Top 4 Bases for Segmenting Consumer Market PDF

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TOP 4 BASES FOR SEGMENTING CONSUMER MARKET The segmentation of consumer markets requires the creation of sub-groups from a larger population to more specifically target them. There are virtually dozens of ways that a market might be segmented and the segments chosen will depend on the business and the products or services it offers. Basically, segmentation is all about identifying specific groups of people based on common characteristics.

The four bases for segmenting consumer market are as follows: A. Demographic Segmentation B. Geographic Segmentation C. Psychographic Segmentation D. Behavioural Segmentation. A. Demographic Segmentation: Demographic segmentation divides the markets into groups based on variables such as age, gender, family size, income, occupation, education, religion, race and nationality. Demographic factors are the most popular bases for segmenting the consumer group. One reason is that consumer needs, wants, and usage rates often vary closely with the demographic variables. Moreover, demographic factors are easier to measure than most other type of variables.

1. Age: It is one of the most common demographic variables used to segment markets. Some companies offer different products, or use different marketing approaches for different age groups. For example, McDonald’s targets children, teens, adults and seniors with different ads and media. Markets that are commonly segmented by age includes clothing, toys, music, automobiles, soaps, shampoos and foods.

2. Gender: Gender segmentation is used in clothing, cosmetics and magazines. 3. Income: Markets are also segmented on the basis of income. Income is used to divide the markets because it influences the people’s product purchase. It affects a consumer’s buying power and style of living. Income includes housing, furniture, automobile, clothing, alcoholic, beverages, food, sporting goods, luxury goods, financial services and travel. 4. Family cycle: Product needs vary according to age, number of persons in the household, marital status, and number and age of children. These variables can be combined into a single variable called family life cycle. Housing, home appliances, furniture, food and automobile are few of the numerous product markets segmented by the family cycle stages. Social class can be divided into upper class, middle class and lower class. Many companies deal in clothing, home furnishing, leisure activities, design products and services for specific social classes.

B. Geographic Segmentation: Geographic segmentation refers to dividing a market into different geographical units such as nations, states, regions, cities, or neighbourhoods. For example, national newspapers are published and distributed to different cities in different languages to cater to the needs of the consumers.

Geographic variables such as climate, terrain, natural resources, and population density also influence consumer product needs. Companies may divide markets into regions because the differences in geographic variables can cause consumer needs and wants to differ from one region to another.

C. Psychographic Segmentation: Psychographic segmentation pertains to lifestyle and personality traits. In the case of certain products, buying behaviour predominantly depends on lifestyle and personality characteristics. 1. Personality characteristics: It refers to a person’s individual character traits, attitudes and habits. Here markets are segmented according to competitiveness, introvert, extrovert, ambitious, aggressiveness, etc. This type of segmentation is used when a product is similar to many competing products, and consumer needs for products are not affected by other segmentation variables. 2. Lifestyle: It is the manner in which people live and spend their time and money. Lifestyle analysis provides marketers with a broad view of consumers because it segments the markets into groups on the basis of activities, interests, beliefs and opinions. Companies making cosmetics, alcoholic beverages and furniture’s segment market according to the lifestyle.

D. Behavioural Segmentation: In behavioural segmentation, buyers are divided into groups on the basis of their knowledge of, attitude towards, use of, or response to a product. Behavioural segmentation includes segmentation on the basis of occasions, user status, usage rate loyalty status, buyer-readiness stage and attitude. 1. Occasion: Buyers can be distinguished according to the occasions when they purchase a product, use a product, or develop a need to use a product. It helps the firm expand the product usage. For example, Cadbury’s advertising to promote the product during wedding season is an example of occasion segmentation. 2. User status: Sometimes the markets are segmented on the basis of user status, that is, on the basis of non-user, ex-user, potential user, first-time user and regular user of the product. Large companies usually target potential users, whereas smaller firms focus on current users. 3. Usage rate: Markets can be distinguished on the basis of usage rate, that is, on the basis of light, medium and heavy users. Heavy users are often a small percentage of the market, but account for a high percentage of the total consumption. Marketers usually prefer to attract a heavy user rather than several light users, and vary their promotional efforts accordingly. 4. Loyalty status: Buyers can be divided on the basis of their loyalty status—hardcore loyal (consumer who buy one brand all the time), split loyal (consumers who are loyal to two or three brands),

shifting loyal (consumers who shift from one brand to another), and switchers (consumers who show no loyalty to any brand). 5. Buyer readiness stage: The six psychological stages through which a person passes when deciding to purchase a product. The six stages are awareness of the product, knowledge of what it does, interest in the product, preference over competing products, conviction of the product’s suitability, and purchase. Marketing campaigns exist in large part to move the target audience through the buyer readiness stages.

VALUE-CHAIN ANALYSIS Porter (1985) identifies five primary activities that add value to the final output of a company (Figure 5.5). Areas where value is also destroyed, or eroded, can also be identified through this technique. 1 Inbound logistics involves managing the flow of products into the company. Recent attention to just-in-time manufacturing has shown how important this can be to the efficient operation of a company and how by management of its suppliers and their quality a company can add to the quality of its final products.

1. Inbound logistics involves managing the flow of products into the company. Recent attention to just-in-time manufacturing has shown how important this can be to the efficient operation of a company and how by management of its suppliers and their quality a company can add to the quality of its final products.

2. Operations have long been seen as the central activity of businesses. These comprise the processes whereby the inbound items are changed in form, packaged and tested for suitability for sale. Traditionally this has been seen as the area where value is added to a company’s products. At this stage value can be added beyond the normal capital and manpower inputs by the maintenance of high quality, flexibility and design.

3. Outbound logistics carry the product from the point of manufacture to the buyer. They therefore include storage, distribution, etc. At this stage value can be added through quick and timely delivery, low damage rates and the formulation of delivery mechanisms that fit the operations of the user. Within the fertiliser industry, the now bought-out ICI once added tremendous value to its products by offering blends that fitted the specific needs of farmers at certain times of the year, and delivery modularisation which fitted the farmers’ own systems. Then, taking it a stage further, deliveries were taken to the field rather than to the farm or indeed spreading could be also be undertaken by the supplier.

4. Marketing and sales activities inform buyers about products and services, and provide buyers with a reason to purchase. This can concern feedback, which allows the user company to fit their operation’s outbound logistics to user requirements or by helping customers understand the economic value of products that are available. Taking the ICI example again, part of the original marketing activity involved showing how some of its products could be used to equalise the workload on a farm throughout the year, and therefore use the overall labour force more efficiently. The embedded and integrated approach certainly added value and competitive clout for ICI at the time.

5. Service includes all the activities required to keep the product or service working effectively for the buyer, after it is sold and delivered. This can involve training, return of goods policies, a consultation hotline and other facilities. Since customer satisfaction is central to achieving repeat sales and word-of-mouth communication from satisfied customers, after-sales service is clearly a major part of added value.

PORTER (1980) ARGUES THAT COMPETITIVE ADVANTAGE CAN BE CREATED IN TWO MAIN (THOUGH NOT EXCLUSIVE) WAYS: THROUGH COST LEADERSHIP OR DIFFERENTIATION (SEE FIGURE 2.11).

Cost leadership The first type of advantage involves pursuing a cost leadership position in the industry. Under this strategy the company seeks to obtain a cost structure, significantly below that of competitors while

retaining products on the market that are in close proximity to competitors’ offerings. With a low cost structure above-average returns are possible despite heavy competition. Cost leadership is attained through aggressive construction of efficient scale economies, the pursuit of cost reductions through experience effects, tight cost and overhead control, and cost minimisation in R&D, services, salesforce, advertising, etc. The cost leadership route is that followed aggressively by Ryanair in the budget airline market. Cost leaders typically need high market shares to achieve the above economies, and favourable access to raw materials. If, for example, efficient production processes, or superior production technology enabling cheaper production, were identified as company strengths or distinctive competencies, they could be effectively translated into a competitive advantage through cost leadership. Similarly, if backward integration (merger with, or acquisition of, suppliers) has secured the relatively cheaper supply of raw materials, that asset could also be converted into a competitive advantage. This strategy is particularly suitable in commodity markets where there is little or no differentiation between the physical products offered. Where products are highly differentiated, however, the strategy has the major disadvantage in that it does not create a reason why the customer should buy the company’s offering. Low costs could be translated into lower price, but this would effectively be a differentiation strategy (using price as the basis on which to differentiate).

Differentiation The second approach to creating a competitive advantage is differentiation, i.e. creating something that is seen as unique in the market. Under this strategy company strengths and skills are used to differentiate the company’s offerings from those of its competitors along some criteria that are valued by consumers. Differentiation can be achieved on a variety of bases, for example by design, style, product or service features, price, image, etc. The major advantage of a differentiation strategy, as opposed to a cost leadership strategy, is that it creates, or emphasises, a reason why the customer should buy from the company rather than from its competitors. While cost leadership creates an essentially financially based advantage for the company, differentiation creates a market-based advantage (see Figure 10.3).

Products or services that are differentiated in a valued way can command higher prices and margins and thus avoid competing on price alone. An example of this is Fairtrade goods (bananas, coffee, tea etc.). These are differentiated by the way in which the suppliers are rewarded for their efforts. Generally the

prices charged are higher than for non-Fairtrade products, but a growing segment of consumers are prepared to pay higher prices to be assured that producers in developing economies are not being unduly exploited. Differentiation and cost leadership The two strategies are not mutually exclusive, and could both be pursued simultaneously. Indeed, differentiation, especially through superior quality, can often result in lower unit costs through achieved gains in market share and attendant economies of scale and/or experience effects. Each of the two basic approaches to creating a differential advantage has its attendant risks. Cost leadership may be impossible to sustain due to competitor imitation (using, for example, similar technology and processes), technological change occurring that may make it cheaper for newer entrants to produce the products or services, or alternatively competitors finding and exploiting alternative bases for cost leadership (see the discussion of cost drivers in Chapter 10). Cost leadership is also a risky strategy where there is a high degree of differentiation between competitive offerings. Differentiation creates reasons for purchase, which cost leadership does not. In addition, cost leadership typically requires minimal spending on R&D, product improvements and image creation, all of which can leave the product vulnerable to competitively superior products. Differentiation as a strategy is also open to a variety of risks. If differentiation is not based on distinctive marketing assets it is possible that it will be imitated by competitors. A low price positioning, for example, might seem attractive in harsh economic times, but unless costs are also low compared with competitors it could spark costly price wars that seriously erode or eliminate margins. This risk can be minimised by building the differentiation on the basis of competencies or marketing assets that the company alone possesses and which cannot be copied by competitors. In addition, the basis for differentiation may become less important to customers or new bases become more important. These latter points should be guarded against by constant customer and competitor monitoring. A further danger of the differentiation strategy is that the costs of differentiating may outweigh the value placed on it by customers. For both the cost leadership and differentiation approaches that seek to appeal industrywide there is the added risk that focusers or nichers in the market (those competitors that focus their activities on a selected segment) may achieve lower costs or more valued differentiation in specific segments. Thus, in markets where segmentation is pronounced, both the basic approaches carry high risks. Chapter 10 explores further these approaches to creating a defensible position in the marketplace.

MARKETING RESOURCES AS THE FOUNDATION FOR DIFFERENTIATION (RESOURCES BASED) While any organisation could produce a long list of the resources at its disposal, what is important is to identify those resources that can help create a competitive advantage, and ideally an advantage that can be sustained into the foreseeable future – sustainable competitive advantage (SCA). Theories developed in the strategic management field can be helpful. Strategic management theorists have shown that a sustainable competitive advantage can be achieved when distinct resources are employed that are resistant to competitor imitation or duplication. The resources that will most likely create sustainable advantage have a number of key characteristics. First, they enable the provision of competitively superior value to customers (Barney, 1991, 1997; Slater, 1997). Second, they are resistant to duplication by competitors (Reed and DeFillippi, 1990; Hall, 1992, 1993). Third, their value can be appropriated by the organisation (Collis and Montgomery, 1995). Resources, such as brand reputation, relationships with customers, effective distribution networks and the competitive position occupied in the marketplace, are potentially significant advantage generating resources. These have been termed marketing resources as they relate directly to marketing activities and are directly leveraged in the marketplace. Their role in generating value for customers is clear. But how easy are they to protect against competitor imitation (and hence erosion of the advantage)? Some resources, such as capital, plant and machinery, are inherently easier for competitors to copy than others, such as company reputation, brand reputation and competitive position created and reinforced over time. Many marketing resources, as we shall see, are intangible in nature and hence more difficult for competitors to understand and replicate. The ways in which resources can be protected from duplication have been termed isolating mechanisms (Reed and DeFillippi, 1990) as they serve to isolate the organisation from its competition, creating a competitive barrier. Isolating mechanisms operate at three main levels. ● First, for a competitor to imitate a successful marketing strategy it must be able to identify the resources that have been dedicated to creating and implementing that strategy in the first place. The competitive position created, for example, will include a complex interplay of resources creating difficulties for competitors in identification. Lippman and Rumelt (1982) refer to this problem for competitors as ‘causal ambiguity’, which can be created through tacitness (the accumulated skill-based resources resulting from learning by doing and managerial experience), complexity (using a large number of interrelated resources), and specificity (the dedication of certain resources to specific

activities). For example, a firm enjoying the resource of close relationships with key customers might be more difficult for a competitor to copy than one offering cut-price bargains. The former will require superior customer linking skills, such as customer relationship management (tacit skills), together with the technical skills to serve customer needs. The latter may be based on an effective cost-control system that could be relatively easily installed by a competitor.

● Second, should a competitor overcome the identification barrier it would still need to acquire the resources necessary for imitation of the strategy. Some resources, such as corporate culture or market orientation, may take time to develop (referred to as being ‘pathdependent’ because they require the firm to go down a particular path to develop them) while others may be uneconomic to acquire, or even protected in some way (for example through patents or copyrights). If resources have transaction costs associated with their acquisition there is likely to be a continuing barrier to duplication. Even where acquisition is theoretically possible some resources may be less effective in the competing firm (for example, managers may be less effective working in one environment than another).

● Third, most resources depreciate over time as competitors are eventually likely to find ways of imitating successful strategies. This is especially true in rapidly changing markets (e.g. where technology is changing swiftly). Again, some resources may depreciate less quickly than others. Reputation, for example, has potential for a longer period of advantage generation than, say, rapidly depreciating plant and machinery. We say potential because we should always remember that reputations take time to build but could be destroyed overnight if mishandled. BP, the multi-national oil and gas producer, suffered a significant amount of reputational and also financial damage (through large reductions in share price) following the Deepwater Horizon oil rig disaster in 2010. It took some time for them to re...