Constructing a Sophistication Index as a Method of Market Segmentation of Commercial Farming Businesses in South Africa

Abstract

This study investigates the process of index construction as a means of measuring a hypothetical construct that can typically not be measured by a single question or item and applying it as a method of market segmentation. The availability of incidental secondary data provided a relevant quantitative basis to illustrate this process by constructing a commercial farming sophistication index for South Africa. It was evident that this approach offers an appropriate and useful means of segmenting a market. Several factors contribute to the appeal of this approach. Among others, it addresses important priorities in the area of future segmentation research. By offering classification rules based on characteristics that can easily be observed or elicited through asking a few key questions, new or potential buyers can be grouped by buying behaviour segment. Furthermore, the multi-step process that was employed provides a systematic and structured multivariate approach to segmentation. It also facilitates replication of the process when conducting future studies. Lastly, the outcome of this type of segmentation method offers researchers and marketing practitioners a procedure, in the form of an equation, to calculate index scores and provide rules to segment the market based on predefined intervals. Hence, the challenge to replicate segment formation across independent future studies is addressed.

Keywords: Agribusiness, Commercial Farming, Index Construction, Segmentation, Sophistication