Prizm is a segmentation scheme

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3 Segmentation 5Cs STP 4Ps

Product

Price

Place

Promotion

Customer

Company

Context

Collaborators

Competitors

Why do marketers think about segmentation? What are segments? What kinds of customer knowledge can be used to identify segments? How do you know a good marketing segmentation when you see one?

Managerial Checklist

Segmentation

Targeting

Positioning

26

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Chapter 3 Segmentation 27

3-1 Why Segment? Think about the last time you went to a new restaurant with a couple of your friends.1 What did people think? Was everyone in complete agreement about the quality of the food, the speed and the friendliness of the service, the prices, the ambience, all the elements of the restaurant? Probably not. Even among our friends, who tend to be similar to us, tastes and opinions vary. No one is right or wrong (well, okay, you were right, and your friends were wrong); it’s just a matter of differences in preferences and attitudes.

Psychologists would say that people have different mo- tivations. Recall from Chapter 2 Maslow’s hierarchy from biological needs to more abstract ones. Consumers pur- chase products to fulfill their needs. For example, consum- ers who are price conscious make purchase decisions using value as a primary attribute, whereas consumers with high needs for social approval purchase brands with much less of a concern for price.

Economists talk about this differently. They call it “ imperfect competition”; that is, consumers have unique needs and desires, so collectively a marketplace of consumers is heterogeneous. Differences in perceptions and preferences re- quire that different products be provided to satisfy the different segments’ needs. When a large, heterogeneous market is seg- mented into smaller, homoge- neous markets, a company can focus on meeting the demands of one or two of these groups and create something that is closer to what the customers want.

In marketing, we deal with all these customer differences through segmentation. An entrepreneur might create a new gadget, or a brand manager a new line extension, or a consul- tant a new piece of software, and each might hope that the whole world will like and buy their market offerings. But it won’t happen. And it’s not smart marketing to go after the whole market. Why not?

>> How could you provide a product that has high enough quality to satisfy premium customers and yet that is priced low enough for price-sensitive customers?

>> How could you afford to place your advertisement in the disparate media that different customers enjoy, (e.g., online, in teen or car or cooking magazines, on network television, etc.)? How many versions of the ad could you afford to create to communicate effectively to those dif- ferent audiences?

>> How could you develop a brand image that appeals to the masses who seek comfort in conformity and simulta- neously appeal to fashion setters or mavericks or other customers who seek to express their individualism? The goals are incompatible.

Instead of trying to appeal to the entire marketplace, the smart marketer and smart company will try to find out what different kinds of customers might like, and decide which groups they can serve best. That strategy begins with market segmentation.

3-2 What Are Market Segments? A market segment is a group of customers who share similar inclinations toward a brand. On a continuum from mass mar- keting to one-to-one marketing, market segmentation is in the middle (see Figure 3.1).

Mass marketing means that all customers are treated the same. This approach might sound attractive because

it simplifies the business (i.e., only one product needs to be of- fered), but it is usually unreal- istic (because customers differ). Think of a simple, commodity product like sugar. We should be able to mass market sugar; sugar’s sugar, right? Au con- traire, Pierre. There is “regular” or white sugar, fruit sugar, con- fectioner sugar, brown sugar,

liquid sugar, etc. Different types of sugar are available to meet the distinct needs of the different segments of bakers.

At the other extreme, one-to-one marketing means that each customer serves as his or her own segment. This approach sounds appealing from the customer’s point of view because the product would be tailored specially for each person’s idiosyncratic desires. Some manufactur- ers of computers and cars are experimenting with letting customers design their own models. Are these companies truly offering one-to-one tailored products? Not really. Dell’s website may seem to do so, but users are allowed to choose only from short lists of features. Nevertheless, even those variations result in a large number of combina- tions, such that one person’s computer seems rather dif- ferent from another’s. The result approaches one-to-one marketing.

Some companies tried mass customization but scaled back because it was not cost-effective or because it was dif- ficult to exert quality control. Yet increasingly technology

“A company can’t please all customers. But it can

delight a segment of them.”

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28 Part 1 Marketing Strategy

offers the benefits of scales of economy. Financial ser- vices don’t need to have set rates; instead, they can vary depending on a customer’s portfolio. Coupons that are printed at grocery checkouts are a function of items the customer just purchased. Ads that pop up on many websites are eerily responsive to what the surfer has been typing.

Between these two ex- tremes is the typical concept of segmentation. The market- place is thought of as com- prised of several segments, each of which is more (or less) favorable to your brand. The segments that like your brand might not be the cus- tomers you want, but that is a marketing issue of targeting and (re)positioning, topics to be addressed in subsequent chapters.

As the contrasts of mass and one-to-one marketing illustrate, segments become more heteroge- neous as they increase in size. As a result, they are more difficult to satisfy with the same product (the problem with mass). The goal of homogeneity in customers’ likes or dislikes is more likely to be achieved as the segment size gets smaller, but if the segment is too small, it might not be profitable (the problem with one-to-one).2 So we need to understand how to find optimal, serviceable segmentation schemes.

Niche marketing is a type of segmentation in which the com- pany strategically focuses, targeting a smaller market, with particular needs that the company can serve well. In Figure 3.1, niches would fall between the one-to-one and seg- ment strategies. Niches might be small segments, but they can be very profitable.

Potayto, Potahto Identical products can be positioned differently to different segments. For example, the same baby diaper can appeal to parents:

thinking about their baby’s comfort.

who want to avoid messes.

who desire to be green.

Yet it’s the same pooper-scooper.

In another category, consider the razors that men and women use. Gillette produces “Venus Divine” for women and “Fusion ProGlide” for men. The razors have the same number of blades, but the XX version is pink, and the XY version is black. Are these products the same or different?

One-to-one Marketing

(not profitable)

Marketing Segmentation

(just right)

Company

Mass Marketing (low customer satisfaction)

Product

Figure 3.1 Marketing Segmentation: Groups of Customers

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Chapter 3 Segmentation 29

3-3 What Information Serves as Bases for Segmentation? 3-3a Demographic All kinds of information about customers have been used in segmenting markets (see Figure 3.2). Some customer at- tributes are easily identified. For example, in many prod- uct categories, a company produces two varieties, one for men and one for women, such as razors, vitamins, running shoes, and television channels. Sometimes the products are constructed differently, e.g., four blades on razors for shav- ing those he-man whiskers vs. a razor shaped to fit in the palm of a woman’s hand to facilitate shaving sensitive areas. Sometimes the product formulations are identical, but the perceptual factors differ in the marketing appeals. Alterna- tively, a company might focus on serving only the men’s or the women’s market.

Other easily identified demographic qualities of custom- ers include their age, household composition, and stage in the life cycle. Spending is quite predictable:

>> Young adults are more likely to be interested in music technologies than in purchasing diapers for their as yet nonexistent children.

>> Young couples buy furniture and vacations together.

>> Families start financial planning to support their kids’ college educations.

>> Older couples who are empty nesters start dreaming of spending their greater discre- tionary income on travel and hobbies.

>> Still older people investigate health care options and chari- table giving.

We constantly hear so much about the baby boomers (in the U.S. and world- wide) because this group of customers is so huge that it affects the sales of nearly every product category. A note to the budding entrepreneur: Make something that older people like or need because boomers are heading in that direction.

Two additional demographic characteristics frequently used in segmentation studies are education,

which helps shape consumer preferences (e.g., opera vs. opry), and income, which facilitates certain consumer choices (e.g., Four Seasons vs. Motel 6). You’ve heard it said that time is money, but, in fact, time seems to be nega- tively correlated with money. Families with higher house- hold incomes hire more service workers (e.g., lawn care, nannies) to help with their daily needs because of their time draught.

Ethnicity is clearly important. In the U.S., the African- American and Hispanic-American populations each number more than 40 million, and Asian Americans are at about 12 million. Any one of these groups is sizable enough to influence a market.

Many more demographic variables have been used in segmenting consumer markets. Any variable has potential depending on its relevance to the product category. While demographics have an advantage of being clear and easy to recognize, they sometimes border on being simplistic ste- reotypes. Think of your male friends: Are they all alike in the clothes they wear, the cars they drive, the foods they eat? No. Ditto for your female friends. Analogously, some older people are uncomfortable with technologies like ATMs and the Internet, but, counter to the stereotype, others are on- line and very savvy. So what sense would it make to segment the market into men and women or into older and younger

Figure 3.2 Data-Based Segmentation on Consumers

Demographics

Gender Age Number of kids Stage in household life cycle Education Income

Geographic Countries Cultures Urban vs. rural

Psychological

Attitudes Knowledge and awareness Wants and needs Affiliations, e.g., political party, university alma mater Traits, e.g., extraversion, need for cognitive processing Expertise and involvement, e.g., hobbies, volunteerism Brand attributes sought, e.g., premium quality vs. low price Risk orientation, e.g., financial investments, adventure travel

Behaviors Users/competitors’ users/nonusers of a brand or category Copurchase patterns, e.g., recommendation agents and similar purchases

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30 Part 1 Marketing Strategy

people if there are at least as many differences within the groups as between the groups? The marketer seeks the men who like their product and the women who like their prod- uct. So some quality other than gender is driving whether men or women like the product, and that’s the quality that we need to find and use as the segmenting variable.

3-3b Geographic Geographic distinctions among customers have also been used to segment markets. For example, given societal dif- ferences, international tourist destinations can wreak havoc with logistics, e.g., while Brits and Germans tend to be or- derly in queuing, customers from many other countries and cultures are less so. There can be cultural differences within a country, e.g., a spicy salsa in the U.S. Southwest is very hot, whereas it is formulated milder for wimpier customer palates in the Northeast. Urban living affords certain elements of entertainment, and smaller town living is different. Climate offers still another consideration; snowblowers tend to sell better in the North than in the South, whereas the reverse is true for chlorine.

When geographic and demo- graphic information are combined, the segmentation schemes can be even smarter. A service called Prizm posits

that hotshot MBAs who live in New York have a lot more in common with their counterparts in London, São Paolo, and Tokyo, for example, than they do with their neighbors in New York who are rela- tively less educated or wealthy. For an example (and for a glimpse of your future trajectory), see Figure 3.3.

3-3c Psychological It would be ideal to get inside the heads and hearts of our customers: What do they want? Do they know? Could they be persuaded to like our brand? Could we change our brand to match their interests better?

Psychological traits vary in terms of how much insight they lend to issues of market-

ing and brands:

>> For example, men and women differ predictably in many ways. Although that might translate into some consumption differences, it’s less likely to affect other categories, e.g., cereal consumption, cell phone plans, theme park attendance, or wine preferences.

>> Or, for example, do techies and artsey types differ in their purchases? Perhaps some purchases may

vary, e.g., different magazine subscriptions and web page bookmarks, or different furni- ture and PC preferences. But do they differ in the pets they own, in the restaurants they frequent, or in the investments they buy?

It would be more useful to the marketer to understand the

psychological and lifestyle choices that are relevant to the brands the marketer is pitching. For example, if we know consumers are avid readers, sports nuts, or wine aficionados,

20–35 years old High income No kids

35–55 years old High income Kids all over the place

55+ years old High income Kids out of the house

Time

Young Digerati

Kids and Cul-de-Sacs

New Empty Nesters

Figure 3.3 Meet Your Future! (brought to you by Prizm Segments@Claritas.com)

African Americans > Large minority group: 39 mm, 12.6% of U.S. population > Buying power: $1 T

Asian Americans > Size of this minority group: 15 mm, 4.8% of U.S. population > Buying power: over $0.6 T > 90% come from: India, China, the Philippines, Vietnam, Korea, and Japan

Hispanic Americans > Large and fastest growing minority group: 50 mm, 16.3% of U.S. population > Buying power: $1 T > Quickly growing online, and social media hugely popular

Ethnicity Factoids

“Segments can be formed from any kind of data, from age to ZIP Code.”

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Chapter 3 Segmentation 31

we know something more about what they enjoy, their social orientation, and the categories of purchases they’d be easily enticed to make. We can cross-sell Kindles or iPads to the reader, season ticket packages and large-screen TVs to the jock, and expensive refrigerators and trips to Argentina to the wine connoisseur.

A popular tool for segmenting using psychographic data is called Vals. The idea is that the attitudes people hold and their value systems determine their orientations toward cer- tain product categories and brands. For example, so-called strivers are people who are trendy and fashionable in order to impress others, and they are often impulsive buyers. Mar- keting managers would study their customers to under- stand what they value, and then the managers would be able to communicate more persuasively to those custom- ers. For example, Vals has been used to identify poten- tial customers for cosmetic surgery: Who would be inter- ested? Who could afford it? Why would they want it? All of this shapes the advertising.

Naturally, customers vary in their marketing-oriented attitudes. Hobbies are ex- amples of purchase catego- ries in which customers vary

in their level of expertise (some newbies, others experienced and sophisticated). Customers vary in their levels of involve- ment with the purchase category (how near and dear it is to their hearts). If cus- tomers are known for their expertise and involvement in a category, and if they’ve demonstrated a willingness to share in- formation and give advice, they will be perceived by others as opinion leaders, innovators, or market mavens and would be ideal persons for the marketer to iden- tify as people likely to generate word of mouth. Some customers are early adopt- ers, caring about new developments in their category, seeking out new prod- ucts. Other customers either care less about that category, or they are more risk averse, and they wait for someone else to try the new gadget or get the kinks out of the beta testing before they purchase the item for themselves.

All the qualities that marketers care about may be mapped onto segments in any product cat- egory. For any purchase, a segment of customers will seek premium purchases, another will be brand conscious, and another will be price sensitive. And, of course, just to pro- vide us with a challenge, a customer who seeks quality ben- efits in one category (e.g., clothing) might be price sensitive in another (e.g., travel).

In addition to understanding who customers are and what kinds of activities they enjoy, it is also important to gauge who customers wish to become. These aspirations help us pre- dict the new categories they will enter. For example, when a person picks up a how-to book (e.g., remodeling), they will

Lifestyle Values Segments Vals segments people based on three motivations: ideals, achievement, and self-expression (www .strategicbusinessinsights.com/vals):

Ideals people are guided by knowledge and principles. These consumers buy the newest laptop technology, were first to adopt e-readers, do

extensive information searches comparing all the brands before they buy just about anything.

Achievement consumers buy products and services that demonstrate success to others. They drive sexy, expensive cars, and they carry, wear, and drink high-end brands.

Self-expression people desire social or physical activity, variety, and risk. These consumers are the first to go bungee jumping, heli-skiing, or any other extreme sport

(and accompanying gear), and they can be brand-fickle.

Smart marketers try to find distinct segments.

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32 Part 1 Marketing Strategy

likely buy more such books before moving on to learn a new skill. Someone enrolling in beginner’s tennis lessons will start noticing brands and attributes of tennis equipment and start gearing up. One reason celebrity spokespeople are thought to be effective is that ordinary people aspire to be like the celebrity, in whatever manner that is achievable—if not in the celebrity’s full lifestyle, then perhaps in the hairstyle or brand of sunglasses.

3-3d Behavioral Beyond attitudes, psychographics, and lifestyles, marketers would like to know what customers purchase, not just what they report they intend to purchase. Grocery scanner data are an example of compiled behaviors. A customer might report to be eating healthy foods, but evidence of their M&M purchases would belie their good intentions.

Behaviors are important in and of themselves (e.g., to help us make predictions regarding future purchasing). In addition, watching what consumers do tells us something about who they are. Attitudes are not directly observable, but we can use behaviors to infer attitudes and psychological states. For example, people have preferences for movie genres, and marketers know it. Thus, when we go to an action movie, we’ll see previews for other ac- tion movies, and when we go to a romantic comedy, the previews are a different batch.

One behavioral segment of great importance to the marketer is the current user of the focal brand. It is relatively easy to communicate to this group, as messages on soup packaging or direct marketing on a favorite website. The type depends on the level of relationship the com- pany has with its customers. Current users have already shown an affinity for the brand. Some current users may be high main- tenance, but most will be worth trying to keep satisfied.

In contrast, it is more challenging to identify, obtain information on, and woo customers who are currently using a competitor’s brand or who aren’t even purchasers in the

category altogether. The first group asks: Why should I switch? Why is your brand better than what I’m familiar with and relatively happy with? The second groups asks: Why do I want to buy this? In addition, when given the choice, cus- tomers vary in their preferred means of contact and access— shopping online or through catalogs or at the malls.

Within the current or competitor’s user groups, there also exist variations on the extent of loyalty or of the ease with which customers may be lost and gained, as well as frequency of usage, which can have impact not only on revenues but also on logistics costs. You’ve heard of 80:20, meaning 80% (or so) of your sales come from 20% (or so) of your customers. You’ve also heard the rules of thumb about how “It costs six times more to acquire a new cus- tomer, compared with retaining a loyal customer.” Thus, these behavioral tendencies—frequency, loyalty, etc.— are worth knowing, so we’d like to be able to identify fre- quent users.

Marketers also study patterns of copurchasing; skis, for example, are purchased or rented with boots, snowsuits, lift tickets, hotel rooms, and spiked cocoa. An increasingly popu-

lar means of using copurchasing patterns to generate cross-selling suggestions are Internet recom- mendation agents. Providers like Amazon examine what you’ve bought (and clicked on to view), and they make suggestions by comparing your data with what other customers have bought. For example, given that many customers buy mysteries by two

writers, Whodunnit and Thebutler, then, when you buy a book by one, you’ll be recommended a book by the other.

3-3e B2B While we have been focusing on categories of segmenta- tion data that are particularly useful for consumers, mar- keters segmenting their business clients most frequently use size. Size can be defined in a number of ways: company sales, market share, number of employees, client’s share of

Forrester has found 6 segments of social media users: (1) Creators produce lots of media for everyone to see—posting blogs, or uploading videos, sharing lots of online content. (2) Critics respond to others’ postings, writes product reviews, may contribute to wikis. (3) Collectors gather and organize info for themselves and ship it out to others, e.g., via RSS (feeds). (4) Joiners are active members of multiple social networking websites. (5) Spectators read blogs, watch others’ videos, read others’ product reviews and ratings. (6) Inactives are just not into it.

Social Media Segments

“Segmentation is the number 1 concern for B2C

and B2B marketers!”

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Chapter 3 Segmentation 33

provider’s business, etc. Businesses plan for, and interact differently with, their larger clients than with their smaller ones. They assign more client service personnel and extend more relationship management efforts because the big cus- tomers are worth it; larger clients tend to be profitable ones.

However, size does not always correlate with future growth potential or with costs associated with high-maintenance clients, who might not be worth retaining regardless of the size of their orders. So, as shown in Figure 3.4, there are other bases for segmenting business customers. Note the close analogies with the consumer concepts.

The primary distinction between segmenting busi- nesses and consumers is that the data sources tend to be dif- ferent. There aren’t scanner data prevalent for businesses,

for example. On the other hand, the number of busi- nesses that comprise one’s customer base will be far fewer than the potentially millions of consumers. In addition, there tends to be good corporate knowledge about business customers, in part because such trans- actions typically rely on a sales force, so there is a knowledgeable front-line in- teracting with the business customer. Of course, com- panies could do a better job of systematizing the sales force knowledge, which would provide a clearer database for segmentation studies and other purposes.

3-3f Concept in Action: Segmentation Variables in Banking Chapter 15 describes cluster analysis, the technique used to form segments once the marketer has these demographic, geographic, psychographic, or behavioral variables. Here is an example from retail banking. The industry is huge and competitive, so it’s not surprising that companies turn to seg- mentation to get an edge.

This particular company began with survey data on its cus- tomers. The first analytical question is to find survey questions that can detect variability in how respondents think about an issue. If there is none, that would say that the customers are ho- mogeneous in their perceptions, which in turn would indicate

that that variable would not be useful in the segmentation. Re- member, splitting customers into segments requires some differences across groups.

For example, Figure 3.5 shows simple results on two survey items. The question at the left indicates that most cus- tomers like the convenience of consolidating with a single company for their mortgage, accounts, and credit cards. While that information is inter- esting, it is not useful for seg- menting because most of the customers are in agreement.

Geek Alert! Cluster Analysis How do I find segments? Marketers and consultants use cluster analysis. Clustering models identify groups of customers who are similar to each other, and customers in one cluster are different from those in another cluster, or segment.

B2B customers are usually segmented by volume, price sensitivity, and geography.

B2C customers are segmented using data on demographics, attitudes, and transactions. E.g., cruise ship operators offer different trips to satisfy different customer segments looking

for uniqueness, or low price, or a lot of programming for children. E.g., the entertainment industry has not quite kept pace with the segments of audience

members who wish to watch their TV shows somewhat delayed (e.g., through DVRs) or greatly delayed (e.g., on DVDs after the season ends), or of those who watch on their PCs or phones rather than on their TVs.

Marketers label the segments (e.g., “green” or “price sensitive”) to help personify the segments, to facilitate the choice of whom to target, and to develop ad content. Marketers also verify that clusters that appear to be different on attributes such as age, income, price sensitivity, etc. truly (statistically) are different; if not, the groups would be combined.

Segmenting Consumers Segmenting Businesses

Demographic: E.g., age, gender, income and education, household life cycle, number of kids, marital status.

Geographic bases: E.g., country, area (Northeast vs. Southern California), climate, market size.

Behavior: E.g., media (magazines, cable, online, movies), loyalty programs, purchase frequency.

Attitudes: E.g., awareness, involvement, price sensitivity, risk tolerance, convenience, prestige.

Demographic: E.g., company size, NAICS industry, account size.

Geographic bases: E.g., country, sales force coverage.

Type of firm: E.g., architects bidding for government (conservative projects, slow to pay, but big), retailer (aesthetics important, manufacturers (efficiency is important), etc.

Attitudes: E.g., price sensitivity, risk tolerance, corporate culture, profitability, high- vs. low-maintenance accounts.

Figure 3.4 Bases for Segmenting in B2C and B2B

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34 Part 1 Marketing Strategy

In contrast, the survey question about the discount (on the right) shows much greater promise as a variable that would help distinguish segments. These data indicate that there are two groups: those who would switch because they are price sensitive and those who would not (the brand loyals or the inertias). This variable would be included in the company’s segmentation analysis.

3-4 How Do Marketers Segment the Market? Marketers identify segments best when iterating between two approaches—a managerial, top-down ideation and a customer-based, bottom-up customer needs assessment. Marketers begin with some knowledge base about the mar- ketplace: the customers, competitors, and the company’s own strengths. Then they can gather information to understand the customer perspective.

Knowledge of the marketplace will clearly also enter into the decision as to which of the segments the company should eventually target. A market segment may look de- sirable in terms of its size and even future growth poten- tial, but it may already be saturated with offerings by other competitors. There may be richer potential opportunities in other segments. The managerial perspective is also clearly important in terms of assessing the extent to which the ser- vicing of a segment is consistent with corporate goals.

As an example of the required integration between the managerial and customer perspectives in formulating segments, consider the service industry of personal invest- ment advisors. These professionals know that their client base may be divided by certain demographic variables such

as income level, as well as psychological traits such as risk aversion. They can obtain geographic data as a proxy for income, which would help them conduct a cost-effective di- rect mailing to ZIP Codes that are known to be proportion- ally wealthier. Upon identifying sales prospects, the financial advisor can send the potential client surveys to measure their comfort level with risk. The advisor is using extant knowl- edge and data (e.g., about income and ZIP Codes) in a man- ner to prime more favorable responses, also complementing this knowledge with personal evaluations (e.g., comfort with

1 Definitely would not

Definitely would not

Definitely would

Definitely would

2 3 4 5

35%

30%

25%

20%

15%

10%

5%

0% 1 2 3 4 5

Prefer Mortgage/Accounts/Credit Cards with Same Company

1 2 3 4 5

40% 35% 30% 25% 20% 15% 10% 5% 0%

1 2 3 4 5

Would Switch for 10% Better Rates

Most customers say they want the convenience of one-stop shopping and a relationship with a firm (the 5s in the left plot). The data from this survey question are clear, but this survey item would not be useful in formulating a segmentation scheme because the consumers are too similar.

The plot to the right contains data from a survey item that would be more helpful in distinguishing segments; some customers would jump ship for better rates (the 5s), others wouldn’t (the 1s; either they would require even better rates or they’re truly loyal).

Know your customers—get data! Make fact-based inferences and decisions!

Figure 3.5 Retail Banking: Looking for Segmentation Variables

Knowing where customers live can tell us a lot about them.

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Chapter 3 Segmentation 35

risk) to know which financial products might seem most ap- pealing to the client.

The iteration between the managerial and customer perspec- tives is also important because sometimes a marketing manager might hold beliefs that are not consistent with the customer data. For example, say a marketer for a London theater production com- pany believes that some customer behavior such as income is predic- tive of the behavior of interest, i.e., the purchase of theater subscrip- tions. That belief might be based on years of anecdotal data (listening to friends, overhearing transit conver- sations, etc.). But those anecdotes are not systematically gathered data and probably do not repre- sent an unbiased selection of customers. Thus, the marketer’s beliefs would need to be reconsidered when confronted with real, better data that in fact the correlation between income and theatergoing isn’t that strong. Empirically, arts-related behav- iors (such as the frequency of museum attendance) are better predictors of who belongs to the theatergoer segment.3

3-4a How to Evaluate the Segmentation Scheme The iteration between marketing managers’ good sense and the customer-based data continues when evaluating potential segmentation scenarios. A set of segments may be very clear from a statistical perspective, but they need to be useful from the managerial point of view. So the question is, How do you know a good marketing segmentation when you see one?

Data to Identify Segments If one element of an iterative segmentation is a smart marketer, the other el- ement is good customer data. Are data available of the sort you’d like to iden- tify the customer segments? For example, census data are always available, but they might not be stored in refined categories, and so they prove too rough to be useful. Commercial data, such as Prizm or Vals data, are available, at a cost, and if you have a large budget, you’re fine. But if you’re an entrepreneur, you might need to approximate their

results on your shoestring budget. If you’re seeking sur- veys of very specific topics, such as consumer reactions to electronics, the data may be trickier to locate.

Databases to Access Segments A related question is whether databases are available that iden- tify potential customers because, after you identify segments, you’ll want to access the customers in the target segments. For example, if you want to communi- cate to people who own homes in New York and Palm Beach, how will you do so? Are there listings of such people? Will you have access? Could you find indirect access, by advertising in the in-flight magazines for air- liners carrying passengers between those cities or by sponsoring promotions with the two cities’ rental car, limo, and taxi agencies?

Profitability Matters Most marketers are curious about the relative sizes of the identified segments, but it’s

National Geo Lauds Mexican Consumers National Geographic recently gave kudos to the Mexican consumers for their many environmentally friendly consumption and lifestyle choices:

They are careful to adjust their thermostats to save energy.

They improve the efficiency of their homes (e.g., sealing drafts, installing ceiling fans, planting shelter trees).

They tend to do laundry in cold water.

Some take public transportation daily, but, if not, they drive compact cars.

More than most groups surveyed, they care about humanity’s impact on the environment, and they vote for political candidates who do also.

Diversity within a country

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Anatomy of a Market Segment

Mars might want to advertise to all U.S. consumers, but you’ve been to Chewniversity (hey, Mars’s word!), so you know it would be wiser (and result in better ROI) to take

advantage of the fact that 8.3% of its customers buy and consume 50% of its Snickers bars. That segmentation information is useful.

We shouldn’t just Nougetaboutit (also Mars’s)!

Chomp 1: 75% of US adults

eat candy.

Chomp 2: Snickers is number one

market share candy (8%).

Chomp 3: Half of Snickers

eaten by 2.5mm target customers (young men).

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Chapter 3 Segmentation 37

not size that matters so much as how profitable the seg- ment is or is likely to be. Segment size is just numbers of customers, but profitability is smarter information: How frequently do the customers purchase? How deep (in terms of money) is their purchase? How price (in)sensitive are they? How stable is the segment? What is its growth potential? Etc. Together, the numbers and profits informa- tion can be used to project the value of approaching any of the segments. Sometimes small segments can be highly profitable if the marketer pays attention and satisfies those customers’ needs—the essence of niche marketing.

Sometimes segments appear small only because the cluster- ing was done too finely. If you’re working with too many seg- ments, you’ll know it because, when you try to describe each segment, their descriptions are blurred. For example, suppose Segment A is a fashionista who is young, female, and cares about shoes and hair but not about cars, and Segment B is all that but she cares about her car marginally more. Are you working with distinct segments or with minor variants on a theme? If you’re Saks, you’ll assume the former and combine the segments; if you’re Jiffy Lube, you would take advantage of the latter and keep the groups distinct.

Fit with Corporate Goals Clusters and segments can be clear but unattractive with respect to providing solutions to the existing marketing objectives. For example, an upscale segment is always a tempting one for marketers to target be- cause they assume that those customers can afford to pur- chase their goods or services with a little less price sensitivity than other customers. However, if your marketplace image is one of being a store with EDLP (everyday low prices), you’d confuse the extant customer base if you tried to appeal to a high-end customer with some new SKUs. Further, new high- end customers might not pay attention to your ads because, to date, your offerings hadn’t been relevant.

Another strategic question regarding segment selection has to do with the strength of competition devoted to that same segment. The ideal goal for the marketer is to find an untapped (or underserved) group of customers whose needs can be met easily and profitably. But if others have beaten you to that group, or if they could easily redirect their efforts after watching your success, the segment gets divided, effec- tively reducing its size and profitability.

Actionable Lots of segmentation schemes fail because marketers focus on the wrong criteria. Specifically, the statistics and clusters might be crystal clear (e.g., four clear clusters of customers), and even the interpretation

and managerial meaning might be clear (e.g., one segment in particular seems to be a great fit). However, the seg- mentation is useless if the marketer is at a loss as to how to put it into action.

For example, customers’ psychological profiles are extremely important to understand their basic needs, wants, motives in order to shape an appealing market offering. But while attitudes help the marketer understand the why of the customer, the mar- keter needs demographic information also, to understand the who and where of the customer. The who information helps ad- vertising creatives depict the target in ads (e.g., matching gender, age, income level), and the where helps inform the design of the channel structure (e.g., where the customers live and shop and

where we can advertise). A good segmentation scheme should come alive—you should be able to imag- ine your customer segments, know what they look like, and know what they’d like to talk about.

It’s not unusual to see a seg- mentation study comprised of some usage variable (e.g., heavy vs. light users) or some attitudi- nal variable (e.g., positively in-

clined toward our brand vs. being loyal to a competitor) in a cross-tab with some demographic variable (e.g., gender or age in some breakdowns like the census: 18–25, 26–45, 46–65, etc.). While the behavior usage or attitude infor- mation is the most relevant information, the demographics help marketers take action (e.g., select media for ads). The hope is to find relationships among these variables—that men tend to like our brand, or the middle-agers tend to be loyal to a competitor, etc. Then the variables of gender or age become our workable proxies for the attitudinal vari- ables that we really want.

We’ll close with a preview of what marketers do with seg- ments. Figure 3.6 depicts several segments identified in a

“Customers’ preferences differ, so we focus on the segment(s)

we can serve best.”

Segment A

Segment B

Segment C

Figure 3.6 Serving Segments in the Marketplace

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38 Part 1 Marketing Strategy

well. Figure 3.9 depicts a strategy of customizing the market offer- ings, different products for different segments. Any of these strat- egies can be smart and sustainable, depending on the company’s strengths and the marketplace environment (e.g., competitors).

Lots of beverage companies follow this tailored strategy, e.g., targeting Coca-Cola to youth and Diet Coke to their parentals, or macho beer to men and lite beers to women.

Segment A

Segment B

Segment C

Figure 3.9 Tailored Strategy: Customizing for Segments

High-end grocers know their shoppers will want organic produce AND fair trade coffees AND cosmetics that have not been animal tested.

Segment A

Segment B

Segment C

a b g

Figure 3.8 Depth Strategy: Serving One Segment Well

marketplace. Figure 3.7 illustrates a company who is trying to reach more than one segment with its product. Figure 3.8 illus- trates a strategy whereby a company has decided they want to be everything to a particular segment, serving those customers very

Computer companies make monitors ultra-compatible so they can be sold in desktop packages or as a second monitor for laptop users.

Segment A

Segment B

Segment C

Product

Figure 3.7 Breadth Strategy: Reaching Multiple Segments

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Chapter 3 Segmentation 39

Managerial recap

Mini-Case

Unlike the claim by Gecko, the Michael Douglas character in the movie Wall Street, greed is not good. It’s not just a value judgment; it’s not good business.4 Rather than trying to capture the entire market, the smart marketer—the smart company—will segment the market and be selective target- ing groups.

Segments don’t have to be huge, but they must be prof- itable. Otherwise, we would just fold the group in with an- other segment and offer the same product to both groups. The marketer must be able to identify the segment; hence the reliance on demographic and behavioral data in ad- dition to data on attitudes and purchase intentions. Seg- ments must also be accessible, that is, there must be some media that will reach them, hopefully in a cost-efficient manner. Last but not least, the segments selected for targeting must match the soul of the company—its posi- tion in the marketplace and its marketing and production capabilities.

>> Marketers create segments because customers vary in their preferences, and it is usually impossible to please all customers with one product.

>> Market segments are groups of customers with similar reactions to the company’s brand.

>> Segments can be formed on nearly any kind of differ- entiating information, e.g., demographics, geographics, psychological attitudes, and marketplace behaviors.

>> Segments are best created iterating between the mana- gerial understanding of the marketplace and good data that may be processed (e.g., via cluster analysis) to iden- tify similarities in purchasing propensities.

>> The resulting segmentation scheme should be one based on data, sustained by a database to help access the cus- tomers, profitable enough to serve, sensible with respect to the larger corporate goals and planning, and finally implementable.

In the face of ever rising health care costs, more people than ever are looking for the best medical treatment at the best price, and they’re willing to go anywhere in the world. Most of the businesses in this space are the health care pro- viders themselves—hospitals, globally connected networks

of specialty centers, etc. However, increasingly the hospital- ity industry is waking up to the opportunities that this type of travel may afford them. Several large hotel chains that already have international presence are seeking medical business partners and airline partners to create packages of

Finally, consider the topic of business expansion (see Figure 3.10). If you currently market primarily to women between roughly 25 and 55 years of age by placing ads in women’s magazines, but sales are flat, in which direction would you expand your business? Would you advertise via multiple media to the same segment of women? Would you try to shape the product and imagery to be compatible with men’s goals? Would you try to extend your market base by age, appealing to consumers who are younger or older than your current purchasers? Clearly, profitability analyses and questions of corporate fit must be addressed, and these issues are clarified by a good, basic understanding of the segmenta- tion structure of the marketplace.

Health-Care Tourism

?

Ads before movie trailers

?

?

?

Ads on TV

18

19 –2

4

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45 –5

4

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Print ads

MaleFemale

Figure 3.10 Serving a Segment and Branching Out

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40 Part 1 Marketing Strategy

Located at back of the textbook

□ Rip Out Chapter Review Card

Located at www.cengagebrain.com

□ Develop a Marketing Plan online. □ Watch video on Raleigh Wheels for a real company

example. □ Complete the interactive quiz to prepare for tests. □ Complete the Segmentation Analytical Tool online □ . . . and more!

Further Reference

seamless service for health care tourists. The airline partner- ships are nearly in place; these classes of entities have been cooperating for decades. The medical alliances are trickier because ultimately the medical service providers still care most about health care provision, and concerns regarding business are still relatively novel. For example, they find it somewhat distasteful to be approached by a hotel chain to talk business.

Secondary data shed a clear light on the segments of customer/patients in this burgeoning world. There are essen- tially three groups of customers (not necessarily exclusively or exhaustively).

First, some people seek primarily relaxation and stress re- duction. They travel to health spas, enjoy aromatherapy mas- sages, herbal and homeopathic treatments. They engage in yoga classes, and they expect the resort’s menu to be detoxifying.

A second group of health-care travelers are getting elec- tive surgery done, and they want to recover away from their friends and family. These people are having faces lifted, lipo- suctioned, breasts increased, etc.

The final class of traveler has relatively serious medi- cal conditions that are fairly essential to their health. The

procedures these folks are looking for range from joint re- placements through cancer treatments to heart surgeries. The operations will require more extended hospitalization, and the primary motive of this segment of traveler is price re- duction compared to home, even for those customer/patients with insurance.

Most of the hotel chains have access to this segmentation information. Some have not sought it out. Others have seen it but are not considering it because they figure that their ser- vice, beginning with the hotel room itself, would be welcome by any of these travelers.

A hotelier based out of London is considering using this segmentation information. The hotel’s competitors think it’s nuts, and will be depriving itself, by definition, of access to the other segments’ business. The London firm, however, thinks the segmentation-based approach may be a good way to begin. The information would allow hotelier to be more selective in its appeals, both to the end users (the customer/ patients), but also in these still early stages of finding medi- cal partners. The management reasons that, as they gain access, experience, and credibility, the doors to other medical partners may open later.

Discussion Questions

1. Which kind of hotel manager do you agree with—the ones who do not wish to limit themselves given their business is good for all three segments of travelers, or the London firm and its ap- proach? Why?

2. If you wish to follow the first strategy (all customers could ben- efit), what would your marketing communications be (to the end user customer/patients)? If you followed the second strategy, what would your marketing communications look like?

3. If you were based in London, which countries would be the first you would approach to develop such relationships? If you were based in Paris, which countries would you approach for your network inclusion? If you were in Houston? Rio? Why?

29382_ch03_rev04.indd 40 21/11/12 3:24 PM

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