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Market Definition is a Multi-Dimensional Process

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Market segmentation allows a firm to operate with limited resources, since mass production, mass distribution, and mass advertising are not required. Market segmentation can enable a small firm to compete successfully with a large firm by maximizing per-unit profits and per- segment sales.
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Market Definition is a
Multi-Dimensional Process
Michael W. Lodato, Ph.D.
Introduction

Customers today know more what they want, and they are more specific about when and where
they want it. This means that markets have to be defined more precisely – and more often. In
response, firms must become more adept at identifying precise differences among customers'
needs and preferences. Armed with these understandings, firms are able to segment customers
into groups with unique needs and preferences.

Once the uniqueness of customers' needs is known, firms can produce products and services
tailored to the specific needs of individual customer groups.

The companies that take the time to understand current and future customer needs in specific
market segments are winning the competitive battle over firms that rely mostly on technicians in the
lab to figure out what can be done with technology.

Precise market definition is crucial to the success of a business because it affects what markets
should be targeted, the selection of products, staffing, distribution, and many other factors.

The key to target marketing is market segmentation because it is central to matching supply and
demand. The demand for hotel rooms, for example, can be dependent on foreign tourists, business
persons, and vacationers. Focusing on these three market segments separately, however, can
allow hotel firms to predict overall supply and demand more effectively.

There are several other advantages to good market segmentation. The more clearly defined the
markets are:
• the more meaningful the analysis of the competition can be,
• the more accurate the calculation of relative market share can be,
• the easier it is to spot appropriate target markets where the business unit can win,
• the more possible it is to get a keen understanding of the industry in which the business
functions,
• the more likely it is that the most appropriate distribution channels will be chosen to reach
them.

The approach outlined below yields meaningful and precise definitions of market segments,
which, in turn, yields precisely defined target markets. It views market segments as being multi-
dimensional.0
What is a Market?

A market is a set of organizations and/or people who could benefit from the products and services
offered by you and your competitors and who have the purchasing power and authority to buy.

In general, there are two kinds of markets:
consumer markets that consist of the ultimate consumers of the products or services for
personal use; and
business or industrial markets that consist of organizations that purchase products or
services for use directly or indirectly in the production of products or services that they offer.

1



Products used directly by business and industrial markets include raw material, components, and
packaging. Products used indirectly include business software, paper, pens, air conditioning, and
banking services.

Defining Target Markets

Target markets are those markets in which the business will focus its marketing, sales, and product
development efforts. The idea is to compete where the business has some leverage. All the
remaining components of the product marketing strategy – product, pricing, promotion, positioning,
and distribution – are specified based upon the target markets chosen.

Methodology for Defining Target Markets

Target markets
are selected from candidate market segments. So the first task is to do what is
called market segmentation.

The following graphic, Figure 1, summarizes a methodology for defining the target markets for a
firm.



1.0
2.0
3.0
4.0

Identify
Describe &
Select
Choose

Market
Analyze
Candidate
Target

Segments
Segments
Target Markets
Markets


Figure 1. Methodology for Defining Target Markets: Top Level Flow

1.0 Identify Market Segments

Market segmentation
is the partitioning of a market into clearly defined parts in which the business
unit could compete. In segmenting a market, we seek to characterize groups of prospects
• with similar or related characteristics,
• who have common needs and values,
• which will respond similarly to specified offerings, and
• which are large enough to be strategically important to the business unit.

Market segmentation allows a firm to operate with limited resources, since mass production,
mass distribution, and mass advertising are not required. Market segmentation can enable a
small firm to compete successfully with a large firm by maximizing per-unit profits and per-
segment sales.

Segmenting a market may be as easy as sorting customers by size, location, or industry. Or it can
be a complex process involving statistical models. Either way, the idea is to capture more market
share and profit by catering to market niches large enough to justify individual attention. Marketers
must ensure that each segment they define is homogenous, its members sharing a key
characteristic that differs from that of all other segments.

For example, a market for a sales automation software offering might be partitioned by industry into
manufacturing, financial, transportation, hotel, etc. But this may not be precise enough for selection
of the markets on which the business will focus. So, other dimensions are considered, such as
geographical location, size of the business, computing environment, and number of salespeople.


2





1.1
1.2
1.3
1.4

REF. 1.0
Identify
Partition
Create
Identify

Identify
Market
Dimensions
Segmentation
Candidate

Market
Dimensions
into
Market

Segments
Worksheet

Components
Segments


Figure 2. Identifying Market Segments First Level Flow

1,1 Identify Dimensions That Define Markets Of Interest

Each market segment is best described in terms of several dimensions. For example, some
dimensions that might come into play within a consumer market sector are gender, age, family
income, and life stage. These are commonly referred to as demographic dimensions.


Dimensions for market segmentation of industrial and business markets
Instead of competing in markets dominated by larger firms, many small and medium-sized
companies concentrate on specific market segments where larger firms are not dominant.


Bases for Industrial and Business Market Segmentation
The following exhibit shows that business markets may be segmented on the basis of technology
employed, functions performed, organizational characteristics, user needs, and end use
application.
Technology
Functions
Organizational
User Needs
Geographic End Use
Employed
Performed
Characteristics
Application
Computing
Data
Type of
Buyer
Political
Marketing
Environment
Storage
Business
Requirements
Boundaries
Uses
Applications
Operating
User
Organization
Product
Regional
Human
System
Applications Size
Specifications
Boundaries
Resources
Uses
Database
Industry
Type
Benefits
Metropolitan Finance
Structure
Sought
Statistical
Uses
Area
Communication Non-Business
Organizational Density Design
System
Organizations
Problems
Uses
Software
Departments
in
Purchase
Production
Organizations
Behavior
Uses

Positions
within
Usage


Organizations
Patterns

Individuals
in



Organizations

Professions


Figure 3. Some dimensions that should be considered and a sample partitioning of those dimensions.

3



Technology-Based Segmentation divides organizations into homogeneous groups on the basis of
the technologies they employ, or wish to employ, in their operations.

Here is a partitioning one might use for each of these technology-based dimensions in the table:
Computing Environment:
• Lap-top, desk-top, workstation, small network, medium network, large network, small
mid-range, medium mid-range, large mid-range, small mainframe, medium mainframe,
large mainframe, other
Operating System:
• DOS, Windows, OS/2, MacIntosh, SCO, Novell, WFW, Windows NT, Sun OS/SPARC,
UNIX, AIX, IBM, IBM R/6000, HP Apollo, DEC ULTRIX, DEC VMS, Silicon Graphics,
Data General, HP-UX, Burroughs Unisys, other
Data Base Structure:
• Oracle, Sybase, Informix, other
Communication System:
• Local Area Network (LAN), Wide Area Network (WAN), closely-coupled network, other

In a services business, the Technology dimension can specify capabilities of people such as how
adept they are at COBOL programming, project management expertise, training, applications
knowledge.

Some Technology dimensions for consideration when defining software markets include:
Systems management software

(Integrated applications that automate data center operations),
Information management software

(Data base management, software engineering, applications development and life cycle
management), and
Business applications software

(End user computing solutions).

Function-Based Segmentation divides organizations into homogeneous groups on the basis of the
functions performed. Functions-based dimensions include:
Data Storage Applications:

Hierarchical Storage Management, disaster prevention, data collection, normal backup,
archiving, near on line, digital video, other.
User Applications:

Computer Aided Design, library storage, engineering, manufacturing, process control,
instrumentation, inventory control, accounting, insurance processing, programming,
material requirements planning, information services, education, and a host of others.

User-Based Segmentation divides organizations into homogeneous groups on the basis of the
types of user organization. User-based dimensions include:
Type of Business (or Industry):

Manufacturing, distribution, retail, service, agrabusiness, financial institutions, insurance,
scientific, medical centers, construction, training, energy, pharmaceutical, real estate,
software, telecommunications, transportation, travel, entertainment, utility, other.
Size of Organization:

Fortune 500; Fortune 1000, large businesses, ($100M+), medium businesses, ($30-
$100M), small businesses, ($1-$30M), little business, ($500K-$1M), micro business, (less
than $500K), large department, medium department, small department, other
Professions:

Doctors, lawyers, CPAs, consultants, other
Non-Business Organization:

Universities, school administrations, hospitals, military bases, local government agencies,
state government agencies, federal government agencies, other
4



Departments Within Organizations:

Human resources, manufacturing, engineering, sales, marketing, legal, other
Position Within Organizations:

Materials managers, financial managers, sales executives, engineers, professors, other
Individuals Within Organizations:

Students, military officers, traveling salesman, other

Needs-Based Segmentation divides organizations into homogeneous groups on the basis of
product specifications identified by organizational buyers - in other words, on the basis of specific
buyer requirements. Examples are the packaging requirements of customers of a fast food chain
and the preference for types of computers (Apple vs. IBM).

Here are examples of needs choices:
• Product
serviceability
• Capacity
• Easy upgrade path
• Low power consumption
• Type of connectivity
• Number of simultaneous users that can be handled.
• Storage
requirements
• Screen resolution requirements
• Reliability
• Response
time
• Degree of expandability
• Degree of modularity
• Intensity of use of the CPU

Geographic Segmentation divides organizations into homogeneous groups based on specific
geographic locations. Examples are oil field equipment users (which are largely concentrated in
Texas, Oklahoma, and Louisiana), resort locations, certain metropolitan areas, automobile
manufacturers (which are concentrated in the Detroit area), etc. Organizations want prospects to
be within reach of their marketing and technical resources, within their geographical areas of
concentration.

Some geographic dimensions with sample partitioning:
Region:

Pacific, Mountain, West North Central, West South Central, East North Central, East South
Central, South Atlantic, Middle Atlantic, New England.
City or Statistical Metropolitan Area Size:

Under 5,000, 5,000 to 20,000, 20,000 to 50,000, 50,000 to 100,000, 100,000 to 250,000,
250,000 to 500,000, 500,000 to 1,000,000, 1,000,000 to 4,000,000, 4,000,000 +.
Density:

Urban, suburban, rural

End-Use Application Segmentation divides organizations into homogeneous groups on the basis of
how different purchasers will use the product or service. End use of a product or service may
dictate unique specifications for performance, design, and price. Computers are a perfect example
because of the wide variety of uses for them. Stereos for home use will have designs very different
than for stereos for use in automobiles.
Market Segmentation of Consumer Markets

Segmenting consumer markets is generally much simpler and easier than segmenting industrial
markets, because industrial products, such as forklifts and trucks, have multiple applications, and
appeal to diverse customer groups.
5



Bases for Consumer Market Segmentation

The following exhibit shows some of the commonly used bases for consumer markets and some
dimensions that are often examined.

Demographic Geographic Psychographic
Behavioral Benefit
Age Political
Activities Use
Occasion Health
Benefits
Boundaries
Sex Climatic
Regions
Interests
User Status
Safety Benefits
Family Size
Regional
Opinions
Usage Rate
Social Benefits
Boundaries
Family Life Cycle
Metropolitan
Self-Orientation Attitude
Toward Intellectual
Statistical Areas
Product
Benefits
Income Density Attitudes Loyalty
Status

Occupation
ZIP Codes
Social Class
Readiness Stage
Education

Lifestyle
Time of Purchase
Religion
Personality
Shopping

Frequency
Race
Politics
Media
Habits

Nationality
Perceptions


Figure 4. Bases for Segmentation of Consumer Markets

Demographic Segmentation divides a population into homogeneous groups based on character-
istics such as age, gender, income level, level of education, occupation, household size, stage in
family life cycle.

Some demographic dimensions with sample partitioning:
Age:

Under 6, 6-11, 12-19, 20-34, 35-49, 50-64, 65+
Sex:
Male,
female
Family size:
1-2, 3-4, 5+
Family life
Young & single, young & married with no children, young & married with

cycle:
youngest child under 6, young & married with youngest child 6 or over,
older & married with no children, older & married with children, older &
married with no children under 18, older & single, other
Income: Under
$5,000,
$5,000-$10,000,
$10,000-$15,000,
$15,000-$20,000,
$20,000-$30,000, $30,000-$50,000, $50,000-$100,000, $100,000 +
Occupation:
Professional and technical, managers, officials and proprietors, clerical,
sales, craftsmen, foremen, operatives, farmers, retired, students,
housewives, unemployed, other
Education:
Grade school or less, some high school, high school graduate, some
college, college graduate, advanced degree
Religion:
Catholic, Protestant, Jewish, other
Race:
White, black, Chicano, oriental, other
Nationality:
American, British, French, German, Scandinavian, Italian, Latin American,
Middle Eastern, Japanese, other

Geographic Segmentation
divides a population into homogeneous groups based on location. This
is used when consumer tastes vary by region. See Bases for Industrial and Business Market
Segmentation
(above) for typical breakdowns in geographic segmentation.

Psychographic Segmentation divides a population into homogeneous groups on the basis of
behavioral and lifestyle profiles developed by analyzing consumer activities, opinions, and interests.
6



In this context, lifestyle refers to a person's mode of living – how an individual operates on a daily
basis. It deals with activities, interests, opinions, needs, motives, and attitudes.

As a TV commercial pointed out, the light beer market can be separated into three motivational
segments: those who are calorie-conscious, those who prefer less alcohol, and those who prefer a
lighter taste. In fact, it is possible for one person to consume light beer on three separate occasions
for three different reasons. Some psychographic dimensions with sample partitioning:
Social class:

Lower lowers, upper lowers, lower middles, upper middles, lower

uppers,
upper
uppers
Lifestyle:

Straights, swingers, longhairs
Personality:

Compulsive, gregarious, authoritarian, ambitious
Activities:

Hunters, skiers, sailors, golfers, tennis players, fishermen, other
Political:

Liberal, conservative, libertarian, other
Self-orientation:
Principle-oriented (have set views), status-oriented (influenced by
what others think), action-oriented (seek activity, variety, and
adventure), other.

Behavioral Segmentation divides a population into homogeneous groups on the basis of their
response to a product or service. Some behavioral dimensions with sample partitioning:
Use occasion:
Regular occasion, special occasion
User status:

Nonuser, ex-user, potential user, first-time user, regular user
Usage rate:

Light user, medium user, heavy user
Loyalty status:
None, medium, strong, absolute
Readiness stage:
Unaware, aware, informed, interested, desirous, intending to buy
Attitude toward: Enthusiastic, positive, indifferent, negative, hostile

Benefit Segmentation divides a population into homogeneous groups on the basis of the benefits
they expect to derive from a product or service. For example, people want to look younger, feel
better, have more time to "smell the roses," feel safer, be perceived as intelligent, etc. Brand
loyalty, as evidenced by frequent traveler programs, is based on benefit segmentation.

1.2 Partition each dimension into its components


1.1
1.2
1.3
1.4

REF. 1.0
Identify
Partition
Create
Identify

Identify
Market
Dimensions
Segmentation
Candidate

Market
Dimensions
into
Market

Segments
Worksheet

Components
Segments


Figure 5. Identifying Market Segments: First Level Flow

Each dimension can be partitioned into components, to bring further understanding. In the
partitioning it is important to include all possibilities, even if you have to name one of the
components “Other.”

For example, a computing environment dimension can have the following components:
* Laptop * Desktop * Small network * Large network * Small mainframe * Large mainframe, * Other.

The reason for this is that when you select components to be included in a dimension of a
market segment you are actually excluding all the other components in that dimension.

More on this in the discussion on Step 1.4 (below).

7



In this step the analyst should eliminate those components from each dimension that obviously do
not fit. For example, if one were contemplating publishing an investment magazine, it would make
sense to eliminate under 19 from the age dimension, and less than $25,000 from the family income
dimension.

1.3 Create Market Segmentation Worksheet


1.1
1.2
1.3
1.4

REF. 1.0
Identify
Partition
Create
Identify

Identify
Market
Dimensions
Segmentation
Candidate

Market
Dimensions
into
Market

Segments
Worksheet

Components
Segments


Figure 6. Identifying Market Segments: First Level Flow

I developed the market segmentation worksheet concept in the early 1990s when helping a client
develop target markets for a line of computer tape library systems. As I thought about the problem I
was amazed at the number of dimensions that I would have to grapple with. Up until that time I felt
comfortable only in dealing with three dimensions. But with the computer tape library product I had
to deal with some 10 dimensions if we were going to define target markets with the precision
needed for effective marketing and sales. The challenge was not only to identify the dimensions but
also to represent them in a way that facilitated the definition of candidate market segments. The
reader will likely agree that market segment worksheets are powerful tools for target market
definition.

Below is an example of a market segmentation worksheet for a sales automation system:

Market Segmentation Worksheet

Computing


Operating

Number of
Type of

Size of
Environment
System

Salespeople
Business
Organization

Laptop
DOS
<

5







Manufacturing
Fortune
500
Desktop

Windows

5 –10
Distribution
Fortune
1000
Small network
Windows NT

10 – 20
Financial

Large
business
Large network
SCO


20 – 50
Insurance
Medium
business
Small m-frame
UNIX

50 – 100
Energy

Small
business
Large m-frame
HP-UX

> 100
Transportation
Other
Other
Other






Other

This example represents 5 dimensions, each of which is partitioned into components. It is
becoming clear why I say that market definition is multi-dimensional. It will become even clearer
as we discuss the next step


8



1.4 Identify Candidate Market Segments


1.1
1.2
1.3
1.4

REF. 1.0
Identify
Partition
Create
Identify

Identify
Market
Dimensions
Segmentation
Candidate

Market
Dimensions
into
Market

Segments
Worksheet

Components
Segments


Figure 7. Identifying Market Segments: First Level Flow

In this step we identify market segments by selecting one or more components from each of several
dimensions. The process is analogous to the old joke about ordering from a menu in a Chinese
restaurant: “Choose one from column A, two from column B, etc.” The result is a meal that should
be satisfying.

In the sample market segmentation worksheet, a candidate market segment is defined by selecting
one or more components from each of the five dimensions. Bold type is used to indicate the
selections.

Market Segmentation Worksheet

Computing


Operating

Number of
Type of

Size of
Environment
System

Salespeople
Business
Organization

Laptop
DOS
<

5







Manufacturing Fortune
500
Desktop Windows

5 –10
Distribution
Fortune
1000
Small network
Windows NT
10 – 20
Financial

Large
business
Large network
SCO


20 – 50
Insurance
Medium
business
Small m-frame
UNIX

50 – 100
Energy

Small
business
Large m-frame
HP-UX

> 100
Transportation
Other
Other
Other






Other

This market segment consists of
• small

• manufacturing
companies

• with between 10 and 20 salespeople
• operating on a small network
• using the Windows operating system.

Other selections from each of the dimensions will yield additional candidate market segments.
In this step the analyst should adjust the market segment definitions for size and reasonableness.
This can be done by adding or subtracting components from each dimension used in the market
segment definition.

Adding a component in any of the dimensions – say, adding "Medium-sized business" to the Size
of Organization
dimension of the segment just defined – increases the "size" of the market
9



segment, (where size means the number of potential buyers in the segment). The market segment
definition would then appear as
• small
and medium-sized
• manufacturing
companies

• with between 10 and 20 salespeople
• operating on a small network
• using the Windows operating system.

Eliminating a dimension is equivalent to including all of the components of that dimension. So, if we
eliminated the number of salespeople dimension, the market segment would appear as
• small and medium-sized
• manufacturing
companies

• with
any number of salespeople
• operating on a small network
• using the Windows operating system.

This could result in a market segment that is too broad for meaningful competitive analysis or
effective target marketing. However, having too many dimensions, where they may not be
meaningful, could lead to market segments that are too small to be of interest. If the total number of
component selection options, across the dimensions, is quite large, the resulting number of
candidate segments may be too large and result in loss of focus.

There may be other tests for reasonableness of market segment definitions other than size. Here
are some criteria to be applied when defining segments:
• The segments should be measurable in terms of size and purchasing power, perhaps
measured in dollars.
• The business should have a capability to promote and serve the segment.
• The number of segments should match the firm's capabilities.
• It should be possible to identify the competitors in the segment.

Note that the above market segment can be thought of as being part of the Manufacturing market
sector
, or the Small business sector, etc. The notion and value of sector will be explained when we
discuss Step 2.0: Describe and Analyze Market Segments.

Market segmentation is not a one-time activity. The challenge is to anticipate, or at least notice,
change, and understand how it affects the current definition of the segments.

Since we live in a 3-dimensional world, it might be difficult for the reader to visualize a market
segmentation worksheet of 4-, 5-, or 6-dimensions. Figure 8 illustrates a market segmentation
worksheet in 3 dimensions.

10


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