Customer Analysis

Segmentation, Targeting & Positioning

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.

• 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” ?

• 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).

Segmentation

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

• 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.

• 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.

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

Consumer 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. BrandBuilding

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. AttributeTiming

Occasion of use? Varies by product(Time of day..)

Form of the ValueEquation

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 Model

Segment 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 position

• Attach a weight to each of the above factors. The weights reflect the relative importance of the factors

• Rate each segment on each of the above attractiveness and position factors

• Compute 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 strategy

• Sequential 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

Competitive Leverage Analysis

Entry Tickets

Unmet Needs

HotButtons

Bells &Whistles

PennySavers

Importance

Dis

crim

inat

ing

Pow

er