Market Segmentation - Nike Case Study

1. What advantages and benefits can a business gain from segmenting its market? 

Market segmentation is where businesses, group their customers into smaller categories, often with similar traits, needs or purchase patterns (Bowen, 1998). Kotler, Keller, Brady, Goodman, and Hansen (2016) stated businesses could segment customers by their behavioral traits, or identifying characteristics; such as their demographic, geographic location and psychographic profile. Segmentation assumes that customers in the same segment have similar preferences and buying behavior (Green, 1977; Wind, 1978). 

Segmentation enables businesses to gain empathy for the segment's needs, and target them with products, services and marketing messages which are relevant. Consumers today respond poorly to mass marketing approach as “one-size-fits-all” messages lack contextual relevance (Bianco, 2004). Therefore Nike, our company in this study, applies segmentation in its product lines to gain competitive advantage. Here are some advantages of segmentation; 

Competitive Advantage as Segment Specialist  

McBurnie and Clutterbuck (1988) commented that a segment specialist would enjoy first-mover advantage until competitors start replicating their approach. When Nike, previously known as Blue Ribbon Sports began its business, the founders who were both competitive distance runners, identified people like them as a niche segment of the running shoe market, with under-met needs. Their in-depth understanding of the needs of this segment led them to develop running shoes that were more durable and prevented sports injuries, features that no competitors were offering. 

While they only had a small share of the running shoe market, they were a specialist in this segment and was capable of responding quickly and more effectively to their customer's unique needs. Nike naturally became the top choice for marathon runners. In the 1972 Olympics, when four of the top 7 runners chose Nike, it was clear that Nike had become the best-in-class in the segment (Mullins, 2013). The brand took off. 

Segmentation creates Laser-Sharp Focus 

Finite resources call for laser-sharp focus. CEO Mike Parker demonstrated how vital segmentation is to Nike when he re-aligned the corporate structure to six market segments, which would drive the highest growth for Nike. Teams then focused on customer insights relevant to the segments they held and drove holistic product offerings for the segment.  

Women were one of the segments. This gender and psychographic segmentation opened a whole new market for Nike, leading to a 24% revenue growth (Tellis, 2003). Nike also found that women spent 40% more than men on sports apparels and were willing to pay a premium for stylish apparels, especially in areas such as aerobics and walking (Fisk, 2009).  

New Markets and Breakthrough Innovation 

While the world was preparing for World Cup 2002, Nike was focusing on the needs of soccer athletes in Korea and Japan. This geographical and behavioral segmentation led to considerations such as weather humidity, prompting Nike to innovate and develop a new material that kept athletes dry during the competition, enabling better athlete performance. Nike now has a new line of apparels suitable for markets with similar climate conditions. 

Segmentation improve Sales Messages 

Knowing who we want to sell to and what products they need, the last thing to do is to sell. Marketers would typically shout out about the unique selling points (USPs) of their products to targeted customers. Segmentation coupled with research enables a company to know how they can reach their target pool and what message would resonate most with them.  

Nike's slogan of "Just Do It" is a stronghold tagline for the brand. While it was already aspirational to many athletes, Nike wanted to deliver a more emotional message to appeal to the softer side of women. In the 1990s, Nike engaged Janet Champ to write up an eight-page magazine insert which spoke about the many roles women played, their many dreams and their growing up journey (Goldman & Papson, 1998). The ad created great resonance amongst women enabling Nike to gain an instant connection to its target segment. 

2. What is the relationship between market segmentation, target marketing and market positioning? What damage can be done to a business market position and target marketing, if market segments are incorrectly identified and ineffectively implemented? 

Segmenting, targeting and positioning or STP, is a process used, when one develops a Strategic Marketing Plan, to identify opportunities in the market, also called market segmentation process (Moutinho, 2000). They are applied in the same chronological sequence.  

Segmentation as a first step is where a business survey the market it desires to enter, to derive meaningful clusters of customers, thus generating a list of segments in that market. The company would study each segment to identify how they buy or use the product or service, their needs or unmet needs and preferences.  

Typically, what follows next is an executive decision on which segment to target. Businesses will evaluate each segment by their propensity to spend, profitability, and also whether the company would have a competitive advantage in that segment, given current strengths and resources. 

The final step of the STP is positioning. This step involves the company selecting how to place itself so it can appeal strongly to its chosen target audience. For instance, if the segment values comfort over price, it will make sense to position the product as one that offers "baby-soft comfort on your skin." The key in this step is to understand what the segment values most to least, so the product can be designed to fulfill those desires. Marketers can then decide on the ideal marketing mix (Product, Price, Place & Promotion) for each segment. 

Nike had all along been serious about helping professional athletes get better, through its footwear and apparels. When it forayed into basketball, it was no wonder that their eyes would be on the National Basketball Association (NBA), a professional basketball league for men. It was a national sport enjoyed by Americans from young to old and was well-loved worldwide.  

In selecting Basketball as a segment, Nike identified commonalities between running and basketball; both were professional sports which involved running, and both demanded shoes which could help athletes perform. Nike was able to leverage their air-cushion technology to design unique shoes for basketballers.  

Within the basketball segment, Nike chose to focus on young athletes as their target segment. In 1984, Nike decided to sponsor future basketball legend, Michael Jordon, then aged 21. Nike was the least concern with selling to these professional players. What they were pursuing was the fan base of young athletes who desired to wear the same shoes as their idols. Jordan as a brand, targets young customers from 13 to 30 years old, who loved basketball or liked the design of Air Jordon shoe. This principle stuck with Nike to today as it continues to sponsor young athletes as a strategy to draw in young customers (Lutz, 2015).   

In the basketball arena, Nike wanted to be positioned as a performance shoe. Jordon, was the encapsulation of performance as he went on to win multiple individual awards as well as team championships. In a marketing commercial for the Air Jordon, Nike got Jordon to attribute his stellar performance to the Air Jordon shoes. The ad further enhanced Nike's position as a brand whose mission was to help all athletes reach their optimal potential. As a result, Air Jordan raked in almost $130 million in its 1985 debut. By 1990, products associated with Jordan brought in an estimated $200 million annually for Nike (Johnson, 1998). 

When Segmentation Goes Wrong 

Christensen, Cook, and Hall (2005) found that more than 90% of products fail. Since the STP begins with segmentation, it becomes particularly important to identify the right segment. Not doing so will result in wasted targeting efforts and wrong market positioning.  

A wrong segmentation can have a further downstream impact, causing the business to make erroneous decisions with regards to the product, pricing, distribution or placement and promotion.  

Marketers could be chasing their tails, selling an excellent product to people who didn't need it or couldn't afford it, or waste advertising dollars on platforms which did not generate revenue for them. If the business were not equipped to fulfill the needs of the selected segment, wrong segmentation would weaken a business' market position as consumers see no compelling reason to choose you over a competitor (McDonald & Dunbar, 2004).  

Therefore, to ensure a higher chance of success, it is advisable for businesses to perform a SWOT analysis on the market and their internal capabilities before deciding on a segment to target. 

3. Can market segmentation be taken too far? What are the potential disadvantages of over segmenting a market? What strategies could a business pursue if the market has been broken into too many small segments? 

In market segmentation, every segment a business pursues will end up requiring resources to support the end-to-end product and service offers. From generating segment insights, to building a custom product for the segment, to producing marketing plans explicitly targeted at people within the segment, all these activities require resources and money. Over-segmentation can, therefore, lead to several problems. 

Ineffective use of resource 

Businesses segment the market to reach and connect with the customers with relevant products, communication, and media mix. While the same resources could be used to target a more generic segment with a larger base, these resources are used to target micro-segments with a smaller base. The return on investment, in this case, reduces as cost increases per segment. This is especially true in cases where there are multiple micro-segments with overlapping characteristics which could be grouped into a more substantial segment.  

Thomas (2007), President/CEO of Dallas-Fort Worth based Decision Analyst recommended in his whitepaper that dividing a market into four or five segments is a good rule of thumb. Chad Pollitt, author, professor and partner/VP for the audience at the Native Advertising Institute echos the same (Terdoslavich, 2017).  

In economics, we have learned that economies of scale and productivity are ways for a company to make a profit. As such, products offered will need to be somewhat homogeneous for companies to gain economies of scale. Over-segmentation will, therefore, put a strain on the business's ability to reap this benefit (Hannagan, 1992). 

Diluted or Confusing Brand Message 

Marketers target different segments with different selling points to attract potential customers at their channel of choice. With over-segmentation, a brand runs the risk of flooding the consumers with too many variations of the brand message, resulting in confusion or diluting the impact each message delivers. With digital marketing gaining importance today, consumers are likely to see multiple messages on Google Ads or Facebook which may or may not be meant for their segment. This leads to the ineffective positioning of the brand or the product's value proposition (Quelch & Kenny, 1994). 

Limited Growth Opportunity 

Over-segmentation also makes it difficult for businesses to make a profit as the growth potential is limited when the segment is too small. (Baker & Hart, 2008). Having too many choices can also become a cognitive burden for consumers who would then turn to competitors with simpler products to meet their needs (Telegraph, 2012). When a company over segments its customers, it also runs the risk of omitting a more extensive base which could benefit from and therefore buy their products.  

The Remedy - Counter Segmentation Strategy 

The objective of segmentation, it is to identify affinity clusters of consumers who display similar traits in their needs and purchase patterns. Counter Segmentation is a strategy which businesses can adopt, to start identifying commonalities in the hyper-segments and start consolidating into fewer but larger segments.  

These commonalities could be as generic as gender, geographic location, specific behavioral dimensions such as price sensitivity or psychographic traits such as an appreciation for fashion. The rule of thumb is to identify segments large enough and profitable enough for the company.  

In the case of Nike, they have started the business by segmenting product lines based on sports categories; running, basketball, golf. If they had continued along this route for the sportswomen played, they would have to create multiple new lines including yoga, walking, swimming, Zumba, rock climbing and many more. The danger of doing so is in creating "uncontrolled line-extension" (Quelch & Kenny, 1994). Instead, Nike decided to take Women as a single segment. The commonalities across these sports were a woman's desire to select her favorite colour, cuts that flattered her figure, materials which created comfort and enabled movement.  

Counter segmentation, in this case, broadens the customer base, making it easier for Nike to serve their needs. 

References 

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