Managing customer heterogeneity

Question 1

What are the five sources of customer heterogeneity? And can you give some examples?

Answer 1

(1) Individual differences (e.g., personality traits)
(2) Life experiences (e.g., higher preference for spicy food living in warmer climates)
(3) Functional needs (e.g., what price you can afford to pay)
(4) Self-identity / image (e.g., products that can promote desired self-image)
(5) Marketing activities (e.g., link between brands and typical identities)

Question 2

What is “latent” customer heterogeneity? And what can it stem from?

Answer 2

Potential differences in desires that are unobserved and have not become manifest in customers’ preferences or behaviours yet.

It can stem from legal constraints (e.g., patents), economic constraints, technology or innovation –> no firm has yet identified or satisfied the need)

Question 3

What is the main approach to managing customer heterogeneity?

Answer 3

The STP approach
(Segmenting, targeting, positioning)

Question 4

When do you use a factor analysis?

Answer 4

When you want to condense a “pool” of potential customers’ needs, wants and preferences into a short set of similar characteristics.

Question 5

When do you use a cluster analysis?

Answer 5

When you want to identify / classify a large set of heterogeneous consumers into a small number of homogeneous segments.

Question 6

What are the three C’s in marketing?

Answer 6

Customer, company, competitor

Question 7

Can you name the six criteria that an ideal target segment should meet?

Answer 7

(1) Based on customer needs
(2) Different than other segments
(3) Differences match firm’s competences
(4) Sustainable
(5) Customers are identifiable
(6) Financially valuable

Question 8

A perceptual map is an analysis tool for what?

Answer 8

Positioning

Question 9

Can you come up with some examples where perceptual maps are applicable and not?

Answer 9

Yes: (fashion), (chocolate), higher education, healthcare services, drinks (ex. dimensions: healthiness and sweetness)
No: highly technical or complex products, products of which consumers have little knowledge, rapidly changing markets

Question 10

What are the three central questions in terms of positioning?

Answer 10

(1) Who are the customers?
(2) What is the set of needs that the good fulfils?
(3) Why is it the best option to satisfy the needs?

Question 11

Can you come up with some examples where a cluster analysis is applicable and not?

Answer 11

Yes: market/customer segmentation
No: continuous variables

Question 12

What is a SWOT analysis?

Answer 12

SWOT appraises the strengths, weaknesses, opportunities and threats that affect a company’s success

Question 13

What are the outputs of the “managing customer heterogeneity” framework?

Answer 13

Industry segmentation, target segmentation, positioning statements

Question 14

What has been the response of firms in order to ‘handle’ to customer heterogeneity? And what are drivers?

Answer 14

Mass marketing –> niche marketing –> 1 to 1 marketing = firms are targeting smaller and smaller segments, but it is hard to effectively compete in all (why we need an approach like STP)

Drivers: Technology has made it possible + the desire for faster response to customer trends and changes.

Question 15

In the STP-approach, the first step is segmentation. Explain how factor analysis is related to this step and briefly the method.

Answer 15

Factor analysis: The main purpose is to group similar attributes together to avoid biasing further analysis –> Data reduction technique. The reduced data can then be used as input for the segmentation analysis.

1. Identify some latent factors that can explain variation in large number of observed attributes (number of factors is attributes with a eigenvalue>1)
2. For each attribute, calculate the factor loadings belong to each latent factor.
3. Determine which attributes that are associated with which latent factor. The criteria is that: Factor loading > 0.3
4. Analyze what characterizes the factors have (given the attributes belonging to them) and give them a “name” e.g., factor 1 is best explained by product diversity, product speciality and product price –> “product” factor

Question 16

In the STP-approach, the first step is segmentation. A commonly used approach to segment customers is by using ‘cluster analysis’. Explain carefully the two steps in this method.

Answer 16

Cluster analysis: Identify and classify a large set of heterogenous customers into a small set of homogenous segments

1. step=segmentation step
   Here we use base variables (=variables for desired product features or pricing requirements) to find subsamples that are homogenous in these base variables, but the base variables are markedly different from other subsamples –> by clustering.

The two main procedures for clustering: Hierarchical vs. non-hierarchical.
*Non-hierarchical: Iterative proces
*Hierarchical: We have mainly focused on agglomerative methods (=bottom-up; start with each case being its own cluster). We can use the dendrogram to determine the optimal level of clusters.

2. step=Describing step
   Here we use descriptors variables to describe how subsamples differ.

Afterwards, you should evaluate the validity of the segmentations results: How is the identifiability of the segment? Is the segment stable and responsive to marketing strategies? Can the company achieve its desired financial objectives with the segmentation scheme?

Question 17

In the cluster analysis, the dendrogram is crucial. Explain how to understand it.

Answer 17

On the x-axis, we have each case being a cluster (e.g., A, B, C, D, E)

On the y-axis, we have the loss of information when decreasing the level of clusters (=distance between link show dissimilarity)

Where to draw the line=Determine how many clusters? Evaluate whether the distance is too big. If this is the case, it is a good idea to stop since you give away too much information (people in a cluster become too dissimilar)

Question 18

In the STP approach, the second step is ‘targeting’. What is the idea and which criteria should the targeting be based on? What is the analysis tool than can be helpful in this case?

Which criteria should an ideal target segment meet?

Answer 18

Targeting=select segments you believe are the best to sell to.

Criteria to base the targeting on:
1. Market attractiveness (e.g., size, growth rate, price sensitivity etc.)
2. Competitive strengths: How do the segment value strengths of the firm? =relative strength of securing and maintaining market share in a given segment
Helpful tool: GE matrix
X-axis: Firm’s competitive strengths (weak vs. strong)
Y-axis: Market attractiveness (low vs. high)
–> The best segments are placed in the upper right corner.
Note: use 3Cs as input.

Criteria for an ideal target segment:
1. Based on customer needs
2. Different than other segments
3. Match the firm’s competences
4. Sustainable
5. Customers are identifiable
6. Financially valuable

Question 19

In the STP approach, the last step is ‘positioning’. What is the main idea and which analysis tool can be helpful?

Answer 19

With positioning you want to improve your relative advantage in the minds of targeted customers. This can be done by both changing actual (innovation) and perceived (brand) offerings.
Note: use 3Cs as input.

A helpful analysis tool is ‘perceptional maps’, where you try to understand the position by customers in some dimensions (e.g., x-axis: traditional vs. contemporary).
Note: Firms are perceived as similar if they are close to each other.

Firms develops a positioning strategy to move the offering such that it can match customer’s preferences (using marketing activities).

Question 20

Another approach for managing customer heterogeneity (other than STP) is the ‘customer-centric view’. What is the main idea and what are the inputs and outputs of the approach? What should be true for it to be succesful (include the time aspect in our explanation)?

Answer 20

The customer-centric view places customer’s needs at the center of an organization’s strategic process and uses the insights to make decisions.

Inputs: Uses customer’s needs to drive decisions
Output: Measures succes from customer’s perspective (customer satisfaction, loyalty, NPS=propensity who will promote product)
Processes: Systems to link customer data to all aspects of the firm

Whether it is succesful depends on how strong the market orientation is:
High market orientation=firms often meet with customers to understand their future needs, there is a high level of communication among employee about customers and the firm responds quickly to customer’s needs.
When implementing the approach, there will be some benefits coming from increased customer satisfaction (in later periods), but those have to be higher than the coordinating costs. During the learning phase payoffs may be negative, but moving further in time benefits from increasing customer satisfaction should be dominating for it to be optimal.

Question 21

How is the customer centric approach different from STP?

Answer 21

The customer-centric approach is more continuous than STP.

STP promotes the notion that firm offerings should match customer preferences, but it does not address whether the firm’s internal organization is able to support actions that align with target segments needs –> CC promote internal alignment, where as STP promotes external.

CC develop richer customer knowledge and greater commitment to each targeted segment.

Question 22

How can classification (using discriminate models) be helpful in the segmentation step of the STP-approach?

Answer 22

Classification analysis using discriminate models can determine how segments of customers differ in their characteristics.
Main feature: It can help to predict which subgroup a new customer belongs to. Thus, you can better target marketing activities.

Regression function for each segment (y=segment membership), where you have estimated some coefficients (betas) belonging to certain predictors/characteristics of customers (x’s). The higher the value of a certain weight (beta), the stronger the association between the corresponding predictor and the segment membership.
E.g., if you have a new customer who is not a part of the cluster analysis, you can observe the customer’s x’s and when you know the relationsship, you can classify the customer into a segment even without doing the cluster analysis.

Question 23

What is customer heterogeneity?

Answer 23

variation among customers in terms of their needs, desires, and subsequent behaviors