Week 4, “Market Segmenting, Targeting, and Positioning” was derived from Principles of Marketing, which was adapted by the Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work’s original creator or licensee. © 2015, The

Saylor Foundation.

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Week 4 Market Segmenting, Targeting, and Positioning

Suppose you’ve created a great new offering you hope will become a hot seller. Before you quit

your day job to market it, you’ll need to ask yourself, “Who’s going to buy my product?” and “Will

there be enough of these people to make it worth my while?”

Certain people will be more interested in what you have to offer than others. Not everyone needs

homeowners’ insurance, not everyone needs physical therapy services, and not everyone needs

the latest and greatest cell phone. Among those that do, some will buy a few, and a few will buy

many. In other words, in terms of your potential buyers, not all of them are “created equal.” Some

customers are more equal than others, however. A number of people might be interested in your

product if it’s priced right. Other people might be interested if they simply are aware of the fact

that your product exists.

Your goal is to figure out who these people are. To do this, you will need to divide them into

different categories. The process of breaking down all consumers into groups of potential buyers

with similar characteristics is called market segmentation. The key question to ask yourself

when segmenting markets: What groups of buyers are similar enough that the same product or

service will appeal to all of them? (Barringer & Ireland, 2010). After all, your marketing budget is

likely to be limited. You need to focus on those people you truly have a shot at selling to and

tailoring your offering toward them.

Once market segments are identified, the next step is to identify which of those segments, if any,

the company wants to pursue with its limited resources and consistency with its mission. This is

called target marketing. A company may decide not to target market, in which case it is mass

marketing. But mass marketing is rare.

4.1 Targeted Marketing vs. Mass Marketing

LEARNING OBJECTIVES

1. Distinguish between targeted marketing and mass marketing and explain what led to the rise of each. 2. Describe how targeted marketing can benefit firms. 3. Explain why companies differentiate among their customers.

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Choosing select groups of people and organizations to sell to is called targeted marketing,

or differentiated marketing. It is a relatively new phenomenon. Mass marketing,

or undifferentiated marketing, came first. It evolved along with mass production and involves

selling the same product to everybody. You didn’t need to conduct any market research to know

that a household could use an electric washing machine. Build it and they will come. You can

think of mass marketing as a shotgun approach: you blast out as many marketing messages as

possible on every medium available as often as you can afford (Spellings Jr., 2009). (By contrast,

targeted marketing is more like shooting a rifle; you take careful aim at one type of customer with

your message.)

Automaker Henry Ford was very successful at both mass production and mass marketing. Ford

pioneered the modern-day assembly line early in the twentieth century, which helped him cost-

effectively pump out huge numbers of identical Model T automobiles. They came in only one

color: black. “Any customer can have a car painted any color he wants, so long as it is black,” Ford

used to joke. He also advertised in every major newspaper and persuaded all kinds of publications

to carry stories about the new, inexpensive cars. By 1918, half of all cars on America’s roads were

Model Ts (Ford, 1922).

Figure 4.1

You could forget about buying a custom Model T from Ford in the early 1900s. The good news?

The price was right.

Source: Unknown. Wikimedia Commons. In the public domain.

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Then Alfred P. Sloan, the head of General Motors (GM), appeared on the scene. Sloan began to

segment consumers in the automobile market—to divide them by the prices they wanted to pay

and the different cars they wanted to buy. His efforts were successful, and in the 1950s, GM

overtook Ford in the as the nation’s top automaker (Manzanedo, 2005). (You might be interested

to know that before GM declared bankruptcy in 2009, it was widely believed the automaker

actually had too many car models. Apparently, “old habits die hard,” as the saying goes.)

Benefits of Segmenting and Targeting Markets The story of General Motors raises an important point, which is that segmenting and targeting

markets doesn’t necessarily mean “skinnying down” the number of your customers. In fact, it can

help you enlarge your customer base by giving you information with which to successfully adjust

some component of your offering—the offering itself, its price, the way you service and market it,

and so on. More specifically, the process can help you do the following:

• Avoid head-on competition with other firms trying to capture the same customers

• Develop new offerings and expand profitable brands and product lines

• Remarket older, less-profitable products and brands

• Identify early adopters

• Redistribute money and sales efforts to focus on your most profitable customers

• Retain “at-risk” customers in danger of defecting to your competitors

The trend today is toward more precise, targeted marketing. Figuring out “who’s who” in terms of

your customers involves some detective work, though—often market research. A variety of tools

and research techniques can be used to segment markets. Government agencies, such as the US

Census Bureau, collect and report vast amounts of population information and economic data

that can reveal changing consumption trends.

Technology is also making it easier for even small companies and entrepreneurs to gather

information about potential customers. For example, the online game company GamePUMA.com

originally believed its target market consisted of US customers. But when the firm looked more

closely at who was downloading games from its website, they were people from all over the globe.

The great product idea you had? As we explained in Week 3, “Consumer Behavior: How People

Make Buying Decisions,” companies are now using the Internet to track people’s web browsing

patterns and segment them into groups that can be marketed to. Even small businesses are able

to do this cost-effectively now because they don’t need their own software and programs. They

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can simply sign up online for products like Google’s AdSense and AdWords programs. You can

locate potential customers by looking at blog sites and discussion forums on the web. Big-

boards.com has thousands of discussion forums you can mine to find potential customers. Do you

have a blog? Go to BlogPoll.com, and you can embed a survey in your blog to see what people

think of your idea. If you have a website, you can download an application onto your iPhone that

will give you up-to-the-minute information and statistics on your site’s visitors.

Getting a read on potential target markets doesn’t have to involve technology, though. Your own

experience and talking to would-be buyers is an important part of the puzzle. Go where you think

would-be buyers go—restaurants, malls, gyms, subways, grocery stores, day care centers, and

offices. Ask questions: What do buyers do during the day? What do they talk about? What

products or services do you see them using? Are they having an enjoyable experience when using

those products, or are they frustrated?

Figure 4.2

The Healthy Choice line of frozen dinners was launched by a heart attack victim.

Source: Photo by Ken. (2008). Flickr. Used under the terms of the Creative Commons Attribution-NonCommercial 2.0 Generic license.

Healthy Choice frozen dinners were conceived as a result of questioning potential customers. The

food-maker ConAgra launched the dinners in the late 1980s after its CEO, Charlie Harper,

suffered a heart attack. One day a colleague complimented Harper on his wife’s tasty low-fat

turkey stew. That’s when Harper realized there were people like him who wanted healthy

convenience foods, so he began talking to them about what they wanted. Two years after the

Healthy Choice line was launched, it controlled 10 percent of the frozen-dinner market (Birchall

[b.], 2009).

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Segmenting and Targeting a Firm’s Current Customers Finding and attracting new customers is generally more difficult than retaining your current

customers. People are creatures of habit. Think about how much time and energy you spend when

you switch your business from one firm to another—even when you’re buying something as

simple as a haircut. If you aren’t happy with your hair and want to find a new hairdresser, you

first have to talk to people with haircuts you like or read reviews of salons. Once you decide to go

to a particular salon, you have to look it up on the Internet or your GPS device and hope you don’t

get lost. When you get to the salon, you explain to the new hairdresser how you want your hair cut

and hope he or she gets it right. You might also have to navigate different methods of payment.

Perhaps the new salon won’t accept your American Express card or won’t let you put the tip on

your card. However, once you have learned how the new salon operates, doing business with it

gets much easier.

The same is true for firms when it comes to finding new customers. Finding customers, getting to

know them, and figuring out what they really want is a difficult process—one that’s fraught with

trial and error. That’s why it’s so important to get to know and form relationships with your

current customers. Broadly speaking, your goal is to do as much business with each one of them

as possible.

The economic downturn of the first decade in the 2000s drove home the point of making the most

of one’s current customers. During the downturn, new customers were hard to find, and firms’

advertising and marketing budgets were cut. Expensive, untargeted, shotgun-like marketing

campaigns that would probably produce spotty results were out of the question. Consequently,

many organizations chose to focus their selling efforts on current customers in hopes of retaining

their loyalty once the downturn was over (Birchall [a.], 2009).

This is the situation in which the adventure-based travel firm Backroads found itself in 2009. The

California-based company increased its revenues by creating a personalized marketing campaign

for people who had done business with Backroads in the past. The firm looked at information

such as customers’ past purchases, the seasons in which they took their trips, the levels of activity

associated with them, and whether or not the customers tended to vacation with children. The

company then created three relevant trip suggestions for each customer based on the information.

The information was sent to customers via postcards and e-mails with links to customized web

pages reminding them of the trips they had previously booked with Backroads and suggesting

new ones. “In terms of past customers, it was like off-the-charts better [than past campaigns],”

says Massimo Prioreschi, the vice president of Backroads’ sales and marketing group

(MarketingSherpa, 2009).

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In addition to studying buying patterns, firms also try to know their customers by surveying them

or hiring marketing research firms to do so. Firms also use loyalty programs to find out about

their customers. For example, if you sign up to become a frequent flier with a certain airline, the

airline will likely ask to you a number of questions about your likes and dislikes. This information

will then be entered into a customer relationship management (CRM) system, and you might be

e-mailed special deals based on the routes you tend to fly. British Airways goes so far as to track

the magazines its most elite fliers like to read so the publications are available on its planes.

Many firms—even small ones—are using Facebook to develop closer relationships with their

customers. At Hansen Cakes, a Beverly Hills (California) bakery, employee Suzi Finer posts “cake

updates” and photos of the goodies she’s working on to the company’s Facebook page. Along with

information about the cakes, Finer extends special offers to customers and mixes in any gossip

about Hollywood celebrities she’s spotted in the area. After Hansen Cakes launched its Facebook

page, the bakery’s sales shot up 15–20 percent. “And that’s during the recession,” noted Finer

(Graham, 2009). Twitter is another way companies are keeping in touch with their customers and

boosting their revenues. For example, when the homemaking maven Martha Stewart schedules a

book signing, she tweets her followers, and voilà—many of them show up at the bookstore she’s

appearing at to buy copies. Finding ways to interact with customers that they enjoy—whether it’s

meeting or “tweeting” them, or putting on events and tradeshows they want to attend—is the key

to forming relationships with them.

Remember what you learned in Week 2, “Customer Satisfaction, Loyalty, Empowerment , and

Management”: not all customers are created equal, including your current customers. Some

customers are highly profitable, and others aren’t. Still others will actually end up costing your

company money to serve. Consequently, you will want to interact with some more than others.

Believe it or not, some firms deliberately “untarget” unprofitable customers. That’s what Best Buy

did. In 2004, Best Buy got a lot of attention (not all good) when it was discovered the company

had categorized its buyers into “personas,” or types of buyers, and created customized sales

approaches for each. For example, an upper-middle-class woman was referred to as a “Jill.” A

young urban man was referred to as a “Buzz.” And pesky, bargain-hunting customers that Best

Buy couldn’t make much of a profit from? They were referred to as “devils” and taken off the

company’s mailing lists (Marco, 2009).

The knife cuts both ways, though. Not all firms are equal in the minds of consumers, who will

choose to do business with some companies rather than others. To consumers, market

segmentation means: meet my needs—give me what I want (Market Segmentation, 2009).

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“Steps in One-to-One Marketing” outlines the steps companies can take to target their best

customers, form close, personal relationships with them, and give them what they want—a

process called one-to-one marketing. In terms of our shotgun vs. rifle approach, you can think

of one-to-one marketing as a rifle approach, but with an added advantage: now you have a scope

on your rifle.

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 1. Establish short-term measures to evaluate your efforts. Determine how you will

measure your effort. For example, will you use higher customer satisfaction ratings, increased

revenues earned per customer, number of products sold to customers, transaction costs, or

another measure?

2. 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.

3. 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.

4. Interact with your customers, targeting your best ones. Find ways and mediums 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.

5. 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, Rogers, & Dorf, 1999).

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4 . 1 K E Y T A K E A W A Y

Choosing select groups of people to sell to is called targeted marketing, or differentiated marketing. Mass marketing, or undifferentiated marketing, involves selling the same product to everyone. The trend today is toward more precise, targeted marketing. Finding and attracting new customers is generally far more difficult than retaining one’s current customers, which is why organizations try to interact with and form relationships with their current customers. The goal of firms is to do as much business with their best customers as possible. Forming close, personal relationships with customers and giving them exactly what they want is a process called one-to-one marketing. It is the opposite of mass marketing.

4.2 How Markets Are Segmented

LEARNING OBJECTIVES

1. Understand and outline the ways in which markets are segmented. 2. Explain why marketers use some segmentation bases vs. others.

We will learn more about business markets and how they are segmented in Week 8. Now, we will

focus on consumer markets and how they can be segmented. In Week 3, “Consumer Behavior:

How People Make Buying Decisions,” we mentioned that certain factors drive consumers to buy

certain things. Many of the same factors can also be used to segment customers. A firm will often

use multiple segmentation bases, or criteria to classify buyers, to get a fuller picture of its

customers and create real value for them. Each variable adds a layer of information about those

buyers until you have a profile of a market segment.

There are all kinds of characteristics you can use to segment a market. You might not immediately

think of some of them. What about the physical sizes of people? “Big-and-tall” stores cater to the

segment of population that’s larger-sized. What about people with wide or narrow feet, or people

with medical conditions, certain hobbies, or different sexual orientations? Next, we’ll look at some

of the more common characteristics market researchers look at when segmenting buyers.

Types of Segmentation Bases Table 4.1, “Common Ways of Segmenting Buyers,” shows some of the different types of buyer

characteristics used to segment markets. Notice that the characteristics fall into one of four

segmentation categories: behavioral, demographic, geographic, or psychographic. We’ll discuss

each of these categories in a moment. For now, you can get a rough idea of what the categories

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consist of by looking at them in terms of how marketing professionals might answer the following

questions:

• Behavioral segmentation. What benefits do customers want, and how do they use our

product?

• Demographic segmentation. How do the ages, races, and ethnic backgrounds of our

customers affect what they buy?

• Geographic segmentation. Where are our customers located, and how can we reach

them? What products do they buy based on their locations?

• Psychographic segmentation. What do our customers think about and value? How

do they live their lives?

Table 4.1 Common Ways of Segmenting Buyers

By Behavior By Demographics By Geography By Psychographics

• Benefits sought from the product • How often the product is used

(usage rate) • Usage situation (daily use,

holiday use, etc.) • Buyer’s status and loyalty to

product (nonuser, potential user, first-time users, regular user)

• Age/generation • Income • Gender • Family life cycle • Ethnicity • Family size • Occupation • Education • Nationality • Religion • Social class

• Region (continent, country, state, neighborhood)

• Size of city or town • Population density • Climate

• Activities • Interests • Opinions • Values • Attitudes • Lifestyles

Segmenting by Behavior Behavioral segmentation divides people into groups according to how they behave with or act

toward products. Benefits segmentation—segmenting buyers by the benefits they want from

products—is very common. Take toothpaste, for example. Which benefit is most important to you

when you buy toothpaste: the toothpaste’s price, ability to whiten your teeth, fight tooth decay,

freshen your breath, or something else? Perhaps it’s a combination of two or more benefits. If

marketing professionals know what those benefits are, they can then tailor different toothpaste

offerings to you (and other people like you). For example, Colgate 2-in-1 Toothpaste &

Mouthwash, Whitening Icy Blast is aimed at people who want the benefits of both fresher breath

and whiter teeth.

Another way in which businesses segment buyers is by their usage rates—that is, how often, if

ever, they use certain products. For example, the entertainment and gaming company Harrah’s

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gathers information about the people who gamble at its casinos. High rollers, or people who

spend a lot of money, are considered “VIPs.” VIPs get special treatment, including a personal

“host” who looks after their needs during their casino visits. Companies are interested in frequent

users because they want to reach others like them. They are also keenly interested in nonusers

and how they can be persuaded to use products.

The way in which people use products is also a basis for segmentation. Avon Skin So Soft was

originally a beauty product. But after Avon discovered that some people were using it as a

mosquito repellant, the company began marketing it for that purpose. Eventually, Avon created a

separate product called Skin So Soft Bug Guard, which competes with repellents like Off!

Similarly, Glad, the company that makes plastic wrap and bags, found out customers were using

its Press ‘n Seal wrap in ways the company could never have imagined. The personnel in Glad’s

marketing department subsequently launched a website called 1000uses.com that contained both

the company and consumers’ use tips. Some of the ways in which people use the product are

pretty unusual, as evidenced by the following comment posted on the site: “I have a hedgehog

who likes to run on his wheel a lot. After quite a while of cleaning a gross wheel every morning, I

got the tip to use ‘Press ‘n Seal wrap’ on his wheel, making clean up much easier! My hedgie can

run all he wants, and I don’t have to think about the cleanup. Now we’re both GLAD!” (Glad,

2009).

Although we doubt Glad will ever go to great lengths to segment the Press ‘n Seal market by

hedgehog owners, the firm has certainly gathered a lot of good consumer insight about the

product and publicity from its 1000uses.com website.

Segmenting by Demographics Segmenting buyers by tangible, personal characteristics such as their ages, incomes, ethnicity,

family sizes, and so forth is called demographic segmentation. This section will discuss some

prominent demographic characteristics used to segment buyers, including age, income, gender,

and family life cycles. Other demographic characteristics include occupation, education,

nationality, religion, and social class.

Demographics are commonly used to segment markets because a mountain of demographic

information is publicly available in databases around the world. You can obtain a great deal of

demographic information on the US Census Bureau’s website (http://www.census.gov). Other

government websites you can tap include FedStats (http://fedstats.sites.usa.gov/) and The World

Factbook (https://www.cia.gov/library/publications/the-world-factbook/index.html), which

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contains statistics about countries around the world. In addition to current statistics, the sites

contain forecasts of demographic trends, such as whether some segments of the population are

expected to grow or decline.

Age

At some point in your life, you are more likely to buy your first home than a funeral plot.

Marketing professionals know this. That’s why they try to segment consumers by their ages.

You’re probably familiar with some of the age groups most commonly segmented in the United

States. They are shown in Table 5.2, “US Generations and Characteristics.” Into which category do

you fall?

Table 5.2 US Generations and Characteristics

Generation Also Known As Birth Years Characteristics

Seniors “The Silent Generation,” “Matures,” “Veterans,” and “Traditionalists”

1945 and prior

• Experienced very limited credit growing up

• Tend to live within their means • Spend more on health care than

any other age group • Internet usage rates increasing

faster than any other group

Baby Boomers 1946– 1964

• Second-largest generation in the United States

• Grew up in prosperous times before the widespread use of credit

• Account for 50 percent of US consumer spending

• Willing to use new technologies as they see fit

Generation X 1965– 1979

• Comfortable but cautious about borrowing

• Buying habits characterized by their life stages

• Embrace technology and multitasking

Generation Y “Millennials,” “Echo Boomers,” includes “Tweens” (preteens)

1980– 2000

• Largest US generation • Grew up with credit cards • Adept at multitasking; technology

use is innate • Ignore irrelevant media

Note: Not all demographers agree on the cutoff dates between the generations. Sources: U.S. Census Bureau, http://www.census.gov/population/www/popdata.html; Richard K. Miller and Kelli Washington, The 2009 Entertainment, Media & Advertising Market Research Handbook, 10th ed. Loganville, GA: Richard K. Miller & Associates, 2009, 157–66; Sydney Jones and Susannah Fox, “Generations Online in 2009,” Pew Research Center,http://www.pewinternet.org/Reports/2009/Generations-Online-in-2009.aspx; Maria Paniritas, “Generation Gap: Boomers, Xers Are Reining in Spending,” Philadelphia Inquirer, August 2, 2009, http://articles.philly.com/2009-08-02/business/25275378_1_spending-habits-boomers-consumer-economy.

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Today, Generation Y is the largest generation. The baby boomer generation is the second largest,

and over the course of the last 30 years, it has been a very attractive market for sellers.

Retro brands—old brands or products that companies “bring back” for a period of time—were

aimed at baby boomers during the economic downturn in the early 2000s. Pepsi Throwback and

Mountain Dew Throwback, which are made with cane sugar—like they were “back in the good old

days”—instead of corn syrup, are examples (Schlacter, 2009). Take a look at Figure 4.3

illustrating Coke’s retro look bottle. This was the original Coca-Cola bottle from Coke’s early

history through the mid-twentieth century when technology allowed for cans and simpler bottle

designs. Marketing professionals believe they appealed to baby boomers because they reminded

them of better times—times when they didn’t have to worry about being laid off, about losing their

homes, or about their retirement funds and pensions drying up.

Figure 4.3 Coca-Cola’s Retro Look Bottle

If you are old enough to remember this bottle, you are

probably a baby boomer, and the bottle design may

appeal to you when buying soft drinks.

Source: Photo by Kansir. (2012). Flickr. Used under the terms of the Creative Commons Attribution 2.0 Generic license.

But baby boomers are aging, and the size of the group will eventually decline. By contrast, the

members of Generation Y have a lifetime of buying still ahead of them, which translates to a lot of

potential customer lifetime value (CLV) for marketers if they can capture this group of buyers.

However, a survey found that the latest recession had forced teens to change their spending

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habits and college plans, and that roughly half of older Generation Yers reported they had no

savings (Fort Worth Star-Telegram, 2009).

So which group or groups should your firm target? Although it’s hard to be all things to all people,

many companies try to broaden their customer bases by appealing to multiple generations so they

don’t lose market share when demographics change. Several companies have introduced lower-

cost brands targeting Generation Xers, who have less spending power than boomers. For

example, kitchenware and home-furnishings company Williams-Sonoma opened the Elm Street

chain, a less-pricey version of the Pottery Barn franchise. The Starwood hotel chain’s W hotels,

which feature contemporary designs and hip bars, are aimed at Generation Xers (Miller &

Washington, 2009).

The video game market is very proud of the fact that along with Generation X and Generation Y,

many older Americans still play video games. (You probably know some baby boomers who own a

Nintendo Wii.) The spa market is another example. Products and services in this market used to

be aimed squarely at adults. Not anymore. Parents are now paying for their tweens to get facials,

pedicures, and other pampering in numbers no one in years past could have imagined.

Staying abreast of changing demographics can be a matter of life or death for many companies. As

early as the 1970s, US automakers found themselves in trouble because of demographic reasons.

Many of the companies’ buyers were older Americans inclined to “buy American.” These people

hadn’t forgotten that Japan bombed Pearl Harbor during World War II and weren’t about to buy

Japanese vehicles. But younger Americans were. Plus, Japanese cars had developed a better

reputation. Despite the challenges US automakers face today, they have taken great pains to cater

to the “younger” generation—today’s baby boomers who don’t think of themselves as being old. If

you are a car buff, you perhaps have noticed that the once-stodgy Cadillac now has a sportier look

and stiffer suspension.

And what about Generations X and Y? Automakers have begun reaching out to them, too. General

Motors (GM) has sought to revamp the century-old company by hiring a new younger group of

managers—managers who understand how Generation X and Y consumers are wired and what

they want. “If you’re going to appeal to my daughter, you’re going to have to be in the digital

world,” explained one GM vice president (Cox, 2009).

Companies have to not only develop new products designed to appeal to Generations X and Y but

also find new ways to reach them. People in these generations not only tend to ignore traditional

advertising but also are downright annoyed by it. To market to Scion drivers, who are generally

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younger, Toyota created Scion Speak, a social networking site where they can communicate,

socialize, and view cool new models of the car. Online events such as the fashion shows broadcast

over the web are also getting the attention of younger consumers, as are text, e-mail, and Twitter

messages they can sign up to receive so as to get coupons, cash, and free merchandise.

Income

Tweens might appear to be a very attractive market when you consider they will be buying

products for years to come. But would you change your mind if you knew that baby boomers

account for 50 percent of all consumer spending in the United States? Americans over 65 now

control nearly three-quarters of the net worth of US households; this group spends $200 billion a

year on major “discretionary” (optional) purchases such as luxury cars, alcohol, vacations, and

financial products (Reisenwitz, Iyer, Kuhlmeier, & Eastman, 2007).

Income is used as a segmentation variable because it indicates a group’s buying power. People’s

incomes also tend to reflect their education levels, occupation, and social classes. Higher

education levels usually result in higher-paying jobs and greater social status.

The makers of upscale products such as Rolexes and Lamborghinis aim their products at high-

income groups. However, a growing number of firms are aiming their products at lower-income

consumers. The fastest-growing product in the financial services sector is prepaid debit cards,

most of which are being bought and used by people who don’t have bank accounts. Firms are

finding that this group is a large, untapped pool of customers who tend to be more brand-loyal

than most. If you capture enough of them, you can earn a profit (von Hoffman, 2006).

Sometimes income isn’t always indicative of who will buy your product, however. Companies are

aware that many consumers want to be in higher-income groups and behave like they are already

part of them (recall the reference groups discussed in Week 3, “Consumer Behavior: How People

Make Buying Decisions”). Mercedes Benz’s cheaper line of “C” class vehicles is designed to appeal

to these consumers.

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Gender

Gender is another way to segment consumers. As we explained in Week 3, “Consumer Behavior:

How People Make Buying Decisions,” men and women have different physiological and other

needs. They also shop differently. Consequently, the two groups are often, but not always,

segmented and targeted differently. Marketing professionals don’t stop there, though. For

example, because women make many of the purchases for their households, market researchers

sometimes try to further divide them into subsegments. (Men are also often subsegmented.) For

women, those segments might include stay-at-home housewives, plan-to-work housewives, just-

a-job working women, and career-oriented working women. Women who are solely homemakers

tend to spend more money, research has found—perhaps because they have more time.

In addition to segmenting by gender, market researchers might couple people’s genders along

with their marital statuses and other demographic characteristics. For, example, did you know

that more women in America than ever before (51 percent) now live without spouses? Can you

think of any marketing opportunities this might present? (Barry, Gilly, & Doran, 1985).

Family Life Cycle

Family life cycle refers to the stages families go through over time and how the stages affect

people’s buying behavior. The primary life cycle stages used by marketers are illustrated in Figure

4.4. For example, if you have no children, your demand for pediatric services (medical care for

children) is likely to be slim to none. But if you have children or adopt them, your demand might

be very high because children frequently get sick. You will be part of the target market not only for

pediatric services but also for a host of other products, such as children’s clothing, entertainment

services, and educational products.

A secondary segment of interested consumers might be grandparents who are likely to spend less

on day-to-day child care items but more on special-occasion gifts for children. In fact, many

markets are segmented based on the special events in people’s lives. Think about brides (and

wannabe brides) and all the products targeted at them, including websites and television shows

such as Platinum Weddings, Married Away, Whose Wedding Is It Anyway, and Bridezilla.

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Figure 4.4 Family Life Cycle Stages

One main concern of marketing research firms is how to identify the

similarities and differences between various life-stage segments.

Source: Mediamark Research, Inc. (1990), Lifestage Marketing. Mediamark Research: New York.

Resorts also segment vacationers depending on where they are in their family life cycles. When

you think of family vacations, you probably think of Disney resorts. Some vacation properties,

such as Sandals, exclude children from some of their resorts. Perhaps they do so because some

studies show that the market segment with greatest financial potential is married couples without

children (Barry, Gilly, & Doran, 1985).

Keep in mind that although you might be able to isolate a segment in the marketplace, including

one based on the family life cycle, you can’t make necessarily make assumptions about what the

people in it will want. Just like people’s demographics change, so do their tastes. For example,

over the past few decades, US families have been getting smaller. Households with a single

occupant are more common than ever. But that hasn’t stopped people from demanding bigger

cars (and more of them) as well as larger houses, or what some people jokingly refer to as

“McMansions.”

But like the trend toward larger cars, the trend toward larger houses appears to be reversing. High

energy costs, the credit crunch, and concern for the environment are leading people to demand

smaller houses. To attract people such as these, D. R. Horton, a leading national homebuilder,

and other construction firms are now building smaller homes.

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Ethnicity

People’s ethnic backgrounds have a big impact on what they buy. If you’ve visited a grocery store

that caters to a different ethnic group than your own, you were probably surprised to see the types

of products sold there.

It’s no secret that the United States is becoming—and will continue to become—more diverse.

Hispanic Americans are the largest and the fastest-growing minority in the United States.

Companies are courting this once-overlooked group. In California, the health care provider Kaiser

Permanente runs television ads letting members of this segment know that they can request

Spanish-speaking physicians, and that Spanish-speaking nurses, telephone operators, and

translators are available at all of its clinics (Berkowitz, 2006).

African Americans are the second-largest ethnic group in America. Collectively, they have the

most buying power of any ethnic group in America. Many people of Asian descent are known to be

early adapters of new technology and have above-average incomes. As a result, companies that

sell electronic products, such as AT&T, spend more money segmenting and targeting the Asian

community (Insight Research Corporation, 2003). Table 4.3, “Major US Ethnic Segments and

Their Spending,” contains information about the number of people in these groups and their

buying power.

Table 4.3 Major US Ethnic Segments and Their Spending

Group Percentage of US Population Annual Spending Power (Billions of Dollars)

Hispanic 13.7 736

African American 13.0 761

Asian 5.0 397

Source: New American Dimensions, LLC.

As you can guess, even within ethnic groups, there are many differences in terms of the goods and

services buyers choose. Consequently, looking broadly at each group would leave an incomplete

picture of your buyers. For example, although the common ancestral language among the

Hispanic segment is Spanish, Hispanics trace their lineages to different countries. Nearly 70

percent of Hispanics in the United States trace their lineage to Mexico; others trace theirs to

Central America, South America, and the Caribbean.

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The Asian ethnic group has distinct divisions. Chinese, Japanese, and Korean immigrants do not

share the same language (Insight Research Corporation, 2003). Moreover, both the Asian and

Hispanic market segments include new immigrants, people who immigrated to the United States

years ago, and native-born Americans. So what language will you use to communicate your

offerings to these people, and where?

Subsegmenting the markets could potentially help you. New American Dimensions, a

multicultural research firm, has further divided the Hispanic market into the following

subsegments (HispanicAd.com, 2008):

• Just moved in’rs. Recent arrivals, Spanish-dependent, struggling but optimistic.

• FOBrs (fashionistas on a budget). Spanish-dominant, traditional, but striving for

trendy.

• Accidental explorers. Spanish-preferred, not in a rush to embrace US culture.

• The englightened. Bilingual, technology-savvy, driven, educated, modern.

• Doubting Tomáses. Bilingual, independent, skeptical, inactive, shopping uninvolved.

• Latin flavored. English-preferred, reconnecting with Hispanic traditions.

• SYLrs (single, young Latinos). English-dominant, free thinkers, multicultural.

You could go so far as to break down segments to the individual level (which is the goal behind

one-to-one marketing). However, doing so would be expensive, notes Juan Guillermo Tornoe, a

marketing expert who specializes in Hispanic issues. After all, are you really going to develop

different products for each of the groups? Different marketing campaigns and communications?

Perhaps not. However, “you need to perform your due diligence and understand where the

majority of the people you are trying to reach land on this matrix, modifying your message

according to this insight,” Tornoe (2008) explains.

Segmenting by Geography Where will your customers come from? Suppose your new product or service idea involves

opening a local store. Before you open the store, you will probably want to do some research to

determine which geographical areas have the best potential. For instance, if your business is a

high-end restaurant, should it be located near the local college or country club? If you sell ski

equipment, you probably will want to locate your shop in the vicinity of a mountain range where

there is skiing. You might see a snowboard shop in the same area but probably not a surfboard

shop. By contrast, a surfboard shop is likely to be located along the coast, but you probably would

not find a snowboard shop on the beach.

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Geographic segmentation explains why the checkout clerks at stores sometimes ask you what

your zip code is. It’s also why businesses print codes on coupons that correspond to zip codes.

When the coupons are redeemed, the store can then find out where its customers are located—or

not located. Geocoding is a process that takes data such as this and plots it on a map. Geocoding

can help businesses see where prospective customers might be clustered and target them with

various ad campaigns, including direct mail, for example.

One of the most popular geocoding software programs is PRIZM NE, which is produced by a

company called Claritas. PRIZM NE uses zip codes and demographic information to classify the

American population into segments. The idea behind PRIZM is that “you are where you live.”

Combining both demographic and geographic information is referred to as geodemographics.

To see how geodemographics works, visit the following page on Claritas’

website: http://www.claritas.com/MyBestSegments/Default.jsp?ID=20.

Type in your zip code, and you will see customer profiles of the types of buyers who live in your

area. Table 4.4, “An Example of Geodemographic Segmentation for 76137 (Fort Worth,

TX),” shows the profiles of buyers who can be found in the zip code 76137—the “Brite Lites, Li’l

City” bunch, Home Sweet Home” set, and so on. Click on the profiles on the Claritas site to see

which one most resembles you.

Table 4.4 An Example of Geodemographic Segmentation for 76137 (Fort Worth, TX)

Number Profile Name

12 Brite Lites, Li’l City

19 Home Sweet Home

24 Up-and-Comers

13 Upward Bound

34 White Picket Fences

The tourism bureau for the state of Michigan was able to identify different customer profiles and

target them using PRIZM. Michigan’s biggest travel segment are Chicagoans in certain zip codes

consisting of upper-middle-class households with children—or the “kids in cul-de-sacs” group, as

Claritas puts it. The bureau was also able to identify segments significantly different from the

Chicago segment, including blue-collar adults in the Cleveland area who vacation without their

children. The organization then created significantly different marketing campaigns to appeal to

each group.

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City size and population density (the number of people per square mile) are also used for

segmentation purposes. Have you ever noticed that in rural towns, McDonald’s restaurants are

hard to find? But Dairy Queens are usually easy to locate. McDonald’s generally won’t put a store

in a town of fewer than 5,000 people. However, this is prime turf for the “DQ”—for one, because it

doesn’t have to compete with bigger franchises like McDonald’s.

Proximity marketing is an interesting new technology firms are using to segment buyers

geographically and target them within a few hundred feet of their businesses using wireless

technology. In some areas, you can switch your mobile phone to a “discoverable mode” while

you’re shopping and, if you want, get ads and deals from stores as you pass by them. And it’s often

less expensive than hiring people to hand you a flier as you walk by (Bluetomorrow.com, 2007).

In addition to figuring out where to locate stores and advertise to customers in that area,

geographic segmentation helps firms tailor their products. Chances are you won’t be able to find

the same heavy winter coat you see at a Walmart in Montana at a Walmart in Florida because of

the climate differences. Market researchers also look at migration patterns to evaluate

opportunities. TexMex restaurants are commonly found in the southwestern United States.

However, northern states are now seeing more of them as more people of Hispanic descent move