Consumer Behaviour and Segmentation - Essay Example

Consumer Buying Behaviour Model & Market Segmentation Introduction This paper identifies the consumer buying behaviour model and its relevance to the concept of market segmentation. However, at the end it will be concluded that this model may not be the most appropriate choice for the managers or decision-makers while segmenting the markets. The goal of market segmentation is to identify distinct consumer groups that have homogeneous needs. Tailoring the marketing mix for particular segments leads to better planning and more effective use of marketing resources (Kotler 1988). Coles and Culley (1986), for example, illustrate how DuPont segmented its market for Kevlar, an aramid fiber that is lighter yet stronger than steel. The company focused the unique needs of consumers in three different segments. Potential fishing boat owners: Kevlar's lightness promised fuel savings, increased speed, and the ability to carry more fish weight. Aircraft designers: Kevlar has a high strength-to-weight ratio. Industrial plant managers: Kevlar could replace the asbestos used for packing pumps. The above market segmentation design, based on product benefits, is widely recognized as the state of the art and superior to traditional segmentation schemes based on industry type or consumer size (Moriarty and Reibstein 1986), sustaining a segmentation strategy based on benefits alone is often difficult for the product market. Eventually, in a competitive market, competitors are able to offer equivalent products and the abnormal profits start to deteriorate. This situation is especially prevalent for industrial raw materials and supplies that are difficult to differentiate by functions and features alone. As the product market turns a commodity (Kotler 1988), price and service become important buying criteria for some consumers. This research explores a consumer buying behaviour based model suitable for segmenting consumers in competitive markets. The concept of consumer buying behaviour based segmentation has been now recognized since long but still very few applications of the approach have been reported in the marketing literature. In this paper the consumer buying behaviour model has been generally applied to segment consumers which can be used by many large industrial companies. In addition, it will be appreciated how segmentation analysis can be used proactively to influence consumers' movements to segments that are mutually beneficial to the seller and buyer. In contrast, previous application work (Moriarty and Reibstein 1986) attempted to uncover existing segments as a way to position products strategically. Consumer Buying Behaviour Model & Market Segmentation The consumer buying behaviour model is derived largely from economic theory of consumer demand and the normative concepts of economic man and rational behaviour. The assumptions of consumer demand specify that buyers, at the point of purchase, possess perfect information about products and prices, are certain of their own stable tastes and preferences, are capable of perfectly processing information, and can express preferences between goods and bundles of goods without cost (Schwartz 1986). The model for the consumer decision process is based on assumptions about the behaviour of economic man who chooses a good for its primary function. The rational decision maker adheres to the tenets of Herbert Simon's three-step model in which one (1) identifies the problem, (2) gathers information, and (3) makes a choice based on the information (Simon 1957). In spite of contemporary consumer behaviour texts resting heavily on the tenets of psychology and sociology to explain attitudes, motivations, and behaviour, the discipline holds fast to economic theory. Research on market segmentation offers several bases for segmenting consumers (Frank, Massy, and Wind 1972), including: demographic descriptors such as geography, standard industrial classification code, and account size, product end-use or application, buying situation, consumer benefits, consumer buying behaviour and consumer decision-making style. It has been suggested that firms would benefit most by the successive application of two or more such segmentation schemes in a nested fashion, similar to the segmentation principle advocated by Webster (1984). There are four basic principles of consumers' decision-making process which can be associated with the notion of the competitive groups. (Cooper & Inoue 1996) These four principles are the building blocks of competitive market structure. 1. Consumers evaluate brands on the basis of their underlying attribute values. Their evaluation schemata (the composite of the attributes) differ across consumers. We assume a multi-attribute attitude model (i.e., a linear compensatory model) with heterogeneous importance weights on attributes in consumers' evaluation rules. In other words, consumers evaluate a car on the basis of attributes such as sporty-look or comfort. The relative importance of these attributes differs across consumers. (Cooper & Inoue 1996) 2. Consumers have different ideal profiles of brand (i.e., ideal points). We assume the ideal-point model in which product attributes are not valued monotonically (i.e., not on a more-is-better basis), but on the basis of the proximity to their ideal level or point. For example, consumers might prefer a car with 130 horsepower to one with 300 horsepower because the former is easier to maneuver; but, on the other hand, a 130-horsepower car might be preferred to a 50-horsepower car because the latter might be perceived as impractical for accelerating onto expressways. Hence, ideal points exist with respect to horsepower. We assume that these ideal points vary across consumers. (Cooper & Inoue 1996) 3. Consumers have different consideration sets of brands. Consideration sets are homogeneous within segments and heterogeneous across segments. For example, a consumer seeking comfort and prestige in a car might consider the Lexus LS400, the Cadillac STS, and the Infinity Q45, but not the Hyundai Excel or the Toyota Corolla. Another consumer, considering cars just as the methods of transportation, might consider the Excel and the Corolla instead of the LS400 or the STS. (Cooper & Inoue 1996) 4. We can divide a market into a certain number of submarkets in which homogeneous consumers consider a distinctive subset of brands with a particular role of attribute evaluation and reference to a specific ideal point. Thus, we deal with the heterogeneity of consumers in terms of consideration sets or choice sets, attribute-evaluation schemata, and ideal points and assume that, with respect to these terms, consumers are homogeneous within segments and heterogeneous across segments. (Cooper & Inoue 1996) Thus, as specified above, competitive reality is that firms often select to serve only certain segments of a market with their product portfolio. From the point of view of the producer, product-market choices have significant strategic implications that determine the future of a business and involve all functional areas within an organization. For products with long design cycles, the market selection decision is intricately related to R&D project selection decisions. In such conditions, product-market decisions must be tightly coupled or windows of opportunity may not be met. Extensive research on market segmentation has led to highly sophisticated methods and models for unravelling buyer heterogeneity, identifying market structures, and designing marketing responses. However, past research has not addressed the fundamental segment selection problem. (Cooper & Inoue 1996) Segment selection is not an easy task and thus requires strong analytical skills. It is a complex problem because there are many alternative courses of action, there are numerous dimensions to any particular course of action, and there is uncertainty regarding the outcomes of any choice. It is a messy problem because it requires systematic integration of multiple evaluation criteria of the various decision makers involved in the product market selection process. The state-of-the-art in segmentation methods provides sophisticated analytic techniques for identifying homogenous groups of consumers based upon their preferences and optimally allocating resources to any subset of these segments. However, the intermediate decisions, involving how to evaluate the attractiveness of each segment and how to select the appropriate segments to serve such that long-run profitability is maximized subject to firm constraints, continue to be treated in an ad hoc manner. Segment selection is the critical link between the segment formation and resource allocation processes. (Cooper & Inoue 1996) In the following text, an attempt has been made to generally classify a few consumer segments by applying the model discussed above. These segments help us to identify the relevance of consumer buying behaviour model with market segmentation concept. Segment 1: Programmed buyers. Consumers in this segment are small and view the product as a routine purchase item. They have the lowest average sales of any group and are not particularly price or service sensitive. The product is not very important or central to their operations. In comparison with those in the other three segments, these consumers have the lowest market share of market products. It can be subsequently learned that many of these consumers use rules-of-thumb to allocate their purchases. They split orders among two or three producers in fixed proportions. Market Leaders, because of their market-leader reputation, receive a major share of these purchases. Perhaps because of their routine procedures, these consumers invest little effort in the buying process, either in negotiating purchases or in investigating alternative sources. In return, producers may charge them the full list price and provide below-average service. Because consumers in this segment tend to allocate market share systematically rather than evaluate the price-volume tradeoffs, thus the purchasing behaviour of this segment can be characterized as "programmed buying." Segment 2: Relationship buyers. Consumers in this segment are also relatively small. The product itself is moderately important for their jobs and, unlike the programmed buyers of segment 1, they are more knowledgeable about competitive offerings. The consumers in this segment pay lower prices and receive more service than programmed buyers. Consumers in this segment have a propensity to switch, but they are less prone to switching than their counterparts in the third and fourth segments. In addition, in comparison with their more aggressive counterparts in the third and fourth segments, these buyers do not push producers for price and service concessions and they pay higher prices for relatively less service. This difference in "value received" probably explains their extreme sensitivity to price increases. These consumers seem to prefer producer partnership to a mere price exchange. The behaviour of this segment can be termed as "relationship buying." Segment 3: Transaction buyers. Consumers in this segment are, on average, twice as large as the relationship buyers. They receive price discounts and an above-average service level; they have the highest sensitivity to decreases in service. The product itself is very important to their demands. Consumers in this group are very knowledgeable about competitive offerings and, though valuing producer's service offerings, they would not hesitate to switch suppliers. Because these consumers actively consider the price versus service tradeoffs, but often favour price over service, thus they are labelled as "transaction buyers." Segment 4: Bargain hunters. Consumers in this segment are large volume consumers that receive the largest price discounts as well as the highest level of service. They are sensitive to any changes in price or service; the product is very important to them. They are most knowledgeable about alternative suppliers and most likely to switch suppliers at the slightest dissatisfaction. Consumers in this segment are the ultimate bargain hunters. Is the model relevant to Segmentation? After the analysis of the model and the concept of Market Segmentation, it can be controversially proclaimed that segmenting markets by type of consumer is no better. The term controversially has been used as this model has been the yardstick for many marketers and educationists of the marketing subject. However, having sliced business clients into small, medium, and large enterprises--or having shoehorned consumers into age, gender, or lifestyle brackets--marketers busy themselves with trying to understand the needs of representative consumers in those segments and then create products that address those needs. (Christensen, Cook & Hall 2005) The problem is that consumers usually don't match their desires to those of the average consumer in their demographic segment. When marketers design a product to address the needs of a typical consumer in a demographically defined segment, therefore, they cannot know whether any specific individual will buy the product--they can only express a likelihood of purchase in probabilistic terms (Christensen, Cook & Hall 2005). With few exceptions, every job people need or want to do has a social, a functional, and an emotional dimension. If marketers understand each of these dimensions, then they can design a product that's precisely targeted to the job. In other words, the job, not the consumer, is the fundamental unit of analysis for a marketer who hopes to develop products that consumers will buy. To prove this point the following case study by Christensen, Cook & Hall (2005) needs to be consulted. Case Study – Product: Milk Shakes Let us consider one fast-food restaurant's effort to improve sales of its milk shakes. (In this example, both the company and the product have been disguised.) Its marketers first defined the market segment by product--milk shakes--and then segmented it further by profiling the demographic and personality characteristics of those consumers who frequently bought milk shakes. Next, they invited people who fit this profile to evaluate whether making the shakes thicker, chocolatier, cheaper, or chunkier would satisfy them better. The panelists gave clear feedback, but the consequent improvements to the product had no impact on sales. A new researcher then spent a long day in a restaurant seeking to understand the jobs that consumers were trying to get done when they hired a milk shake. He chronicled when each milk shake was bought, what other products the consumers purchased, whether these consumers were alone or with a group, whether they consumed the shake on the premises or drove off with it, and so on. He was surprised to find that 40% of all milk shakes were purchased in the early morning. Most often, these early-morning consumers were alone; they did not buy anything else; and they consumed their shakes in their cars. The researcher then returned to interview the morning consumers as they left the restaurant, shake in hand, in an effort to understand what caused them to hire a milk shake. Most bought it to do a similar job: They faced a long, boring commute and needed something to make the drive more interesting. They weren't yet hungry but knew that they would be by 10 AM; they wanted to consume something now that would stave off hunger until noon. And they faced constraints: They were in a hurry, they were wearing work clothes, and they had (at most) one free hand. The researcher inquired further: "Tell me about a time when you were in the same situation but you didn't buy a mill shake. What did you buy instead?" Sometimes, he learned, they bought a bagel. But bagels were too dry. Bagels with cream cheese or jam resulted in sticky fingers and gooey steering wheels. Sometimes these commuters bought a banana, but it didn't last long enough to solve the boring-commute problem. Doughnuts didn't carry people past the 10 AM hunger attack. The milk shake, it turned out, did the job better than any of these competitors. It took people 20 minutes to suck the viscous mill shake through the thin straw, addressing the boring commute problem. They could consume it cleanly with one hand. By 10:00, they felt less hungry than when they tried the alternatives. It didn't matter much that it wasn't a healthy food, because becoming healthy wasn't essential to the job they were hiring the milk shake to do. The researcher observed that at other times of the day parents often bought milk shakes, in addition to complete meals, for their children. What job were the parents trying to do? They were exhausted from repeatedly having to say "no" to their kids. They hired mill shakes as an innocuous way to placate their children and feel like loving parents. The researcher observed that the milk shakes didn't do this job very well, though. He saw parents waiting impatiently after they had finished their own meals while their children struggled to suck the thick shakes up through the thin straws. Consumers were hiring milk shakes for two very different jobs. But when marketers had originally asked individual consumers who hired a milk shake for either or both jobs which of its attributes they should improve-and when these responses were averaged with those of other consumers in the targeted demographic segment-it led to a one-size-fits-none product. Once they understood the jobs the consumers were trying to do, however, it became very clear which improvements to the milk shake would get those jobs done even better and which were irrelevant. How could they tackle the boring-commute job? Make the milk shake even thicker, so it would last longer. And swirl in tiny chunks of fruit, adding a dimension of unpredictability and anticipation to the monotonous morning routine. Just as important, the restaurant chain could deliver the product more effectively by moving the dispensing machine in front of the counter and selling consumers a prepaid swipe card so they could dash in, "gas up" and go without getting stuck in the drive-through lane. Addressing the midday and evening job to be done would entail a very different product, of course. By understanding the job and improving the product's social, functional, and emotional dimensions so that it did the job better, the company's milk shakes would gain share against the real competition--not just competing chains' milk shakes but bananas, boredom, and bagels. This would grow the category, which brings us to an important point: Job-defined markets are generally much larger than product category-defined markets. Marketers who are stuck in the mental trap that equates market size with product categories don't understand whom they are competing against from the consumer's point of view (Christensen, Cook & Hall 2005). Conclusion There is a better way to think about market segmentation and new product innovation. The structure of a market, seen from the consumers' point of view, is very simple: They just need to get things done. When people find themselves needing to get a job done, they essentially hire products to do that job for them. The marketer's task is therefore to understand what jobs periodically arise in consumers' lives for which they might hire products the company could make. If a marketer can understand the job, design a product and associated experiences in purchase and use to do that job, and deliver it in a way that reinforces its intended use, then when consumers find themselves needing to get that job done, they will hire that product. (Christensen, Cook & Hall 2005) Why do so many marketers try to understand the consumer rather than the job? One reason may be purely historical: In some of the markets in which the tools of modern market research were formulated and tested, such as feminine hygiene or baby care, the job was so closely aligned with the consumer demographic that if you understood the consumer, you would also understand the job. This coincidence is rare, however. All too frequently, marketers' focus on the consumer causes them to target phantom needs. (Christensen, Cook & Hall 2005) References Christensen, Clayton M., Cook, Scott, Hall, Taddy, (2005) Marketing Malpractic. Harvard Business Review, 00178012, Dec2005, Vol. 83, Issue 12 Coles, Gary J. and James D. Culley (1986), "Not All Prospects Are Created Equal," Business Marketing, 71 (May), 52-8. Cooper, Lee G., Inoue, Akihiro, (1996) Building Market Structures From Consumer Preferences. 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