SEGMENT2ndEdition

8/8/2019 SEGMENT2ndEdition

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Segment±1

Market Segmentation

Market segmentation is the

subdividing of a market into

distinct subsets of customers.

Segments

Members are different betweensegments but similar within.





Segment±3

Primary Characteristicsof Segments

Bases ² characteristics that tell us why segmentsdiffer (eg, needs, preferences, decision

processes).

Descriptors ² characteristics that help us find andreach segments.

(Business markets) (Consumer markets)

Industry Age/Income

Size Education

Location Profession

Organizational 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 Region1. Snow Belt2. 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: Education1. Low Education2. Moderate Education

3. High Education

Segment 1

Segment 2

Segment 3



Segment±7

Variables to Segmentand Describe Markets

Consumer Industrial

S egmentation Needs, wants benefits, Needs, wants benefits, solutions toBases solutions to problems, problems, usage situation, usage rate,

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

Descriptors Age, income, marital status, Industry, size, location, currentDemographics 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, order

brand 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 of attitudes 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 M arriott H otel u sed to be a M arriott H otel: An

u pscale hotel catering to bu siness people, pleasure

seekers and international and grou p travelers. T oday, besides the M arriott H otels ( the company¶s

major bu siness), there are M arriott Suites,

Residence I nns, C ourtyards b y M arriott and

F airfield I nns²each serving a smaller, targeted

segment of the market.

² Lenneman and Stanton, ³Mining for

Niches,´ Bu siness H orizons.



Segment±9

Segmentation in Action

W e segment our cu stomers b y letter vol ume, b y postage

vol ume, b y the type of equipment they u se. T hen we

segment on whether they bu y or lease equipment.

Based on this knowledge, we target our marketing

messages, fine t une our sales tactics, learn which

benefits appeal to which cu stomers and zero in on key

decision makers at a company.

² K athleen Synnot, VP, Worldwide Marketing

Mailing Systems Division, Pitney Bowes, Inc.

[quoted in M arketing M asters (Walden and Lawler)]



Segment±10

Customers¶ Diverse Needs RequireDiverse Channels

K odak increases customer contact and supportwith a three tiered distribution system.

. . . Business Imaging Division created threeavenues for marketing microfilm, supplies andimaging systems and software:

direct sales reps (for more complex systems);

brokers and distributors (for film sales and delivery);

Components Marketing Division (to sell to systemintegrators and VARs).

² Bu siness M arketing



Segment±11

Ad in London Newspapers, 1900

M en wanted for hazardou s journey.

S mall wages, bitter cold, long months of complete darkness, constant danger, safe

ret urn doubtf ul. H onor and recognition

in case of success.

² Ernest Shackleton, Arctic Ex plorer

Did it work?



Segment±12

Segmentation

I f you¶re not thinking segments, you¶re not

thinking. T o think segments means youhave to think about what drives cu stomers,

cu stomer grou ps, and the choices that are

or might be available to them.

² Levitt, M arketing I magination



Segment±13

Segmentation Marketing Implies a³Market´

A market consists of all the potential

cu stomers sharing a particular need or

want who might be willing and able to

engage in e xchange to satisfy that need

or want.

²K otler, M arketing M anagement



Segment±14

Market Definition

Common customer needs define a market not a product.

Product 1

Technology A

Technology B

Customer- Need

Set 1 (Market 1)

Customer- Need

Set 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 atsupermarket 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/technologicalsubstitution

Customer judgments/ perceptual mapping



Segment±17

Why is Market DefinitionImportant?

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 369,916 388,520 349,396 323,005 342,197 297,000Other Electric 367,057 324,010 343,885 370,374 202,495 129,070

Electronic Word

Processors60,040 112,220 209,800 392,352 733,699 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 5.6

Electronic WordProcessors

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 DietCoke 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

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 meettheir 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 consumers

Casual Egg Users

Health conscious consumers

Enthusiastic users

Profiles: Beliefs

Attitudes

Lifestyles

Health/ Nutrition consciousness

Media habitsConsumption habits

Demographics

²Frank and Phillips, A gribu siness, July 1990



Segment±24

Targeting and Positioning

Health ConsciousStrategy Casual Users Consumers Enthusiastic Users

P ositioning Convenient and Ideal and natural Traditional food withuseful in many food, good for the many applications.

situations. family. Very convenient, goodfor the family.

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

situation. with guests.

C opy Easy pace, Fresh, clean Reinforcing, emphasisT onality relaxed setting, very on benefits and wide

atmospher. natural. use.

P romotions 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 MarketingEngineering Methods for STP

Clustering and discriminant

analysis (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: schoolsB: light commercialC: indoor/outdoor

carpetingD: 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 (³Only product/service with XXX´)

2. Difference (³More than twice the [feature] vs.

[competitor]´)3. Similarities (³Same 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¶sstrategy, given its capabilities and the likelyreactions 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

Advertising

Selling

Service Efforts



Customer Needs and Customer Value Measurement

Present

State

Behaviors

Ignore

Postpone

Engage in

Purchase Process

y

Desired

State

Functional

and

Economic

Needs

Perceived

and

Psychological

NeedsSearch for options

Evaluate options

Choose optionPurchase Option

Use Option

Customer

Value

Measurement

Approaches

Objective

Measures

of Value

Perceptual

Measures

of Value

Behavioral

Measuresof Value

Customer Needs and Buying Process

Motivation



Segment±33

Customer Value AssessmentProcedures

Attit ude-Based Behavior-Based I nferential/Val ue Based

Choice models Internal engineering assessment Neural networks Indirect survey questions Discriminant analysis Field value-in-use assessment

I ndirect/ (Decompositional M ethods ) Direct Questions Conjoint analysis

Preference Regression

Unconstrainted C onstrained/ C ompositional M ethods Focus groups Multiattribute value analysis Direct survey questions Benchmarking Importance and attitude ratings Rule-based system/AI/expert

systems

Customer

Value



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 ³Ward¶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 ³outliers.´

Selecting a clustering procedure

Hierarchical clustering (e.g., Single linkage, averagelinkage, 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 data

from one respondentIII

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 VarianceAgglomerative 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 VarianceAgglomerative Clustering Procedure

B C D E

25.18

5.00

0.50



Segment±41

Interpreting Cluster AnalysisResults

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 office

use

LA N storage

needs

color periph.wide

connect.

budget

± 1

1

0

Bu siness

Design

Means of

Variables



Segment±43

Which Segments to Serve? ²Segment Attractiveness Criteria

Criterion Examples of Considerations

I. S ize and Growth

1. Size Market potential, current market penetration

2. Growth Past growth forecasts of technology change

II. S tr uct ural C haracteristics

3. Competition Barriers to entry, barriers to exit, position of competitors, ability to retaliate

4. Segment saturation Gaps in the market

5. Protectability Patentability of products, barriers to entry

6. Environmental risk Economic, political, and technological change

III. P rod uct- M arket F it

7. Fit Coherence with company¶s strengths and image

8. Relationships with Synergy, cost interactions, image transfers,segments cannibalization

9. Profitability Entry costs, margin levels, return on investment



Segment±44

Selecting Segments to Serve

Low Average High

Weak

Strong

Medium

Segment Attractiveness

Firm¶s

Competitive

Position

A

E

D

C

B



Segment±45

Discriminant Analysis forDescribing Market Segments

Identify a set of ³observable´ variables

that helps you to understand how to

reach and serve the needs of selected

clusters.

Use discriminant analysis to identify

underlying dimensions (axes) thatmaximally differentiate between the

selected clusters.



Segment±46

Two-Group Discriminant Analysis

Need for Data Storage

Price

Sensitivity

XXOXOOO

XXXOXXOOOO

XXXXOOOXOOO

XXOXXOXOOOOXXOXOOOOOOO

X-segment

O-segment x = high propensity to buy

o = low propensity to buy



Segment±47

Interpreting DiscriminantAnalysis 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 (³hit

rate´) in each cluster?

Can you identify good descriptors to finddifferences 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 ³choice model´ model revealsimportance weights of characteristics



Segment±50

Choice Models vs Surveys

With standard survey methods . . .

preference/ importance

choice

weights v perceptions

predict observe/ask observe/ask

But with choice models . . .

importance

choice weights v perceptions

observe infer observe/ask



Segment±51

(ABB) Behavior-BasedSegmentation Model

Stage 1: Screen products using key attributes to identify the³consideration set of suppliers´ for each type of customer.

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

U ij = V ij + I ij

where:

U ij = Utility that customer i has for supplier j¶s product.

V ij = Deterministic component of utility that is a function of product andsupplier attributes.

I 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

K nowledgeable salespeople

Maintenance requirement

Ease of installation

Warranty



Segment±53

Specification of the DeterministicComponent of Utility

V ij = § W k bijk

k

where:

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

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

wk = estimated coefficient to represent theimpact 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 (I i j) has a specific formcalled double exponential, then:

eV ij

pij = ±±±±±±

§ eV ik

k

where:

pij = probability that customer i chooses supplier j.

V ij = estimated value of utility (ie, based on estimates of b

ijk ) obtained from maximum likelihood estimation.

^

^

^



Segment±55

What Does This Result Imply?

Interval-level utility measurements are goodenough. That is:

eV ij eV ij + a

pij = ±±±±±± = ±±±±±±

§ eV ik § eV ik + a

k k

The marginal impact of an attribute is highestwhen the probability of choosing an option jis 0.5.

^

^

^

^



Segment±56

What Does This Result Imply? (cont¶d)

d

dbwil

ijk

k il il ! * *( )1

Marginal Impact

of an Attribute on

the Probability of

Choosing anOption

Probability of Choosing the Option

0.5



Segment±57

K ey idea: Segment on the basis of

probability of choice ²

1. Loyal to us

2. Loyal to competitor

3. Switchables:

loseable/winnable

customers

Applying the MNL Model inSegmentation 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

WinnableCustomers

(business to gain)

Loyal to

Competitor



Segment±59

Using Choice-Based Segmentationfor Database Marketing

A B C D

Average Customer

Purchase Purchase Profitability

Customer Probability Volume Margin = A v B v 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 SegmentationAnalysis

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 multiplemeasures)

Are the segments stable?

Does the study answer important marketing questions (product

design, positioning, channel selection, sales force strategy, salesforecasting)

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 theattractiveness of segments and the strengths of thefirm.

Use descriptor variables to develop a marketing plan to reach and serve chosen segments.

Develop mechanisms to implement thesegmentation strategy on a routine basis (one wayto do this is through information technology).



Segment±63

Choosing aValue Assessment Method

M ethod C riterion 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 Notavailable? 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.



Related Models Described in theMarketing Engineering Book

To develop ³needs´ variables

Conjoint Analysis (Chapter 7)

Other segmentation methods

Preference-based segmentation (PREFMAPin Chapter 4)

To help evaluate and select segments

Analytic Hierarchy Process (Chapter 6)

GE Planning Matrix (Chapter 6)

Documents

SEGMENT2ndEdition