Module 5 Target Markets and Relationship Marketing

The Learning outcomes for this module are:

To define marketing
Learn what a market is
Understand the differences among general targeting strategies
Become familiar with the major segmentation variables
Know what segment profiles are and how they are used
Understand how to evaluate market segments
Identify the factors that influence the selection of specific market segments for use as target
markets
Become familiar with sales forecasting methods

What is a Market?
A. Chapter 2 defined a market as a group of people who, as individuals or as organisations,
have needs for products in a product class and have the ability, willingness, and authority to
buy such products.
B. Markets fall into two categories.
1. Consumer market individuals who purchase with the intent to consume or directly
benefit from the purchased good. They do not intend to profit from the purchase through
resale.
2. Business market individuals or groups that buy a specific kind of product for resale,
direct use in producing other products, or use in general, daily operations.

Target Market Selection Process

Marketers generally employ a five-step process for target-market selection: identifying the
appropriate targeting strategy, determining which segmentation variables to use, developing
market segment profiles, evaluating relevant market segments, and selecting specific target
markets.

Step 1: Identify the Appropriate Targeting Strategy

The targeting strategy used is affected by target market needs and characteristics, product
attributes, and the organisations objectives and resources.
1. Undifferentiated Targeting Strategy

a) The undifferentiated targeting strategy is one in which an organisation defines an entire

market for a particular product as its target market, designs a single marketing mix, and
directs it at the entire market.
b) The underlying assumption is that the needs of the target market for specific kinds of
product are very similar; thus the business can satisfy most customers with a single marketing
mix.
c) There are two requirements for effective use of this approach.
(1) The market must be a homogeneous market, one in which a large proportion of customers
have similar needs for a product.
(2) The organisation must be able to develop and maintain a single marketing mix that
satisfies customers needs.
2. Concentrated Targeting Strategy through Market Segmentation
a) Heterogeneous markets are markets made up of individuals or organisations with diverse
product needs.
b) Market segmentation, the process of dividing the total market into groups or segments that
have relatively similar product needs for the purpose of designing a marketing mix that will
more precisely match the needs of individuals in a selected segment, is appropriate for
heterogeneous markets.
c) A market segment consists of individuals, groups, or organisations with one or more
similar characteristics that cause them to have relatively similar product needs.
d) There are five conditions for effective segmentation.
(1) Consumers needs for the product must be heterogeneous.
(2) The segments must be identifiable and divisible.
(3) The total market should be divided so that segments can be compared with respect to
estimated sales potential, costs and profits.)
(4) At least one segment must have enough profit potential to justify the development and
maintenance of a special marketing mix for that segment.
(5) The organisation must be able to reach the chosen segment with a particular marketing
mix.
e) Concentrated targeting strategy is a strategy in which an organisation targets a single
market segment using one marketing mix.

(1) Advantages
(a) Specialisation gives the firm an opportunity to analyse the characteristics and needs of a
distinct customer group carefully and then focus all marketing efforts into satisfying that
groups needs.
(b) A firm can generate large sales volume by reaching a single segment.
(c) A firm with rather restricted resources is able to compete with much larger organisations.
(2) Disadvantages
(a) If the segments demand for the product declines, the companys financial strength also
declines.
(b) Success in one segment may preclude entry into another segment.
3. Differentiated Targeting Strategy through Market Segmentation
A differentiated targeting strategy is one in which an organisation targets two or more
segments by developing a marketing mix for each segment.
a) Advantages
(1) A business can increase its sales in a total market by focusing on more than one segment.
(2) Sales to additional market segments may absorb excess production capacity.
b) Disadvantages
(1) A greater number of production processes, materials, and skills means higher production
costs.
(2) Several distinct promotion plans and distribution methods are required, resulting in higher
marketing costs.

Step 2: Determine Which Segmentation Variables to Use

1. Segmentation variables are characteristics of individuals, groups, or organisations that are
used to divide a market into segments.
a) Most marketers use several variables in combination.
b) Marketers consider the following factors when choosing segmentation variables.
(1) The segmentation variable should be related to customers needs for, uses of, or behaviour
toward the product.

(2) The variable must be measurable.

(3) The companys resources and capabilities determine the number and size of segment
variables used.
(4) Choice of segmentation variables is a critical step because an inappropriate variable limits
the chances of developing a successful marketing strategy.
2. Variables for Segmenting Consumer Markets
a) Demographic Variables
(1) Demographic characteristics commonly used to segment markets include age, gender,
race, ethnicity, income, education, occupation, family size, family life cycle, religion, and
social class.
(2) Marketers rely on these characteristics because they are often closely linked to
consumers needs and purchasing behaviour and they can be readily measured.
(a) Age is a commonly used variable for segmentation purposes.
(b) Gender is another commonly used demographic variable for segmenting markets.
(c) Marketers also use race and ethnicity as variables for segmenting markets, especially
markets for food, music, clothing, cosmetics and services like banking and insurance.
(d) Income is another way to segment markets because it affects consumers ability to buy
and their desires for certain products.
(e) Family life-cycle which relates to marital status and the presence and age of children
affects consumers needs for housing, appliances and many other products.
(f) Other segmentation variables are possible, such as education level and occupation.
b) Geographic Variables
(1) Geographic variables include climate, terrain, city size and urban/rural values.
(2) Market density refers to the number of potential customers within a unit of land area, such
as a square mile.
(3) Geodemographic segmentation clusters people in postcode areas and even smaller
neighbourhood units based on lifestyle and demographic information.
(4) Micromarketing is an approach to market segmentation in which organisations focus

precise marketing efforts on very small geographic markets, such as community and even
neighbourhood markets.
c) Psychographic Variables
Psychographic variables personality characteristics, motives and lifestyles can be used
alone to segment markets or in conjunction with other segmentation variables.
(1) Personality characteristics can be useful for segmenting markets when a product
resembles many competing products and consumers needs are not significantly related to
other segmentation variables.
(a) This segmentation approach can be risky. It is difficult to measure personality traits
accurately.
(b) Marketers should choose personality characteristics viewed positively.
(2) When using motives to segment a market, marketers divide the market based on
consumers reasons for making a purchase.
(3) Lifestyle segmentation groups individuals on the basis of their beliefs, values, and how
they spend their time, along with some demographic variables such as education.
d) Behaviouristic Variables
(1) These variables commonly involve consumers product use.
(2) How consumers use or apply the products may also determine segmentation.
(3) Benefit segmentation is the division of a market according to benefits that consumers want
from the product
3. Variables for Segmenting Business Markets
Business markets can also be segmented, often by multiple variables in combination.
a) Marketers may segment business markets according to geographic location because
demand for some products may vary because of differences in climate, terrain, customer
preferences, or similar factors.
b) Marketers sometimes segment business markets by types of organisations because required
product features, distribution systems, price structures and selling strategies may vary among
different types of organisations.
c) Marketers may segment business markets by size of customer because organisational size
may influence a customers purchasing procedures and the types and quantities of products
desired.

d) Finally, marketers may segment business markets based on how organisational customers
actually use products.

Step 3: Develop Market Segment Profiles

1. Market segment profiles describe the similarities among potential customers within a
segment and explain the differences among people and organisations in different market
segments.
2. A profile can deal with demographic characteristics, geographic factors, product benefits
sought, lifestyles, brand preferences, or usage rates.
3. Market segment profiles provide marketers with an understanding of how a business can
use its capabilities to serve potential customer groups.

Step 4: Evaluate Relevant Market Segments

1. Sales Estimates
a) Potential sales for a segment can be measured along several dimensions, including product,
geographic area, time, and level of competition.
b) 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.
(1) It can be stated in terms of dollars or units and can refer to a total market or to a market
segment.
(2) When analysing market potential, it is important to indicate the time frame and the level
of industry marketing activities.
c) 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.
(1) Factors that influence a companys sales potential are the size of the market sales
potential, the magnitude of industry-wide marketing activities, and the intensity and
effectiveness of the firms marketing activities relative to those of its competitors.
(2) There are two general approaches to measuring company sales potential: breakdown and
buildup.
(a) The breakdown approach 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 companys sales potential.
(b) The buildup approach 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 market potential.
2. Competitive Assessment
a) Sales estimates may be misleading without competitive information.
b) Several questions must be asked about competitors in the segments being considered.
(1) How many competitors exist?
(2) What are their strengths and weaknesses?
(3) Do several competitors have major market shares and together dominate the segment?
(4) Can our company create a marketing mix to compete effectively against competitors
marketing mixes?
(5) Is it likely that new competitors will enter this segment?
(6) If so, how will they affect our firms ability to compete successfully?
3. Cost Estimates
a) Meeting the needs of a target segment can be expensive.
b) If costs are too high, marketers may treat the segment as being inaccessible.
STEP 5: SELECT SPECIFIC TARGET MARKETS
1. Marketers first decide whether there are enough differences in customers needs to warrant
the use of market segmentation.
a) If customer needs are homogeneous, the undifferentiated approach may be the best choice.
b) If customer needs are heterogeneous, then one or more target markets must be selected.
2. The firms management must consider whether the organisation has the financial
resources, managerial skills, employee expertise and facilities to enter and compete
effectively in selected segments.

Developing Sales Forecasts

1. A sales forecast is the amount of a product the firm actually expects to sell during a
specific period at a specified level of marketing activities.
a.) Businesses use the sales forecast for planning, organising, implementing and controlling
their activities.
b.) Common problems in companies that fail are improper planning and lack of realistic sales
forecasts.

c.) Sales forecasting techniques fall into five categories: executive judgement, surveys, timeseries analysis, regression analysis and market tests.
2. Executive Judgement
Executive judgment is based on the intuition of one or more executives.
a.) It is inexpensive and expedient.
b.) It works reasonably well when product demand is relatively stable and the forecaster has
years of market-related experience.
c.) It is unscientific.
3. Surveys
a.) A customer forecasting survey is a survey of customers regarding what types and
quantities of products they intend to buy during a specific period.
b.) A sales force forecasting survey consists of estimates by a firms salespeople of their
anticipated sales in their territories for a specified period.
(1) The sales staff is closer to customers on a daily basis than other company personnel and,
therefore, should know more about customers future product needs.
(2) Forecasts can be prepared for single territories, divisions consisting of several territories,
regions made up of multiple divisions, or the total geographic market.
c.) The 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.
d.) 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.\
4. Time-series Analysis
With time series analysis, a forecaster uses the firms historical sales data to discover a
pattern, or patterns, in the firms sales over time and generally involves trend, cycle, seasonal
and random factor analyses.
a.) Trend analysis focuses on aggregate sales data from a period of many years to determine
whether annual sales are generally rising, falling, or staying about the same.
b.) Cycle analysis is examination of sales figures over a period of three to five years to
ascertain whether sales fluctuate in a consistent, periodic manner.

c.) Seasonal analysis is an analysis of daily, weekly, or monthly sales figures to evaluate the
degree to which seasonal factors influence sales.
d.) Random factor analysis attempts to attribute erratic sales variations to random, nonrecurrent events.
5. Regression Analysis
a.) Regression analysis is a method of predicting sales based on finding a relationship
between past sales and one or more variables such as population, per capita income, or gross
domestic product.
b.) Simple regression analysis uses one independent variable, whereas multiple regression
analysis includes two or more independent variables.
c.) These methods are useful only when a precise relationship can be established and are
therefore f6.
6. Market Tests
a.) A market test involves making a product available to buyers in one or more test areas and
measuring purchases and consumer responses to distribution, promotion, and price.
b.) Market tests provide information about consumers actual rather than intended purchases.
c.) They are effective in estimating sales of new products or of existing products in new
geographic areas.
d.) The chief disadvantages of market tests are that they are time-consuming and expensive.
7. Multiple Forecasting Methods
a.) Although some businesses rely on a single sales forecasting method, most use several
techniques to attempt to validate the results from one technique.
b.) Methods used for short-range forecasts are often inappropriate for long-range forecasting.
utile when no historical data exists, as with new products.

Contribution Questions and Video Case Study

Contribution questions

Please post your answers to the following questions on the forum by

clicking on the link above, and respectfully answer any other answers
provided by your peers.
Q1. In your local area, identify a group of people with unsatisfied product needs
who represent a market. Could this market be reached by a business
organisation? Why or why not?
Q2. Identify and describe four major categories of variables that can be used to
segment consumer markets. Give examples of product markets that are
segmented by variables in each category.

Video Case Study

You have just received a sizable inheritance and after giving part of it to
charity, you now have $500,000 to begin a new retail operation in your local
area.
Go to realestate.com, http://www.rs.realestate.com.au/cgi-bin/rsearch?a=sp
and type in the four-digit postcode of where they currently live or somewhere
close by, this should provide you some basic information about this local
market. What kind of retail operation will you invest in? post up the answer
and supporting evidence.

Quick Quiz

This quick quiz is for self reflection and has been setup to allow you to complete it as many times as you wish.
No scores will be recorded!