Market segmentation in the airline industry - Essay Example

Market Segmentation Chapter 1 Success in marketing can be achieved by matching the organizational capabilities with the requirements of the marketplace. This matching is based on market segmentation. Market and their segments are clusters of potential customers. Market segmentation is a proactive process which involves the application of analytic techniques (7). Market segmentation has been defined as the process of dividing the total market into a number of smaller, more homogeneous submarkets, termed market segments (Danneels, 1996). A heterogeneous group of customers are grouped into homogeneous groups or segments. Each of these segments requires a different marketing mix to service their needs. This paper will discuss the benefits of carrying out segmentation when marketing to consumers. It would then relate how the airlines segment the market and service the customers using the different market mix. Types of market segmentation The concept of segmentation comes naturally to human beings (1). This categorization reduces uncertainty and simplifies procedures. This very principle when applied to marketing is known as market segmentation, which helps to unify groups of consumers. The market has to be first defined in terms of the product’s end users and their needs. It is then divided into various groups according to different characteristics. To reach the customers in the most effective way, market segmentation can be based on general variables like demographic, socio-economic, geographical, or psychographic. While demographics looks at the general characteristics like the age, income, education and occupation, psychographic variable delves deeper into people’s lifestyles and attitudes. Geographic segmentation divides the market in terms of cities, countries, regions of even locality. It also includes the size of the area, population and climatic conditions. When people are segmented based on their attitudes it is known as attitudinal segmentation but even though they appear to be having different outlook in life, they seem to be buying the same brands. Benefits of segmentation Segmentation helps to focus on the specific market and its needs. The goal of segmentation is not to have just any customer but to select a homogeneous group of customers and focus on servicing their needs. The organization can then decide on the right marketing mix for the services or product offered. Nevertheless, segmentation on a particular basis has not always been successful. For instance, different attitude leads to different behavior. Knowing the attitudes help advertise in the right market but even if a customer has a brand preference it may not reflect in his behavior contend Bond and Morris. Chosen service segmentation This paper will demonstrate the segmentation in the case or airlines which has become very competitive due to market influx from low-budget carriers. Segmentation in this service sector is based on customer expectation. Segmentation is also based on socio-economic, demographic and geographic variables especially in the services sector, as they enable the reference market to be divided in a simple way and easy segmentation is possible (3). Nevertheless, it has been observed that people with different characteristics may behave in the same way and those with similar characteristics may behave differently. According to Diaz-Martin et al using customer expectations of service attributes should form the basis for market segmentation. Expectation based segmentation is a powerful marketing tool in the services sector because it provides knowledge for customer identification, which aids better customer service. They can tailor their actions to suit the individual requirements. It allows for more competent promotional activities because analysis of the sensitive requirements of the customers is possible. Expectations are based on word-of-mouth publicity, past experiences and promises by the service provider. As far as airlines are concerned, this basis for segmentation is the most effective. Chapter 2 Determining strategic direction The marketing environment for the airlines has become very competitive as the international market is expanding and the technological advances are taking place. This has led to reduced fares, enhancement of in-flight facilities, computer reservation system, paperless tickets, and improvements in airport infrastructure (4). Airline which had earlier enjoyed monopoly now have to step up marketing efforts and pay greater attention to consumers. Competition has also made the airline cost-conscious, and in this attempt they outsource non-core services like catering and maintenance. Good marketing is the key to airlines’ success. Branding in airlines gives it a distinctive edge with a symbol or logo. All the airlines want to conform to a safe, affordable, convenient and efficient air service for consumers. Thus the corporate brand matters and the advertising and corporate communications have differential features to attract customers and establish brand images. Niche marketing is essential to beat competition in the environment of budget airlines, supersonic flights and charters. To develop a marketing plan for the airline would require a situational analysis or pre-segmentation analysis. At this stage, to ascertain the market segment airlines can make an initial offer, float a scheme, observe the market response and then decide on the market mix to be applied to that segment (2). Once this is done, the marketing objectives have to be determined and then the strategic direction has to be planned. Strategic direction includes segmentation, targeting and positioning. The marketing mix is applied after the variables have been considered. 2.1 Segmentation When airlines adopted a sales-oriented approach, efforts failed. Today segmentation on demographic and geographical variables is not effective. Psychological, psychographic and behavioral segmentation variables are employed to develop the target market. Developing schedules just to fill the seats is a sales-oriented approach which is redundant. This is an attitudinal form of segmentation (1) where the results have been very flat as in the case of United Airlines, British Airways and Singapore Airlines (7). Latent class segmentation differentiates people on the basis of the degree of their perception of brand, price promotion, sales personnel and product line. Air travelers are conscious travelers today and know the value of service they are entitled to. Segmenting on the basis of their perception gives a better cluster solution which is more robust than based on attitudes (1). Differentiated marketing strategy for different segments based on their perception and expectations could reap benefits for the airlines. These expectations influence the customer-perceived service quality which helps to gain competitive advantage and secure customer loyalty (3). Since consumer expectations are not homogeneous this can be a useful segmentation variable. Airlines can also segment the market based on business or leisure travel and exploit the differences in the factors of these two markets but this has a limitation that the richness and complexity of the factor of demand in each sector may be overlooked (12). Cost is a low consideration for business travelers hence the airlines target this segment high priced tickets. Airlines further segment the market and have differential pricing and in-flight services according to the price of the seat. Feeder markets can be left to new airlines and the established airlines can concentrate on long-hauls and dense routes. Corporates want more value for money and the leisure market is competitive where price is the prime determinant (5). They are prepared to accept much lower service level for a cheaper price whereas the business traveler is not price conscious and his prime concern is seat availability. Customers are the source of all business growth and hence many companies conduct an in-depth, accurate customer-valuation (13). This is achieved by an analysis of who actually contributes towards the company’s revenue and who eats on the profits. If an organization does not know the customer’s worth, it cannot make rational decisions about how to serve them. This basis allows managers to develop specific strategies for each customer segment. They should use this knowledge to craft a strategy to acquire and retain the most profitable customers. Frequent flyer program is an example of value-based segmentation. This is based on the simple concept – fly more with an airline and reap more rewards. The airlines have different levels of frequent flyer status and there is a different marketing program for each frequent flyer level (10). 2.2 Targeting Targeting implies renouncing a great number of potential consumers and it contradicts the tendency to sell as much as possible (2). Thus it differs from the sales oriented approach and is more customer-focused. After segmentation an action plan has to be developed targeting the areas to be covered, the customers to be reached and the advertising budget to be allocated. This would again depend upon season, location, investment in promotional activities in international sectors. Targeting helps in employing the right marketing mix. There has been a strong growth in the intra-European sectors. Easyjet and Ryanair carry three-quarters of all low cost passenger traffic. An airline has to decide whether low cost passenger traffic is the target because then the marketing strategy would differ entirely. If they target the no-frills, younger generation, their advertising budgets, strategy and timing for promotion would depend on this target market. Research also suggests that the younger group may have the highest disposable income as they may belong to the affluent socio-economic group (10). This may affect the marketing mix. If the airlines target the elite group it should devote its resources to acquire and retain such loyal customers. The profitable customers should be split into two or three levels. The unprofitable customers should again be split into two levels – the marginally profitable and the totally unprofitable. The marketing mix can then be applied including advertising budgets and promotional services. There should also be a strategic plan to win back the unprofitable customers through promotional strategies. Hence targeting is essential to determine the right proportion of marketing mix. Markets are mature and airlines tend to ignore the older customers due to lack of information. Once the older group has been targeted, segmentation may again be required based on preferences, customer behavior and perceptions. The profiles of older people have also undergone a change and so have their preferences. 2.3 Positioning Once the target market has been decided airlines have to determine how to position their services against competition. Positioning refers to the image and impression about the airline (11). The airline has to determine how to project itself. Market segmentation provides an understanding of the consumer characteristics which helps to project the right image of the airline. Here the values of the passengers have to be taken into account and the impression that these passengers have of other airlines. Positioning strategies are simpler if the market is homogeneous but today’s market is volatile and sensitive. What appeals to one segment may not appeal to the other. The positioning strategies have also to take into account the reaction from the other segments. For instance, if an airline wants to capture the budget travelers along with the high priced segment, they may lose out on this high priced segment in trying to capture the budget travelers. The high priced segment is a sensitive one and hence positioning or the brand image has to be determined accordingly. It can consider branding low cost airline under a different name so as not to lose out on the higher segment. The airline can consider concentrating on the most profitable segment and this could be done after a value-based segmentation. The airline may even decide to concentrate on the underserved customers by other airline or the ignored customers. Positioning strategies should not undermine the image of the airline which would cost it to lose valuable customers. Even if the airline wants to share code with other airlines, it should be done keeping in mind the positioning of that airline on its existing customers. 2.4 Conclusion Hence market segmentation in the airline industry would require understanding that the market is heterogeneous and the economy is consumer-oriented. Then the segmentation criteria have to be followed to develop the segment as different segments respond differently to different market offerings. Positioning strategies would have to be developed taking into account the impact it would have on the target market as well as effect on the present and potential customers. The right marketing mix can only be employed once the market has been intelligently segmented, the target customers identified and the positioning strategies determined. At the same time, long-term marketing plans may be risky as consumer demands change, perceptions change, and the need changes. For the same reasons, the past strategies too may not work as the market is constantly changing. References: 1. Bond, J & Morris, L (2003), A class of its own: latent class segmentation and its implications for qualitative segmentation research, Qualititative Market Research, Vol. 6 NO. 2 2003, pp. 87-94 2. Danneels, E (1996), Market segmentation: normative model versus business reality, European Journal of Marketing, Vol. 30 No. 6, 1996, pp. 36-51 3. Diaz-Martin, A M (2000), The use of quality expectations to segment a service market, Journal of Services Marketing, Vol. 14 No. 2 2000, pp. 132-146 4. Dibb, S & Wensley, R (2002), Segmentation analysis for industrial markets, European Journal of Marketing, Vol. 36 No. 1/2 2002, pp. 231-251 5. Driver, J C (1999), Developments in airline marketing practice, Journal of Marketing Practice: Applied Marketing Science, Vol. 5 No. 5, 1999, pp. 134-150 6. Driver, J C (2001), Airline marketing in regulatory context, Marketing Intelligence & Planning, Vol. 19 No. 2 2001, pp. 125-135 7. Goller, S Hogg, A & Kalafatis, S P (2002), A new research agenda for business segmentation, European Journal of Marketing, Vol. 36 No. 2 2002, pp. 252-271 8. Jenkins, M & McDonald, M (1997), Market segmentation: organizational archetypes and research agendas, European Journal of Marketing, Vol. 31 No. 1, 1997, pp. 17-32 9. Long, M M & Schiffman, L G (2000), Consumption values and relationships: segmenting the market for frequency programs, JOURNAL OF CONSUMER MARKETING, VOL. 17 NO. 3 2000, pp. 214-232 10 Mintel (2005), No-frills/Low-cost Airlines, Leisure Intelligence, 05 Nov 2006 11. Moschis, G P Lee, E & Mathur, A (1997), Targeting the mature market: opportunities and challenges, JOURNAL OF CONSUMER MARKETING, VOL. 14 NO. 4 1997 12. Mason, K J & Gray, R (1999), Stakeholders in a hybrid market: the example of air business passenger travel, European Journal of Marketing, Vol. 33 No. 9/10, 1999, pp. 844-858 13. McDougall, D Wyner, G & Vazdauskas, D (1997), Customer valuation as a foundation for growth, Managing Service Quality Volume 7 · Number 1 · 1997 · pp. 5–11 Read More