FORECASTING AND DEMAND MODELING SYSTEMS

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• FORECASTING AND DEMAND MODELING SYSTEMS
• A SYSTEM DESIGN AND OPERATIONAL EFFECTIVENESS
  PROGRAM
• SEGMENTATION AND TARGETING
• Stephen B. Parkoff, Ph.D., CMC

Selected slides Courtesy of Lilien and
Rangaswamy 2001.
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OBJECTIVES

• The objective of this module is to define the
  segmentation and targeting of markets in theory
  and practice and to show how target segments can
  be described, selected and evaluated
• We will also discuss designing and collecting
  data, various practical segmentation methods and
  explore several models using segmentation and
  clustering techniques

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• INTRODUCTION TO THE STP PROCESS OF ANALYZING
  MARKETS
• Segmentation gt Targeting gt Positioning

• Define the market
• Analyze the market
• Segment the market
• Target a segment
• Position your product
• Example

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DEFINITION OF A MARKET

• A market consists of all the potential customers
  sharing a particular need or want who might be
  willing and able to engage in exchange to satisfy
  that need or want.
• Kotler, Marketing Management
• A market is also a set of products that are
  substitutes for one another within a usage segment

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DEFINING THE MARKET

• Common customer needs define a market not a
  product.

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APPROACH TO DEFINING A MARKET

• Customer-Behavior
• Demand cross elasticity
• Brand/product switching
• Perception/Judgment
• Engineering/technological substitution
• Customer judgments/perceptual mapping

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WHY IS DEFINING THE MARKET IMPORTANT?

• Strategy(What to focus on).
• Resource allocation(How much/where/when?).
• Feedback/performance measurement(How well are we
  doing? How can we learn from our actions?).

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ANALYZE THE MARKET BEFORE YOU GO TO MARKET USE
STP

• Segment group consumers by criteria
• Target choose which group(s) to sell to
• Position select the marketing mix most
  appropriate for the target segment(s)

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STP IS A MARKETING PROCESS

• Segmentation
• Identify segmentation bases and segment the
  market.
• Develop profiles of resulting segments.
• Targeting
• Evaluate attractiveness of each segment.
• Select target segments.
• Positioning
• Identify possible positioning concepts for each
  target segment.
• Select, develop, and communicate the chosen
  concept

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THE KEY TO EFFECTIVE MARKETING

• SEGMENT
• SEGMENT
• SEGMENT

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A SELECTED SEGMENT IS A TARGET MARKET

• Stated very simply, a target market is a segment
  of the total market that a company can serve
  effectively and profitably

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TARGETING IS PINPOINTING THE MARKET YOU WANT TO
REACH
SELECT SEGMENTS AND EVALUATE ATTRACTIVENESS
IDENTIFY AND TARGET CUSTOMERS
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POSITIONING IS SELECTING THE RIGHT MARKETING MIX

• Once a target segment is selected you have to
  develop a marketing mix of advertising,
  promotion, price and display to attract the
  customers in that segment

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MARKET DEFINITION BY SWITCHING BEHAVIOR

• Current
  Purchase Occasion
• Diet Diet Diet Coke Coke Pepsi Pepsi Spr
  ite Sprite Total
• Coke 53 9 27 4 5 2 100Last Diet
  Coke 12 61 4 15 2 5 100Purchase Pepsi 24
  3 58 9 5 1 100Occasion Diet
  Pepsi 4 14 11 63 2 6 100 Sprite 21 2 17
  3 52 6 100 Diet Sprite 2 15 2 12 7 61
  100

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SEGMENTATION

• What is a market segment
• What is segmentation analysis
• What variables are used
• Benefits of segmentation analysis

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WHAT IS A MARKET SEGMENT

• A market segment is a group of actual or
  potential customers who can be expected to
  respond in a similar way to a product or service
  offer - they want the same types of benefits or
  solutions to problems or they will respond in
  similar ways to a companys marketing
  communications

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SEGMENTATION IS DIVIDING MARKETS INTO ACTIONABLE
GROUPS

• Segmentation is a process of dividing customers
  whose valuation of a product or service vary
  greatly into groups
• Similar values or responses within a group
• Differences across groups
• Segmentation methods are the models and
  procedures available to collect data, divide the
  market and profile segments - includes direct
  measurement of demographics and inference of
  values based on purchase behavior

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IMPLICATIONS OF SEGMENTATION

• 1. Segmentation defines common customer needs.
• 2. Those common needs may be satisfied by similar
  or dissimilar technologies or have different
  solutions.
• Ex Customer dissatisfaction at long delays at
  supermarket checkout.
• Solution 1 Faster UPC scanner systems.
• Solution 2 Entertainment/Sales systems on
  checkout lines.
• Note Total solution defines (competitive)
  market, not product or technology

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A SEGMENTATION MODEL MUST SATISFY THREE
CONDITIONS

• Homogeneity - a measure of how the potential
  customers in a segment
• (a) have similar responses to a marketing
  variable and
• (b) are different than other groups
• Parsimony - a measure of the degree to which the
  segmentation would make every potential customer
  a unique target
• Accessibility - the degree to which marketers can
  reach segments separately, using observable
  characteristics of the segments (descriptor)

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SEGMENTATION REQUIRES IMAGINATION

• If youre not thinking segments, youre not
  thinking. To think segments means you have to
  think about what drives customers, customer
  groups, and the choices that are or might be
  available to them.
• Levitt, Marketing Imagination

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MARKET SEGMENTATION IS A MEANS TO AN END

• There is no best way you have to be creative
  to identify effective ways
• Identify targets for a direct mail program
• Guide the design of new products
• Determine the appropriate selling message and
  products to promote to a given customer
• Assign customers and prospects to channels

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SEGMENTATION IS INTELLIGENT GROUPING

• Grouping consumers by some criteria, such that
  those within a group will respond similarly to a
  marketing action and those in a different group
  will respond differently.

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EXAMPLE OF SEGMENTATION

• All Homeowners Single Family Homes Condos

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ANOTHER EXAMPLE
All people Large people Small
People
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A TWO-STAGE APPROACH IN BUSINESS MARKETS

• Macro-Segments
• First stage/rough cut
• Industry/application
• Firm size
• Micro-Segments
• Second-stage/fine cut
• Different customer needs, wants, values within
  macro-segment

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Using Cluster Analysis for Aggregating Customers
Into a Segment

• Select a cluster analysis procedure for
  aggregating (or disaggregating customers) into
  segments.

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STEPS IN A SEGMENTATION STUDY

• Articulate a strategic rationale for segmentation
  (i.e., why are we segmenting this market?).
• Select a set of needs-based segmentation
  variables most useful for achieving the strategic
  goals.
• Select a cluster analysis procedure for
  aggregating (or disaggregating customers) into
  segments.
• Group customers into a defined number of
  different segments.
• Choose the segments that will best serve the
  firms strategy, given its capabilities and the
  likely reactions of competitors.

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HOW DO YOU IDENTIFY AND REACH CUSTOMERS?

• Make a distinction between bases -
  characteristics that tell us why customers differ
  between segments (e.g, needs, preferences,
  decision processes)
• and
• Descriptors - characteristics that help us reach
  those differing customers
• Business markets Consumer markets
• Industry Age/Income Size Education Locati
  on Profession Organizational Life styles
  structure Media habits

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IDENTIFY POTENTIAL SEGMENTATION VARIABLES
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Variables to Segment and Describe Markets
Consumer Industrial

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Variables to Segment and Describe Markets
(continued)
Consumer Industrial
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Variables to Segment and Describe Markets
(continued)
Consumer Industrial
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SEGMENTATION IN ACTION

• A Marriott Hotel used to be a Marriott Hotel An
  upscale hotel catering to business people,
  pleasure seekers and international and group
  travelers. Today, besides the Marriott Hotels
  (the companys major business), there are
  Marriott Suites, Residence Inns, Courtyards by
  Marriott and Fairfield Innseach serving a
  smaller, targeted segment of the market.
• Lenneman and Stanton, Mining forNiches,
  Business Horizons.

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SEGMENTATION IN ACTION 2

• We segment our customers by letter volume, by
  postage volume, by the type of equipment they
  use. Then we segment on whether they buy or
  lease equipment.
• Based on this knowledge, we target our marketing
  messages, fine tune our sales tactics, learn
  which benefits appeal to which customers and zero
  in on key decision makers at a company.
• Kathleen Synnot, VP, Worldwide Marketing
  Mailing Systems Division, Pitney Bowes, Inc.
• quoted in Marketing Masters (Walden and Lawler)

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SEGMENTATION IN ACTION 3

• Kodaks Business Imaging Division increased
  customer contact and support with a three tiered
  distribution system. They created three avenues
  for marketing microfilm, supplies and imaging
  systems and software
• direct sales reps (for more complex systems)
• brokers and distributors (for film sales and
  delivery)
• Components Marketing Division (to sell to system
  integrators and VARs).
• Business Marketing

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SEGMENTATION HAS MANY BENEFITS

• Focuses efforts on who to find out more about
• Identifies actionable segments
• Selects segments large enough to be worthwhile
  focusing on
• Defines the geographical concentration
• Identifies price sensitivity of customers
• Identifies how competitive the segment is
• Shows how vulnerable the segment is to additional
  entrants

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TARGET A MARKET SEGMENT

• Which segments do you target
• Selecting segments to target
• The targeting process

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SHOULD YOU TARGET A SEGMENT?

• Is the segment identifiable?
• Is it large enough too be worthwhile?
• Is there homogeneity or heterogeneity in
  preferences?
• Is it actionable?
• How competitive is the segment?
• How easy is it for new companies to target the
  segment?
• What are the pricing and profitability options?

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WHICH SEGMENTS DO YOU TARGET?
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OPTIONS IN SELECTING SEGMENTS TO TARGET

• Concentrate on a single segment
• Select segments in which to specialize
• Provide a range of products to a specific segment
• Provide a single product to many segments
• Cover the full market all products to all
  segments

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SELECT SEGMENTS BY RATING ATTRACTIVENESS
More attractive segments
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WHICH SEGMENTS TO SERVE?Segment Attractiveness
Criteria
Criterion Examples of Considerations
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RELEVANT SEGMENTATION DESCRIPTOR
Variable A Climatic Region 1. Snow Belt
2. Moderate Belt 3. Sun Belt
Fraction of Customers
Segment 1
Segment 2
Segment 3
100
Likelihood of Purchasing Solar Water Heater (a)
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IRRELEVANT SEGMENTATION DESCRIPTOR
Variable B Education 1. Low Education
2. Moderate Education 3. High Education
Fraction of Customers
Likelihood of Purchasing Solar Water Heater (b)
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TARGETING IS ALSO A PROCESS

• Specify drivers of each dimension
• Weight the drivers in relative importance
• Rate segments on each driver
• Multiply rates times weights for each segment
• Develop results visually graphs and pictures
• Review the results perform sensitivity analysis
  (change weights and ratings

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THE MARKET FOR EGGS

• Segments
• Disinterested consumers
• Casual Egg Users
• Health conscious consumers
• Enthusiastic users
• Profiles
• Beliefs
• Attitudes
• Lifestyles
• Health/Nutrition consciousness
• Media habits
• Consumption habits
• Demographics
• Frank and Phillips, Agribusiness, July 1990

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TARGETING AND POSITIONING THE EGG MARKET

• Health Conscious Strategy Casual Users
  Consumers Enthusiastic Users
• Positioning Convenient and Ideal and
  natural Traditional food with useful in
  many food, good for the many applications. situa
  tions. family. Very convenient, good for
  the family.
• Copy Informal Health-oriented Larger family
  setting.Visuals settings. personality or Major
  meal, possibly situation. with guests.
• Copy Easy pace, Fresh, clean Reinforcing,
  emphasisTonality relaxed setting, very benefits
  and wide atmosphere. natural. use.
• Promotions Reminders at Matter-of-fact Simple
  reminders to checkout, egg information on
  the buy eggs. display, or nutritional
  value dairy. and health attributes of eggs
  in recipes and leaflets.

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POSITION YOUR PRODUCT

• Differentiate your product
• Maximize customer value
• Use of Perceptional Mapping

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POSITION TO DIFFERENTIATE YOUR PRODUCT

• Positioning involves designing an offering so
  that the target segment members perceive it in a
  distinct and valued way relative to competitors.
• Three ways to position an offering
• 1. Unique Only product/service with XXX
• 2. Difference More than twice the feature
  vs. competitor
• 3. Similarities Same functionality as
  competitor lower price
• What are you telling your targeted segments?

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POSITION TO MAXIMIZE CUSTOMER VALUE

• Functional Value
• (What does this product do for me?)
• Supplier/Service Value
• What does the product mean to me?
• (What is the insurance? service? psychological?
  value of the product or supplier?)

Price/Performance
Advertising Selling Service Efforts
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DEFINE CUSTOMER NEEDS AND MEASURE THEIR VALUE
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CUSTOMER VALUE ASSESSMENT METHODS
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Product Positioning Using Perceptual Preference
Maps

• Differentiation Creation of tangible or
  intangible differences on one or two key
  dimensions between a focal product and its main
  competitors.
• Positioning Strategies to ensure that key
  differences between the focal product and its
  competitors occupy a distinct position in the
  minds of customers.
• Mapping Techniques (using customer-data) that
  enable managers to develop differentiation and
  positioning strategies by enabling them to
  visualize the competitive structure of their
  markets as perceived by their customers

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GENERIC POSITIONING STRATEGIES

• Our product is unique
• (eg, Perdue chicken).
• Our product is different
• (eg, Listerine).
• Our product is similar
• (eg, Meisterbrau).

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EXAMPLE PERCEPTUAL MAP OF BEER MARKET -1
Heavy
Budget
Premium
Light
(This map show only the products/brand)
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EXAMPLE PERCEPTUAL MAP OF BEER MARKET -2
(This slide shows only the attributes)
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EXAMPLE Perceptual Map of Beer Market
(This slide shows both products attributes)
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HOW STP ADDS VALUE TO A FIRM
Segmentation Identify segments
Targeting Select segments
Positioning Create competitive advantage
Marketing resources are focused to better meet
customers needs and deliver more value
Customers develop preference for brands that
better meet their needs and deliver more value
Customers become brand/supplier loyal, repeat
purchase, communicate favorable experiences
Brand/supplier loyalty leads to increased market
share and creates a barrier to competition
Fewer marketing resources needed over time to
maintain share due to brand or supplier loyalty
Profitability (value to the firm) increases