2013-monitor-customer segmentation training module
TRANSCRIPT
Copyright © 2013 by Monitor Company Group, L.P.
No part of this publication may be reproduced— without the permission of Monitor Company Group, L.P.
This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.
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Customer Segmentation - Approach & ApplicationsAssociate Training Module2013
John Gregg,The Monitor Company Group
2Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
2
• The customer segmentation concept
• Applications
• Customer segmentation steps
• segment customers
• choose target segments
• create value propositions for target segments
• determine profit potential of serving target segments with value propositions
• Examples
• needs-based
• behavioral
• Key takeaways
Agenda
3Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
3
Agenda
• The customer segmentation concept
• Applications
• Customer segmentation steps
• segment customers
• choose target segments
• create value propositions for target segments
• determine profit potential of serving target segments with value propositions
• Examples
• needs-based
• behavioural
• Key takeaways
4Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
4
CompetitorsCustomers
• Identify cost reduction opportunities
Customer segmentation is a key tool in the process of customer analysis; enabling the thedevelopment of strategies to connect with them
Cost Capabilities
Strategic Purpose:
Tools:
•To identify revenue and profit maximizing strategies
•To achieve differentiation and to preempt competitors’ moves
•To determine the strategies that fit best with a company’s core competencies
Context – Fit within the 4Cs strategy paradigm
•Customer Segmentation
•Key Purchase Criteria (Using conjoint analysis to map the customer’s decision journey/path to purchase and importance of the factors considered at each step on the path
•Corporate/product/brand positioning (e.g. Multi-dimensional scaling)
•Determine most attractive segments
•Value Proposition Development
•Customer Retention and Loyalty
•Customer Acquisition
5Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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*In some cases, there will be only one target segment
Customer segmentation is a process of identifying homogeneous groups of customers. Once customers have been segmented, a company chooses target segments and approaches each segment with a value proposition that meets the segment’s needs.
•Each customer segment describes a homogeneous group of customers
Segment customers(existing and potential)
Choose target segments*
Create value propositionfor each target segment
Determine profit potential
•Target segments are the most attractive customer segments for a given company to focus on
•A value proposition is the combination of product, service, and delivery offered to the customer
•The potential profit from serving the target segments with proposed value propositions must be determined
The Process
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Customer segmentation is valuable because all customers are not created equal.
•Each customer segment has a unique set of needs and requires its own value proposition
•The profit potential differs by customer segment
Customer segmentation helps companies focus scarce resources where they can be most leveraged
Why Do Customer Segmentation?
7Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
8Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Customer segmentation is useful for both customer
retention and customer acquisition.
Segment customers
Choose target segments
Create value proposition for each target segment
Retain target
customers
Acquire target
customers
Retention and Acquisition
9Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Monitor caseteams have used customer segmentation to:
• Identify gaps or redundancies in the product portfolio
• Screen out unacceptable new products
• Choose product features
• Determine product pricing
• Establish appropriate service options
• Determine optimal distribution strategy
• Advise on advertising strategy
Applications (1 of 2)
10Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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•A large European beer manufacturer was faced with increasing
competition and low market growth. Monitor used segmentation
to identify product portfolio gaps and determine optimal
positioning for new and existing brands. This resulted in an 8%
market share increase.
•An international cosmetics company wanted to identify
opportunities in the high growth skin care market. A Monitor
team identified unmet consumer needs for anti-aging creams
and proposed an optimal strategy for targeting the appropriate
customers. This resulted in approximately $145MM in value
creation.
Monitor ’s customer segmentation work has brought significant results for
many clients. Examples of our work include:
Applications (2 of 2)
11Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
12Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• Choose
segmentation
method
(needs-based,
behavioral, or
demographic)
based on
underlying issues
Process:
Tips:
• Choose target
segments based on
attractiveness and
ability to serve in a
differentiated way (in
some cases, there
will be only one target
segment)
• Create value
propositions
based on
customer needs
(each target
segment requires
its own value
proposition)
• Determine the
revenue and cost
impacts of
offering the
proposed value
propositions to
the target
segments
• Segments should be
– meaningful
– MECE (only one
segment per
customer)
– measurable
– substantial
– actionable
• Attractiveness is
based on profit
potential (revenue
potential and cost to
serve)
• Ability to serve in a
differentiated way
recognizes both the
client’s and the
competitors’ core
competencies as well
as regulatory factors
• Each value
proposition
should address:
– product
– service
– distribution
• Profit potential
should include
profit as well as
“hidden costs”
(e.g., increased
training and
marketing costs
for new products)
Segment customers
(existing and
potential)
Choose target
segments*
Create value
proposition for each
target segment
Determine profit
potential
*In some cases, there will be only one target segment
Customer Segmentation Steps
13Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
13
• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
14Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• Customer needs
(e.g., preferences
for low price vs.
high service)
– psycho-
graphics
– attitudes
Needs-based Behavioral Demographic
Type of data
used to
segment:
Examples: • Value high service
over low price
• Value low price over
high convenience
• Value brand name
over low price
• Buy on sale only vs.
at full price
• Behaviors (e.g.,
purchasing
patterns, usage
patterns)
• Use ATM vs. use
branch
• Shop weekly vs.
monthly for
groceries
• Drink coffee vs. do
not drink coffee
• Demographics
(e.g., age, income,
home ownership)
• Young vs. old
• High income vs. low
income
• Home owners vs.
renters
There are three main types of segmentation:
Segmentation Methods
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• Primary research
necessary
Needs-based Behavioral Demographic
Segmentation
process:
Usefulness in
creating value
propositions:
• High (shows
causation)
• Descriptive and
actionable
(describes
customers and
drivers of
purchase)
• Primary research
necessary only if
behavioral data not
available from
client database
• Moderate (shows
correlation, not
causation)
• Descriptive, not
actionable (describes
purchasing behavior,
but does not address
drivers or purchase)
• No primary research
necessary
• Demographic data
sometimes readily
available from client
• Low (occasionally
shows correlation,
never causation)
• Descriptive, not
actionable (describes
customers but does
not address drivers of
purchase)
Needs-based segmentation is the most time consuming to execute, but also
the most valuable. Most of Monitor ’s work involves needs-based
segmentation.
Comparison of Segmentation Methods
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• Make a complete list
of potential customer
and non-customer
needs
– focus groups or a
small number of
unprompted
customer
interviews
– brainstorming
– previous client
work or Monitor
research
Create a needs list Collect data
Conduct Factor/
Cluster analysis to
determine statistical
segments
Steps: • Ask a representative
sample of customers
and non-customers
a battery of
questions designed
to gauge their needs
concerning a
product/service
• Customers and
non-customers are
placed into
segments based
on their responses
to the key
variables that drive
purchase behavior
Defining customer groups in a needs-based segmentation begins
with identifying the likely customer and non-customer needs.
Needs-Based Segmentation
17Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The Monitor Research and Data Analysis Group in Shanghai, Boston and/or
London should be contacted when running a needs-based segmentation to
ensure proper, statistically valid analysis.
• These tools could generate a number of statistically valid answers. In that
case, the segmentation options must then be screened using business
judgement.
Factor Analysis and Cluster Analysis are statistical tools used to
determine appropriate needs-based customer segments.
Factor/Cluster Analysis
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There are two methodologies for segmenting a database of
behavioral or demographic information.
CHAID - an analytical tool that uses
the Chi-Square statistic to find the
drivers of a dependent variable80/20
Process:
Statistical
validity:
Drawbacks:
• Divide customers according to their
profitability.
• Hypothesize as to the variables that
drive profitability. Combine variables to
create segments.
• Low
• Iterative, manual process
• Requires solid intuition
• Risks leaving out important
variables
• Does not address causation
• Choose dependent variable (e.g.,
profit), hypothesize as to the
segmentation variables, collect data on
variables, run CHAID, reality check
results, and create segments based on
the CHAID
• High
• Process requires contacting the
Monitor Research and Data
Analysis Group for software/
statistical expertise in conducting
CHAID analysis
Behavioral and Demographic Segmentation
19Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• CHAID analysis determines and ranks all of the statistically significant drivers of a
chosen dependent variable (e.g., profit, retention, productivity)
• Specifically, it groups independent variables into subgroups
– independent variables are categorized according to their statistical significance
(e.g., store location, age)
– CHAID identifies interactions/effects between variables
– CHAID yields subgroups which are statistically significant and MECE
CHAID is a statistically robust method used to segment a
demographic or behavioral database.
CHAID
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• Meaningful - there should be enough differentiation among segments such that each
segments seems unique
• MECE Analysis (Mutually Exclusive, Completely Exhaustive) - each customer should
belong to one, and only one, segment
• Measurable - clearly defined with a market share that can be quantified
• Substantial - there should be enough volume in a segment to merit analysis
• Actionable - we should be able to design a value proposition for each segment
Regardless of the type of segmentation used, the customer groups
determined by the segmentation process must have the following
characteristics:
Segmentation Requirements
21Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
22Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Note: me cases, there will be only one target segment
The target segments should be chosen based on their attractiveness to a
given company and that company’s ability to serve the target segments in a
differentiated way.
Attractiveness
(profit potential)
Ability to serve in a
differentiated way
Revenue potential Cost to serve
Client’s core
capabilities vs.
competitors’
External factors
• Size
• Growth potential
• Buyer power
• Product
requirements
• Price sensitivity
• Advertising
requirements
• Channel preference
• Service
requirements
• Strategic objectives
• Ability to leverage:
– technology
– costs
– skills
– existing
resources
• Existing market
perceptions
• Existing base in
segment
• Legal restrictions
• Regulatory
requirements
Target Segment Selection
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Develop
Capabilities
to Serve this
Segment
Target this
Segment
Avoid this
Segment
Adjust Value
Proposition to
Improve
Attractiveness of
this SegmentLow
Low
High
High
Ability to Serve Segment in a
Differentiated Way
(Lever = Capabilities)
Target Segment Selection Matrix
24Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
25Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• Features
• Price
• Quality
• Brand
• Positioning
• Promotion/
advertising
Product Service Distribution
• Before sale
• During sale
• After sale
• Delivery channels
• Speed
After customers have been segmented and the most attractive segments
have been chosen, a customized value proposition should be created for
each target segment by trading off among the following elements:
Actions should leverage strengths and optimize resources with
the goal of increasing market share of the target segments
Value Proposition Development
26Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
27Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Once the value propositions have been established, the potential
profit to be gained from providing them to the target segments
should be quantified.
Determine profit
potential
Calculate revenue
increase
Calculate cost
to serve
Current
customersNew customers
Current
customersNew customers
Profit Potential Quantification
28Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
29Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
29
*Disguised client case
Smith’s Fashion Center is a large discount women’s retailer in the Northeast
that wants to understand its customer base to determine expansion options.
A list of the drivers of retail purchasing
behavior was made
Customers were asked ~20 questions to
record their needs
Factor/Cluster analysis was used to determine
the segments
Segment size and revenue potential were
calculated
An expansion market was chosen and the
merchandise strategy was adjusted based on
the segmentation results
Smith’s Fashion Center* - Process
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A five segment solution was chosen from the Factor/Cluster analysis.
Female apparel shoppers
Bargains UtilityFashionPrimary motivation:
Bargains Efficiency/serviceFun
(love to shop)
Secondary motivation: High quality
bargains
Service FashionBargainsNot motivated by: Fashion
“Fashion
Forward
Shopping
Lover”
Segment name: “Fashion
Value”
“Fashion
on a
Shoestring
”
“Unfashionabl
e Bargain
Lover”
“Rich but
Unfashionable”
$950 $750$1,400Average spending
per year: $850$1,350
Smith’s Fashion Center - Segments
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Rich but unfashionable
Unfashionable Bargain Lover
Fashion on a Shoestring
Fashion Value
Fashion ForwardShopping Lover
Percent of current customers Percent of current customer spending*0%
20%
40%
60%
80%
100%
Pe
rce
nt
of
To
tal
Smith determined that its target segments were “Fashion Value” and
“Fashion on a Shoestring”.
*In this case, spending was a good proxy for profit
Ability to serve in a
differentiated way
Smith's Fashion Center - Current Customers
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Chosen Expansion City
Rich but Unfashionable
Unfashionable Bargain Lover
Fashion on a Shoestring
Fashion Value
Fashion Forward
Shopping Lover
Percent of population Percent of spending0%
20%
40%
60%
80%
100%
Pe
rce
nt
of
To
tal
Smith chose an expansion city with a high mix of its target segments.
Smith's Fashion Center - Expansion City Customers
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Importance of Accessories
Fashion Forward
Shopping Lovers
Fashion
Value
Fashion
on a
Shoestring
Unfashion- able
Bargain Lover
Rich but
Unfashion-able
40%
60%
35%
15%
25%
0%
20%
40%
60%
80%
100%
Perc
ent
Sayin
g I
mpo
rtan
t to
Carr
y A
ccesso
ries
Highqualitybrands
Mediumqualitybrands
Low qualitybrands
Current mix Optimal mix0%
20%
40%
60%
80%
100%
Perc
ent
of
Respo
ndents
Purc
hasin
g B
rand
Merchandise Quality
Based on the needs of the target segments, the merchandise strategy
was adjusted to include accessories and more low quality brands.
Smith's Fashion Center - Merchandising Strategy
34Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
34
• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
35Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
35
*Disguised client case
Situation:
Complication:
Question:
Hypothesis:
•The client, Highland Hotels, has high margins and is one of
the five largest hotel/conference center chains in Europe
•The market is coming to the end of a period of rapid growth
and Highland’s relative cost position is worse than its
competitors’
•How can Highland preserve its high margins in a slowing
market where it finds itself at a cost disadvantage?
•By offering a differentiated value proposition to the most
profitable customer segment, Highland can preserve its
high margins
Monitor used customer segmentation to determine
the target segments for Highland Hotels and to
create value propositions for those target segments.
Highland Hotels* - Background
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Monitor conducted an 80/20 behavioral/demographic
segmentation for Highland Hotels.
High profit customers were segmented based on
their behavioral and demographic characteristics
A target segment was chosen based on its
attractiveness and Highland’s ability to serve it
Customers were divided into groups based on
their profitability
The behavioral and demographic drivers of
profitability were determined
A value proposition was created for the target
segment
Highland Hotels - Process
37Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Low profit
Medium profit
High profit
Customers Profit0%
20%
40%
60%
80%
100%
Pe
rce
nt
of
To
tal
One third of Highland’s customers account for
more than 60% of its total profits.
Highland Hotels - Customer Profitability
38Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Business/leisure Leisure only Business only
$250
$75
$50
$0
$50
$100
$150
$200
$250
$300
Avera
ge A
nnu
al P
rofit
per
Custo
me
r T
ype
1-2 3-5 6-8 9-10 11+
$50
$85
$140$150
$260
$0
$50
$100
$150
$200
$250
$300
Avera
ge
Annual P
rofit
per
Cu
sto
mer
Type
Days per Year
Less than 2 days 2-4 days 4+ days
$40
$70
$130
$0
$50
$100
$150
Avera
ge A
nnu
al P
rofit
per
Custo
me
r T
ype
Occasion
Visit Frequency Length of Visit
The primary drivers of profitability are visit
frequency, length of visit, and occasion.
Highland Hotels - Profitability Drivers
39Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Highland identified four types of high value
customers based on the profitability drivers.
High Profit Segments Annual Frequency Length of Stay Occasion
•“Hotel-aholics”
•“Honeymooners”
•“Hello again”
•“One-timers”
Very frequent
(9.2x)
Infrequent
(1.5x)
Frequent
(6.2x)
Infrequent
(1.3x)
Medium
(3.9 days)
Long
(10.0 days)
Short
(1.8 days)
Long
(5.4 days)
Business/leisure
Leisure
Business
Business
Highland Hotels - High Profit Segments
40Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
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Low profit
Medium profit
High profit
One-timers
Hello again
Honeymooners
Hotel-aholics
Customers High profit customers High profit customers'
profitability
0%
20%
40%
60%
80%
100%
Pe
rce
nt
of
To
tal
Highland decided to target “hotel-aholics” because they were
the most attractive segment and a good fit with the company’s
capabilities.Ability to serve in a
differentiated way
Highland Hotels - Target Segment
41Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
41
Monitor designed a value proposition for the “hotel-
aholic” segment that differentiated Highland from its
competitors.
Priority service Special services
• Favorite room ready
• “Permanent”
electronic key
• Complimentary dry
cleaning
• Two phone lines
• Fax machine in room
• One 20 minute
complimentary call to
home
Rewards
• Frequent flier miles
• “Kids Stay Free” days
Highland Hotels - Value Proposition
42Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
42
• The customer segmentation concept
• Applications
• Customer segmentation steps
– segment customers
– choose target segments
– create value propositions for target segments
– determine profit potential of serving target
segments with value propositions
• Examples
– needs-based
– behavioral
• Key takeaways
Agenda
43Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
43
• There are three main types of customer segmentation: -based, behavioral and demographic.
Needs-based segmentation is the most difficult to execute, but the most valuable. Most of
Monitor ’s work involves needs-based segmentation
– needs-based segmentation involves creating a list of needs, collecting data, and conducting
Factor/Cluster analysis to identify segments
– there are two methodologies for segmenting a database of behavioral or demographic
information
the 80/20 method involves dividing customers according to their profitability,
hypothesizing as to the variables that drive profitability, and combining variables to create
segments
the CHAID method involves choosing a dependent variable, hypothesizing as to the
segmentation variables, collecting data, running the CHAID, reality checking the results,
and creating segments
• Regardless of the type of segmentation used, the resulting segments must be meaningful,
MECE, measurable, substantial, and actionable
Customer Segmentation Steps
Types of Segmentation
• Customer segmentation involves separating customers (existing and potential) into
homogeneous groups, choosing target segments (or one target segments), creating value
propositions for each target segment, and determining the profit potential of serving the target
segments with the proposed value propositions
Key Takeaways (1 of 2)
44Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
44
• Target segments are chosen based on their potential profitability and the
client’s ability to serve the segments in a differentiated way
• Determining the profit potential of serving the target segments with the
proposed value propositions consists of calculating the revenue and cost
impact of serving both current and new target customers
• The three major elements of a value proposition are product, service, and
distribution
Target Segments
Applications
• Customer segmentation, done properly, helps companies focus scarce
resources where they can be most leveraged
• Monitor uses customer segmentation for both customer retention and
customer acquisition
Key Takeaways (2 of 2)
45Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
45
Customer Segmentation Steps Comparison of Segmentation Methods
Needs-Based Segmentation Behavioral and Demographic Segmentation
Segment customers
(existing and
potential)
Choose target
segments
Create value
proposition for
each target
segment
Determine profit
potential
• Choose
segmentation
method (needs-
based, behavioral,
or demographic)
based on
underlying issues
• Choose target
segments based on
attractiveness and
ability to serve in a
differentiated way
(in some cases,
there will be only
one target segment)
• Create value
propositions
based on
customer needs
(each target
segment requires
its own value
proposition)
• Determine the
revenue and
cost impacts of
offering the
proposed value
propositions to
the target
segments
• Segments should be– meaningful– MECE (only
one segment per customer)
– measurable– substantial– actionable
• Attractiveness is based
on profit potential
(revenue potential and
cost to serve)
• Ability to serve in a
differentiated way
recognizes both the
client’s and the
competitors’ core
competencies as well as
regulatory factors
• Each value
proposition should
address:
– product
– service
– distribution
• Profit potential
should include
profit as well as
“hidden costs”
(e.g., increased
training and
marketing costs for
new products)
Process:
Tips:
• Primary
research
necessary
Needs-based Behavioral Demographic
Segmentation
process:
Usefulness in
creating
value
propositions:
• High (shows causation)
• Descriptive and actionable
(describes customers and
drivers of purchase)
• Primary research
necessary only if
behavioral data not
available from
client database
• Moderate (shows
correlation, not causation)
• Descriptive, not actionable
(describes purchasing
behavior, but does not
address drivers or
purchase)
• No primary research
necessary
• Demographic data
sometimes readily
available from client
• Low (occasionally
shows correlation, never
causation)
• Descriptive, not
actionable (describes
customers but does not
address drivers of
purchase)
• Make a complete list
of potential customer
and non-customer
needs
– focus groups
or a small
number of
unprompted
customer
interviews
– brainstorming
– previous client
work or
Monitor
research
Steps: • Ask a
representative
sample of
customers and non-
customers a battery
of questions
designed to gauge
their needs
concerning a
product/service
• Customers and non-
customers are
placed into
segments based on
their responses to
the key variables
that drive purchase
behavior
Create a needs list Collect data
Conduct Factor/
Cluster analysis to
determine
statistical
segments
CHAID - an analytical tool that uses
the Chi-Square statistic to find the
drivers of a dependent variable
80/20
Process:
Statistical
validity:
Drawbacks:
• Divide customers according
to their profitability.
• Hypothesize as to the
variables that drive
profitability. Combine
variables to create segments.
• Low
• Iterative, manual process
• Requires solid intuition
• Risks leaving out important
variables
• Does not address causation
• Choose dependent variable
(e.g., profit), hypothesize as
to the segmentation
variables, collect data on
variables, run CHAID, reality
check results, and create
segments based on the
CHAID
• High
• Process requires contacting
the Monitor Research and
Data Analysis Group in
Boston for software/
statistical expertise in
conducting CHAID analysis
Takeaway Slides (1 of 3)
46Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
46
Segmentation Requirements Target Segment Selection Matrix
Value Proposition Development Profit Potential Quantification
• Meaningful - there should be enough differentiation among
segments such that each segments seems unique
• MECE - each customer should belong to one, and only one,
segment
• Measurable - clearly defined with a market share that can be
quantified
• Substantial - there should be enough volume in a segment to
merit analysis
• Actionable - we should be able to design a value proposition
for each segment
Develop
Capabilities
to Serve this
Segment
Target
this
segment
Avoid
this
segment
Adjust Value
Proposition to
Improve
Attractiveness of
this SegmentLow
Low
High
HighAbility to Serve Segment in a
Differentiated Way
(Lever = Capabilities)
• Features
• Price
• Quality
• Brand
• Positioning
• Promotion/
advertising
Product Service Distribution
• Before sale
• During sale
• After sale
• Delivery
channels
• Speed
Actions should leverage strengths and optimize
resources with the goal of increasing market share of
the target segments
Determine profit
potential
Calculate revenue
increaseCalculate cost to serve
Current
customers
New
customers
Current
customers
New
customers
Takeaway Slides (2 of 3)
47Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
47
Low price High quality Fast delivery0%
20%
40%
60%
80%
100%
Impo
rta
nce /
Eff
ectiven
ess
Client
Competitor
Comb Chart
Attractiveness
A
B
C
Target
segmentSegment
Financial
Attractiveness
Ease of Implementation
Hi
Lo
Low price
High quality
Fast delivery
A B C D
Segment Needs
Segment
Segment Share
Total market = $
Com
petito
rs (
% o
f T
ota
l S
ale
s)
Client
A B C D0%
20%
40%
60%
80%
100%
Segment (% of Total Sales)
$ $ $ $ $
Satisfaction Over Time
Pe
rce
nt o
f R
ep
lies
100%
Time
Good
Okay
Bad
Value Proposition
Segment A
Segment B
Segment C
Segment D
Product Service Channel
Customer Retention
Cu
sto
me
r va
lue
Time
Acquis
itio
n
Cost
Size of
segment
Segment D
Segment C
Segment B
Segment A
Customers Sales Profits0%
20%
40%
60%
80%
100%
Pe
rce
nt
Revenue and Profit
# $$
C
Takeaway Slides (3 of 3)
48Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
Question: What growth opportunities will the following market and channel segments bring to your company in the next three years?
Class 3 Large urban public hospitals
County hospitals
Grass root healthcarecenters (e.g. CHC)
Hospitals in low-tiercities and rural areas
Private hospitals/clinics
Very Large
Very Large
Very Large
Very Large
Very Large
Limited
Limited
Limited
Limited
Limited
Chinese Firm MNC
Type of Market-Channel Segment 1 Chinese versus multi-national (MNC) Firm Responses
Our survey of device firm managers, found large hospitals in focus cities are seen to provide the greatest opportunities to 2015
Source: 2012 Monitor Company: China Medical Devices Industry Survey: N = 160Research Method: Quantitative On Line SurveySurvey Participants: Chinese Firm 42%; Multi-National Corporation (MNC) 58%: CEO/MD 37%; VP/Director:39%; Senior Manager/Business Unit Director: 24%
49Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
Impact ongrowthDriver
Changingpatient population
Accessto care
Economic growth
Commentary
• The patient base is expanding due to:- an aging population, as the population aged 50+ is expected to
increase from 26% in 2012 to 32% in 2020
- increasing incidence / prevalence rates brought by changing
lifestyles, e.g., prevalence rate of cancer in urban China increased
from 25% to 36% since 2002
• Access to care in China is fueled by:- expanded insurance coverage
- public & private healthcare investment
- urban population growth
• China remains one of the world’s fastest growing major economies- China has achieved GDP growth of ~9% p.a. for the past 30+ years
Source: Monitor Analysis
Underlying market growth is attributable to an aging population, increasingrates of disease incidence and prevalence, and rapid increases in wealth
50Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
Differences in physician and patient education drives varying adoption ratesof medical devices across product categories and city tiers
Development stages,select medical devices
Source: Monitor Interviews and analysis
Introductionstage
Expansionstage
Maturestage
Deviceadoptionin China
30
40
50
60
Tier 3City
Tier 2City
Tier 1City
Device penetration rates,by city tierPercent
70
Introduction-Expansionstage products
Mature stage products
Device development stage
Professional medical education by suppliers could accelerate adoption curves for newer products
2 Awareness & adoption rates
Mature productsinclude various
catheters,needles, etc.
Newer productsinclude various
stents, ports, etc.
51Copyright © 2012 Monitor Company Group, L.P. — Confidential — LAX
China remains a challenging, yet potentially very attractive market to the world’s medical device manufacturers
Thank You Questions?
John Gregg
Director,
Monitor Company Group
33Copyright © 2009 Monitor Company Group, L.P. — Confidential — LAX
52