Segment–1

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–2

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–3

Primary Characteristicsof 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) (Consumer markets)

Industry Age/IncomeSize EducationLocation ProfessionOrganizational Life styles structure Media habits

Segment–4

A Two-Stage Approachin 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–5

Relevant Segmentation Descriptor

Variable A: Climatic Region 1.Snow Belt

2.Moderate Belt 3.Sun Belt

Fraction of Customers

Likelihood of Purchasing Solar Water Heater (a)

0 100%

Segment 1Segment 2

Segment 3

Segment–6

Likelihood of Purchasing Solar Water Heater (b)

Irrelevant Segmentation Descriptor

Fraction of Customers

0 100%

Variable B: Education 1.Low Education 2.Moderate Education 3.High Education

Segment 1Segment 2

Segment 3

Segment–7

Variables to Segmentand Describe Markets

Consumer Industrial

Segmentation Needs, wants benefits, Needs, wants benefits, solutions to Bases solutions to problems, problems, usage situation, usage rate,

usage situation, usage rate. size*, industrial*.

Descriptors Age, income, marital status, Industry, size, location, current Demographics family type & size, supplier(s), technology utilization,

gender, social class, etc. etc. Psychographics Lifestyle, values, & Personality characteristics of

personality characteristics. decision makers. Behavior Use occasions, usage level, Use occasions, usage level,

complementary & complementary & substitutesubstitute products used, products used, brand loyalty, orderbrand loyalty, etc. size, applications, etc.

Decision Making Individual or group Formalization of purchasing(family) choice, low or high procedures, size & characteristicsinvolvement purchase, of decision making group, use ofattitudes and knowledge outside consultants, purchasingabout product class, price criteria, (de)centralizing buying,sensitivity, etc. price sensitivity, switching costs, etc.

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

Segment–8

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–9

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–10

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–11

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–12

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–13

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–14

Market Definition

Common customer needs define a market not a product.

Product 1

Technology A

Technology B

Customer-NeedSet 1 (Market 1)

Customer-NeedSet 2 (Market 2)

Segment–15

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–16

Market Definition Approaches

Customer-Behavior:

Demand cross elasticity

Brand/product switching

Perception/Judgment:

Engineering/technological substitution

Customer judgments/perceptual mapping

Segment–17

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–18

Electric Typewriter Market

1980 1981 1982 1983 1984 1985

Shipments

A (Us) 403,027 495,192 548,905 550,351 541,388 515,000

B 369,916 388,520 349,396 323,005 342,197 297,000

Other 367,057 324,010 343,885 370,374 202,495 129,070

Total 1,140,000 1,207,722 1,242,186 1,243,730 1,086,080 941,070

Market Shares (%)

A (Us) 35.4 41.0 44.2 44.2 49.8 54.7

B 32.4 32.2 28.1 26.0 31.5 31.6

Other 32.2 26.8 27.7 29.8 18.6 13.7

Segment–19

1980 1981 1982 1983 1984 1985

Shipments

A (Us) 403,027 495,192 548,905 550,351 541,388 515,000

B 369,916 388,520 349,396 323,005 342,197 297,000

Other Electric 367,057 324,010 343,885 370,374 202,495 129,070Electronic Word

Processors 60,040 112,220 209,800 392,352 733,699 1,372,016

Total 1,200,040 1,319,942 1,451,986 1,636,082 1,819,778 2,313,086

Market Shares (%)

A (Us) 33.6 37.5 37.8 33.6 29.8 22.3

B 30.8 29.4 24.1 19.7 18.8 12.8

Other Electric 30.6 24.5 23.7 22.6 11.1 5.6Electronic Word

Processors 5.0 8.5 14.4 24.0 40.3 59.3

Word Processor Market

Segment–20

Market Definitionby Switching Behavior

Current Purchase Occasion

Diet Diet Diet Coke Coke Pepsi Pepsi Sprite Sprite Total

Coke 53% 9% 27% 4% 5% 2% 100%

Last Diet Coke 12% 61% 4% 15% 2% 5% 100%

Purchase Pepsi 24% 3% 58% 9% 5% 1% 100%

Occasion Diet Pepsi 4% 14% 11% 63% 2% 6% 100%

Sprite 21% 2% 17% 3% 52% 6% 100%

Diet Sprite 2% 15% 2% 12% 7% 61% 100%

Segment–21

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–22

SegmentationIdentify segments

TargetingSelect segments

PositioningCreate 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

How STP Adds Value to a FirmHow STP Adds Value to a Firm

Segment–23

STPing the Market for Eggs

Segments: Disinterested consumersCasual Egg Users

Health conscious consumersEnthusiastic users

Profiles: BeliefsAttitudesLifestylesHealth/Nutrition consciousnessMedia habitsConsumption habits

Demographics

—Frank and Phillips,Agribusiness, July 1990

Segment–24

Targeting and Positioning

Health Conscious Strategy Casual Users Consumers Enthusiastic Users

Positioning Convenient and Ideal and natural Traditional food withuseful in many food, good for the many applications.situations. family. Very convenient, good

for the family.

Copy Informal Health-oriented Larger family setting.Visuals settings. personality or Major meal, possibly

situation. with guests.

Copy Easy pace, Fresh, clean Reinforcing, emphasisTonality relaxed setting, very on benefits and wide

atmospher. natural. use.

Promotions Reminders at Matter-of-fact Simple reminders tocheckout, egg information on the buy eggs.display, or nutritional valuedairy. and health

attributes of eggs inrecipes and leaflets.

Segment–25

Overview of Marketing Engineering Methods for STP

Clustering and discriminantanalysis (PDA2001 exercise)

Choice-based segmentation(ABB Electric)

Perceptual mapping(G20 exercise)

Segment–26

. ..D

......

Segmentation (for Carpet Fibers)

A,B,C,D: Location of segment centers.

Typical members:

A: schools B: light commercial C: indoor/outdoor

carpeting D: health clubs

Distance betweensegments C and D

.... ..

Strength(Importance)

Water Resistance(Importance)

....... .A

....... .. ...

....... .. ...

...

.... CB

Perceptions/Ratings for one respondent:Customer Values

.

Segment–27

....... .. ...

....... .... .

Water Resistance(Importance)

Targeting

Segment(s) to serve

....... .

..

....... .. ...

Strength(Importance)

Segment–28

Product Positioning

.Comp 1

Comp 2

Us

Water Resistance(Importance)

Positioning

. .Strength

(Importance)

....... .. ...

....... .... .

....... .. ...

Segment–29

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 (“Only product/service with XXX”)

2. Difference (“More than twice the [feature] vs.[competitor]”)

3. Similarities (“Same functionality as [competitor]; lower price”)

What are you telling your targeted segments?

Segment–30

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–31

Total Customer Value =

Functional Value

(What does this product do for me?)

+

Supplier/Service Value

What does the product mean to me?

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

Price/Performance

AdvertisingSelling

Service Efforts

Customer Needs and Customer Value Measurement

PresentState

Behaviors

Ignore

Postpone

Engage inPurchase Process

DesiredState

Functionaland

EconomicNeeds

Perceivedand

PsychologicalNeeds

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

CustomerValueMeasurementApproaches

ObjectiveMeasuresof Value

PerceptualMeasuresof Value

BehavioralMeasuresof Value

Customer Needs and Buying Process

Motivation

Segment–33

Customer Value Assessment Procedures

Attitude-Based Behavior-Based Inferential/Value Based • Choice models • Internal engineering assessment • Neural networks • Indirect survey questions • Discriminant analysis • Field value-in-use assessment

Indirect/(Decompositional Methods)Direct Questions • Conjoint analysis

• Preference Regression

Unconstrainted Constrained/Compositional Methods • Focus groups • Multiattribute value analysis • Direct survey questions • Benchmarking • Importance and attitude ratings • Rule-based system/AI/expert systems

CustomerValue

Segment–34

Segmentation: Methods Overview

Factor analysis (to reduce data before cluster analysis).

Cluster analysis to form segments.

Discriminant analysis to describe segments.

Segment–35

Cluster Analysis forSegmenting 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–36

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–37

Doing Cluster Analysis

Dimension 2

Dimension 1

•

••

••

••

••

•• •

Perceptions or ratings datafrom one respondent

III

aI II

b

a =distance from member to cluster center

b =distance from I to III

Segment–38

Single Linkage Cluster Example

Distance Matrix

Co#1 Co#2 Co#3 Co#4 Co#5

Company #1 0.00Company #2 1.49 0.00Company #3 3.42 2.29 0.00Company #4 1.81 1.99 1.48 0.00Company #5 5.05 4.82 4.94 4.83 0.00 Resulting

Dendogram

1

2

3

4

5

1 2 3 4 5

Company

Distance

Segment–39

Ward’s Minimum Variance Agglomerative Clustering Procedure

First Stage: A = 2 B = 5 C = 9 D = 10 E = 15

Second Stage: AB = 4.5 BD = 12.5

AC = 24.5 BE = 50.0

AD = 32.0 CD = 0.5

AE = 84.5 CE = 18.0

BC = 8.0 DE = 12.5

Third Stage: CDA = 38.0 CDB = 14.0 CDE = 20.66 AB = 5.0

AE = 85.0 BE = 50.5

Fourth Stage: ABCD = 41.0 ABE= 93.17 CDE = 25.18

Fifth Stage: ABCDE = 98.8

Segment–40

A

98.80

Ward’s Minimum Variance Agglomerative Clustering Procedure

B C D E

25.18

5.00

0.50

Segment–41

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–42

Profiling Clusters

Two Cluster Solution for PC Data: Need-Based Variables

size power officeuse

LAN storageneeds

color periph.wideconnect.

budget

–1

1

0

Business

Design

Means of Variables

Segment–43

Which Segments to Serve?—Segment Attractiveness Criteria

Criterion Examples of Considerations

I. Size and Growth1. Size • Market potential, current market penetration2. Growth • Past growth forecasts of technology change

II. Structural Characteristics

3. Competition • Barriers to entry, barriers to exit, position ofcompetitors, ability to retaliate

4. Segment saturation • Gaps in the market5. Protectability • Patentability of products, barriers to entry6. Environmental risk • Economic, political, and technological change

III. Product-Market Fit7. Fit • Coherence with company’s strengths and image8. Relationships with • Synergy, cost interactions, image transfers, segments cannibalization9. Profitability • Entry costs, margin levels, return on investment

Segment–44

Selecting Segments to Serve

Low Average High

Weak

Strong

Medium

Segment Attractiveness

Firm’s Competitiv

e Position

A

E

D

C

B

Segment–45

Discriminant Analysis forDescribing 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–46

Two-Group Discriminant Analysis

Need for Data Storage

PriceSensitivity

XXOXOOO XXXOXXOOOO XXXXOOOXOOO XXOXXOXOOOO XXOXOOOOOOO

X-segment

O-segmentx = high propensity to buyo = low propensity to buy

Segment–47

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–48

Behavior-Based Segmentation

Traditional segmentation

(eg, demographic,psychographic)

Needs-based segmentation

Behavior-based segmentation

(choice models)

Segment–49

Choice Models

1. Observe choice:

(Buy/not buy => direct marketersBrand bought packaged goods, ABB)

2. Capture related data: demographics

attitudes/perceptions

market conditions (price, promotion, etc.)

3. Link

1 to 2 via “choice model” model revealsimportance weights of characteristics

Segment–50

Choice Models vs Surveys

With standard survey methods . . .

preference/ importancechoice weightsperceptions

predict observe/ask observe/ask

But with choice models . . .

importance choice weights perceptions

observe infer observe/ask

Segment–51

(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.

Uij = Vij + ij

where:

Uij =Utility that customer i has for supplier j’s product.

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

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

Segment–52

Attributes in ABB’sChoice-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–53

Specification of the Deterministic Component of Utility

Vij = Wk bijk

k

where:

i =an index to represent customers, j is an index to represent suppliers, and k is an index to represent attributes.

bijk =i’s perception of attribute k for supplier j.

wk =estimated coefficient to represent the impact of bijk on the utility realized for attribute k of supplier j for customer i.

Segment–54

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

If customer’s past choices are assumed to reflect the principleof utility maximization and the error (ij) has a specific formcalled double exponential, then:

eVij

pij = –––––– eVik

k

where:

pij =probability that customer i chooses supplier j.

Vij =estimated value of utility (ie, based on estimates of bijk) obtained from maximum likelihood estimation.

^

^

^

Segment–55

What Does This Result Imply?

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

eVij eVij + a

pij = –––––– = –––––– eVik eVik + a

k k

The marginal impact of an attribute is highest when the probability of choosing an option j is 0.5.

^

^

^

^

Segment–56

What Does This Result Imply? (cont’d)

dP

dbw P Pil

ijkk il il * *( )1

Marginal Impactof an Attribute on the Probability of

Choosing an Option

Probability of Choosing the Option

0.5

Segment–57

Key idea: Segment on the basis of probability of choice—

1.Loyal to us

2.Loyal to competitor

3.Switchables: loseable/winnable customers

Applying the MNL Model in Segmentation Studies

Segment–58

Switchability Segmentation

Current Product-Market by Switchability(ABB Procedure)

Questions: Where should your marketing efforts be focused?How can you segment the market this way?

Loyal to Us Losable

Winnable Customers

(business to gain)

Loyal toCompetitor

Segment–59

Using Choice-Based Segmentation for Database Marketing

A B C DAverage Customer

Purchase Purchase ProfitabilityCustomer Probability Volume Margin = A B C

1 30% $31.00 0.70 $6.51

2 2% $143.00 0.60 $1.72

3 10% $54.00 0.67 $3.62

4 5% $88.00 0.62 $2.73

5 60% $20.00 0.58 $6.96

6 22% $60.00 0.47 $6.20

7 11% $77.00 0.38 $3.22

8 13% $39.00 0.66 $3.35

9 1% $184.00 0.56 $1.03

10 4% $72.00 0.65 $1.87

Segment–60

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–61

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–62

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–63

Choosing aValue Assessment Method

MethodCriterion Value Behavior Compositional or Unconstrained

Based Based Decompositional

Amount of customer High Low Medium Low information needed

Number of customers Low High Medium+ Any

Good in dynamic/ Yes No Partly* Partly* changing markets?

Past purchase data Not Needed Not Not available? necessary necessary necessary

Analysis time frame Long Medium Long/Medium Short

Cost Very high/ Medium High Lowrespondent

Insight Very high Medium High Low

Appropriate for lead users? Yes No Yes No

Predictive of behavior? High Moderate Moderate Low

* If customers can reliably report how they will behave after change.

Segment–64

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)