by Richard Hamer

The Impact of an Aging Population

If all anybody ever looked at was demographic trends, we would have a gloomy picture of inactive senior citizens.  Among our findings we’d discover that seniors are living longer, but not working longer.  They have failed to save and they have not anticipated the cost of living in retirement.  Obesity rates are still increasing and the impact of that yields greater disability but not shorter life expectancy, therefore greater pressure on Medicare’s finances   And finally the one that everybody has heard over and over, the ratio between elderly people and younger people keeps getting worse. 

The U.S. Census Bureau looks at the latter indicator as a comparison between persons aged 85 and over and their children or potential caregivers, who they judge to be aged 50 to 65.  In 1970 there were 3.4 persons 85+ for every 100 persons 50-65.  Now there are 10.5 people 85+ to be taken care of by those one hundred 50-65 year olds.  In 2030 the 85+ number will be 16.

It’s a lot to absorb.  And if you try, the exorable quality of demographic trends leaves you unable to imagine getting through the next 50 years.

Here’s what we say: Demographic trends are real, but they are abstracted from real life.  In demographic trends, there is no self-determination.

A Ray of Hope

The gloom of demographics is turned to a ray of hope when the changing attitudes and aspirations of young seniors and those aging into retirement are considered.  According to the “Future of Retirement Survey” commissioned by HSBC, new seniors — the boomers –expect to remain active after 65 through work, leisure, education, and spiritual development.  They want to do something with their later years.  They are looking at retirement as a process, not an event.

Moreover, new seniors do not expect to rely on governments alone to help them in old age.  And, according to the Census Bureau, boomers at 65 may have less disability than previous retirees.  The Bureau charts that the percent of seniors with disability has dropped from 26% in 1970 to around 20% now.  They attribute this to higher educational levels and also note that poverty levels for persons 65+ continue to decline. 

Implications for Health Plans 

The implications for health plans is that a critical need they could meet is to facilitate disability free years for persons in their later years.  If the new seniors want flexible work arrangements, active lifestyles, and the freedom to pursue their many interests, then 75 is going to be the new 65.  And this will happen because seniors are addressing their post 65 years that way, not because some mis-managed government program ran out of money.  We are not trying to gloss over the real and looming problems of public finance.  We appreciate our readers granting us the luxury of, for now, focusing on the self determination of seniors and what the research says they want.

To facilitate disability free years for people aged 50 or more, health plans need outreach.  Such a program implies some manner of health coaching and cajoling of enrollees, prevention and early detection programs, effective physician involvement and management.  And it also implies an active marketing and outreach program to keep new members coming in. 

Without new members, a health plan’s enrolled population will age relative to the overall older population.  At some point, not withstanding risk adjustment, the cost of the “disability-free” programs won’t work economically.  Moreover, whatever products health plans invent to help employers and older workers work under flexible arrangements will not succeed without new blood.

Importance of Psychographics It is our argument then, that demographics are removed from real life and that understanding the psychologies of seniors will help us understand how they will address their post-65 lives.  Retirement, as the last two generations knew it, is dead.

Psychographics is one of those nasty words you hate to hear.  But behind its clunky combination of latinates is a straightforward idea:  psychographics is the measurement of psychological, as opposed to physical, characteristics.  So any political poll, public opinion poll, survey of attitudes and likely behaviors, is a psychographic study.  For health plans that want to know why seniors are interested in a product or service, a psychographic study will help segment the market into persons with similar perceptions and needs.  And from that, marketing and product development can proceed more effectively.

For more information:  http://www.deftresearch.com/deft_insights.htm Richard Hamer is a Principal at Deft Research, LLC —  www.deftresearch.com

technorati tags: senior citizens, market research, psychology, health plan, health plans, demographics, psychographics, Medicare, Medicare Part D, health insurance, drug coverage

Why segment the senior consumer market?   By Paul Riedesel,PhD

First, what is meant by market segmentation?

The entire field of market segmentation is based on this idea, that consumers have differing needs. They will find value in different products. They will respond differently to marketing communications. They will gravitate toward different price points.

Because of this, businesses operate more efficiently if they can act on those differences. A business that tries to offer a single undifferentiated product with generic marketing support will always lose out to more nimble competitors who have specific targets and know how to serve them.

In the Medicare Part D world, health plans are struggling to make sense out of new regulations while meeting very tight deadlines. But today’s difficulties are going to give way to a market where segmentation will be of great benefit.

Consider an example below. Typical values for a firm with an unsegmented marketing approach for direct mail might be:  Returns 2%, sales 25% of that or 0.5%.

With market segmentation, because each segment receives a message targeted at them, response rates should be higher. And even though the rate of converting responses into sales is the same, the segmented approach has shown to deliver twice the number of sales and twice the marketing ROI.

What’s more, the segmented approach compensates for one poor result, for example the marketing ROI for one of three segments can be considerably lower than for the other two, yet overall results are often better than the unsegmented approach.

Which Segment?

It is obvious that all competitors cannot target the same segment and succeed. A common mistake is to assume that you must focus on the “heavy buyers” who, in reality, are often not the most profitable group. For example, a consulting firm may decide to forego targeting Fortune 500™ firms that are fiercely contested by the Big Four accounting/consulting firms and instead pursue middle market firms. “Sub prime” lenders and credit card companies know exactly who their prospects are, and do not bother advertising in Money magazine or funding public television shows. Part D players may find market niches among seniors with, for example, private Medigap policies and specific interests or needs that the plan can address.

For health plans, market segmentation is not common. Part of this is due to health plan cultures developed to serve large employer-based health plans and retirees. But Medicare Part D, for example, has been an unprecedented public-private effort to create a consumer market. Because it is consumer focused and new, we believe the market understanding developed through segmentation will serve in a variety of ways.

Identifying and targeting one or a few segments instead of the entire market allows the firm to use its resources more effectively. Market segmentation means products and messages more aligned with the needs of selected consumers.

Researching Segments

Some type of systematic research is required as a foundation for market segmentation. Most often, this research entails a sample survey which should be done by research experts.

Segmentation research addresses a set of fundamental questions:

1. How many segments are there?
2. How large is each segment?
3. How do you define the segments?
4. How do you describe the segments?

Segments are typically defined by dimensions such as:

• Behavior —such as the frequency of purchasing, total spending, or the mixture of stores shopped (switching, investigating, comparing, delegating decisions), or
• Characteristics —such as geodemographics for consumers or SIC codes for businesses (health conditions, subsidy status, current coverage status), or
• Attitudes —such as financial sophistication, fashion orientation, or disposition to adopt new technologies (interest, optimism).

The variables that are used to define the segments are called the “basis.” The basis is chosen in light of how the segmentation will be applied. Direct marketers, for instance, carefully dissect their databases in terms of purchase behavior. Deft Research’s segments are based on seniors’ motivations and concerns. We chose this because motivations and concerns are what will cause seniors to act on a Part D offer.

We don’t think that there is only one “correct” way of doing segmentation research, nor that there is a single set of segments waiting to be “discovered.” While the analysis needs to employ objective statistical methods, any number of judgments, preferences and practical considerations go into the design of the process and the final determination of the segment structure. The same dataset can yield different segments.

Market segmentation spotlights opportunities for health plans to improve marketing and sales, staff training, customer service, new enrollee intake, business planning, and public relations. Generally, it will be used by Part D plans that want to assure they emerge from this first period of Part D confusion as a drug coverage provider of relevance and viability. Part of this means achieving sales and marketing goals. Part of this means establishing a market position where consumers think of you as you’d like them to think of you.

Surveys may be administered in many different ways: via telephone interviews, research “panels” for either online or mail surveys, in-home or in-office interviews, etc. Compared to other forms of marketing research, the sample sizes for segmentation studies tend to be large. The simple reason is that you need to be able to profile multiple sub-samples (the segments) with a high degree of precision, rather than just the total sample. It is unusual to use fewer than 500 and not unusual to use 2,000-3,000.

Analysis

The most complex and opaque part of segmentation research is the derivation of the segments—that literally means dividing the sample into a small number of exclusive clusters. This is almost always done by applying some form of statistical cluster analysis. The analyst will typically try several different cluster “solutions.” While there are objective statistical measures of the quality of a cluster solution, they are no more important than informed managerial judgment. Deft Research may well offer two or three possibilities to discuss.

The “right” number of segments is subjective, but in practice companies tend to settle on four to eight segments. In a diverse, complex category more might be called for.

Agreeing on the number of segments, as well as the labels that will be attached to them, always requires careful study of their full profiles. While the segments may be defined with one class of basis variables (e.g. attitudes about fashion and shopping), you always need to describe the segments in terms of other variables (e.g. demographics, spending, media preferences, preferred brands) that were not part of the definition of the segments.

… and Application

An important deliverable from most segmentation research is a tool for classifying other consumers into the segments. This could be a formula where by asking a small number of questions you can place a “new” consumer in one of the segments. It could be a set of logical rules [”if combined account balances >$10,000 + have at least three accounts + non-mortgage debt < $20,000: assign to segment G"].

Conclusion

Market segmentation is a far-reaching strategy that can benefit Part D players.

The underlying rationale is to use your resources more efficiently by serving consumer needs better. The mechanism is to treat the market as consisting of multiple segments with different needs, rather than as a mass market where “average” really suits no one very well.

Deft Research aims to enable your market segmentation by providing a detailed and objective picture of the marketplace. The research requires a sample survey. It defines and describes segments from which the health plan can choose one or more targets. Part D players will get more “bang for the buck” by more precisely meeting segments’ needs and by using marketing tools to which that segment will respond.

Paul Riedesel, PhD is a principal of Action Marketing Research in Minneapolis.