What did we learn from BMW?
The automobile market is divided into a number of “groups” or “segments.” Sub-Compact; Compact; Full-Size; Luxury, etc.
These divisions are however, product based, not customer based. However, customers have, over time, “adopted” this segmentation scheme
BMW in the luxury / performance segment. But wants to segment further based on “usage experience.” The Better Driver. Not product based, but customer / market based.
What did we learn from BMW?
Usage experience + “Value pricing” for the segment key to differentiating the product offering from Mercedes, Lexus & Infiniti
Along with appropriate product and price, the promotions (advertisements) and place (channels) also aligned with strategy
Segmentation What is Segmentation?
Why do we need Segmentation?
What do we do once we have “Segmented the Market” ?
Segmentation Market Segmentation is the Process of Identifying
Homogeneous Groups of Buyers Requiring Different Marketing Strategies to Influence their Consumption
Organizations have Limited Resources Consumers may be too Numerous, Widely Scattered and
Varied in their Needs Competing Organizations may be Better able to Attract
Certain Groups of Customers (Segments) in the Market Each Organization Should, Therefore Identify the Most
Attractive Parts of the Market That it Could Effectively Serve (Target Market).
RJ Reynolds Focus on the Chicago market Company has several brands - Winston, Salem,
etc. Question: How should RJR allocate its marketing
resources in the Chicago market ? The usage rate of RJR brand cigarettes varies
across the city This usage rate seems to be related to the socio-
economic characteristics of the smokers
RJ Reynolds Higher education level smokers use low tar
cigarettes; “Blue collar” folks smoke Winston, and African-American smokers prefer menthol (found in Salem)
Chicago’s North Shore area has high education levels; the South-East area is a blue-collar neighborhood and the South side has many African-American residences
So, RJR allocates its promotion money based on brand & geography
A Segmentation Model In the above example, the usage rates of the
different brands of cigarettes formed the basis for the entire segmentation scheme. Hence, this variable is referred to as a basis variable.
In a regression context, think of the basis variable as a “dependent variable.”
The basis variable should capture the heterogeneity of interest to the marketer, i.e., the differences across consumers.
A Segmentation Model
The geographic and socio-economic characteristics in the RJR example are referred to as the descriptor variables.
In a regression context, think of the descriptor variables as the “independent variables.”
The descriptor variables help the marketer deliver different 4P levels to the different segments - different products (cigarette brands); prices (low / medium / high); promotions (advertising in specific magazines); place (different kinds of stores)
Descriptor Variables
Low Education High Education
Likelihood of Smoking Low-TarCigarettes given Smoker
20% 80%
Frac
tion
of
Cus
tom
ers
Likelihood of Smoking Low-TarCigarettes given Smoker
30% 40%
OwnMicrowave
Do Not OwnMicrowave
Relevant Descriptor Irrelevant Descriptor
Segmentation Bases & Descriptors
Bases: Needs, wants, benefits, solutions to problems, usage situation, usage rates
Descriptors Demographics: Age, income, gender, family size, marital status,
social class Psychographics: Lifestyle, values, personality Behavior: Use occasions, usage level, brand loyalty,
complementary and substitute products used Decision making: Individual or group choice, low or high
involvement purchase, attitudes and knowledge about product class, price sensitivity, etc.
Media patterns: Level of use, types of media used, times of use, etc.
Consumer
Bases: Needs, wants, benefits, solutions to problems, usage situation, usage rates, size, industry
Descriptors Industry, size, location,current suppliers, technology utilization Personality characteristics of decision makers Applications, order size, use occasions, usage level, brand loyalty,
complementary and substitute products used Purchase procedures, size and composition of decision making
group, use of outside consultants, purchasing criteria, (de)centralized purchasing, price sensitivity, switching costs, budget cycle, etc.
Patronage at trade shows, receptivity to sales people, level of use, types of media used, times of use
Segmentation Bases & Descriptors
Industrial
Criteria for Segmentation
A. IDENTIFIABLE
B. ACCESSIBLE
C. RESPONSIVE
D. SIGNIFICANT
A good segmentation scheme must have the following two characteristics
1. MUTUALLY EXCLUSIVE
2. COLLECTIVELY EXHAUSTIVE
Strategic Approach to Segmentation
Identify Segments Describe Segments
Strategic Impact Bases Levels Demographics Media
Category vs. Brand Building
Use Product / Service?
User Nonuser
Switching vs. Loyalty Use my brand? My brand Other brand
Value of Customer Level of Use? Heavy Moderate Light
Image vs. Attribute Timing
Occasion of use? Varies by product (Time of day..)
Form of the Value Equation
Motivation for use? Function Psychic
Example: Category vs. Brand Building
BCI / CCI Analysis - Segments described by consumption levels
BCI: Brand Consumption Index
CCI: Brand Consumption Index
Basis: Use Product or Service
BCI (J,X) = Number of units of brand X consumed by consumer J
Average number of units of brand X consumed in the market (per capita)
Number of units of the category consumed by consumer J
CCI (J) = Average number of units of the category consumed per capita
CCI / BCI Analysis
LOW
HIGH
BCI
LOW HIGH
CCI
Combine BCI and CCI to Examine Descriptors of the (e.g.) High CCI / Low BCI cell
1. 2.
3. 4.
Finding: Consumers in Cell #2, mostly live in the South-Western U.S. The firmmay want to allocate more resources to this geographic region (descriptor)
Problem
Oftentimes, one needs to use multiple bases for segmentation. For example, size of firm, order size and nature of application in an industrial marketing application. Or in a financial services application, the bases might be - number of accounts held with the bank, frequency of ATM visits, volume of transactions, etc.
Suppose there are N such basis variables. Let each variable have L levels. Then the number of possible segments are NL.
Obviously, there may be too many segments to be meaningful
Hence, we need some procedure that can take the data across consumers on all the relevant bases variables and then group those consumers together who have similar values on the bases variables
Grouping consumers using their bases variables
Number ofAccounts
Volume ofTransactions
Group 1
Group 2
Group 3
Group 4
Group 5
Profiling the Segments When there are several bases variables, the statistical
procedure that is used to group consumers is called cluster analysis.
Once the clusters (or segments) have been identified using the bases variables, the next step is to describe (or profile) them using the descriptor variables
For example, in the financial services case, one can compute the average income, age, family size, and media habits of the consumers belonging to each of the 5 groups in the figure
If the average profile of each group is “sufficiently” different, then we have “good” descriptors
Question: How do we decide how many segments to have? For example, in the figure, one could potentially combine groups 1 and 2 to get a single, larger group. Then we would have only 4 segments
3 Steps in a Segmentation Study
Survey stage– Gathering data on a random sample of consumers for
several different bases and descriptor variables
Analysis stage– Cluster analysis
Profiling stage
Later in the course, we will go through a specific application to a PDA product
1. Identify SegmentationVariables and Segmentthe Market
2. Develop Profiles ofResulting Segments
Market Segmentation
Survey Stage
Analysis Stage
Profiling Stage
Targeting
Opportunities for Profit * Size * Growth Potential
Competitive Intensity * Unmet Needs * Entry Barriers
• Firm’s Objectives• Firm’s Capabilities• Synergies across
Segments
TARGETMARKET
SELECTION
The Multi-factor Targeting ModelSegment Attractiveness• Market / Customer Factors Size, growth, life cycle stage, loyalty, price sensitivity, cyclicality in demand• Economic & technological factors Industry capacity, access to raw materials, barriers to entry & exit• Competitive factors• Environmental factorsFirm’s Position• Market position factors Relative share, change in share, company image, breadth of product line• Economic and technological factors Cost position, capacity utilization, techno- logical position• Capabilities Management, sales force, innovation, financial, channels• Interaction with other segments Market synergies, operating synergies
Select factors that drive segment attractiveness and the firm’s relative positionAttach a weight to each of the above factors. The weights reflect the relative importance of the factorsRate each segment on each of the above attractiveness and position factorsCompute the weighted sum to give you an index of the attractiveness of each segment and an index of the firm’s position in each of the segments.Select a mass marketing; multi-segment or niche marketing strategySequential targeting is also possible
The Multi-factor Targeting Model
GROW
Firm’s Position
High
Medium Low
Hig
hM
ediu
mL
ow
Seg
men
tA
ttrac
tiven
ess
BUILD
SUPPORTREINFORCE
MAINTAIN HARVEST DIVEST
Market Targeting
3. Evaluate the Attractiveness of each Segment
4. Select the TargetSegment(s).
Multi-factor Model
Firm resources & Strategy
Positioning Now that we have segmented the market and picked out
the segments we want to target with our offering, the next question is, how can we convince consumers in the target segment to choose our offering?
To do this, we have to convince this segment that our product / service / firm:
Meets (or exceeds) their needs Does it better than competitive offerings
This is the role of Positioning in a firm’s marketing strategy
Needs In evaluating their needs and how different offerings fulfill this needs,
consumers look at the “value equation” Firms typically think of the value equation as: Value = Performance Quality Price Performance Quality = f (Product Attributes / Features) However, consumers are more concerned with the performance
quality relative to what they want That is, consumers are more focused on the Benefits from the
product, or Perceived Quality Further, their Perceived Price could be different from the actual price
of the product (e.g., costs associated with the down time of photocopy machine)
Value equation from consumer perspective is: Value = Perceived Quality Perceived Price
= Benefits Perceived Price
ExampleSuspension
Engine Capacity
Wheelbase
Headroom
Turning Radius
Miles / Gallon
Maintenance
Sportiness
Roominess
Economy
Quality
Attributes Benefits Perceptions
ABCs of Positioning
Attributes. Understand the attributes of the product or service that drive the consumers’ perceived product or service …..
Benefits. The next step is to differentiate your product or service offering from those of your competitors’ via your ….
Communication of Value. You can change your advertising message, your channels of distribution, your brand name, etc...
• How does consumer become aware if need for your product / service?
• How does consumer find your offering?
• How does consumer make final selection?
• How does consumer order and purchase your product or service?
• How is your product / service delivered?
• How is your product installed?
• How is your product service paid for?
• How is your product stored?
• What is the customer really using the product for? (vinegar and coffee machines)
• What does customer need help with while using the product?
• What about returns and exchanges?
• How is product repaired or serviced?
• What happens when product is disposed of and no longer in use?
Finding the Attributes that Help in DifferentiationMapping the Consumption Chain - MacMillan & McGrath
HBR
Positioning Analysis
1. The key to positioning is determining the needs of consumers along (several ?) important benefit dimensions
2. Consumers perceptions of the existing services / products / firms in the market (including yours ?) along each of these dimensions
3. Inferring opportunities / threats from the way in which consumers perceive the set of products (in 2.) relative to their needs (in 1.)
An important tool in Marketing that summarizes all this information is called the Perceptual Map
A perceptual map typically focuses on the two most important attributes or benefits that consumers seek. Hence, it is a 2-D map with each dimension corresponding to the attributes / benefits
The perceptual map contains consumers’ Ideal Points (i.e., their needs from 1. above) along each of the dimensions
It also contains Brand Locations, i.e., consumers’ perceptions of the brands in the market along the two dimensions of interest
A Perceptual Map
Economy
Sportiness
Porsche
BMW
JaguarAcuraNSX
CelicaSupra Prelude
VWGolf
VolvoV70
TwingoPunto
CorollaCivic
Miata
5
2
1
3
4
6
1~6: Clusters of Ideal PointsRadius proportional to # of consumers
Collecting the Data Car 1 Car 2 Car 3 Ideal Point
Sporty (1-7)
Economy (1-7)
Sporty (1-7)
Economy (1-7)
Sporty (1-7)
Economy (1-7)
Sporty (1-7)
Economy (1-7)
Consumer 1
Consumer 2
Consumer 3
Consumer 4
Consumer 5
Consumer 6
Positioning Statement
For [target segment], the [product] [most important claim] because [single most important support]
For business travelers, Avis provides the best customer service, because it’s #2 and tries harder.
Questions to ask when Positioning
What position do we own? Find the answer in the marketplace
What position do we want? Select one that does not become obsolete
Who must we out-gun? Do we have enough money?
Spend enough to accomplish objective
Can we stick it out? Expect internal pressures for change
Do ads match our position? Don’t let creativity get in the way
Creating Value Through Positioning: Super Premium Vodka Defined by Federal regulations as “neutral
spirits so distilled or so treated after distillation with charcoal or other materials as to be without distinctive character, aroma, taste or color”
Stolichnaya (Russia); Absolut (Sweden); Finlandia (Finland); Denaka (Denmark); Elduris (Iceland); Tanqueray Sterling (UK)
Average price around $15 versus $8.50 for a 750 ml. bottle
“Ultra Premium” Stolichnaya Cristall priced at more than $20 per 750 ml.
Creating Value Through Positioning: Jaguar Automobiles For years Jaguar was a “much admired,
much ogled hunk of hardware that didn’t run very well or very often, but it reeked of prestige, status and the luxury image.”
Bought by Ford for $2.5-3.0 billion
Average buyer of XJ-6 is 48 years old, male, and makes more than $100000 per year
Positioning in the Cosmetics Industry
Why haven’t Japanese soap and cosmetic firms been as successful as Japanese automobile and electronics firms?
Unilever (Anglo-Dutch); P&G (American); L’Oreal (French) are international giants
Kao (Soaps) and Shiseido (Cosmetics) big Japanese firms R&D:
Shiseido 3% of sales Kao 4.5% of sales 4 scientists on Board of Directors P&G / Unilever 2.5% of sales
Image & Advertising Mike Perry, Personal Products Director Unilever describes his
job as “selling dreams in a bottle” Sam Sugiyama, Manager of the London Office of Shiseido says
that he spends almost nothing on advertising: “Technology and service mean success. Advertising is not a short cut.”
Beer Brand At a Party As his hobbies As his occupation
Budweiser Older guy Watch ball games,rake leaves
Businessman
Heineken Three piece Polo Rich guy
Michelob Smoke a pipe Philately Professional
Schlitz Flex muscles Busting kids Factory, servicestation worker
Pabst Drunk Square dancing, guns Jockey with 50 to 1odds
Miller Good guy, friendly Golf, tennis Junior executive
Carling Fishes butt out ofbeer and drinks it
Horse shoes Laborer
Example of Positioning: Beers as People
Positioning totally new products First Automobile: “Horseless Carriage” Similarly: “off-track” betting; “lead-free”
gasoline; “tubeless” tire “AGAINST” Position: Avis is only No. 2 in rent-
a-cars, so why go to us? We try harder “UGLY” Position: The 1970 VW will stay ugly
longer “UN” Position: 7Up: the Un-Cola Reposition Competitor: You have tasted the
German beer that is most popular in America (Lowenbrau). Now taste the German beer that is most popular in Germany (Beck's)
Positioning
5. Identify PossiblePositioning Conceptsfor each Target Segment
6. Select, Develop andSignal the ChosenPositioning Concept
Perceptual Map
Positioning Statement
Summary Segmentation is the concept that recognizes
diversity in the marketplace. The process of segmenting the market produces clusters of people who are similar
Targeting a segment involves the identification of segments to which marketing effort will be directed. Marketers must select targets for which their product will meet a need.
Positioning requires designing a company and product image and developing a marketing mix to promote the image to the target segment(s)
S-T-P process
1. Identify SegmentationVariables and Segmentthe Market
2. Develop Profiles ofResulting Segments
3. Evaluate the Attractiveness of each Segment
4. Select the TargetSegment(s).
5. Identify PossiblePositioning Conceptsfor each Target Segment
6. Select, Develop andSignal the ChosenPositioning Concept
Market Segmentation Market Targeting Product/Service Positioning