CHAPTER
4
Opportunity Analysis,
Market Segmentation,
and Market Targeting
The development and implementation of marketing strategy are complicated
and challenging tasks. At its pinnacle, marketing strategy involves the selection of markets and the development of programs to reach these markets.
This process is carried out in a manner that simultaneously benefits both the
markets selected (satisfying the needs or wants of buyers) and the organization (typically
in dollar-profit terms).
Within this framework, necessary first tasks are opportunity analysis, market segmentation, and market targeting. This chapter describes analytical concepts and tools
that marketing managers find useful in performing opportunity analyses, segmenting
markets, selecting market targets, and estimating market and sales potential.
■ OPPORTUNITY ANALYSIS
Opportunity analysis consists of three interrelated activities:
• Opportunity identification
• Opportunity-organization matching
000200010270582693
• Opportunity evaluation
Opportunities arise from identifying new types of buyers, uncovering unsatisfied needs
of buyers, or creating new ways or means for satisfying buyer needs. Opportunity analysis focuses on finding markets that an organization can profitably serve.
The success of Reebok International, Ltd. illustrates a disciplined approach to
opportunity identification. In 1981, Reebok had sales of $1.5 million and was known
primarily for its high-quality custom running shoes. Consumer interest in running had
plateaued, however, and new opportunities had to be identified for the company to
grow. Over the next 28 years, Reebok systematically pursued opportunities based on
buyer types, buyer needs, and technological innovation as a means of satisfying the
needs of buyers. Reebok identified buyer “performance-oriented” needs with a focus
on specific athletic activities (such as tennis, basketball, golf, and track and field) and
“nonathletic” needs with an emphasis on comfort, fashion, and style for three types of
buyers—men, women, and children. Technological innovation, most recently with the
65
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
66
CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING
launch of Rbk Custom in 2008, a Web-based shoe customization platform, has met the
needs of buyers interested in comfort and fit. The result? Reebok broadened its global
marketing presence following a merger with Adidas in 2006, and now posts global
sales of $3.5 billion annually with about half of its sales outside the United States.1
Opportunity-organization matching determines whether an identified market
opportunity is consistent with the definition of the organization’s business, mission
statement, and distinctive competencies. This determination usually involves an
assessment of the organization’s strengths and weaknesses and an identification of the
success requirements for operating profitably in a market. A SWOT analysis like that
described in Chapter 1 is often employed to assess the match between identified market opportunities and the organization’s strengths and weaknesses.
For some companies, market opportunities that promise sizable sales and profit
gains are not pursued because they do not conform to an organization’s character.
Starbucks is a case in point. The company has built a thriving business serving freshly
brewed, specialty gourmet coffee. However, the company refuses to use artificially
flavored coffee despite its growth potential. According to company chairman Howard
Schultz,“A large growth segment in our category is artificially flavored coffee; it would
EXHIBIT 4.1
Opportunity Evaluation Matrix: Attractiveness Criteria
Political,
Technological,
and Socioeconomic
Forces
Competitive
Activity
Buyer
Requirements
Demand/
Supply
Organizational
Capabilities
Buyer type
How many and
which firms are
competing for
this user group?
What affects buyer
willingness and
ability to buy?
Do different
buyer types
have different
levels of effective demand?
How important
are adequate
sources of
supply?
How sensitive
are different
buyers to
these forces?
Can we gain
access to
buyers through
marketing-mix
variables? Can we
supply these
buyers?
Buyer needs
Which firms
are satisfying
which buyer
needs?
Are there buyer
needs that are
not being satisfied? What are
they?
Are buyer needs
likely to be
long-term? Do
we have or can
we acquire
resources to
satisfy buyer
needs?
How sensitive
are buyer
needs to
these forces?
Which buyer
needs can our
organization
profitably
satisfy?
Means for
satisfying
buyer needs
What are the
strategies being
employed to
satisfy buyer
needs?
Is the technology for satisfying buyer
needs changing?
To what extent
are the means
for satisfying
buyer needs
affected by
supply sources?
Is the demand
for the means
for satisfying
buyer needs
changing?
How sensitive
are the means
for satisfying
buyer needs to
these forces?
Do we have
the financial,
human, technological, and
marketing
expertise to
satisfy buyer
needs?
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
000200010270582693
Market Niche
Criterion
67
WHAT IS A MARKET?
give us maybe 40 percent incremental volume, but we won’t do it.”He adds,“It’s not in
our DNA.”2
Opportunity evaluation typically has two distinct phases—qualitative and quantitative. The qualitative phase focuses on matching the attractiveness of an opportunity with the potential for uncovering a market niche. Attractiveness is dependent on
(1) competitive activity; (2) buyer requirements; (3) market demand and supplier
sources; (4) social, political, economic, and technological forces; and (5) organizational capabilities. Each of these factors in turn must be tied to its impact on the types
of buyers sought, the needs of buyers, and the means for satisfying these needs.
Exhibit 4.1 is an opportunity evaluation matrix containing illustrative questions useful
in the qualitative analysis of a market opportunity. The quantitative phase yields estimates of market sales potential and sales forecasts. It also produces budgets for financial, human, marketing, and production resources, which are necessary to assess the
profitability of a market opportunity.
■ WHAT IS A MARKET?
The fact that an opportunity has been identified does not necessarily imply that a market exists for the organization. Although definitions vary, a market may be considered
to be the prospective buyers (individuals or organizations) willing and able to
purchase the existing or potential offering (product or service) of an organization.
This definition of a market has several managerial implications. First, the definition
focuses on buyers, not on products or services. People and organizations whose idiosyncrasies dictate whether and how products and services will be sought, acquired,
consumed, or used make up markets. Second, by highlighting the buyer’s willingness
and ability to purchase a product or service, this definition introduces the concept of
effective demand. Even if buyers are willing to purchase a product or service, exchange
cannot occur unless they are able to do so. Likewise, if buyers are able to purchase a
product or service but are unwilling to do so, exchange will not occur. These relationships are important to grasp because a marketing strategist must ascertain the extent of
effective demand for an offering in order to determine whether a market exists. To a
large degree, the extent of effective demand will depend on the marketing-mix activities
of the organization. Third, use of the term offering, rather than product or service,
expands the definition of what organizations provide for buyers. Products and services
are not purchased for the sake of purchase; they are purchased for the benefits that
buyers expect to derive from them. It is for this reason that the late Charles Revson of
Revlon Cosmetics continually reiterated that his company did not sell cosmetics but,
rather, hope. This expanded definition of an offering requires strategists to consider
benefits provided by a product or service apart from its tangible nature.
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Market Structure
Frequently, one hears or reads about the automobile market, the soft drink market, or
the health care market. These terms can be misleading because each refers to a composite of multiple minimarkets.Viewing a market as composed of minimarkets allows a marketer to better gauge opportunities. Consider, for example, the “coffee market.”
Exhibit 4.2 on page 68 shows how the U.S. coffee market might be broken down into
multiple markets by a marketing manager for Maxwell House or Folgers.With this breakdown, the manager can more effectively identify who is competing in the caffeinated
versus the decaffeinated markets and how they are competing, monitor changes in sales
volume for instant versus ground coffee, and appreciate differences between buyer
taste preferences and competition in the Southwest and Northeast United States.
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING
EXHIBIT 4.2
Market Structure for Coffee in the United States
Total U.S. Coffee Market
Retail Sales
(retail food stores)
Institutional Sales
(restaurants, institutions, etc.)
Ground
Caffeinated
New England
Whole Bean
Instant
Decaffeinated
Midwest
Southeast
Northwest
Market Share
How a market is defined plays a critical role in determining market share. Market
share is defined as the sales (in dollars or units) of a company, product, service, or
brand divided by the sales of the “market,” expressed as a percentage. Consider the
market share calculation for Atlantic Blend, a premium caffeinated ground coffee
brand sold only in grocery stores and supermarkets in the Mid-Atlantic region of the
United States by a coffee roaster in New York state. Atlantic Blend sales are $80 million. Depending on the “market” definition, Atlantic Blend’s market share will range
from 1 percent to 32 percent, as shown in the following table.
Coffee
Dollar
Sales
Atlantic
Blend
Sales
Market
Share
Total U.S. coffee market
$8.0 billion
$80 million
1.0%
U.S. retail coffee market
$6.0 billion
$80 million
1.3%
U.S. retail ground coffee market
$4.5 billion
$80 million
1.8%
U.S. retail caffeinated ground
coffee market
$3.0 billion
$80 million
2.7%
U.S. retail caffeinated ground coffee
market in the Mid-Atlantic region
$230 million
$80 million
32.0%
Market Definition
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
000200010270582693
As a regional (Mid-Atlantic) product and brand, Atlantic Blend is clearly a minor
player in the total U.S. coffee market with a 1 percent overall market share. However,
Atlantic Blend captures a significant share (32 percent) of the retail caffeinated ground
coffee market in the Mid-Atlantic region where it is marketed. The retail caffeinated
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MARKET SEGMENTATION
ground coffee market in the Mid-Atlantic region of the United States is Atlantic Blend’s
served market. A served market is the market in which a company, product, service, or
brand competes for targeted customers. Marketing managers often look closely at
served market share when considering strategic options. For example, if a company has
a “high” served market share, a market penetration strategy to gain increased served
market share will be more difficult. Market development strategies might be more advisable, such as pursuing sales growth in an adjacent geographic market; that is, Atlantic
Blend might enter the New England market. Alternatively, if a company has a “low”
served market share, a product development strategy or a market penetration strategy
might be perceived as a means to increase market share.
■ MARKET SEGMENTATION
A useful technique for structuring markets is market segmentation—the breaking
down or building up of potential buyers into groups. These groups are typically termed
market segments. Each segment is thought of as possessing some sort of homogeneous
characteristic relating to its purchasing or consumption behavior, which is ultimately
reflected in its responsiveness to marketing programs. Market segmentation grew out of
the recognition that, in general, an organization cannot be all things to all people.
Although the legendary Henry Ford is reputed to have said that buyers of his Ford
automobiles could have any color they desired as long as it was black, most marketers
today agree that such an undifferentiated marketing strategy is no longer appropriate.
The idea that an organization can effectively apply one marketing strategy to satisfy all
possible buyers is not viable in today’s marketing environment.
At the other extreme, unless the organization is highly specialized and sells only
to, say, one buyer, it is often not feasible to treat each potential buyer as unique. Thus,
as one marketing authority has so aptly written, market segmentation “is a compromise between the ineffectiveness of treating all customers alike and the inefficiency
of treating each one differently.”3
Advances in information technology and flexible manufacturing and service delivery
systems have made “segments of one” a reality in some settings. Mass customization—
tailoring products and services to the tastes and preferences of individual buyers in high
volumes and at a relatively low cost—combines the efficiencies of mass production and
the effectiveness of designing offerings to a single buyer’s unique wants.
Benefits of Market Segmentation
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Segmentation offers three principal benefits with regard to the development of marketing
strategy.4 Market segmentation:
1. Identifies opportunities for new product development. The analysis of various
segments of present and potential buyers can reveal one or more groups whose
specific needs are not being well satisfied. These segments represent possible
opportunities for new product development. Frito-Lay, Inc. is a case in point.
The company identified two attitudinal and lifestyle market segments. “Indulgers” are consumers who know they should limit their fat consumption but
cannot and those who simply don’t care. This segment represents 47 percent
of snack chip consumers who are heavy users of snack chips. The other 53
percent of consumers are “compromisers,”who enjoy snacking but restrict their
snack chip intake because of nutritional concerns. Frito-Lay, Inc. decided to
invest heavily in the “compromiser” segment. Baked Lay’s low-fat potato crisps
posted sales of $250 million in their first full year in the market. This success
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING
was followed by a line of Ruffles, Doritos, and Tostitos made with a low-fat,
calorie-free cooking oil. This line recorded first-year sales of $350 million and
was one of the company’s most successful food introductions.5
2. Helps in the design of marketing programs that are most effective for
reaching homogeneous groups of consumers. In addition to product development, segmentation permits refinements in the pricing, advertising and
promotion, and distribution elements of the marketing mix. For example,
Procter & Gamble markets its Crest toothpaste with different advertising and
promotion campaigns directed at six different market segments, including
children, Hispanics, and senior citizens.
3. Improves the allocation of marketing resources. Market segmentation can
provide guidance in directing marketing resources. All market segments
are not necessarily equal in terms of an organization’s ability to serve them
effectively and profitably. As with any opportunity assessment, a company’s
strengths and capabilities relative to each identified segment’s needs and competitive situation must be considered. Returning to the athletic shoe “market”
discussed earlier, consider how New Balance competes with Nike and Adidas,
two performance-oriented shoe marketers. Instead of allocating resources to
compete directly with Nike and Adidas in the “performance” segment, New
Balance focuses on the baby boomer (46 to 64 years old) nonathletic segment.
It offers comfortable shoes for men and women and spends its marketing
resources networking with podiatrists, not athletes.6
Bases for Market Segmentation
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
000200010270582693
Two broad types of variables are commonly used for market segmentation. Socioeconomic characteristics of consumers, such as gender, age, occupation, income,
family life cycle, education, and geographic location make up one type. The other
type consists of behavioral variables, including benefits sought from products and
services, usage behavior, lifestyle, and attitudes. For industrial buyers, socioeconomic characteristics may include company size and location, and industry or customers served. Behavioral variables may include purchasing objectives and
practices as well as product and service benefits. The appropriateness of any one or
combination of variables in a specific situation will depend on whether or not a
variable relates to purchasing, use, or consumption behavior and responsiveness to
marketing programs.
The choice of variable(s) to use to segment a market often depends on insights
into buyer behavior, provided by creative research. Segmentation of the cell phone
market by Nokia illustrates this point. According to the director of America’s brand
marketing at Nokia,“Different people have different usage needs. Some people want
and need all of the latest and most advanced data-related features and functions, while
others are happy with basic voice connectivity. Even people with similar usage needs
often have differing lifestyles representing various value sets. For example, some
people have an active lifestyle in which sports and fitness play an important role,
while for others arts, fashion and trends may be very important.”7
Nokia’s research on consumer usage, lifestyles, and individual preferences identified six market segments:“Basic” consumers who need voice connectivity and a low
price; “Expression” consumers who want to customize and personalize features;
“Active” consumers who desire a rugged product to stand up to an active lifestyle;
“Classic” consumers who prefer a more traditional cell phone with some features at a
modest price;“Fashion” consumers who want a very small phone as a fashion accessory; and “Premium” consumers who are interested in all the high-end technological
and service features.
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MARKET TARGETING
Requirements for Effective Market Segmentation
Ultimately, market segmentation is a means to an end: to identify and profile distinct
groups of buyers who differ in their needs, preferences, and responsiveness to an
organization’s marketing programs. Effective market segmentation should provide
answers to six fundamental buyer-related questions for each market segment:
1. Who are they?
2. What do they want to buy?
3. How do they want to buy?
4. When do they want to buy?
5. Where do they want to buy?
6. Why do they want to buy?
More often than not, the answers to these questions should be expressed in a narrative form documented with quantitative and qualitative research.
From a managerial perspective, effective market segmentation means that each
segment identified and profiled satisfies four fundamental requirements.8 Each market
segment should be:
1. Measurable. The size and buying power of a market segment can be quantitatively determined.
2. Differentiable. A market segment is distinguishable from other segments and
responds differently to different marketing programs.
3. Accessible. A segment can be effectively reached and served through an
economically viable marketing program.
4. Substantial. A segment should be large enough in terms of sales volume potential to cover the cost of the organization serving it and return a satisfactory profit.
How are these requirements applied in practice? Consider Harley-Davidson, Inc.,
the U.S. sales leader in heavyweight motorcycles.9 Following two years of extensive
research studying specific consumer groups, the company concluded that women
represented a viable market segment based on these requirements. Women account
for about 10 percent of total U.S. motorcycle owners, and the percentage is growing.
They seek adventure, freedom, and individuality—just as men do. “What they don’t
want is a special product, a pink motorcycle, for example, but they do want a product
that fits them better,”said the company’s vice-president of marketing.
Harley-Davidson’s tailored marketing program for women includes a product that
requires less strength to operate a motorcycle and lowered seat heights. The communications program includes advertisements in magazines, such as Allure, Vanity Fair,
Glamour, and Self, and at local dealer events to introduce first-time women riders to the
product and the sport of cycling. For Harley-Davidson, the female segment is measurable, differentiable from males, accessible through communications and distribution
channels, and substantial enough in terms of sales and profit to warrant attention.
■ MARKET TARGETING
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After a market has been segmented, a marketing manager needs to address three
questions:
• Where to compete?
• How to compete?
• When to compete?
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING
Where to Compete?
The manager must first decide where to compete. This question focuses on which
market segment(s) the company should choose for marketing efforts, or market
targeting. Market targeting (or target marketing) is the specification of the market
segment(s) the organization wishes to pursue.
For example, recognizing that Wal-Mart, Lowe’s, and a host of regional competitors were targeting the home-improvement “do-it-yourselfer” segment for home
repairs and remodeling, Home Depot decided to pursue the “professional” segment
for growth alongside the “do-it-yourselfer” segment. This segment consisted of housing professionals, such as managers of major apartment and condominium complexes
and hotel chains, and professional building contractors. Once that was decided, the
company modified its merchandise assortment to meet the needs of the “professional”
segment and broadened its services, including longer store hours, delivery, commercial credit, truck and equipment rental, and ordering via phone, fax, or the Internet.10
How to Compete?
Next, a manager must decide how to compete. This question focuses on how many
market segments the organization will pursue and the marketing strategies to employ.
Two frequently used market targeting approaches are differentiated marketing
and concentrated marketing. In a differentiated marketing approach, the organization
simultaneously pursues several different market segments, with a unique marketing
strategy for each. An example of this type of marketing is the strategy of Nokia following its segmentation research described earlier. Exhibit 4.3 shows Nokia’s differentiated marketing strategy in 2005 featuring seven different cell phone models designed
for and uniquely marketed to six market segments.11 Nokia’s differentiated marketing
approach, along with continued technological advancements, has contributed to its
status as the world’s leading cell phone marketer. As a rule, differentiated marketing is
expensive to implement. Managing multiple products across multiple market segments increases marketing, inventory, administrative, and advertising and promotion
costs as well as product development expenditures.
In a concentrated approach, the organization focuses on a single market segment.
An extreme case would be one in which an organization marketed a single product
offering to a single market segment. More commonly, an organization will offer one or
more product lines to a single segment. For many years, Gerber proclaimed that “babies
are our only business”and focused almost exclusively on baby foods. Gerber still offers
prepared baby foods, which is its primary business. However, today Gerber offers companion lines of baby skin care and health care products; baby care products such as
bottles, pacifiers, playthings, clothing, and accessory items; and insurance policies.12
Through a concentrated marketing approach, a company gains a strong knowledge
of a segment’s needs and can achieve a strong market position—Gerber commands
a 79 percent market share in prepared baby foods. Furthermore, concentrated marketing provides operating economics through specialization in manufacturing and marketing. However, concentrated marketing has risks. Specializing in one segment can
limit a company’s growth prospects, particularly if the segment size declines. Also,
competitors might invade the segment.
When to Compete?
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
000200010270582693
Third, the manager must determine when to compete. This question relates to timing.13 Some organizations adopt a “first-to-market” posture, while others take a “waitand-see” stance concerning the pursuit of market segments. Historically, Matsushita
has generally deferred to Sony and other firms to identify market segments to be
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MARKET TARGETING
EXHIBIT 4.3
Nokia’s Differentiated Marketing Strategy
Market Segments
BASIC
Offering
Characteristics
Durable, ease of
use, and low
price
Changeable
covers, color
displays,
downloadable
ring tones, and
games
Small size, stylish,
durable, user
friendly, color
displays, and
fitness monitor
Traditional style,
Web browser,
networking, phone
book, calendar, and
camera
MP3 music player,
styling, games,
camera, color
display, and
Internet access
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Enhanced user
interface, camera,
color display,
multimedia
messaging, and
PDA
First-time users.
Teens needing
voice
connectivity
EXPRESSION
Younger buyers
who desire
customized and
personalized
products
ACTIVE
Cool, young
active adults
desiring to
connect with
friends; sports
enthusiasts
CLASSIC
FASHION
PREMIUM
Travelers with
various business
needs who
prefer
functionality
Buyers who
want to “show
off ” with a
personal sense
of style
World travelers
wanting PDA,
connectivity, and
games
Series 1000/
Series 2000
Series 3000
Series 5000
Series 6000
Series 7000
Series 8000
served. When the market segment potential has been demonstrated, Matsushita relies
on its production and marketing expertise, backed by large investments, to capture a
disproportionate share of the market segment.
Some marketers, after having identified market segments, pursue them in a
sequential manner rather than simultaneously. Hewlett-Packard is a case in point. Recognizing the need for handheld computing power, two market segments were identified: (1) business users, and (2) student users. The company targeted the business
segment first for its handheld computer—the iPaq Pocket PC—followed by the student segment attending large primary and secondary schools.
Timing in market targeting can have a significant effect on sales and profit. For
instance, companies that targeted the Hispanic market segment early with a unique
offering or marketing program were rewarded in sales and profit. Metropolitan Life
Insurance is such a case. The company was among the first insurance companies to
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING
recognize this opportunity and is now one of the largest insurers of Hispanic consumers
in the United States.
On the other hand, in the early 1970s, marketing executives at Frito-Lay identified
a “better for you” benefit segment of snack users who desired healthier snack chips.
The company created a multigrain snack chip called Prontos and launched the brand
with a supporting marketing program only to post disappointing sales and profit.
According to a marketing executive, the “better-for-you segment was too narrow a target market and a multigrain snack chip may have been invented and introduced
before its time.” Frito-Lay tracked this segment’s development over the next decade
and launched another multigrain snack chip with the Sun Chips name. Today, the Sun
Chips brand produces sales of $100 million annually.
■ MARKET SALES POTENTIAL AND PROFITABILITY
An essential activity in opportunity evaluation is the determination of market sales
potential and profitability. Estimating a market’s sales potential for offerings is a difficult task even for a seasoned marketing executive. Markets and offerings can be
defined in numerous ways that can lead to different estimates of market size and dollar sales potential. This was illustrated earlier in the description of market structure
and resulting market shares in the U.S. coffee industry. For innovative offerings or
new markets, marketing analysts must often rely almost entirely on judgment and creativity when estimating market sales potential. Therefore, it is understandable that
market sales potential estimates vary greatly for high-definition television (HDTV) and
hybrid (gasoline- and battery-powered) automobiles. The underlying technology for
both offerings is still evolving as is the physical form. In such dynamic settings, measures for identifying prospective market segments are uncertain.
Estimating Market Sales Potential
Market sales potential is a quantitative approximation of effective demand. Specifically, market sales potential is the maximum level of sales that might be available to
all organizations serving a defined market in a specific time period given (1) the
marketing-mix activities and effort of all organizations, and (2) a set of environmental
conditions. As this definition indicates, market sales potential is not a fixed amount.
Rather, it is a function of a number of factors, some of which are controllable and
others not controllable by organizations. For instance, controllable marketing-mix
activities and marketing-related expenditures of organizations can influence market
sales potential. On the other hand, consumer disposable income, government regulations, and other social, economic, and political conditions are not controllable by
organizations, but do affect market sales potential. These uncontrollable factors are
particularly relevant in estimating market sales potential in developing countries.
Three variables are commonly considered when estimating market sales potential.14
These include (1) the number of prospective buyers (B) who are willing and able to purchase an offering; (2) the quantity (Q) of an offering purchased by an average buyer in a
specific time period, typically one calendar year; and (3) the price (P) of an average unit
of the offering. Market sales potential is the product of these three variables:
Market sales potential = B Q P
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
000200010270582693
Though simple, this expression contains the building blocks for developing a
more complex formulation through what is called the chain ratio method, which
involves multiplying a base number by several adjusting factors that are believed to
influence market sales potential. An application of this method by Coca-Cola and
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MARKET SALES POTENTIAL AND PROFITABILITY
Pepsi-Cola is shown in the following calculation of cola-flavored carbonated soft drink
potential in a South American country:
Market sales
potential for
cola-flavored
carbonated soft
drinks in a
country
=
Population aged 8 years and over × proportion
of the population that consumes carbonated
soft drinks on a daily basis × proportion of
the population preferring cola-flavored
carbonated soft drinks × the average number
of carbonated soft drink occasions per day ×
the average amount consumed per consump–
tion occasion (expressed in ounces) × 365 days
in a calendar year × the average price per
ounce of cola
The chain ratio method serves three important purposes. First, it yields a quantitative estimate of market sales potential. Second, it highlights factors that are controllable and not controllable by organizations. Clearly, a country’s population aged
8 years and older is an uncontrollable factor. However, the other factors are controllable or can be influenced to some degree. For example, organizations can influence the proportion of a population that consumes carbonated soft drinks through
primary demand advertising and the cost of cola drinks through pricing. If either of
these two factors change, market sales potential changes, other things being equal.
Finally, it affords a manager flexibility in estimating market sales potential for different buyer groups and different offerings. For example, by including another factor
such as the proportion of the population preferring diet colas, the potential for this
offering can be calculated.
Sales and Profit Forecasting
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Sales and profit forecasting follow the estimation of market sales potential. A sales
forecast is the level of sales a single organization expects to achieve based on a chosen
marketing strategy and an assumed competitive environment. An organization’s forecasted sales are typically some fraction of estimated market sales potential.
Forecasted sales reflect the size of the target market(s) chosen by the organization
and the marketing mix chosen for the target market(s). Forecasted sales also reflect the
assumed number of competitors and competitive intensity in the chosen target
market(s). For example, suppose an organization’s target market represents one-fourth
of 1 million prospective buyers for a particular offering. The marketing channel chosen
for the offering provides access to about three-fourths of these buyers and the communication program (advertising) reaches these same buyers. Suppose further that the
average purchase rate is 20 units of an offering per year and the average offering unit
price is $10.00. Using a version of the chain ratio method, forecasted sales might be
calculated as follows:
Total estimated prospective buyers
times
Target market (25% of total buyers)
times
Distribution/Communication coverage
(75% of target market)
times
Annual purchase rate (20 units per year)
times
Average offering unit price ($10.00)
Forecasted sales
1 million
× .25
× .75
× 20
× $10.00
$37.5 million
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.
76
CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING
The $37.5 million sales forecast does not consider the number of competitors vying
for the same target market nor does it consider competitive intensity. Therefore, this
sales forecast should be adjusted downward to reflect these realities.
Forecasting sales, like estimating market sales potential, is not an easy task. Nevertheless, the task is central to opportunity evaluation and must be undertaken. For this
reason, sales forecasting is addressed again in Chapter 5 in reference to product and
service life cycles.
Finally, a pro forma income statement should be prepared showing forecasted
sales, budgeted expenses, and estimated net profit (Chapter 2). When completed, the
marketing analyst can review the identified opportunities and decide which can be
most profitably pursued given organizational capabilities.
NOTES
1. The Reebok example is based on Roger A. Kerin, Steven Hartley, Eric N. Berkowitz,
and William Rudelius, Marketing, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2006): 231–235;
and “Reebok,” Adidas-group.com, February 2, 2009.
2. Terry Lefton,“Schultz’ Caffeinated Crusade,”BRANDWEEK (July 5, 1999): 20 –25.
3. Ben M. Enis, Marketing Principles:The Management Process, 2nd ed. (Pacific Palisades,
CA:Goodyear, 1977):241.
4. Orville C. Walker Jr. and John Mullins, Marketing Strategy: A Decision-Focused
Approach, 6th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2008): Chapter 6.
5. “American Marketing Association Edison Award Best New Product,” Marketing News
(January 16, 1999): special supplement.
6. Stephanie Kang,“New Balance Steps Up Marketing Drive,”Wall Street Journal (March 21,
2008):B 3.
7. “Nokia: A Phone for Every Segment,” in Roger A. Kerin, Steven Hartley, Eric N.
Berkowitz,William Rudelius, (reference cited): 255–257.
8. Philip Kotler and Kevin Lane Keller, Marketing Management, 13th ed. (Upper Saddle
River, NJ: Prentice Hall, 2009): 262; and Daniel Yankelovich and David Meer,“Rediscovering Market Segmentation,” Harvard Business Review (February 2006): 122–131.
9. Cynthia Koons, “Harley-Davidson Markets to Women,” Wall Street Journal (February
22, 2006): B7; and Terry Box,“Biker Chic,” Dallas Morning News (June 24, 2007): pp. 1D, 6D.
10. Dean Foust,“Home Depot’s Remodeling Project,”BusinessWeek Online, January 9, 2004.
11. “The Giant in the Palm of Your Hand,” The Economist (February 12, 2005): 67–69; and
“Nokia: A Phone for Every Segment”(reference cited).
12. “Gerber Products Company,”Hoover’s.com, January 5, 2009.
13. Sources for examples contained in this discussion include Meg Green, “Winning the
Hispanic Market,” BEST’S Review (September 2004); 24–54; “Competition for Classrooms”
Dallas Morning News (November 12, 2002): 1D, 6D; and Roger A. Kerin, P. Rajan Varadarajan,
and Robert A. Peterson, “First-Mover Advantage: A Synthesis, Conceptual Framework, and
Research Propositions,”Journal of Marketing (October 1992): 33–52.
14. Portions of this discussion are based on Philip Kotler and Kevin Lane Keller, Marketing
Management (reference cited): Chapter 4.
000200010270582693
Strategic Marketing Problems: Cases and Comments, Twelfth Edition, by Roger A. Kerin and Robert A. Peterson. Published by Prentice Hall.
Copyright © 2010 by Pearson Education, Inc.