Lecture 3: Introduction to Market Segmentation

BASIC MARKETING FEEDBACK LOOP

Consumer Behaviour [Lecture 2] Segmentation [Lecture 3] 3.1 Market Definitions and Types of Goods 3.2 Segmentation Analysis 3.3 Demographic Segmentation Application

Firm Behaviour

Days 6,7,8,9

Promotion Branding Ethics

Days 4.5 10,11,12

Pricing Distribution

Lecture 3: Introduction to Market Segmentation

3.1 What is a market? 3.2 The link between consumer needs and market definitions? 3.3 What is the difference between a search and experience good? 3.4 A reformulated buyer behaviour model. 3.5 What is a market segment? 3.6 What is segmentation analysis?

3.1 What is a Market?

One way to define a market is to do what Abell (1980) does. He asks three questions: Who is Being Satisfied? What is being satisfied? How are customer needs being satisfied?

3.1 What is a Market? If we translate the 3 Questions into 3 Operational concepts or dimensions we arrive at a way to identify a market:
Customers (Who?) Functions (What?) Technologies (How?)
A number of market definitions are possible depending on
our answers to the above questions.
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3.1 What is a Market?

A product market: specific customer (who), seeking specific solution/function (what), based on a single technology(how). A solution market (The Single Best): specific customer (who), seeking a specific solution (what), based on all the possible technologies to perform those functions (how).

An industrial market : several customer groups, several functions, based on a single technology
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3.2 The link between consumer needs and market definitions.

What is a Product or Service? [3 Assumptions]

1.

A product or service is a solution to a problem or the answer to a specific need (or set of needs).
Every solution has a bundle of attributes that can be real or perceived. Two Types of Needs Generic or Inherent Needs: A need that is an inherent requirement of natural or social life. Derived or Secondary Needs: Is the particular solution (or assortment of solutions) to an inherent need or problem.
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2.

3.

3.2 Consumer Needs and Market Definition

Social Interaction Generic Need Possible Solutions Derived Needs Solution Market Assumption 1

Inter-Personal Local Pub Social Club Organised Sport

Electronic Internet Chat Rooms

Assumption 2

A Multi-Attribute Good Real + Perceived Assumption 3

Observable Attributes
Pub/Club Location and Facilities

Unobservable Attributes
Social Atmosphere

3.3 The difference between search and experience goods

Figure 1: Continuum of Search and Experience Characteristics.
Frequency

Most Goods

Most Services

Shoes

Auto Repair

Low

Moderate

High

Difficulty in Observing Product or Service Attributes

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3.3 The difference between search and experience goods

Products can be classified into goods or services whose attributes and quality are easy to observe [Search Good].
And those whose quality are hard to observe [Experience Good]. A pair shoes is more like a search good A good restaurant is more like an experience good.
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3.4 A reformulated buyer behaviour model

The decision to purchase a certain good or service can be seen as a cost-benefit calculation. V = R C V = Net benefit from product consumption. R = Gross benefit. = Evaluation of quality level. A value between 0 and 1. Inverse measure of risk (1- ) = Risk C = Cost of good (includes price and opportunity cost).

Buyer Decision Rule: A consumer purchases the good when V > 0.*
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3.4 A reformulated buyer behaviour model

The Fundamental Equation Can Be Rewritten: > C R Which defines a critical value for a consumer: * = C R Firms will successfully target consumers for whom > * .
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3.4 A reformulated buyer behaviour model

The Fundamental Equation gives us a lot of information about the techniques firms must use to market their products: * = C R Examples: 1. A new product to the market * ? 2. A firm that has to raise price C ? 3. A new improved product R ?
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3.4 A reformulated buyer behaviour model

Two Implications and Questions:

1. What happens after you purchase a particular product which is an experience good?
-Answer: You develop a switching cost: V = R C + S - Implication: R < C ; R + S > C V > 0
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3.4 A reformulated buyer behaviour model

2. What happens to the original (before purchase) cost-benefit calculation if you have forward looking consumers and experience goods? V = R C S

V < 0 even if R > C

R < C S

Option a): You delay purchase and/or follow others. Option b): You seek out more information. Reason: To lower risk you want to increase
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3.4 A reformulated buyer behaviour model

3. What happens to and S when the good is a search good? - Answer: = 1 - Answer: S = 0

4. Firms want to lower uncertainty (e.g., ). How?

5. Firms want to S before purchase and S after purchase. How? These kinds of questions may appear on the exam!

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3.5 What is a Market Segment?

A schematic representation

Mass Market

Target Market

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3.5 What is a Market Segment? Definition of target market segment:

A target segment is an internally homogeneous group of consumers which is heterogeneous with respect to the mass market. Example: Probability that teens (13-19 year olds) will consume a fizzy drink in a given week is 0.56. For all consumers (13-65) it is 0.25. Teens are two-times more likely to consume a fizzy drinks like coca-cola than the mass market.
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3.6 What is Segmentation Analysis?

Segmentation Strategies Compared
A Ford 1920s Supplier C GM 1930s Supplier
A B C

Mass Marketing

Multiple Segment

Ferrari Supplier
B

NicheMarketing
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3.6 What is Segmentation Analysis?

General Techniques Socio-demographic (age structure profiles) part c of the lecture. Benefit (economy segment (price); durability(quality); symbolic (Veblen)). Lifestyle (Vanilla Sky; Yann Tiersen) Behavioural (Cigarette smokers & Bungie Jumpers)
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3.6 What is Segmentation Analysis?

Segmentation Techniques Based on Usefulness and Measurability
High

Age

Usefulness

Ethnicity

Gender Income

Lifestyle Attitudes Generic need sought

socio-demographic segmentation

Low

Low

Measurable

High
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Lecture 2: Consumer Behaviour

Quasi-Rationality Why do signs make us buy more? Wansink (1999)* See Experiment

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