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Customer Behavior Module Seven Market Differentiation & Segmentation Module 7 A Typology of Market Differentiation & Segmentation Differentiation is the way in which marketers present their offerings differently from their competition in order to become the customers' choice. Presenting offerings differently entails creating and implementing the marketing mix (Product, price, place, and promotion). Marketers use three types of differentiation: generic targeted segmented differentiation 2 Customer Behavior Module 7 Generic Differentiation Generic differentiation is a global (or overall) differentiation on a nontargeted basis, which means the differentiation is not for any specific segment of customers. This type of differentiation is appropriate for companies who are able to present their products and services as superior to competitive products in the entire market place. 3 Customer Behavior Module 7 Product-Based Differentiation Companies use product-based differentiation by offering better products than their competitors. The products superiority may be based on superior quality and performance reliability, or innovations in the products performance, design features, or on brand image, and manufacturer reputation. 4 Customer Behavior Module 7 Non-product Differentiation Non-product Differentiation is based on distribution, pricing and or advertising and promotions. Many companies attempt to differentiate themselves by memorable and unique advertising. 5 Customer Behavior Module 7 Agood example of generic differentiation by innovation in distribution is the home delivery of Domino’s Pizza guaranteed in one – half hour. 6 Customer Behavior Module 7 Targeted Differentiation Is an approach in which a company identifies a specific market segment and then designs a marketing program to target and appeal to this particular segment. This is in contrast to the generic differentiation, where a single undifferentiated marketing program is offered to everyone. Companies normally act as "niche" players in this type of differentiation. As with generic differentiation, this approach uses specific elements of the marketing mix to differentiate company’s offerings. 7 Customer Behavior Module 7 Small businesses represent a good opportunity as a targeted market for a number of products and services, In the long – distance telephone market, resellers sell cheaper long – distance rates to small businesses by representing 70 –80 small businesses at once. 8 Customer Behavior Module 7 Segment of One A special form of targeted differentiation is segment of – one marketing. This refers to customizing the market offerings to each individual customer. Recent advances in technology enable a firm to respond to very small segments, even single customers, without losing the economies of scale. This development is called “ mass customization “ and is accomplished by flexible manufacturing. 9 Customer Behavior Module 7 Segmented Differentiation The third type of differentiation, involves breaking up the total market into segments that are homogeneous by some characteristics of its customers (Such as demographics, psychographics or usage patterns) and then treating each segment as a distinct market for which all elements of the marketing mix are differentiated. The automobile industry serves as an excellent early example of this type of differentiation. 10 Customer Behavior Module 7 Segmented differentiation can be practiced by business- to- business marketers as well. In the automotive components industry, tire companies serve at least four different markets: 1. 2. Original Equipment Manufacturers, namely, the automobile manufacture Tire dealers and distributors 3. Their own distribution chain, such as Goodyear dealers tires 4. The repair and maintance market – referred to as the tire, batteries, and accessories For each ofmarket, these or four markets, the tire companies known as the retread market. will use very different marketing strategies, differentiating by one or more elements of the marketing mix within each segment. 11 Customer Behavior Module 7 Customer Diversity as a Basis for Differentiation A basic reason for differentiation is that customers needs and wants may vary on the basis of personal and environmental characteristics, and their resources may vary with respect to time, money, and expertise. the most useful differentiation strategy may depend on whether needs/wants and resources are homogenous or diverse. 12 Customer Behavior Module 7 Resources Homogeneous Diverse Homogeneous Diverse Targeted Differentiation (Product & Promotion) Segmented Differentiation (Product, Service, Promotion, Price, Distribution) Generic Differentiation (Product, Service, Promotion, Price, Distribution) Targeted Differentiation (Price & Distribution) Figure 1 Typology of Differentiation & Segmentation 13 Customer Behavior Module 7 Identification of Markets for Differentiation and Segmentation Market segmentation is a process of identifying subgroups of customers within a market whose needs , wants and or resources are different in a way that makes them respond differently to a given marketing mix . the differing responses of customers to one or more elements of the marketing mix form the rationale for segmentation. Once a marketer has identified subgroups of customers with different response tendencies the marketer attempts to target them by different marketing mix. 14 Customer Behavior Module 7 There are three board bases of identifying segments in any market – the "what", the "who", and the "why" bases of segmentation. Usage Segmentation What? Who ? Demographic Segmentation Why ? Psychographic Segmentation Figure 2 Three Bases of Identifying Market Segments 15 Customer Behavior Module 7 What The what pertains to product usage and results in what is commonly referred to as usage segmentation. The who bases identifies subgroups of customers based on their descriptive characterizes. This is commonly referred to as demographic segmentation. And finally the why pertains to the reasons that customers behave the way they do, these reasons lie in different benefits customers seek from a product, and different lifestyles they want the product to fit. 16 Customer Behavior Module 7 Usage Segmentation The common approach to usage segmentation is to divide customers on their level of usage, thus, segments are ranked high medium, and low, according to the quality consumed. Another popular way of segmenting by usage is called the heavy half theory. As one half of the consumers consume about 80 percent of the product whereas the other half consumes only 20 percent. This 80/20 split at one extreme to a 10/90 split at the other. Once the company has decided on the three or four segments, it needs to profile each according to its demographic and psychographics make up Generally, one would find heavy users to share the same demographics and perhaps also the same psychographics. 17 Customer Behavior Module 7 Demographic Segmentation The "Who" bases of Segmentation DEMOGRAPHICS Gender: Males, females Age: Youth, baby boomers, senior citizens, Generation X Family life cycle: Young, single, older married couples, and so on. Religious and/or ethnic background. Income, education, occupation, and social class. GEOGRAPHY 18 Regions: Northern Region, Southern Belt, West Coast, East Coast and so on. Metro Size: Mega-metro (e.g. New York), mid-size towns (300600k), small cities (100-300) Urbanization: Urban, inner-city, suburban, rural Climate Cold (northern), warm (southern) Customer Behavior Module 7 Demographic Bases The most prevalent demographic characteristics are all marked differently to men and women. Two points are noteworthy here. First in some product categories, the product itself needs to be different for the two genders (e.g. clothing, shoes, and cosmetics), so the segmentation by the gender is inevitable. In other product categories, segmentation is not inevitable. But it is pursued in the hope of increasing the products perceived attractiveness for one or the other gender. The second point about gender – based segmentation is that for product categories used by both genders, there would always be a segment that would defy gender based differentiation, although the size of this segment would vary with sociocultural trends, unisex clothing exemplifies this cross – gender product uniformity 19 Customer Behavior Module 7 Geodemographics Geodemographics is the study of relationships between demographics on the one hand and the geographic location on the other. The underlying premise is that people of similar demographic characteristics (age, income, occupation) tend to live in similar geographic locations The natural and economic resources of a geographic location enable and constrain people's activities, geographic location helps shape people's life styles and activities ( which are also in part shaped by demographics). 20 Customer Behavior Module 7 The " Why" Basis of Market Segmentation Marketers have offered three categories of explanations for different customer responses: (1) difference in benefits sought (2) product involvement attitude (3) differences in lifestyles and psychographics 21 Customer Behavior Module 7 The explanation based on benefits sought is that customers differ in the specific benefit they seek in the same product or service, so they respond differently to various market offerings. Second, consumers differ in their involvement in and attitude towards the product category, and consequently differ in their response. The third explanation is that customers differ in their personality, lifestyle and psychographics. Consumers buy products and services to satisfy the personality needs they have and to implement the lifestyle they desire to live. Accordingly, they respond differently to different marketplace stimuli. 22 Customer Behavior Module 7 Benefit segmentation Benefit segmentation refers to grouping individual customers according to benefits they seek from a product or service. Customers are grouped into a segment based on the similarity of benefits sought; different benefit segments seek different benefits 23 Customer Behavior Module 7 An example of business-to-business service is provided by a classic study that found several different segments including a time – sensitive segment, a price – sensitive segment, a "no worry" segment, and a pick up segment. Further, in the time sensitive segment, several sub segments emerge including ability to handle emergencies, minimum door -to -door time and prime night time departures. In the price – sensitive segment, the sub segments include those who care most about best price, lowest total cost and daylight rates. 24 Customer Behavior Module 7 The "no worry" segment had the following sub segments: keep the shipper informed; honest and straight forward; and able to trace the shipment. Finally, the pick up segment include good pickup service; minimum time between calls and pickups; and good truck driver attitude. 25 Customer Behavior Module 7 Product Attitude and Involvement Customers differ in their attitude toward and involvement in product categories. Some customers are not much involved in the product and use it only to the extent necessary or take it for granted; others are so passionately involved that they are consumed by it. 26 Customer Behavior Module 7 Identify which segment you might belong to: Gearhead – these are true car enthusiasts who enjoy driving their cars. They love to maintain and care for their car, keeping them in tip-top condition. This kind of segment believes that the kind of car u drive shows who you are. Epicures – these car owners drive elegant, comfortable, wellequipped, luxury cars. They want to enjoy the car without doing any work on it; accordingly, they depend on someone else taking care of their cars. 27 Customer Behavior Module 7 Functionalists – this group likes functional, fuel efficient cars without concern for style or sportiness. They tend to buy small and mid-sized cars. Road haters – this group is the least involved in their car or in driving. Concerned most with safety, they don’t enjoy driving and have no interest in knowledge about cars. 28 Customer Behavior Module 7 Segmentation of Business Markets The general approach to segmenting business markets parallels consumer segmentation. However, the specific categories differ somewhat. 29 Customer Behavior Module 7 Demographics For the institutional/business market, demographic characteristics include the size of the customer (small, medium and large businesses), geographic location, type of business (i.e. what business the customer company is in), and the life-cycle stage. The size of the business can help in two ways. 30 Customer Behavior Module 7 First, it translates into usage segmentation, as size is generally related to the quality of product needed. Also, large and small businesses differ in the degree of formalization in their buying procedure, which in turn requires different selling approaches. 31 Customer Behavior Module 7 Geographic location can be very useful bases to segment the business market because that has a direct implication for where to locate distribution and sales infrastructure. The type of business is an important segmentation criterion because the product may have to be customized for different applications 32 Customer Behavior Module 7 Psychographics The concept of psychographics would translate in the business context as the behavioral dynamics of the customer. The formal policies and organizational structure set up for procurement serve as the board parameters of this behavior which a marketer needs to be aware of. Some companies use centralized buying, whereas others spread this function over many employees and facilities. 33 Customer Behavior Module 7 The Buying Center Is an important concept in industrial buying consists of all the members of a customer firm who play some role in the purchase decision . It includes five different roles: user, influencer, buyer, gatekeeper, and decider 34 Customer Behavior Module 7 Beyond the formal structure, informal organizational dynamics and political processes are important, as is the corporate culture. Culturally, the buyer organization may have an open and candid dialogue with the potential supplier, keeping the latter fully informed about its emerging needs and supplier selection deliberations, or it may operate in secrecy and intrigue. 35 Customer Behavior Module 7 Market Value – Based Segmentation Schema It is similar to benefit segmentation except that instead of specific benefits, it uses a category of market value (e.g. performance or social value). two types of market values were universal and personal. For the user, these were, respectively, performance and social – emotional. Using the basic distinction between universal and personal values we can obtain a value-based broad division of the total market. Depending on whether universal values are important or not, and likewise whether personal values are important or not, we obtain a matrix of broad market segmentation. 36 Customer Behavior Module 7 Selection of Bases for Segmentation An effective segmentation strategy begins with selection of appropriate basis for segmentation. Several principles can help with this decision. 37 Customer Behavior Module 7 Criteria for Successful Segmentation 1. Substantiality – every segment targeted must be big enough to be profitable to the economy. 2. Identifiably – every segment must be identifiable so that the marketer can know who the customer is and what his or her needs, wants, and resources are. 3. Reachability – finally, these segments must be reachable without wasting resources so that you know where to advise and distribute the product to reach the targeted segments. 38 Customer Behavior Module 7 A comparative Look at the Three Bases of Segmentation The three bases of segmentation have different strengths and weaknesses. Some are easier to measure, but less useful for customizing the marketing mix. Some contain explanation of why customers' marketplace behaviors differ across segments, while others are purely mechanistic divisions of the market. 39 Customer Behavior Module 7 Measurability The easiest type of segmentation to measure is usage segmentation, since the marketer can simply ask customers how much of a product they consume in a given time . the measurement of psychographics becomes quite involving, as it requires asking wide-ranging questions. Benefits are moderately easy to assess – one merely needs to prepare a list of all possible benefits and ask respondents to rate their relative importance. 40 Customer Behavior Module 7 The only snag is that it works for products whose benefits are relatively physical and easy to articulate. Certain intangibles such as aesthetics or beauty are difficult to translate into objective quantities. 41 Customer Behavior Module 7 Scope of Relevance The scope of relevance for the usage basics extends to both the household and institutional markets. Among the "why" bases, benefit segmentation applies to both the markets, whereas psychographics apply to household markets only. Another important difference between these to "why" bases is that benefit or value segmentation is most suitable for products customers seek primarily for their functional value, whereas psychographic segmentation is most benefiting for products sough for nonfunctional values. 42 Customer Behavior Module 7 Diagnostic Value The demographics and psychographics are in between, with the latter being more explanatory than the former. In demographics, the reason for differential responses to marketing mix are implicit; we make sense of demographic differences, because, and only after, we inject our common-sense understanding of motivational differences among people of different demographics. 43 Customer Behavior Module 7 Actionability In terms of actionability, usage segmentation is the least self- sufficient; we need to cross-profile it by demographics to take any action whatsoever. 44 Customer Behavior Module 7 Marketing Mix Implications Different bases influence different elements of marketing planning. Usage segmentation is most useful for allocation of the total marketing resources. One allocates most resources to heavy users – unless, of course, discerns untapped potential in the low use segments. Either way use segmentation helps managers decide at which markets the company's resources should be directed. Demographics help most in media-mix decisions as people of different demographics differ in their media habits. They also influence distribution decisions 45 Customer Behavior Module 7 The most direct influence of psychographics is on the creative aspect of marketing communications. In advertising and mass communications, we need to depict the customers' similar lifestyle to our target segment and use psychographic positioning that would appeal to our target customers. If a marketer is marketing a conspicuous product, he or she would be totally handicapped if he or she did not delineate various market segments on the basis of psychographics. Psychographics also help fine-tune a marketer's board media choices, in particular because several print media vehicles specialize by consumer interest groups,( e.g. there are magazines that appeal to outdoor adventure types.) 46 Customer Behavior