A Guide on How Marketing Gurus Target their Customers

Segmentation, Targeting and Positioning is the second element of creating a Business Development Strategy. STP comes directly after Business Analysis to acknowledge the Vision, Mission, Customer Profile, Financial Statement and Management Style of the target Business.

Market Segmentation is the process of breaking the market into more strategically manageable parts that can be targeted and which needs can be satisfied more precisely.

Once the company has identified the Market Segments and the Needs of each Segment, it must decide how many and which one to target.

Once the company has identified the Market Segments and the Needs of each Segment, it must decide how many and which one to target. Not all Segmentation Schemes are useful, a Marketer should wisely combine several variables in an effort to identify smaller, manageable, better-defined Market Segments. This has led Market Researchers to advocate Needs-Based Marketing which is proposed in the seven-step approach.

To be useful, Market Segments must rate favorably on five key criteria:

1. Measurable: the Size, Purchasing Power and Characteristics of the Segments can be measured.

2. Substantial: the Segments are Large - or have a high Growth Potential, and Profitable enough to serve.

3. Accessible: the Segments can effectively reached and served.

4. Differentiable: the Segments are distinguishable and respond differently to different marketing-mix elements and programs.

5. Actionable: different Marketing Messages and Campaignes can be designed efficiently for attracting and serving the Segment.

In evaluating different Market Segments, a Marketer should rely on three key factors:

1. Market Size and Potential Growth: An investor often asks a question like "How big is your Target Market?" to be able to identify whether the Rate of Return is worth investing. To be able to determine Market Size, companies usually refer to:

• Total Available Market: TAM refers to the combined revenues (or unit sales) of industry leading companies.
• Served Available Market: SAM refers to the percentage of TAM that a company providing a specific solution can serve.
• Served Obtainable Market: SOM refers to Share of Market obtainable by a company serving a percentage of SAM.

2. Segment Structural Attractiveness: See Michael Porter's Five-Force Analysis.

3. Alignment with Corporate Goals: A company must identify whether investing in the Segment aligns with the company's Goals. Some attractive Segments may not mesh with company's long-run objectives, or the company may lack one or more competencies to offer competitive advantage.

Michael Porter has identified five forces that determine the intrinsic Structural Attractiveness of a Market Segment:

1. Industry Competitors: A Segment is unattractive when there is an aggressive or strong competitors, stable or declining or if competitors have high shares of the segment. Like conditions will usually lead to Price Wars, Advertising Battles, New-Product Introduction and will make it expensive to compete.

2. Potential Entrants: The most attractive Segment is the one at which Entry barriers are High and Exit barriers are Low. Few new companies can enter the industry, and poorly performing companies can exit easily.

3. Substitutes Products: Substitutes place a limit on prices and on profits. If Technical Advances or Competition increases in these substitute industries, prices and profits are likely to fall. Prices usually fall and profit margin decrease usually with increased supply and less demand, since Customers will always have similar products and the switching costs to another competitor will be low.

4. Customer's Bargaining Power: A Segment is unattractive if Customers posses a strong or growing bargaining power. Customers' Bargaining Power grows with an undifferentiated product, a high price or when customer's switching costs to another competitor are efficiently low. For a company to protect itself, the company should develop superior offers that customers have no choice.

5. Supplier's Bargaining Power: A Segment is unattractive if Suppliers are able to raise Prices or reduce Quantity supplied. Suppliers tend to be powerful when there are few Substitutes, supplied product is an important input and when costs of switching suppliers are high. A company should protect itself by building win-win relationships with suppliers, or use multiply supply sources.

Companies usually have a continuum of four main levels of Segmentation that can guide their Target Market Decisions. At one end is a Mass Market of essentially one Segment (Full-Market Coverage). At the other end is the Customerized Segments or Concentrated Marketing of Individuals. Most companies operate on the gray-levels of the range:

1. Multiple-Segment Specialization: With Selective Specialization, companies tend to select a subset of all possible Segments, each of Objective Attractiveness. The Multi-Segment Strategy also diversifies a company's risk and sources of revenue. A company can achieve some sort of Synergy between Segments by either of:

• Product Specialization: Companies sell a certain Product to several different Market Segments.
• Market Specialization: Companies concentrate on serving different needs of a certain Market Segment. A company gains a strong reputation among this Customer Segment and becomes a channel for additional Products to be used by this Segments. However, companies risk Price Cuts or Shrinking in Size of their Segments.

2. Single-Segment Concentration: With Single-Segment Concentration, a company markets to only one, single Segment of which the company can achieve the highest Profitability. Through Concentrated Marketing, companies have the advantage of gaining deep knowledge of the Segment's Needs and achieves strong Market Presence with a Competitive Advantage.

Niche Segments are more narrowly defined group seeking a distinctive mix of benefits. Niche Marketers tend to understand their Customers' Needs so well that Customers are willing to pay premium Prices.