5.3 The STP Process – Steps 3 and 4
Selecting Target Markets and Target-Market Strategies
Now that the population is divided into segments, we have an important decision to make. Which of these segments should we target? Since an organization has limited resources, a very strategic decision needs to be made. We need to find a segment(s) that we can satisfy, compete in, and still be profitable. If the wrong segment(s) are chosen, it can doom any initiatives the organization undertakes. Selecting the correct market segment to target is vital.
An attractive market has the following characteristics:
- It is sizeable (large) enough to be profitable given your operating cost. Only a tiny fraction of the consumers in China can afford to buy cars. However, because the country’s population is so large (nearly 1.5 billion people), more cars are sold in China than in Europe (and in the United States, depending on the month). Three billion people in the world own cell phones. But that still leaves three billion who don’t (Corbett, 2008).
- It is growing. Think of this in terms of potential. The middle class of India is growing rapidly, making it a very attractive market for consumer products companies. People under thirty make up the majority of the Indian population, fueling the demand for “Bollywood” (Indian-made) films.
- It is not already swamped by competitors, or you have found a way to stand out in a crowd. IBM used to make PCs. However, after the marketplace became crowded with competitors, IBM sold the product line to a Chinese company called Lenovo.
- Either it is accessible or you can find a way to reach it. Accessibility, or the lack of it, could include geographic accessibility, political and legal barriers, technological barriers, or social barriers. For example, to overcome geographic barriers, the consumer products company Unilever hires women in third-world countries to distribute the company’s products to rural consumers who lack access to stores.
- The company has the resources to compete in it. You might have a great idea to compete in the wind-power market. However, it is a business that is capital intensive. What this means is that you will either need a lot of money or must be able to raise it. You might also have to compete with the likes of T. Boone Pickens, an oil tycoon who is attempting to develop and profit from the wind-power market. Does your organization have the resources to do this? Will it allow for profitable returns?
- To make this determination, three things are typically considered:
- market potential: the size of the target market for all sellers
- sales potential: if current market shares are used, how much of the market potential would belong to our organization?
- sales forecast: given our anticipated strategy, what share of the market can we reasonably expect to achieve? Note that the sales forecast can be lower than the sales potential especially if it is a new product / brand on the market; it can be the same as the sales potential; and it can be larger than the sales potential if the organization intends to invest in an aggressive strategy for this segment.
- To make this determination, three things are typically considered:
- It “fits in” with your firm’s mission and objectives. Consider TerraCycle, which has made its mark by selling organic products in recycled packages. Fertilizer made from worm excrement and sold in discarded plastic beverage bottles is just one of its products. It wouldn’t be a good idea for TerraCycle to open up a polluting, coal-fired power plant, no matter how profitable the market for the service might be.
Target-Market Strategies: Choosing the Number of Markets to Target
Henry Ford proved that mass marketing can work—at least for a while. Mass marketing is also efficient because you don’t have to tailor any part of the offering for different groups of consumers, which is more work and costs more money. The problem is that buyers are not all alike. If a competitor comes along and offers these groups a product (or products) that better meet their needs, you will lose business.
Multisegment Marketing, also known as Differentiated Marketing
Most firms tailor their offerings in one way or another to meet the needs of different segments of customers. Because these organizations don’t have all their eggs in one basket, they are less vulnerable to competition. Marriott International is an example of a company that operates in multiple market segments. The company has different types of facilities designed to meet the needs of different market segments. Marriott has invested in unique brands so consumers don’t confuse the brand and the brand is not diluted. Some of the Marriott brands and their target markets are as follows:
- Marriott Courtyard. Targeted at over-the-road travelers.
- Ritz-Carlton Hotels. Targeted at luxury travelers.
- Marriott Conference Centers. Targeted at businesses hosting small- and midsized meetings.
- Marriott ExecuStay. Targeted at executives needing month-long accommodations.
- Marriott Vacation Clubs. Targeted at travelers seeking to buy timeshares.
A multisegment marketing strategy can allow firms to respond to demographic changes and other trends in markets. For example, the growing number of people too old to travel have the option of moving into one of Marriott’s “Senior Living Services” facilities, which cater to retirees who need certain types of care. A multisegment strategy can also help companies weather an economic downturn by allowing customers to trade up or down among brands and products. Suppose you take a pay cut and can’t afford to stay at Marriott’s Ritz-Carlton hotels anymore. A room at a JW Marriott—the most luxurious of the Marriott-brand hotels but cheaper than the Ritz—is available to you. A multisegment strategy can also help companies deal with the product life cycle issues. If one brand or product is “dying out,” the company has others to compete.
Concentrated Marketing
Some firms—especially smaller ones with limited resources—engage in concentrated marketing. Concentrated marketing involves targeting a very select group of customers. Concentrated marketing can be a risky strategy because companies really do have all their eggs in one basket. The auto parts industry is an example. Traditionally, many North American auto parts makers have supplied parts exclusively to auto manufacturers. But when General Motors, Ford, Chrysler, and other auto companies experienced a slump in sales following the recession that began in 2008, the auto parts makers found themselves in trouble. Many of them began trying to make and sell parts for wind turbines, aerospace tools, solar panels, and construction equipment (Simon, 2009).
Niche marketing involves targeting an even more select group of consumers. When engaging in niche marketing, a company’s goal is to be a big fish in a small pond instead of a small fish in a big pond1. Some examples of companies operating in niche markets include those shown in Table 5.5 “Companies That Operate in Niche Markets”.
Table 5.3: Companies That Operate in Niche Markets
| Company | Niche | Market Share (%) |
|---|---|---|
| Hohner | Harmonicas | 85 |
| Tetra | Tropical fish food | 80 |
| Swarovski | Crystal jewels | 65 |
| Uwatec | Snorkeling equipment | 60 |
| St. Jude Medical Center | Artificial heart valves | 60 |
Source: José María Manzanedo, “Market Segmentation Strategies. How to Maximize Opportunities on the Potential Market,” February 20, 2005, (accessed December 1, 2009).
Microtargeting, or narrowcasting, is a new effort to isolate markets and target them. It was originally used to segment voters during elections. Microtargeting involves gathering all kinds of data available on people—everything from their tax and phone records to the catalogs they receive. One company that compiles information such as this is Acxiom. For a fee, Acxiom can provide you with a list of Hispanic consumers who own two pets, have caller ID, drive a sedan, buy certain personal care products, subscribe to certain television cable channels, read specified magazines, and have income and education levels within a given range (Schiffman & Kanuk, 2010). Clearly, microtargeting has ethical implications and privacy issues.
One-to-One Marketing
One-to-one marketing is an idea proposed by Don Peppers and Martha Rogers in their 1994 book The One to One Future. The book described what life would be like after mass marketing. We would all be able to get exactly what we want from sellers, and our relationships with them would be collaborative, rather than adversarial. Are we there yet? Not quite, but it does seem to be the direction the trend toward highly targeted marketing is leading.
Steps in One-to-One Marketing
- Establish short-term measures to evaluate your efforts. Determine how you will measure your effort. Will you use higher customer satisfaction ratings, increased revenues earned per customer, number of products sold to customers, transaction costs, or another measure?
- Identify your customers. Gather all the information you can about your current customers, including their buying patterns, likes, and dislikes. When conducting business with them, include an “opt in” question that allows you to legally gather and use their phone numbers and e-mail addresses so you can remain in contact with them.
- Differentiate among your customers. Determine who your best customers are in terms of what they spend and will spend in the future (their customer lifetime value), and how easy or difficult they are to serve. Identify and target customers that spend only small amounts with you but large amounts with your competitors.
- Interact with your customers, targeting your best ones. Find ways and media in which to talk to customers about topics they’re interested in and enjoy. Spend the bulk of your resources interacting with your best (high-value) customers. Minimize the time and money you spend on low-value customers with low growth potential.
- Customize your products and marketing messages to meet their needs. Try to customize your marketing messages and products in order to give your customers exactly what they want—whether it’s the product itself, its packaging, delivery, or the services associated with it (Harler, 2008; Peppers & Rogers, 1999; Peppers, et. al., 1999).
Audio Clip
You can listen to this interview with Apurva Ghelani (4 minutes) online.
Apurva Ghelani, a senior sales engineer from the marketing company Air2Web, discusses how companies like NASCAR get permission from consumers to send them advertisements via their wireless devices.
