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University of Washington EMBA ProgramNorth America 5
Marketing Management
“Segmenting Markets, Process and Assessment”
Instructor: Elizabeth Stearns
The Stearns Group
Purpose of Forming Market Segments
• To form the closest possible match between customers’ needs or wants and priorities, and the firm’s offer, such that customer satisfaction is maximized and competitive advantage is created. As a result, unit volume and/or price increases, and profits are enhanced
Market Segmentation
• The process of grouping actual and potential customers in a market for the purpose of selecting targets for effort and designing marketing strategies and programs for them
Market Segment
• A group of actual or potential customers with similar characteristics, who seek similar sets of benefits and attach the same importance to their satisfaction
Segmentation
• Dividing up the market into groups of consumers who share similar needs and who respond similarly to marketing mix variables
– Account for customers’ diverse needs and differing behaviors in its strategy
– Design the marketing mix to more closely match customer needs
– Improve efficiency and effectiveness of resource allocation
Questions to Ask of Individual Market SegmentsWorthwhile? How does the attractiveness of this segment compare
with other segments?
Is it an appropriate size to warrant our effort?
Can we expect a reasonable return relative to ourinvestment of time and resources?
Winable? Can we develop a property that enables us to deliverimportant customer benefits better than
competition?
Do we have the appropriate skills and resources (e.g., production, service, distribution, dealers) toimplement this concept?
Synergistic? Will our entry into this segment affect our position or performance in other market segments?
Who are your 3 million annual buyers?
Which of these Customers provide the highest profit?
Some Customers are Worth More!
$$$$ $$$ $$
$$$$
$$
$$ $$
$
$$
$$ $$$ $$$$$$
Economic Value to Keeping Customers
2% Retention equals approximately 10% reduction in costs
Why Customers Are More Valuable Over TimeC
omp
any
Pro
fit
Time
Base Profit
Increased Purchases & Higher Balances
Reduced Operating Costs
Referrals
Price Premium
CustomerAcquisitionCost
• Profit Comes from Different Sources“Zero Defections” Reichheld & Sasser, Jr.
Some Confusion on Who is Targetand Who Has Responsibility for Targets’ Future Sales
• Product/Brand
• Distribution specific
• Demo/Geo-demo specific
• Other? Profit, Future Value/Lifetime Value
GM Cars“Ladder of the American Dream”
$$$
Volume
Saturn?
GEO?
Chevrolet
Pontiac
Buick
Oldsmobile
Cadillac
$$ $ $$$ $$ $
So…who are they really?
A B
A B C
A C E
A D E
X Y Z
##
##
##
##
##$$$
Characteristic Quantity
Segments Defined by Shopping & Purchase Behavior?
• DM- Direct Marketing, D- Bricks and Mortar, I- Internet
D
DMD / DMDM / D
ID / DM / I
DM / D / I
I / D / DM
Segments Defined by Churn / Share of Wallet?(share of liver?!)
• “Never Churns”
• 1 to 2 Brands
• 2+ Brands
By Customer/Product Profitability ?
P1
Highlyprofitableproduct
P2Profitableproduct
P3Losingproduct
P4Mixed-bag
product
Products
++ ++
++Highprofitcustomer
++
-B/E: Avgcustomer
+
--
Losingcustomer
S1 S2 S3
Customers
By Communications Stream/Response?
Person
Phone
Fax
Web
TV
Radio
Outdoors
POS
Person Mail Phone Fax email Web
How
Cos
. Com
mu
nic
ateHow Customers Respond
By Communications Stream/Response?
Person
Phone
Fax
Web
TV
Radio
Outdoors
POS
Person Mail Phone Fax email Web
How
Cos
. Com
mu
nic
ateHow Customers Respond
Dr. Gary Bridge, IBM
Wireless
Value Segmentation Approach
Are the groups of
appropriate size for us to
consider?
Are the groups
measurable?
Are there significant differences
among groups in segment attempt?
Are benefits sought by customers
understood?
Are customers
perceptions of relative
importance understood?
Are there differences
among customers in importance of benefits
sought?
Conduct Market
Research
Start
Stop
Collapse or group finer
Try different groupings
Targeting Decision
Try different groupings
1
2
3 4
5
6
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
Frank Horner
Thank You!
Market Segmentation Matrix Example: French Fries
Fastfood
Corporate Tablecloth
Institutions
Government
Priority ordering
Tastes real like in Paris
Easy to hold ,(Easy to serve, cook)Easy to store, ship
Affordable
Customer needs/required benefits
Market Segmentation Matrix Example: French Fries
Fastfood
Corporate Tablecloth
Institutions
Government
Priority ordering
Tastes real like in Paris
Easy to hold ,(Easy to serve, cook)Easy to store, ship
Affordable
4
2 3
3
1 4 4
3 2 3
2 2 3 2
4 1 4 1 1
Customer needs/required benefits
1
Market Segmentation Matrix Example: French Fries
Fastfood
Corporate Tablecloth
Institutions
Government
Priority ordering
Tastes real like in Paris
Easy to hold ,(Easy to serve, cook)Easy to store, ship
Affordable
4
2 3
3
1 4 4
3 2 3
2 2 3 2
4 1 4 1 1
Customer needs/required benefits
1
Segment 1 Segment 2
A Customer Loyalty Segmentation Scheme
Your Customers Competitors’ Customers
Loyal Switchers LoyalSwitchers
USAGE
Heavy Medium Light
USAGE
BEHAVIOR
Customer Loyalty Paradigm
Heavy
Medium
Light
Switchers Loyal
USAGE
BEHAVIOR
Customer Loyalty Paradigm
Heavy
Medium
Light
Switchers Loyal
USAGE
BEHAVIOR
Customer Loyalty Paradigm
Heavy
Medium
Light
Switchers Loyal
Inactive orex-customers
Customer Development Over Time
PartnersAdvocatesClientsRepeat
customersFirst-timecustomers
Suspects
Prospects
Disqualifiedprospects
©2000 Prentice Hall
Strategic Focus and Customer Targeting
ROI
Improve Efficiency
Improve Price
Reduce Investment
Change Sales Mix
Reduce Costs
Strategic Focus and Customer Targeting
ROI
Increase SalesVolume (units)from customers
ImproveEfficiency
ImprovePrice
ReduceInvestment
ChangeSales Mix
ReduceCosts
Retain existingcustomers
More business fromcurrent customers
Non Users
Competitors'customers
Set Business and Customer Objectives by Segment
Theory Practice Reality Break-Even
Profit
Investment Spend
