By Prof. Oyedunni S. Arulogun
This chapter is designed to help learners understand the concept of market analysis; it discusses the key concepts, processes and techniques as well as their applications. By the end of this chapter, learners should be able to:
§ describe how companies position their products for maximum competitive advantage.
Understanding how market works and what consumers want is crucial to the success of any business. Market analysis is a tool that can help identify where to focus efforts and how to maintain a competitive edge.
What is market analysis?
Market analysis is a study of the dynamism of the market as illustrated in Fig. 1. It is basically a business plan that presents information regarding the commercial market in which one is operating. It is carried out so that strategy on how to run a business can be formulated. Marketing analysis helps in determining the characteristics that are peculiar to a particular market; it also helps to analyse the information which will be used to make decisions for the business. It is the attractiveness of a special market in a specific industry.
The market analysis also presents information about the purchasing habits of customers in that market and information about competitors. Based on market research and the intention to attract investors, a strong analysis will show why business is a strong addition to a given market and how it will earn money. Furthermore, market analysis can be used to establish the best sales and communication channels for a target audience.
Fig. 3.1. Market analysis
In other words, market analysis has a lot of importance in the success of any business, some of which include:
In carrying out an effective market analysis, the following questions need to be answered honestly.
· Who are they?
· Where are they?
· What do they need?
· How do they make their buying decisions?
· Where do they buy?
· How do you reach them with your marketing and sales messages?
A comprehensive market analysis should include:
In doing a comprehensive market analysis, an organisation needs to do a SWOT analysis. SWOT analysis means Strengths, Weaknesses, Opportunities and Threats analyses (See Fig. 2)
Fig. 3.2. SWOT Analysis
Knowing your customers
A market segment is a sub-set of a market made up of people or organisations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function. A marketing programme that is aimed at individual segments needs to be understood and used to capitalise on the group's differences, using them strategically in all advertising campaigns. A customer analysis is a critical section of a company's marketing plan. It is a simple tool that can help a business better understand current and potential customers, so that they can increase sales and grow their business. It identifies target customers, ascertains the needs of these customers, and then specifies how the product satisfies these needs. Customer profiles are a collection of information about customers that help determine why people buy or do not buy a product. Customer profiles can also help develop targeted marketing plans and help ensure that products meet the needs of their intended audience.
Knowing your customers (customer analysis) can be broken down into:
· Behavioural profile (why your product matches a customer's lifestyle) and
· Demographic profile (describing a customer's demographic attributes): this is identifying target market segments that are predisposed to preferring your products over those of your competitors. Gender, age, ethnicity, marital status, level of education attained and income are all market-segmenting criteria based on demographics. By having a well-defined set of demographic factors, marketing will be able to identify the best channels to reach these specific demographic segments.
Market segmentation is the process of dividing a market into groups of customers (i.e. segments) that share chosen characteristics. It is also the process of dividing the market into groups of consumers who respond in a similar way to a given set of marketing stimuli (e.g. price, product features).
Why is segmentation important?
Segmentation will enable a business to:
1. understand a market from the customers’viewpoint;
2. exploit its strengths better by selecting compatible market segments;
3. develop more sharply focused strategies aimed at market requirements; and
4. identifygaps in the market that offer new product opportunities.
What makes a good segmentation?
A good market segmentation framework should be:
1. measurable – size, purchasing power;
2. accessible – ability to reach and serve segment;
3. substantial – large and profitable to serve;
4. unique in its response – distinct segments should respond differently to marketing;
5. stable in behaviour – should not change too often over time to allow for effective marketing;
6. identifiable – ability to describe customers clearly; and
7. universal– able to fit all relevant customers, both desirable and undesirable to the organisation.
Types of segmentation
1. Geographic – country, region, state, city, area (where they live and work)
2. Demographic – age, gender, family size, family life cycle, income, occupation, education, race, ethnicity and religion
3. Behavioral – occasions, loyalty status, benefits sought, usage rate, spending, consumption, usage and desired benefits.
4. Psychographic– Psychographic segmentation divides a market into different groups based on socioeconomic class, lifestyle, or personality characteristics.
5. Other – Mindsets, Motivations, culture, aspirations, etc
Fig. 3.3. Market segments
Fig.3.4: Market segmentation
Different consumers have varying desires and interests and it is almost impossible to satisfy all customers in a market with a single product or service. Companies have responded by offering a proliferation of products and brands. Therefore, companies have found it essential to move away from mass marketing towards a target marketing strategy where the focus is on a particular group of customers. This identification of target customer groups is market segmentation, where customers are aggregated into groups with similar requirements and buying characteristics. Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests and spending habits. It is the process of dividing potential markets or consumers into specific groups. Market research analysis, using segmentation, is a basic component of any marketing effort. It provides a basis upon which business decision makers maximise profitability by focusing their company’s efforts and resources on those market segments most favourable to their goals.
Companies employing customer segmentation operate under the fact that every customer is different and that their marketing efforts would be better served if they targeted specific, smaller groups with messages that those consumers would find relevant, hence leading them to buy something. Companies also hope to gain a deeper understanding of their customers' preferences and needs with the idea of discovering what each segment finds most valuable to more accurately tailor marketing materials toward that segment. By enabling companies to target specific groups of customers, a customer segmentation model allows for the effective allocation of marketing resources and the maximisation of selling opportunities. Customer segmentation can also improve customer service and assist in customer loyalty and retention. As a by-product of its personalised nature, marketing materials that are sent out using customer segmentation tends to be more valued and appreciated by the customer who receives them as opposed to impersonal brand messaging that does not acknowledge purchase history or any kind of customer relationship. Other benefits of customer segmentation include staying a step ahead of competitors in specific sections of the market and identifying new products that exist or potential customers that could be interested in or improving products to meet customer expectations.
Not only do companies strive to divide their customers into measurable segments according to their needs, behaviours or demographics but they also aim to determine the profit potential of each segment by analysing its revenue and cost impacts. Value-based segmentation evaluates groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them. It also helps companies determine which segments are the most and least profitable so that they can adjust their marketing budgets accordingly. Customer segmentation can have a great effect on customer management in that, by dividing customers into different groups that share similar needs, the company can market to each group differently and focus on what each kind of customer needs at any given moment.
Methods of market segmentation
There are four main methods used in market segmentation: a priori, usage, attitudinal and need.
A priori: This is defined as relating to knowledge that proceeds from theoretical deduction rather than from observation or experience. For purposes of market research analysis, this means making certain assumptions about different groups that are generally accepted as pertaining to that group. An example is deducing that adults over 50 are not as tech savvy as those who are twenty because high tech devices were not as widely available to the older generation than they are to the younger. However, be careful to check your assumptions since they can change over time.
Usage segmentation: This is completed either by decile or pareto analysis. Decile analysis splits the groups into ten equal parts while pareto distributes according to the top 20% and the remaining 80%. Usage segmentation helps to drill down more deeply than a priori because it indicates which group is the heaviest user of your product.
Attitudinal segmentation: Using cluster analysis to create customer psychological profiles is difficult because it is limited by the input data used. Demographic data is the least helpful, whereas preference data (scaling) is better suited toward this type of analysis. However, once usage segmentation is created, it is exceptionally helpful to know the motivating factors behind the purchasing decisions of the heaviest users of your product.
Needs-based segmentation: This involves dividing the market based on customer needs. This type of analysis is used to develop products that sell rather than trying to sell the products that a business developed. It uses conjoint analysis to separate the groups according to functional performance.
Factors determining market segmentation
Market size – The size of the market is a key factor in a marketing analysis. The bigger the market, the more competitors you are likely to have. For a big market, you need to make sure your products and services stand out. Otherwise, the customers can easily switch to a rival product. Not only that, a bigger market makes you rethink your pricing policy. Set your price too high then you are going to lose your customer base to other competitors. Set it too low and people will think that you are just providing cheaper poor quality goods. If the market size is small then you can get away with charging a high price. All these facts are kept in the marketing analysis.
Growth rate of the market – The market growth rate is a huge factor in any sort of marketing analysis. This is because you get the idea of how long the said market will last. Before you make an investment, you need to analyse the market’s growth rate. If it is likely to grow over time then you can invest more in it. If it has no growth then you are likely to be discouraged from investing anything at all. How much time and importance you give to the market depends on its growth rate.
Market trends:Market trends are a significant part of the marketing analysis. Having knowledge about the trends help you to decide what kind of product you are going to sell. When you are starting off a business, you need to know what the current trend is. What is the thing that the customers like? How much are they willing to spend? What other trends may capture their attention? These are the sort of things which will go into your analysis.
Distinguishing characteristics – What are the critical needs of your potential customers? Are those needs being met? What are the demographics of the group and where are they located? Are there any seasonal or cyclical purchasing trends that may impact your business?
Size of the primary target market – In addition to the size of your market, what data can you include about the annual purchases your market makes in your industry? What is the forecasted market growth for this group? How much market share can you gain? What is the market share percentage and number of customers you expect to obtain in a defined geographic area?
Therefore, effective market segmentation helps to:
ü accurately define industry/market boundaries,
ü determine the size and characteristics of market opportunities,
ü identify unmet customer needs,
ü customise products, pricing or distribution channels,
ü identify the cost to serve various customer groups,
ü side-step competition and grow the business, and
ü provide the foundation for sustained, profitable growth.
Segments therefore must be:
ü differentiable, and
Targeting and positioning
The process of Segmentation is a part of a 3-stage chronological order, which follows on to include Targeting and Positioning, also known as STP model (Fig. 1).
Figure 3.5. STP model
The process includes:
(1) Segmentation: this is the determination of which kinds of customers exist,
(2) Targeting: selection of which customers are the best that the market wants to serve and, finally,
(3) Positioning: implementation of products/services for that segment in the optimal ways available.
Fig.3.6. Stages in market segmentation
Targeting isidentifying the most attractive segments from the segmentation stage. The choice of which segment(s) to target by a marketer, generally depends on several factors. Some of these factors include how well existing segments are served by other manufacturers; as it will be more difficult to appeal to a segment that is already well served compared to the one whose needs are not currently being served well. Secondly is the size of the segment, and how it is expected to grow is another factor. It should be noted that a rapidly growing segment has the tendency to attract competition. Thirdly, the strength of the company that will help it appeal, particularly, to one group of consumers is also required. For example, a firm may already have an established reputation. However, profitability of the business seems to be one of the most important factors in determining which segment the firm is going to target.
When practitioners consider targeting specific consumer segments, they often want to know how they should position their products and services. Positioning refers to the “image” or “impression” about the company or its products which marketers want their present and potential customers to have. This is often achieved by taking into account the factors the market or a certain sub segment values, as well as the impression consumers have of other competitors. Marketers must plan their positions to give their products the greatest advantage in selected target markets. In order to achieve this, it should be noted that the way the product is defined by consumers is an important attribute in the place the product occupies in the minds of the consumers, relative to competing products. It should be noted that positioning strategies tend to be easier to develop and implement when a company sells products only to one market or segment which consists of a homogeneous group of people who value certain offerings such as “convenience” and “value.” However, this is hardly the case with most organisations since their customer bases are rather heterogeneous. In the most common cases, what appeals to one segment might not appeal to another.
Strategies for positioning should be adequately put in place and such strategies should include positioning by specific product attributes, positioning by benefits, positioning for user category, positioning for usage occasion, positioning against other competitors and positioning against another product class. Steps to choosing and implementing a positioning strategy are:
Step 1: Identifying possible competitive advantages which involve competitive differentiation such as product differentiation, physical attributes, service differentiation, personnel differentiation and location image differentiation.
Step 2: Selecting the right competitive advantage: Unique Selling Proposition (USP).
Step 3: Communicating and delivering the chosen position.
A firm should assess the impact of its positioning strategies on other segments. If there is an adverse reaction from other segments, whether these are younger or older customers, perhaps the marketer should identify those factors (if any) which are likely to appeal to all or most segments and position products and services based on these factors. Alternatively, the company could pursue “niche marketing,” that is, concentrate on the most profitable segments or those segments which are currently ignored or underserved by competitors. The company should also consider product and brand extension strategies by marketing its offerings under different names or forming alliances with different organisations – strategies which may lessen the risk of detracting from the company’s image in the minds of different groups of consumers.
Fig. 3.7. Targeting
Positioning: The last element of the STP process is the Positioning. It involves implementing our targeting. For example, Apple Computer has chosen to position itself as a maker of user-friendly computers. Thus, Apple has done a lot through its advertising to promote itself, through its unintimidating icons, as a computer for “non-geeks.” The Visual C software programming language, in contrast, is aimed at “techies.” Positioning is required to differentiate the product or brand in the minds of the target market.
Fig. 3.8. Positioning
Methods of collecting data for market analysis
The following methods will be useful for market analysis;
This includes observing people in marketplace conditions to ascertain consumer behaviour. However, in the digital realm, observation takes a whole new meaning as you are now able to judge visitors’ website behaviours using analytics.
This can further be broken down into:
3. Focus groups and product testing
The company can call in a select bunch of people to ask questions pertaining to a particular product or service. In addition, you can launch a product in a limited scale to gauge customer response and then extrapolate those results for a nationwide or global launch.
You should note that all forms of data collection have their own limitations. That is why for near-accurate analysis, you should use a combination of primary and secondary sources of information.
A comprehensive marketing programme encompasses a wide array of marketing decisions in the areas of segment targeted, product design, pricing, promotion and distribution. Developing an effective marketing programme involves making sound decisions in these specific areas. Because people respond differently to marketing stimuli based on their needs, experiences, stage in life and other factors, it is highly unlikely to be able to develop marketing strategies that would be effective for all consumers. Market analysis should be tailored to the specific needs of a market or segment; the programmes that may be effective with one segment may not be effective when implemented to appeal to another.
That is, the specific segment(s) chosen and positioning strategies appropriate for each segment would determine the viability of certain marketing tactics. Another factor that needs to be taken into consideration is the type of product or service involved. Because the effectiveness of marketing strategies and programmes vary by type of segment and type of product, decision makers should rely primarily on information about older consumers’ responses to marketing offerings which are specific to the product or service being marketed as well as to the segment of interest. Such product and segment-specific information is likely to be more useful than generic information on any segment or product offering. In order to effectively implement a marketing strategy, marketers or consultants should recommend the implementation of various strategies proven to be effective for the proposed programmes.
This chapter explored the concept market analysis by looking at its definition and why it is an important aspect of business success. It explained the SWOT analysis relevance in market analysis, describes what makes good market segmentation, factors determining market segmentation, types of segmentation, methods of market segmentation and methods of collecting data for market analysis.
What type of demographic segmentation is reflected in this advert?
Multiple choice questions
1. All of the following would be ways to segment within the category of psychographic segmentation except
a. social class
2. The orange juice manufacturers know that orange juice is most often consumed in the mornings. However, they would like to change this and make the drink acceptable during other time periods during the day. Which form of segmentation would they need to work with to establish strategy reflective of their desires?
a. gender segmentation
b. benefit segmentation
c. occasion segmentation
d. age and life-cycle segmentation
3. ___________________ consists of dividing a market into distinct groups of buyers on the basis of needs, characteristics or behaviour; these distinct groups might require separate products or marketing mixes.
a. Product differentiation
b. Market segmentation
c. Market targeting
d. Market positioning
4. ________________ factors are the most popular bases for segmenting customer groups.
5. Targeting affluent customers with luxurious goods is an example of
A. geographic segmentation
B. income segmentation
C. psychographic segmentation
D. behavioural segmentation
6. The three-step process within marketing segmentation includes:
a. segmentation, differentiation and positioning
b. targeting, segmentation and positioning
c. segmentation targeting and positioning
d. positioning, mass marketing and segmentation
Essay type questions
1. List and explain 4 methods of data collection for market analysis
2. (a) Define market segmentation
(b) List and explain the various factors determining market segmentation
3. What are the components of a good market analysis?
4. With relevant examples, give a comprehensive explanation of SWOT analysis.
5. Why is segmentation important?
Lancaster, G. and Massingham, L. 1988 Essentials of marketing. Maidenhead, Berkshire: McGraw-Hill.
Smith, W. R. 1956. Product differentiation and market segmentation as alternative marketing strategies. Journal of Marketing Vol. 21. 1: 3-8.