Chapter 5

Chapter 5
Target Markets: Segmentation

and Evaluation
Objectives
• Learn what a market is
• Understand differences among targeting strategies
• Become familiar with segmentation variables
• Know what segment profiles are and how they
are used
• Evaluate market segments
• Identify factors that influence selection of specific
market segments
• Understand positioning
• Become familiar with sales forecasting methods
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What are Markets
• Market:
Market a group of people who, as individuals or
organizations, have needs for products in a product
category and have the ability, willingness, and
authority to purchase such products.
• Market Requirements: four conditions for a

market (group of people) to exist:
Need/desire for a particular product
Have ability to buy it
Willing to use buying power
Have authority to buy it
Target Market Selection Process
(Five-step process)

Step 1: Targeting Strategy
• The targeting strategy to be used depends on:
– target market characteristics
– product attributes
– organization’s objectives and resources
There are three targeting strategies:

1. Undifferentiated Strategy
2. Concentrated strategy
3. Differentiated strategy
• 1.
Step 1: Targeting Strategy:
(1) Undifferentiated strategy
• The undifferentiated targeting strategy is one in which an
organization (1) defines an entire market for a particular
product as its target market, (2) designs a single marketing
mix, and (3) directs it at the entire market.
• The underlying assumption is that the needs of the target

market for specific product are very similar; thus the business
can satisfy most customers with a single marketing mix.
• There are two requirements for effective use of this strategy:

a) The market must be homogeneous (i.e. a large proportion of
customers have similar needs for the product).
b) The organization must be able to develop and maintain a
single marketing mix that satisfies customers’ needs.
(1) Undifferentiated strategy (cont.)

(2) Concentrated strategy (through market segmentation)
When the total market is heterogeneous (a market with diverse

product needs), market segmentation must be used.
Market segmentation: the process of dividing the total

market into groups or segments that have relatively
similar product needs to design a marketing mix that
matches those needs in a selected market segment.
Market segment: Individuals, groups, or organizations

sharing one or more similar characteristics that cause
them to have similar product needs.
(2) Concentrated strategy (through market segmentation) (cont.)
Conditions For Successful Market Segmentation:

• Customer product needs are heterogeneous
• Segments must be identifiable and divisible
• Total market should be divided so that segments
can be compared on sales potential, costs, and
profits
• At least one segment has profit potential to justify a
special marketing mix for that segment
• Segment must be reachable with a particular
marketing mix
(2) Concentrated strategy (through market segmentation) (cont.)
Concentrated targeting strategy: a strategy in which an

organization targets a single market segment using one
marketing mix (specialize in a market segment).
Advantages:
(1) Specialization helps the firm analyze and understand
market needs carefully and then focus all marketing efforts to
satisfy those needs.
(2) A firm with limited resources can compete with much
larger firms (due to specialization in the market).
Disadvantages:
(1) If market demand for the product declines, the
company’s financial strength also declines.
(2) Success in one segment may preclude (restrict) entry
into another segment.

(2) Concentrated strategy (through market segmentation)

(3) Differentiated strategy (through market segmentation)
Differentiated targeting strategy: A strategy in

which an organization targets two or more segments by
developing a marketing mix for each segment.
Advantages:
1) A firm can increase its sales by serving more than one segment.
2) Sales to additional market segments may absorb excess
production capacity.
Disadvantages:
1) Higher production cost (i.e. more production processes,
materials, skills)
2) Higher marketing cost (i.e. several promotion plans, distribution
methods)
(3) Differentiated strategy (through market segmentation) (cont.)

Step 2: Determine Which
Segmentation Variables to Use
Segmentation Variable: characteristics of individuals,
groups, or organizations used to divide a market into
segments
Important criteria:
– A segmentation variable should be related to customers’
needs for, uses of, or behavior toward the product.
– The variable must be measurable.
Notes:
– The company’s resources and capabilities determine the
number and size of segment variables used.
– Type of product and degree of variation in consumer
needs also affect the choice of segmentation variables.
– Choice of segmenting variables is a critical step (i.e. it
affects chances for success in the market).
Variables for Segmenting
Consumer Markets

(A) Demographic characteristics
Marketers rely on these demographic characteristics because
they are often closely linked to customers’ needs and purchasing
behavior and can be readily measured.
Examples:
– Marketers need to be aware of age distribution and how that
distribution is changing (i.e. children often have greater influence over
spending patterns)
– Gender is commonly used to segment markets (i.e. markets for
clothing, soft drinks, nonprescription medications, toiletries,
magazines, perfumes).
– Marketers also use race and ethnicity for segmenting markets (i.e.
products as food, music, clothing, and cosmetics, banking).
– Income affects people’s ability to buy and their desires for certain
lifestyles.
– Marital status and family life cycle are also used by marketers for
products like housing, holiday packages, appliances, food and
beverages, automobiles, and recreational equipments.
(B) Geographic variables
Markets may be divided into geographic regions
because customer product needs may differ from one
region to another.
Notes:
– Marketers may focus efforts on cities of a certain size or
market density, use geodemographics, or micromarketing.
– Market density: refers to the number of customers within

a unit of land area, such as a square mile.
– Geodemographic segmentation can also be used (using
both demographic and geographic variables to segment
markets)
– Micromarketing focuses precise marketing efforts on
very small geographic markets (such as community or
Copyrightneighborhood markets).
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(C) Psychographic variables
Psychographic variables can be used by themselves to segment
a market or combined with other types of segmentation
variables. They are three types:
1. Personality characteristics: personality traits that can be
used when a product resembles many competing products and
consumers’ needs are not greatly affected by other
segmentation variables (i.e. Marketers select personality
characteristics that many people view positively).
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2. Motives: consumers’ reasons for making a purchase. (i.e.
personal appearance, affiliation, status, safety, and health are
examples of motives affecting the types of products purchased
and the choice of stores in which they are bought).
3. Lifestyle: a way of living. That is, grouping individuals according
to their activities, interests, and opinions. (i.e. how people spend
their time, importance of things in their surroundings, beliefs
about themselves and broad issues).
(D) Behaviouristic variables
Firms can divide a market according consumer
behavior involving some aspect of product use (i.e.
how consumers use the products). One common type
of this is benefit segmentation
Benefit segmentation: is the division of a market

according to benefits that consumers want from the
product.
The effectiveness of benefit segmentation depends on three

conditions:
1. The benefits sought must be identifiable.
2. The market must be divided into recognizable segments.
3. One or more of the resulting segments must be accessible to the
firm’s marketing efforts.
Variables for Segmenting:
Business Markets
1. Geographic Location. (i.e. climate, terrain).
2. Type of Organization. (i.e. chemical firms,
… etc.)
3. Customer Size. (i.e. big firms with large
buying orders may require different
procedures).
4. Product Use. How a firm uses products may
affect the types and amounts of products purchased
and the manner in which they are purchased.

Step 3: Develop Market
Segment Profiles
• Market segment profile describes:
– similarities among potential customers within a segment
– differences among people and organizations in different
market segments.
• A profile can deal with demographic characteristics,
geographic factors, product benefits sought, lifestyles,
brand preferences, or usage rates.
• Market segment profiles help a marketers understand

how to use his capabilities to serve potential
customers.
Step 4: Evaluate Relevant
Market Segments
The following techniques can be used:
1. Sales Estimates
• Market potential
• Company sales potential (breakdown and buildup)
2. Competitive Assessment
3. Cost Estimates
© Microsoft

1. Sales Estimates
• potential sales for a segment (either for total market or a specific company)
can be measured along several dimensions, including:
– product (one item or entire product line)
– geographic area
– Time (S-R of L-R ), and
– level of competition.
• Market potential: is the total amount of a product for all firms in an industry
that customers will purchase within a specified period at a specific level of
industry-wide marketing activity. (It can be stated in terms of dollars or units)
• Company sales potential: is the maximum percentage of market potential

that an individual firm within an industry can expect to obtain for a specific
product. It can be influenced by:
– size of the market sales potential
– the magnitude of industry-wide marketing activities
– the intensity and effectiveness of the firm’s marketing activities relative
to those of competitors.

Market Potential
Company
Market
15% Share
Total
Market
Rest of Potential
Industry
85%

approaches for measuring
company sales potential:
There are two approaches: breakdown and buildup
– Breakdown: measures company sales potential based on a
general economic forecast for a specific time period and the
sales potential derived from it. The marketing manager starts
with broad comprehensive forecasts of general economic
activity, estimates market potential, and then estimates the
company’s sales potential.
– Buildup: measures company sales potential by estimating how
much of a product a potential buyer in a specific geographic
area will purchase in a given time period, multiplying the
estimate by the total number of potential buyers in that area,
and adding the totals for each area to calculate sales potential.

2. Competitive Assessment
• Sales estimates may be misleading without
competitive information.
• Several questions must be asked about competitors
in the segments being considered: for example,
– How many competitors exist?
– What are their strengths and weaknesses?
– Do several competitors have major market shares and
together dominate the segment?
– Can our company create a marketing mix to compete
effectively against competitors’ marketing mixes?
– Is it likely that new competitors will enter this segment?
– If so, how will they affect our firm’s ability to compete
successfully?
3. Cost Estimates
• Meeting the needs of a target segment can

be expensive.
• If costs are too high, marketers may treat

the segment as being inaccessible.

Step 5: Select Specific
Target Markets
• The marketer must consider whether the
organization has the followings to enter and
compete effectively in the selected segment/s:
 required financial resources
 managerial skills
 employee expertise
 facilities
• The marketer must also consider long-term
growth of the market segment/s.

Developing Sales Forecast
• Sales forecast: The amount of a product a
company expects to sell during a specific period at a
specified level of marketing activities.
• Sales forecasting techniques fall into five categories:

1. Executive Judgment
2. Surveys
3. Time Series Analysis
4. Regression Analysis
5. Market Tests

1. Executive Judgment
A sales forecasting method based on the

intuition of one or more executives.
Characteristics:
 It is simple convenient and inexpensive.
 It works reasonably well when product
demand is relatively stable and the forecaster
has years of market-related experience.
 But it is unscientific.
2. Surveys: four types:
1. Customer Forecasting survey
2. Sales Force Forecasting survey
3. Expert Forecasting survey
4. The Delphi technique
1. Customer Forecasting survey: survey of

customers regarding how much they intend to buy
during a specific period
Characteristics:
 Customers must be willing and able to participate
 buying intentions (not actual purchases) are usually
inaccurate.
 Surveys consume much time and money.
2. Surveys (continued)
2. Sales Force Forecasting survey: estimates by a firm’s
salespeople of their anticipated sales in their territories for a
specified period.
Characteristics
 Salespeople are closer to customers, on a daily basis, than other
company personnel and, therefore, should know more about
customers’ future product needs.
 Forecasts can be prepared for single territories, divisions consisting
of several territories, regions made up of multiple divisions, or the
total geographic market.
 For the survey to be effective, salespeople as a group must be
accurate, or at least consistent estimators.
 Assuming that the survey is well administered, the sales force can
help establish reasonable sales goals.
 Salespeople should be assured that their forecasts are not used to
set their sales quotas.
2. Surveys (continued)
3. Expert Forecasting survey: is a sales forecast
prepared by professionals such as economists,
management consultants, advertising executives,
college professors, or other persons outside the firm
with solid experience in a specific market.
4. The Delphi technique: is a procedure in which experts

create initial forecasts, submit them to the company for
averaging, and have the results returned to them so
that they can make individual refined forecasts. The
ultimate goal is to develop a highly accurate sales
forecast.
3. Time Series Analysis
Time series analysis – historical sales data used

to discover patterns in sales over time. It involves:
1. Trend analysis – aggregate sales data over many years
to determine trends in annual sales
2. Cycle analysis – analysis over 3-5 years to ascertain
whether sales fluctuate in a consistent manner
3. Seasonal analysis – daily, weekly, or monthly sales
figure to evaluate sales influences of seasonal factors
4. Random factor analysis – attributing erratic sales
variations to random, nonrecurrent events.

4. Regression Analysis
Regression Analysis: predicting sales based on finding
a relationship between past sales and one or more
independent variables, such as population or income
Characteristics:
 Simple regression analysis uses one independent
variable, whereas multiple regression analysis includes
two or more independent variables.
 These methods are useful only when a precise
relationship can be established with historical data.
 Therefore, they are not useful if there is no historical data
(i.e. can not predict sales for new products).

5. Market Test
Market Test: Making a product available to buyers in
one or more test areas and measuring purchases
and consumer responses to marketing efforts.
Characteristics:
 Market tests provide information about consumers’
actual rather than intended purchases.
 Effective in estimating sales of new products or of
existing products in new geographic areas.
 The chief disadvantages of market tests are that
they are time-consuming and expensive.

Using Multiple
Forecasting Methods
most marketers use several techniques to
attempt to validate the results from one
technique. Other reasons include:
– Diverse product lines
– Product sold to different market segments
– Variation in length of needed forecasts

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Chapter 5

Target Markets: Segmentation

• Market Requirements: four conditions for a

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 4

There are three targeting strategies:

• The underlying assumption is that the needs of the target

• There are two requirements for effective use of this strategy:

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 7

When the total market is heterogeneous (a market with diverse

Market segmentation: the process of dividing the total

Market segment: Individuals, groups, or organizations

Conditions For Successful Market Segmentation:

Concentrated targeting strategy: a strategy in which an

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 10

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 11

Differentiated targeting strategy: A strategy in

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 13

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 15

– Market density: refers to the number of customers within

Benefit segmentation: is the division of a market

The effectiveness of benefit segmentation depends on three

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 20

• Market segment profiles help a marketers understand

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 22

• Company sales potential: is the maximum percentage of market potential

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 24

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 25

• Meeting the needs of a target segment can

• If costs are too high, marketers may treat

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 27

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 28

• Sales forecasting techniques fall into five categories:

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 29

A sales forecasting method based on the

1. Customer Forecasting survey: survey of

4. The Delphi technique: is a procedure in which experts

Time series analysis – historical sales data used

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 34

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 35

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 36

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 37

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