Customer Analysis and

Segmentation
- Week 2 -

Marketing Strategy 37000

Christopher Krohn
Copyright 2016
Christopher E. Krohn.
July 1 / 2, 2016 All rights reserved.

Course Framework
3Cs Customer, Company and
Competitor Analysis

STP Segmentation, Targeting and

Positioning Strategy

4Ps Product, Price, Promotion

and Place Marketing Mix

1
Agenda
Introduction to Segmentation
Segmenting Consumer Markets
Segmenting Business Markets
Segment Profiling
Perceptual Maps
Other Techniques / Wrap-Up

Everything
starts with the
customer.
-- Lou Gerstner

2
Marketing Strategy: High-Level Process

1. Segmentation 2. Targeting 3. Positioning

Identify Evaluate the Identify possible

segmentation attractiveness of positioning
variables and each segment concepts for each
segment the market target segment
Select target
Develop profiles of segment(s) based on Select and develop
resulting segments your firms ability to your positioning,
(needs, attitudes, meet their needs and then deliver on it
behaviors, beat the competition (4Ps)
demographics, etc.) profitably

Marketing Strategy: High-Level Process

1. Segmentation 2. Targeting 3. Positioning

Identify Evaluate the Identify possible

segmentation attractiveness of positioning
variables and each segment concepts for each
segment the market target segment
Select target
Develop profiles of segment(s) based on Select and develop

resulting segments your firms ability to your positioning,

(needs, attitudes, meet their needs and then deliver on it
behaviors, beat Requires
the competitionAnalysis (4Ps)
of the
demographics, etc.) profitably
Customer

3
Are All Customers Equal?
Customers may not have homogenous needs,
problems, and preferences
Some customers are worth more than others
Competitors may be better positioned than you to
serve certain customers
At some level, businesses face capacity constraints

Businesses choose which customers to serve

(and / or customers choose for them)

How to Choose the Right Customers?

Usually not practical to make an upfront decision regarding every
potential customer individually, so marketers divide up customers
into groupings referred to as
> Customer Segments
The process of analyzing the market and creating these customer
groupings is called
> Customer (or Market) Segmentation
Marketers then pick and choose from these groupings to identify
> Target Segments

4
Common Segmentation Problems
Scenario Potential Consequences
No segmentation done or no clear Serving all customers equally results in
target segment identified. Company mediocrity across the board
tries to serve all customers equally. Customer needs change over time, and
the firm misses key trends
More focused competitors come in and
pick off the best customers

An informal segmentation process Intuition can be very costly when wrong

occurred and target segments were wasted marketing $ and sales force effort
selected. The analysis relied entirely chasing poor prospects
or in large part on executive intuition, hit-or-miss product development efforts
with limited or no data support from inappropriate / ineffective pricing
market research. Opportunities are missed that could have
been identified with market research

Common Segmentation Problems

Scenario Potential Consequences
An insufficient number of potential Missed opportunity for achieving
segmentation variables were competitive advantage from a
considered; firm jumps too quickly proprietary understanding of the market
to an intuitively promising approach None of the segments identified are
(Ready, Fire, Aim) differentially attractive to serve
No correlation between segments and
category consumption

Firm employs an overly simplistic Same problems as above, plus:

segmentation scheme (e.g. relying on Leads to weaker, less insightful
only one variable in a complex implementation of marketing mix
market) elements (4Ps)

5
Goals for Effective Segmentation
1. Distinctive Groupings
Customers within a given segment have homogenous needs,
preferences, behaviors, etc. and will respond the same way to a
given mix of marketing elements (4Ps)
There is a meaningful difference between customer needs,
behavior, and response to marketing mix across segments

2. MECE Structure
The segments do not overlap each other (Mutually Exclusive)
The overall segmentation scheme accounts for the entire market
(Collectively Exhaustive)

Goals for Effective Segmentation

3. Measurable Segments, Ideally Attractive Ones
Revenue potential (size, growth rate, price sensitivity)
Cost to acquire, serve, retain, develop
Loyalty and buying pattern
Responsiveness to marketing mix

4. Accessible, Actionable, Differentiable Groupings

Firm can effectively reach and serve one or more segments
(accessibility), leveraging or overcoming any existing
customer preferences / attitudes
Firm has the ability to meet the needs of one or more
segments better than the competition

6
Agenda
Introduction to Segmentation
Segmenting Consumer Markets
Segmenting Business Markets
Segment Profiling
Perceptual Maps
Other Techniques / Wrap-Up

Approaches to Consumer Segmentation

(1 of 4 - Demographic)

Approach Examples

Geographic Iron City beer targets residents of the

Pittsburgh metropolitan area

Demographic Seventeen.com targets unmarried

(Age, gender, marital teenage girls
status, occupation, family
size, race, religion, etc.)

Socioeconomic Chase Private Client targets high net

worth individuals for its private banking
and investment services

7
Geoclustering Segmentation
A multi-attribute approach to segmentation combining geographic,
demographic and socioeconomic factors. Such systems have been
commercialized by various providers (e.g. the Nielsen PRIZM system)
Predominant PRIZM Young Digerati (1.3% of US households) are tech-savvy and
Segments for 60611 live in fashionable neighborhoods on the urban fringe. Affluent,
(Sreeterville, Chicago) highly educated, and ethnically mixed, Young Digerati
communities are typically filled with trendy apartments and
1.American Dreams condos, fitness clubs and clothing boutiques, casual restaurants
2.Bohemian Mix and all types of bars--from juice to coffee to microbrew.
Median income: $91K
3.Money & Brains
Age Ranges: 25-44
4.The Cosmopolitans Family Type: Mix
5.Young Digerati Education: College Grad +
Employment: Management

Source: Nielsen.com Lifestyle: Shop at Bloomingdales, Travel to Asia,

Read Dwell, Drive an Audi A3, watch IFC

Approaches to Consumer Segmentation

(2 of 4 - Behavioral)
Approach Examples

Volume Use Swansons Hungry Man brand targets

those who eat large portions and buy a lot
of frozen, packaged meals

Loyalty / Buying Harrahs small-market casinos target

Low-Rollers -- Frequent gamblers who
Pattern bet relatively small amounts on each visit
and are responsive to loyalty programs

User Status Nokia now targets first-time phone buyers

(Product knowledge and with inexpensive feature phones
past experience, attitude
toward product / brand,
purchase readiness)

8
Approaches to Consumer Segmentation
(3 of 4 - More Behavioral)

Approach Examples

Decision Process Jockey was the first brand to target women

(Deciders vs. influencers; buying underwear for their husbands -- by
impluse buy vs. planned or using ads showing Jim Palmer in his
researched purchase) skivvies

Media Usage / Drugstore.com targets consumers who

Channel prefer to shop online for health-related
merchandise
Preference

Approaches to Consumer Segmentation

(4 of 4 - Needs Based)
Approach Examples

Psychographic Patagonia targets outerwear buyers who

(Values, self-concept, are socially and environmentally conscious
attitudes, lifestyle,
personality)

Needs-Benefit Axe mens grooming products target men

who want to keep a step ahead in the
mating game.
Note: Needs and benefits sought may vary
by usage occasion

9
Needs-Benefit Segmentation Example
Disguised Pet Food Company Research
Responsible Care & Just a Price
Ol Faithfuls
Nutrition Concern Dog Buyers
Believe proper See pets as See pet as a Dont feel strong Care primarily
pet nutrition is beloved members friend, buddy or emotions for their about price,
important, and of the family and companion pets. Pet food is secondarily
read product take a TLC is simply a about
labels carefully approach to their Buy good practical need convenience
pet care quality mid-
Heavily influenced range brands Often own Buy mostly in
by their vet Buy premium they think will multiple animals grocery / mass
brands taste good to channels
Want natural pet May buy in bulk
ingredients and Visit pet store quantities, Buy private label
buy premium frequently Medium-high especially when brand or
brands. Value brand loyalty; on promotion Whatevers on
research-backed Buy lots of treats prefer well- sale
product claims and pet services known brands Shop at grocery
store, feed lot Skew toward
lower SES

Consumer Segmentation Choices

Demographic Behavioral Needs-Based
Pros

Simple, easily understood
Segments usually have

Medium-high accessibility
Highly measurable
Generates insights into
underlying drivers of
high accessibility (e.g. Enables focus on
behavior
easy to buy media) behaviors that drive Enables powerful,

revenue marketing messages

Good for generating new
product ideas

Cons May have limited

correlation with purchase
May not get at the
powerful underlying needs
May be harder to get the
necessary data
behaviors that drive behavior May underestimate
Limited insight into needs, No guarantee that high importance of intangible or
problems customers are volume buyers are emotional benefits
trying to solve attractive to target (price Lower accessibility in
Can lead to diffuse, weak sensitivity, brand loyalty) fragmented markets
marketing messages due Harder to track success
to heterogeneity

10
Agenda
Introduction to Segmentation
Segmenting Consumer Markets
Segmenting Business Markets
Segment Profiling
Perceptual Maps
Other Techniques / Wrap-Up

Segmenting Business Markets

1 of 4 - Demographics / Firmographics
Segmentation Variable Examples

Industry The accounting and consulting firm Deloitte

targets 20 different industry groupings (e.g.
Oil & Gas)

Size Company size has historically been one of

Dells key segmentation variables

Geographic Industrial distribution company that uses

distance to nearest distribution facility as a
Location key segmentation variable

11
Segmenting Business Markets
2 of 4 - Purchasing Approach
Segmentation Variable Examples
Purchase Criteria / Needs Quality focus vs. service vs. price
Final Decision-Maker Centralized vs. decentralized purchasing
Key Influencers Engineering, Finance, Marketing, etc.
Deal Structure Leasing deals vs. buying, term structure, etc.
Bidding Process RFP vs. public auction vs. sealed bid auction
Preferred Relationship Arms-length transaction vs. strategic partner
% of Overall Spend Minor or unimportant purchase vs. major buy
Sales Cycle Time Quick sale vs. long decision process
Channel Preference Direct, distributor, reseller, on-line catalog

Segmenting Business Markets

3 of 4 Operational / Situational Factors
Segmentation Variable Examples

Technology Aditi, a cloud computing SaaS firm, targets

companies that have based their
businesses on Microsoft technology

User Status Salesforce.com built its business by

targeting firms with no CRM system in
place or with only single-user systems

Customer A small PR firm that provides strategy and

planning services, targeting only those
Capabilities companies that have the capability to handle
the PR execution themselves

12
Segmenting Business Markets
4 of 4 More Operational / Situational Factors
Segmentation Variable Examples

Urgency The industrial distribution company

McMaster-Carr primarily targets customers
who need fast delivery from stock

Product The industrial adhesives company

Cyberbond markets cyanoacrylate adhesive
Application targeted specifically at applications that
require a low odor product

Buyer-Seller The consulting firm Bain & Company targets

clients that share its results-oriented values and
Similarity avoids those who do not

Business Segmentation Example

Industrial distribution company with
national U.S. presence

Purchases thousands of different

products, warehouses them, and re-
sells them to manufacturing firms

Data have been disguised to protect

anonymity

13
 Geographical Customer Concentration Drives the
Profitability of the Companys Warehouses
20%
17%
16.8% Geography Will
16%
15.7%
Percent (%)

15%
Likely Be a Key
RONAProfitability

Segmentation
Variable
10%
Warehouse

5% 4%
3.6% 3%
2.9%

0%
Less 50 to 100 100 to 200 Greater
Than 50 Than 200
# of Miles toRequired
Miles From Warehouse Reach 80% of Sales
to Reach 80% of Shipments
Branches: 13 15 13 7

Market Size and Industry Concentration Total= $11.5B

Vary by Geography
$0.9B

$0.8B
$0.4B
$0.4B
$0.2B

$2.3B $2.0B $1.6B $1.5B $1.2B

100%
Other
Demand

Plastics

Other Other
Other Other
Other
Other

Other Other
Demand

Petroleum Refining
80%
P etroleum Refi ni ng

Pulp & Paper Ga s & Wa ter U til itie s

Plastics
Plastics
Oil Companies
Petroleum Refining
Oil Textiles
Oil Companies

Pharmaceuti cals Companies

Pharmaceuticals Pharmaceuticals
of 1998 PVF

Texti les

Food Plastics
Gas & Wa ter
Utilities

60%
Chem icals

Pharma-
Plastics Pl as ti cs

Textiles Pulp & Plastics Pulp &

ceuticals Pu lp &
Pa per
% of Category

Ph ar ma -
ce u tic al s

Chemicals
Chem icals

Chemicals Paper
Plastics Paper
Ph a rm ac eu ti ca ls

Oil Food
Pulp & Paper Plastics Food
Oil Companies Food

Oil
40% Companies Plastics Chemicals Companies
Chemicals
Pulp &
Paper

Food Pulp &

Pulp &
Food
Chemicals
Percent

Paper
20% Paper Chemicals
Chemicals

Food
Chemicals Pharma- Food
Food Pulp&
Paper ceuticals
0%
Central

Central

Other

Southwest Northeast South Mid- Pacific

Coastal
Mountain
Northeast
States
Northwest

Southeast

Central Central Atlantic Atlantic Coast

14
 Industries Have Unique Needs
Comments from Pharmaceutical plant customer interviews
We use a lot of specially-coated products, plus about 200 different kinds of
other specialty parts. A pharmaceutical plant is a whole different world from
most industries. You dont just sell them the same commodity parts that you
sell to a Big 3 auto manufacturer or any other plant.

If the distributor cant work from our Approved Materials List, I dont want to do
business with them. They must have the precise set of parts I need or they can
just forget it.

I want a distributor who understands the industry but also understands his
limitations. They need engineering expertise in house. I dont mean people
who have worked in a plant for awhile. I mean degreed engineers.

Industry Attractiveness Varies

Downstream Upstream Pulp & Pharma- Other
Oil Oil Paper Chemicals Plastics ceuticals Food Utilities
Category $0.2 $1.1 $1.4 $2.5 $1.3 $0.7 $1.9 $0.4
Spending
Average Spend $1,100 $90 $950 $180 $80 Industry$300
$450 Will $__
per Facility
Also Be a Key
Category
Growth
Segmentation
Variable
Profit Potential

Concentration

Product Mix

Overall
Attractiveness

15
 Customer surveys followed by factor / cluster
analysis yielded three needs-based segments
Price Value Partnership
% Category
Spend: 20% 35% 45%

Survey The choice of distributor is not The distributor doesnt have to You view your distributor as a
Statements critical, just getting the product follow Approved Material Lists, they partner
Agreed there at a good price is just have to meet our specs
Look to distributor to help manage
with Most
Price is by far the most important You expect the distributor to assist total installed cost
Strongly
factor in choosing a distributor you in reducing total installed cost
Superior IT is a critical factor

Survey Expect to see sales rep regularly Data reporting is a critical Price is by far the most important
Statements capability you look for factor
Disagreed You view your distributor as a
with Most partner Price is by far the most important Just getting the product there at a
Strongly factor good price is critical
You expect your distributor to help
you adopt the internet in the Just getting the product there at a Dont need to follow AML, just
purchasing process good price is critical have to meet our specs

Nested Segmentation:
Putting it All Together
Todays Example
4. Used by Sales force to
Personal improve effectiveness
Factors
3. Used to assist with
Situational / Targeting (Week 4)
Operational
Factors 2. Price vs. Value vs.
Purchasing Approach Partnership needs

Demographic Variables 1. Geography and Industry

used as primary
(Work Outside - In to Segment) segmentation variables

16
Agenda
Introduction to Segmentation
Segmenting Consumer Markets
Segmenting Business Markets
Segment Profiling
Perceptual Maps
Other Techniques / Wrap-Up

Do you know what I've learned? Cosmetics is

everything like laundry detergent! You need to
know who your consumers areintimately. You
need to understand not just their habits and
practices but their needs and wants, including
those they can't articulate. Then you've got to
delight them with your brands and your products.

-- Alan G. Lafley

17
Customer Insight is the Key
Customer Effective
Research, Customer Marketing
Analysis, Insight Competitive
Feedback Advantage
Best practice is to look all the
way through your industrys
value chain to understand
customer needs from the end-
user back to your firm.

Generating Customer Insights

Anecdotal Feedback Qualitative Research Quantitative Research
Obtained from sales Obtained from focus Obtained from surveys,
force, customer service, groups and behavioral data,
user groups, and observational studies experimental research
customer meetings and secondary sources
Useful for helping form
Can be leading indicator hypotheses to test in Allows for systematic
of emerging issues (e.g. quantitative research testing of hypotheses
customer complaints) segmentation generated by other
variables research methods (or by
May produce insights
customer wants and managements intuition)
regarding a specific
needs
customers needs If done right, gives you
positioning concepts
numbers you can bank on
Dangerous to new product ideas or
for targeting, budgeting
extrapolate usage opportunities
and forecasting

18
Segment Profiling
Size and Growth Behaviors
current size, growth rate by buying patterns
segment (CAGR) decision process
revenue and profit potential brand loyalty
customer concentration use of substitute / competitive products
geographical, industry breakdowns channel preferences
category and product knowledge
Needs media use
benefits sought
underlying needs drivers Goal:
customer ideal points Develop a deep
price sensitivity understanding of each
psychographic profiles segment for targeting,
Positioning, 4Ps

Segment Revenue and Profit Potential

Although they represent less than 30% of the customer
base, the Responsible Nutrition and Care & Concern
segments generate 52% of industry profits
100% Price Sensitives

80% Just a Dog

Ol' Faithfuls
60%
Care & Concern

40% Responsible
Nutrition

20%

0%
Customers Spending Profits

19
Segment Share Analysis
The Responsible Nutrition and Care & Concern
segments are most likely to purchase premium brands.
100% Low/Private Label
Low End or Private Low/Private
Label Brands Low End or Mid-Range
Private Label Low End
Market Share in Segment

Mid-Range Brands Brands

80% Brands Premium D or
Premium Private
Premium Brand D Label
60% Mid-Range Brand C
Brands Premium Brand C Brands
Mid-Range Premium
40% Brands Premium Brand B
Brand B
Premium Brand D Mid-Range
Premium Brand D
20% Premium Brands
Premium Brand B Premium Brand A
Premium Brand B
Premium
Premium Brand A Brand A
Brand A
0%
Ol Faithfuls Just a Dog Care & Responsible Price
Concern Nutrition Sensitives

Agenda
Introduction to Segmentation
Segmenting Consumer Markets
Segmenting Business Markets
Segment Profiling
Perceptual Maps
Other Techniques / Wrap-Up

20
 Perceptual Map
A research-driven tool used to show how customers perceive a
group of products, brands, or companies
Which dimensions to map?
There are many potential dimensions for each product category --
which are the most relevant?
Maps can be drawn for attributes, benefits, values, etc.
May require maps with multiple dimensions
Relevant dimensions may not be clear without prior qualitative research
(e.g. focus groups)
Even in a research setting, customers may be unable to articulate
relevant dimensions

Different segments may focus on different attributes and/or have

different perceptions
Computing the variance of responses within a sample can help assess
the level of homogeneity of responses

Attribute Rating Method

1. Attribute Rating Relies on either Factor analysis or
Customers rate products Discriminant analysis
or brands on a set of pre-
Attempts to identify the attributes which are most
specified attributes
important for differentiating among the brands;
creates map showing these relationships.

Hypothetical Full The Personalized Services, Friendly,

Service Friendly and Full Service attributes are closely
Output
Merrill Personalized related in the customers minds,
Lynch Services indicating the presence of a single
Raymond underlying Service attribute.
E-Trade
James The Low Cost and High Tech attributes
High-Tech are distinct, and are to some extent seen
TD Ameritrade
as tradeoffs against the Full Service
Scottrade
attribute.
Low
Cost

21
Overall Similarity Method
2. Overall Similarity Relies on Multidimensional Scaling (MDS)
Customers make
Attempts to draw a map such that the distances
judgements about the
between each brand reflect the customers view of
similarity of pairs of
their similarity. The axes on the plot are not labeled
products or brands
and must be inferred by the researcher.

Hypothetical
Meridian These wine brands line up horizontally
Output
Turning Leaf roughly according to price, so this is
Yellowtail likely a cost axis or perhaps an
Kendall-
every-day drinking vs. special
Fetzer Jackson occasion distinction
The vertical axis might be old school
Beringer brands (lower) vs. newer brands (higher)
Gallo or perhaps serious wines vs. casual/
Mondavi
fun wines

Perceptual Maps: Uses

Understanding Market Structure
How are current competitors positioned?
Are customers picking up on our desired positioning?
Are there any holes in the map that could be exploited with a new
offering?

Testing Product Concepts

Introduce customers to the new product (provide a description, picture, free
sample, etc.) and then map their perception against existing products
likely to cannibalize our existing products sales?
good fit with our overall positioning, product line?
differentiated from competitive products?

Setting Product Development / R&D Goals

Focus efforts toward the ideal points of each target segment

22
Perceptual Mapping: Survey Methods
When to use each type?
1. Attribute Rating Better when the relevant product or brand
Customers rate products attributes are clear and easily identified.
or brands on a set of pre-
specified attributes Example: Relevant attributes of car brands are
fairly easy to identify (safety, performance, luxury,
OR fun to drive, economy, reliability, etc.)

2. Overall Similarity Better when attributes are unclear or

Customers make customers are unable to verbalize them
judgements about the
Example: The relevant attributes which consumers
similarity of pairs of
use to evaluate brands of wine are probably subtle,
products or brands
complex and hard to articulate

Agenda
Introduction to Segmentation
Segmenting Consumer Markets
Segmenting Business Markets
Segment Profiling
Perceptual Maps
Other Techniques / Wrap-Up

23
Market Potential Analysis
Market size Estimating Market Size
Current size, growth rate (CAGR)
Data from market research
Breakdown by segment
(surveys, behavioral studies, etc.)
(geographic, demographic, etc.)
Population-based estimates
Look at both revenue and profit Population + usage-based
potential: does this vary by estimates
segment as well? Experience of similar products
Parallel introductions in other
Opportunities to Create geographies / segments
Primary Demand Estimate % penetration of market
Category penetration for existing substitutes
Estimate % shared usage rate with
Opportunity gaps existing complements
Network externalities

Customer Trend Analysis

Customer needs and profiles change over time.
Manage these trends proactively.

Example: US Auto Industry, Mid-1970s

Trend / Shift in Market Implications Requisite Actions

Oil embargo, gas Customers increasingly Invest in technology to

shortages, higher prices focused on better fuel improve fuel efficiency,
Recession, increased economy reduce engine pollution
unemployment Potential for government Introduce small cars to
Emerging customer regulation (US, state) compete with imports
sense of environmental Potential loss of market Focus on government and
values, especially on share to VW, Japanese community relations
West Coast imports

24
Common Marketing Research Errors
Insufficient investment in research. Decisions
are made based on management intuition, common sense,
anecdotal information and other methods not backed up by
solid data and rigorous analysis.

Lack of specific goals for research activities. This

leads to wasted resources from boiling the ocean or trying to
serve conflicting agendas.

Unrealistic timeframes. Company force-fits a

research project into an arbitrary timetable, leading to the use
of inappropriate research tools & techniques to meet deadlines.

Over-reliance on qualitative research without

the hard data from quantitative studies to prove out hypotheses

Customer Analysis and Segmentation:

Summary
Customer needs are not homogenous. This leads
marketers to identify different customer segments.

There are many types of segmentation variables from

which to choose. A best practice is to examine multiple
variables before choosing a segmentation approach.

Marketers then develop segment / market profiles to

prepare for targeting and positioning.

Marketing research is nearly always required for

effective segmentation and to generate customer
insights in developing segment profiles.

25
Customer Analysis and Segmentation:
Questions for Your Business
What kind of segmentation approach are we using? Have we
examined a sufficient number of segmentation variables? Is
our resulting segmentation too simplistic?

Do we have a comprehensive, fact-based profile of each

segments needs, behaviors, and descriptive characteristics?

What proprietary customer insights do we possess that we can

leverage for competitive advantage?

Is our investment in market research adequate? What gaps in

our knowledge base are the highest priority to address?

26