Analysis of Techniques Market Segmentation - Term Paper Example

 Analysis of Techniques Market Segmentation Table of Contents Page 1 Introduction 3 1.1 Markets 3 1.2 Marketing 3 2 Theories 4 2.1 Segmentation 4 2.1 Segmentation Process 5 3 Success in Marketing – Techniques 5 4 Research Methods 7 5 Analysis – Benefits of Segmentation 8 6 Examples 8 7 Conclusions 9 8 Bibliography 13 9 Bibliography 1 Introduction – The Necessesity of Segmentation 1.1 Markets To understand markets, we begin with understanding what a Market means in this context. A Market is the demographic and/or geographic group or groups of buyers for products and services on offer. It may be limited to a small area or may be worldwide but that is dependant on the type of product or service on offer. But a market can be defined only through the Marketing effort that is put in to exploit this market. The potential market may be larger but the market for a company’s product or service is the targeted market for which it makes this effort. Using different methods, Marketing determines the size of the market that is being approached but this has to be a controlled exercise otherwise the effort will be aimless. 1.2 Marketing Marketing is a highly misunderstood word. It is not tactics or methods of getting customers to buy a company’s product or services. That is advertisement or promotions. It is a conscious effort to analyze and understand what is needed and trying to fulfill this need. Marketing is also about understanding the competition. It is highly relevant to investigate what other competitors have to offer in terms of the product, quality, service deliveries and pricing. Marketing is also about knowledge of your own company and its capability of manufacturing, delivering and pricing of a particular product or service. But above all, Marketing is all about customers. Their behavior and attitude towards buying a product is of paramount importance. Their needs and wants and their likes and dislikes are decisive factors and purchase decisions depend on these issues. It is the understanding of these factors that will develop a marketing strategy. Therefore Marketing is all about understanding the customers and of finding ways and means to for providing product or service as per his requirements. The American Marketing Association (AMA) defines Marketing in the following way. “Marketing is an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders”. (AMA). This comprehensively calls for Market segmentation and results in two way satisfaction of both customer and the stakeholder. 2 Theories 2.1 Segmentation Markets are heterogeneous and are created by reasons of different values, needs wants, constraints, beliefs and incentives. Customers differ in their values and perceptions and want to purchase things that have value for them. Value is not just the monetary part, but also the usefulness and emotions that with go with it. The need and want play a great role in determining this value. The price actually determines the location from which this purchase will be made. Service and reliability are other important determining factors. Therefore a market segment is a set of customers that have a common approach to above questions and have a common desire to purchase a common set of goods and or services. They also respond to such offers in a common way. Marketing segmentation would therefore cover the process of dividing customers who have a common need for common variety of products whose preferences vary in very narrow bands for these items. 2.2 Segmentation Process There are many variables of demography and geography that help to determine segmentation. The company needs to consider if the segment is large enough to support its intended sales by price and quantum. Then is there a growth possibility or is it restricted or even declining by nature. The company’s own skills and those of its workers are important too in being able to service the segment being carved out. Both knowledge and communications skills have to be developed and training must be carried out for improvements. Finally it must also be borne in mind that such segmentation must be within the scope of the company and stakeholders policy. 3 Success in Marketing - Techniques Marketing success depends largely upon the ability to divide the segments of different class of customers and catering to their particular and peculiar requirements at the lowest cost. What determines the customer motivation and behavior is normally determined by the 4P’s, viz, Product, Price, Promotion and Place. Lately another 3P’s have been added to the list and they are People, Process and Physical Evidence. (CIM) Targeting is the process, by which this segment selection takes place and is determined when, 1. Valuation of product is similar in a group of products 2. A set of products is a suitable substitute for another similar set 3. Behavior and/or value is the basis of selection 4. Evaluation identifies the target segments For an effective and efficient Marketing strategy, segmentation is an important tool, but segmentation research data precedes selection and segmentation methods models and procedures are based on customer profiles. Profiling requires certain pre-conditions and they are that a group of customers need specific products and there is nominal variance in their expectations. This will result in effective and profitable Targeting. Customers, by nature are of three distinguished types and a company needs to handle each with great care. They are purchase decision makers and they must be cultivated according to their outlook and preferences. There is the ultra-conservative type. This segment is highly consistent with their way of doing things. In their case any deviation might alienate them therefore it is very important to cater to them repeatedly in the same form and manner as the last time. Once established they seldom change preferences. They become wary if discounts are offered or premium charged as for them it translates into loss of consistency. Cost effectiveness is acceptable if it does not disturb the status quo and bulk offerings are acceptable on similar conditions. They are very negative towards complex offerings. Then there are the conservative ones who will veer towards the new or unknown only if it involves low risk and competitive pricing. They are neutral to complex offerings and prefer to stay within a wide band of preferences, making few experiments. Lastly the Liberals who would like to try anything new and willing to take up a challenging offer. For them the price is secondary and the end result is foremost. They are the daring types who will experiment with new offerings. Finally the fundamental factors for a company deciding on segmentation can be explained as: Similarity of customer needs and wants and the customers are willing to pay premium for the products. Customers cluster into groups by need (viz., Religion, Ethnicity, Race) Cost of serving may be higher but is lower than the customer expectations and thereby a premium price can cover that escalation. But there is a great need to strike a balance between the cost of serving the group and the value the customer obtains from the product for its special utility value that is charged for the customized product. A customized product can be priced higher but pricing highly will invite competition and the efficiency of marketing lies in the final assessment. 4 Research Methods Hence a survey is required to be carried out to find the perceptions of the targeted segment and to give it credibility; both Positivist and Post-Positivists Methods should be applied. Method refers to the research tactics used in the conduct of a research effort. Examples include drawing samples, conducting questionnaire surveys, engaging, and participating in observations. Positivist methods are based on Descriptive and Experimental Research. Their justification lies in Internal and External reliability of content and Validity through Random and Deliberate sampling of data. In case of Post-Positivist Research the method adopted are Naturalistic Inquiry and Narrative Inquiry. Here the justification is based on Trustworthiness, as the result is credible, confirmable, dependable and transferable. It is further validated by fairness of the research. The reason for adopting a mix of both methods is that while in Business and Management researches, the quantitative or the numerical approach to analysis is based on Positivism, unless this is qualified by qualitative means (post positivism), the numbers alone can often be misleading. For instance Sales figures of a particular time period are of little value unless they are further divided into sales of individual items with prices and costs for each treated separately, from which the contribution to profit or loss of each item can be found. 5 Analysis – Benefits of Segmentation Segmentation offers great advantages to a company. The obvious ones are: Reduction in expenses – direct result of targeted customer strategies. Improved cash flow – advertisements are segment oriented only. Improved productivity – easier to produce for specified products. Improved manufacturing quality – this is a result of standardization of products. Improved service delivery – schedules for fewer goods are easy to achieve. Improved employee working conditions/benefits – employees with skills will benefit from this. Improvement in market share – result of customer loyalty. Segmentation improves the image of the company and customer recall is higher. This is the ultimate benefit the managers look for. This is also to the advantage of the stakeholders, both employees as well as shareholders. 6 Examples A prime example of segmentation is found at Tesco. Tesco had introduced Loyalty schemes in mid nineties in collaboration with Dunnhumby Ltd. Who pioneered these schemes with a customer-centric approach. As a result Tesco introduce the Tesco Club card that became a huge success. Tesco aimed at understanding the customer and then turning business decisions into customer oriented ones rather than jut profit oriented. This paradigm shift resulted in increasing sales by 52% and continues to outpace the competition. New stores have opened to cater to demands and have increased the shop floor area by 150%. Tesco Chairman, Sir Terry Leahy remarked in one of his annual reports that his company’s mission statement was to “continue to increase value for customers’ to earn their lifetime loyalty”.1 (Case Study by Devon Wylie) Tesco has spent $5 billion over last five years as investments in this programme that has resulted in reducing prices. Tesco uses this to find customer preferences and evaluates the effectiveness of these schemes. This helps to reduce costs all around including cost of normal promotions. With this information Tesco is able to find out which customers use these schemes and what percentage approves of them. This helps make specific promotions targeted at various groups and saving on these are returned to customers as further reduction in prices. The end result was reduction of about 60% in promotions costs and this money when redirected to business contributed to price reduction for customers By and large the overall loyalty has gained them more customers and now their Club card programme accounts for 85% of their weekly sales. 7 Conclusions Marketing has always been a difficult process and many a company have survived or perished as a result of its marketing strategy. In order to survive and thrive, a company has to adopt sound policies which will ensure that its products or services attract customers at remunerative prices. Over a period of time Marketing has evolved to the extent that it is now a common practice to divide markets into different identifiable segments. This segmentation is dependant on macro and micro environmental factors. The Macro factors are the external factors like socio-economic fabric of society/community, the legal and technological changes that take place in due course of time, the political changes in the country and often on worldwide basis. The macro factors affect the company planning but they are beyond its control. Then there are Micro factors which comprise of events related to the internal working of the company. They are usually results of suppliers, customers and competitor’s actions or reactions. They can be both predictable and sudden but can be manipulated to the company’s advantage with careful handling and flexibility. Using a target market approach, segmentation is done by breaking a large market into smaller ones by grouping common characteristics of customers. This makes marketing a more focused effort and produces better results and returns. The basis of segmentation is: Demographics like age group (teens, retirees, young adults), gender, education level, ethnicity, income, occupation, social class and marital status Geographics like location (national, regional, urban/suburban/rural, international) and climate Purchasing habits by identifying brands used, purchase frequency, current suppliers Local Environment like cultural, political, legal framework. Benefits sought by buyers by price, overall value, specific feature, ease-of-use, service, etc. Knowledge of how the product is used, situation when used, etc. Purchase Conditions by studying time of day/month/year of purchase, credit terms, trade-in option, etc. Characteristics of Individual Buyer by observation of purchase experience, how purchase is made, influencers on purchase decision, importance of purchase etc. Having segmented the markets the next step is to ensure that the company and its staff have the requisite knowledge and skills to service the segment to the satisfaction of the customer. This in turn will result in economizing costs and increasing profit margins. It is also possible to charge premium prices as specific and skilled servicing is provided. The result of this prudent exercise will show in the ultimate benefits to the company. Chartered Institute of Marketing, Available at: http://www.cim.co.uk/cim/ser/html/infQuiGlo.cfm?letter=M AMA, Available at:  http://www.marketingpower.com/content24159.php Available at: http://www.loyalty.vg/pages/CRM/case_study_14_Tesco.html Read More