Chapter 2 Market Segmentation

Chapter 2 - Market Segmentation and the Marketing Environment

LEARNING OBJECTIVES
After reading this chapter, students should be able to: Explain how the marketing environment can influence consumer behaviour Describe the trends in consumption behaviour, with particular relevance to the current environment Use principles of consumer behaviour to explain market segmentation Distinguish between the segmentation approaches for the consumer and business markets Discuss the conditions required for segmenting markets, as well as evaluate segmentation as a marketing tool Describe the ways that various target marketing strategies are used to meet consumer needs.

CHAPTER TOPICS
1. The Marketing Environment in the Noughties Technology boom Focus oh healthier lifestyles Case in point 2.1Maccas turns a new leaf Multicultural influences Busy lifestyles Changing household composition Changing media consumption patterns Sports marketing Environmentally aware community Changing gender roles What is segmentation? Market aggregation Broad approaches to segmentation Conditions for effective segmentation Advantages and limitations of segmenting markets Business market segmentation

2. 3. 4. 5. 6. 7.

The marketing environment in the noughties

The 21st century from 20002010 is also known as the noughties, just as we refer to other decades as the eighties or nineties. Over the last decade a lot of trends have evolved as a result of significant events or changing lifestyles. The marketing environment is defined as those factors that have an influence on the operation of a business and its effectiveness in the marketplace (text, p. 34). It can include factors internal to the business over which the company has control, such as skills of the workforce, and factors external to the company, such as employment rates and health of the economy, over which the company exerts no control. Some of the current trends that can affect the purchase and consumption of products and services include the following. Technology boom Technology has changed the way we live, consume and do business. Marketers can have access to a global market through the World Wide Web, whilst consumers are able to acquire information and products from wherever they want. Marketers can use technology as part of their marketing strategyimpacting all parts of the Consumer Behaviour by Karen Webb
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marketing mix. Some products are only offered in a digital format online; the Internet can serve as a distribution channel and online store; special discounts can operate through an online environment since it is cheaper for a marketer to use online facilities with fewer service staff required; and promotions such as SMS, coupons, email marketing, tailored website design and unmatched information dissemination can occur as a direct result of technological advancements. Focus on healthier lifestyles Consumers now have access to more information, and tend to be better educated as a result of this access. Health is a greatly debated topic, with a lot of ideas and remedies existing for living longer or looking younger. Consider some of the Reality TV shows like Extreme Makeover. Issues like childhood obesity, the dangers of smoking and other drugs of addiction, and nutrition in foods are regularly featured in news and other television programs. Marketers need to be socially responsible, not just in their quest to protect the environment, but also their consumers. A good example is take-away food outlets such as McDonalds having to introduce healthy options to ensure long-term profits. Healthy food chains like Subway are being introduced at a rapid pace across the country. Consider examples of how companies have modified their offerings or come into being because of this healthy lifestyle trend. Case in point 2.1Maccas turns a new leaf McDonalds has responded to the growing concern over levels of obesity by introducing their Salads Plus range. Instead of viewing the media treatment of the issue as a threat, the market leader saw an opportunity to be a solution to the problem, rather than the cause. In hindsight, w e know just how successful this initiative has been, with many other fast-food giants following McDonalds lead. Encourage students to consider other examples of companies viewing potential threats as opportunities to grow with consumer needs. Multicultural influences Australia is known for its diverse ethnicity. A scan through the Yellow Pages on the types of cuisine available in restaurants, or a visit to any supermarket, shows the origins of many countries. Trying other nations cuisines is also encouraged. Ask students to name some of the brands in a supermarket that seem to be a direct result of our multicultural acceptance of our society. Nostalgic reference to the 1950s and 60s is warranted here when the only cuisines apart from steak and veg were Chinese and perhaps Ita lian (pizza). Busy schedule Is 24 hours in a day long enough any more? Should we sleep less? How can we get everything done that is required? Many of us are now considered time poor, where the one resource we seem to be most short of is time. Many businesses have introduced products to help us manage our busy lives better. Ask students what products or services exist as a result of busy-ness. A diverse range of ideas should be raised, including home appliances like dishwashers, Internet shopping, pre-prepared foods, drive-through dry cleaners, Internet banking. Changing household compositions Households do not necessarily equate to a nuclear family of two parents and their children. More than a third of marriages now end in divorce, many couples live together without being married, there is growing acceptance of homosexual relationships, higher infertility rates, child-bearing at a later age and the amount of single or couple-only households has grown substantially. Marketers need to respond to these changes to be more competitive. Encourage students to think of ways marketers have responded to the trends mentioned here. For example, smaller households mean smaller sizes available for purchase or single serve ready-prepared meals like Lean Cuisine. Child-care centres with longer operating hours are required for single-parents working fulltime. Changing media consumption patterns

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Consumers are not necessarily reached with mass media like television and radio anymore. This is typically a result of trends such as busy lifestyles, women in the workforce, and the availability of more effective technologies for communication. The way consumers enter competitions, searching for comparative information for shopping goods, the creative use of different tools like interactive screens in shopping centres and highly specialised magazines are all changes that are happening in media to better reach consumers. Encourage students to raise some of the new media that are now available to marketers to help them reach their consumers. Sports marketing Australians are known for their love of sport and the great outdoors. Sports marketing can cover two areas: sportspeople are now marketed heavily, alongside the sport they represent. Some of our greatest heroes are sportspeople. Ian Thorpedo Thorpe immediately springs to mind. To hop on this bandwagon, marketers sponsor sporting events in the hope that they will be associated with the success of that event. Sponsors can also keep the cost of entry down for spectators and allow better coverage of particular events. Encourage discussion of those companies that sponsor particular sports (or cultural) events. This is a good exercise for brand recall! Environmentally aware community Care of the environment and the surrounding community is paramount for marketers. Packaging, production and disposal of waste and by-products must all be closely monitored. Agencies exist to regulate these activities, as well as watchdogs in the media. Encourage students to focus on the marketing aspect, and consider companies that are environmentally friendly either in their packaging (recyclable materials) or their processes (e.g. product testingBody Shop). Changing gender roles The traditional roles of men and women have been changing over the last few decades. No longer are men the sole money earner, or women responsible for household duties. How can marketers take advantage of these trends? Encourage students to consider products available for cleaning and how these have changed as a result of gender roles. Also consider some of the products that are now available since women are often working instead of, or as well as, their male partners. Long-daycare centres, convenience products, and quicker cleaning methods such as Enjo are examples that could be raised.

What is segmentation?
The entire market is too large for most marketers to serve and satisfy. It is impossible to be all things to all people. Marketers need to break the market into groups of customers with similar needs. The proce ss of dividing the market into similar groups is called market segmentation. Segmentation allows marketers to properly satisfy the needs of their particular markets. A separate marketing mix is then developed to match each segments needs. The actual process of segmentation involves identifying target market(s) to serve. There are five steps to identifying markets: 1. Conduct research to identify customer needs for each type of product 2. Consider how these needs relate to segmentation bases (see below) 3. Describe segments 4. Determine which segment/s you will target and your positioning strategy 5. Develop the appropriate marketing mix. Bases of segmentation Markets can be segmented by criteria often referred to as bases of segmentation. The segmentation bases used in consumer markets include the following: Geographicfor example by country, state, region, urban/rural, by climate, suburb, local government area.

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Chapter 2 Market Segmentation

Demographicthis is best described as the information students used to collect at school when studying a country. For example, population, gender, income, age, religion, ethnicity, family lifecycle stage, education. Psychographic/lifestyleThese criteria, in particular, will be looked at in some detail in this course. They include attitudes, interests, opinions, social class and lifestyle traits. Sometimes our psychographic profile is a function of some of the other bases of segmentation. For example, our education level may govern our opinions on many issues, or the lifestyle that we lead. Benefit- and product-relatedbenefits desired from a particular product category, loyalty towards a brand, level of usage, brand switchers. Loyalty is an important variable to always consider, since it is far more expensive to recruit new buyers than to satisfy loyal ones. Geodemographicthis is a combination of geographic and demographic, since people who live in a certain area tend to display similar demographic characteristics.

Solomon (2002) suggests that segmentation needs to be focused more on consumer characteristics and 1 behaviour rather than on products characteristics.

3.

Market aggregation

Market aggregation is where the marketer targets the entire market. One marketing mix is developed for the whole market. This is only appropriate when: the majority of customers have the same attitudes and perceptions about the products in the market; economies of scale can be achieved through production or other efficiencies; the company has insufficient resources to design and manage separate marketing mixes; or the identified segments are too small to warrant separate attention.

4.

Broad approaches to segmentation

Effective segmentation requires that a company really understanding its customers and prospects. The questions that need to be addressed include: What business is the company really in? What are the psychological reasons or underlying motives behind consumers expressed needs? How is the market changing? Examples include local competitors, global players, new products or substitutes, government regulation and the Internet. For example, Nokia introduced camera phones because of the rapid growth of the digital camera market. As a result, Kodak have seen digital technology as a threat and lost significant market share and substantial profits. Other companies like Big W have seen an opportunity, introduced photography, and now print some of the cheapest digital photographs.

5.

Conditions for effective segmentation

The overriding aim of marketing activities is to better understand the customer in order to satisfy their needs. However, company objectives and resources also need to be kept in mind. Meeting all consumers unique needs would be a timely and costly exercise. Profit is usually the main aim of any company. With each market segment served, separate marketing programs need to be developed. Resources, human and financial, are then required to serve each segment. Therefore, it is important a company does not target too many segmentsor long-term profits will be jeopardised. A segment should meet the following criteria: Measurablewell-defined so a marketer can determine precisely how many people are in the segment. Accessiblea marketer can actually serve the market with their resources, capabilities and knowledge. Profitablethe segment needs to have enough sales potential to cover costs and make a profit.

Solomon, M.R. (2002) Consumer behaviour: buying, having and being. Prentice-Hall, New Jersey, Chapter 1.
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Chapter 2 Market Segmentation 6. Advantages and limitation of segmenting markets

There are several advantages and limitations to segmentation. Benefits of segmentation Companies that understand where their customers live, their preferences for certain styles of products, and basic demographic characteristics are able to improve their marketing activities, better satisfy the needs of their customers and provide a sustainable advantage over competitors. Segmentation also allows for more efficient use of limited company resourcesbeyond financial. Limitations of segmentation centre on the need to develop separate marketing mixes for each segment. It can be expensive to produce small amounts of different items, with different colours and sizes. Tailored production runs are far more expensive than more standardised runs where economies of scale can be achieved. Case in point 2.2Telltale habits Freedom Furniture is developing technology to discover what sort of people their customers are, rather than relying only on geographic criteria. Micro-segmentation tools are being used to develop detailed statistical profiles of its customers. The information is being used to fine-tune catalogue distribution, determine product ranges for individual stores and guide direct marketing activities. A better understanding of life stage and spending patterns of customers in specific regions controls a lot of the marketing activities of Freedom, including store layout, display and product ranges. For example, more exclusive areas require more elaborate contemporary interior designs. Areas where families reside require greater durability and more conservative designs. Although this information was assumed, it can now be supported by research data and allow greater use of direct marketing rather than advertising. Knowing consumers needs allows brochures to be sent out to specific micro -segments, which often results in greater spending by core customers. Ask students to use their intuition in their town or suburb, to describe the likely key areas of demand for furniture and furnishings. What type of segmentation bases are being used in their assumptions?

7.

Business market segmentation

Business markets can be segmented like consumer markets, but use different criteria. Geographicsame concept as consumer markets with consideration of countries, regions, states, etc. Customer type and sizesize of the organisation can affect marketing, because of the more formal processes involved in dealing with larger organisations. Telstra would offer different services to the small office/home office (SOHO) segment, compared to a call centre operating a national base like Ezibuy. Industry type is another segmentation variable to consider. Other variables that could be considered are addressed in the table below.
Table 1: Bases for segmenting business markets Base of segmentation Description Demographic Industry (addressed above) Company size Location Operating variables Which customer technologies should be focused on User/non-user status Customer capabilities and number of services required Purchasing Centralised or decentralised purchasing functions approaches Power structure and cultureengineering focused, R&D focused, customer centred Extent of existing relationships Purchasing policiesleasing, outright purchase, service contracts Purchasing criteria like service, quality and price

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Situational factors Urgencyrequires quick delivery Specific application of our product Size of order Buyerseller similarityvalues similar to our company Attitudes towards risk and willingness to try new supplier Loyalty to supplier

Personal characteristics

Source: Adapted from Kotler, P., Adam, S., Brown, L. and Armstrong, G. (2003) Principles of Marketing, 2nd edition. Pearson Education: Australia, p. 226.

DISCUSSION EXERCISES
1. 2. 3. You are the product brand manager for Kelloggs Nutri-Grain. Determine which trends in the environment might impact on your marketing activities. Choose a magazine from a newsagent. Determine what bases of segmentation could be used to describe the target market for that magazine. Scan through some newspapers and look at the attention given to particular social or environment issues. What opportunities exist for companies with this type of issue? Which companies are under threat? What will companies need to do prior to introducing a new product or extension of an existing product? You are the marketing manager for the Australian Meat & Livestock Corporation. Consider the different types of market you could target. Describe two different consumer markets and two different business markets which could be worth targeting with specialised marketing efforts. Justify your reasons.

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