To help them understand the market and buyer behaviour, marketers should answer the following questions:
Source: Kotler, P., Marketing Management, Prentice-Hall, 1997
Chart 11.2 Selling versus marketing concept
Production Products Selling and
promotion
Profit through sales volume
Target market
Customer
needs Integrated
marketing
Profit through customer satisfaction
STARTING POINT FOCUS MEANS ENDS
THE SELLING CONCEPT
THE MARKETING CONCEPT
Chart 11.1 Marketing strategy process
Market segmentation
Market
targeting Marketing
mix
Market positioning Market/customer
analysis
99
What market need does the business address?
What products serve that need?
Who buys the products?
Why do customers buy?
Who makes the buying decision?
Where do customers buy?
The focus of understanding markets is the understanding of customers and buyer behaviour. Philip Kotler, professor of international marketing at Kellogg School of Management, devised a model of buyer behaviour (see Chart 11.3) in consumer markets emphasising the stimuli-response mechanism where buyers react to marketing and environmental stimuli. Depending on the personal characteristics of the buyer, the stimuli will result in a particular buying decision.
The value of the model of buyer behaviour is that it provides an explanation for the demand of a business’s products, not just as a function of price, but also as a result of a host of other factors that are specific to individual consumers or groups of consumers.
Demand for a product can be stimulated only by addressing all factors that finally result in a buying decision. For example, the price of a cup of coffee may be almost irrelevant in explaining why an individual goes to one coffee shop rather than another. Factors such as
“feeling relaxed” or being able “to watch the world go by” can be far more important and would influence shop design.
When selling to businesses or government, the personal characteristics of a buyer are not entirely irrelevant, but rational factors outweigh personal factors. In business-to-business markets, environmental (demand, pest) and organisational factors are far more important.
However, an understanding of customer needs is more easily achieved by establishing a relationship with the decision-makers.
Market segmentation
A market segment is defined as a sufficiently large group of buyers with a differentiated set of needs and preferences that can be targeted with a differentiated marketing mix (see below). Fine-tuning the marketing mix to address the segment needs will lead to increased sales. However, adjusting the marketing mix for particular segments results in increased costs. To be of value, therefore, the benefits of segmentation must outweigh the costs.
A benefit of market segmentation could be a higher market share in the targeted segment
Source: Kotler, P., Marketing Management, Prentice-Hall, 1997
Chart 11.3 Model of buyer behaviour in consumer markets
Product Price Place Promotion Marketing
stimuli
Economic Technological
Political Cultural Other stimuli
Cultural Social Personal Psychological
Buyer’s characteristics
Problem recognition Information search
Evolution Decision Post-purchase
behaviour Buyer’s decision
process
Product choice Brand choice Retailer choice Purchase timing Purchase amount Buyer’s decisions
or the ability to charge a higher price. For example, when analysing the tariff-plan preferences of mobile phone users, market research revealed that customers are prepared to pay a substantial premium in terms of the average per-minute price to have their preferred tariff plan. By offering a range of tariff plans aimed at segments with different preferences, a mobile phone company will not only win more customers but also reap a higher average revenue per minute.
For segmentation to work in practice, a segment must be identifiable and quantifiable, and it must be possible to address the segment effectively. Some buyers may be happy to pay a higher price for certain attributes. An example is air travel, where business travellers who attach value to flexibility are prepared to pay much more than they would for a non- flexible ticket. But discriminating between buyers can be problematic, inasmuch as a business traveller may buy a cheap, non-flexible return ticket and simply not use the return portion.
Segments must be measurable, in terms not just of potential market size but also of actual buying behaviour. It must be possible to attach segment flags to sales records in order to track segments. Simple information, such as gender, can be recorded at the point of sale, but factors used in psychographic segmentation schemes are difficult to record and it may be impossible to validate the success of the chosen segment scheme in a feedback loop.
Primary market research is the most appropriate tool to identify market segments.
Typically, a market research questionnaire includes the demographics, questions relating to product attributes and their relative importance, brand preferences, usage patterns and willingness to buy, as well as attitudinal and lifestyle questions.
Segmentation methods
It is important to bear in mind that segmentation is not simply the act of dividing the market into categories, for example a breakdown of buyers by age. If age does not explain differences in buyer behaviour, it is not a useful variable for the purposes of market segmentation. There are several segmentation methods, each with advantages and drawbacks:
Geographic segmentation is increasingly used with geo-marketing databases. Detailed information about the type of household in particular postcodes is available to marketers. Often geography is a proxy for a host of other variables (income, ethnicity, household size) because households with common attributes tend to cluster in certain areas.
Demographic segmentation includes segmentation based on life-stage analysis, age, gender, income and social class. In saturated consumer markets, such traditional measures are often bad at explaining buyer behaviour because demographics do not necessarily explain needs.
Psychographic segmentation is based on lifestyle, personal values and attitudes. It is better at identifying clients’ needs or preferences than, for example, social class, but measurement and tracking are problematic.
Behavioural segmentation is based on customers’ knowledge of the product, point of purchase, purchase pattern and frequency, intensity of use, benefits and trade-offs, loyalty and other buyer behaviour factors.
Understanding markets and customers 101
Segmentation can be simple, using one variable (for example, business versus consumer market, male versus female), or based on preferences. Segments based on demographics are readily identifiable and quantifiable, but as mentioned previously, they may not be sufficient to explain differences in buyer behaviour.
Multivariate analysis uses more than one variable in the development of market
segmentation and examines several elements simultaneously, for example age and gender.
Multivariate segmentation can be imposed or evolved:
Prescribed multivariate segmentation is based on identifiable attributes among existing and potential buyers. Life cycle stage analysis is a common form of
prescribed multivariate segmentation. It is based on the mix of age, marital status and whether or not there are children in the household. Customers are placed into segments based on their life stage, on the basis that, at particular stages in life, people have similar needs that can be addressed.
Evolved multivariate segmentation uses market research data in conjunction with cluster analysis to indicate the appropriate grouping of buyers based on common attitudes, behaviour and demographics. Once these groupings are established, it becomes possible to give meaningful labels to the clusters, such as “young aspirational urbanite” or “work hard, play hard”. Such segmentation is generally better at explaining buyer behaviour, but measurement and tracking are notoriously problematic.
In business markets, segmentation is very different. Typical segmentation schemes are based on the size of the buying organisation or the industry sector, or a combination of both. Segmentation can also involve organisational functions or applications. For example, a wireless messaging service provider may segment the market by application, such as dispatch, e-mail, logistics and field sales. The basic messaging product will be adapted better to meet the functional needs of these segments.
A business plan becomes significantly more realistic and plausible if it matches the business’s offer to segments and demonstrates a clear link between identified segment needs and the marketing mix targeting the segment. Making a demand forecast based on market segments (see Chapter 12) is also likely to increase the accuracy of the forecast.
Market targeting
In considering which segments to target, the attractiveness of the segment and the resources available to target it must be analysed. In general, if a segment can be served profitably it represents a potential target.
A business can concentrate on one segment or target several or all segments (see also Chapter 10). Even if all segments are addressed, this does not imply lack of market segmentation. Elements of the marketing mix can be adjusted to address particular segments.
An important aspect of market targeting is marketing communication. If a product is positioned to serve the needs of a segment, it may not be possible to serve simultaneously other segments with different needs. For example, if a product is positioned as a safe
family-oriented product, this would be part of the brand value. Trying to promote the product to adventurous single people as well may dilute the brand value in the family market, while not generating many sales in the “adventurous single person” segment. It is therefore important to have a consistent segmentation strategy.
The segments targeted have operational implications, notably logistics, customer service, advertising and distribution. You must ensure consistency in your business plan. For example, if a product is aimed at the 16–24 age group, who by and large do not read newspapers but do watch a lot oftv, the media budget should not include newspaper advertising.
A key variable in any business plan is market share. Target marketing could explain convincingly why you hope to achieve a high share in certain segments but obtain hardly any sales in other segments. This level of detail in your forecasts shows that you have done your homework.