307 Final: Segmentation, Targeting, and Positioning

Usage Rate

"80/20" rule—20% of consumers may account for 80% of consumption (in many product categories) - Note that larger consumption rate segments may be subject to heavy competition --> Heavy users of a product will buy more, but segments of these may attract more competition - Reasons for targeting smaller segments (good for smaller, growing firm) Reduced competition Opportunity for growth

Segmentation, Targeting, and Positioning 3 Stage Process

(1) determine which kinds of customers exist (2) select which ones we are best off trying to serve and, finally (3) implement our segmentation by optimizing our products/services for that segment and communicating that we have made the choice to distinguish ourselves that way. Sequence of steps in chart

Perceptual Matching Ideal Points

(don't need to memorize each specific step!!!!) After identifying various methods to position products/services, here are the six steps to establish our positioning of products and services Perceptual map: Displays, in two or more dimensions, the position of products or brands in the consumer's mind Example: Sweet vs. light taste (vertical dimension) Less natural vs. healthy (horizontal dimension) Ideal points: where a particular market segment's ideal product would lie on map (larger the circle, larger the market size) *Changing firms positioning is never an easy task!! Six Steps: 1. Determine consumers' perception / evaluation of the product or service in relation to competitors through series of questions to determine brand positioning Ex. how consumer uses existing product, what items consumer regards as alternative sources to satisfy needs, likes/dislikes about brand, what mike make them choose a brand over the other 2. Identify the market's ideal points and size - If firm doesn't have a product positioned close to a point representing the largest market it should consider an introduction - Smallest markets should not necessarily be ignored (consider niche market) 3. Identify competitors' positions - Must study how same competitors position themselves (Gatorade and Powerrade appeal to same target market, next to each other on stores, etc.) 4. Determine consumer preferences - Firm knows what consumer thinks of products in the market place and their positions relative to one another - Now it must find out what the consumer really wants (determine ideal product that appeals to each market) 5. Select the position - Find out how to appeal to the target market ---> Develop new product to meet the needs of this market, adjust or reposition marketing approach, ignore target market preferences (for sweet vs. light taste, less healthy vs. healthy) and hope customers will be attracted to their product b/c it's closer to their ideal product than anything else on the market (Gatorade) 6. Monitor the positioning strategy - Firms must always view the first 3 steps of the positioning process as ongoing with adjustments made in step four as necessary - Markets are not stagnant (consumer's tastes shift and competitors react)

2. Demographic

- personal statistics such as income, gender, education, location (rural vs. urban, East vs. West), ethnicity, and family size. - Example: Campbell's soup, for instance, has found that Western U.S. consumers on the average prefer spicier soups—thus, you get a different product in the same cans at the East and West coasts. 1. Age 2. Gender 3. Ethnicity 4. Income—not generally a reliable predictor (willingness to spend is more useful) Income ≠ willingness to spend! --> Generally, income is not a reliable predictor of spending. Some low income individuals live greatly above their means and many individuals with high income are quite frugal. Thus, although this is, strictly speaking, not a demographic factor per se, it makes more sense to segment based on price sensitivity. 5. Family lifecycle stage --> a single individual may be better able to afford certain luxuries than older individuals who have higher income but greater obligations --> Divorce can have a dramatic financial impact and may greatly increase expenses as living quarters and duplicate items are needed. --> Once a child is born, this will increase expenses but, at the same time, also decrease income if one spouse cuts back on work or leaves the workforce entirely. --> "Empty nesters" who often have reached higher pay levels may find more resources left over after children leave --> Once a home mortgage has been paid off, available income may increase. The financial shape of retirees tends to vary dramatically.

Four Approaches to Targeting

1. Undifferentiated: Offering sold as a commodity by everyone to call customers - all consumers are treated as the same, with firms not making any specific efforts to satisfy particular groups. - - may work when the product is a standard one where one competitor really can't offer much that another one can't. Usually, this is the case only for commodities. 2. Differentiated: Firm makes different offerings to each of several different segments (e.g., auto manufacturers make different cars and trucks aimed at different customer groups) - Airlines offer high priced tickets to those who are inflexible (business travelers who pay high price but not many of them) - The same airlines then sell some of the remaining seats to more price sensitive customers who can buy two weeks in advance and stay over Saturdays 3. Concentrated: Firm focuses on serving one segment that exists while leaving other segments to competitors (or offering one benefit)—e.g., Tesla (electric cars) - For example, Southwest Airlines focuses on price sensitive consumers who will forego meals and assigned seating for low prices. 4. Micro-marketing (one-to-one): Unique offerings to each customer

Criteria in Evaluating Segment Attractiveness

A number of criteria can be used to evaluate the attractiveness of different segments (These are discussed further in the text) 1. Identifiability (and distinctiveness from other segments) 2. Reachability 3. Substantiality (segment size)—note that a large segment may attract heavy competition, however. 4. Profitability 5. Responsiveness Our choice to target should generally depend on several factors: 1. How well are existing segments served by other manufacturers? It will be more difficult to appeal to a segment that is already well served 2. How large is the segment, and how can we expect it to grow? (Note that a downside to a large, rapidly growing segment is that it tends to attract competition). 3. Do we have strengths as a company that will help us appeal particularly to one group of consumers? - Firms may already have an established reputation. While McDonald's has a great reputation for fast, consistent quality, family friendly food, it would be difficult to convince consumers that McDonald's now offers gourmet food and would be better off targeting families in search of consistent quality food in nice, clean restaurants

Some Bases for Segmentation

A number of variables can be used for segmentation. These, in turn, can be grouped into various categories above 1. Geographic (technically part of demographics) 2. Demographic 3. Psychographic 4. Benefit Desired 5. Behavioral - Loyalty - Scanner data based approaches - Example: Some consumers are "brand loyal"—i.e., they tend to stick with their preferred brands even when a competing one is on sale. Some consumers are "heavy" users while others are "light" users (80% wine consumption is by 20% of a consumer group) Facing flat sales of guns in the traditional male dominated market, a manufacturer came out with the Lady Remington, a more compact, handier gun more attractive to women. Taking this a step farther, it is also possible to segment on lifestyle and values." Some consumers want to be seen as similar to others, while a different segment wants to stand apart from the crowd. One can also segment on benefits sought, essentially bypassing demographic explanatory variables. Some consumers, for example, like scented soap (a segment likely to be attracted to brands such as Irish Spring), while others prefer the "clean" feeling of unscented soap (the "Ivory" segment). Some consumers use toothpaste primarily to promote oral health, while another segment is more interested in breath freshening.

Segmentation Examples

Air Travel Business/Executive: Inflexible; relatively price insensitive (Small number of people, but travel often) - generally have to pay higher prices when booking due to short notice - we can only fill up part of the plane with these customers. Leisure Traveler/Student: Relatively flexible; very price sensitive (other methods of travel--e.g., bus, car, train--are feasible; travel may not be essential) (Very large segment) - If people travel for vacation, they will usually need to arrange some time in advance, so they can buy tickets earlier. - They may also be willing to change the time at which they go if there are large differences in fares at two different times. - Although these customers will pay much less, there is a larger quantity of them Comfort Travelers: Comfort (e.g., space, food) important; willing to pay (Small segment) - may be willing to pay a large premium to travel in first class, in extreme cases, for having access to a shower during the flight. - These customers are few and far between, but can offer a great deal of revenue.

Geolocation Based Segmentation

An emerging segmentation technique involves the tracking of customer visits to various types of shopping establishments over time. •Members of a volunteer panel have software installed on their phones to identify their locations (A researcher would need the consent of the customer to have this data collected for research purposes so we use volunteers) •Over time, the frequency of visits to different types of establishments can be identified •This information can be integrated with information provided by panel members: -Demographics -Interests -Online and offline behavior recorded

5. Behavioral

BEHAVIOR: Habits, choices, and tendencies Some examples: -Usage rate -Brand switching •Brand switchers—variety seeking •Brand switchers—motivated by price •Loyals—extreme temptation is needed to bring about switch •Inertials (resisters) -Habitual buyers -"If it ain't broke..." -Likely switch if there is a good reason Other scanner data based methods - scanner data can identify behaviors such as brand switching, store choice, and media habits. Segmentation by behavior involves variables such as usage rate/frequency, willingness to switch brands (whether to save money or for variety), shopping outlet choice (e.g., supermarket, convenience store), and media habits. Scanner data can identify behaviors such as brand switching, store choice, and media habits.

Example: Predicting Pregnancy from Target Purchases

Certain purchases, for example, when taken together tend to predict a likely pregnancy. This practice is rather controversial due to the privacy issues involved. Twenty-five variables used to predict—e.g., -Change to unscented lotions and cotton balls -Dramatic increase in purchases of: •Hand sanitizers •Selected vitamins •Wash cloths •Cotton balls •Legal issues •Ethical and public relations issues

1. Geographic What is micro-segmentation?

GEOGRAPHIC (technically a case of demographic segmentation) Regional differences Climate and physical environment - weather may bring both work and certain leisure activities to a stop, often on short notice. Tastes (Campbell's Soup) Lifestyle and values (Urban vs. rural areas) - The same product, for example, is variously known as "pop," "soft drinks," "soda," or even "Coke" in different regions - In the rural area, restaurant choices may be much more limited. Although more specialized shopping may be possible in urban areas, traffic congestion may actually making shopping a more onerous task. Micro-segmentation Adaptation of retail store assortment to the specific area based on: Residential demographics (age distribution, ethnicity, income levels) Other characteristics (e.g., vicinity of a beach/vacation destination, residential or business area?) May be largely data-driven based on past sales (scanner data) --> Micro-segmentation involves attempts by a large chain store such as Target to tailor the assortment of each store location to the needs of the area

Clarification: Data enhancement vs. the merge-purge process

Merge Purge: When no single source contains all the customers of interest, it is possible to combine different lists and remove the duplicates. - Buyers of baby clothing may have bought from several different catalog and online merchants before. - There is no one merchant from whom everybody has bought, but some customers may have bought from more than one. - Magazine subscriptions and organizational membership may also predict such purchases. - The merge-purge process increases the number of individuals in the database but does not necessarily add more information about each individual. Data enhancement: Combining information about the same customer from several different sources—e.g., real estate records, past purchases, vehicle registrations, magazine subscriptions. - Individuals are matched across databases and their information is combined in a new, comprehensive one. --> REACHING TARGET MARKETS through direct mail lists -Increases the amount of information available about each individual but not necessarily the total number of individuals in the database

3. Psychographic

PSYCHOGRAPHICS: A combination of demographics and lifestyle 1. Motives 2. Values 3. Lifestyle --> Usually more practical than personality Psychographics involves a combination of demographics and lifestyles. Two men may be nearly identical demographically, for example—both 41 years old, both married with two children, both having incomes of $81,000, and both being Presbyterian—but having very different lifestyles: One is physically active, adventurous, and willing to try new things while the other is more sedentary and less willing to change existing habits. Different consumers may hold different values and may need different appeals (motives) Some, for example, like to be seen as being similar to others while others want to stand out.

TARGETING

SELECTING SEGMENT(S) AND SPECIALIZING "You can't be all things to all people" ---> choose one or more groups. - experience has demonstrated that firms that specialize in meeting the needs of one group of consumers over another tend to be more profitable. Focus narrows scope of competition, but demands are greater. - In this phase, we decide to target one or more segments.

Benefits Sought in Segmentation What is it based on?

Segmentation on benefits sought involves identifying different groups of customers looking for various types of products—e.g., "exotic" vs. "safe" foods. In some cases, it may not be clear what, if any, demographics may correlate with various tastes, but there are clearly customers who prefer each of several ones. Targeting customers under this basis may be less efficient because it may not be possible to identify "efficient" media where a large proportion of viewers, readers, or listeners has a specific preference here. It is Based on... Differences in arbitrary tastes—a matter of preference rather than significant tradeoffs (e.g., cola vs. non-cola drink) Tradeoffs (e.g., taste vs. calories; price vs. performance) Usage situation (e.g., coffee for camping (instant) vs. higher quality for home brewing)

SEGMENTATION

Segmentation: 1. "Aggregating prospective buyers into groups that (1) have common needs and (2) will respond similarly to a marketing action." Although not all these consumers are completely alike, they share relatively similar needs and wants. - some customers will tend to be quite brand loyal while others will frequently switch brands, whether for sales and other promotions. There is little benefit in offering a coupon or other discount to a brand loyal segment. It would not make sense to target a price discount or other promotion to this segment. Those who are not loyal customers for our brand would not switch, and those who already buy our brand now get a discount not needed to secure their purchases. Therefore, there would be no incremental sale. 2. "The process of dividing a market into meaningful, relatively similar, and identifiable segments or groups." The second definition involves issue of selecting segments that we can work with in practice. The differences in segments should be actionable in the sense that one can provide different value to each group, or choose to focus on one of the segments that one can serve well. Members of each segment should be relatively similar to each other so that they will respond similarly to the offerings made. Segments should be identifiable, or reachable, so that we can actually communicate in offering our value proposition. Marketing action involves: efforts, resources, and decisions--product, distribution, promotion,

Direct Mail Catalogues

Still used -Spam e-mail is technically illegal and viewed unfavorably -Catalogs get more attention of customers than online -More elegant and higher resolution images to motivate purchase The "Merge-Purge" process: - Used to combine different sources of names (e.g., customers who have bought from competitors, members of relevant organizations, and subscribers to relevant magazines). -Available sources include magazine subscription lists, competitors' customers (more catalogs are believed to increase the "pie" size rather allowing competitors to take away) -No one source contains all potential customers; thus, sources are added together (merge) -There will likely be some overlap between sources, so duplicates must be removed (purge) Limited response rates -Typically 1-3% when highly relevant sources are used to base which groups to send catalogs(e.g., past purchase) ---> The first sales from such lists may not be profitable, but those customers who buy can be retained for future mailings. -Merely sending to everyone in the phone book would result in a much lower rate! -The 1-3% response rate is still considerably greater than response to TV, newspaper, and magazine advertising or conventional advertising

Dynamic Pricing

The effective price may be set based on the past behavior of the customer -Customers who have not shopped at Staples or Staples.com recently may receive a coupon -Amazon.com may base the price offered on previous purchases. New customers may receive lower price offers. -Those who elect to pay for airline upgrades (e.g., to first class) may be less likely to get such upgrades as comps (interesting)

Reaching Target Markets

There are a number of ways to most efficiently reach more specialized target markets (rather than aiming all advertising at the general population: 1. TV network viewer demographics, lifestyles, and interests -Food network vs. ESPN vs. Bloomberg -networks carrying specialized programming of interest to particular types of customers 2. Retail store level scanner data—e.g., drug store chain predicting pregnancy - Certain purchase patterns predict certain interests or statuses. - Pregnancy example: Target is reported to use twenty-five variables to predict pregnancy (change to unscented lotions, increase in vitamin purchases, increase in purchases of hand sanitizers, wash cloths, and cotton balls) 3. Direct mail lists - A number of vendors sell lists (i.e., names and mailing addresses) of individuals with various characteristics. - Previous purchases - Auto and real estate ownership -Medical conditions -Profession organization membership - Ownership of products based on warranty registration -Area of residence, recent moves -Estimated income -Other demographics --> Data enhancement: Matching individuals across sources to combine comprehensive information—multiple variables 4. Specialty media -Specialized TV programs addressing product of interest (e.g., food, travel) -Print or online specialty magazines (e.g., digital photography, home improvement, jogging, travel, hunting) 5. Search behavior -Paid search—"pay per click" -Products explored online -Sites frequented

Excess Retail Store Returns

•Best Buy and a number of other retail chains engage the services of Retail Equation, a service tracking return patterns of customers •Certain customers who have made "excessive" returns are told that they will no longer be able to return items for a certain period of time even if this would generally be permitted under the retailer's return rules •These customers can be expensive. One cell phone service provider also "banished" customers who make unusually large numbers of calls to customer service. •These restrictions are intended to: -Curtail abuse (e.g., wearing clothes or using a product and then returning it) -Guard against stolen items or items bought elsewhere being "returned" -Guard against excessively costly customers (an estimated 11% of retail store merchandise is being returned)

Income and Price Sensitivity

•Income and wealth are NOT reliable predictors of price sensitivity. •In order to be able to buy certain high priced items, a certain level of income or wealth is a necessary, but not sufficient, condition. •A book titled The Millionaire Next Door provides strong evidence that many wealthy people have developed wealth through frugality rather than high incomes. •Wealthier individuals will NOT necessarily choose higher priced options. •Therefore, segmenting on price sensitivity rather than income or wealth makes more sense. •

1/2. Identifiability and Reachability

•Members of a segment need to be identified either individually or as a group with characteristics and to be reachable (i.e., targeted with advertising and reached with stores or other sales outlets) •Lists of very specific segments—to whom catalogs and other materials can be sent—can be bought from brokers. Examples of lists available: -Occupation (especially if licensed or listed in Yellow pages) -Organizational membership -Medical condition •Reach through specialized media

Some Demographic Targets

•The George Foreman Grill - The George Foreman Grill is today quite popular and is sold both in retail stores and through infomercials. Originally, the infomercials were quite unsuccessful because they started out showing footage from George Foreman's boxing career. This was not of interest to most women, who were the primarily buyers of the program. The commercials were, instead, changed to focus more on the use of the grills and Foreman's affable personality. •"Free Style Cruising" at Norwegian Cruise Lines: Do what you want when you want. Cruises had historically been more regimented, and catered in large part to "the newly wed and the nearly dead"—honeymooning couples and senior citizens. In attempting to appeal to families, the experience was made more flexible, Meals were available during mornings, days, and evenings, and families could choose from any number of activities ongoing at any time.

Specifying Segments

•Variables involve descriptors such as age, gender, income, price sensitivity, brand loyalty, geographic location, usage rate, and involvement - Each variable will have two or more levels - For example, geographic location could take the values of urban, suburban, or rural; usage rate could be high, medium, or low) - need to determine which variables will be most useful in distinguishing different groups of consumers as a large number is cumbersome to work with •Levels involve the different categories within each variable. For example, for age, levels might be 0-20, 21-30, 31-40, 41-55, 56-65, and 66; for geographic location, Northeast, Southeast, Midwest, Southwest, West or urban, rural. •Segments are obtained by "crossing" the combinations—e.g., crossing usage rate (high, medium, low) with brand loyalty (high, medium, low) gives nine combinations (e.g., low usage, low loyalty; medium usage, low loyalty; high usage, medium loyalty). Note that segmentation calls for some tough choices. - - for example: must decide that the variables that are most relevant in separating different kinds of soft drink consumers are (1) preference for taste vs. low calories, (2) preference for Cola vs. non-cola taste, (3) price sensitivity—willingness to pay for brand names; and (4) heavy vs. light consumers. We now put these variables together to arrive at various combinations.

Some Positioning Strategies: Value Proposition

→ Last step in developing marketing segmentation strategy is positioning → Market positioning: defining marketing mix variables so target customers have clear understanding of product in comparison with competing products) Value Proposition BEST SITUATION = firm's product or service offers overlap with customer needs and wants but suffers no overlap with competitors' offerings --> Intersection of customer needs/wants with firm benefits or company offering on photo (i.e. The unique value that a product or service provides to its customers and how it is better and different than those of competitors) --> VP communicates customer benefits to be received from a product or service and thereby provides reasons for wanting to purchase it --> if situation exists and product is successful, success is still not sustainable as competitors attempt to copy important product or service attributes and encroach on this value proposition Circles for Successful Value Proposition 1. Customer needs and wants 2. Benefits that a customer needs and wants (company's offerings - capabilities) 3. Benefits offered by competitors Components of a proposition 1. Target market 2. Offering name or brand 3. Product/service category or concept 4. Unique point of difference/benefits The value proposition—some possible benefits -Unique product/service -Price •Low price as benefit •Good value compared to competitors -Quality -Prestige -Customer values (e.g., cruelty free foods and personal care items) Customer communication and education is needed!

Criteria for Segment Attractiveness (Grewal)

→ is the segment worth pursuing using several descriptive criteria (below) 1. Identifiable Firms must be able to identify who is within their market to be able to design products or services to meet their needs Segments must be distinct from one another b/c too much overlap means distinct marketing strategies aren't necessary to meet segment members' needs 2. Substantial Once firm has id'd potential target markets, it needs to measure the segments sizes Too small = insignificant buying power = won't generate sufficient profits or support the marketing mix activities 3. Reachable Products and services won't have any impact if the market cannot be reached/accessed through communications and product distribution (no matter how identifiable or substantial the target market is) Consumer must know how the product and service exists, what it can do for them, and recognize how to buy it 3. Responsive Customers must react similarly and positively to the firm's offering for a segmentation strategy to be successful If the firm cannot provide products to that segment, they should not target it 4. Profitable Marketers must focus their assessments on the potential profitability of each segment, both current and future Key factors - Market growth (current size and expected growth rate) - Market competitiveness (number of competitors, product substitutes, entry barriers) - Market access (ease of developing or accessing distribution channels and brand familiarity) Segment profitability = (Segment size x Segment adoption percentage x purchase behavior x profit margin percentage) - Fixed costs