Learning objectives
8.1 Introduction
The process of segmentation, targeting and positioning is central to effective strategic marketing. Segmentation is concerned with the process of identifying different groups of customers who are similar in ways that are relevant to marketing. In order to seg- ment a market, it is important to understand who customers are, why they behave in particular ways and how they may be grouped together. Targeting decisions can then be made based on the range of identified segments. In order to choose the most appro- priate target markets, it is necessary to understand what different segments want and the extent to which the organization can supply those wants. Finally, having identi- fied target markets, the organization must then consider how to position itself in those markets. Positioning refers to the way in which an organization tries to communicate its value proposition to its target market in order to convince customers that it has a distinct offer. In effect, positioning is about the way in which the organization tries to build and communicate its competitive advantage.
This chapter will review segmentation, targeting and positioning. It will begin by explaining the benefits of market segmentation and targeting for both providers
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By the end of this chapter you will be able to:
● explain the different approaches to segmenting a market
● understand the issues involved in selecting a target market
● understand the role of positioning in communicating the value proposition.
and customers. The requirements for successful segmentation will be examined in general terms, and approaches to segmenting final consumer and corporate markets will then be explored in more detail. The chapter continues with a discussion of different approaches to market targeting, and the final sections will explain the key elements of positioning and repositioning.
8.2 The benefits of segmentation and targeting
Segmentation is essentially a process whereby a provider of goods or services chooses to group prospective customers together on the basis of a set of common characteristics that have significant implications for its marketing activity. Common characteristics that might be used to segment a market include variables such as age, income, personality and lifestyle. On the basis of those common characteristics, seg- ments are expected to respond differently to marketing activities – they may want different features, be more or less price-sensitive, respond to particular types of marketing communications, or use different channels. Targeting is then concerned with the identification of an appropriate set of segments which the organization will seek to serve. Implicit in any decision to undertake segmentation and target- ing is the realization that no single organization is capable of being all things to all men. It is inevitable that certain products will have particular appeal to certain kinds of individuals. At one extreme, each individual customer could be pre- sented as a segment of one because each individual has different needs. In such a case, the marketing mix is bespoke to match the characteristics and needs of a single person or organization. This practice is perhaps more common than might at first be imagined. In retail markets, financial advisers provide a service encounter that is unique to the individual client – as do private bankers. In corporate markets, a customized approach is essential when dealing with large corporate clients. At the other extreme, the whole population could be treated as if it were a single homogenous segment. Traditionally, banks have treated the personal bank- ing market as homogenous and provided a single standard current account to all customers. Increasingly, however, there is recognition that customers do have dif- fering banking needs and that there is the potential to develop specific products for specific segments. Thus, for example, Barclays now offers over ten different current accounts in the UK market, targeted to a variety of segments – including children, students, people with very high incomes and people with very low incomes.
Segmentation and targeting is a means by which a number of important benefits are secured for both providers and consumers of products and services. In sum- mary, the benefits of segmentation and targeting are as follows:
1. It facilitates efficient resource utilization. Indiscriminate use of the marketing mix is a wasteful use of precious resources. By identifying and targeting discrete seg- ments of consumers (retail or corporate), a company is able to limit the scope of individual components of the mix and thus reduce costs. To take a simple exam- ple, an advertising programme involving the use of the press media will be less expensive if it involves the use of magazines that are read by a discrete target seg- ment of consumers rather than the entire population. Similarly, products designed to meet the particular needs of a given segment will not need features
they do not require. Thus, segmentation results in greater resource efficiency, which benefits consumers through better value, shareholders through reduced waste and lower costs, and the environment through resource efficiency.
2. It allows effective targeting of new customers. The logical next step from segmenting a market is the selection of segments to target for marketing activities. Nowadays, it is unusual for a company to have a completely indiscriminate approach to tar- geting new customers. As the costs of customer acquisition have increased and companies become increasingly focused upon customer profitability, they have to be selective in respect of which kinds of people or organization they want to be their customers. It must be appreciated that different customers display different characteristics and behaviours that impact upon customer value. For example, in the UK, SAGA targets people aged over 50 for its range of leisure and financial services. SAGA is able to price its motor insurance premiums very keenly, as the over-50s represent a low-risk group in terms of propensity to incur motor claims.
Thus, SAGA can be very price-competitive and deliver superior value to this group of consumers in a way that would not be possible if the company was trying to serve a mass market.
3. It facilitates competitive advantage. The more specific an organization’s approach to segmenting the market, the easier it is to establish and maintain competitive advantage. This arises by virtue of the fact that competitive advantage is a rela- tive concept that involves differentiating an organization from its rivals in the eyes of its customers. Self-evidently, the more indiscriminate the approach to tar- geting, the wider the array of competitors against whom an organization will have to seek to differentiate itself. In the case of SAGA, it is required to maintain a competitive advantage over those other organizations that also seek to target the over-50s – such as RIAS. This presents SAGA with a smaller set of key rivals than if it were to target the entire adult population. In turn, this makes it easier to achieve and maintain differentiation.
4. It directs the marketing mix. Best practice dictates that each target segment chosen by an organization should be subject to a specific and relevant marketing campaign.
In this way, marketing is managed to achieve the best fit with each target segment.
Consider the case of the NFU Mutual Insurance Company. Originally aimed at providing for the insurance needs of Britain’s farmers, it has repositioned itself to address the insurance and investment needs of the following segments:
● farmers
● people who live in rural communities
● people who live in non-metropolitan towns and have an affinity for the countryside.
The mix for the farming segment includes insurance products that are specific to farmers, such as crop and livestock insurance. In terms of promotion, it advertises extensively in the farming press. As far as rural dwellers are concerned, it uses radio and television selectively to target those who live in predominantly rural parts of the country. Its product range is geared towards rural dwellers with a special interest in country pursuits such as horse-riding.
Some financial service providers are affinity-based, and this allows for particu- larly close targeting of the marketing mix. The Police Mutual Assurance Society (PMAS), based in Lichfield, Staffordshire, has a mix that makes full use of its affinity
relationship with the UK’s police service. For example, it makes use of locally-based police officers as part of its distribution processes. So-called ‘Authorized Officers’
act as a conduit for communication between serving police officers and civilian staff, and PMAS. Authorized Officers have introducer status, and this enables PMAS to enjoy exceptionally low new business acquisition costs. PMAS’s low-cost provision is further enhanced by the way in which it arranges for deduction of premiums through the police payroll system. The promotional element of the mix makes full use of specialist forms of communication, such as police magazines and publications.
The Bournemouth-based Teachers Provident Society enjoys a similar affinity rela- tionship with Britain’s largest teaching union, as does Maif with respect to teachers in France. Their marketing mixes take advantage of the close relationships they enjoy with their respective affinity groups in order to achieve a bespoke approach.
5. It enhances customer satisfaction. Segmentation and targeting is an effective means of enhancing customer satisfaction through the ways in which the mix should achieve a close match with customer needs and wants. Clearly, the more precisely a product and its features reflect the characteristics of a given group of individu- als, the greater the degree of satisfaction they should experience from its con- sumption. The corollary to this is that the absence of well-managed segmentation results in a generalized approach to the market. This results in customers feeling that a number of product features are irrelevant to them, and that communica- tions messages are ill-judged and lacking real relevance to their personal circum- stances and preferences. As a consequence, such consumers will always be vulnerable to competitors with a more focused approach to segmentation that enables them to deliver greater customer satisfaction.
Alongside these benefits, there are also costs associated with segmentation.
Identifying, measuring and maintaining a system of segmented markets is a cost in itself. Additionally, costs are incurred through the development of different prod- ucts and different marketing campaigns for these different segments. Any exercise in market segmentation must be aware of these costs, and look to implement market segmentation only where the benefits outweigh the costs.
8.3 Successful segmentation
There is no best way to segment a market. On the contrary, as will become clear in subsequent sections, there is a variety of approaches that can be used with varying degrees of complexity and sophistication. Ultimately, a commercial judgement must be made to ensure the best fit between the incremental costs that segmentation entails and the incremental value that can be realized. For an organization to get an approach to segmentation that is ‘right’ for it depends on a good understanding of the market, the right skills and knowledge, and careful evaluation of the different options. In terms of skills and knowledge, the following areas are of particular importance:
1. A sense of touch for the market. Managers seeking to segment a market have to display a sound understanding of the marketplace in which they operate.
This understanding should be based upon the ability to integrate all relevant sources of knowledge to form a cohesive, whole picture of the market. Not only does this involve hard, objective facts such as market values, number of cus- tomers, frequency of purchase, competitors and their respective market share, but it also involves more subjective and qualitative-based inputs. Such inputs include an understanding of consumer choice and an awareness of the strategies of competitors. A sense of touch for the market provides the marketing manager with the capacity to identify opportunities for differentiation and competitive advantage.
2. Analytical skills and resources. Access to appropriate data and the ability to manip- ulate and interpret it is vital. The more varied the data about a market, the greater the number of options for segmentation. Markets vary considerably with regard not only to the variety of data sources that are available but also in respect to recency, frequency, consistency and accuracy of data. The ability to source and analyse relevant data is a competence that is not always in evidence. Therefore, there has to be a commitment to developing this competence if it is not already present.
3. Commercial judgement. A wide range of ‘common characteristics’ can be used in market segmentation. These vary from basic demographic criteria, such as age and gender, through to subtle and complex criteria based upon personality traits.
It must be appreciated that choice of target segments is a crucial part of market- ing strategy and a key facilitator of competitive advantage. A fine judgement has to be made regarding the impact that a chosen approach to segmentation is likely to have on the commercial outcome. This entails careful consideration of costs and benefits for any given method of segmentation.
4. Creative insight. To be successful, segmentation calls for a combination of elements of marketing as both art and science. Science is required in terms of the gathering of factual information, its analysis, and the use of various modelling and simula- tion processes. Ultimately, a judgement has to be made regarding which approach is most likely to facilitate effective differentiation and competitive advantage.
This requires a high degree of creative insight if a segment is to be identified that can be successfully penetrated. It also requires creative intuition regarding how to translate the company’s aspirations to penetrate a given segment into a concrete marketing mix that appeals to the segment. It is understood that the Co-operative Bank chose the ethical consumer segment more on the basis of creative insight than conventional factual analysis.
Thus, good segmentation combines elements of science and art, elements of the quantifiably objective and qualitatively judgemental.
In terms of evaluating different options for segmentation, there are several fac- tors that require consideration. Organization-specific criteria relating to fit with current activity and ability to serve will clearly be important. Equally, it is helpful to evaluate proposed methods of segmentation in terms of their performance in a number of key areas. One common approach is to focus attention on the following criteria:
1. Measurability. This is concerned with the extent to which the preferences, size and purchasing power of different segments can be measured. Certain segmentation
variables are difficult to measure, making segment size and purchasing power difficult to identify. An investment company may identify small investors who are risk averse as an attractive market segment, but may find it difficult to find out exactly how many people fall into this category because of the difficulties of measuring risk aversion. In contrast, the segment of women aged over 60 will be much easier to measure.
2. Profitability. This is the degree to which segments are large and/or profitable enough. A segment should be the largest possible homogenous group worth going after with a tailored marketing programme. Medical students are one very distinctive and homogenous segment of the market, but it would probably not be viable for a bank to develop a distinct current account just for this particular group.
3. Accessibility. This refers to the degree to which the segments can be effectively reached and served. A bank that wishes to target individuals in social class AB will usually be able to gather enough information about the television programmes that such individuals watch and the newspapers that they read, and this should make such a segment relatively accessible. In contrast, a bank that has identified the existence of a segment of internationally orientated companies that it wishes to target with a range of export financing products may find it more difficult to identify which firms are in that segment and communicate with them.
4. Relevance. This is the degree to which the common characteristics used to group customers are relevant to customer decisions. A segmentation system which groups individuals in terms of lifestyle and establishes that the type of credit card carried (standard, gold, platinum) depends on an individual’s aspira- tions and self-concept uses a personality-based characteristic to explain prefer- ence. This type of characteristic is likely to be a more relevant predictor of consumer decisions on which card to carry than, say, a characteristic such as age or income.
From the discussions so far, it is clear that there is a variety of approaches used to segment markets. What they all have in common is the search for a set of common characteristics – i.e. characteristics that all customers in a group share and which are in some way associated with the way in which those consumers respond to market- ing activities. A very simple example of a common characteristic would be age or income; a more complex example might be personality. The next sections explore the common characteristics that are used in segmenting customer and business markets.
8.4 Approaches to segmenting consumer markets
Earlier in this chapter, segmentation was described as grouping consumers around a common characteristic that is of relevance to marketing. The choice of common characteristics is crucial in determining a successful outcome when segmenting a marketplace, since this effectively defines target markets and thus impacts on what the organization will be expected to deliver to that market. The types of common characteristics than can be used to segment consumer markets can be divided
into two broad categories, which give rise to customer- orientated segmentation and product-based segmentation.