Marketing - Evaluation of Market Segmentation

I am an MBA student studying marketing. Here is a paper on market segmentation.

INTRODUCTION

The process of market segmentation, targeting and positioning involves dividing the market into distinct groups of buyers(segmentation), evaluating the market segment's attractiveness and selecting one or more to enter(targeting), and formulating competitive positioning for a product and detailed marketing mix(positioning), (Kotler et al., 1999). It is important for any business to analyze the different needs of the market segments, their internal strengths and weaknesses, external opportunities and threats, and various other factors like the mission, vision, values, beliefs, attitudes, norms and standards of the organization as well as the competitors strategy, social and cultural factors, economic environment, global perspective, demographic environment, technological and political / legal aspects before deciding which one to target.

Evaluation of market segmentation

The first element that needs to be defined is the criteria by which the segments will be evaluated. In a nonprofit setting segment desirability is not necessarily determined by profitability and market share objectives. If a measure of profitability or desirability can be quantified, the markets can be ranked using tree analysis or gains charts (Day, 1980).

Approaches vary with some authors suggesting a quantitative evaluation of the resulting segments (Jorge Restrepo), while others highlight other strategies for evaluation. A way to approach market segment evaluation is through the examination of a market structure by constructing a spatial model where similarities and differences are mapped, (Wedel, 2000). This representation of the market is then used in conjunction with demand estimating and forecasting models to determine possible positioning alternatives for a product (McKenna, 1988). This analysis can be enhanced by using a chi-squared trees analysis and correspondence analysis to generate compositional perceptual maps, which are "vital to understanding consumer brand positioning" (Jorge Restrepo).

Other elements should also be considered such as simplicity and potential adaptability of the segmentation structure across national boundaries. Kotler (2004) suggests considering three major criteria for assessing the relative attractiveness of market segments as follows: segment size and growth, segment structural attractiveness, and company objectives and resources. Porter, (1985) proposes a similar approach but also recommends studying the firm's resources and skills as reflected in the value chain, and their suitability to target market alternatives. Aaker, (1995) bases his selection criteria on the SWOT analysis produced during the strategic marketing planning process. Berrigan and Finkbeiner, (1992) propose a somewhat similar process that includes market structure analysis, market opportunity analysis, product portfolio analysis, resource capabilities analysis and competitive analysis.

In evaluating different market segments, the firm must ask whether a potential segment has the characteristics that make it generally attractive, such as size, growth, profitability, scale economies, and low risk, (Steenkamp and Ter Hofstede, 2002). Secondly, the firm must consider whether investing in the segment makes sense given the firm's objectives and resources, (Steenkamp and Ter Hofstede, 2002). Some attractive segments could be dismissed because they do not mesh with the company's long-run objectives while some should be dismissed if the company lacks one or more of the competences needed to offer superior value, (Kotler et al, 1999).

1. Segment Size and Growth

A company first determines segment size and growth. It collects and analyses data on current segment sales, growth rates and expected profitability for various segments.

A large segment will generally have greater sales potential and therefore make it more attractive though it may also offer the potential of gaining economies of scale due to larger volumes involved. Large segments may not be very attractive because they can be more competition as the size will attract other companies (Drummond and Ensor, (1999). Smaller organizations may find smaller segments more attractive since they might not have the resources to address a larger market. The company will be concerned with segments that have the right size and growth characteristics. Segments that are growing are normally seen as attractive as segments where growth has peaked, (Kotler, 2001). Segments in growth have a long term potential that can justify any investment into it.

Growth rate and likely future position of the segment is a key consideration in the evaluation process. Usually, business firms seek out the high growth segments. Analysis will readily indicate to the firm that for example in the clothing industry, Edgars stores and Express stores, Edgars is a premium store while express is a popular store. The premium segment happens to be the high growth segment. Size-wise, the popular segment is a bigger compared to the premium segment. When this fact is taken into consideration, the firm's choice may tilt toward the premium segment. The tilt will be particularly essential if the firm's natural disposition is to strive for a position in the high growth segment of the business.

But the idea of right size and growth is relative. Some companies will want to choose segments with large current sales, a high growth rate and a high profit margin. However, every company may not find the largest, fastest-growing segments attractive ones. Smaller companies may feel that they don't have the skills and resources needed to serve the large segments, or that these segments are too competitive. These companies may select segments that are apparently smaller and less attractive, but that are potentially more profitable for them.

Here, marketers pause and ask themselves what a total profitability of a segment is? In answering this I will use the above example, the firms quickly sensed that the premium segment is a more profitable one. Even a relatively lower volume in the segment may bring in good returns. On the contrary, in the popular segment, a much larger volume will be necessary for the business to be viable, since prices and margins in the segment are low. Another point is that costs of marketing, distribution and promotion in this business will be quite high and constantly on the rise. Costs of launching a new brand will be particularly be high. The market is very competitive and therefore aggressive promotional support through expensive media like the TV becomes essential. In this background,