Market Segmentation and Costing

1 Marketing Price Price is defined as the quantity of payment that one party gives another in exchange for some good or service. In economics it is referred as the ratio of good quantities that are exchanged for each other. The price of any commodity is influenced by many factors but in ordinary circumstances, the main forces that influence it are its cost of production and demand and supply forces.

Pricing strategies In the marketing mix, price is the only element that generates revenues. There are several pricing strategies, among them penetration, skimming, competition, product line, bundle, psychological, optimal, cost based and cost plus pricing (Port 1999) Penetration pricing- the firm sets a very low price to capture market share, then raises it later. For instance a mobile phone service provider may charge extremely low prices and increase when it gets subscribers.

Skimming pricing- the firm sets very high initial prices and lowers slowly to skim the profits in layers e.g. a games console company sets high prices and reduces over five years to minimal at its end of life cycle.

Buy this excellently written paper or order a fresh one from ace-myhomework.com

2 Competition pricing- setting in comparison with competitors’ prices; higher, lower, or same.

Product line pricing- products in the same range are set with different prices e.g. a HD version of DVD and a non HD are set such that the one with more features costs higher.

Bundle pricing- setting lower price for products bought in a bundle- e.g. buy one, get one free Psychological pricing- psychology of the price is considered e.g. 99 pounds instead of 100 pounds.

Premium pricing- setting price to reflect class e.g. designer products Cost based pricing- cost of value addition is considered and then a profit added.

In order to maximise profit margins from a product, a retailer can employ price lifecycle optimisation. This process helps them set initial prices that manage the mark down cycles while managing price information like competitor price changes or cost increases or the inventory aging and anything that will affect the set price.

Life cycle costing This is a means of valuing a product on the basis of cost effectiveness in the long run, that is, all future costs are considered. These are usage costs (consumption), maintenance costs and disposal cost e.g. considering green products versus standard products, the price of green products may look higher but in the real sense they are energy efficient.

Market segmentation and positioning Segmentation

3 Segmenting is a process where the market is divided into segments based on common characteristics of customers and their needs. The process involves 

Determining potential customers.



Identify their segments on characteristic basis e.g. profession.



Analyse the competition in that market.



Select customer segments that are attractive (that will give a competitive advantage).

It is hardly possible to find a homogeneous market. Customer segments may be

on the basis of geographical, demographic, psychological or behavioural characteristics (Kotler et al 1998). Once a firm has segmented the market, it will be easy to offer value proposition guided by the needs of these segments and hence gain competitive advantage. For instance, airlines offer high cost plane tickets for customers who are inflexible, like businessmen who when they decide to travel, they must do so within the day they want and cannot wait a day longer. Since these customers cannot fill the plane, extra seats are offered to those that can wait even a week longer at cheaper prices for the same destination.

Positioning After targeting a certain customer segment the next thing is to implement. It involves setting business with that segment in mind. For instance Apple Inc likes to position itself as a manufacturer of user-friendly personal computers and so advertises its computers as for ‘non geeks’.

Positioning has two dimensions: the physical attributes which are the capabilities and functionality of the brand e.g. a car’s specifications in engine size and design. The

4 second is how the brand is communicated and the way it is perceived by consumers.

Kotler et al. (1998) say “that the most important is not what you do to the product but what you do to the mind of the prospect.” In order to position the firm correctly, the market researcher must know what really is of interest to the consumer (Wensley & Robin 1981).

Firms can maintain a competitive advantage through provision of reliable service to their customers. It is good to have some level of specialty in order to have an identity with customers. Customer intimate firms go an extra mile in providing what is wanted by the customer in more precise terms. They always have a competitive advantage on customers of that preference. Marketing communications is the main way brands are conveyed as being of a certain quality or style.

If a customer segment becomes less attractive for a firm, it can reposition itself which involves changing consumer perceptions of the brand.

Buyer behaviour Buyers can be classified into two: individual and organisational. Understanding consumer behaviour is important because purchasing circumstances cannot be generalised easily and the purchasing decision making is also affected by other changes like the product, the marketing environment and individual influences.

In any rational buying, the decision to buy has five steps: Need recognition and problem awareness information search evaluation of alternativespurchase post purchase evaluation.

This process means that any marketer must consider the whole process as opposed to a random decision to purchase. There are several instances where

5 customers skip steps or just reverse them. For instance, an aroma from a coffee shop could lead a customer to pop in and take a cup.

Problem awareness It comes through slow realisation, straightforward or practical realisation or a sudden impulse. A marketer can trigger problem recognition through advertisement and other means of communication, like display.

Information search The customer analyses the problem and finds out what purchase would solve his problem. Once the solution is found, the customer determines how to make the purchase and what information to search and where to get it. It can be an ongoing search or a purposeful. A marketer must guard against information overload at this point.

Information evaluation After getting several alternatives, the customer evaluates the various alternatives available for the one that gives maximum value proposition. A marketer can influence the decision at this point through communication.

Purchasing When the customer finds a good option after evaluation, the natural outcome is to purchase. The decision is now accompanied by negotiation and after sale service provision.

Post purchase evaluation The customer becomes concerned because of the expense incurred and the foregone alternatives. The marketer’s role here is reassurance and customer support.

6 After sales service and a good instruction manual also serve for reassurance. Through this the marketer can get repeat purchase or a recommendation of another customer.

Consumer behaviour is determined by: Level of purchase decision involvement – (how interested is the buyer), personal risk, social risk and economic risk. The four types of consumer behaviour are: Routine behaviour – in frequently purchased items – there is little search for information. E.g. when buying a snack.

Limited decision making – occasionally bought products – moderate time of information search is required – e.g when buying shoes Extensive decision making – a lot of time and search is required – e.g when buying a home.

Impulse buying – no conscious planning is involved.

Consumers will be affected personally, psychologically and socially during and after the purchase and marketers have to be aware of this when handling customers (Payne & Frow 1999).

Five forces Michael Porter described a market’s competitive environment as constituting five factors. These are rivalry between firms, threat of new market entrants, the bargaining power of the buyers, bargaining power of suppliers and finally the threat of substitute products. In a marketing situation, these forces individually affect the strategies of the marketing manager.

Rivalry between firms

7 Rivalry is said to be high when there are numerous competitors, a small market share, high storage costs, low switching costs of buyers, low levels of differentiation of products (Porter 1985). In such a situation the marketer can gain competitive advantage by changing prices, increasing product differentiation, creatively exploiting distribution channels and establishing good relationship with suppliers.

Threats of new market entrants The likelihood that a new entrant will come into the market is higher when entry costs are low, there is less regulation from the government as pertains to entry requirements, existing brands do not have much loyalty from customers, there are no price wars and when existing firms do not have much control of the supplies. At such times, marketers should avoid such a market especially if their brand does not create much loyalty (Porter 1985).

Buyer bargaining power Bargaining power of buyers is high when there low switching costs in changing vendors, products are undifferentiated, they are price sensitive and when there are several substitute products. In order to stand at a competitive edge, the seller can develop superior offers which are irresistible to strong buyers or select buyers who have less power to negotiate.

Supplier power A market segment can be said to be unattractive when suppliers possess too much power. This happens when the suppliers have ability to: Raise their prices even when they have not suffered volume decreases on their side, reduce their quantity supplied, impose costs of switching costs on their customers, control the channels of

8 distribution, collude with other suppliers and compete in an environment with limited substitutes. Marketers can seek to compete with several suppliers or create a win-win relationship with buyers.

Substitute products These are products that can give similar utility to a consumer. They mainly impact on the price of a product. A segment is unattractive if it has many substitute products and marketers can either avoid such a market or create superior products.

Marketers must obtain up-to-date information on the market situation before plunging into it. Internet can help them seek new markets and market information for them to have a competitive advantage.

Promotion mix There are several aspects of promotional mix. Among them are advertising, personal selling, sales promotion, public relations, corporate image, direct marketing and exhibitions.

Advertising It involves promotion of ideas, services or goods by a preferred sponsor (Urban 1976). The mass media involved are radio, TV, newspapers and banners as the most common. The advantages or disadvantages of each are specific to a certain media but the general pros and cons are: Advantages of advertising 

It has great influence



It covers a wide range



It is short but lasts long

9 

It has high professionalism



It is specific and visible



It is easy to plan

Disadvantages 

It is very expensive



It can be time consuming



It can be easy to forget if not well psychologically impacting



It can create shallow reception



Lack of interest by viewers or readers can render it worthless

Direct marketing It involves direct contacting of consumer by manufacturer to spread knowledge about the products. It could take place through mailing or other forms of direct contact without involving a middleman. Other forms are emailing, voicemail, use of coupons, television marketing and broadcast faxing.

Advantages 

Consumer enjoys low prices due to lack of middle men.



The marketing managers are able to know the accurate response on products.



Profits and loss can be determined with accuracy.



The manufacturer saves on advertising costs.

Disadvantages 

Direct mailing can be considered invasive to privacy by customers.

Public relations Advantages

10 

It is more credible as it is not perceived as advertising by customers.



It is cheaper as opposed to mainstream advertising.



There is avoidance of clutter- customers are less offended since there is not much junk or too many ads.



It is possible to engage in reach specific groups that are targeted. For instance older customers telling them of a new product or invention.



It helps in image building.

Disadvantages 

PR often does not complete the communication process. The receivers may not thus make the connection.



If media disseminate incorrect information, it will negatively impact on the company.

Sales promotion Advantages 

It builds or reinforces brand image.



It can bring customer loyalty.



It increases product accessibility.

Disadvantage 

It has a smaller coverage.



Very persistent sales personnel can offend customers.

It is the work of the marketer to go for the most optimal choice that brings the

best value proposition for the firm both in the short term and long term.

11

12 List of References Kotler, P., Armstrong, G., Brown, L., Chandler, S. A., 1998. Marketing, (4th ed), Prentice Hall, Sydney.

Payne, A., and Frow, P., 1999. Developing a segmented service strategy: improving measurement in relationship marketing. Journal of Marketing Management, 15, 797–818.

Port, J., 1999. Creative license. Business Review Weekly, 26 October, p.1-2.

Porter, M., 1985. Competitive advantage: Creating and sustaining superior performance, Harvard Business Review, 12(2), 18.

Urban, C., 1976. Correlates of magazine readership. Journal of Advertising Research, 19(3), 7–12.

Wensley, L., Robin, Z., 1981. Strategic marketing: Betas, boxes, or basics. Journal of Marketing, 45(Summer), 173–82.