Segmenting for Success

Designing an implementation plan

Presented by: Susan Abbott
www.abbottresearch.com 1-888-244-0285

Valid and reliable doesnt always mean useful

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200 CEOs

200 CEOs surveyed in 2004 59% had conducted a major segmentation exercise within the past two years

59%

Paid for segmentation project

14% said they derived value from it

Yankelovich and Meer, Harvard Business Review, 2006, reporting on study by Marakon Associates and Economist Intelligence Unit

14% Valuable

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The most critical point of this presentation

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For segmentation to be useful, you must be able to act on it Then you need to coordinate action in the organization. Marketing cant do it alone.

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Consider all operational levers

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Whats a useful segmentation strategy?

Aligns with strategy

Points you to opportunities

Connects values, attitudes, beliefs specifically related to your product or service category/offerings
Focuses on actual customer behavior You can explain it to your boss. And it makes sense. To both of you Accommodate/anticipate changes in markets and behavior

Adapted from : Yankelovich and Meer

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Differentiated Product/Service: Mobil Oil

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Early 1990s gasoline price wars 2 price / volume segments

Price sensitive customers, USD $700 annual, 20% of market Not price sensitive, USD $1200 annual, 80% of market

Response
Shifted focus away from pricing onto other differentiators

Added 2 per gallon, annual value USD $118 million

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Mobil Oil Example Benefit Matrix

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Basis for Segment Principal Benefit sought

Price Sensitive

Price Insensitive

Lowest price of Something besides gasoline at the pump price (Service? Convenience stores?) ? Spend average of USD $700 per year 20% of market ? Spend USD $1200 per year 80% of market

Demographics Behaviour

Size of segment

Ask yourself: can you still buy gas here if you are not in the target segment? Yes, of course. But they are not tailoring their offering to you.
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Price and Benefits Differentiation: Loblaw

using a multi-format approach to maximize market share over the longer term focusing on food but serving the consumers everyday household needs creating customer loyalty and enhancing price competitiveness through a superior control label program
Source: 2005 annual report
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Segment Focus Strategy: Whole Foods

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We Sell the Highest Quality Natural and Organic Products Available

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Dell: Differentiated Products & Services

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New Vostro line of small business computers

No freeware or demonstration software loaded in Different software offers for Windows and Office suites More reliable than consumer models Support services

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Competing with Starbucks

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E-roleplay: Two Sided Market Segmentation Actors who need interesting jobs between roles Service companies that need better training experiences
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Life stage Segmentation: Umpqua Bank

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Umpquas Day-to-Day Banking Segments

Label Description Go
Specially blended to give a quick lift to those just starting out Low service charges Low minimum required balance

Reach
A crisp and lively blend for those working toward their dreams Unlimited transactions $7.50 monthly. Includes safety deposit box.

Savor
A rich blend with those who have achieved their goals with room to grow $10 monthly, but accounts earn interest Free notary services Free investment consultation

Cruise
Bright and full bodied to bring out all the flavor of your better years Low or no charges on most services, unlimited transactions Membership in Club Carefree 50+

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Principle Benefit Sought

Demographic Correlate

Students and young adults

Young Families in asset acquisition stage

Well-established, mid-life. Building investments

Behavioral Correlate

Low balances

High spending, low balances, no investments yet

Have savings and investments

Moving into retirement, or semi-retirement

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Differentiated Communication
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Same product

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The Marketing Concept

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1. Understand your customers' needs and preferences 2. Group your customers into segments based on their needs and preferences 3. Target segment(s) you can best meet their needs and preferences
This includes targeting and competitive analysis

4. Branding
Not merely awareness but brand positioning

5. Provide superior service or products to meet your targeted customers' needs and preferences.
Happy customers, profitable sustainable growth
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It sounds just like a change management project!

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Get organized to build model

Build Model

Deepen Learning

Use

How segmentation strategy fits with overall business strategy How might you act on the learning. Eliminate non-starters right away. Who needs to be involved

Choice of model needs to fit business strategy and options Must fit organizations ability to identify and respond to segments OR start building the needed data

Spread the learning throughout the organization

Integrate all marketing activities with the segment strategy Integrate data collection and management Integrate channel strategy, metrics Integrate all other research

Stakeholder identification
Its not just a marketing & research department project!
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Why do you need executive sponsorship?

To make operational changes, you need to touch all parts of the business Sales efforts, even the structure of the sales force may change
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Infrastructure may change

All marketing efforts will have to change to match the segment structure

Existing culture, knowledge, business processes and powerful constituencies will derail your efforts without C-level support Net result: segmentation didnt work for us
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Choosing a Model

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The basic difficulty is that value-based segments generally don't fit neatly into demographic ones
McKinsey Quarterly, A segmentation you can act on, 1999

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Profit Based Segments may not be actionable

Became famous through the work of First Manhattan Consulting Group Showed banks that 20% of their customers were profitable, 80% unprofitable
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Dominated thinking for a decade

Profitability

Typical decile chart each is 1/10th of the total customer base

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More actionable
Some examples of new segments for men
Male spas offering manicures, pedicures, etc. Phillips Bodygroom shaver, designed to remove hair below the neck
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No matter what claims are made for a methods theoretical validity and statistical sophistication, if it cant be shown that there is a consistent empirical relationship between product usage and psychographic segments, the method is essentially useless to the marketer.

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To get the most out of segmentation research, it is important to be concerned more with consistent empirical relationships than with elegant theoretical models
Chakrapani & Deal

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The critical questions you need to ask

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Can we see different product, promotion, communication, distribution or profit opportunities with this segmentation model?

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Can we measure the segments? Can we obtain realistic data to consider segment potential?

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What are the desires of each segment? What do they want from us? Do they make different tradeoffs? Which attitudes matter for the purchase decision?

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Does senior management understand the segmentation model? Does it fit with their deep knowledge of the business?

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Is this segmentation model responsive to changes in the market and our customers?

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Can we differentiate competitor offerings with this segmentation model?

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Can we reach segment(s)?

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3 Major Segment Strategies

One product to all segments
Example, discount airlines one price, one level of service
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One product for one segment

Niche markets Luxury goods typically handled this way e.g. adventure travel

Multiple products designed for and targeted at multiple segments

Typical strategy in financial services and broad based consumer products Example: how many kinds of toothpaste can you buy?
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The most critical point of this presentation

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For segmentation to be useful, you must be able to act on it Then you need to coordinate action in the organization. Marketing cant do it alone.

Abbott Research & Consulting 2006,2007

Thank you!

Susan Abbott
Web: www.abbottresearch.com E-mail: susan@abbottresearch.com Blog: www.arc.typepad.com/customercrossroads Phone: 416-481-7409 or 888-244-0285

www.abbottresearch.com 1-888-244-0285