Market Segmentation and Market Targeting

Instructional Goals: You will understand:

 What it means to "segment" a market

 The basic steps in segmenting a market
 The bases used to segment consumer and business markets
 How to evaluate and select segments for targeting of marketing programs

And the relevance of these concepts to operational decision making.

Lecture 2:30 PM to 3:15

Marketers can orient their products to customers in four distinct ways.

 Mass marketing aims to attract all kinds of buyers by producing and distributing the one
best product at the lowest possible price
 Segment or product-variety marketing aims to serve large identifiable groups by
offering a limited array of good products at a variety of prices.
 Target (both niche and local) marketing aims to please identifiable clusters of customers
by providing products that are carefully tailored to match group means and tastes.
 Individual marketing aims to satisfy individual customers by providing products that are
precisely tailored to match individual means and tastes.

Increasingly sellers are moving away from mass marketing and toward individual marketing.
This was always the ideal. But it was once prohibitively expensive to tailor products to minority
tastes. Mass production required standardization, product design was costly and production lines
inflexible. Besides, nobody knew how to ascertain individual tastes and preferences with any
precision. The rise of flexible production and computer-assisted design and manufacture means
that you can cater to minority tastes at mass production prices; modern market research permits
you to identify those tastes.

Target marketing is where we are today. The key steps in target marketing are market
segmentation, market evaluation, and product positioning. Market segmentation means
dividing mass markets into distinct groups of buyers with relatively homogeneous preferences,
attitudes, or behaviors, which distinguish them from the rest of the market. To do this, marketers
begin by analyzing preference segments, which are expressed in three ways:

 Homogeneous preferences: in this type of market, all members basically hold similar
preferences. In this example, everyone in the market prefers creaminess and sweetness
equally. When no segment exists, a mass marketing strategy is usually followed.
 Diffused preferences: in this type of market, customers vary greatly in their preferences.
Brands in this market are likely to hold distinct positions according to the differing tastes
of the consumers of the product. In this example, some consumers prefer creaminess
while others prefer sweetness, but all at various levels of commitment. As such, brands in
this market will find it easier to find and hold a lucrative position.
  Clustered preferences: in this type of market, natural segments emerge to describe
distinct groups according to preference. In this example, groups form which prefer
creaminess and/or sweetness at similar levels. A marketer in this situation should choose
position that responds directly to one of those segments.

The effectiveness of this process depends upon the specification of segments that are identifiable,
substantial, and accessible.

Market evaluation means assessing the sales potential of each segment and selecting the
segments that are most suitable for exploitation. Sales potential is a function of the number of
people in the segment, their disposable incomes, and their willingness to pay for product
attributes, together with the organization's ability to serve them. Indicators of sales potential
include size, growth rate, price sensitivity, current usage in the product category, etc. When all
segments have been analyzed, the marketer can choose to accept them at five levels: single
segment (one product to one segment only), selective specialization (one product to more than
one unrelated segments), product specialization (one product to several segments), market
specialization (more than one products to a particular customer group), or full market coverage
(one or more product to all customer groups).

Market positioning means presenting the product to the consumer. A product's position is
defined by how consumers view it on important attributes -- the "rank" a product holds in the
consumer's mind when compared to its competitors. Choosing a position is an element of
marketing strategy, and products may need to be repositioned as consumer's perceptions change.
Products can be positioned in many ways: by user, by usage, by price and/or quality, through a
personality symbol, according to product attributes or benefits received, against a single
competitor, against many competitors, or against an entire product category.

Video Case 1: Patagonia 3:15 PM to 4:00

The Patagonia case is designed to illustrate the marketing and societal marketing concepts and
market leadership. The company tries hard to stay in touch with its market through its catalog,
guide line service, picture contest, and toll-free numbers which illustrate the marketing concept.
The company relies on product innovations that benefit consumers. Although their products are
higher priced, customer satisfaction is great. Kotler reports that he wore the same pair of
Patagonia shorts for five years (including backpacking in the High Sierras over rough terrain).
The other Patagonia products that he owns also lasted. The company has always been concerned
with environmental issues throughout its history.

This is no 1990's fad on their part and their customers know that. One aspect of their
contributions to environmental groups that isn't in the case due to space limitations is that they
dole out funds in small amounts to groups that are frequently not well-known. The rationale for
this is that many of these small, mostly local groups consist of highly dedicated individuals who
will make the most of the funds. According to Chouinard, "these little organizations are
extremely effective. It takes more work searching them out...but it's much more satisfying
because you see what your money's done." He believes that they accomplish more with their
dollars than large organizations would.
So, the marketing concept elements of customer orientation, integration of marketing activities,
profit making and the good of society are all included in the statement. Much of the case
describes the founder of Patagonia, Yvon Chouinard, because he is an extraordinary figure and
has stamped his personality on the company. Although he claims not to be a businessman and he
spends more than half of his time roaming the globe engaging in a multitude of outdoor
activities, his business philosophy and orientation is actually quite sharp. He knows his products
and his market; his firm works closely with suppliers and dealers (as the TQM and Business
Process Re-engineering types propose); his firm is a market leader --- constantly ahead of other
firms in developing new fabrics and gear which enables it to compete on brand and quality
dimensions rather than price and his brand commands a high degree of consumer loyalty.

Patagonia is recognized as a leader and, according to retailers, consumers come into their stores
intending to buy only Patagonia products so much so that high end retailers frequently only carry
the Patagonia brand. Chouinard and Patagonia have been compared favorably with The North
Face (Berkeley, California) with respect to their commitment to excellent products, field testing
under the most difficult conditions, and conscious effort to give back to the environment.

Students will probably be very taken with Chouinard's lifestyle -- most of us would rather play
than work. But one has to realize that early on, he was extremely poor. From the late 50's until
the early 70's, he made very little money selling pitons, chocks and other mountain climbing
gear. Although it has grown in popularity, mountain climbing is still not a sport that attracts
millions. In that period, he frequently lived in huts or a tent and even survived on left-over food
and squirrels at one point. But he always walked the walk (in modern parlance and he uses this
phrase) that he thought was important and eventually he made it big which illustrates the rags-to-
riches nature of much entrepreneurial activity and the importance of remaining true to one's
values.

As an outdoorsman, Chouinard is concerned about the environment, and that has always been
evident in his business activities. By giving away several million dollars to many small
protectionist and conservation groups, Patagonia has generated much favorable publicity and
helped protect the environment. In addition, the firm also gives away goods to small groups to
sell to raise funds. The firm is also known for taking care of its employees.

Patagonia relies on innovation to sustain sales. For example, it was the first firm to sell products
made of polypropylene. Since then, other manufacturers had adopted this product so that today
you can find polypropylene wear in Kmart. Patagonia, however, is selling PCR Synchilla, which
is great stuff in the cold. They have moved on to something else. They are market leaders. Look
at one of their catalogs, which you can get by calling writing Patagonia Mail Order, Inc., 1609
W. Babcock St., P.O. Box 8900, Bozeman, MT. 59715-2046. This is not a firm interested in
selling at the lowest price, so it makes a good example of how to compete at the higher end.
Many students may already be familiar with the quality of Patagonia products.

At present, Patagonia has established a no-growth policy because Chouinard believes that
consumption should decline -- that we are depleting the earth's resources -- a policy that some
business critics have pooh-poohed. But such a policy is viable for a firm that sells high-priced,
innovative products in the low-volume, high-margin end of the market. If all consumers did
reduce the quantity of goods by buying higher-quality, longer-lasting goods, his strategy to slow
down the depletion of resources might work. The catch, of course, is that not all consumers can
afford high priced goods. At any rate, this is a good subject for debate in class: "Can a small firm
in Ventura really reduce the pace of American consumption?"

The Patagonia case could be used with a discussion of segmenting and targeting. Elements of
pricing policies and quality and value are brought out in the Patagonia case.

Teaching Objectives:

 To illustrate the marketing concept.

 To give examples of customer orientation.
 To exemplify the integration of environmental concerns with sound marketing and
business practices.
 To illustrate market leadership.

To demonstrate the importance of product innovation.

1. How does Patagonia exemplify the marketing concept? The societal marketing concept?

Patagonia exemplifies the marketing concept through consumer orientation by developing high
quality products that are designed with the consumer's needs in mind. It is constantly working to
develop fabrics that keep consumers warm and dry. By producing highly functional products in
colorful and exciting designs, Patagonia creates high value-added for consumers. It stays in
touch with its market through its catalog, the Guide Line, and the activities of Chouinard.

Patagonia exemplifies the societal marketing concept by giving funds to conservation and
protectionist groups, by using recycled materials, by reducing its consumption of fabrics and
supplies to only what is needed, and by working with suppliers to recycle waste.

2. What type of marketing strategy has Patagonia pursued?

Patagonia is a market leader. They innovate by developing new fabrics and products for all sorts
of outdoor activities. They are also at the forefront of environmental business activity. As
products move from growth to maturity, Patagonia avoids price competition through innovation.

3. How has Patagonia responded to the forces in the macro-environment?

Patagonia responds to natural forces by supporting and enriching environmental causes. It

responds to technological forces by developing new fabrics and products such as PCR Synchilla
and by using recycled goods and by recycling waste products. It responds to cultural forces by
remaining true to its values of environmental concern, high-quality products and by promoting
lower consumption of goods by selling longer lasting goods. By encouraging lower consumption
through the sell of multi-functional products, Patagonia is responding to economic forces. Its
higher prices may discourage purchase. It responds to demographic changes by catering to the
needs of Baby Boomers and Baby Busters which are the two most active groups. Through its
support of environmental groups, Patagonia has an effect on political forces.

4. Are the critics right? Or will Patagonia's actions help reduce consumption?

Probably not! This company commands a high degree of brand loyalty based on their quality
image which their high prices help to maintain. Probably the most effective part of their strategy
is using recycled materials in Synchilla and their own efforts at re-cycling and using earth-
friendly materials. Changing American consumption patterns is more than one company can
hope to accomplish.

Economic factors have a greater impact on consumption. Unfortunately, the American society
seems to be moving toward a split of haves and have-nots -- middle- and lower-income groups
seem to be losing ground. The haves will continue to buy Patagonia products and the have-nots
probably have not and, therefore their deteriorating economic situation will not affect sales of
high priced goods such as Patagonia's.

Teaching Suggestions

Students should respond positively to the Patagonia case. Many of them are into outdoors
activities and will recognize the brand. You could divide the class into students who are familiar
with Patagonia and those who aren't. Show those who aren't familiar with the company catalogs
(which you or other students could bring to class.) Ask them to describe the impressions that
they get of the company. Then, ask those students who have owned or are familiar with
Patagonia to describe their experiences. Did the products last? etc.

This process is akin to measuring image creation through catalogs and a reality check with
customer satisfaction. If the two are consistent, you can have a discussion of the importance of
building customer satisfaction to lead to customer preference, repeat purchase, brand loyalty and
good word of mouth which will support the firm's sales in the long run. If not, there is plenty of
room for discussion of why the company has failed to "complete its promise" (in the image with
product quality, durability, etc.) and the impact that that will have in the marketplace.

In the discussion described above, there should be plenty of opportunity to discuss the following
questions:

 Is Patagonia really market responsive? Does it meet consumers needs? How?

 Why do consumers prefer Patagonia? Is it the quality or the image or both? Is it the
quality of manufacture or the innovation in materials that attracts customers to Patagonia
products?
 Does it matter why they want Patagonia products? Do consumers care about Patagonia's
support of environmental issues?
 Is price an issue? Why or why not? If it isn't, what opportunities does this create for
Patagonia? How does Patagonia exploit these opportunities?
 How can it continue its market leadership? Will the principles that have worked thus far
work in the future?
This case offers an excellent opportunity to examine entrepreneurial activity. Students should be
encouraged to read more about Chouinard and other entrepreneurs and discuss why they have
been successful. It's important for students to realize the dedication that entrepreneurial activity
requires and that many entrepreneurs start out to do what they want and love rather than to make
money. This is an opportunity to reinforce a powerful lesson that an end goal focused solely on
making big bucks seldom brings happiness or big bucks!