In which step of the target marketing process do marketers evaluate segments and decide which one or more to focus on?

Overview of the STP Process

As mentioned earlier, STP stands for segmentation, targeting, and positioning.

Segmentation is the first step in the process. It groups customers with similar needs together and then determines the characteristics of those customers. For example, an automotive company can split customers into two categories: price-sensitive and price-insensitive. The price-sensitive category may be characterized as one with less disposable income.

The second step is targeting, in which the company selects the segment of customers they will focus on. Companies will determine this base on the attractiveness of the segment. Attractiveness depends on the size, profitability, intensity of competition, and ability of the firm to serve the customers in the segment.

The last step is positioning or creating a value proposition for the company that will appeal to the selected customer segment. After creating value, companies communicate the value to consumers through the design, distribution, and advertisement of the product. For example, the automotive company can create value for price-sensitive customers by marketing their cars as fuel-efficient and reliable.

How do Companies Segment Consumers?

The most common way to segment consumers is by looking at geography, demographics, psychographics, behavior, and benefits sought. Psychographics include the lifestyle, interests, opinions, and personality of the consumer.

Behavior is the loyalty, purchase occasion, and usage rate of the buyer, and benefits sought are the values the consumer is looking for, such as convenience, price, and status associated with the product.

Another way to segment consumers is by asking why, what, and who.

A more difficult but important thing for companies when segmenting consumers is understanding their behavior. This is the “why” question. By collecting information on a consumer’s past purchases, companies can make good predictions of future purchases. Therefore, this allows companies to target the right consumer.

The “what” that companies ask focuses on purchase behavior. Data that interests companies can be broken down into recency, frequency, and monetary value. These three things show when the last visit to the store was, how frequently customers shop in the store, and how much money they spend. They help companies determine the value and loyalty of customers.

Segmenting consumers by “who” is arguably the easiest way because the information is readily available. Information can include a person’s income, education, family size, and age. Firms hope that such features closely correlate to the needs of the consumer. For example, if a person is in their mid-40s and belongs to a large family, then the automobile company will likely advertise an SUV instead of a two-seater vehicle.

How Do Companies Target Customers?

Targeting is the process of evaluating the attractiveness of the consumer segments, as well as determining how to attract the consumers. A firm’s choice of consumer segment largely depends on the product and service they are offering. It also determines the marketing strategy the company will employ. Markets that are undifferentiated are suitable for mass marketing.

For example, large companies such as Microsoft will utilize the same design and similar ads for all customers. For other markets, one-to-one marketing is more appropriate. One example would be Dairy Queen, where the customers can design and create their own cake. Another example would be luxury stores such as Tiffany Co., which sends personalized letters as ads.

Three factors influence a company’s selection of segments. First of all, companies consider the characteristics of the segments. Characteristics include are how fast or slow a segment is growing and how profitable it is.

Secondly, the company considers its own competencies and resources to address the needs of the segments. For example, a large segment is attractive. However, a company may not be able to serve the whole segment because of a lack of resources.

Lastly, a company considers the competition in the segment, both current and in the future. A large and growing segment may be profitable but will attract a lot of competition, effectively reducing margins.

Segmentation and Targeting Strategy

Strategies are the process of creating product, pricing, communication, and customer management strategies. Product strategy aims to extract the most value out of customers. It is done by offering products at different price levels or by only making expensive products available first.

Pricing strategy involves appealing to either price-sensitive or price-insensitive segments. Communication strategy advertises using the appropriate ads and the right media to target the chosen consumer group.

For example, products for younger audiences will be advertised through digital channels as such a segment spends more time on Google and Facebook. Lastly, customer management strategies use a customer’s past purchase behavior to decide the best approach to promote products. They include offering upgrades, priority boarding for airplanes, or coupons. The strategy will also account for how frequently to promote the product.

Additional Resources

Thank you for reading CFI’s article on market segmentation and targeting. To keep learning and advancing your career, these CFI resources will be useful:

In the increasing information and digital age that we live in, companies need to know how to find their target markets. Since “companies cannot connect with all customers in large, broad, or diverse markets […] identifying and uniquely satisfying the right market segments are often the key to marketing success” (Kotler & Keller, 2016, p. 267).

Philip Kotler and Kevin Keller (2016) states that “effective target marketing requires that marketers:”

1. Identify and profile distinct groups of buyers who differ in their needs and wants (market segmentation)

2. Select one or more market segments to enter (market targeting)

3. For each target segment, establish, communicate, and deliver the right benefit(s) for the company’s market offering (market positioning) (p. 267)

Sounds easy, right? Well, let’s dive into each step to make sure you have a better idea.

“Market segmentation divides a market into well-defined slices” (Kotler & Keller, 2016, p. 268). Therefore, “a market segment consists of a group of customers who share a similar set of needs” (Kotler & Keller, 2016, p. 268). The most popular ways to break up a market can be through “geographic, demographic, psychographic, [or] behavioural segmentation” (Kotler & Keller, 2016, p. 268).

Some companies will combine geographies and demographics “to yield even richer descriptions of consumers and neighbourhoods” (Kotler & Keller, 2016, p. 268). “Nielsen Claritas has developed a geo clustering approach called PRIZM,” which has classified “U.S. residential neighbourhoods into 14 distinct groups and 66 distinct lifestyle segments” (Kotler & Keller, 2016, p. 268).

“Once [a] firm has identified its market segment opportunities, it must decide how many and which ones to target.” (Kotler & Keller, 2016, p. 284). “Marketers are increasingly combing several variables in an effort to identify smaller, better-defined target groups” (Kotler & Keller, 2016, p. 284).

Kotler and Keller (2016) suggest:

“Marketers have a range or continuum of possible levels of segmentation that can guide their target market decisions.” (Kotler & Keller, 2016, p. 286).

Full Market Coverage - “Firm attempts to serve all customer groups with all the products they might need” (Kotler & Keller, 2016, p. 286). Typically, only larger organizations use a full market strategy, such as Microsoft, GM, and Coca-Cola (Kotler & Keller, 2016, p. 286).

Multiple Segments - Selective specialization (“subset of all the possible segments”- ex. The launch of Crest Whitestrips by Procter & Gamble, the target was “newly engaged women, brides-to-be as well as gay males”), product specialization (“firm sells certain products to several different market segments”- ex. A microscope company selling to a “university, government, and commercial laboratories”), or market specialization (“concentrates on serving many needs of a particular customer group”- ex. Selling a range of products “only to university laboratories”) (Kotler & Keller, 2016, p. 288).

Single Segments - “Firm markets to only one particular segment” (Kotler & Keller, 2016, p. 288). For example, Porsche focusing on car enthusiasts (Kotler & Keller, 2016, p. 288).

Individuals as Segments - Customized marketing to each individual (Kotler & Keller, 2016, p. 290). Wagner Custom Skis that are uniquely made for the customer (Kotler & Keller, 2016, p. 290).

“Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the minds of the target market” (Kotler & Keller, 2016, p. 297). It is vital for a company and its team to all be on the same page with the brand positioning strategy (Kotler & Keller, 2016, p. 297).

Kotler and Keller (2016) gave examples that resulted from effective positioning.

Kotler and Keller (2016) show that choosing a strong positioning strategy may require going through the following steps:

1. Choosing a competitive frame of reference

Analyzing your brand in comparison to competitors to create your frame of reference.

2. Identifying points of difference and similarity

Points of difference “are attributes or benefits that consumers strongly associate with a brand, positively evaluate, and believe they could not find to the same extent with a competitive brand”. A strong brand will have multiple points of difference from competitors. For example, “Apple – design, ease of use and irreverent attitude”. “Creating strong, favorable, and unique associations is a real challenge, but an essential one for competitive brand positioning”.

Points of Parity “are attribute or benefit associations that are not necessarily unique to the brand but may in fact be shared with other brands.” Points of Parity are important so that consumers “believe the brand is good enough” to be considered.

3. Create a Brand Mantra

“A brand mantra is a three to five word articulation of the heart and soul of the brand.” The brand mantra shows what the brand essentially represents. For example, Nike’s brand mantra is “authentic athletic performance,” which has guided their entire marketing strategy.

Proper market segmentation, targeting, and positioning will help a company build a strong brand. When a company segments the market, targets the most profitable ones, and positions themselves correctly in the minds of their target segments, they will be able to connect with their customers on a deeper level.

Kotler, P., & Keller, K. L. (2016). Marketing Management (15th ed.). Pearson. Retrieved 2020