Market Segmentation Processes - Essay Example

?Supreme Multivitamins Define what is meant by the term ‘segmentation’? A quick scan of available academic literature shows that there is general agreement on the meaning of the term market segmentation. Most academics and practitioners take the term to represent “the process of division of a collectivity into homogeneous groups according to one or more criteria” (Claudiu, Ionel & Tudor, 2008, p. 790). It has also been defined as the “process of subdividing a market into distinct subsets of customers that behave in the same way or have similar needs” (Bennett, 1995, p. 165). The purpose in segmenting the market is to more effectively concentrate efforts in one or several well-defined target segments, each of which may be addressed by a particular and distinctive market strategy (Foedermayr & Diamantopoulos, 2008). Market segmentation was introduced in 1956 by Wendell Smith, and since then it has, more than any other marketing concept, been the subject of scholarly discussion and inquiry (Quinn, 2009). His main argument lay in the sense that goods will be able to realize their maximum potential utility if the differences among market segments were recognized and catered to, rather than if goods were produced indiscriminately for the mass market (Foedermayr & Diamantopoulos, 2008). The wisdom in segmentation is that it aids in creating a homogeneous group out of a heterogeneous market, for which a more effective marketing mix may be designed. This enhances the attractiveness of the firm and its products to the target segment, by allowing the company to more ably meet the customers’ perceived needs. Furthermore, the segmentation exercise undertaken by the company in the process of strategizing better enables the company to more specifically determine and understand customer needs, and the criteria by which such needs may be segmented. A closer match could therefore be created between the product design, the marketing approach, and the requirements of the customers (McDonald & Dunbar, 2007). Market segmentation is conceived of as a highly useful “sense-making” tool, often for the purpose of communicating to the targeted market in the most effective way (Quinn, 2009, p. 253). However, the degree to which it is useful as a tool for creating specific strategic plans is the subject of current debate. A salient criticism against reliance on segmentation as a concept emerged in the 1990s. At that time it became apparent to some scholars that consumer lifestyles continue to grow increasingly fragmented. As a result, market segmentation appears to become more and more ineffective as a valid method for defining the market of a firm (Quinn, 2009; Charles, 2002; Holt, 1997). The idea of “lifestyle” has been used to define market segments, but more and more the concept has become vague and ambiguous. In practice, it has become difficult to define in detail all customers served by a firm or industry, and increasingly the approach to segmentation is to identify the criteria most important to that business and divide the customers into groups according to those categories that are most manageable (Quinn, 2009, p. 255). The variations in lifestyles and the wide variety of differentiated products have created not a few general homogeneous markets; on the contrary, and for some industries in particular, customization of product and service designs have become the standard. For instance, in addressable and interactive communications are profiled against individualized customer analytics and propensity modelling; these assist in determining the likelihood that specific propositions shall be accepted (Bailey, Baines, Wilson & Clark, 2009). 2. What are the different segmentation processes for both B2C and B2B? To understand the different approaches concerning B2C and B2B markets, it is necessary to define the terms. B2C is short for business-to-customer; that is, the business that supplies the product, whether good or service, is targeting the end user or individual consumer. On the other hand, B2B refers to business-to-business; these cover the types of businesses that provide goods and services for other businesses. Easily, one can see that the B2C businesses are faced with a wider array of expectations based on individual needs and preferences, while B2B businesses are expected to conform to more standardized, less individualized, expectations, since they supply interim-stage products that are meant to undergo additional stages of processing by other businesses before being released to the consumer. The following diagrams are sourced from Lazarus Research Group (2006). The basic difference between B2B and B2C markets, is that B2C businesses have a much larger customer base, a much shorter buying process, and buyers tend to make their decisions based on their own decisions, with the influence of family and friends. B2B markets usually have a higher cost of sales for their purchases, although they have a higher level of lifetime value to a company continuing their service (Lazarus Research Group, 2006). The second figure shows the process of market segmentation, summarized in the following steps (Lazarus Research Group, 2006; San Diego State University, 2010). (1) Form prospective buyers into segments, according to the following criteria: Criteria include: potential for increased profit and return on investment; similarity of needs of potential buyers within a segment; and difference of needs of buyers among segments Consumer markets may be segmented according to geographic, demographic, and psychographic characteristics of targeted customers, benefits sought, and usage rate (2) Develop a market-product grid and estimate size (market in the horizontal rows, and products in the vertical columns) (3) Select target markets, according to the following criteria: Market size Expected growth Competitive position Cost of reaching segment Compatibility with objectives and resources (4) Take marketing actions to reach target markets For individual consumers the likes of which are catered to by B2C businesses, there are several methods of defining market segments or establishing categories. One basis is by defining why people are attracted to certain goods and services, such as motivation, involvement, loyalty, or place or brand attachment). Another basis is by defining the constraints under which consumers make their decisions (e.g. time and scheduling, access including means of communication and transportation, and social factors such as associations and social inhibitions) (Jun, Kyle & Mowen, 2009). For B2C markets, the type of criteria most commonly used are so-called micro indicators (price and quantity compared to income levels, age ranges, gender proportions) than macro indicators. Macro indicators are more commonly applied to B2B market segmentation, in combination with micro characteristics. For instance, in international segmentation analysis, macro level indicators are initially used in the process of selecting countries where the firm may viably establish its market; thereafter, customer segments are established using micro-level criteria. As a result, the company is able to develop cross-national segments – i.e., inter-market and global segments across geographical boundaries (Foedermayr & Diamantopoulos, 2008; Agarwal, 2003; Ter Hofstede, et al. 2002). Further, concerning the use of macro-indicators, it is found that for the B2B markets, the importance attributed by different industries to the various segmentation factors such as: (1) the political and legal considerations and risks; (2) the market potential, profitability and attractiveness; (3) structural characteristics of the market (pure competition, oligopoly, monopoly, and so forth); and (4) industrial or technological infrastructure of the market (Erem and Menguc? 1997). For the B2B market there are additional considerations not ordinarily contemplated in the B2C market. It is important to take into account the process of supply and the complexity of the supply delivery chain. For this, Claudiu, Ionel & Tudor (2008) have determined the following sets of criteria: (1) criteria that takes into account the targeted company, including variables such as location, staff and management, experience, and production facilities and capacity; (2) criteria involving the long-term prospects of the company, described by variables that include the company’s financial stability, economic performance, organizational strategy and culture, technological aspects, safety of the supplier, and business references; and (3) criteria regarding the company’s business behaviour, such as attitude of the selling staff, its production and selling equipment, the quality and availability of the firm’s products and services, the expertise of its technical staff, and the competence of its management. Most firms, whether B2B or B2C, devote much attention to the selection of criteria for market segmentation; however according to Foedermayr & Diamantopoulos (2008), studies have determined that less than half of all firms that employ market segmentation procedures undertake to evaluate their segmentation strategy. This appears to be due to the fact that the task of measuring, with a reasonable degree of accuracy, the success of the company’s segmentation efforts presents daunting challenges (Badgett & Stone, 2005). For most of these firms, the criteria used most commonly are financial performance measures, in particular the relative growth in sales volume, sales revenues, profit, cost, and market share. The use of audited financial accounts is more for reason of convenience rather than reliability or because such measures are the most informative, as they are readily available from the company’s balance sheet and income statements, and because they gain a semblance of objective validity to the extent that they are officially reported to the Securities and Exchange Commission (Craft, 2004). Other than financial information, qualitative criteria applied include assessment of successful branding, company reputation (vis-a-vis notoriety), intuition, feedback and the ability of the company to meet its customers’ needs (Craft, 2004). These measures, as well as the financial results, are more effectively used, however, on short-term assessments of performance as a result of segmentation strategy. For longer term measures, there are several factors identified by Craft (2004) to be more favourably resorted to by companies. Three of the most commonly applied of these factors are: long-term financial success, relationship building, and market positioning. Variably used, depending on the nature of the business, are environmental factors, firm characteristics, and socio-cultural perception and acceptance. The qualitative variables are important for longer-term assessments, because segmentation activities do not immediately and directly impact on the firm in terms of increased sales performance, improved profits, or expanding market share. This is another reason why it becomes even more unlikely that a specific impact that is solely attributable to segmentation decisions may be isolated and measured. The bottom line of a firm’s performance is influenced by many interrelated factors other than segmentation strategies and decisions (Foedermayr & Diamantopoulos, 2008). 3. What is meant by the marketing phrase of ‘targeting’? According to Claudiu, Ionel & Tudor (2008, p.791), the term targeting implies the development of the marketing mix for one or more segments of the markets after market segmentation had been conducted. The two important factors to consider in the course of targeting are: (1) The attractiveness of the targeted market segment In assessing the attractiveness of a segment, several considerations are useful to determine viability, such as the dimension (number or geographical density) of the prospective target segment, its growth rate, the competition in that segment (i.e., the greater the competition, the better), and the expected profit levels. (2) Compatibility between the acquisition goals, strategies and resources of the targeting company and the targeted segment, particularly in the case of B2B marketing. Compatibility is better conceived of as the measure by which the company is capable of supplying the needs of the segment, such as regarding the quantity, degree and speed by which the product may be made available, the price of the product, the supporting services that are provided with the purchase of the product, and the possibility of striking a partnership in the case of B2B segment marketing. In considering the factors for targeting a specific market segment, there are several strategies that may be alternatively employed. These include: (1) the non-differentiated strategy of targeting all segments, in a manner that does not distinguish among the segments in the potential market; (2) the differentiated strategy, whereby the firm focuses on two or more segments, each with a distinct strategic approach; and (3) the concentrated strategy, where a single market segment is focused upon by the marketing efforts of the company (Claudiu, Ionel & Tudor, 2008) 4. How you would segment and target the market for the new multivitamin range? In the case given, the owner, Montgomery Burns, through his company, Value Min, intend to introduce a new brand of multivitamin called ‘Supreme’ to the market. The new brand’s range include Multivitamin and Iron, Multivitamin and minerals, Zinc, Cod Liver Oil, Effervescent Vitamin C, and Evening Primrose Oil. The company targets the affluent end of the market for Supreme. According to medical literature, the active ingredients of the product range have the following respective properties: Cod liver oil – This provides DHA, EPA, vitamin A, and vitamin D. It helps in maintaining healthy skin, strong bones and teeth; healthy joints; a healthy cardiovascular system, nervous system, digestive tract, and nervous system; and the prevention of depression and other mood disorders (Kim, 2011). Effervescent vitamin c – This product allows for fast absorption of vitamin c. Over 94% of the ascorbic acid's acidity is neutralized by the effervescent reaction. This results in a carbonated drink similar to mineral water, with the negative effects of the vitamin’s acidity eliminated (Wholesale Nutrition, 2011). Its effervescence is appealing to children. Evening primrose oil – This is a good source of GLA, head of omega 6 family line; it is used to treat premenstrual syndrome (PMS), demonstrating meaningful benefits in up to 90% of users, helps to lower risk for or manage arthritis, helps in diabetic neuropathy, improves hair, nails and skin, lowers the risk for stroke and heart attack by lowering platelet stickiness and inappropriate blood clotting. It is particularly beneficial for women and the elderly (Evening Primrose Oil.com, 2011). Iron – Multivitamins and minerals in general are formulated to aid in nutritional purposes; however, the inclusion of iron would provide added benefits in some aspects, including carrying oxygen to blood cells in the human body. Approximately two-thirds of bodily iron is located in haemoglobin. Health benefits include the proper growth of the human body, the promotion of metabolism, the production of healthy red blood cells, and the prevention of anaemia (Organic Facts, 2008a). It is especially helpful for menstruating women. Zinc – The health benefits of Zinc include proper functioning of immune system, digestion, control of diabetes, improves stress level, energy metabolism, acne and wounds healing. Also, pregnancy, hair care, eczema, weight loss, night blindness, cold, eye care, appetite loss and many other factors are included as health benefits of zinc (Organic Facts, 2008b). While multivitamins in general are good for all (indicated as “1” in market-product table), the combination of other active ingredients may benefit more some market segments than others (indicated as “2”). The following market-product table may be useful in conceptualizing certain target markets for some products. Market-Product Grid Market Segment Product Multivitamin & minerals Multivitamin & Iron Zinc Cod Liver Oil Effervescent Vitamin C Evening Primrose Oil Men 1 1 1 1 1 1 Women 1 2 (menstruation) 2 (pregnancy) 1 1 2 (PMS) Children 1 1 1 1 2 (appealing) 1 Teens 1 2 (growth spurt) 2 (acne) 1 1 1 Seniors 1 1 1 1 2 (less acidity) 2 (arthritis) Special conditions anemia diabetes stroke, heart attack From the above grid, it is seen that for multivitamins and minerals and for cod liver oil, all pertinent market segments may have equal need of the product. For the rest, there are specific market segments that may be targeted in the marketing and promotion of the product: these are multivitamins and iron (women and teens), zinc (women and teens), effervescent vitamin C (children and seniors), and evening primrose oil (women and seniors). In Britain, a Food Standards Agency survey last year found 31 per cent of adults claimed to be taking the supplements, which typically cost ?7 for a month's supply. The market in the UK is estimated to be worth over ?330m a year (Laurance, 2009). By properly segmenting and targeting the market for its products, Value Min will be able to realize healthy profits from the “Supreme” product range while better meeting the needs of its customers. Wordcount = 2,655 excluding title References Agarwal, M K 2003 “Developing global segments and forecasting market shares: A simultaneous approach using survey data.” Journal of International Marketing, vol. 11, issue 4 pp. 56–80. 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