Market Segmentation: Practical Applications

Jim Rogers Emerson College November 6, 2008

What is Market Segmentation?

The process of breaking of buyers into groups that are different from each other but internally similar Applicable any marketing situation: Business to business, business to consumer, not-forprofit, politics

Why segment?
Starts from the premise that all buyers are not the same: profit/volume potential, motivations, product uses, needs and desires, etc. Segmentation allows you to chose which buyers to target and provides important insights as to how to appeal to them. Significant competitive advantage

How Segmentation fits with other business activity

Segmentation

Strategy

Tactics

Segmentation has great impact on strategy and tactical development

Strategy
Target Market(s) Offering Strategy

Offering
Product Line Associated Service Bundle

Marketing Tactics
Advertising and other communication (message and media) Distribution Channels Pricing Sales force allocation Promotion

How market segmentation models are developed

Hypothesis Generation
Market Knowledge Past segmentation learning

Qualitative Research
Focused Groups One-on-One Other

Quantitative Research
Especially for consumer markets Expensive but provides great insight

What makes for a good segmentation model?

Provides actionable insight Intuitively understandable Only as complex as it needs to be Embraced at all levels of Management, in all functions (NOT just Marketing!)

How to ensure successif this is your assignment:

Make sure ingoing market knowledge gathering are done correctly and fully incorporated in development of quantitative Make sure sample size is adequate Hire the right market research supplier Immerse yourselfand be the Project Champion Remember: this is an art and a science Get full Top Management backing and do not underestimate the task of installation

Segmentation Examples
Yellow Pages Publishers Association (B to B) Major Automotive Corporation (B to C)

Yellow Pages Publishers Association (YPPA)

Problem: National advertising was not growing Sales efforts were not focused No accepted hypothesis as to why or what to do

Advertiser Segmentation
Interviews showed that consumer dynamics drove role of the Yellow Pages in business generation Businesses where the consumer bought infrequently and under pressure was where the Yellow Pages were most leverageable Where consumers buy frequently and can shop easily there is less leverage

Segmentation and Results

Categories ranked on Yellow Pages leverage, and current advertising spend Individual accounts targeted based on potential Testing program initiated, proving payback of program upgrade Results: Program in place 10+ years; $Bs incremental profitability

Major Automotive Corporation

First time effort at market segmentation despite 100 year history Many factors make segmentation highly complex:
Wide range of products and price points Wide variation in category-related attitudes and needs Complex buying dynamics External factors can change drivers very quickly

Internal factors made the effort more challenging

Top Management enthusiastic but had no experience in the area Little segmentation expertise at any level Product Development buy-in uncertain Which Brand gets which segment? But there was no hesitation to give this project the resources it needed

Mother of all Consumer Segmentation Projects

10,000 person random sample in US; similar sample in Europe (new car buyers) Three plus hour personal interview plus self administered questionnaire Measured purchase/ownership history, attitudes (category related and other), automotive-related needs and desires, etc..highly comprehensive data base from which to work

Once the data was collected, the analytic approach was key
After several attempts, automotive-related attitudes, desires and needs were chosen as the driving variables Other dataincluding vehicle ownedwas used to characterize the segments, not to define them Luxury was broken out separately The final model employed an approximately 30 segment solution

The resultant model and learning was very important to the Corporation
While 30 segments is difficult to conceptualize, the effort did lead to much better targeting of vehicles to buyer groups With 10,000 individuals to work with, regional and ethnic differences could be better understood Even model-level differences could be understoode.g. Ford Expedition vs. Lincoln Navigator All Brands had a much better understanding of who their customers really were and who they could be

Implementation was tricky

Brands fought over attractive segments Product Development not keen to develop products for boring segments Difficult to drive understanding of the segments down into the Organization Updating required on a regular basis

Some final thoughts on Segmentation

Critical to the entire marketing and sales effort Done right, an insightful Segmentation Model is a major competitive advantage Requires a knowledgeable Champion to be responsible for completion and installation. To be successful, requires Top Management and cross-functional buy-in. And the discipline to focus on the right segments!

Questions and Discussion