Week 4: Market Segmentation and Target Market Selection

The objective for this week is to be able to select the consumers that are most beneficial to the company. The STDP process studied in Chapter 4 provides me the important tools to achieve this objective. I will also study the HBR article on market segmentation and target market selection to enhance my knowledge on this subject.

One key point I got from Gladwell's talk is that there is no perfect product for everyone. The ideal solution is not to find a perfect product for all customers. Rather, it is to cluster the customers into segments, and produce a variety of solutions that satisfy the customers in each targeted segment. Consumer obsession requires focus and segmentation helps achieve this objective. Focusing on segments, instead of a large heterogeneous market, enables a firm to better understand each segment’s customers and determine what they want and need. This also allows the firm to notice changes in the segment and response quickly. As such, the firm is able to serve each targeted segment more efficiently and effectively with products that match the customer needs.

A firm should select the most promising segments for targeting. Factors used to evaluate segments and identify the most promising ones include the market segment itself, the potential for competitive superiority, and the extent of environmental threats. The key to target market selection is to understand differentiation between the firm and its competitors. This can be achieved through ranking systems and weighing the evaluation criteria to come up with a composite score for each segment.

What is positioning? The “Note on Marketing Strategy” (HBS No. 598-061) defines positioning as the marketer’s effort to identify a unique selling proposition for the product. In Wikipedia, it is stated that the most common definition of positioning is identifying a market niche for a brand, product or service utilizing traditional marketing placement strategies (i.e. price, promotion, distribution, packaging, and competition). That is positioning aims to differentiate the brand or product through attributes that are meaningful to the customers.

The HBR article on market segmentation discusses two extreme types of differentiation: vertical differentiation and horizontal differentiation. While vertical differentiation is about having better product quality than competitors, horizontal differentiation is about serving different groups of customers. I think the story of Howard Moskowitz in Gladwell’s talk is a good example of horizontal differentiation. Moskowitz pointed out that mustard does not exist on a hierarchy: “There is no good mustard, or bad mustard. There is no perfect mustard, or imperfect mustard. There are only different kinds of mustards that suit different kinds of people”. He democratized the taste profiles and created horizontal differentiation.

The last section in the HBR article discusses the role of brands. Branding is directly linked to positioning and it emphasizes product differentiation. Company products can also be marketed under different brand names to focus on different segments. The first example that comes to my mind is Gap Inc. It uses three brands, Old Navy, Gap, and Banana Republic to offer variation of the basic clothing product to different customer segments from low-end to high-end.

Considering segmentation at my company, I think my company segments by industry, organization, usage, and location. We currently focus on railroad industry and North America region. One segment is that of Class I railroads which are large freight railroad companies, as classified based on operating revenue. One segment is that of smaller freight railroads (Class II and Class III). Another segment is that of commuter rails. Commuters require telecommunication system that can support the train speed of more than 100 mph, while freight railroads need to support at much lower speed. Large railroad companies’ first priority is on reliability issue. They require system that is significantly reliable. The large companies have operation divisions that are capable of deploying the system themselves. The support services they need are more on education and training. Smaller railroad companies, on the other hand, need lower cost solutions and require deployment services. So we have different products and services for each segment based on the customer needs.