Segmentation & Targeting Segmentation is the process of dividing the market into consumer groups with similar needs and developing marketing programs that meet those needs. - The most successful firms drive their business based on segmentation. Targeting is the process of selecting that segment or those segments in a market to serve Why Segmenting a Market? A. Market is not homogeneous in terms of needs, wants, problem solutions, benefits sought, and usage occasions. B. Market segmentation drives market strategy. Example: The Corporate Headache Which pain reliever to offer and to whom? 1
A. Market is not homogeneous Assume that there are two customers. From marketing research we find out that they both believe that there are two key benefits that they look at in selecting a pain reliever for their headache: - Effectiveness -- how quickly it relieves them of their headache - Gentleness -- side effects (e.g. upset stomach) When asked about importance of these two benefits in their selection of a pain reliever, they give the following importance ratings on a 5-point scale (1 = not important at all, 5 = very important) Customer Effectiveness Gentleness A 5 2 B 2 5 Average 3.5 3.5 Gentleness Customer A gets severe headaches that must be relieved even if the product upsets stomach Customer B is a heavy user and is concerned with side effects 5 4 3 2 1 Customer B 1 2 3 4 5 Effectiveness Average Customer Customer A Conclusion: Market is not homogeneous (in needs, wants, benefits) A pain reliever designed for the average customer may not appeal to either one of the two customers Aggregate data on benefit importance may be misleading 2
B. Market segmentation drives market strategy Now suppose we conduct a scientific survey of potential customers who get headaches and we ask for their importance rankings of these two benefits. Although everybody gives different ratings, many of them tend to cluster either around customer A or customer B. Further information yields that these two clusters differ in terms of income and age 5 4 Customer B Average age = 65 Average income = $35K Gentleness 3 2 Customer A Average age = 32 Average income = $45K 1 1 2 3 4 5 Effectiveness Conclusions - Rather than designing a different product for each customer, it may be economically feasible and profitable to offer two products -- one each for cluster A and cluster B. - Different marketing strategies may be required to reach each cluster of customers. Should a firm go after both segments? Where can it achieve competitive advantage? Market segmentation drives market strategy 3
The Segmentation Process A market segment is a group of actual or potential customers who can be expected to respond in a similar way to a product or service offer. Market segmentation is the process of dividing customers with different product valuations into groups containing customers with similar product valuations. A target market is a market that a company chooses to serve effectively and profitably. A Segmentation Model Segmentation bases should describe why segments differ, the criteria of interest (e.g., needs, preferences, decision processes). Headache: effectiveness and side effects Segment descriptors should help marketers find and reach segments and in particularly to discriminate among segments along the criterion (basis) of interest. (Business markets) Headache: age and income (Consumer markets) Industry Age/Income Size Education Location Profession Life styles Media habits Example. Need: solar water-heating system 4
Relevant Segmentation Descriptor Variable A: Climatic Region 1. Snow Belt 2. Moderate Belt 3. Sun Belt Fraction of Customers Segment 1 Segment 2 Segment 3 0 100% Likelihood of Purchasing Solar Water Heater (a) Irrelevant Segmentation Descriptor Variable B: Education 1. Low Education 2. Moderate Education 3. High Education Fraction of Customers Segment 1 Segment 2 Segment 3 0 100% Likelihood of Purchasing Solar Water Heater (b) 5
Segmentation: Phase 1 Segment the market using demand variables (e.g. customer needs, wants, benefits sought, problem solutions, and usage situations) 5- Steps: Step 1: Outline the role of market segmentation in the company's strategy (why we segment the market? how it will help to establish a competitive advantage?) Step 2: Select a set of needs-segmentation bases, the most useful variables for achieving the strategic goals. Step 3: Select the mathematical procedure for aggregating the customers into segments. Step 4: Specify the maximum number of segments. Step 5: Search across those segments to determine how many to target.. Segmentation: Phase 2 Describe the market segments identified using variables that highlights the profit potential (purchase power and size) of each segment helps the company to reach and serve the segments 6
Variables to Segment and 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, industry. 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 & substitute substitute 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 & characteristics involvement purchase, of decision making group, use of attitudes and knowledge outside consultants, purchasing about 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. Which Segments to Serve? Phase 3: Segment Attractiveness Criteria Criterion I. Size and Growth Examples of Consideration Bigger, faster growing segments II. Structural Attractiveness Porter identified a set of 5 competitive factors: - the threat of the existing competitors - the new entrants - pressure from substitute products - customer bargaining power - supplier bargaining power. 7
Phase 4: Select Target Segments Five options for targeting segments: to concentrate on a single segment to select segments in which to specialize to provide a range of products to a specific segment (market specialization) to provide a single product to many segments (product specialization) to cover the full market 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 8
Market Definition Customer-Need Set 1 (Market 1) Product 1 Technology A Customer-Need Set 2 (Market 2) Technology B Common customer needs define a market not a product. Implications 1. Segmentation defines common customer needs. 2. Those common needs may be satisfied by similar or dissimilar technologies or have different solutions. 9
Segmentation Analysis: The Mathematical Methods Data reduction: Factor analysis Segment formation: Cluster analysis Segment description: Discriminant analysis Forming Segments by Cluster Analysis Define a measure of similarity (or dissimilarity-distance) between all pairs of elements (individuals, families, decision making units, etc.). Develop a method for assigning elements to clusters or groups. 10
Doing Cluster Analysis a = distance from member to cluster center b = distance from I to III Dimension 2 III b Perceptions or ratings data from one respondent I a II Dimension 1 Clustering Method: Producing Dendograms Graphically displays the distances between clusters. If the vertical lines represent clusters, the y-axis gives the distance between the clusters that are connected by horizontal lines on the top. If you reduce the number of segments by one, you will combine the two clusters that have the shortest distance between them. The dendogram is useful for determining the number of distinct segments in the market. We should look for segments that are well separated from each other. 11
Clusters Example 0.00 Distance 2.84 1.53 0.83 0.67 0.00 Distance 2.84 1.53 0.44 0.83 0.31 1 5 3 6 2 7 4 Cluster 1 3 2 4 Cluster Seven-cluster solution Four- cluster solution Discriminant Analysis for Describing 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. 12
CLUSTER ANALYSIS SOFTWARE RESULTS/VIEW DIAGNOSTIC SCREEN: THE MEAN OF EACH VARIABLE IN EACH CLUSTER Variable Overall CL1 CL2 CL3 CL4 ---------- ----------- ----------- ----------- ----------- ----------- Innovator 3.63 2.14 3.33 5.33 3.25 Use_Pager 3.46 1.73 4.72 3.63 4.88 Use_Phone 3.72 5.05 2.28 4.08 2.25 Use_Schdl 3.89 4.36 2.44 5.08 2.25 Inf_Passiv 3.56 3.27 3.50 3.17 5.63 Inf_Active 4.01 3.36 3.72 4.46 5.13 Remote_Loc 4.50 4.64 4.83 3.96 5.00 Wireless 2.90 1.36 5.17 1.83 5.25 Share_Inf 3.40 3.77 2.83 2.71 5.75 Monthly 20.3 11.8 28.9 14.8 40.6 Invoice 993. 518. 683..13 6E+04.191E+04 Cluster Proportion.306.250.333.111 CHARACTERIZATION OF CLUSTERS CL1 -- Phone users who do not use pager and do not need Wireless CL2 -- Pager uses who need wireless but do not need phone CL3 -- Innovators who need schedular, but do not need wireless CL4 Pager users in remote locations who need wireless and exchange information frequently and rapidly 13
Means for variables (DESCRIPTORS) in each cluster. It enable demographic descriptions of customers. Variable Overall CL1 CL2 CL3 CL4 ---------- ---------- ---------- ---------- ---------- ---------- PDA.306.185.150.765.125 Professnl.236.111.150.647.000 Income 45.653 40.185 40.950 64.176 36.500 Bus_Week.292.259.150.647.000 Education 2.347 2.296 2.000 3.059 1.875 M_Gourmet.097.037.050.294.000 PC_Mag.389.333.350.588.250 Construct.125.074.050.059.625 Field&Stream.167.074.150.118.625 Emergency.083.037.050.059.375 Sales.292.556.200.118.000 Service.181.111.500.000.000 Age 36.361 35.778 38.050 35.765 35.375 Cluster Proportion.375.278.236.111 The exercise (#4) has 3 questions : 1. Run cluster analysis to identify the number of distinct segments (to obtain the dendogram) 2. From the Results/View Diagnostics screen characterize the Clusters 3. Use the Results/View Diagnostics screen of the Discrimination option to target the segments you picked in question 2. 14