Lecture 2: Segmentation, Targeting, & Positioning Flashcards
Segmentation
The act of slicing up the total market.
Segments refer to groups of people.
Groups (i.e, segments): Preliminary Questions
1) Which group of customers would you cater to, which segment?
2) Which value drivers should you emphasize in the minds of customers in your chosen group/segment?
Step 1: Creating the Segmentation Table
Customer analysis:
1) Who are the groups of customers?
2) What key value drivers are they sensitive to?
3) What are the segment sizes and growth rates? “
Competitor analysis:
1) Who are your competitors in each segment?
2) What are their market shares within each segment?
Step 2: Targeting a Segment to Serve
Company analysis:
1) What are your company’s competencies and constraints (e.g., costs, technology)?
2)Can your company match the value drivers of a segment?
Customer analysis:
1) Which segment has the largest size and highest growth rate?
Competitor analysis:
1) How many competitors? How strong are they?
2) Can you do better than, or at least as well as, the competitors in matching the value drivers of a segment?
Step 3: Positioning statement
Given the target segment you’ve chosen, which value drivers should you emphasize in the customers’ minds?
1) Customer analysis: what are your consumers value drivers ? value drivers that matter to the customers
2) Company analysis: Can your company satisfy those value drivers?
3)competitor analysis: Value drivers that positively differentiate you from your competitors
You need to be clear and convincing about why consumers should buy your product. Your product is a function of your value drivers.
Why do we need Segmentation?
Consumers differ in their sensitivities to value drivers: Value drivers may even be contradictory across segments.
Company’s core competencies and constraints: I may be unable to satisfy all customers. No company is good at everything, a company excels at some things. You want to efficiently use your limited resources.
Competitors already have products that satisfy specific groups of customers: It’s hard to come up with one product that provides value to all customers better than my segment-specific competitors do.
Why do we identify different groups of customers? Why do we not ignore differences and do mass marketing?
- Limited resources.
- Customers have varying needs.
- Wasteful, spending resources on consumers who will never purchase the product.
Segmentation Effects
If you only satisfy value drivers 1 to 3, they might consider your product, but if you failed to satisfy the other value drivers 4-6 and your competitor can satisfy 1-6 then your competitor’s product will be chosen over yours. Do not ignore value drivers 4-6 just because the sensitivity varies between segments.
Note: Mass marketing rarely works.
A customer might not be convinced to buy your product if you satisfy the first three value drivers but not the following three.
You can afford not to do segmentation, but you aren’t maximizing the value you can create and the profit you can gain.
If there are lots of competitors, each competitor tries to find their niche of consumers they can uniquely serve. Therefore, you create smaller sub-segments from the already established segments.
However, what happens when you have further and further and further slicing and dicing (“super segmentation”)? What may be some problems with having numerous options? or Customization?
- Costs for the company: customization creates a new product every time, cannot mass produce, and lose out on economy of scale).
- Customers’ lack of expertise: can give them information and recommendation (that is an additional cost for the company)
- Paradox of choice: even if they don’t lack the expertise, they may lack the motivation or energy. Too much choice, too many things to compare and so you walk away. Give people lots of options (the thought is that it would increase the probability of a consumer picking something) but the numerosity also makes it harder to choose.
Takeaway: Always do segmentation even if there are no competitors, but not too much segmentation so as to oversaturate choice and customization.
How to Segment the Market
At the end of the segmentation stage (i.e., before we come to the targeting stage), what kinds of information do we need to know?
First Kind of Information
First kind of information (comes from consumer analysis):
- For each segment, identify the relevant sensitivities to value drivers and how the sensitivities differ across segments.
E.g., SUV market (different groups of people whose sensitivity differs to value drivers, young people want a rugged image, older people want luxury and comfort.)
Second Kind of Information
Second kind of information (comes from consumer analysis): size and growth rate of each segment.
if it’s a bigger segment, you can reach more people. A growing segment is also promising for investing.
Third Kind of Information
Third kind of information (comes from competitor analysis): competitors in each segment, what they are offering, their market share.
Who are your competitors trying to reach the same people? What products are your competitors offering?
Try to get a sense of the relative intensity of competition within each segment.
Fourth Kind of Information
Fourth kind of information (comes from consumer analysis): Profiles or descriptor variables of consumers in each segment
Demographics/lifestyle: age, income, gender, ethnicity, occupation, life stage (married, single, family, empty nesters), etc.
Geographics: urban, suburban, rural, state, etc.
Note: Demographics and geographic are related but are not the same given that the same type of people are scattered across the country
Create a profile for these segments to describe them.
Segmentation table
Create a segmentation table by putting all four kinds of information together. The table tells you what consumers/people care about, what their profiles are, who your competitors are, and the size and growth rate of the segment.
What’s the fundamental criterion for segmentation (identifying different groups of people in the market)?
The most fundamental criterion is that the sensitivities to the key value drivers have to be different between segments.
if all the segments you’ve identified prefer the exact same product that you are offering, then you have failed to segment the market. You haven’t really figured out how groups of people differ in their sensitivities to value drivers relevant to your product.
How to do Segmentation
There is a simple way that is
most commonly used, especially in small- and medium-sized companies.
And there is a Rigorous way
that is better but much more expensive. It is also only used for product categories where the product life cycle is longer because if the product lifecycle is very short and you’re spending a year or more to use this rigorous way to do segmentation, by the time you’re done your product is outdated already.
How to segment: The Simple Way
Example: The Toothpaste Market
Simple Way: Step 1
Define the following:
Value drivers of customers in general for the product market.
Example: Toothpaste market
Value Driver Variables:
- Flavor
- Product Appearance
- Brightness of teeth
- Decay prevention
- Price
- Fresh breath
- Cavity protection
Descriptor variables (e.g., demographic/geographic) for profiling customers:
- Age (children, teens, older people)
- Gender
- Life stage (family, single)
Why were these variables chosen? These variables are strongly correlated with consumers’ sensitivity to the value drivers.
Simple Way: Step 2
A crucial assumption: A customer’s descriptor variables are strongly correlated with his/her sensitivity to the value drivers i.e., customers with the same (vs. different) descriptor variables will have similar (vs. different) sensitivities to the value drivers
How do I know that this assumption holds? Market Research
If and only if the assumption is true. Then we can group customers based on their descriptor variables to form segments such that within each segment, the customers’ descriptor variables are similar => their sensitivities to value drivers are similar.
Between segments, their descriptor variables are different => their sensitivities to value drivers are different.
Simple Way: Step 3
Group people based on descriptor variables to get four segments.
The fundamental criterion is satisfied (sensitivity to value drivers have to be different between segments): Sensitivities to value drivers differ between segments (because sensitivities correlate with the descriptor variables used to create the segments)
Step 3: Stability of the Correlation
The stability of the correlation between descriptor variables and sensitivities to value drivers is an important factor to consider. If it’s constantly changing, then you can’t rely on the assumptions you make.
The simple way is more prone to errors when you’re using it in a market where these correlations fluctuate and change rapidly.
Why did I use the toothpaste market as an example? Why didn’t I use the smartphone market? the laptop market?
The latter two markets involve lots of changes. People’s preferences are constantly changing over time, and they are changing very quickly, unlike toothpaste, where the sensitivities to the value drivers tend to be pretty stable across decades. The same correlation patterns tend to hold across time.
Simple Way: Step 3 Benchmark
What information do we have so far:
- Value drivers of each segment
- How value drivers differ across segments
- Profiling using descriptor variables
in other words, so far we have 4 segments and their descriptive variables
Simple Way: Step 4
Now we need to get competitors in each segment. Consider which competitors cater to the value drivers within each segment.
How do you get this kind of information?
A crude way to do it is to go to, e.g., Walmart and look at the product packaging because if your competitors are catering to certain value drivers, they’re going to promote these value drivers on their product packaging. Will also promote these value drivers in their advertising, so you look at what they are doing.
Another slightly better way is to approach the people in each segment and ask them what products they have been using and why they use them. That gives you the market share of each of your competitors within each segment.
Example: If you ask 50 people, you can get a percentage of people using colgate, using crest, etc.
Simple Way: Step 5
Now we need to get
-Size & growth rate of each segment
How do you get this kind of information?
Know the profiles/descriptor variables for each segment
Go to the publicly available census data,
e.g., for segment 1
number of children <13 -> segment size
5-year trend of number of children <13 -> growth rate
Simple Way: Disadvantages
- Useful only if descriptors strongly correlate with sensitivities to value drivers (crucial assumption for the simple way to work). If it turns out age, gender, and life stage have zero correlation with sensitivities to value drivers, then just because you can group people into different segments, it doesn’t mean that you’ve done anything that is useful for the purpose of segmentation. If they’re very weak correlations, then you know this simple way is far from satisfying.
- Hard to do if sensitivities to value drivers are constantly changing
- Hard to do for new product categories because you don’t know what are the segments out there, and what people’s sensitivities to the value drivers are. Using the simple way, you wouldn’t be able to find out.
- Ignoring future competitors by relying only on past information.
So: a bit simplistic, but still way better than not doing anything. Not doing anything means assuming that you don’t need to do segmentation. You can just cater to the entire market out there. And that is a bad way to invest your resources because you’re not focusing on who are the people who are actually most likely to buy your product.
Key conclusion: despite all its disadvantages, it is still better than doing nothing at all.
How to segment: The rigorous Way
The end goal of performing segmentation is to figure out people’s sensitivities to value drivers.
V: the value that a potential customer ascribes to your product. If they find your product valuable, V is higher in terms of its numerical value.
W: Weight.
You want to figure out all the values and their weight in this equation for each individual potential customer.
For each individual, their W1 will be different from another individual’s W1.
Example: Laptop
First value driver: How portable is the laptop? Some consumers may care a lot about a laptop’s portability, so their W (weight) would be higher than someone who doesn’t really care about portability.
Second value driver: The laptop’s colour? The same consumer who cares about portability may not care for the laptop’s colour, so the weight ascribed to the second value driver may be low.
Rigorous Way: Step 1
3 products or simulations of the product where only one value driver varies between the products.
Example:
You give the individual three laptops, which are the same size, colour, and weight. The only thing that varies is the resolution of the laptop screen between the three products.
You ask the individual to rank the three products.
Repeat the process with the second value driver varying only, etc.
Note: First you will ask the individual what laptops do they usually use or used before to gain information about your competitors and descriptor variables: age, gender, socioeconomic status, where they live, etc.
Rigorous Way: Step 2
Continue the process in step one until you have a good representation of the population you care about.
Rigorous Way: Step 3
Cluster analysis (e.g., showing 3 VDs below)
How many segments:
- Similar w’s within each segment
- Different w’s between segments
Segment size:
- Correlations between w’s and products used (correlations between people’s weight and the people’s sensitivities to value drivers and the product they use.)
- Market share of competitors withineach segment (because now that you’ve grouped people into different segments, you know what products they use within that segment, and so you can figure out the market share.)
Cluster analysis:
Plot the three value drivers on a three-dimensional space, and by doing so, you can figure out how many segments there are such that they have similar Weights within each segment. You can then see how many segments there are and how big each segment is.
Example:
A cluster analysis might illustrate that only a small percentage of people care about the colour of the laptop. So of the 2000 people, only 150 people care about the colour -> that would represent one segment.
Rigorous Way: Advantages & Disadvantages
Advantages:
- Not making any assumptions. Not relying on past data to make assumptions about the present.
- Taken care of some drawbacks of the simple way.
- We’re actually doing the work to figure out how what descriptive variables are related to what kind of valid drivers (provides the
actual data).
Disadvantages:
- Laborious and expensive, so only doable if you’ve time and resources (e.g., Coca-Cola)
- Why expensive?
1. you have to pay people to come to try your products and need a representative sample, cannot use a convenient sample where you ask your friends and family to try the products.
2. Create the product prototypes
3. Sometimes, you have actually to manufacture the product cannot do a simulation.
Note: The difference between simple rigorous is the quality of the information, the validity, and the reliability of the information in this table. Just because you’ve now created a table the simple way doesn’t mean that the table is capturing reality as precisely in the most nuanced way that you could have.
The more rigorous your processes, the better the quality of information in your table.
Targeting
The act of choosing one (or more) slices. Choosing which segment(s) you are going to target and invest your resources in.
Full market coverage: targeting all segments.
- In theory, you could do full market coverage, a segmentation exercise does not mean you can’t target all segments.
Consider which segments are price sensitive when dealing with high price products.
Types of Targeting
Single-Segment concentration: you offer one product, targeting one segment.
Selective Specialization concentration: Each product is designed in a particular way to cater to the specific needs of each segment.
Product Specialization: Create variations of one product (in this example, P2) to satisfy all the needs of all segments.
Market Specialization: create different products to serve only this particular segment.
Criteria for Positioning
Which value drivers do we need to emphasize in the minds of customers in the target segment (e.g., YCAA) for our potential product (e.g., Discovery)?
Answering this question gives us the positioning of our product.
At the bare minimum, positioning should include considerations around quality and price. Are you going for the high equality, high price positioning (e.g., apple) or high-quality, low price? low quality and low price (e.g., dollarama).
Note: it is a potential product because you don’t have the actual product yet at this stage. STP happens before you actually have the product, and the goal of STP is to figure out what kind of product you want to make.
So you want to figure out what value drivers you want to emphasize in designing your potential product, designing your advertising or promotion campaign, setting the price point and so on.
Positioning for YCAA segment
Two criteria. What are they?
(1) From Consumer Analysis: Emphasize value drivers that are important to customers in target segment: in this case,
-Sportiness
-Reliability
(2) From Competitor Analysis: Emphasize value drivers that differentiate you from the present competition in the target segment (Jeep): in this case,
Reliability (value drivers you do better on).
“Rule of two”: DVRS Example
Came out ~2000: New Product at the time.
Various benefits:
- Better quality than VCR (existing product), easier to program than VCR, and no need for cassettes because everything’s in the box
you can rewind, fast-forward, slow-play the last half hour of TV
- Ceate your own personalized network, so the DVR automatically records shows that you like and shows close to what you like; over time, it develops a good sense of your preferences
- It can skip the ads
- Early DVRs on the market: Microsoft Ultimate TV and ReplayTV.
How did they position themselves?
Ultimate tv Microsoft positioned itself on all the benefits mentioned above. Ignored the rule of two because they were selling it at a high price, so to justify the price, they talked about all the features. No distinctive positioning and had low sales. The value drivers did not stand out.
Replaytv Microsoft positioned itself on only two value drivers, the same price point. It sold more but still had low sales because pitching only two value drivers did not make the high price justifiable for consumers.
Eventually, DVRs succeeded simply because the cost of manufacturing changed. Cos† went down, so the product was able to be sold at a lower price point and was incorporated through subscription offers, letting consumers test out the product and understand what exactly is actually being offered by the DVR. New technology = people don’t understand, therefore its important to give them an opportunity to try out it and experience its benefits.
Exceptions to the “rule of two”
Example: Aquafresh
- Emphasized many value drivers
-white teeth, gum protection, fights bad breath,
Why did it work?
- The three product benefits were familiar to people. The product’s benefits were understandable unlike with DVR’s.
- Aquafresh created a distinctive logo, where the toothpaste had three colours. Each colour corresponded to one of the benefits to emphasize the saliency and memorability of the product. Built the three colours into the product itself.
Positioning: Summary of all criteria
Value drivers to emphasize in the minds of customers should be:
1. Important to the target segment
2. Better than the competitors’ products
3. Positiniong is Communicable: rule of two, easily understood, focused, salient, memorable (to convey the idea of your product)
4. Believable: no perceived contradictions
Note: The company owed Dove and Axe two brands and created two perceived contradictions and caused backlash Dove touched on ethical values and messages of inner beauty and non-objectifying of women. Axe, on the other hand, objectified women, caused a huge upset for its hypocrisy. Within the same branding, minimize the perceived contradictions between the products.
