Segmentation
Ontela A and B
Definition
• Segmentation is the process of dividing the market into groups based
upon important consumer characteristics.
Why Segment?
• Better focus on customer needs
• Promotes new product ideas
• Helps develop effective marketing mix strategy
• Allocation of marketing resources to different products depending upon segment
attractiveness.
Technical reason for segmentation…
• Markets are composed of customers who view a product differently from
each other.
• For example a mobile phone for me is “functional” while for my daughter, it is
psychosocial.
• This difference is captured in the Willingness to Pay (WTP) of each customer.
• Now, if we do not segment the market, our demand curve would look like this……
• However, if you are able to segment and charge different prices to different
segments, you will be able to “extract” more consumer surplus, and therefore,
make more money!
• No point in segmentation unless you are able to
• Charge different prices for same products—More Money
• Charge same prices for different products—More Customers
Using Market Segmentation
• Useful market segments share certain characteristics:
• Measurable
• Substantial
• Accessible
• Differentiable
• Actionable
Segmenting Consumer Markets
• Nation or country
Bases for • State or region
Segmentation • City or metro size
• Density
• Geographic
• Climate
• Demographic
• Psychographic
• Behavioral
Segmenting Consumer Markets
• Age, race, gender
Bases for • Income, education
Segmentation • Family size
• Family life cycle
• Geographic • Occupation
• Demographic • Religion, nationality
• Psychographic • Generation
• Behavioral • Social class
Segmenting Consumer Markets
Bases for • Lifestyle
Segmentation • Activities
• Interests
• Opinions
• Geographic
• Personality
• Demographic
• Core values
• Psychographic
• Behavioral
Segmenting Consumer Markets
Bases for • Occasions
Segmentation • Benefits
• User status
• Geographic • Usage rate
• Demographic • Loyalty status
• Buyer-readiness
• Psychographic
• Attitude
• Behavioral
What is a Market Segment?
Benefits
Values
♥ The Company
Attributes
Segmentation
• Key questions
• What criteria should be used for segmentation?
• How much is the product important for the customer in a particular segment?
• How much is the value of a customer in that segment?
• How big is the segment?
• Customer’s WTP
• Cost of serving the customer in the segment.
The question is how to segment…
• The Demographic trap
• Most students, managers and sometimes teachers too fall into this trap.
• Suppose IFFCO wants to segment the market based on age, income and education, as
well as number of transactions made, time of transactions and packsize purchased
• So basically we are using demographic and behavioral data
• Total number of variables =6
• Suppose we were to create 3 categories for each of the 6 variables, then we will have
• This is far too many segments to make any sense or meaning
So,
• While it is convenient to use demographics, psychographics, attitude
and behavior to segment
• Why? Because these are manifested or easily measured
• But, these seldom provide guidance as to “how” and “what” to
market to the segments.
• Therefore… “Needs Based Segmentation”
Needs-Based Segmentation
• To illustrate the point…
• Let us consider the case Ontela A
• Why does Ontela require segmentation?
• At the very beginning understand that more a customer willing to pay for the PicDeck, more is
h/er value to the company, since they are willing to hold a subscription for a longer period.
• So, Ontela needs to identify the segments for the wireless carriers…..
• So, how does Ontela go about identifying the segments?
Steps in “Needs-based Segmentation”
Steps Description
Needs based Group customers based on similar needs and benefits
Segmentation sought by customer in solving a particular
consumption problem
Segmentation For each needs-based segment determine which
Identification demographics, lifestyle, and usage behavior make the
segment distinct and identifiable
Segment Use pre-determined segment attractiveness criteria to
Attractiveness determine the overall attractiveness of the segment
Segment Profitability Determine Segment Profitability
Segment Positioning For each segment, create a value proposition and
product price positioning strategy
Segment “acid test” Create “segment story-boards” to test attractiveness of
each segment’s positioning strategy
Marketing Mix Expand segment positioning strategy to include all
Strategy aspects of marketing mix
Ontela’s primary segements…Needs….
• Based on needs Ontela has identified 3 personas
Persona Steve Sarah Regina
Needs (values) For business For personal use, Used for “social
Purposes: Will will focus on easy communication”.
value low cost of transfer of photos Will value the ease
communication and from mobile phone (convenience) with
increase in revenue to PC. So which the customer
for business can upload photos
on to FB, and other
sites.
Persona: It is a process by which we give a
“name” to the segment.
The idea of a Persona……
• Personas are fictitious characters created by a retailer to mimic a real
customer.
• They are made based on Profiles, which include foundational demographic information
that is collected through research with real people.
• These profiles are a direct representation of a customer group that shares similar values, behaviors,
and goals.
• Personas begin with those basic profiles, but then are given names, faces, personalities, and
families, to paint an accurate picture of precisely what that person would want and need in real life.
• Personas add the emotional and behavioral component -- the warm, fuzzy stuff. Once complete,
they can help determine need state or end goal for a particular consumer, so that your brand knows
precisely how to target them, and what will resonate.
• While both Segments and Personas are found in a similar manner, a persona will
indication as to how the customer behaves; while the segment talks about “why he
buys”; Persona gives you “who buys”
Profiling the segment
Persona Steve Sarah Regina
Needs (values) For business For personal use, Used for “social
Purposes: Will will focus on easy communication”.
value low cost of transfer of photos Will value the ease
communication and from mobile phone (convenience) with
increase in revenue to PC. So which the customer
for business can upload photos
on to FB, and other
sites.
Segment Profile Businessman in his Busy Mom. Not Less age. Not
30s-40s. Male. Not technologically driven by gender.
a technophile. sound. Looks for Looks for ease of
Usually will change clicking photos of operation.
if forced to. Driving family and friends, Technologically
motivation: but unable to sound. Heavy user
increase in process thereafter. and high on social
Business connect.
opportunities
Segment Size; Revenues; Price
Persona Steve Sarah Regina
Needs (values) For business Purposes: Will For personal use, will focus Used for “social
value low cost of on easy transfer of photos communication”. Will value
communication and increase from mobile phone to PC. So the ease (convenience) with
in revenue for business which the customer can
upload photos on to FB, and
other sites.
Segment Profile Businessman in his 30s-40s. Busy Mom. Not Less age. Not driven by
Male. Not a technophile. technologically sound. Looks gender. Looks for ease of
Usually will change if forced for clicking photos of family operation. Technologically
to. Driving motivation: and friends, but unable to sound. Heavy user and high
increase in Business process thereafter. on social connect.
opportunities
Segment Size Smaller Small Possibly largest
WTP Speculative Speculative Speculative
Segment Profitability Speculative Speculative Speculative
Segment Development Cost Speculative Speculative Speculative
Segment Attractiveness Speculative Speculative Speculative
Segment Positioning
Persona Steve Sarah Regina
Positioning Statement PicDeck will allow you to “Now it is easy to preserve “PicDec will allow you to be
serve clients quickly and Memories” in touch with friends
effectively. “Be in touch, on realtime””
the run”
So, this kind of “gut feel” segmentation does not give much insights……
While it helps in understanding whether you should launch your product at all, it does
not help much with your business plans!
Therefore…Cluster Analysis
Ontela B
• Now we will look at the technique of segmentation thru the cluster
analysis process:
• Let us start by looking at Segment Profitability first.
• Look at the 13th Question: Monthly fee
• And the last Row in the Exhibit 2: % of respondents in each cluster
Cluster 1 2 3 4 5 6
Monthly fee $5.75 $6.64 $7.93 $3.90 $8.31 $1.67 $6.07
Percentage of respondents in each cluster 24% 12% 19% 16% 15% 14% 100%
$1.38 $0.80 $1.51 $0.62 $1.25 $0.23
Order 2nd 4th 1st 5th 3rd 6th
Now look at the questions in Exhibit 2
• Questions 1 to 5: Looks at sources of dissatisfaction—pain points—
gives a lead on the “needs” or “values”
• Questions 6 to 12: Looks at the customer behavior and preferences
related to the product features
• Question 13: Related to profitability.
• All the questions relate to
• How much does the customer use and value photo content captured by mobile phone
• How would s/he respond to my product feature (easy transfer)
Between Customers analysis (horizontal)
Weighte
Response d
Variable Variable Description 1 2 3 4 5 6 Average
Q01 It is easy to upload phone photos 3.07 3.19 2.65 4.06 2.29 3.00 3.04
Q02 Would take more phone photos if transfer were easier 4.33 3.37 3.96 2.43 3.86 2.36 3.49
Q03 Would take more phone photos if quality were better 4.67 4.28 4.21 4.20 4.12 2.75 4.11
Q04 Would replace digital camera if phone transfer were easier 4.11 1.72 2.06 2.31 3.24 1.58 2.66
Q05 Would replace digital camera if phone photo quality were better 4.69 1.81 3.10 3.76 3.59 1.89 3.34
Q06 I value saving phone photos so they are not lost 4.60 3.57 3.75 3.20 3.04 2.42 3.55
Q07 I value sending photos by email 4.53 3.94 4.02 3.22 3.02 2.25 3.61
Q08 I value having photos on my desktop 4.55 4.07 3.92 3.18 2.94 2.31 3.60
Q09 I value sharing photos on Facebook, etc. 3.95 3.69 3.83 3.00 2.98 2.22 3.36
Q10 When deciding on new tech, easy setup is a factor 3.84 3.44 2.71 3.27 3.37 2.83 3.27
Q11 When new technologies emerge, I am first to adopt 3.13 2.07 3.52 2.65 1.96 2.17 2.69
Q12 When buying new tech, I search for best price 4.45 3.76 4.40 3.98 3.06 3.58 3.95
Q13 Monthly fee $5.75 $6.64 $7.93 $3.90 $8.31 $1.67 $6.07
Percentage of respondents in each cluster 24% 12% 19% 16% 15% 14% 100%
$1.38 $0.80 $1.51 $0.62 $1.25 $0.23
Cluster Rating 1st 3rd 2nd 4th 5th 6th
Within Group Analysis (Vertical)
Weight
Response ed
Variable Variable Description 1 2 3 4 5 6 Average
Q01 It is easy to upload phone photos 3.07 3.19 2.65 4.06 2.29 3.00 3.04
Q02 Would take more phone photos if transfer were easier 4.33 3.37 3.96 2.43 3.86 2.36 3.49
Q03 Would take more phone photos if quality were better 4.67 4.28 4.21 4.20 4.12 2.75 4.11
Q04 Would replace digital camera if phone transfer were easier 4.11 1.72 2.06 2.31 3.24 1.58 2.66
Q05 Would replace digital camera if phone photo quality were better 4.69 1.81 3.10 3.76 3.59 1.89 3.34
Q06 I value saving phone photos so they are not lost 4.60 3.57 3.75 3.20 3.04 2.42 3.55
Q07 I value sending photos by email 4.53 3.94 4.02 3.22 3.02 2.25 3.61
Q08 I value having photos on my desktop 4.55 4.07 3.92 3.18 2.94 2.31 3.60
Q09 I value sharing photos on Facebook, etc. 3.95 3.69 3.83 3.00 2.98 2.22 3.36
Q10 When deciding on new tech, easy setup is a factor 3.84 3.44 2.71 3.27 3.37 2.83 3.27
Q11 When new technologies emerge, I am first to adopt 3.13 2.07 3.52 2.65 1.96 2.17 2.69
Q12 When buying new tech, I search for best price 4.45 3.76 4.40 3.98 3.06 3.58 3.95
Q13 Monthly fee $5.75 $6.64 $7.93 $3.90 $8.31 $1.67 $6.07
Percentage of respondents in each cluster 24% 12% 19% 16% 15% 14% 100%
Cluster Rating 4th 1st 2nd 5th 3rd 6th
Cluster Ratings
Cluster Rating 1 2 3 4 5 6
Financial
3 1 5 2 4 6
Clusters
Horizontal 1 3 2 4 5 6
Vertical 2 3 5 1 4 6
1. Cluster 3 seems to be the best
2. Cluster 2 easy to sell to but may not make money
3. Cluster 1 values my product but may not be easy to sell to
Now look at demographic…..
Cluster
1 2 3 4 5 6 Avg
Z1 Median Age
42 41 22 30 39 55 37.53
Z2 Age > 55
25% 27% 12% 19% 28% 43% 25%
Z3 Age < 25
23% 18% 55% 31% 16% 12% 27%
Z4 Male
52% 48% 43% 58% 49% 41% 49%
Z5 Married
48% 71% 22% 34% 64% 67% 49%
Z6 DataPlan
72% 15% 22% 42% 27% 11% 36%
Z7 MessagePack
45% 35% 61% 65% 39% 18% 45%
Z8 Family Plan
26% 54% 66% 17% 37% 12% 35%
Z9 Tech Mag
4.17 1.46 1.26 3.70 2.68 2.18 2.71
Z10 Celebrity Mag
1.77 3.33 4.54 1.39 2.50 3.80 2.82
Z11 Fashion Mag
2.12 2.65 3.65 2.51 1.89 1.25 2.38
Z12 Women’s Mag
2.34 2.64 2.85 2.10 2.57 2.90 2.55
Z13 Homemaking Mag
1.38 2.57 1.55 1.32 1.99 2.62 1.81
Z14 Sports Magazines
3.00 2.57 2.10 4.47 2.91 1.90 2.85
Z15 Internet Use
3.85 1.66 3.12 3.50 2.01 1.42 2.78
Z16 Pay Own Bill
91% 84% 45% 93% 92% 95% 82%
Now Describe the clusters……..
• Cluster 1: Tech focused; Mostly male; Close to median age (middle age); High
Sports and tech oriented… Cannot be Regina.
• Cluster 2: Not Tech focused; Higher than average women and home making
magazine; higher females; Family plan; no data pack; not technically savvy.
Sarah?
• Cluster 3: Youngest cluster, reads fashion magazine; celebrity and women’s
magazine ; most likely to have a message pack and have a family plan. Regina?
• Cluster 4: Similar to 1 but slightly higher age.
• Cluster 5: Less tech savvy, older, married, low on data plan; does not read,
possibly a business man. Diverse segment…maybe Steve.
• Cluster 6: Technologically uninterested.
Three issues
• We now have 6 clusters (or segments) instead of 3 earlier
• We now know what does the customer value and what would s/he
buy
• We now know what is the profit from the segments
• Can we segment now?
Steps in “Needs-based Segmentation”
Steps Description
Needs based Group customers based on similar needs and benefits
Segmentation sought by customer in solving a particular
consumption problem
Segmentation For each needs-based segment determine which
Identification demographics, lifestyle, and usage behavior make the
segment distinct and identifiable
Segment Use pre-determined segment attractiveness criteria to
Attractiveness determine the overall attractiveness of the segment
Segment Profitability Determine Segment Profitability
Segment Positioning For each segment, create a value proposition and
product price positioning strategy
Segment “acid test” Create “segment story-boards” to test attractiveness of
each segment’s positioning strategy
Marketing Mix Expand segment positioning strategy to include all
Strategy aspects of marketing mix
Segment Attractiveness
Segment Attractiveness Analysis
• What makes a segment attractive
• Size and Growth
• Market Size
• Market Growth rate
• Market Potential
• Competitive Intensity
• Number of competitors
• Ease of Entry
• Substitutes
• Market Access
• Customer Familiarity
• Channel familiarity
• Company Fit
Important
• “I will know when our businesses are doing a good job of market
segmentation when they can articulate who we should not sell to”
• Chuck Lillis, CEO MediaOne Group
• And this is the purpose
• Chasing bad customers is worse and more frustrating than chasing difficult good ones.
• Segment Attractiveness analysis helps us identify just this.
Framework for Segment Attractiveness
Market Competitive
prospects intensity
• Market size • Number of
• Market growth Competitors
• Market Potential ess • Ease of Entry
Segment Attractiveness
•Substitues
analysis
Company’s position
• Customer Access/Familiarity
• Trade Access/Familiarity
• Company Fit/ Actionability
Market Prospects Matrix
Hi
Market Growth Rate
Opportunity Attractive
Unattractive Mature
Lo
Lo Hi
Market Size
Competitive Intensity Matrix
Hi
Moderate Fierce
No. of competitors
Mild High
Lo
Hi Lo
Ease of Entry
Position Assessment Framework
Hi
Disadvantaged Strong
Company Fit
Low Moderate
Lo
Lo Hi
Customer Access
Market
Market Strategy
Strategy Framework
Framework -- Attractive
Attractive // Mature
Mature Markets
Markets
Strong
DEFEND MAXIMISE
Company’s Position
Moderate
UPGRADE
Disadvantaged
LIMIT
Low
Fierce High Moderate Mild
Competitive Intensity
Market
Market Strategy
Strategy Framework
Framework -- Opportunity
Opportunity Markets
Markets
Strong
GROW
Company’s Position
Moderate
Disadvantaged
EXPLORE
Low
Fierce High Moderate Mild
Competitive Intensity
Market
Market Strategy
Strategy -- Unattractive
Unattractive Markets
Markets
Strong
LIMIT LIMIT
Company’s Position
Moderate
Disadvantaged
DE-EMPHASISE LIMIT
Low
Fierce High Moderate Mild
Competitive Intensity
Market Targeting Strategies
• Evaluating and selecting market segments requires
assessing the segment’s overall attractiveness in
light of company’s objectives and resources.
• Five patterns of target market selection can then be
considered.
Choosing a Targeting Strategy
• Undifferentiated Marketing
• Differentiated Marketing
• Concentrated Marketing
• Customized Marketing
• Mass Customization
Undifferentiated Marketing
• Appeals to a broad spectrum of people
• Efficient due to economies of scale
• Effective when most consumers have similar needs
• Example: Walmart, Patanjali, Tata Salt,
Differentiated Marketing
• Develops one or more products for each of several
customer groups with different product needs
• Appropriate when it is possible to identify one or more
segments with distinct needs for different types of
products
• Example: L’Oreal (Elseve, L’Oreal, Lancome), HUL, P&G
Concentrated Marketing
• Entails focusing efforts on offering one or more
products to a single segment
• Useful for smaller firms that do not have the
resources to serve all markets
• Example: Johnson and Johnson, Tata (?)
Customized Marketing
• Segments are so precisely defined that products
are offered to exactly meet the needs of each
individual
• Example:Levi’s Original Spin (custom) jeans, hair stylists
Mass Customization
• An approach, related to customized marketing, in which a company
modifies a basic good to meet the needs of an individual
• Example: Dell, XLRI, Full Service Airlines, Some mobile companies, Many
Services Companies (especially Banking, Insurance, Mobile Network
Providers)
Market Targeting Strategies
• Targeting multiple segments may result in cost
economies
• Supersegment targeting may be appropriate
• Blocked markets often require megamarketing
countermeasures
• Be aware of ethical concerns
Segments
Single Multiple
Focused Product
Single Focused
Products
Market Un
Multiple
Focused Focused
Steps in “Needs-based Segmentation”
Steps Description
Needs based Group customers based on similar needs and benefits
Segmentation sought by customer in solving a particular
consumption problem
Segmentation For each needs-based segment determine which
Identification demographics, lifestyle, and usage behavior make the
segment distinct and identifiable
Segment Use pre-determined segment attractiveness criteria to
Attractiveness determine the overall attractiveness of the segment
Segment Profitability Determine Segment Profitability
Segment Positioning For each segment, create a value proposition and
product price positioning strategy
Segment “acid test” Create “segment story-boards” to test attractiveness of
each segment’s positioning strategy
Marketing Mix Expand segment positioning strategy to include all
Strategy aspects of marketing mix
Step 4: Segment profitability
• An attractive segment is based on the market and company’s
strengths, but ultimately profitability of the segment is crucial.
• Also note measuring the profits would lead to a careful analysis of the costs
• Segment sales – Segment Development Costs
• Customer Lifetime analysis
Measures of Performance
• There are various measures of performance
• At Market Level
• At marketing mix level
Some common Performance Metrics
Metric Formula Use
Market
Market Share
Share Units
Units (%)
(%) Performance
Performance in in the
the market
market
Market Share (Rs.) (%) Performance in the market
Market Share (Rs.) (%) —when pricesinare
Performance thesimilar
market
Relative Market Share Performance
—when pricesagainst
are similar
nearest competitor
Market Concentration Whether market is
Relative Market Share Performance
dominated byagainst
few players
nearest competitor
Herfindahl Index Sum of the squared market Used to check the ease of
Market Concentration shares of all players. Higher entry intomarket
Whether a segment—
is
means more dominance of whether a segment
dominated is
by few players
a small group of players fragmented or
Herfindahl Index Sum of the squared market concentrated
Used to check the ease of
shares of all players. Higher entry into a segment—
means more dominance of whether a segment is
a small group of players fragmented or
concentrated
Some more key measures….
•
Steps in “Needs-based Segmentation”
Steps Description
Needs based Group customers based on similar needs and benefits
Segmentation sought by customer in solving a particular
consumption problem
Segmentation For each needs-based segment determine which
Identification demographics, lifestyle, and usage behavior make the
segment distinct and identifiable
Segment Use pre-determined segment attractiveness criteria to
Attractiveness determine the overall attractiveness of the segment
Segment Profitability Determine Segment Profitability
Segment Positioning For each segment, create a value proposition and
product price positioning strategy
Segment “acid test” Create “segment story-boards” to test attractiveness of
each segment’s positioning strategy
Marketing Mix Expand segment positioning strategy to include all
Strategy aspects of marketing mix
Step 5: Creation of the Value Proposition or
Positioning
• A position (or a statement of position) is a cold-hearted, no-nonsense
statement of how you are perceived by in the minds of your
prospects.
• A positioning statement expresses how you wish to be perceived by
your prospects. It is the core massage that you wish to deliver in
every medium. —Harry Bechwith, Selling the Invisible.
So, next class:
• Positioning Concept: Case: Birth of Swatch.