Sternthal b. tybout a. kellogg on marketing. ch 1 segmentation and targeting

4 Strategy: Thinking About the Customer

CHAPTER 1

Segmentation and Targeting

BRIAN STERNTHAL and ALICE M. TYBOUT

S

United States to Latin countries because it was a fairly priced service that pledged not to change prices. Advertising was done exclusively on Hispanic television programming. Despite an advertising budget of $1.3 million, which is a small fraction of competitivedial-around ad spending, Americatel became a major player in the dial-around long distance category. While it is relatively easy to identify examples of successful segmentation and targeting, many managers find undertaking these tasks for their own products daunting. One reason is that the list of potential bases for segmenting a market is seemingly endless and there is little guidance as to how tochoose among them. Further, when the segmentation analysis is complete, many or even all of the subgroups may represent attractive targets, making it difficult to decide how to focus resources. In this chapter, we address these issues by presenting a strategic approach to segmentation and targeting. The cornerstone of this strategy is the belief that usage patterns should provide the starting pointfor market segmentation. Other factors, such as demographics (age, gender, family size, income, education), geographic location, attitudes, lifestyle, and the benefits that consumers seek from products in the category, may be used to make the usage-based approach actionable and to enrich the positioning. Once segmentation is complete, a “path of least resistance” approach should be adopted wherebypriority is given to targets that generate the greatest revenue with the least investment. The presentation of our approach is structured around three distinct situations that a manager may face. We begin by considering the most common scenario, that of a brand that is currently competing in a category and, thus, has a customer base. Next, we explore how firms that lack an established customerbase in a category may modify this basic strategy. Finally, we examine the situation in which both the firm and the brand are new to the market. However, before we turn to the details of how to segment and target, we brief ly consider the question of whether segmentation is necessary at all.

egmentation and targeting are two key elements of marketing planning. Segmentation involves dividing themarket of potential customers into homogeneous subgroups. These subgroups may be distinguished in terms of their behavior patterns, attitudes, demographic characteristics, psychographic profile, and the like. Marketing effort is focused on target(s) whose needs correspond to the firm’s capabilities. The process of segmenting and targeting is illustrated by Americatel in the long distance phoneservice market. During the past several years, long distance carriers have introduced “dial-around” services that offer consumers relatively low long distance rates. MCI introduced 10-10-321 and AT&T launched 10-10-315 under the Lucky Dog Phone name to offer consumers low f lat rates on their long distance calls. A spate of small firms has also entered the market with low price, long distance service.As a result, there is substantial price volatility in the market. Although the offerings by these major carriers provide attractive alternatives to customers who are calling long distance within the United States or to Europe, there has been little focus on those who do their long distance calling to other countries. For example, with more than 12 million persons in the United States, the Hispanicpopulation is substantial. Many Hispanics have family in Mexico, Cuba, Puerto Rico, or South America. They make frequent calls of substantial duration to family and friends in their home country. Research indicates that these consumers want a carrier that offers low price but also a service that will sustain the price that they agree to initially. Americatel entered the market with a 10-10-123...