Market Segmentation

 Market segmentation is the subdividing of a market into distinct subsets of customers.

Segments

 Members are different between segments but similar within.

Segment–1

Segmentation Marketing

Definition

Differentiating your product and marketing efforts to meet the needs of different segments, that is, applying the marketing concept to market segmentation.

Segment–2

Primary Characteristics of Segments



Bases

—characteristics that tell us why segments differ (eg, needs, preferences, decision processes).



Descriptors

—characteristics that help us find and reach segments.

(Business markets) Industry Size Location Organizational structure (Consumer markets) Age/Income Education Profession Life styles Media habits

Segment–3

A Two-Stage Approach in Business Markets

Macro-Segments:

 First stage/rough cut   Industry/application Firm size

Micro-Segments:

 Second-stage/fine cut  Different customer needs, wants, values

within

macro segment

Segment–4

Relevant Segmentation Descriptor

Variable A: Climatic Region

1. Snow Belt 2. Moderate Belt 3. Sun Belt

Fraction of Customers

Segment 1 Segment 2 Segment 3 0 100%

Likelihood of Purchasing Solar Water Heater (a) Segment–5

Irrelevant Segmentation Descriptor

Variable B: Education

1. Low Education 2. Moderate Education 3. High Education

Fraction of Customers

Segment 1 Segment 2 Segment 3 0 100%

Likelihood of Purchasing Solar Water Heater (b) Segment–6

Variables to Segment and Describe Markets

Segmentation

Bases

Descriptors

Demographics Psychographics Behavior Decision Making Media Patterns Consumer Needs, wants benefits, solutions to problems, usage situation, usage rate.

Age, income, marital status, family type & size, gender, social class, etc.

Lifestyle, values, & personality characteristics.

Use occasions, usage level, complementary & substitute products used, brand loyalty, etc.

Individual or group (family) choice, low or high involvement purchase, attitudes and knowledge about product class, price sensitivity, etc.

Level of use, types of media used, times of use, etc.

Industrial Needs, wants benefits, solutions to problems, usage situation, usage rate, size*, industrial*.

Industry, size, location, current supplier(s), technology utilization, etc.

Personality characteristics of decision makers.

Use occasions, usage level, complementary & substitute products used, brand loyalty, order size, applications, etc.

Formalization of purchasing procedures, size & characteristics of decision making group, use of outside consultants, purchasing criteria, (de)centralizing buying, price sensitivity, switching costs, etc.

Level of use, types of media used, time of use, patronage at trade shows, receptivity of sales people, etc.

Segment–7

Segmentation in Action

A Marriott Hotel used to be a Marriott Hotel: An upscale hotel catering to business people, pleasure seekers and international and group travelers. Today, besides the Marriott Hotels (the company’s major business), there are Marriott Suites, Residence Inns, Courtyards by Marriott and Fairfield Inns—each serving a smaller, targeted segment of the market.

—

Lenneman and Stanton, “Mining for Niches,”

Business Horizons

.

Segment–8

Segmentation in Action

We segment our customers by letter volume, by postage volume, by the type of equipment they use. Then we segment on whether they buy or lease equipment.

Based on this knowledge, we target our marketing messages, fine tune our sales tactics, learn which benefits appeal to which customers and zero in on key decision makers at a company.

—

Kathleen Synnot, VP, Worldwide Marketing Mailing Systems Division, Pitney Bowes, Inc.

[quoted in

Marketing Masters

(Walden and Lawler)]

Segment–9

Customers’ Diverse Needs Require Diverse Channels

Kodak increases customer contact and support with a three tiered distribution system.

. . . Business Imaging Division created three avenues for marketing microfilm, supplies and imaging systems and software:  direct sales reps (for more complex systems);  brokers and distributors (for film sales and delivery);  Components Marketing Division (to sell to system integrators and VARs).

—

Business Marketing

Segment–10

Ad in London Newspapers, 1900

Men wanted for hazardous journey. Small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful. Honor and recognition in case of success.

—Ernest Shackleton,

Arctic Explorer

Did it work?

Segment–11

Segmentation

If you’re not thinking segments, you’re not thinking. To think segments means you have to think about what drives customers, customer groups, and the choices that are or might be available to them.

—Levitt,

Marketing Imagination

Segment–12

Segmentation Marketing Implies a “Market”

A market consists of all the potential customers sharing a particular need or want who might be willing and able to engage in exchange to satisfy that need or want.

—Kotler,

Marketing Management

Segment–13

Market Definition

Customer-Need Set 1 (Market 1) Product 1 Technology A Customer-Need Set 2 (Market 2)  Common customer needs define a market

not

a product.

Technology B

Segment–14

Implications

1. Segmentation defines common customer needs.

2. Those common needs may be satisfied by similar or dissimilar technologies or have different solutions.

Ex: Customer dissatisfaction at long delays at supermarket checkout.

Solution 1: Faster UPC scanner systems.

Solution 2: Entertainment/Sales systems on checkout lines.

Note: Total solution defines (competitive) market,

not

product

or

technology.

Segment–15

Market Definition Approaches

Customer-Behavior:

 Demand cross elasticity  Brand/product switching

Perception/Judgment:

 Engineering/technological substitution  Customer judgments/ perceptual mapping

Segment–16

Why is Market Definition Important?



Strategy

(What to focus on).



Resource allocation

(How much/where/when?).



Feedback/performance measurement

(How well are we doing? How can we learn from our actions?).

Segment–17

Electric Typewriter Market

1980 1981 1982 1983 1984

Shipments

A (Us) B Other Total 403,027 369,916 367,057 1,140,000 495,192 388,520 324,010 1,207,722 548,905 349,396 343,885 1,242,186 550,351 323,005 370,374 1,243,730 541,388 342,197 202,495 1,086,080 1985 515,000 297,000 129,070 941,070

Market Shares (%)

A (Us) B Other 35.4

32.4

32.2

41.0

32.2

26.8

44.2

28.1

27.7

44.2

26.0

29.8

49.8

31.5

18.6

54.7

31.6

13.7

Segment–18

Word Processor Market

1980

Shipments

A (Us) B Other Electric Electronic Word Processors Total 403,027 369,916 367,057 60,040 1,200,040 1981 495,192 388,520 324,010 112,220 1982 548,905 349,396 343,885 209,800 1,319,942 1,451,986 1983 550,351 323,005 370,374 392,352 1,636,082 1984 541,388 342,197 202,495 733,699 1985 515,000 297,000 129,070 1,372,016 1,819,778 2,313,086

Market Shares (%)

A (Us) B Other Electric Electronic Word Processors 33.6

30.8

30.6

5.0

37.5

29.4

24.5

8.5

37.8

24.1

23.7

14.4

33.6

19.7

22.6

24.0

29.8

18.8

11.1

40.3

22.3

12.8

5.6

59.3

Segment–19

Market Definition by Switching Behavior

Last Purchase Occasion

Coke Diet Coke Pepsi Diet Pepsi Sprite Diet Sprite Coke 53% 12% 24% 4% 21% 2% Diet Coke

Current Purchase Occasion

Pepsi Diet Pepsi Sprite Diet Sprite 9% 61% 3% 14% 2% 15% 27% 4% 58% 11% 17% 2% 4% 15% 9% 63% 3% 12% 5% 2% 5% 2% 52% 7% 2% 5% 1% 6% 6% 61% Total 100% 100% 100% 100% 100% 100%

Segment–20

STP as Business Strategy

Segmentation

 Identify segmentation bases and segment the market.

 Develop profiles of resulting segments.

Targeting

 Evaluate attractiveness of each segment.

 Select target segments.

Positioning

 Identify possible positioning concepts for each target segment.

 Select, develop, and communicate the chosen concept.

… to create and claim value

Segment–21

How STP Adds Value to a Firm

Segmentation

Identify segments

Targeting

Select segments

Positioning

Create competitive advantage Marketing resources are focused to better meet customers needs and deliver more value to them Customers develop preference for brands that better meet their needs and deliver more value Customers become brand/supplier loyal, repeat purchase, communicate favorable experiences Brand/supplier loyalty leads to increased market share and creates a barrier to competition Fewer marketing resources needed over time to maintain share due to brand or supplier loyalty Profitability (value to the firm) increases

Segment–22

STPing the Market for Eggs

Segments: Profiles:

Disinterested consumers Casual Egg Users Health conscious consumers Enthusiastic users Beliefs Attitudes Lifestyles Health/Nutrition consciousness Media habits Consumption habits Demographics —Frank and Phillips,

Agribusiness,

July 1990

Segment–23

Targeting and Positioning

Strategy

Positioning Copy Visuals Copy Tonality Promotions

Casual Users Convenient and useful in many situations.

Informal settings.

Easy pace, relaxed atmospher.

Reminders at checkout, egg display, or dairy.

Health Conscious Consumers Ideal and natural food, good for the family.

Health-oriented personality or situation.

Fresh, clean setting, very natural.

Matter-of-fact information on the nutritional value and health attributes of eggs in recipes and leaflets.

Enthusiastic Users Traditional food with many applications.

Very convenient, good for the family.

Larger family setting.

Major meal, possibly with guests.

Reinforcing, emphasis on benefits and wide use.

Simple reminders to buy eggs.

Segment–24

Overview of Marketing Engineering Methods for STP

 Clustering and discriminant analysis (PDA2001 exercise)  Choice-based segmentation (ABB Electric)  Perceptual mapping (G20 exercise)

Segment–25

Segmentation (for Carpet Fibers)

Strength

(Importance) A,B,C,D: Location of segment centers.

Typical members: A: schools B: light commercial C: indoor/outdoor carpeting D: health clubs .

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B .

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Perceptions/Ratings for one respondent: Customer Values .

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D .

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Distance between segments C and D .

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C . .

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Water Resistance

(Importance)

Segment–26

Strength

(Importance)

Targeting

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Segment(s) to serve ...

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Water Resistance

(Importance)

Segment–27

Strength

(Importance)

Positioning

.

Product Positioning Comp 1 Comp 2 Us .

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Water Resistance

(Importance)

Segment–28

A Note on Positioning

Positioning involves designing an offering so that the target segment members perceive it in a distinct and valued way relative to competitors.

Three ways to position an offering: 1. Unique 2. Difference 3. Similarities (“Only product/service with XXX”) (“More than twice the [feature] vs.

[competitor]”) (“Same functionality as [competitor]; lower price”) What are

you

telling your targeted segments?

Segment–29

Steps in a Segmentation Study

 Articulate a strategic rationale for segmentation (ie, why are we segmenting this market?).

 Select a set of needs-based segmentation variables most useful for achieving the strategic goals.

 Select a cluster analysis procedure for aggregating (or disaggregating customers) into segments.

 Group customers into a defined number of different segments.

 Choose the segments that will best serve the firm’s strategy, given its capabilities and the likely reactions of competitors.

Segment–30

Total Customer Value =

Functional Value

(What does this product

do

for me?) Price/Performance

+ Supplier/Service Value

Advertising Selling Service Efforts What does the product

mean

to me?

(What is the insurance? service? psychological? value of the product or supplier?)

Segment–31

Customer Needs and Customer Value Measurement Customer Needs and Buying Process Present State Functional and Economic Needs Perceived and Psychological Needs Desired State Motivation Behaviors Ignore Postpone



Engage in Purchase Process

•Search for options •Evaluate options •Choose option •Purchase Option •Use Option

Customer Value Measurement Approaches Objective Measures of Value Perceptual Measures of Value Behavioral Measures of Value

Customer Value Assessment Procedures

Customer Value

Attitude-Based Direct Questions Behavior-Based

• Choice models • Neural networks • Discriminant analysis

Inferential/Value Based

• Internal engineering assessment • Indirect survey questions • Field value-in-use assessment

Indirect/(Decompositional Methods

• Conjoint analysis • Preference Regression

) Unconstrainted

• Focus groups • Direct survey questions • Importance and attitude ratings • Rule-based system/AI/expert systems

Constrained/Compositional Methods

• Multiattribute value analysis • Benchmarking

Segment–33

Segmentation: Methods Overview

 Factor analysis (to reduce data before cluster analysis).

 Cluster analysis to form segments.

 Discriminant analysis to describe segments.

Segment–34

Cluster Analysis for Segmenting Markets

 Define a measure to assess the similarity of customers on the basis of their needs.

 Group customers with similar needs. The software uses the “Ward’s minimum variance criterion” and, as an option, the K-Means algorithm for doing this.

 Select the number of segments using numeric and strategic criteria, and your judgment.

 Profile the needs of the selected segments (e.g., using cluster means).

Segment–35

Cluster Analysis Issues

 Defining a measure of similarity (or distance) between segments.

 Identifying “outliers.”  Selecting a clustering procedure  Hierarchical clustering (e.g., Single linkage, average linkage, and minimum variance methods)  Partitioning methods (e.g., K-Means)  Cluster profiling  Univariate analysis  Multiple discriminant analysis

Segment–36

Doing Cluster Analysis

Dimension 2

a = distance from member to cluster center b = distance from I to III III • • • • • b I • • • a • Perceptions or ratings data from one respondent II • • •

Dimension 1 Segment–37

Single Linkage Cluster Example

Distance Matrix

Company #1 Company #2 Company #3 Company #4 Company #5 Co#1 0.00

1.49

3.42

1.81

5.05

Co#2 Co#3 Co#4 Co#5 0.00

2.29

1.99

4.82

0.00

1.48

4.94

0.00

4.83

0.00

Resulting Dendogram Company

1 2 3 4 5 1 2 3

Distance

4 5

Segment–38

Ward’s Minimum Variance Agglomerative Clustering Procedure

First Stage: Second Stage: Third Stage: Fourth Stage: Fifth Stage: A = 2 B = 5 AB = 4.5

AC = 24.5

AD = 32.0 AE = 84.5

BC = 8.0

CDA = 38.0

AE = 85.0

CDB = 14.0

BE = 50.5

ABCD = 41.0

C = 9 BD = 12.5

BE = 50.0

CD = 0.5

CE = 18.0

DE = 12.5

CDE = 20.66

D = 10

AB = 5.0

ABE= 93.17

CDE = 25.18

ABCDE = 98.8

E = 15

Segment–39

Ward’s Minimum Variance Agglomerative Clustering Procedure

98.80

25.18

5.00

0.50

A B C D E Segment–40

Interpreting Cluster Analysis Results

 Select the appropriate number of clusters:  Are the bases variables highly correlated? (Should we reduce the data through factor analysis before clustering?)  Are the clusters separated well from each other?

 Should we combine or separate the clusters?  Can you come up with descriptive names for each cluster (eg, professionals, techno-savvy, etc.)?  Segment the market independently of your ability to reach the segments (ie, separately evaluate segmentation and discriminant analysis results).

Segment–41

Profiling Clusters

1

Means of Variables

0

Two Cluster Solution for PC Data: Need-Based Variables

Design

–1 size power office use

Business

LAN color storage needs wide connect.

periph.

budget

Segment–42

Which Segments to Serve?

—Segment Attractiveness Criteria

Criterion Examples of Considerations I.

Size and Growth

1. Size 2. Growth • Market potential, current market penetration • Past growth forecasts of technology change II.

Structural Characteristics

3. Competition 4. Segment saturation 5. Protectability 6. Environmental risk • Barriers to entry, barriers to exit, position of competitors, ability to retaliate • Gaps in the market • Patentability of products, barriers to entry • Economic, political, and technological change III.

Product-Market Fit

7. Fit 8. Relationships with segments 9. Profitability • Coherence with company’s strengths and image • Synergy, cost interactions, image transfers, cannibalization • Entry costs, margin levels, return on investment

Segment–43

Selecting Segments to Serve

E

Strong

Firm’s Competitive Position

Medium Weak

A B C D

Low Average High

Segment Attractiveness Segment–44

Discriminant Analysis for Describing Market Segments

 Identify a set of “observable” variables that helps you to understand how to reach and serve the needs of selected clusters.

 Use discriminant analysis to identify underlying dimensions (axes) that maximally differentiate between the selected clusters.

Segment–45

Two-Group Discriminant Analysis

Price Sensitivity X-segment

XXOXOOO XXXOXXOOOO XXXXOOOXOOO XXOXXOXOOOO XXOXOOOOOOO

Need for Data Storage

x

= high propensity to buy

o

= low propensity to buy

O-segment Segment–46

Interpreting Discriminant Analysis Results

 What proportion of the total variance in the descriptor data is explained by the statistically significant discriminant axes?

 Does the model have good predictability (“hit rate”) in each cluster?  Can you identify good descriptors to find differences between clusters? (Examine correlations between discriminant axes and each descriptor variable).

Segment–47

Behavior-Based Segmentation

 Traditional segmentation (eg, demographic, psychographic)  Needs-based segmentation 

Behavior-based segmentation

(choice models)

Segment–48

Choice Models

1. Observe choice: (Buy/not buy => Brand bought => direct marketers packaged goods, ABB) 2. Capture related data:  demographics  attitudes/perceptions  market conditions (price, promotion, etc.) 3. Link 1 to 2 via “choice model” => model

reveals

importance weights of characteristics

Segment–49

Choice Models vs Surveys

With

standard survey methods

. . .

preference/ choice  predict  importance weights  observe/ask  perceptions  observe/ask

But with choice models

. . .

choice  observe  importance weights  infer  perceptions  observe/ask

Segment–50

(ABB) Behavior-Based Segmentation Model

Stage 1: Screen products using key attributes to identify the “consideration set of suppliers” for each type of customer.

Stage 2: Assume that customers (of each type) will choose suppliers to maximize their utility via a random utility model.

U ij

=

V ij

+ e

ij where

:

U ij V ij

= = e

ij

= Utility that customer

i

has for supplier

j

’s product.

Deterministic component of utility that is a function of product and supplier attributes.

An error term that reflects the non-deterministic component of utility.

Segment–51

Attributes in ABB’s Choice-Segmentation Model

 Invoice price  Energy losses  Overall product quality  Availability of spare parts  Clarity of bid document  Knowledgeable salespeople  Maintenance requirement  Ease of installation  Warranty

Segment–52

Specification of the Deterministic Component of Utility

V ij

= 

W k b ijk k where

:

i

= an index to represent customers,

j

index to represent suppliers, and

k

is an is an index to represent attributes.

b ijk

=

i

’s perception of attribute

k

for supplier

j

.

w k

= estimated coefficient to represent the impact of

b ijk

on the utility realized for attribute

k

of supplier

j

for customer

i

.

Segment–53

A Key Result from this Specification: The Multinomial Logit (MNL) Model

If customer’s past choices are assumed to reflect the principle of utility maximization and the error ( e

i

j ) has a specific form called double exponential, then:

p ij

 ^

e Vij

= ––––––

e

^

Vik k where

:

p ij V ij

= probability that customer

i

chooses supplier

j

.

= estimated value of utility (ie, based on estimates of

b ijk

) obtained from maximum likelihood estimation.

Segment–54

What Does This Result Imply?

 Interval-level utility measurements are good enough. That is:

p ij

^

e Vij

= –––––– = 

e Vik

^

k

^

e Vij

+

a

–––––– ^ 

e Vik

+

a k

 The marginal impact of an attribute is highest when the probability of choosing an option

j

is 0.5.

Segment–55

What Does This Result Imply?

(cont’d)

dP il db ijk

 * ( 1 

P il

* )

Marginal Impact of an Attribute on the Probability of Choosing an Option

0.5

Probability of Choosing the Option Segment–56

Applying the MNL Model in Segmentation Studies

Key idea

: Segment on the basis of probability of choice— 1.

Loyal to us 2.

Loyal to competitor 3.

Switchables: loseable/winnable customers

Segment–57

Switchability Segmentation

Loyal to Us Losable Winnable Customers (business to gain) Loyal to Competitor

Current Product-Market by Switchability (ABB Procedure) Questions:

Where should your marketing efforts be focused?

How can you segment the market this way?

Segment–58

Using Choice-Based Segmentation for Database Marketing

Customer 1 2 3 4 5 6 7 8 9 10

A

Purchase Probability 30% 2% 10% 5% 60% 22% 11% 13% 1% 4%

B

Average Purchase Volume $31.00

$143.00

$54.00

$88.00

$20.00

$60.00

$77.00

$39.00

$184.00

$72.00

C

Margin 0.70

0.60

0.67

0.62

0.58

0.47

0.38

0.66

0.56

0.65

D

Customer Profitability =

A



B



C

$6.51

$1.72

$3.62

$2.73

$6.96

$6.20

$3.22

$3.35

$1.03

$1.87

Segment–59

Managerial Uses of Segmentation Analysis

 Select attractive segments for focused effort (Can use models such as Analytic Hierarchy Process or GE Planning Matrix).

 Develop a marketing plan (4P’s and positioning) to target selected segments.

 In consumer markets, we typically rely on advertising and channel members to selectively reach targeted segments.  In business markets, we use sales force and direct marketing. You can use the results from the discriminant analysis to assign new customers to one of the segments.

Segment–60

Checklist for Segmentation Studies

 Is it values, needs, or choice-based? Whose values and needs?

 Is it a projectable sample?

 Is the study valid? (Does it use multiple methods and multiple measures)  Are the segments stable?

 Does the study answer important marketing questions (product design, positioning, channel selection, sales force strategy, sales forecasting)  Are segmentation results linked to databases?

 Is this a one-time study or is it a part of a long-term program?

Segment–61

Concluding Remarks

In summary,  Use needs variables to segment markets.

 Select segments taking into account both the attractiveness of segments and the strengths of the firm.  Use descriptor variables to develop a marketing plan to reach and serve chosen segments.

 Develop mechanisms to implement the segmentation strategy on a routine basis (one way to do this is through information technology).

Segment–62

Choosing a Value Assessment Method

Criterion

Amount of customer information needed Number of customers Good in dynamic/ changing markets?

Past purchase data available?

Analysis time frame Cost Insight Appropriate for lead users?

Predictive of behavior?

Value Based High Low Yes Not necessary Long Very high/ respondent Very high Yes High Behavior Compositional or Based Low High No

Method

Needed Medium Medium Medium No Moderate Decompositional Medium Medium * If customers can reliably report how they will behave after change.

Partly* Not + necessary Long/Medium High High Yes Moderate Unconstrained Low Any Partly* Not necessary Short Low Low No Low

Segment–63

Related Models Described in the Marketing Engineering Book

 To develop “needs” variables  Conjoint Analysis (Chapter 7)  Other segmentation methods  Preference-based segmentation (PREFMAP in Chapter 4)  To help evaluate and select segments  Analytic Hierarchy Process (Chapter 6)  GE Planning Matrix (Chapter 6)

Segment–64