Study guide: Segmentation and Targeting Methods

📋 Course Outline

1. Segmentation Targeting and Positioning
2. Segmentation Fundamentals
3. Useful Segmentation Criteria
4. Consumer Segmentation Bases
5. Purchase Behavior and Customer Needs
6. Target Segment Selection
7. Segment Coverage and Ethical Limits
8. Segmentation-Driven Strategy Formation
9. Mobil’s Actionable Gas Segments
10. Cluster Analysis
11. Preference and Response Methods
12. Core Segmentation Vocabulary

📖 1. Segmentation Targeting and Positioning

🔑 Key Concepts & Definitions

• Segmentation: groups customers with similar needs into homogeneous customer segments and identifies the characteristics of those segments

★ Must-know

• The STP process identifies potential customers through segmentation, selects customers to pursue through targeting, and formulates the value proposition for target customers through positioning.

Further detail

• A tea company can target price-insensitive customers with a premium tea, price-sensitive customers with a lower-priced tea, or both groups with different products and positions.

💡 Memory Hook

STP: segment, target, position

📖 2. Segmentation Fundamentals

🔑 Key Concepts & Definitions

• Market segmentation: separates a heterogeneous group of customers with different needs into homogeneous subgroups whose members have similar needs and preferences

★ Must-know

📌 Firms do not create customer segments; they uncover segments that exist within a market regardless of whether the firm chooses to segment it.

• Segmentation helps firms identify unmet needs and opportunities for business strategy and new product development.

Further detail

• McKinsey’s 2005 study of 810 patients with hypertension uncovered six segments based on attitudes toward the disease and self-reported medication adherence, including proactive patients at 24% and skeptics at 17%. - McKinsey & Company

💡 Memory Hook

Heterogeneous market, homogeneous segments

📖 3. Useful Segmentation Criteria

🔑 Key Concepts & Definitions

• Substantial segment: large enough for a firm to serve profitably rather than being too small to target cost-effectively

★ Must-know

• A useful segmentation must be:
  • Identifiable
  • Substantial
  • Accessible
  • Stable
  • Differentiable
  • Actionable

Further detail

• Coke C2 targeted 20- to 40-year-old men who wanted the taste of regular Coke with fewer calories, but it was replaced by Coke Zero because the target wanted a full-flavored drink with no calories and sales cannibalized existing Coca-Cola beverages.

• Sales of nonalcoholic beverages in Japan doubled between 2009 and 2012 to 12 million cases, and sales of nonalcoholic beer were expected to grow from $1.26 billion in 2013 to $1.77 billion in 2022.

💡 Memory Hook

ISASDA: identifiable, substantial, accessible, stable, differentiable, actionable

📖 4. Consumer Segmentation Bases

★ Must-know

• Consumer segmentation variables address: Who buys, What customers buy, Why customers buy it

• Consumer markets can be segmented geographically, demographically, psychographically, behaviorally, and by benefits sought, while business markets can be segmented geographically, by firmographics, buying approach, behavior, and benefits sought.

Further detail

• McDonald’s geographic adaptations include:
  • Lobster rolls in Maine
  • Durian milkshakes in Singapore
  • Excluding beef in India
  • Excluding pork in Israel and some Muslim countries

💡 Memory Hook

Who buys → what they buy → why they buy

📖 5. Purchase Behavior and Customer Needs

🔑 Key Concepts & Definitions

• RFM model: The RFM model segments customers according to the recency, frequency, and monetary value of their purchases.
• Demand space: the intersection of a usage context with consumers’ emotional and functional needs, creating a unique set of demands that can define a market segment

★ Must-know

• Loyal bank customers bought 40% more products and generated 30% to 70% more value over their relationship with the bank than average bank customers in a study of Belgium, Germany, and Italy.

Further detail

• Knorr positioned soup as a healthy snack for Indian children who became hungry before the late dinner hour, and its sales grew by 127% within six months.

💡 Memory Hook

Purchase data and usage context → better understanding of customer needs

📖 6. Target Segment Selection

🔑 Key Concepts & Definitions

• Targeting: evaluates the attractiveness of market segments, selects one or more segments to pursue, and designs marketing programs to serve them

★ Must-know

📌 Mass marketing offers the same product to a broad market to exploit economies of scale, whereas one-to-one marketing or mass customization personalizes products or services for individual customers.

📌 Target-segment selection should consider segment characteristics, the firm’s competencies and resources, and current and potential competition.

Further detail

• Targeting strategies include:
  • A single niche segment
  • Multiple segments simultaneously
  • Sequential entry into adjacent segments
  • All market segments

💡 Memory Hook

Mass marketing reaches everyone, whereas customization serves a segment of one

📖 7. Segment Coverage and Ethical Limits

★ Must-know

• A firm may target multiple segments simultaneously, enter segments sequentially, or target all segments across the market.

• Targeting all market segments can preempt competitors but requires significant investment and creates a risk of failure because of its lack of focus.

• Micro-level segmentation and targeting should account for public reaction, customer privacy, and ethical concerns, including concerns about targeting children.

• In May 2018, the European Union implemented the General Data Protection Regulation (GDPR) in response to growing concerns about data privacy.

Further detail

• Sansiri targeted high-, medium-, and low-price housing segments with houses, townhouses, and condominiums, but rapid expansion produced poor construction quality, unsold units, heavy discounting, and a 52-week stock-market low in November 2018. - Somluck Srimalee, 2012

• Amazon apologized after a 2000 DVD price test offered different prices to customers based on comparison-shopping behavior, and Coca-Cola abandoned a weather-sensitive vending machine after public backlash in late 1999.

💡 Memory Hook

Broad coverage prevents competitors' entry, whereas excessive breadth can destroy focus.

📖 8. Segmentation-Driven Strategy Formation

🔑 Key Concepts & Definitions

• RFM segmentation: classifies customers by how recently and frequently they purchased and by the monetary value of their purchases

★ Must-know

• Segmentation and targeting influence five strategy areas:
  • product
  • pricing
  • communication
  • sales force
  • customer management

📌 Airlines charge different prices for the same seat by offering lower fares to leisure travelers who book weeks in advance and stay overnight on Saturday, conditions that are less attractive to business travelers.

Further detail

• Gap Inc. differentiated its brand family by age, aspirations, income, and price positioning, including Old Navy for younger price-sensitive shoppers and Banana Republic for customers with higher incomes and aspirations.

• Supermarket coupons let customers self-select into price-sensitive and price-insensitive segments because price-sensitive customers accept the effort of clipping and redeeming coupons while other customers pay the regular price.

📌 Companies use target-segment knowledge to select advertising messages and media, such as Toyota emphasizing truck toughness for workers who transport heavy loads and using channels where those customers spend time.

📌 Companies can use transaction volume and potential customer value to assign different sales channels and teams, with consultative national-account teams for valuable customers and lower-cost transaction-focused channels for low-value infrequent customers.

💡 Memory Hook

PPCSC: Product, Pricing, Communication, Salesforce, Customer management.

📖 9. Mobil’s Actionable Gas Segments

★ Must-know

• Mobil identified five gas-station customer segments:

  • Road Warriors
  • True Blues
  • Generation F3
  • Homebodies
  • Price Shoppers

• The five Mobil segments represented Road Warriors at 16% of buyers, True Blues at 16%, Generation F3 at 27%, Homebodies at 21%, and Price Shoppers at 20%.

• Road Warriors spent as much as $1,200 annually on gas and valued well-lit stations, long opening hours, snacks and drinks, and fast entry and exit more than low prices. - Mobil, 1995

• After focusing on non-price-sensitive segments, Mobil increased its average pump price by two cents per gallon, generating more than a 20% increase in sales and an additional $118 million in annual earnings.

Further detail

• 🔄 Mobil redesigned its offering by: improving station lighting, keeping many stations open 24 hours, expanding snacks and drinks, introducing Speedpass for contactless payment linked to customers’ credit cards

💡 Memory Hook

Focus on non-price-sensitive drivers → better service, higher prices, and stronger earnings.

📖 10. Cluster Analysis

🔑 Key Concepts & Definitions

• Cluster analysis: groups customers using multiple variables so that customers within a group are similar and customers in different groups are dissimilar

★ Must-know

• Cluster analysis creates a distance metric across variables such as age, income, occupation, and RFM purchase behavior, then forms groups with small within-cluster distances and large between-cluster distances.

Further detail

• In the illustrated two-variable example, Segment A contained customers with low incomes but high expenditures, whereas Segment C contained high-income customers who spent relatively less on the company’s products.

💡 Memory Hook

Customers plotted as points, with tight groups separated by wide distances.

📖 11. Preference and Response Methods

🔑 Key Concepts & Definitions

• Multi-attribute model: The multi-attribute model asks consumers to evaluate the importance of several product attributes and groups consumers with similar stated preferences.
• Conjoint analysis: infers consumer preferences by requiring repeated choices between product alternatives that differ across carefully designed combinations of attributes
• Response-based segmentation: groups customers according to predicted responses to marketing actions derived from their actual past purchase behavior
• Latent class analysis: infers hidden customer segments from limited individual-level data by repeatedly estimating segment membership and segment-specific response patterns until the allocation converges

📝 Essential Points

• A mobile-phone evaluation may include: brand, screen size, data storage capacity, price, number of applications available for the operating system

💡 Memory Hook

Preference methods use stated choices, whereas response methods use observed purchase behavior.

📖 12. Core Segmentation Vocabulary

🔑 Key Concepts & Definitions

• Segmentation: a marketing planning process that divides a broad target market into groups of consumers sharing common needs or characteristics
• Targeting: selects the potential customer segments to which a company wishes to sell after analyzing each segment’s attractiveness
• Positioning: defines a value proposition for target segments and differentiates a product, service, or brand in consumers’ perceptions
• Mass customization: uses flexible, computer-aided manufacturing systems to let each customer select and customize a product’s final features
• One-to-one marketing: a customer relationship management approach that emphasizes personalized relationships with individual customers

📊 Synthesis Tables

STP Process

Segmentation Methods Compared