Identifying Market Segments and Targets

Club Med has gone upscale to target new market segments.

Companies cannot connect with all customers in large, broad, or diverse markets. But they can divide such markets into groups of consumers or segments with distinct needs and wants. A company then needs to identify which market segments it can serve effectively. This decision requires a keen understanding of consumer behavior and careful strategic thinking. To develop the best marketing plans, managers need to understand what makes each segment unique and different. Identifying and satisfying the right market segments is often the key to marketing success.

One of the most famous leisure travel brands in the world,  France’s ClubMéditerranée, better known as Club Med, has targeted several different customer  groups through the years. Started in 1950 and long a pioneer in the concept of the all-inclusive resort, Club Med originally used exotic locations, bare-bones accommodations, and the advertising theme “The antidote to civilization” to target singles, young couples, and others seeking sea, sand, and a good time. Rooms did not have phones, TVs,  fans, or locks on the doors. To transcend its hedonistic image and broaden its clientele, Club Med decided to add family-friendly resort locations and services in the 1970s. Depending on location, the resorts, known as villages, offer a wide range of activities, from flying-trapeze clinics to body building to snow skiing. Club Med staff are called “GOs,” or Gentil Organisateurs (“gracious/nice organizers”) ; clients are called “GMs,” or Gentils Membres (“gracious/nice guests/members”). An informal atmosphere has GOs and GMs dining, drinking, dancing, and playing together.

An attempt to move outside the leisure-travel business to become a broader services company proved ill-fated; a series of urban bar/restaurants flopped. Combined with a post-9/11 economic recession and increased competition, the failure left Club Med reeling in 2001–2002. Under the new leadership of Henri Giscard d’Estaing (son of the former president of France), the company invested hundreds of millions of dollars to move upscale and attract wealthier customers by crafting a more sophisticated image. For the firm’s 60th anniversary in 2010, advertising proclaimed that Club Med was “Where Happiness Means the World,” which was backed by an extensive online marketing effort.

To compete more effectively, many companies are now embracing target marketing. Instead of scattering their marketing efforts, they’re focusing on those consumers they have the greatest chance of satisfying.

Effective target marketing requires that marketers :

1.	Identify and profile distinct groups of buyers who differ in their needs and wants (market segmentation).
2.	Select one or more market segments to enter (market targeting).
3.	For each target segment, establish and communicate the distinctive benefit(s) of the company’s market offering (market positioning).

Bases for Segmenting Consumer Markets

Market segmentation divides a market into well-defined slices. A market segment consists of a group of customers who share a similar set of needs and wants. The marketer’s task is to identify the appropriate number and nature of market segments and decide which one(s) to target.

We use two broad groups of variables to segment consumer markets. Some researchers try to define segments by looking at descriptive characteristics: geographic, demographic, and psychographic. Then they examine whether these customer segments exhibit different needs or product responses. For example, they might examine the differing attitudes of “professionals,”“blue collars,” and other groups toward, say, “safety” as a product benefit.

Other researchers try to define segments by looking at behavioral considerations, such as consumer responses to benefits, usage occasions, or brands. The researcher then sees whether different characteristics are associated with each consumer-response segment. For example, do people who want “quality” rather than “low price” in an automobile differ in their geographic, demographic, and psychographic makeup?

Regardless of which type of segmentation scheme we use, the key is adjusting the marketing program to recognize customer differences. The major segmentation variables—geographic, demographic, psychographic, and behavioral segmentation.

Geographic Segmentation

Geographic segmentation divides the market into geographical units such as nations, states, regions, counties, cities, or neighborhoods. The company can operate in one or a few areas, or it can operate in all but pay attention to local variations. In that way it can tailor marketing programs to the needs and wants of local customer groups in trading areas, neighborhoods, even individual stores. In a growing trend called grassroots marketing, such activities concentrate on getting as close and personally relevant to individual customers as possible.

Much of Nike’s initial success comes from engaging target consumers through grassroots marketing efforts such as sponsorship of local school teams, expert-conducted clinics, and provision of shoes, clothing, and equipment. Citibank provides different mixes of banking services in its branches depending on neighborhood demographics. Curves, an exercise chain  aimed at middleaged women, places paper bags where consumers can place a form asking for more information about Curves in local businesses such as ice cream shops, pizza parlors, and other places where guilt can strike the weight-conscious shopper. Retail firms such as Starbucks, Costco, Trader Joe’s, and REI have all found great success emphasizing local marketing initiatives, but other types of firms have also jumped into action.

Analyzing Business Markets

Business organizations do not only sell; they also buy vast quantities of raw materials, manufactured components, plant and equipment, supplies, and business services. According to the Census Bureau, there are roughly 6 million businesses with paid employees in the United States alone. To create and capture value, sellers need to understand these organizations’ needs, resources, policies, and buying procedures.

Business-software giant Oracle became an industry leader by offering a whole range of products and services to satisfy customer needs for enterprise software. Known originally for its flagship database management systems, Oracle spent $30 billion in recent years to buy 56 companies, including $7.4 billion to buy Sun Microsystems, doubling the company’s revenue to $24 billion and sending its stock soaring in the process. To become a one-stop shop for all kinds of business customers, Oracle seeks to offer the widest ranges of products in the software industry. It now sells everything from server computers and data storage devices to operating systems, databases, and software for running accounting, sales, and supply-chain management. At the same time, Oracle has launched “Project Fusion” to unify its different applications, so customers can reap the benefits of consolidating many of their software needs with Oracle. Oracle’s market power has sometimes raised both criticism from customers and concerns from government regulators. At the same time, its many long-time customers speak to its track record of product innovation and customer satisfaction.

What Is Organizational Buying?

Frederick E. Webster Jr. and Yoram Wind define organizational buying as the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers

The Business Market versus the Consumer Market

The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance ; distribution ; and services.

More dollars and items change hands in sales to business buyers than to consumers. Consider the process of producing and selling a simple pair of shoes. Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who sell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also buys many other goods and services to support its operations.

Given the highly competitive nature of business-to-business markets, the biggest enemy to marketers here is commoditization. Commoditization eats away margins and weakens customer loyalty. It can be overcome only if target customers are convinced that meaningful differences exist in the marketplace, and that the unique benefits of the firm’s offerings are worth the added expense. Thus, a critical step in business-to-business marketing is to create and communicate relevant differentiation from competitors. Here is how Navistar has adjusted its marketing to reflect the economic crisis and a different customer mind-set.

Business marketers face many of the same challenges as consumer marketers. In particular, understanding their customers and what they value is of paramount importance to both. A survey of top business-to-business firms identified the following as challenges they faced

1.	Understanding deep customer needs in new ways;
2.	Identifying new opportunities for organic business growth;
3.	Improving value management techniques and tools;
4.	Calculating better marketing performance and accountability metrics;
5.	Competing and growing in global markets, particularly China;
6.	Countering the threat of product and service commoditization by bringing innovative offerings to market faster and moving to more competitive business models; and
7.	Convincing C level executives to embrace the marketing concept and support robust marketing programs.

Business marketers contrast sharply with consumer markets in some ways, however :

-	Fewer, larger buyers. The business marketer normally deals with far fewer, much larger buyers than the consumer marketer does, particularly in such industries as aircraft engines and defense weapons. The fortunes of Goodyear tires,Cummins engines, Delphi control systems, and other automotive part suppliers depends on getting big contracts from just a handful of major automakers.
-	Close supplier–customer relationship. Because of the smaller customer base and the importance and power of the larger customers, suppliers are frequently expected to customize their offerings to individual business customer needs. Through its Supplier Added Value Effort ($AVE) program, Pittsburgh-based PPG industries challenges its suppliers of maintenance, repair, and operating (MRO) goods and services to deliver on annual value-added/cost-savings proposals equaling at least 5 percent of their total annual sales to PPG. One preferred supplier submitted a suggestion to $AVE that reduced costs for a lighting project by $160,000 by negotiating discounted prices for new fixtures and fluorescent bulbs.7 Business buyers often select suppliers that also buy from them. A paper manufacturer might buy from a chemical company that buys a considerable amount of its paper.
-	Professional purchasing. Business goods are often purchased by trained purchasing agents, who must follow their organizations’ purchasing policies, constraints, and requirements. Many of the buying instruments—for example, requests for quotations, proposals, and purchase contracts — are not typically found in consumer buying. Professional buyers spend their careers learning how to buy better.Many belong to the Institute for Supply Management, which seeks to improve professional buyers’ effectiveness and status. This means business marketers must provide greater technical data about their product and its advantages over competitors’ products.
-	Multiple buying influences. More people typically influence business buying decisions. Buying committees consisting of technical experts and even senior management are common in the purchase of major goods. Business marketers need to send well-trained sales representatives and sales teams to deal with the well-trained buyers.
-	Multiple sales calls. A study by McGraw-Hill found that it took four to four and a half calls to close an average industrial sale. In the case of capital equipment sales for large projects, it may take many attempts to fund a project, and the sales cycle—between quoting a job and delivering the product—is often measured in years.
-	Derived demand. The demand for business goods is ultimately derived from the demand for consumer goods. For this reason, the business marketer must closely monitor the buying patterns of ultimate consumers. Pittsburgh-based Consol Energy’s coal business largely depends on orders from utilities and steel companies, which, in turn, depend on broader economic demand from consumers for electricity and steel-based products such as automobiles, machines, and appliances. Business buyers must also pay close attention to current and expected economic factors, such as the level of production, investment, and consumer spending and the interest rate. In a recession, they reduce their investment in plant, equipment, and inventories. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of the demand.
-	Inelastic demand. The total demand for many business goods and services is inelastic—that is, not much affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather falls, nor will they buy much less leather if the price rises unless they can find satisfactory substitutes. Demand is especially inelastic in the short run because producers cannot make quick changes in production methods. Demand is also inelastic for business goods that represent a small percentage of the item’s total cost, such as shoelaces.
-	Fluctuating demand. The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output. Economists refer to this as the acceleration effect. Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent rise in business demand for products in the next period; a 10 percent fall in consumer demand may cause a complete collapse in business demand.
-	Geographically concentrated buyers. For years, more than half of U.S. business buyers havebeen concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan. The geographical concentration of producers helps to reduce selling costs.At the same time, business marketers need to monitor regional shifts of certain industries.
-	Direct purchasing. Business buyers often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive such as mainframes or aircraft

Buying Situations

The business buyer faces many decisions in making a purchase. How many depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. Three types of buying situations are the straight rebuy, modified rebuy, and new task.

-	Straight rebuy. In a straight rebuy, the purchasing department reorders supplies such as office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to maintain product and service quality and often propose automatic reordering systems to save time. “Out-suppliers” attempt to offer something new or exploit dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their purchase share over time.
-	Modified rebuy. The buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides. The in-suppliers become nervous and want to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business.
-	New task. A new-task purchaser buys a product or service for the first time (an office building, a new security system). The greater the cost or risk, the larger the number of participants, and the greater their information gathering—the longer the time to a decision

The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. Over time, new-buy situations become straight rebuys and routine purchase behavior.

New-task buying is the marketer’s greatest opportunity and challenge. The process passes through several stages: awareness, interest, evaluation, trial, and adoption. Mass media can be most important during the initial awareness stage; salespeople often have their greatest impact at the interest stage; and technical sources can be most important during the evaluation stage. Online selling efforts may be useful at all stages.

In the new-task situation, the buyer must determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. Different participants influence each decision, and the order in which these decisions are made varies.

Because of the complicated selling required, many companies use a missionary sales force consisting of their most effective salespeople. The brand promise and the manufacturer’s brand name recognition will be important in establishing trust and the customer’s willingness to consider change. The marketer also tries to reach as many key participants as possible and provide helpful information and assistance.

Once a customer has been acquired, in-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys. Data storage leader EMC successfully acquired a series of computer software leaders to reposition the company to manage—and not just store—information, often by giving customers customized information

Customers considering dropping six or seven figures on one transaction for big-ticket goods and services want all the information they can get. One way to entice new buyers is to create a customer reference program in which satisfied existing customers act in concert with the company’s sales and marketing department by agreeing to serve as references. Technology companies such as HP, Lucent, and Unisys have all employed such programs.

Business marketers are also recognizing the importance of their brand and how they must execute well in a number of areas to gain marketplace success. Boeing, which makes everything from commercial airplanes to satellites, implemented the “One Company” brand strategy to unify all its different operations with a one-brand culture. The strategy was based in part on a triple helix representation: (1) enterprising spirit (why Boeing does what it does), (2) precision performance (how Boeing gets things done), and (3) defining the future (what Boeing achieves as a company). NetApp is another good example of the increased importance placed on branding in business-tobusiness marketing.

NetApp 

NetApp is a Fortune 1000 company providing data management and storage solutions to medium- and large-sized clients. Despite some marketplace success, the company found its branding efforts in disarray by 2007. Several variations of its name were in use, leading to a formal name change to NetApp in 2008. Branding consultants Landor also created a new identity, architecture, nomenclature, tone of voice, and tagline (“Go further, faster.”) for the brand and its new name. Messages emphasized NetApp’s superior technology, innovation, and customer-centric “get things done” culture. Some of the marketing efforts supporting the brand, however, still left some things to be desired. The Web sites were called “Frankensites” because they had been worked on and modified by so many developers over a 12-year period. Web site makeovers streamlined and organized the company’s presentation and made it easier to make changes and updates. The new Web site was estimated to increase sales leads from inquiries by fourfold. Investing heavily in marketing communications despite the recession, NetApp ran print and online ads and tapped into a number of social media outlets—communities and forums, bloggers, Facebook, Twitter, and YouTube.

Analyzing Consumer Markets

The aim of marketing is to meet and satisfy target customers’ needs and wants better than competitors. Marketers must have a thorough understanding of how consumers think, feel, and act and offer clear value to each and every target consumer.

LEGO of Billund, Denmark, may have been one of the first mass customized brands. Every child who has ever had a set of the most basic LEGO blocks has built his or her own unique and amazing creations, brick by plastic brick. When LEGO decided to become a lifestyle brand and launch theme parks; its own lines of clothes, watches, and video games; and products such as Clikits craft sets designed to attract more girls to the brand franchise, it neglected its core market of five- to nine-year-old boys. Plunging profits led to layoffs of almost half its employees as the firm streamlined its brand portfolio to emphasize its core businesses. To better coordinate new product activities, LEGO revamped its organizational structure into four functional groups managing eight key areas. One group was responsible for supporting customer communities and tapping into them for product ideas. LEGO also set up what was later renamed LEGO Design byME, which let customers design, share, and build their own custom LEGO products using LEGO’s freely downloadable Digital Designer 3.0 software. The creations that result can exist—and be shared with other enthusiasts solely online, or, if customers want to build them, the software tabulates the pieces required and sends an order to LEGO’s Enfield, Connecticut, warehouse. Customers can request step-by-step building guide instructions and even design their own box to store the pieces.

Successful marketing requires that companies fully connect with their customers. Adopting a holistic marketing orientation means understanding customers — gaining a 360-degree view of both their daily lives and the changes that occur during their lifetimes so the right products are always marketed to the right customers in the right way. This chapter explores individual consumer buying dynamics; the next chapter explores the buying dynamics of business buyers.

What Influences Consumer Behavior?

Consumer behavior is the study of how individuals, groups, and organizations select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and wants. Marketers must fully understand both the theory and reality of consumer behavior. This Table provides a snapshot profile of U.S. consumers

Cultural Factors

Culture, subculture, and social class are particularly important influences on consumer buying behavior. Culture is the fundamental determinant of a person’s wants and behavior. Through family and other key institutions, a child growing up in the United States is exposed to values such as.

Expenditures
Average U.S. outlays for goods and services in 2009
	$	%
Housing	$16,920	34.1%
Transportation	$8,758	17.6%
Food	$6,133	12.4%
Personal insurance and pensions	$5,336	10.7%
Healthcare	$2,853	5.7%
Entertainment	$2,698	5.4%
Apparel and services	$1,881	3.8%
Cash contributions	$1,821	3.7%
Education	$945	1.9%
Miscellaneous	$808	1.6%
Personal care products and services	$588	1.2%
Alcoholic beverages	$457	9%
Tobacco products and smoking supplies	$323	0.7%
Reading	$118	0.2%
Ownership
Percentage of households with at least one vehicle owned or leased		77.0%
Percentage of households that own homes		67%
Percentage of households that own their homes “free and clear”		23%
Time use on an average workday for employed persons ages 25–54 with children in 2008
Working and related activities	8.8 hours
Sleeping	7.6 hours
Leisure and sports	2.6 hours
Caring for others	1.3 hours
Eating and drinking	1.0 hours
Household activities	1.0 hours
Other	1.7 hours
Monthly users’ time spent in hours: Minutes per user aged 2+ years—Q1 2009
	# Of Americans	Average minutes per day spent
Watching TV in the home	285,574,000	153 minutes
Watching time-shifted TV	79,533,000	8 minutes
Using the Internet	163,110,000	29 minutes
Watching video on the Internet	131,102,000	3 minutes
Mobile subscribers watching video on a mobile phone	13,419,000	4 minutes

Sources: Bureau of Labor Statistics, Consumer Expenditure Survey, www.bls.gov/cex; AC Nielsen, A2 M2 Three Screen Report, 1st Quarter 2009, http://blog.nielsen.com/nielsenwire/wp-content/ uploads/2009/05/nielsen_threescreenreport_q109.pdf.

achievement and success, activity, efficiency and practicality, progress, material comfort, individualism, freedom, external comfort, humanitarianism, and youthfulness. A child growing up in another country might have a different view of self, relationship to others, and rituals. Marketers must closely attend to cultural values in every country to understand how to best market their existing products and find opportunities for new products.

Each culture consists of smaller subcultures that provide more specific identification and socialization for their members. Subcultures include nationalities, religions, racial groups, and geographic regions. When subcultures grow large and affluent enough, companies often design specialized marketing programs to serve them.

Virtually all human societies exhibit social stratification, most often in the form of social classes, relatively homogeneous and enduring divisions in a society, hierarchically ordered and with members who share similar values, interests, and behavior. One classic depiction of social classes in the United States defined seven ascending levels: (1) lower lowers, (2) upper lowers, (3) working class, (4) middle class, (5) upper middles, (6) lower uppers, and (7) upper uppers.

Social class members show distinct product and brand preferences in many areas, including clothing, home furnishings, leisure activities, and automobiles. They also differ in media preferences; upper-class consumers often prefer magazines and books, and lower-class consumers often prefer television. Even within a category such as TV, upper-class consumers may show greater preference for news and drama, whereas lower-class consumers may lean toward reality shows and sports. There are also language differences—advertising copy and dialogue must ring true to the targeted social class.