Segment evaluation: choice of targeting strategies and market targets - Marketing Management

Determining whether, and on what basis, a market segments is the first step in the process of target marketing. Once market segments have been identified we must select a targeting strategy and if appropriate, select specific market segments to target. During this process we must evaluate the relative attractiveness of different segments.

Evaluating market segments

Whenever a market segments (and most markets do), as part of overall marketing strategy a company must decide on targeting which segments it wishes to serve and on what basis. To do this, the strategic marketer must first evaluate existing market segments. This evaluation process broadly involves assessing the attractiveness of the various segments in the market to determine which are worth serving. We must, therefore, consider the overall attractiveness of the segment, e.g. size and growth, as well as company objectives and resources.

Segment structural attractiveness

A number of factors influence the relative attractiveness of a particular segment. Each should be assessed before making targeting decisions:

  1. Segment size and growth: Although larger segments are not always the most attractive (especially to the smaller company) an evaluation of market segments should include an assessment of current size, together with existing and potential future growth rates. As with market size, the most attractive segments are not always those that have the highest existing or potential future growth rates. Indeed, even a segment in decline may, because of lower levels of competition, offer attractive sales potential to the company able to supply e.g. spare parts for old model automobiles. After a period of time, the original equipment manufacturers may feel that declining demand for such spares no longer justifies supplying the market, and subject to meeting any statutory or contractual requirements with regard to supply, then withdraw. This leaves the market open to smaller specialist suppliers who, for a time at least, can make sufficient profits to justify the investment.
  2. This extends beyond the idea of evaluating the attractiveness of a segment from a purely volume perspective, to that of long-term profitable attractiveness. We can use Porter’s model of industry /competitive advantage, to indicate key areas for assessing segment attractiveness.

  3. Extent of segment competitive rivalry: Some segments are characterized by intense and frequent rivalry, perhaps because they are high growth, high profit, but often because they are in decline with overcapacity. A more competitive segment will tend to be less attractive, particularly to the new entrant, unless it has some distinct and sustainable advantage it can use to compete.
  4. Barriers to entry or exit: The most competitive segments, and the ones with the lowest profit margins, are those with low barriers to entry and high barriers to exit. What initially appears to be an attractive new segment can, if entry barriers are low, quickly become over-competitive and ultimately unprofitable.
  5. Threat of substitutes: Existence of many substitutes reduces the attractiveness of a segment. An appraisal of substitutes should take in not only existing substitutes, but also likely future ones. Predicting these is difficult, although techniques of technological forecasting (TF), can be useful.
  6. Bargaining power of buyers: Some otherwise attractive segments are made less attractive by the bargaining power of buyers. In many retailing segments, the bargaining power of large multiple chain stores like Tesco is such that profit margins for suppliers can be slender. As with substitutes, not only should the current bargaining power of buyers be assessed, but also likely future developments should be anticipated.
  7. Bargaining power of suppliers: This is the reverse argument of the previous factor. Assessing segment attractiveness should also take into account the extent to which present suppliers of materials, plant, finance, labour, etc. exercise strong bargaining power. Again, an assessment should be made of likely future trends and changes.
  8. Company objectives and resources: This key area of segment evaluation concerns the extent to which the segment equates with a company’s long-term objectives and strategic plans, skills and resources.

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