4.5: Deciding on Market Segments

Deciding on Market Segments

When deciding on what viable segments exist in a trading area, restaurant operators should use a systematic approach, careful thinking, and analysis. The initial step for the operation is to identify one or more characteristics that can accurately describe the potential target market segment. Any of the segmentation criteria previously discussed will be useful to accomplish this task. Viable segments usually present several or more viable characteristics. For example, a new restaurant might want to target the following individuals: 21 to 60 years of age, living within 10 miles of the city, and having an annual income greater than $50,000 per year.

Figure: 3.2 Market Segments Decision Process

Identify segmentation similarities

The purpose of identifying segmentation similarities is to develop a relatively homogenous market segment made up of individual consumers who will respond in a similar manner to the marketing strategies and marketing communication efforts of the restaurant. It is also important that the members of the selected target segments place a high value on the combined attributes that the restaurant has used in its product and services mix. For example, the casual restaurant segment has experienced rapid growth over the recent years by offering good basic amenities at a relatively low price, resulting in a high level of perceived value to consumers. However, it would not make sense for these types of restaurants to target upper-level fine ding patrons. These individuals, for business or personal reasons, normally elect to eat and conduct business in upscale full-service restaurants.

Profile each Market Segment

The initial step in the segmentation process is to identify the actual target market you intend to serve. Once the target market surfaces, it is important to compile as much
information about the target market consumers as possible. The overall goal is to match the stated ‘wants’ and ‘needs’ of the targeted segment with the product-service mix offerings and marketing messages that the operation uses or will construct to use. The importance of matching consumers' wants and needs with the marketing offerings and advertising is a prime consideration. It is also important to identify the similarities and differences among and between various target markets. People within the same market segment usually share similar characteristics and react in a similar fashion to changes in marketing programs. When developing a profile of the target market, it is necessary to use the various segmentation variables described earlier.

Determining Market Demand

Forecasting the sales potential of a given market segment or for an entire market for any given product-service mix is an extremely difficult task. Although computer models and statistical approaches have facilitated the process somewhat, at the end of the day it is still extremely difficult to account for all of the variables that can influence consumer demand. Even the best forecasts contain margins of error in either direction. In any event, the restaurant operation has to make some determination of the level of demand a trading area has in order to make short or long-term contingencies as well as day-to-day operational decisions. Without reasonably accurate forecasts, restaurant management must cannot operate efficiently. Decisions become hit or miss. The competitive demands of the restaurant industry in general will not allow such a casual approach for long.

1. Market demand can best be definable as the potential consumers having both purchasing power and motivation to use the restaurant's products and services. Many different variables can affect the demand within any given segment. Variables such as consumer motivation are often difficult to quantify. Market demand for a product or service is the total volume that one comes to realize from a clearly specified customer group in a defined geographic area in a defined period. One can calculate market demand only when clear definitions are available for each of these variables. Determining total market demand is an important marketing function because so many other assumptions come into play because of its forecast. It is important for restaurant management training to include the examination of forecasts for market demand and an understanding of their uses and limitations. Primary demand for a restaurant would normally receive the classification of the demand for the entire line of product offerings. Secondary demand would be the demand for a particular brand the operation offers, beverages, or other service attributes.
2. Product demand for the product-service mix calculates based on the total market demand multiplied by the market share, or the percentage of the market that the operation's product and service mix will capture. Market share calculates by dividing the operation's sales by the total figure for industry sales – in our case, restaurant sales. Determining the projected market share is an imprecise science. It should, however, be based on the operation's thorough and objective assessment of the company's capabilities, the competitiveness of those also targeting the same consumers, and marketing strategies used by all foodservice operations in the trading area.

Once decisions become clear about the specific marketing strategies and tactics that will be useable, then resource needs can be determined to market the product-service mix to specific target market segments.

Broad Segmentation Strategies

Once specific target markets identification is complete, the marketing manager must begin to develop broad marketing strategies as depicted in Figure 3.3. There are three
segmentation strategies applicable a mass-market strategy, a differentiated strategy, and a concentrated strategy.

Figure: 3.3 Strategies for Reaching Target Markets

Mass-Marketing Strategy	A market coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer. It is the type of marketing (or attempting to sell through persuasion) of a product to a wide audience. The idea is to broadcast a message that will reach the largest number of people possible. Traditionally mass marketing has focused on radio, television and newspapers as the medium used to reach this broad audience.
Differentiated Marketing Strategy	One where the company decides to provide separate offerings to each different market segment that it targets. It also refers to multi-segment marketing as it clearly tries to appeal to multiple segments in the market. The company provides unique benefits to different individual segments. It increases the total sales but at the expense of increase in the cost of investing in the business.
Concentrated Marketing Strategy	A strategy targeting very defined and specific segments of the consumer population. It is particularly effective for small companies with limited resources, as it does not believe in the use of mass production, mass distribution and mass advertising. There is no increase in the total profits of the sales as it targets just one segment of the market.
Direct Marketing	Direct marketing involves buying consumer databases based on the defined segmentation profiles. These databases usually comes with consumer contacts (e-mail, mobile phone, home phone, and so forth).

Select the Best Market Segments

Once the previous steps reach completion, those responsible for developing the marketing plan must decide on the specific target market segments for the operation. While the use of data and all relevant information the operation has garnered over time is important, ultimately the judgment, insight, and experience the operation's marketing individuals bring to the decision process are also quite valuable. The overall goal is to limit the uncertainty surrounding market segmentation decisions. All decisions should form based on a careful analysis of the data and how the forecasts of projected demand and market share were determined.

At this point one must examine the projected return on investment (ROI) that the target market is expected to provide. The ROI calculation: Divide the return from the marketing effort, or the net profit by the amount of the marketing investment. Firms will normally have target ROI's for their invested dollars, but the higher the ROI, the better the investment - and the investment decisions.

Mass-market Strategy

A mass-marketing strategy requires the operation to develop one product-service mix that is relates to all potential consumers in the target markets. This approach considers the market to be one homogeneous market segment with similar wants and needs by its constituents. There is no reason to develop more than one marketing program, since consumers are alike and react in a similar fashion to the components of the marketing program.

When McDonald's first opened, the firm offered a very limited menu that was consistent across the entire organization. It featured only a couple of hamburger choices, milkshakes, soft drinks, and fries. No other choices were available, and as many restaurant organizations learned, the smaller the menu the less waste the operation experienced, and subsequently, with less money committed to inventory and the negative aspects of waste, the higher the resulting profit. Numerous companies and industries utilize this type of market strategy in the early stages of their life cycles.

However, in reality, few products or services appeal to all segments of the market. Since its inception, McDonald's has changed this strategy in response to trends in the demographic and social environments. From their original meager offerings, McDonald's has expanded into chicken sandwiches, salads, smoothies, coffee drinks, and other menu items that appeal to a more health-conscious market segment. The main problem associated with the expansion of products and services lies in the operations, and the customers', ability to identify what it is the operation does well. Consider a restaurant chain that only sells chicken strips. Where is there focus? Can you reduce or dilute the effectiveness of their efforts? The largest threat when using this strategy is that competitors will tailor their product-service mix and take away market share because they are better able to meet the needs of smaller target market segments of consumers. Beware trying to be too many things to too many consumers; ultimately, you become not wonderful at anything - to anyone.

Differentiated Strategy

When a restaurant operation decides to follow a differentiated strategy, it is adopting a strategy that calls for the operation to appeal to more than one market segment with a separate marketing program for each segment. The overall objective of this approach is to increase sales and market share by capturing sales from several smaller market segments. Each of the marketing programs, including the product-service mix, conforms to the specific needs of a market segment.

Many large foodservice organizations have followed the approach within the hospitality and tourism industry instituted by Choice Hotels International. The hotel chain has developed numerous product-service mixes or brands, each targeting a different market. Among the brands offered by Choice Hotels are Clarion Hotels and Suites, Quality Inns and Suites, Comfort Inns and Suites, Sleep Inns, Economy Lodge, and Travelodge. Each of the Choice brands offers a different array of amenities at various price levels in an attempt to have at least one brand that will appeal to any consumer in the economy or mid-priced market segments. A differentiated strategy could also be applicable at the unit or property level.

From the foodservice perspective, consider the large corporations that own multiple restaurant brands and have units specializing in casual to quick service operating offering everything from steak, chicken, and seafood to a variety of burgers and upscale sandwich items - all competing in the same marketplace and trading area. At the unit level, consider a small French Bistro that specializes in upscale crepe items in the $9.00 to $12.00 range but offer special entree items in the $22.00 to $26.00 price range. They offer interesting appetizers including an original onion soup, and flaming desserts such as Crepe Suzettes reasonable priced in the $5.00 range. They open early for breakfast with an array of filled croissants and coffees, and stay open late to get the dessert and glass of wine crowd boasting one of the best 'wine by the glass' options in the area. They are interested in approaching everyone in the trading area - but they appeal to consumer differences in specific and concise ways. These are other example of differentiating a trading area and to a smaller scale, day parts.

Concentrated Strategy

A concentrated market segmentation strategy calls on the operation to develop modifications of one or more product-service mixes marketed to one or relatively few market segments with limited changes in the marketing program. This strategy is most useful to smaller firms that do not have substantial resources to compete in broad appeal forms of marketing to large segments. A concentrated marketing strategy for a small restaurant might include flyers and coupons in their neighborhood of the unit. The operation could target breakfast patrons with morning specials, or they could approach the late night crowd with drink or food discounts. A concentrated strategy does not move away from the primary marketing effort, but rather concentrates activity in specific areas to aid the overall marketing program. For example, a special to boost Tuesday night sales.

A principal concept in target marketing is that those who become the ‘targets’ show a strong affinity or brand loyalty to that particular brand. Target Marketing allows the marketer or sales team to customize their message to the targeted group of consumers in a focused manner. Research has shown that racial similarity, role congruence, labeling, shared knowledge and ethnic salience all promote positive effects on the target market. Research has generally shown that target marketing strategies are constructed from consumer inferences of similarities between some aspects of the advertisement (such as the source pictured, language used, lifestyle represented) and characteristics of the consumer (the reality of having, or desire of having the represented style). Consumer persuasion occurs by the characteristics in the advertisement and those of the consumer themselves.