cenco marketing the future of marketing 3 _ mohan

©2003 Mohan Sawhney Kellogg School of ManagementNorthwestern University

Segmentation and Value Proposition Design

©2002 Mohan Sawhney

Steps in strategic target marketing

Understanding market segmentation

The process of market segmentation

Acting upon segmentation

Target market selection

Value Proposition design


Defining market segmentation

Market segmentation is the process of dividing a potential market into meaningfully distinct groups of customers, such that customers within a group (i.e., segment) have similar needs and values, and each group can be identified and offered a different marketing mix plan.

Market segmentation is a selective demand stimulation strategy, as opposed to a primary demand stimulation strategy.


Why practice segmentation?

• Customers differ in what they care about, how they decide, where they buy, and how they use products. So a company cannot be “everything to everybody” with the same offering. Market segmentation is a “divide and conquer” strategy that recognizes the differences across customers, and creates focused strategies for each segment.

• Firms that recognize that recognize differences across groups of customers and create segment-specific strategies can deploy marketing resources more effectively and productively.

• Customers are willing to pay more for offerings that exactly meet their needs, and are more loyal to firms that understand and speak to their needs better

• Market segmentation produces increased costs to the firm in the short run. But these increased costs are generally offset by increasing sales in the long run.


Market segmentation approaches

Traditional (“A Priori”) Segmentation Approach:– Start with segments based on identifiable customer/firm characteristics

and then work forward to see if these segments have meaningful distinct needs/behavior or if these segments seek different benefits

Response-based (“Post-Hoc”) Segmentation Approach:– Start with collecting data on customer buying characteristics to determine

distinct groups of customers and then work backwards to see if these groups can be identified in terms of demographic/firmographic characteristics.

Who customers are(Identifier variables)

What customers want/do(Response Variables)

Traditional Approach

Response-Based Approach


Post-hoc segmentation

Process– Conduct research on identifying key customer buying characteristics.

– Cluster on those characteristics to find customers who have “similar” needs, care-abouts, and buying behavior.

– Determine the profile of customers belonging to a cluster/segment in terms of their demographics/firmographics such that they can be offered an appropriate marketing-mix plan.

Rationale• Customer buying behavior = f (needs, behavior, care-abouts)• Cluster/segment profile = f (demographics/firmographics)

– Outcomes from “post hoc” approach may become a useful basis for future “a-priori” segmentation


Segmenting the PCS market:Traditional (“A Priori”) Approach

Response Random Cellular Pager Teens/Variable Sample Users Users 20-25

Monthly Bill 80 71 69 76Coverage Area 63 69 68 65Handset Price 70 69 68 65Ability to Walk/Ride 54 68 63 58Phone Size/Weight 37 36 32 29Replaces Work Phone 23 18 27 27

First DefineSegment Identities

Then Search forResponse Differences

Segment Identities


Response-based approach (Step 1)

Response Segment 1 Segment 2 Segment 3 Segment 4

Variable "Cost" "Price" "Coverage""Mobility"Monthly Bill 99 68 68 65Coverage Area 51 57 96 72Handset Price 60 98 51 58Ability to Walk/Ride 48 48 56 97Phone Size/Weight 36 40 41 46Replaces Work Phone 17 21 25 18Own Cellular Phone? 30% 29% 45% 60%Will Definitely Use PCS 58% 54% 70% 70%

Use These to Define Benefit Segments

First Identify Response Differences

Response Segments


Response-based approach (Step 2)

Identifier Cost Price Coverage MobilityVariable Segment Segment Segment Segment

Income > 35 K 77 80 92 86Married 45 46 57 52Children 37 33 50 37Work in suburbs 29 31 60 49Live in suburbs 45 44 70 54Same Office Everyday 66 67 55 51Drive to Work 45 49 76 67Take Train to Work 18 23 10 15

Work Backwardto Identify Segments

Define Response Segments

Response Segments


Lenses versus objects:Segmentation variables versus segments

Applicationsused

Degree of Mobility

Contextualfactors

Devicesused

Occupation

Range of Mobility

RoadWarrior

Hypothetical segment description:• White collar executive• Wide-area roaming• 50% time traveling• Carries laptop, cell phone• Poor landline access• Needs persistent email connectivity• Not technically savvy

Tips for segmentation• Look for good identifier “proxies”• Search for patterns across variables• Limit number of segments to 4-6• Form multi-dimensional description• Validate with observational research


Strategic options after segmentation

Adapt the core product Customize the product without modifying the core Reconfigure the services you offer with the product Modify the channels you use to go to market Modify the pricing approach for the product Modify the customer service levels you offer Alter perceptions about you or your competitor’s product Alter importance weights that customers attach to the various benefits

Make important benefits “table stakes” Call attention to neglected or new dimensions


Segmented offerings at Fidelity

Segment Planning & guidance

Services Trading commission

High net worth

Personalized and frequent interactions Quarterly portfolio reviews

Dedicated representatives

$14.95

Active traders

Comprehensive research Advanced decision tools Special trading software

Dedicated team Deep brokerage experience

$14.00

Core customers

Annual portfolio review Self-guided tools

Access to pooled reps

$29.95

Retirees Retirement income planning

Retirement consultants

$29.95


Segmented service model at Fidelity

Access level Customer type Reps to customer ratio

Private access > $5mm in assets 116:1

Premium access $500K-$5mm in assets 250:1

Active traders >36 trades/year 440:1

Preferred access $100K-$500K in assets 440:1

Standard access < 100K in assets 1,500:1

“Penalty box” 9,000 problem customers

900:1




Approaches to market segmentation



Putting segmentation into action


Overview of target market selection

High Low

Strong

Weak

CompanyCapabilities

Segment Attractiveness

Aim: Select segment where company position is strong and market is attractive

CompanyAnalysis

CustomerAnalysis

CompetitorAnalysis

IndustryAnalysis

Profitability

Value Chain

BenefitSegments

SegmentAttractiveness


A template for segment evaluationAttractiveness

Criteria Relative

Importance Attractiveness Rating (0-10)

Attractiveness Score

Market Attractiveness Segment size Growth rate Profit Margins Cost to serve

0.40 0.30 0.20 0.10

6 3 4 8

TOTAL

2.40 0.90 0.80 0.80 4.90

Competitive Environment Number of competitors Advantage over substitutes Degree of differentiation Strength of competitors

0.20 0.30 0.20 0.30

8 3 5 7

TOTAL

1.60 0.90 1.00 2.10 5.60

Company Fit Channel fit Branding fit Customer base fit Technology fit

0.40 0.10 0.30 0.20

5 6 3 8

TOTAL

2.00 0.60 0.90 1.60 5.10

Relative Weights of Attractiveness Factors

Relative Weight

Factor Score

Weighted Score

Market Attractiveness Competitive Environment Company Fit

0.30 0.40 0.30

4.90 5.60 5.10

1.47 2.24 1.53

OVERALL RATING 5.24


Targeting strategies

S1 S2 S3

O1

O2

O3

S1 S2 S3

O1

O2

O3

S1 S2 S3

O1

O2

O3

S1 S2 S3

O1

O2

O3

Mass

VerticalHorizontal

Niche


What is positioning?

The position is the place that your offering occupies in your prospects’ minds and hearts on attributes that are important to them, relative to competing alternatives that they may consider.

Positioning is defined from the customer frame of reference, not the company’s. Positioning is defined relative to competing alternatives, not in absolute terms.

The objective of positioning is to define a value proposition - the promise you make to specific audiences of prospects to win their minds and hearts.

(points of difference)


The positioning statement

“For __________________________” (target customers or prospects)

______________________ provides ______________(your product/service offering) (Key benefits)

because ____________________________________________.(points of differentiation/reasons to believe)

(points of difference)

(key benefits)(your product/service)


Examples of positioning statements

AVIS

“For business people who rent cars, Avis is the company who will provide the best service because the employees own the company.”

HOME DEPOT

“For do-it-yourselfers, Home Depot offers the best prices because we are the largest building supply company.”

BODY SHOP

“For people seeking wellness, the Body Shop offers the most natural bath and cosmetic products because we are the most environmentally friendly cosmetics company.”

SOUTHWEST AIRLINES“For short-route travelers, Southwest Airlines offers the best prices with reasonable and dependable service because we operate point-to-point service and don’t charge more for last minute bookings.”


Covering your bases in positioning:The “positioning diamond”

What?Definition of

offering and benefits

For whom?Target customers

or prospects

Against whom?Competing alternatives

Why?Points of

differentiation


Dimensions of value in positioning

Functional valueWhat the product

does

Economic valueWhat that means in

time and money

Emotional valueHow it makes

you feel

ACT(BODY)

THINK(MIND)

FEEL(HEART)

• Key features and their benefits• Intended end-uses• Intended end-users• Deployment experience• Usage experience• Maintenance experience• Service experience

• TCO (Total Cost of Ownership)• EVC (Economic Value to Customer)• Time savings• Cost savings• Quality improvements• Flexibility enhancement

• Value of ownership• Value of affiliation• Value of relationship• Emotional significance


Positioning statements versus value propositions

The positioning statement attempts to summarize the key benefits and points of differentiation in a way that addresses the shared values and priorities of multiple audiences and target segments. The positioning statement is like a “platform” or “umbrella” that should be general enough to work for all relevant audiences.

Value propositions are statements of key benefits offered by the product to specific audiences and specific segments. Value propositions are derived from the positioning statement, but focus on the unique values and priorities of each audience and target segment.


Positioning statements versus value propositions: An example

Positioning Statement : The Windows .NET Server operating system is the most productive infrastructure platform for powering connected applications, networks, and Web services from the workgroup to the data center.

Value Proposition (tailored to the IT Implementer): For IT Implementers, who want to be empowered to control their network infrastructure, Windows .NET Server provides reliable deployment, management, and use of the network infrastructure that allows you to respond faster than you can on any other platform.


Messaging tag lines:The articulation of positioning

IBM - “the next utility” Nokia – “human technology” HP – “invent” Hertz – “exactly” Compaq – “inspiration technology” Accenture – “innovation delivered” Ernst & Young – “from thought to finish” Lexus – “the exhilarating pursuit of perfection” Boeing – “forever new frontiers”


Six tests to evaluate your positioning

Relevance test: Do customers care? Does the positioning get at a strong “pain point”?

Clarity test: Will customers “get” it? Does the positioning express the benefits in a clear and customer-friendly way? It is specific and focused, or ambiguous and vague? Does the positioning lend itself to clear translation into messaging and product strategy decisions?

Credibility test: Will customers believe it? Can we offer solid support points or evidence to substantiate our positioning?

Uniqueness test: Is the position unique? Does is set us apart from competition in a meaningful way? It the position already “owned” by a competitor? Is it a “me-too” position?

Attainability test: Can we get there? Are we making claims that are achievable, or are we selling hopes, dreams and vaporware?

Sustainability test: Can this position be maintained over time? To what extent will it remain relevant in the future, even as technology and products change?


Product Name:

Target Audience:

Specific Audience Needs:

Functional Benefits:

Emotional Benefits:

Economic Benefits:

Positioning Statement (across audiences):Value Proposition (tailored to this audience):

Key Positioning Pillars: (prioritized) Pillar 1 Pillar 2 Etc. Audience 1 Relevance to Customer: Degree of Differentiation: Believability by Customer: Support Points: Proof Points: (attached) Audience 2 Relevance to Customer: Degree of Differentiation: Believability by Customer: Support Points: Proof Points: (attached)

Summary: A positioning framework

Adapted from: Joan Giese Positioning Framework document

cenco marketing the future of marketing 3 _ mohan

Documents

process of market segmentation

segmentation approach

segmentation variables

priori segmentation

practice segmentation

pcs market

potential market

profile of customers