Learning objectives
After studying this chapter, you should be able to:
• understand the role of the market in the exchange process
• distinguish between the basic kinds of markets
• appreciate the differences between the undifferentiated and segmental approach toward markets
• understand the various bases for market segmentation
• translate segmentation concepts into the activity of selecting a target market
The Web segment
Online advertising is still a relatively tiny market, but an increasing number of companies are vying for the right to tell advertisers and their ad agencies where and how to responsibly spend their limited pool of Web ad dollars.
Easier said than done. No reliable measurements exist for determining the size of the Web audience, leaving advertisers to sort through a dizzying number of competing claims from different websites. The creator of a system that catches on with advertisers has a big opportunity: the chance to become the Nielsen of the Internet.
The latest entrant in the race to accurately count web viewers: Relevant.Knowledge, an Atlanta-based company founded by former Turner Broadcasting executives and staffed with research executives with experience counting eyeballs in traditional media like television and radio. This company provides standardized, detailed demographic data and faster feedback about Web viewing, among other services. Relevant.Knowledge has been delivering data on a test basis to companies including CNN, Sony, cǀNET, and Microsoft's MSN Network.
Relevant.Knowledge is taking aim at one of the biggest issues bedeviling online advertisers and publishers: a dearth of reliable information that advertisers can use to justify buying ads on the web. So far, advertisers have been caught in a culture clash between technology buffs and traditional researchers. The result: not enough data that can be applied to multiple websites. Individual sites provide information about the number of visitors they receive, but such results can not easily be compared to what other sites may be supplying. Most sites cannot distinguish one person visiting the same site over and over again from a new visitor. Instead, media buyers have had to rely on more primitive tools, like reports about what competitors are spending and where.6
6 Sources: AI Urbansky. "Escape To The Net," Promo, February 2000, pp. 21-22; Heather Green, "Gelling Too Personal." Business Week e.biz, February 7, 2000, p. EBI4; "You've got Spam:' .'American Demographics, September 1999, p. 22; Christine LeBeau, "Cracking the Niche," American Demographics, June 2000, pp. 38-39.
Introduction
Knowing your market accurately and completely is a prerequisite for successful marketing. This task is made even more difficult for companies trying to advertise on the Web. Yet, as noted earlier, this trend toward using the Internet will continue. Three important concepts related to the topic of markets are presented in this chapter:
defining the nature of markets, identifying the types of markets, and a discussion of product differentiation and market segmentation.
Defining the market
The market can be viewed from many different perspectives and, consequently, is impossible to define precisely.
In order to provide some clarity, we provide a basic definition of a market: a group of potential buyers with needs and wants and the purchasing power to satisfy them. Rather than attempting to cut through the many specialized uses of the term, it is more meaningful to describe several broad characteristics and use this somewhat ambiguous framework as the foundation for a general definition.
The market is people
Since exchange involves two or more people, it is natural to think of the market as people, individuals, or groups.
Clearly, without the existence of people to buy and consume goods, services, and ideas, there would be little reason for marketing. Yet this perspective must be refined further if it is to be useful.
People constitute markets only if they have overt or latent wants and needs. That is, individuals must currently recognize their need or desire for an existing or future product, or have a potential need or desire for an existing or future product. While the former condition is quite straightforward, the latter situation is a bit more confusing, in that it forces the marketer to develop new products that satisfy unmet needs. Potential future customers must be identified and understood.
When speaking of markets as people, we are not concerned exclusively with individual ultimate consumers.
Although individuals and members of households do constitute the most important and largest category of markets, business establishments and other organized behavior systems also represent valid markets. People, individually or in groups, businesses, and institutions create markets.
However, people or organizations must meet certain basic criteria in order to represent a valid market:
• There must be a true need and/or want for the product, service, or idea; this need may be recognized, unrecognized, or latent.
• The person/organization must have the ability to pay for the product via means acceptable to the marketer.
• The person/organization must be willing to buy the product.
• The person/organization must have the authority to buy the product.
• The total number of people/organizations meeting the previous criteria must be large enough to be profitable for the marketer.
All five criteria must be met for an aggregate group of people or organizations to equate to a market. Failure to achieve even one of the criteria may negate the viability of a market. An interesting example is the pharmaceutical industry. There are several serious human diseases that remain uncured only because they have not been contracted by a large enough number of people to warrant the necessary research. The excessive research costs required to develop these drugs necessitates that companies are assured a certain level of profitability. Even though the first four criteria may be met, a small potential customer base means no viable market exists.
The market is a place
Thinking of the market as a place,"the marketplace", is a common practice of the general public. Such locations do exist as geographical areas within which trading occurs. In this context, we can think of world markets, international markets, American markets, regions, states, cities, and parts of cities. A shopping center, a block, a portion of a block, and even the site of a single retail store can be called a market.
While not as pervasive as the "people" component of the market, the "place" description of a market is important too. Since goods must be delivered to and customers attracted toward particular places where transactions are made, this identification of markets is useful for marketing decision-making purposes. Factors such as product features, price, location of facilities, routing salespeople, and promotional design are all affected by the geographic market. Even in the case of unmeasurable fields, such as religion, a marketplace might be Yankee Stadium in the state of New York in the United States, where Billy Graham is holding a revival. Finally, a market may be somewhere other than a geographical region, such as a catalogue or ad that allows you to place an order without the assistance of a marketing intermediary or an 800 number.
The market is an economic entity
In most cases, a market is characterized by a dynamic system of economic forces. The four most salient economic forces are supply, demand, competition, and government intervention. The terms buyer's market and seller's market describe different conditions of bargaining strength. We also use terms such as monopoly, oligopoly, and pure competition to reflect the competitive situation in a particular market. Finally, the extent of personal freedom and government control produces free market systems, socialistic systems, and other systems of trade and commerce.1
Again, placing these labels on markets allows the marketer to design strategies that match a particular economic situation. We know, for instance, that in a buyer's market, there is an abundance of product, prices are usually low, and customers dictate the terms of sale. US firms find that they must make tremendous strategy adjustments when they sell their products in Third World markets. The interaction of these economic factors is what creates a market.
There is always the pressure of competition as new firms enter and old ones exit. Advertising and selling pressure, price and counter price, claim and counterclaim, service and extra service are all weapons of competitive pressure that marketers use to achieve and protect market positions. Market composition is constantly changing.
Types of markets
Now that we have defined markets in a general sense, it is useful to discuss the characteristics of the primary types of markets: (1) consumer markets, (2) industrial markers, (3) institutional markets, and (4) reseller markets.
It should be noted that these categories are not always clear-cut. In some industries, a business may be in a different category altogether or may even encompass multiple categories. It is also possible that a product may be sold in all four markets. Consequently, it is important to know as much as possible about how these markets differ so that appropriate marketing activities can be developed.
Consumer markets
When we talk about consumer markets, we are including those individuals and households who buy and consume goods and services for their own personal use. They are not interested in reselling the product or setting themselves up as a manufacturer. Considering the thousands of new products, services, and ideas being introduced each day and the increased capability of consumers to afford these products, the size, complexity, and future growth
potential of the consumer market is staggering. The next chapter, “Marketing research: an aid to decision making”, touches on many of these issues.
Industrial markets
The industrial market consists of organizations and the people who work for them, those who buy products or services for use in their own businesses or to make other products. For example, a steel mill might purchase computer software, pencils, and flooring as part of the operation and maintenance of their business. Likewise, a refrigerator manufacturer might purchase sheets of steel, wiring, shelving, and so forth, as part of its final product.2 These purchases occur in the industrial market.
There is substantial evidence that industrial markets function differently than do consumer markets and that the buying process in particular is different.
Institutional markets
Another important market sector is made up of various types of profit and nonprofit institutions, such as hospitals, schools, churches, and government agencies. Institutional markets differ from typical businesses in that they are not motivated primarily by profits or market share. Rather, institutions tend to satisfy somewhat esoteric, often intangible, needs. Also, whatever profits exist after all expenses are paid are normally put back into the institution. Because institutions operate under different restrictions and employ different goals, marketers must use different strategies to be successful.
Reseller markets
All intermediaries that buy finished or semi-finished products and resell them for profit are part of the reseller market. This market includes approximately 383,000 wholesalers and 1,300,000 retailers that operate in the US.
With the exception of products obtained directly from the producer, all products are sold through resellers. Since resellers operate under unique business characteristics, they must be approached carefully. Producers are always cognizant of the fact that successful marketing to resellers is just as important as successful marketing to consumers.
AD 1: The Olympus camera is part of the consumer market.
Approaching the market
All the parties in an exchange usually have the ability to select their exchange partner(s). For the customer, whether consumer, industrial buyer, institution, or reseller, product choices are made daily. For a product provider, the person(s) or organization(s) selected as potential customers are referred to as the target market.
A product provider might ask: given that my product will not be needed and/or wanted by all people in the market, and given that my organization has certain strengths and weaknesses, which target group within the market should I select? The process is depicted in Exhibit 2.
For a particular product, marketing organizations might follow an undifferentiated, segmentation, or combination approach toward a market. These concepts are explained in the following sections.
AD 1: An example of an institutional ad.
The undifferentiated market (market aggregation)
The undifferentiated approach occurs when the marketer ignores the apparent differences that exist within the market and uses a marketing strategy that is intended to appeal to as many people as possible. In essence, the market is viewed as a homogeneous aggregate. Admittedly, this assumption is risky, and there is always the chance that it will appeal to no one, or that the amount of waste in resources will be greater than the total gain in sales.
For certain types of widely consumed items (e.g. gasoline, soft drinks, white bread), the undifferentiated market approach makes the most sense. One example was the campaign in which Dr. Pepper employed a catchy general-appeal slogan, "Be A PEPPER!", that really said nothing specific about the product, yet spoke to a wide range of consumers. Often, this type of general appeal is supported by positive, emotional settings, and a great many reinforcers at the point-of-purchase. Walk through any supermarket and you will observe hundreds of food products that are perceived as nearly identical by the consumer and are treated as such by the producer—especially generic items.
Identifying products that have a universal appeal is only one of many criteria to be met if an undifferentiated approach is to work. The number of consumers exhibiting a need for the identified product must be large enough to generate satisfactory profits. A product such as milk would probably have universal appeal and a large market;
something like a set of dentures might not. However, adequate market size is not an absolute amount and must be evaluated for each product.
Two other considerations are important: the per unit profit margin and the amount of competition. Bread has a very low profit margin and many competitors, thus requiring a very large customer base. A product such as men's jockey shorts delivers a high profit but has few competitors.
Success with an undifferentiated market approach is also contingent on the abilities of the marketer to correctly identify potential customers and design an effective and competitive strategy. Since the values, attitudes, and behaviors of people are constantly changing, it is crucial to monitor these changes. Introduce numerous cultural differences, and an extremely complex situation emerges. There is also the possibility that an appeal that is pleasing to a great diversity of people may not then be strong or clear enough to be truly effective with any of these people.
Finally, the competitive situation might also promote an undifferentiated strategy. All would agree that Campbell's dominates the canned soup industry, and that there is little reason for them to engage in much differentiation.
Clearly, for companies that have a very large share of the market undifferentiated IT market coverage makes sense.
For a company with small market share, it might be disastrous.3
Exhibit 2: Approaches to market.
Product differentiation
Most undifferentiated markets contain a high level of competition. How does a company compete when all the product offerings are basically the same and many companies are in fierce competition? The answer is to engage in a strategy referred to as product differentiation. It is an attempt to tangibly or intangibly distinguish a product from that of all competitors in the eyes of customers. Examples of tangible differences might be product features, performance, endurance, location, or support services, to name but a few. Chrysler once differentiated their product by offering a 7-year/70,OOO-mile warranty on new models. Pepsi has convinced many consumers to try their product because they assert that it really does taste better than Coke. Offering products at a lower price or at several different prices can be an important distinguishing characteristic, as demonstrated by Timex watches.
Some products are in fact the same, and attempts to differentiate through tangible features would be either futile or easily copied. In such cases, an image of difference is created through intangible means that may have little to do with the product directly. Soft drink companies show you how much fun you can have by drinking their product.
Beer companies suggest status, enjoyment, and masculinity. Snapple, an American beverage company owned by Dr.
Pepper, may not taste the best or have the fewest calories, but may have the funniest, most memorable commercials. There tends to be a heavy emphasis on the use of mass appeal means of promotion, such as advertising, when differentiated through intangibles. Note the long-term use of Bill Cosby by Jell-O to create an image of fun. Microsoft has successfully differentiated itself through an image of innovation and exceptional customer service.
There are certain risks in using product differentiation. First, a marketer who uses product differentiation must be careful not to eliminate mention of core appeals or features that the consumer expects from the product. For
example, differentiating a brand of bread through its unique vitamin and mineral content is valid as long as you retain the core freshness feature in your ad. Second, highlighting features that are too different from the norm may prove ineffective. Finally, a product may be differentiated on a basis that is unimportant to the customer or difficult to understand. The automobile industry has learned to avoid technical copy in ads since most consumers do not understand it or do not care.
However, there is a flip-side to product differentiation, an approach toward the market called market segmentation.4
The segmented market
While product differentiation is an effective strategy to distinguish your brand from competitors', it also differentiates your own products from one another. For example, a company such as Franco-American Spaghetti has differentiated its basic product by offering various sizes, flavors, and shapes. The objective is to sell more product, to more people, more often. Kraft has done the same with their salad dressings; Xerox with its multitude of office products. The problem is not competition; the problem is the acknowledgment that people within markets are different and that successful marketers must respond to these differences.
This premise of segmenting the market theorizes that people and/or organizations can be most effectively approached by recognizing their differences and adjusting accordingly. By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer. Even the soft drink manufacturers have moved away from the undifferentiated approach and have introduced diet, caffeine-free, and diet-caffeine-free versions of their basic products.5
While it is relatively easy to identify segments of consumers, most firms do not have the capabilities or the need to effectively market their product to all of the segments that can be identified. Rather, one or more target markets (segments) must be selected. In reality, market segmentation is both a disaggregation and aggregation process.
While the market is initially reduced to its smallest homogeneous components (perhaps a single individual), business in practice requires the marketer to find common dimensions that will allow him to view these individuals as larger, profitable segments. Thus, market segmentation is a twofold process that includes: (1) identifying and classifying people into homogeneous groupings, called segments, and (2) determining which of these segments are viable target markets. In essence, the marketing objectives of segmentation analysis are:
• to reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed
• to increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment's characteristics
Segmentation strategies
There are two major segmentation strategies followed by marketing organizations: a concentration strategy and a multisegment strategy.
An organization that adopts a concentration strategy chooses to focus its marketing efforts on only one market segment. Only one marketing mix is developed. For example, the manufacturer of Rolex watches has chosen to concentrate on the luxury segment of the watch market. An organization that adopts a concentration strategy gains an advantage by being able to analyze the needs and wants of only one segment and then focusing all its efforts on that segment. This can provide a differential advantage over other organizations that market to this segment but do not concentrate all their efforts on it. The primary disadvantage of concentration is related to the demand of the