Evaluating market segments

A company should examine two broad issues when evaluating market segments: market attractiveness and the company's capacity to compete in the segment.

Market attractiveness

Market attractiveness is a function of the market potential of a segment and the level of competition in that segment. The size of a segment and its growth rate can increase its attractiveness. For example, the penetration of mobile phones has increased dramatically across Europe in the past decade, attracting new entrants with products and services for mobile phone users such as text messaging and ringtones. However, companies should look not just at the potential revenues to be gained from a segment, but also at potential profits. Several factors may combine to depress the profitability levels of a segment, particularly intense competition, ease of entry by new competitors, price sensitivity among consumers and high levels of bargaining power among buyers and suppliers. For example, in recent years budget air travel has been the fastest-growing segment of the aviation industry, generating rapid sales growth for industry leaders like Ryanair and easyJet. Traditionally seen as being just for holiday-makers, budget travel is gaining an increasing share of the business travel segment. It is also intensely competitive, with relatively low profit margins and pressures to keep costs down. So much so that British Airways was forced to sell its low-cost carrier Go in 2000 when it failed to make a profit.

Company capability

Market attractiveness factors must be weighed against a firm's capacity to serve a market segment- it may be attractive but may lie outside the resource base of the company. A firm's capacity, or capability, to serve a market segment may be assessed by analysing its exploitable marketing assets. For instance, will the market segment allow the firm to exploit its current marketing strengths? Is segment entry consistent with the image of its brands, does it provide distribution synergies, or does it allow the firm to exploit its cost or technological advantages? However, where new segment entry is inconsis­tent with image, a new brand name may be created. Toyota (www.toyota.com), for example, developed the Lexus model name when entering the upper-middle executive car segment. Entry to a new segment should also fit with the capabilities of management and the company's vision. Successful marketing depends on implemen­tation. Without the commitment of management, segment entry will fail on the altar of neglect.

Target marketing strategies

T he aim of evaluating market segments is for a company to arrive at a choice of one or more segments to enter. Target market selection is the choice of what and how many market segments in which to compete. There are four generic target marketing strategies from which to choose: undifferentiated marketing, differentiated mar­keting, focused marketing and customized marketing (see Fig. 5.2). Each option will now be examined.

Undifferentiated marketing

Market analysis will occasionally reveal no pronounced differences in customer charac­teristics that have implications for a marketing strategy. Alternatively the cost of developing a separate market mix for different segments may outweigh the potential gains of meeting customer needs more exactly. Under these circumstances a company may decide to develop a single marketing mix for the whole market. This absence of segmentation is called undifferen­tiated marketing. Unfortunately this strategy can occur by default. For example, companies that lack a marketing orientation may practice undifferentiated marketing through lack of customer knowledge. Furthermore, undifferen­tiated marketing is more convenient for managers since they have to develop only a single product. Finding out that customers have diverse needs, which can be met only by products with different characteristics, means that managers have to go to the trouble and expense of developing new products, designing new promotional campaigns, training the salesforce to sell the new products, and developing new distribution channels. Moving into new segments also means that salespeople have to start prospecting for new customers. This is not such a pleasant activity as calling on existing customers who are well known and liked.

So, the market segmentation process is usually the factor that motivates those companies that practice undifferentiated marketing to embark on one of the three target marketing strategies we will look at below.