China’s Ever Intensifying Market Segmentation And The Product Differentiation It Requires

Recently, I read the China Internet Report 2021 which was released by the South China Morning Post. The report mentioned emerging and underserved internet user market segments and examples of product differentiations that have occurred in the market in order for these market segments to be tapped into. The report reminded me of how in China some market segments may seem insignificant in terms of proportion but actually, due to the sheer scale of the market in China, these market segments are sufficient as markets in themselves to justify targeted product differentiations. It also reminded me of how the constant granulation of market segments in China is results in product differentiations due to both top-down planning and bottom-up requirements:

(1) Top-down: Brands’ ensuring their products are appropriately differentiated in order to meet the needs of different market segments

and

(2) Bottom-up: Sales channels ensuring their channel stays relevant to target market segments both in terms of the product it sells and the way the product is delivered.

Background: Market Evolution

All of us understand to some degree the massive scale of the market in China. Over the last decade or so, many exporters and brands have relied on the China market to sustain growth. To take my home-country New Zealand as but one example, in 2020:

  • 93% of inshore shellfish exports were to China
  • 82% of log exports were to China
  • 72% of mutton exports were to China
  • 64% of infant formula exports were to China

Hence, it is plain to see that the sheer size of the Chinese market sustains revenue and growth for entire industries.

I remember when I first arrived in China for study in 2008, imported food and beverages enjoyed a particular status simply due to the fact they were imported products. A bottle of wine, a block of chocolate, a can of infant formula or even a bottle of mineral water were, by default, viewed by the vast majority of consumers in China as superior to locally produced products. Consumers gave little consideration to the quality, taste or functionality of the product. Likewise, many foreign brands did not consider localization of their product or even market segmentation beyond simply having labelling and marketing in the medium of the Chinese-language.

Since then, the Chinese market has evolved greatly. Firstly, multiple factors now influence Chinese consumers’ purchase decisions – the importance of country of origin is becoming less and less important. Secondly, market segments in China are becoming more and more granulated and, what perhaps would be minor segments not worth a brand’s marketing and product development resources in other countries, due to the scale of the Chinese population many of these segments which main seem insignificant proportionally are in fact significant in market-size. This is causing a trend of product differentiation amongst brands across numerous industries and product categories in order to ensure there are products with clear selling propositions which cater specifically to the different market segments.

In 2020, KPMG conducted a survey which required participants to, on a scale of 1 to 10, rank the importance of a series of product attributes influencing consumers’ food product purchases. These attributes included things like Price, Convenience, Familiarity, Health/nutrition, Innovative/unique, Taste, Texture, Fashion/trend, Brand, Aesthetics, Country of origin, Carbon Zero and et cetera. On average, Country of Origin ranked only as one of the 5th most important attributes which influence Chinese consumers’ food product purchase decisions. The attributes of Carbon Zero and Innovative/Unique equally ranked as the #1 attributes which influence Chinese consumers’ food product purchase decisions. Interestingly, price was one of the 4th most important attributes for Chinese consumers.

The fact that Chinese consumers prioritize a product being Innovative/Unique is testament to the importance of needing to understand the different market segments. Innovative/Unique is obviously a very subjectively interpreted attribute and thus depends on the market segment the consumer comes from as each market segment has needs specific to that market segment.

(1) Brands’ ensuring their products are appropriately differentiated in order to meet the needs of different market segments

Various trends pertaining to market segments of internet users in China illustrate well how brands are ensuring their products are appropriately differentiated in order to meet the needs of market segments.

In the recent China Internet Report 2021 released by the South China Morning Post, several different underserved internet user market segments were identified with examples of how these market segments are driving trends in product differentiation and the development of selling propositions catered towards these market segments.

The underserved internet user market segments identified in the report are:

  • The “Silver Economy” market segment- defined by elderly internet users
  • The “Sheconomy” market segment – defined by increasingly independent and confident female internet users
  • The “Sinking Markets” market segment – defined by internet users from tier-3 or lower cities and rural areas.

The Silver Economy is an interesting one and in this market segment in particular, there are many examples of differentiations which are done to strategically tap into this market segment. The emergence of this market segment is driven by both China’s aging population and internet penetration. While in 2020 there were around 989 million internet users in China, approximately 11% of these users were 60 or above – compared to only 4% of internet users in 2016. While 11% may sound like a small proportion of internet users – due to the sheer size of China’s population and its population of internet users, 11% equates to around 189 million.

In order to tap into this market segment, many tech companies have offered product differentiations in order to cater for this market segment and some have even released entirely new products solely catering towards the Silver Economy market segment. For example, both the search engine Baidu and the newsfeed App Toutiao have released large text versions to cater for visual impairments common to this market segment and ride hailing app Didi has, for seniors, offered one-click orders with pre-set regularly-used addresses, and simplified billing processes. Tech-giant Tencent has also backed the App Tangdou which dedicated to create an online community for square-dance lovers – a common pass-time of the elderly in China.

(2) Sales channels ensuring their channel stays relevant to target market segments both in terms of the product it sells and the way the product is delivered.

Various emerging market segments and their specific needs are also influencing sales channels both in terms of the products they select and the way they deliver their products. When I worked in Sales and Marketing for a cider company in China, I noticed the diligence and care given by many sales channels to ensure their product was both relevant to attract their target demographic and delivered in a way that was attractive to the target demographic.

One large multi-national restaurant chain which was opening in China had decided they wanted to include alcoholic drinks on their menu in their restaurants and, specifically, a premium cider on the menu. Our cider was premium and we thus pitched our cider as the exclusive cider for their menu. However, the restaurant chain soon realized that offering bottled drinks which could be purchased at a cheaper retail price from supermarkets nearby was in fact detrimental to attracting their target market segment – young white-collar workers looking for uniqueness and innovation in both the taste and dining experience. Hence, the sales channel decided that instead of simply selling bottled drinks, they would instead offer cocktails that included various top-rated beverages as the key component in the cocktail recipe. This bettered the sales proposition to the customer as the uniqueness in both taste and delivery justified the price premium on purchasing the drink from the restaurant rather than from a cheaper retail outlet. As a result, the restaurant chain worked with beverage brands to develop both alcoholic and non- alcoholic cocktail recipes for their restaurant chain and thus created a clear product differentiation and selling proposition to better cater for their market segment.

Another sales channel I pitched our cider product to was a nationwide bar/restaurant chain in China with 30+ venues. It was positioning itself as the hang-out place for university students and recent university graduates new to the workforce. The interior design of the bar and restaurant chain was done in a way that made it feel “underground” and “counter-culture” while yet being refined; the idea was to create a market positioning that made each venue “THE” social environment for those youngsters looking to recuperate from a day within the rigidness of their daily academic or corporate environment. As a result, the sales channel’s criteria for product selection not only considered the potential sales volume and sales margins of products, but also whether or not the product enhanced this market positioning.

When we pitched our product to the above sales channel, the product selection team were happy with our pricing and with our taste. However, they thought that the delivery – specifically the relatively mundane labeling of the product – was not conducive to enhancing their market positioning as it did not appeal to their market demographic. As a result, we drafted a plan for custom labelling designed by their in-house team which would ensure the product appealed to their market segment and thus enhanced the market positioning of the channel. It was a win-win situation; for us as the seller, it meant that we were able to get commitment to a certain volume as there was an MOQ (Minimum Order Quantity) and for them it meant that got a more relevant product.

A Few Thoughts

If you are a brand entering China or already in China and wanting to ensure you are as relevant to your market segment as possible. You are going to need to take into consideration both (1) your top-down planning based on high-level market trends and research, and also (2) feedback from the frontline – the sales channels whom want to ensure their products and they way they sell and deliver the sales experience of these products is as relevant as possible to the target demographic.

If you are interested in reading the China Internet Report 2021, it can be viewed via the below link:

https://multimedia.scmp.com/infographics/china-internet-2021/

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