Instructional Goals: You will understand:

• What it means to "segment" a market
• The basic steps in segmenting a market
• The bases used to segment consumer and business markets
• How to evaluate and select segments for targeting of marketing programs

And the relevance of these concepts to operational decision making.

Lecture 12:00 PM to 12:15

Marketers can orient their products to customers in four distinct ways.

• Mass marketing aims to attract all kinds of buyers by producing and distributing the one best product at the lowest possible price
• Segment or product-variety marketing aims to serve large identifiable groups by offering a limited array of good products at a variety of prices.
• Target (both niche and local) marketing aims to please identifiable clusters of customers by providing products that are carefully tailored to match group means and tastes.
• Individual or marketing aims to satisfy individual customers by providing products that are precisely tailored to match individual means and tastes.

Increasingly sellers are moving away from mass marketing and toward individual marketing. This was always the ideal. But it was once prohibitively expensive to tailor products to minority tastes. Mass production required standardization, product design was costly and production lines inflexible. Besides, nobody knew how to ascertain individual tastes and preferences with any precision. The rise of flexible production and computer-assisted design and manufacture means that you can cater to minority tastes at mass production prices; modern market research permits you to identify those tastes.

Target marketing is where we are today. The key steps in target marketing are market segmentation, market evaluation, and product positioning. Market segmentation means dividing mass markets into distinct groups of buyers with relatively homogeneous preferences, attitudes, or behaviors, which distinguish them from the rest of the market. To do this, marketers begin by analyzing preference segments, which are expressed in three ways:

• Homogeneous preferences: in this type of market, all members basically hold similar preferences. In this example, everyone in the market prefers creaminess and sweetness equally. When no segment exists, a mass marketing strategy is usually followed.
• Diffused preferences: in this type of market, customers vary greatly in their preferences. Brands in this market are likely to hold distinct positions according to the differing tastes of the consumers of the product. In this example, some consumers prefer creaminess while others prefer sweetness, but all at various levels of commitment. As such, brands in this market will find it easier to find and hold a lucrative position.
• Clustered preferences: in this type of market, natural segments emerge to describe distinct groups according to preference. In this example, groups form which prefer creaminess and/or sweetness at similar levels. A marketer in this situation should choose position that responds directly to one of those segments.

The effectiveness of this process depends upon the specification of segments that are identifiable, substantial, and accessible.

Market evaluation means assessing the sales potential of each segment and selecting the segments that are most suitable for exploitation. Sales potential is a function of the number of people in the segment, their disposable incomes, and their willingness to pay for product attributes, together with the organization’s ability to serve them. Indicators of sales potential include size, growth rate, price sensitivity, current usage in the product category, etc. When all segments have been analyzed, the marketer can choose to accept them at five levels: single segment (one product to one segment only), selective specialization (one product to more than one unrelated segments), product specialization (one product to several segments), market specialization (more than one products to a particular customer group), or full market coverage (one or more product to all customer groups).

Market positioning means presenting the product to the consumer. A product's position is defined by how consumers view it on important attributes -- the "rank" a product holds in the consumer’s mind when compared to its competitors. Choosing a position is an element of marketing strategy, and products may need to be repositioned as consumer’s perceptions change. Products can be positioned in many ways: by user, by usage, by price and/or quality, through a personality symbol, according to product attributes or benefits received, against a single competitor, against many competitors, or against an entire product category.

Video Case 1: Patagonia 12:15 PM to 12:55

The Patagonia case is designed to illustrate the marketing and societal marketing concepts and market leadership. The company tries hard to stay in touch with its market through its catalog, guide line service, picture contest, and toll-free numbers which illustrate the marketing concept. The company relies on product innovations that benefit consumers. Although their products are higher priced, customer satisfaction is great. Kotler reports that he wore the same pair of Patagonia shorts for five years (including backpacking in the High Sierras over rough terrain). The other Patagonia products that he owns also lasted. The company has always been concerned with environmental issues throughout its history.

This is no 1990's fad on their part and their customers know that. One aspect of their contributions to environmental groups that isn’t in the case due to space limitations is that they dole out funds in small amounts to groups that are frequently not well-known. The rationale for this is that many of these small, mostly local groups consist of highly dedicated individuals who will make the most of the funds. According to Chouinard, "these little organizations are extremely effective. It takes more work searching them out...but it’s much more satisfying because you see what your money’s done." He believes that they accomplish more with their dollars than large organizations would.

So, the marketing concept elements of customer orientation, integration of marketing activities, profit making and the good of society are all included in the statement. Much of the case describes the founder of Patagonia, Yvon Chouinard, because he is an extraordinary figure and has stamped his personality on the company. Although he claims not to be a businessman and he spends more than half of his time roaming the globe engaging in a multitude of outdoor activities, his business philosophy and orientation is actually quite sharp. He knows his products and his market; his firm works closely with suppliers and dealers (as the TQM and Business Process Re-engineering types propose); his firm is a market leader --- constantly ahead of other firms in developing new fabrics and gear which enables it to compete on brand and quality dimensions rather than price and his brand commands a high degree of consumer loyalty.

Patagonia is recognized as a leader and, according to retailers, consumers come into their stores intending to buy only Patagonia products so much so that high end retailers frequently only carry the Patagonia brand. Chouinard and Patagonia have been compared favorably with The North Face (Berkeley, California) with respect to their commitment to excellent products, field testing under the most difficult conditions, and conscious effort to give back to the environment.

Patagonia relies on innovation to sustain sales. For example, it was the first firm to sell products made of polypropylene. Since then, other manufacturers had adopted this product so that today you can find polypropylene wear in Kmart. Patagonia, however, is selling PCR Synchilla, which is great stuff in the cold. They have moved on to something else. They are market leaders. Look at one of their catalogs, which you can get by calling writing Patagonia Mail Order, Inc., 1609 W. Babcock St., P.O. Box 8900, Bozeman, MT. 59715-2046. This is not a firm interested in selling at the lowest price, so it makes a good example of how to compete at the higher end. Many students may already be familiar with the quality of Patagonia products.

At present, Patagonia has established a no-growth policy because Chouinard believes that consumption should decline -- that we are depleting the earth’s resources -- a policy that some business critics have pooh-poohed. But such a policy is viable for a firm that sells high-priced, innovative products in the low-volume, high-margin end of the market. If all consumers did reduce the quantity of goods by buying higher-quality, longer-lasting goods, his strategy to slow down the depletion of resources might work. The catch, of course, is that not all consumers can afford high priced goods. "Can a small firm in Ventura really reduce the pace of American consumption?"

Teaching Objectives:

• To illustrate the marketing concept.
• To give examples of customer orientation.
• To exemplify the integration of environmental concerns with sound marketing and business practices.
• To illustrate market leadership.
• To demonstrate the importance of product innovation.

1. How does Patagonia exemplify the marketing concept? The societal marketing concept?

2. What type of marketing strategy has Patagonia pursued?

3. How has Patagonia responded to the forces in the macro-environment?

4. Are the critics right? Or will Patagonia’s actions help reduce consumption?

• Is Patagonia really market responsive? Does it meet consumers needs? How?
• Why do consumers prefer Patagonia? Is it the quality or the image or both? Is it the quality of manufacture or the innovation in materials that attracts customers to Patagonia products?
• Does it matter why they want Patagonia products? Do consumers care about Patagonia’s support of environmental issues?
• Is price an issue? Why or why not? If it isn’t, what opportunities does this create for Patagonia? How does Patagonia exploit these opportunities?
• How can it continue its market leadership? Will the principles that have worked thus far work in the future?

You are encouraged to read more about Chouinard and other entrepreneurs and discuss why they have been successful. It’s important for you to realize the dedication that entrepreneurial activity requires and that many entrepreneurs start out to do what they want and love rather than to make money. An end goal focused solely on making big bucks seldom brings happiness or big bucks!

Computer Exercise: Buying Power Index (BPI) 1:00 PM to 1:30

The purpose of this computer exercise is to show how to use a Buying Power Index (developed by Sales and Marketing Management magazine) to select geographic markets in which to sell and advertise. Read the Kotler text for background.

Where, geographically, should a company sell or advertise? The answer: generally, wherever sales potential is high. Obviously a market planner would need research data of geographic sales potentials to help make these decisions. But it is often expensive to buy such custom-made research and, at times, the data is not easily available.

However, Sales and Marketing Management magazine has developed a Buying Power Index which is available to everyone for a modest fee, and which may provide strong clues about where the best sales potential exists geographically. The BPI, as it is called, is reported in a publication called Survey of Buying Power. It is an analysis of the country's geographical markets. It is updated every year and is based on census data. A sample page is shown in Exhibit 11.

The BPI is composed of three factors which affect sales potential: (1) population; (2) income after taxes, called Effective Buying Income; and (3) retail sales. This data covers every Standard Metropolitan Statistical Area in the country. In addition, it also covers every county in the country.

Effective Buying Income (Ability to Pay)

Population is one of the factors that affect sales. Where there are people, usually there are opportunities for selling. It simply takes many people in a geographical market to have many sales opportunities. Population is shown in two basic ways: individuals and households; and data is presented in raw numbers and as a percent of the U.S. total.

But population alone is not as meaningful as the Effective Buying Income of an area, because the EBI represents the market's financial ability to buy. EBI data is shown for individuals and households, and also is reported in raw numbers and percentages of the U.S. total. Effective Buying Income represents income after taxes.

Total retail sales are shown for every county and metro area in the same manner as described above.

These three factors are combined into a weighted multiple factor index as follows:

Population is weighted 2; retail sales are weighted 3; and Effective Buying Income is weighted 5. Shown below is an example of how the weighting is done for Bristol, Rhode Island:

Bristol, Rhode Island:	% of U.S.	weight	total
Population:	.0205	2	0
Effective buying income:	.0202	5	0
Retail sales:	.0111	3
Total

0.1753 = .0175 Buying Power Index for Bristol, R.I.

There are a number of ways that the Buying Power Index can be used to select geographical markets:

1. Selection can based on the areas where a company would like to distribute. Perhaps it would be four states adjacent to the manufacturing plant. Then all counties within those states with a BPI over .1500 (of any other BPI level) could be selected and ranked. Final selections can come from this list.
2. The largest populated markets in the country can be selected and their BPIs found. Then these could be ranked accordingly, and a cutoff point determined arbitrarily. Any markets below a certain BPI level could be eliminated.
3. Or the largest 150 populated markets can be selected and analyzed as in item 2 above.

The means of comparing markets, therefore, is the BPI. It should be noted that the BPI, as constituted, is probably best for mass-consumed products sold at popular prices. However, if a manufacturer has a brand that does not fit the BPI weighting formula, adjustments can be made in which other factors are added, or the weights can be changed as the marketer sees fit. For example, if a brand is notably higher priced than the competitors' brands, it is possible to increase the weight for the Effective Buying Income factor. A custom-made index will be described in the next exercise. Once the markets have been selected and ranked, the BPI can be used to allocate a budget to the markets proportionally.

Shown below are five markets and their BPIs. The BPI data came from the Survey of Buying Power. In order to allocate a budget proportionately, you must first add the BPIs, and then find each percentage of the sum. Suppose that a total budget of $500,000 has been set ahead of time. This budget now can be allocated on the basis of each market's sales potential as follows:

		Percent	Budget
Market	BPI	of total	allocated
A	.1 250	17.8	$89,000**
B	.1355	19.3	96,500
C	.1105	15.7	78,500
D	.1900	27.0	135,000
E	.1420	20.0	101,000
Totals	.7030	100.0	$500,000

**17.8% x $500,000 = $89,000 etc.

Problems

Listed below are 24 TV markets (ranked on the basis of TV households in the area). Also shown are the BPIs for the year 1980 and estimates for 1987. Your task is to select the top 5 markets that are projected to have the most growth in the next 7 years. List them, and explain on what basis you made your decision.

	1980	1987 est.
	BPI	BPI
Birmingham	.3663	.3555
Buffalo	.5489	.4737
Charleston, WV	.1317	.1336
Charlotte, NC	.2888	.2890
Columbus, Ohio	.5026	.4932
Flint, Mich.	.2492	.2335
Grand Rapids	.2593	.2894
Greenville, SC	.2368	.2470
Harrisburg	.2164	.2090
Kansas City	.6740	.6554
Louisville	.4051	.3974
Memphis	.3838	.3977
Milwaukee	.6583	.6169
Nashville	.3792	.3804
Norfolk	.3308	.3246
Oklahoma City	.4298	.4396
Orlando	.3170	.3584
Phoenix	.6762	.7551
Providence	.3592	.3490
Raleigh, NC	.2337	.2540
Salt Lake City	.3802	.4149
San Antonio	.4566	.4649
San Diego	.a483	.9333

2. Using the top five markets discussed in Question 1, allocate a $500,000 advertising budget to these markets on the basis of the 1987 projected BPIs (as described earlier). Show your work below.

3. What dangers do you see in the weighting system employed in the present BPI index? Explain.

4. If you were selling videotape machines, what changes in the weighting system would you employ to accommodate the fact that you are not selling a mass-consumed, low-priced product?

Creating Your Own Buying Power Index

There are many times when it is unsuitable to use the BPI discussed in the last application exercise. This usually occurs when you are selling a specialty product to a selective rather than a mass market of consumers. Examples of such products could be gourmet foods, specialized sports equipment, or home computers.

Sales and Marketing Management's Survey of Buying Power contains much specialized information that may be used to create a custom-built Buying Power Index. Not only are there data on each geographical market's population, Effective Buying Income, and retail sales, but there is also a breakdown by age and income groupings, and by a number of different retail product categories such as:

Food	Furniture, furnishings,
Groceries and other foods	Men's and boy's clothing
Eating & drinking places	appliances
Health & beauty aids	Footwear
General merchandise	Automotive
Women's & girl's clothing	Major household appliances
Furniture & sleep equipment	Drugs & health aids

From this specialized data, you may devise an index to meet your specialized needs. Shown below is an example of data assembled from the Buying Power Index that could meet the needs of a dishwasher manufacturer who sells nationally.

The special choices of data for selling dishwashers were as follows: (1) use of household data rather than population data in each market; (2) use of household income data above $25,000 a year, rather than Effective Buying Incomes of the market; (3) use of major household appliances sales data, rather than total retail sales; and (4) use of two consumer age groups data (from 25-34 to 35-44 years). An age grouping was not used in the original BPI.

Here is the data assembled in a chart, with an explanation of how the index was created. (For the sake of simplicity, only four markets in Massachusetts were selected.)

(a)	(b)	(c)	(d)	(e)	(f)	(g)
Metropolitan area covered .	Number of Housholds	No. earning $25,000+	Appliance Sales	No. aged 25-49	Sum of Factors	Percent
Boston	1,366.4	449.5	$548.0	1,287.5	3,651.4	70.4
Springfield	204.0	51.8	66.7	182.4	504.9	9.7
Worcester	222.2	63.8	105.5	200.5	592.0	11.4
New Bedford	170.2	33.9	83.1	148.3	435.5	8.4
			Totals		5,183.8	99.9°

Index numbers were constructed as follows:

1. The number of households and appliance sales were given in the Survey of Buying Power data.
2. The number earning $25,000+ a year was given in percentage form and multiplied by the number of households in each market.
3. The number aged 25-34 and 35-49 were given in percentage form. These were added for each market and multiplied by the population figures (given for each market).
4. Then columns b, c, d, and e were added across to get a sum of factors for each market.
5. The sums of factors were added downward and a total attained.
6. Each sum of factor was divided by the total to get an index number (or percent).

Now it is possible for us to use this data just as we would for the BPI. We can allocate a budget proportionately, to the markets or use the data for other comparative purposes.