3.3.2 Understanding markets and customers


    3.3.2 Understanding markets and customers

    The value of primary and secondary marketing research

    Market Research = the systematic and objective collation, analysis, and evaluation of information that is intended to assist in the marketing process


    Primary Market Research (field) = involves the collection of first hand data that did not exist before and therefore it is original data. It fills gaps that secondary research cannot

    Examples of primary research:

    • Focus groups
    • Interviews (online & in-person)
    • Surveys & questionnaires
    • Mystery shoppers
    • Product testing and product trial


    Advantages of primary research:

    • Directly focused on research objectives = fit for purpose
    • Tends to be more up-to-date than secondary research
    • Provides more detailed insights – particularly into customer views


    Disadvantages of primary research:

    • Time-consuming and often costly to obtain
    • Risk of survey bias – research samples may not be representative of the population


    Secondary Market Research (desk) = research that has already been undertaken by another organisation and therefore already exists


    Sources of secondary research:

    • Government publications
    • Newspapers
    • Magazines
    • Company records
    • Competitors
    • Market research organisation
    • Loyalty cards
    • Internet


    Advantages of secondary research:

    • Already gathered so may be quicker to collect
    • May be gathered on a much larger scale than possible for the firm
    • In some cases it can be very cheap or free to access


    Disadvantages of secondary research:

    • Information may be outdated, therefore inaccurate
    • The data may be biased and it is hard to know if the information was collected is accurate
    • The data was not gathered for the specific purpose the firm needs or is not relevant to the original context
    • In some cases it can be costly (e.g. marketing firm reports)


    Market Mapping = a framework for analysing market positioning is a ‘market (positioning) map’. A market map illustrates the range of positions that a product can take in a market based on two dimensions that are important to customers


    Dimensions for the axes examples:

    • Low price v high price
    • Basic quality v high quality
    • Low volume v high volume
    • Necessity v luxury
    • Light v heavy
    • Simple v complex
    • Unhealthy v healthy
    • Low-tech v hi-tech


    Advantages of positioning maps:

    • Help spot gaps in the market
    • Useful for analysing competitors – where are their products positioned?
    • Encourages use of market research


    Disadvantages of positioning maps:

    • Just because there is a gap in the market doesn’t mean there is demand for the product
    • Not a guarantee of success
    • How reliable is the market research that maps the position of existing products based on the chosen dimensions?


    The value of sampling

    Sampling = involves gathering data from respondents whose views or behaviours are representative of the target market as a whole

    • Random = member of target population has an equal chance of being chosen
    • Quota/Stratified = based on obtaining a sample that reflects the types of consumers from whom the business wished to gain information (e.g. gender, age)


    Advantages of sampling:

    • Provides a good indication
    • Helps avoid expensive errors
    • Can be used flexibly
    • Reliable information
    • Helps firms learn about the market quickly


    Disadvantages of sampling:

    • May be unrepresentative
    • Bias
    • Difficult to locate suitable correspondents
    • May not have an accurate profile of customers
    • Can be out of date due to time taken to collate


    The interpretation of marketing data

    Confidence Intervals = they measure the probability that a population parameter will fall between two set values. The confidence interval can take any number of probabilities, with the most common being 95% or 99%

    • Plus or minus numbers are used to show the accuracy of statistical results arising from sampling data
    • It’s used to assess to reliability of sampled data when forecasting figures (e.g. sales levels)




    Factors influencing confidence levels:

    • Sampling size – the larger the sample, the better the reflection of opinion of the whole population, so confidence levels fall
    • Population size – the target market for the product has a minor effect on confidence intervals
    • % of sampling choosing a particular answer – if high or low % of sample expresses the same opinion, then confidence intervals are likely to be low


    Extrapolation = it is like an educated guess or a hypothesis

    • When you make an extrapolation, you take facts and observations about a present or known situation and use them to make a prediction about what might eventually happen


    Disadvantages of extrapolation:

    • Less reliable if fluctuations occur (e.g. weather is unpredictable)
    • Assumes past changes will continue
    • Ignores qualitative factors (e.g. changes in tastes and fashion)
    • Ignores the product life cycle


    Correlations = another method of sales forecasting that looks at the strength of a relationship between two variables

    • Positive correlations means the two sets of data are connected in some way (e.g the closer it gets to Christmas, the more Christmas trees that are sold)
    • Negative correlations also means the two sets of data are related but as x increases, y decreases


    The value of technology in gathering and analysing data for marketing decision making

    Big Data = the process of collecting and analysing large data sets from traditional and digital sources to identify trends and patterns that can be used in decision-making

    • large data sets are both structured (e.g. sales transactions from an online store) and unstructured (e.g. posts) on social media


    How the data is generated:

    • Retail e-commerce databases
    • User-interactions with websites and mobile apps
    • Usage of logistics, transportation systems, financial and health care
    • Social media data
    • Location data (e.g. GPS-generated)
    • Internet of Things (IoT) data generated
    • New forms of scientific data (e.g. human genome analysis)


    How technology enables more effective marketing decisions:

    • Analytics and customer insights – this help businesses track how users and customers use their online products and services
    • Dynamic pricing – the technology behind dynamic pricing enables a business to adopt a pricing strategy where prices are set flexibly for products or services based on current market demands
    • Audience reach and segmentation – the widespread use of social media marketing is an example of how technology is enabling businesses to more effective reach their target audience and communicate with them
    • Customer relationship management (CRM) – this is a technology used to manage interactions with customers and potential customers. A CRM system helps businesses build customer relationships and streamline processes so they can increase sales, improve customer service, and increase profitability
    • Campaign testing – this is a key feature of digital marketing technology. It allows a business to set up more than one (and in some cases many thousands) of different marketing campaigns to test which is most effective.
    • Competitor analysis – software is available to monitor what competitors are doing


    The interpretation of price and income elasticity of demand data

    Price Elasticity of Demand (PED) = measures the responsiveness of quantity demanded for a product to a change in price

    • = percentage change in quantity demanded / percentage change in price


    What firms use PED to predict:

    • The effect of a change in price on the total revenue and expenditure on a product
    • The likely price volatility in a market following changes in supply – this is important for commodity producers who may suffer big price movements from time to time
    • The effect of a change in an indirect tax (e.g. VAT, fuel or other duties) on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer
    • Information on the PED can be used by a business as part of a policy of price discrimination (also known as ‘yield management’) – this is where a business decides to charge different prices for the same product to different segments of the market (e.g. peak and off peak rail travel or prices charged by many of our domestic and international airlines)
    • A business contemplating a tactical price-war or planning a promotional discount based on price (e.g. 50% off for a limited period) will want to know how responsive customer demand will be to the pricing tactics used


    The values of PED:

    • If PED = 0 demand is said to be perfectly inelastic – this means that demand does not change at all when the price changes (the demand curve will be drawn as vertical)
    • If PED is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic
    • If PED = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending by the same at each price level
    • If PED > 1 then demand responds more than proportionately to a change in price i.e. demand is elastic. For example a 20% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of demand for this price change is –1.


    Factors affecting PED:

    • The number of close substitutes for a good – the more close substitutes in the market, the more elastic is demand because consumers can easily switch their demand if the price of one product changes relative to others.
    • The cost of switching between products – there may be significant costs involved in switching between products. In this case, demand tends to be relatively inelastic (e.g. mobile phone service providers may insist on 12 or 18-month contracts being taken out)
    • The degree of necessity or whether the good is a luxury – goods and services deemed by consumers to be necessities tend to have an inelastic demand whereas luxuries tend to have a more elastic demand.
    • The % of a consumer’s income allocated to spending on the good – goods and services that take up a high proportion of a household’s income will tend to have a more elastic demand than products where large price changes makes little or no difference to someone’s ability to purchase the product.
    • The time period allowed following a price change – demand tends to be more price elastic, the longer that we allow consumers to respond to a price change.
    • Whether the good is subject to habitual consumption – when this occurs, the consumer becomes less sensitive to the price of the good in question because their default position is to buy the same products at regular intervals.
    • Peak and off-peak demand – demand tends to be price inelastic at peak times and more elastic at off-peak times.
    • The breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a price change.


    Income Elasticity of Demand (YED) = measures the relationship between a change in quantity demanded for good ‘X’ and a change in real income

    • = percentage change in demand / percentage change in income
    • Most products have a positive income elasticity of demand – so as consumers’ income rises more is demanded at each price
    • Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income.
    • Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for restaurant meals. The income elasticity of demand in this example is +1.25.
    • However, there are some products (inferior goods) which have a negative income elasticity of demand, meaning that demand falls as income rises. Typically inferior goods or services tend to exist where superior goods are available if the consumer has the money to be able to buy it (e.g. the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties)


    The income elasticity of demand is usually strongly positive for:

    • Fine wines and spirits, high quality chocolates (e.g. Lindt) and luxury holidays overseas
    • Consumer durables – audio visual equipment, 3G mobile phones and designer kitchens
    • Sports and leisure facilities (including gym membership and sports clubs)


    Income elasticity elasticity of demand is lower for:

    • Staple food products such as bread, vegetables and frozen foods
    • Mass transport (bus and rail)
    • Beer and takeaway pizza
    • Income elasticity of demand is negative (inferior) for cigarettes and urban bus services


    The value of the concepts of price and income elasticity of demand to marketing decision makers

    Limitations of using elasticity to make marketing decisions:

    • Consumer tastes change
    • Difficult to calculate
    • It assumes things stay equal
    • Consumers may not be able to predict their own spending so primary research could be unreliable
    • Consumers may react differently to what’s expected
    • Image of product may have changes
    • Technology
    • Competitors entering or leaving the market


    The use of data in marketing decision making and planning

    Data helps to make effective marketing decisions as it is accurate and can provide reliable results.


    When marketing analysis is needed:

    • Forecasting sales for new products or investments into new markets
    • Gathering evidence to support a finance raising exercise
    • To support a new marketing strategy or significant changes to the marketing objectives
    • To help make decisions in relation to significant organisational or operational change


    3.3.3 Making marketing decisions: segmentation, targeting, positioning

    The process and value of segmentation, targeting, and positioning

    Market Segmentation = splits up a market into different types (segments) to enable a business to better target its products to the relevant customers


    Advantages of market segmentation:

    • Better matching of customer needs – needs differ frequently so creating separate products for each segment makes sense
    • Enhanced profits for business – customers have different disposable incomes and vary in how sensitive they are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits
    • Better opportunities for growth – market segmentation can build sales (e.g. customers can be encouraged to “trade-up” after being sold an introductory, lower-priced product)
    • Retain more customers – by marketing products that appeal to customers at different stages of their life, a business can retain customers who might otherwise switch to competing products and brands
    • Target marketing communications – firms need to deliver their marketing message to a relevant customer audience. By segmenting markets, the target customer can be reached more often and at lower cost
    • Gain share of the market segment – through careful segmentation and targeting, businesses can often achieve competitive production and marketing costs and become the preferred choice of customers and distributors


    Main bases of segmentation:

    Target Market = the set of customers sharing common needs, wants, and expectations that a business tries to sell to

    Approaches to market targeting:

    • Mass marketing (undifferentiated)
      • Business targets the WHOLE market, ignoring segments
      • Products focus on what customers need and want in common, not how they differ
    • Segmented (differentiated)
      • Business target several market segments within the same market
      • Products are designed and targeted at each segment
      • Requires separate marketing plans and often different business units & product portfolios
    • Concentrated (niche)
      • Business focuses narrowly on smaller segments or niches
      • Aim is to achieve a strong market position (share) within those niches


    Influences on choosing a target market and positioning

    The role of market positioning in marketing strategy:

    • Businesses use marketing to create value for customers by making two key decisions:


    Decision 1 – choose which customers to serve:

    • Market segmentation (analysing the different parts of a market)
    • Targeting (deciding with market segments to enter)


    Decision 2 – choose how to serve those customers:

    • Product differentiation (what makes it difference from the competition)
    • Market positioning (how customers perceive the product)



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