FOCUS ON UNDERSTANDING MARKETS

TOPIC 1 STARTING A BUSINESS

Types of market segmentation

What is market segmentation?
Market segmentation involves identifying particular groups that have broadly similar needs and wants within a market. Businesses will try to identify markets that have segments large enough to specically target. For example, a manufacturer of trainers may segment its market by identifying professional and amateur athletes, leisure wearers, women and children. They will produce a range of products, and market those products to each market segment in a slightly different way. This means that the business will need to develop an appropriate marketing mix for each segment. Market segmentation enables a business to: accurately dene its markets; position products and services to match the demands of particular markets and segments; identify gaps in the market that it could ll; make more efcient use of its marketing resources.

LEARNING OBJECTIVES u What is market segmentation? u Types of segmentation u Problems and benets of segmentation

Types of segmentation
Broadly speaking there are ten different ways of segmenting the market. These are outlined in the following table:
Segmentation method Age Explanation This is a basic demographic or population-based form of segmentation. It aims to identify segments of the market by age group, focusing on main age-group segments and then adjusting the product or service to attract age groups outside the core customer segments. Some products and services are specically aimed at a particular gender. It is important to note that all genders may use a particular product, but one gender is more likely to make the purchase. In effect this is a mixture of occupation and income. Each socio-economic group (A-E) has broadly similar characteristics, which infer taste, lifestyle and level of disposable income. Sometimes it is appropriate to offer different products and to market them in different ways to different geographical areas. This is due to regional differences in attitude and taste. This type of segmentation suggests that we all follow a predetermined lifecycle, beginning by being independent and single, then acquiring a partner, and perhaps children, and nally retiring. Products and services will be targeted at specic stages of an individuals lifecycle. This links with the above, and targets single people, childless couples and families with a number of children. Pack sizes, and size or durability of products, are designed to match. This is a behavioural version of segmentation, where segmentation is based on how often the customer purchases particular products or services and whether they are regular or occasional buyers. Again this links to lifecycle and family size and refers to the way in which the product or service aids the customer or ts in with their preferred ways of doing things. This refers to the characteristics or advantages of using a particular product or service, as identied by customers, perhaps based on taste, packaging, pack size, ease of use or peace of mind. This focuses on why the customer has chosen to purchase the particular product or service. In other words, what has motivated them to make the decision to buy? For more on the marketing mix see Designing an effective marketing mix on pp. 2749.

Gender

Socioeconomic group Location Lifecycle of individual

Family size and type Usage rate

Lifestyle Benets

Psychographic

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Problems and benets of segmentation

Segmentation only really works if the segments that have been identied are accessible, in other words that the business can provide products and services to that segment. The segment also needs to be protable, which means that any risks or investments have to provide the business with a reasonable rate of return. Also, the segment needs to be sustainable,
in order to justify a long-term involvement with it. The major problem with segmentation is the fact that a business may be convinced to produce signicantly different products and services to each of the different segments. Previously it may have only produced a limited range of products, but now it will have to produce variations, which may cost more.

The key advantages are: It enables the business to precisely identify the requirements of specic segments It should allow the business to more effectively meet the demands of the groups compared to the competitors It means that all marketing can be targeted at segments, and resources will not be wasted

Example Innocent smoothies are targeted at adult age groups. However, a kids version in a bottle has been designed.

KEY TERM
Marketing mix the appropriate application of product design, pricing, type of promotion and method of distribution to cater for the demands of a particular market or segment.

Specic toys are aimed at females, such as Barbie dolls. However, packaging of certain products is aimed at female buyers, even though they may be consumed by the whole family, e.g. washing powders. Newspapers use socio-economic groups to target potential readers. Newspapers such as The Times target socio-economic groups A and B, whereas The Sun targets groups C to E. National breweries offer different brands of beer to different geographical areas, matching the specic tastes of each region. The housing market caters for rst-time buyers, those moving to bigger housing, and those seeking retirement homes. Typically, supermarkets or manufacturers will offer familysized products. Car manufacturers produce vehicles with a range of seating capacities. On-pack offers, such as money-off vouchers for next purchase, encourage increased usage rates. Convenience foods are primarily designed to provide microwaveable meals for young working people and busy families. Toothpaste can provide different benets to customers who may vary in focussing more on taste, fresh breath or cleaning power. Luxury products are often bought for the purpose of rewarding oneself, or to pamper a loved one.

INTERNET RESEARCH
For more information on socioeconomic classications visit www.statistics.gov.uk and type in socio-economic in the search box.

Questions
1 Suggest the key market segments targeted by McDonalds. (4 marks) 2 How might a supermarket use socio-economic groups for market segmentation? (6 marks) 3 Suggest SIX products or services specically aimed at families with young children. (6 marks)

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FOCUS ON UNDERSTANDING MARKETS

TOPIC 1 STARTING A BUSINESS

Market size, growth and share

How to calculate market size
Market size is the measurement of all the sales by businesses that supply products or services to that market. There are, however, two different ways of measuring market size: Market size by value the total amount spent by customers on all the products and services involved. Market size by volume the quantity of the products or services purchased (which can be a measurement of packs, cans, tons, units or any other suitable measurement). In order to work out the price that is being paid per unit we simply have to divide the total volume by the total value, as we can see in the following example.

LEARNING OBJECTIVES u How to calculate market size u How to calculate market growth u How to calculate market share

How to calculate market growth

Market growth is the percentage increase in the size of a market. It too can be measured by volume or value. In other words, it is the number of units sold or the revenue that was generated. Businesses will be particularly concerned about trends in market size. They will look to see whether the market is growing or whether it is declining. A growth market should offer them better opportunities and will encourage them to launch new products and to increase distribution. They will be particularly concerned if the market is declining in size, as this will mean that there is still a high level of competition, but that the demand itself has fallen. Most serious is the situation when the volume of products sold in a particular market is growing but the value is falling. What does this actually mean? Simply that the average price being paid by customers is dropping, which infers that there is more competition in the market and competitors are price-cutting to hold onto their share of the market. Working out changes in market size is a relatively straightforward technique:

How to calculate market share

Market share is the proportion or percentage of the total market that is controlled by either a single business or a particular product or service. It too can be measured either in terms of volume or value. However, most of the time it is measured in terms of the total percentage of that market or by value alone. Businesses see market share as a key test of their marketing strategy. While it may be difcult for marketing to increase the overall size of a market, what marketing should certainly do is to strengthen or to increase the market share of the particular businesss products and services. Economic forces usually determine the overall size of a market and its growth. These would include the disposable income of customers, the interest rate, ination and the price of other products and services, which may directly or indirectly compete with the products and services. Market share, however, is a measurement of a businesss success or failure compared to its competitors. The higher the market share the more dominant that business or its products and services are in that market. In the snack food market Walkers has a dominant position. In confectionery, Kit Kat is considered to be market leader, as it has a signicant market share.

FOR EXAMPLE
In 2006 the total number of cars sold in Britain was 2,331,351. The value of these sales was approximately 30bn. Therefore the average price per vehicle sold was 12,868.

FOR EXAMPLE
If a market is worth 24m and this rises to 26m, the rise represents a market growth of 8.33%. If the total number of units sold in that market rises by 16,000, to 136,000, then the market growth by volume is 11.76%.
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FOR EXAMPLE
The Finnish mobile phone manufacturer, Nokia, has a 35% global market share. This is compared to its nearest competitor, Motorola, with 17.8%. Market share can be simply calculated by either establishing the markets total value or volume, and then expressing a businesss or products volume or value as a percentage of this total gure. In other words, if the market is worth 20m and a businesss sales are 4m, then the business has a 20% market share.

CASE STUDY MY TRAVEL AND THOMAS COOK

n early 2007, the German-owned Thomas Cook Group bought the holiday company My Travel. The merger cost 2.8bn. As part of the groups overall long-term plans, 150 duplicate stores and six ofces were closed, costing nearly 3,000 jobs. The merger created Europes second biggest travel company, giving it a 35% share of the British package-holiday market. The cuts, made to help make the business even more protable, aimed to save 95m. The merger, however, came at a difcult time, with expensive air travel taxes and higher fuel costs discouraging foreign holidays. The group also faced

increased competition from Internet-based businesses, and holidaymakers planning their own holidays via the Internet. On average, some 19m people travel with the Thomas Cook Group, including My Travel. Across the world the group employs 33,000 people, has a turnover of 12bn and operates a eet of 97 aircraft. In comparison, My Travel, which started in 1972, began as a travel agency operating out of two stores in Lancashire. Thomas Cooks online position in the market was fth before the merger, and My Travel was third. The merger has now allowed it to become the leading online holiday group in Britain. Thomas Cook continues to acquire new businesses and in September 2007 it purchased Air Berlin, which it will merge with its own airline, Condor, to create one of the leading low-fare airlines in Europe.

Questions
1 What do you understand by the word merger? (2 marks) 2 Find out who My Travel was in talks with concerning a merger before deciding to go with Thomas Cook. (4 marks) 3 Why would Thomas Cook choose to close 150 branches after its merger with My Travel? (4 marks) 4 How has the merger affected the groups market share? (3 marks)

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FOCUS ON UNDERSTANDING MARKETS

TOPIC 1 STARTING A BUSINESS

Case studies, questions and exam practice

CASE STUDY YAHOO v MICROSOFT v GOOGLE

n 2007, Google had a dominant market position, being the most popular Internet search engine, with a 56.5% share of the US market and a 75% market share of the British market. Lagging behind were Yahoo with 23.3% and Microsoft with 11.3%. Both of the main rivals to Google have re-launched their products, adding new features. Microsofts live search offered a series of new features and improved the way in which it delivered answers to questions. Yahoo primarily changed the way in which searches are requested. Another rival, Ask.com, dramatically changed the way it looked earlier in the year, offering search suggestions and thumbnail pictures of sites. Around 2bn is spent each year on Internet advertising. This means that online advertising now accounts for over 10% of Britains total advertising revenues. Advertising revenue is the principal source of income for businesses such as Google. Therefore Googles dominance not only affects businesses like Microsoft and Yahoo, but also other, more conventional businesses that rely on advertising revenue.

Questions
1 Using the market share gures for April 2007, and working on the assumption that online advertising revenue is 2bn, calculate the market share by value of Google,Yahoo and Ask.com. (9 marks) 2 List SIX other types of business that are reliant on advertising revenue, and that could be directly affected by Googles share of online advertising revenue. (6 marks) 3 Compared to 2006, the advertising revenue online has increased by 41.2%. What was the increase by value? (4 marks)

SHORT-ANSWER QUESTIONS
1 Dene the word market. 2 Distinguish between a local and a national market. 3 Distinguish between a tangible and an intangible product or service. 4 Dene the word demand. 5 How might competitors activities affect demand? 6 How can marketing affect demand? 7 Dene the term market segmentation. 8 List SIX different types of segmentation. 9 What are the two ways in which the size of a market can be measured? 10 What is market share?

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CASE STUDY CREEPING DOMINANCE

n October 2007 Universal Music bought Richard Bransons V2 label for 7m. The key artists on the label were Paul Weller and the Stereophonics. The two acts would join the Kaiser Chiefs and the Klaxons, already part of the Universal Group. In October 2007 Universal Music was showing a 55% market share. However, the Association of Independent Music (AIM), which represents 800 smaller record labels, was concerned about the growing market dominance of Universal. AIM complained that it was seeing restricted access to the radio, TV and other outlets, and that between the 800 members its retail market share was only 20%.

Questions
1 AIM claims that Universal is trying to marginalise independence, stie competition and limit consumer choice. What does it mean by this? (6 marks) 2 What do you think AIM means when it refers to the purchase of V2 as an example of Universals creeping dominance? (4 marks)

CASE STUDY PRIMARK FOR KIDS

he childrenswear market in Britain is worth 4.5bn. Five years ago, Primark had a 2.8% market share. By 2006 this had risen to 5.4%, and in 2007 to 6.2%. This now places Primark fourth in terms of market share. The clothing store, Next, is the number one market shareholder, with a current market share of 10.2%. Asda is in second place with 8.5%, and Tesco has third place with 7.8% market share. Interestingly, each of the top four increased their market share from 2006 to 2007 by at least 0.1%. Primarks growth has come at the expense of Gap, JJB Sports and BHS. BHSs market share fell from 3.2% to 2.9%. This now means that over 1 in every 3 spent is going to a value retailer like Primark, Asda and Tesco.

Questions
1 What do you think is meant by the term value retailer? (2 marks) 2 What is Primarks share of the market worth in value terms? (4 marks) 3 What is the market worth of Next, Asda and Tesco in value terms? (6 marks)

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CHECKLIST AND REVISION

CHECKLIST

Topic 1: Starting a business

Topic 2: Financial planning

n n n n n n n n n n n n n n n n n n n n n n n n n n n
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What is enterprise and what are entrepreneurs? Risk taking and rewards Opportunity cost Government support for new businesses Sources of business ideas Product and market niches Franchises Copyright, patents and trademarks Inputs, outputs and transformation Adding value Business plans and sources of guidance Primary and secondary market research Quantitative and qualitative research Sampling What is a market? Demand Market segmentation Market size, growth and share Sole traders Partnerships Private limited companies Public limited companies Not-for-prot businesses Sources of nance for start-up businesses Factors inuencing location Employees in small businesses Using consultants and advisors

n n n n n n n n n n n n n n n n

Calculation of xed, variable and total costs Calculation of price, total revenue and prot Contribution Calculation of break-even output Construction of break-even charts Analysing variables on break-even charts Nature of cash ow Forecasting cash ow Structure of a cash-ow forecast Why forecast cash ow? Income, expenditure and prot budgets Process of setting budgets Objectives of start-up businesses Strengths and weaknesses of plans and ideas Why are start-ups risky? Why do many start-ups fail?

UNIT1 PLANNING AND FINANCING A BUSINESS

MOCK EXAM

avin hoped to compete in the 2010 Vancouver Winter Olympics, but serious long-term damage to his knee ligaments meant that this was out of the question. His sponsor, an articial skating rink company, had gone into receivership, and Gavin and his brother, Kevin, had snapped up the business at a knockdown price by borrowing 130,000 from several members of their family. The idea was to set up a mobile skating rink in towns and cities around the country, moving it around every week or so, like a travelling circus. The rst thing to do was to put the business on the right foot and get a loan to pay back the family. The bank offered the brothers 90,000 and they raised the remaining 40,000 from personal loans and credit cards. The rink opened in Norwich, then moved up the east coast, as far as Hull, in the rst ten weeks. The trouble was that in an average week they would attract only 500 customers:
Variable costs per customer Weekly xed costs Average spend per customer 3.50 1,900.00 7.00

SKATE LATE LTD

The brothers had drawn up a business plan and opted to create a private limited company, as they believed that this would offer advantages. They conducted market research in the towns they intended to visit with the rink before they set up. There was a high potential demand and little competition. They had drawn up a cash-ow forecast and budgets before approaching the bank. Kevin had wanted to get a venture capital company on board and not take out a loan, but the best offer he had was a 100,000 investment for 40% of the business. Living on the road, with Gavin driving a camper van that doubled as their ofce, kitchen and bedroom, and Kevin driving the truck with the rink, they had found it impossible to nd staff willing to live on the road or work just a week in each town for them. They were putting in 16-hour days, seven days a week. It came as a great shock that in the rst ten weeks they had not even broken even. All their gures were based on a minimum of 1,000 customers a week.

Questions
1 (a) What is meant by the term venture capital? (2 marks) (b) What is meant by the term budget? (2 marks) (c) Give TWO non-nancial requirements of the bank that would have to have been in their business plan before the bank would agree to the loan. (2 marks) (d) What type of market research was carried out by Gavin and Kevin, and why did they choose this method? (4 marks) (e) Using the information given, work out Skate Late Ltds prot or loss for the rst ten weeks. (6 marks) (f) If, after the rst ten weeks, the average number of customers rose to 700, what would be the percentage growth in customers? (4 marks) 2 (a) Give reasons why the business might have failed to reach its break-even number in the rst ten weeks. (10 marks) (b) What is the number of customers required for the business to break even, and what is its prot or loss based on 700 customers per week? (15 marks) (c) Suggest how Gavin and Kevin could reorganise the business operations so that the pressures on them are not so great. (15 marks)

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