5. MARKET SEGMENTATION, TARGETING, POSITIONING & DIFFERENTIATION
5.1. M ARKET SEGMENTATION
Segmentation is the first step, any company aiming to find out which consumers to serve, should take. Market segmentation is process of dividing consumers, who are in-market, into groups based on their characteristics, behaviors or needs. (McDonald &
Dunbar, 2012) While the consumers within the segment developed based on the segmentation process need to be homogenous, the developed segments need to be heterogenous. (Koudelka, 2018) In other words, the segments need to reflect clear differences between groups of in-market consumers.
The market segmentation process can be divided into following four steps:
1. Market definition
2. Selection of segmentation criteria 3. Segments identification
4. Further segments development (Koudelka, 2018)
Prior to moving to description of segmentation steps in greater detail, it is important to also mention requirements of effective segmentation:
• Measurable – segment’s characteristics such as size or purchasing power can be measured
• Accessible – it is possible to efficiently reach and serve the segments
• Substantial – the segments are profitable enough to be served
• Differentiable – the segments differ in their response to marketing efforts
• Actionable – ability of company to effectively serve all segments they target (Kotler, Armstrong, Harris, & He, 2020)
All above mentioned requirements will ensure that segments developed based on the segmentation process will be relevant and actionable.
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5. 1. 1. Market definition
Definition of the market, which will be segmented is the first and crucial step of the segmentation process, as it influences all the following steps of the process and the results of the segmentation. (Koudelka, 2018) Market definition usually includes specification of product category and specification geographical location which company intends to serve. However, the marked can by further defined by type of consumer, type of consumer need and others. (Koudelka, Spotřebitelé a marketing, 2018)
5. 1. 2. Segmentation criteria
Second step of the market segmentation process is identification of segmentation criteria. There are three groups of segmentation criteria:
• Defining criteria
• Descriptive criteria
• Criteria examining responses to marketing tools (Koudelka, 2005) Defining criteria
These criteria are the most important, for the market segmentation, as they provide company with information about consumer’s relationship to the product. Therefore, they can be regarded as dependent variables. (Koudelka, 2018) This group of criteria can be further divided into two sub-groups of causal criteria and use criteria.
Causal criteria
These criteria include reasons for use, expected value, perceived value and attitudes towards product category and brands available within the category. (Koudelka, 2005) Resulting segments should be homogenous groups, from perspective of casual segmentation variables, but every group should significantly differ from other groups formed.
Use criteria
Enables firm to examine how consumers differ in uses of the product or brand and subsequently form the segments based on the examination. User status (user or non-user), frequency of use, product or brand loyalty are examples of use criteria.
(Koudelka, 2005) Descriptive criteria
This group of criteria enables company to characterize the costumers and their consumer behavior. In other words, descriptive criteria can be regarded as explanatory variables. Descriptive criteria can be further broken down to traditional descriptive criteria and nontraditional descriptive criteria. As demonstrated in table below.
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Descriptive segmentation criteria Traditional crieria Non-traditional criteria Demografical criteria Social class
Etnographic criteria Lifestyle Physiographic criteria Personality Geographical criteria
Figure 9 - Overview of descriptive segmentation criteria, Source: (Koudelka, 2005, p. 60)
Criteria examining responses to marketing mix
Third group of segmentation criteria are criteria that enables the firm to examine consumers responses to marketing mix. Concretely these criteria provide information on how consumers respond to price incentives, sales promotion, advertising messages and how sensitive they are in terms of distribution channels. (Koudelka, 2005)
5. 1. 3. Segments identification & formulation
Third step of the process is the segments identification, which follows the identification of criteria that differentiate consumers. Segments are identified and formed based most relevant criteria given the market definition & characterization, consumer behavior and consumer's relationship to the product. Various statistical techniques are used for segments identification & formulation, such as sequencing or cluster analysis. (Koudelka, 2005)
5. 1. 4. Further segments development
Within the final step of the segmentation, the segments developed in the third stage of the process are further extended by additional information. Consumer’s persona can be created based on variables determining the segment. Further segment development creates solid foundation for marketing strategy and enables the marketing team to make informed choices. (Koudelka, 2005)
5. 1. 5. Concepts of market segmentation
Based on the market segmentation process steps, we can conclude it is very diverse process. There are various concepts and methods, which can apply to the segmentation process, which are summarized in scheme below.
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Figure 10 - Overview of approaches to segmentation, Source: (Koudelka, Segmentujeme spotřební trhy, 2005, p. 109)
Firstly, there are intuitive approaches to market segmentations, such as segmentation based on impression, experience and experiment. Segmentation based on impression of the market or based on experience might take place subconsciously. Segmentation based on experience can prove to be relevant and accurate if it is based on long-term experience with given market. However, such segmentation is limited, as it is based solely on factors which were encountered within the experience. (Koudelka, Segmentujeme spotřební trhy, 2005)
Secondly, there are systematic approaches to the segmentation process. Unlike intuitive segmentation, systematic approached to segmentation examine possible sources of differences between consumers in systematic manner, not just based on the experience, experiment or impression.
Inductive and deductive segmentation are two types of systematic segmentation approach. Deductive segmentation is based on segmentation of the market conducted by other entities, for example competitors. It provides information on segmentation variables used and segments further developed by the competition. In case company comes to conclusion additional segmentation variables, other than used in used in segmentation developed by competitor, should be also considered, they proceed with inductive segmentation. This type of segmentation will enable them to set own segmentation variables and influence number of segments formed. (Koudelka, 2018)
5. 2. Targeting, differentiation & positioning
Targeting, differentiation and positing are three important components of a marketing strategy that should follow segmentation. While targeting, provides further information on which consumers company should serve, differentiation and positioning provide enables company to formulate their value proposition for current and potential customers.
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5. 2. 1. Targeting
While market segmentation enables company to divide the market into homogenous groups of consumers, which are significantly different from each other, targeting enables company to make informed decision on which segment(s) to focus on, enter and serve. (Kotler, Armstrong, Harris, & He, 2020)
When company is making decision which segments to target, it should consider their goals and resources along with overall segment attractiveness. Attractiveness of a segment is determined by its size, profitability, possible economies of scale and level of risk associated with given segment. (Kotler & Keller, 2016) Company can generally arrive to one of five following conclusions:
• Single segment concentration
Single segment concentration enables the company to gain and possess profound segment knowledge and strong market presence. In case firm becomes a market leader single segment concentration also brings high returns.
Nevertheless, single segment concentration brings certain risks, such as new competitors in segment or overall decline of the segment.
• Selective specialization
Oppose to single segment concentration, company decides to serve more than one segment. Biggest advantage of selective specialization is the risk diversification.
• Product specialization
This strategy lies in successfully serving number of segments with single product. The product can be differentiated to suit needs of each segment. New technologies, which would make the product obsolete, pose a risk to product specialization strategy.
• Market specialization
Can be achieved by building strong reputation for assortment of products in particular consumer group, which subsequently enables firm to sell additional products and services to served consumer group. Risk of market strategy is increasing dependency on single consumer group.
• Full market coverage
Company decides to serve whole market. This targeting strategy is suitable for large firms who have the capacity and resources to serve entire market.
Example of such a firm is Coca Cola. (Kotler & Keller, 2016)
5. 2. 2. Differentiation
Once company divided market into segments and made decision on which segments to serve, positioning and differentiation needs to follow to create lasting sustainable competitive advantage.
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„…. a marketing strategy designed to distinguish a company's products or services from the competition. Successful product differentiation involves identifying and communicating the unique qualities of a product or company while highlighting the distinct differences between that product or company and its competitors.” (Kopp, 2021)
In other words, differentiation is identification of product characteristics, that differentiate the product or company from rest of the market offering. Differentiation provides firm value proposition, which should highlight product features or characteristics, that consumers find attractive. (Investopedia, 2020)
Any feature can differentiate product or service. Common differentiation strategies include price differentiation, performance & reliability differentiation and location &
service differentiation. (Kopp, 2021) Price differentiation
There are two types of price differentiation. Lowest cost price differentiation strategy attracts frugal buyer who are highly cost-conscious. Or firm can decide to charge premium price, implying superiority of their product and its high quality.
Performance & reliability differentiation
This differentiation strategy is based on durability and performance of the promoted product. However also service businesses can apply this differentiation strategy, for example they can emphasize timely delivery of their services.
Location & service differentiation
Such differentiation strategy is highly suitable for small local business as it enables them to highlight and emphasize the location convenience and personal approach.
Above mentioned strategies represent only few examples of differentiation, as already mentioned, any unique feature of the product or service can differentiate the firm from the competition. But the promoted deference should be important, distinctive, superior, communicable, affordable, profitable and difficult to imitate. (Kotler, Armstrong, Harris, & He, 2020) Differentiation is highly important as it provides firms with competitive advantage, which enables small businesses to compete with larger firms which benefit from economies of scale. (Kopp, 2021)
5. 2. 3. Positioning
Once the unique value proposition was of firm’s product or service was identified, next step is positioning of its offering. Positioning is:
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„…act of designing the company’s market offering and image to occupy a distinctive place in the minds of the target market. “ (Kotler & Keller, 2016, p. 359)
In short, positioning is position of the product/brand/service that it holds in consumer’s minds. (Kotler, Armstrong, Harris, & He, 2020) Tools, which can be used for development of positioning strategy are positioning maps and positioning statement. Positioning maps provide visualization of position of firm’s the product/brand/service that it holds in consumer’s minds compare to competition.
Positioning statement specifies which segment and need the firm aims to target and which difference of the brand wants to be recognized for. (Kotler, Armstrong, Harris,
& He, 2020)
Biggest challenge of positioning usually is its implementation. (Kotler, Armstrong, Harris, & He, 2020; Kotler, Armstrong, Harris, & He, 2020; Kotler, Armstrong, Harris,
& He, 2020) While formulation of positioning strategy does not pose a challenge to company, implementation does. Because for the positioning strategy to be successful, firm firstly must deliver on the position they wish to be occupy in consumers’ minds.
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