In addition to choosing the basis upon which to segment a market, choices must be made regarding which segments to target. This is not necessarily a sequential process.
Indeed, choice of segmentation criteria and choice of targets (i.e. the targeting strategy) is an interactive and interdependent set of processes which may well
require a high degree of iteration before a final strategic position is arrived at.
Segments must be evaluated in terms of their attractiveness to the organization, their profit potential, and the organization’s ability to deliver the required service.
This information can then be taken into consideration when deciding which segments to target. The basic array of targeting strategies is as follows:
● Undifferentiated – serves an entire marketplace with a single marketing mix which does not distinguish between sub-segments of the market
● Differentiated – an aggregate marketplace, such as banking, is organized into a number of segments, each of which is targeted with a tailored marketing mix
● Focused – a choice is made to target a small subset of the segments of a multi- segment marketplace with a single marketing mix that best suits the needs of that segment
● Customized – each individual that comprises the target market is the subject of a marketing mix that is tailored in some way to the individual’s specific needs.
8.6.1 Undifferentiated targeting
It should not be assumed that an undifferentiated strategy is necessarily an inher- ently inferior form. An analysis of customer characteristics may simply reveal the absence of a compelling variable upon which segmentation could be based. Equally, it may be the case that the cost of segmenting the market and producing a set of bespoke marketing mixes is not commercially justifiable.
In the recent past, life insurance companies operating in the UK and using an essentially commission-only sales-force adopted a largely undifferentiated strategy.
This was sometimes referred to as ‘playing the numbers game’, whereby the low cost of new customer acquisition and the heavy up-front charges meant that almost any new customer thus acquired was likely to contribute to embedded value profits. A range of developments, such as the regulation-induced increase in new customer acquisition costs, lower product margins and the pressure to improve persistency rates, have all served to make the life insurance industry more discriminating in its approach to gaining new customers, and thus there has been a growing tendency to move away from an undifferentiated approach. Admittedly, the attempts to intro- duce segmentation have sometimes been somewhat elementary, often based simply upon a minimum income threshold. Most of the life insurance companies that oper- ated an undifferentiated approach are no longer open to new customers.
8.6.2 Differentiated targeting
This arises when a company has been able to identify a commercially valid basis upon which an aggregate market can be broken down into segments. The fast- moving consumer goods sector has probably been the best exemplar of differenti- ated marketing. Differentiated segmentation is gaining in popularity within the financial services sector. There is a sense in which its development has been held back by a relative lack of suitable marketing orientation within the sector; however, the major clearing banks, such as Barclays, Lloyds TSB and HSBC, are showing a
growing usage of differentiated marketing. Typical generic segments that are encountered among mainstream clearing banks include:
Business banking marketplace segments Business start-ups
Sole traders and partnership
Small businesses (typically with 5–50 staff) Medium business (typically 50–250 staff) Large business (typically 250–1000 staff) Large Corporate Market (more than 1000 staff)
Retail banking marketplace segments Student banking
Ordinary current account customers
High net-worth customers (e.g. earning more than £50 000 pa)
Private banking customers (e.g. have investable assets in excess of £500 000)
The illustrative banking segments shown above reveal a fairly basic approach to segmentation. In the case of B2B banking, segmentation is typically based on busi- ness demographics. As far as B2C banking is concerned, it is typically based upon demographic or socio-economic characteristics. To a large extent, this comes down to the practicalities of the typical large clearing bank which, in the UK, might have over 50 000 staff of whom more than 10 000 are based in some 2000 or more branches. Segmentation has to reflect the practicalities of gaining the engagement of a huge and diverse workforce in implementing a segmentation strategy.
8.6.3 Focused segmentation
This approach to segmentation is encountered in circumstances where a company breaks a market down into a set of segments but chooses to target a small subset of available segments or, in some cases, only a single segment. A focused approach may take a number of different forms:
1. Single segment concentration. In this approach, the organization concentrates only on a single segment in the market and supplies products tailored specifically to the needs of those customer groups. This approach is often described as niche marketing. It is potentially highly profitable, because the organization focuses all its efforts on a particular segment of the market where it has a strong differential advantage. At the same time there are risks associated with this approach, because if the segment were to disappear or a new competitor enter the market, the organization could be vulnerable to a significant loss of business. The general insurer Hiscox focuses on high net-worth clients, whereas the Ecclesiastical Insurance Company focuses upon providing general insurance to churches and allied organizations. Endsleigh Insurance has carved out a niche for itself by focusing on the student segment.
2. Selective specialization. Selective specialization is another type of niche marketing.
However, rather than concentrating only on one segment the organization chooses to operate in several (possibly unrelated) segments. This approach to tar- geting is less focused than single segment specialization, but probably less risky.
3. Product specialization. Most markets can be seen as comprising a number of different customer groups and a number of different but related products. The organization
that concentrates on supplying a particular product type to a range of customer groups is pursuing a product specialization strategy. This approach to market targeting may be particularly appropriate to organizations with particular strengths or knowledge in relation to a given technology or product. Thus, Al Baraka Islamic Bank in Bahrain, Bank Islam in Malaysia and the Islamic Bank of Britain can be seen to be pursuing a product specialization strategy by offering Islamic financial services (a particular product type) to a range of different cus- tomer groups (segments) which range from retail customers needing very simple banking products through to businesses requiring very complex financing arrangements.
4. Market specialization. This approach is the opposite to product specialization.
Rather than concentrating on a particular product, the organization chooses to specialize in meeting the needs of a particular customer group. This strategy may be most suitable where knowledge of the customer group’s particular needs is a particularly important basis for establishing a competitive advantage. Private banks pursue this type of approach in relation to high net-worth individuals – they seek to provide a range of different financial products to meet the needs of the high net-worth customers.
8.6.4 Customized targeting
This approach represents the ultimate manifestation of the segmentation concept, based as it is upon a separate, tailored marking mix for each customer. Some mar- kets lend themselves more naturally to a customized approach, especially those that are in service sectors involving a high degree of human interface. In the financial services sector, customized targeting is most in evidence as part of a hybrid strategy in which a distinct set of services (such as investment banking) is offered to a particular segment (such as large corporations) and then the service is customized to individuals within that segment.