the competitive advantage may force marketers to reposition a product.

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Name_________________________________ Instructor______________________________

Section________________________________ Date__________________________________

Key Concepts
The purpose of this section is to allow you to determine if you can match key concepts with the definitions of the
concepts. It is essential that you know the definitions of the concepts prior to applying them in later exercises in
this chapter.

From the list of lettered terms, select the one that best fits each of the numbered statements below. Write the letter
of that choice in the space provided.

Key Terms
a. market i. psychographic segmentation
b. target market j. product-related segmentation
c. consumer products . k. undifferentiated marketing
d. business products l. differentiated marketing
e. market segmentation m. concentrated marketing
f. geographic segmentation n. micromarketing
g. geographic information system (GIS) o. positioning
h. demographic segmentation

____ 1. Marketing strategy that commits all of a firms marketing resources to serve a single market segment.

____ 2. Goods or services purchased for use either directly or indirectly in the production of other goods and
services for resale.

____ 3. Specific segment of consumers most likely to purchase a particular product.

____ 4. A group of people or institutions who possess sufficient purchasing power and the authority and
willingness to buy.

____ 5. Dividing an overall market into homogeneous groups on the basis of population location.

____ 6. Dividing a consumer population into homogeneous groups based on characteristics of their
relationships to a product.

____ 7. Marketing strategy used by firms that produce only one product and market it to all customers using a
single marketing mix.

____ 8. Marketing strategy to target potential customers at basic levels such as by ZIP code.

____ 9. Dividing consumer groups into homogeneous segments on the basis of characteristics such as age,
sex, income level, and stage in the family life cycle.

____ 10. Division of the total market into smaller, relatively homogeneous groups.

____ 11. Goods or services purchased by the ultimate consumer for personal use.

____ 12. Dividing a consumer population into homogeneous groups based on their psychological and lifestyle
profiles.

____ 13. Computer technology that records several layers of data on a single map.

____ 14. Marketing strategy that emphasizes serving a specific market segment by achieving a certain position

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 in buyers minds.

____ 15. Strategy used by organizations that produce numerous products and use different marketing mixes to
satisfy smaller market segments.

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