Week 08 - Market Segmentation
M ARKET S EGMENTATION
LEARNING OBJECTIVES
Be familiar with the concept of market segmentation
LECTURE NOTES
Markets are either product driven or customer driven. In the mature U.S. market, which includes extensive use of mass-customization manufacturing techniques, the supply of goods and services is moving more and more toward a customer driven approach. Customers themselves are always learning, changing, and adapting. Changing expectations, lifestyles, life stages, access to ever increasing information, and competition providing new products and services mean there is little constancy in customer behaviour. Customer preferences and buying decisions change from month to month and year to year.
Smart enterprises use segmentation to continually monitor, quantify, and qualify the changing customer, in part to stay ahead of the competition. Segmentation data provides organizations with information to develop timely goods and services that profitably serve customers, thereby sustaining the organization's growth and ability to compete with the development of new products and services. Companies must be able to discern the difference between how customers appear and how they act; while some customers may look alike, they behave quite differently.
SEGMENT CHARACTERISTICS
A market segment can be seen to be comprised of three spheres (as seen above):
?Category of need
?Customer demographics
?Customer psychographics
Segment characteristics should generally be able to answer such questions as:
?Who are they?
?What do they look like?
?What do they need?
?How do they act?
?What do they buy?
?When do they need it?
?Why do they want it?
Category of Need
The first thing you can establish is a category of need that your offering satisfies. The following classifications may help.
For businesses:
Strategic - your offering is in some way important to the enterprise mission, objectives and operational oversight. For example, a service that helped evaluate capital investment opportunities would fall into this domain of influence. The purchase decision for this category of offering will be made by the prospect's top level executive management.
Operations - your offering affects the general operating policies and procedures. Examples might be, an employee insurance plan or a corporate wide communications system. This purchase decision will be made by the prospect's top level operations management.
Functional - your offering deals with a specific function within the enterprise such as data processing, accounting, human resources, plant maintenance, engineering design, manufacturing, inventory control, etc. This is the most likely domain for a product or service, but you must recognize that the other domains may also get involved if the purchase of the product or service becomes a high profile decision. This purchase decision will be made by the prospect's functional management.
For the individual consumer:
Social Esteem or Pleasure - your offering satisfies a purely emotional need in the consumer. Examples are a mink coat or a diamond ring. There are some products that are on the boundary between this category and the Functional category such as a Rolex watch (a Timex would satisfy the functional requirement and probably keep time just as well).
Functional - your offering meets a functional requirement of the consumer such as a broom, breakfast cereal or lawnmower.
Customer profiles
Demographics and psychographics are criteria that can be used to break customers into specific groups based on commonalities amongst the customer group. See the reading for more information about psychographics.
SEGMENT MEASURES
The key measurement of any (possible) segment is ROI (Return on investment). This can be measured in quiet a number of different ways (talk to your accountant). The key is to distinguish the following basic types of customer:
?Highly profitable or high-use customers: What can we do to keep these customers and keep them spending or using the library? How can we attract more like them?
?Profitable or moderate-use customers: How do we get more of these customers to adopt the habits (spending or use) of our highly profitable or high-use ones?
?Unprofitable or low-use customers: From the perspective of a small business, how can we phase out these customers and, in the meantime, serve them economically? From the perspective of a library, how can we increase use?
That said, other measures are appropriate and may be desirable measures of a segment. The (frequently) include:
?Market Share: how much of the market does this customer represent?
?Mind Share: how important is reaching this customer to other customers?
?Cost:for example , the cost of acquiring a customer of this type (acquisition), the cost of targeting this customer and the foregone alternatives
SEGMENT TIME VALUE (OR OTHER FACTORS)
The time value of the segment is a bit of a catch-all for other factors. However, it includes an examination of the Marketing Channel (the medium of sale, such as the Internet or a retail store), the stage of the product lifecycle and other characteristics of the customer or product not addressed elsewhere.
Finally, a point to consider is, given the characteristics of your offering, what type of decision maker will most likely be interested in purchasing from you. It may be beneficial to rank your prospects based on the following classifications. While you may not be able to make this classification of the prospect prior to the first contact, if your sales personnel are sensitive to these characteristics it can strongly influence your sales strategy.
Ultra Conservative - don't rock the boat, whatever they purchase must be consistent with their current way of doing things.
?They are most likely interested in products/services that are improvements to existing offerings rather than something new.
?Once established as a customer they are seldom inclined to review alternatives.
?Very negative to technically complex offerings or offerings requiring extensive user education.
?Cost effective offerings are only of interest if they don't disturb the status quo.
?They are likely to react positively to any volume purchasing opportunities.
Conservatives - are willing to change, but only in small increments and only in a very cost effective manner.
?Will consider new products/services but only if related concept has been proven to be effective. More likely to purchase improvements to existing offerings.
?Will probably want to review competitive offerings, but will gravitate to best known offering with lowest risk decision.
?Negative to neutral when considering technically complex offerings or offerings requiring extensive user education.
?Strongly influenced by cost effective offerings and/or 'best price' opportunities
Liberals - regularly looking for new solutions, willing to make change (even major change) if the benefit can be shown.
?Will usually consider new products/services even if the related concept has not yet been proven to be effective, but only if the potential benefits can be specified and understood.
?Wants offerings that make effective use of technology, but is not interested in offerings just because they use a certain technology.
?Will always want to review competitive offerings, but will usually choose the one offering the greatest benefit, even if there is some risk involved.
?Neutral to positive when considering technically complex offerings or offerings requiring extensive user education.
?Usually concerned with keeping employees informed and educated, so will often consider educational offerings.
?Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they are not the most cost effective.
?Often are on social trend bandwagons so react positively to offerings that address these needs.
Technical Liberals - enamored with the benefits provided by high tech solutions and any purchase decision will be biased by the technical content of the offering.
?Usually consider new products/services even if the related concept has not yet been proven to be effective.
?Often consider just because they use a certain technology.
?Will always want to review competitive offerings, but will usually choose the one offering the most hi-tech features, even if there is some risk involved.
?Consider themselves technically competent and will expect leading edge use of technology.
?Positive to fanatic when considering technically complex offerings even when requiring extensive user education.
?Conversion costs usually not a major concern if technical benefits are there.
?Not particularly concerned with keeping employees informed and educated, so educational offerings are not of great interest.
?Strongly influenced by offerings that most closely deliver the 'end results' desired, even if they are not the most cost effective.
Self Helpers - consistently defines/designs solutions to their problems, likes to acquire tools that help in the innovation process.
?Will usually consider new products/services, but the related concept must have been proven to be effective.
?Often consider just because they use a certain technology that is relevant to the development program they have underway.
?Will always want to review competitive offerings, but will usually choose the one offering the most effective 'do it yourself' features.
?Usually consider themselves technically competent and will expect very effective use of proven technology.
?Not especially inclined toward technically complex offerings, would rather have user friendly, but thought provoking, offerings.
?Conversion costs usually not a major concern if offering promises potential for innovation.
?Usually concerned with keeping employees informed and educated, so educational offerings are of interest