New SegmentationMethods and CLV

Gerald E. SmithMK719

DEFINITIONS

• MARKET SEGMENTATION: Customer oriented -- identifies customer subgroups of the market as they currently exist.

• PRODUCT DIFFERENTIATION: Product oriented -- identifies subgroups of competing products.

RULE OF MARKET SEGMENTATION

• Maximize homogeneity within market segments

• Maximize heterogeneity between market segments

BASES FOR SEGMENTINGMARKETS

CONSUMER:• Geographic• Demographic (age,

income, marital, occupation, ethnicity, etc.

• Psychographic (AIO, lifestyles)

• Behavioral (occasions, user status, usage rate, loyalty status, hierarchy of needs)

• Benefits

BUSINESS TO BUSINESS:• Demographic (industry, size, location)

• Customer Variables (technology, user/nonuser, loyalty status)

• Purchasing(centralized/decentralized, functional orientation, contracts vs. bids vs. lease)

• Situational (urgency, order size, product application)

PSYCHOGRAPHIC SEGMENTATION

• Actualizers (taste, finer things)• Fulfilleds (functionability, value, durability)

• Believers (established products/brands)• Achievers (visibility to peers)• Strivers (emulation)• Experiencers (experiential consumption)• Makers (basic practical possessions)• Strugglers (urgent basic needs)

BENEFIT SEGMENTATIONToothpaste Category

Prevents Cavities Freshens Breath Provides Medical Benefits

Demographics Families with children at homeYoung and middle aged parentsModerate incomeModerate to higher educationModerate to high incomes

Single adultsYoung adults, teensWorking incomesWorking or going to schoolModerate incomes

Empty nesters, mature adultsSenior citizens, “Mod Maturity”’sFixed incomeMore educatedWealth driven

Psychographics (Lifestyles) Believers, Fulfilleds, driven byprincipleInvolvement with school andcommunity activitiesEducation is importantHygiene is important

Achievers, Strivers, Experiencersdriven by status, acceptanceActive social lives, social goalsActive physical activitiesAppearance is importantAvoiding halitosis is important

Makers, Believers, Strugglers,driven by survival, healthActive health interestsDiet, exerciseRegular medical visitsMedical education, lectures, etc.

Usage Use Occasions: At least 2x dailyTime of Use: Morning/EveningRelated Behaviors: Regular dentalcheckups, floss usageLoyalty: MoreUsage Level: HeavyAttitudes: Primary product

Use Occasions: IncidentalTime of Use: Prior to socialinteractionsRelated Behaviors: Use withbreath productsLoyalty: LessUsage Level: LightAttitudes: Secondary product

Use Occasions: Several timesdailyTime of Use: Morning/Evening,after mealsRelated Behaviors: Regular dentalcheckups, doctor visits, floss usage,special dental productsLoyalty: More, dependent ondoctor directionUsage Level: ModerateAttitudes: Supplementary product

Most Important Attributes FluorideCavity preventing attributes

TasteStrength of tasteBreath freshening attributes

Medical ingredientsEffects, and side effectsEndorsements

Segmentation UsingMeans End Laddering

Source: Perry, Strategic Marketing Management (2001).

Segmenting UsingMeans End Laddering

Segmentation Framing

Source: Barron and Hollingshead, “Making Segmentation Work,” Marketing Management (2002).

DocumentSecurityService

e.g.,Federal Express

Point-to-PointShippingService

e.g.,UPS

$10-$12per small parcel

$14-$16per small parcel

Segmenting byFrames of Reference and

Contrasting Reference Value Profiles

Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002).

Segmenting by Value Delivery Model and

Composite Channel Customer Value Models

Commercial Volume DrivenSegment

Brand Awareness$41,000

Brand Likelihood ofPurchase $41,000

Brand Tie-In Purchase$36,000

Product Failure-Reinstall $21,000

Experienced Installers$19,000

Reference Value$400,000

PositiveIncremental

Value$158,000

NegativeIncremental

Value$114,000

NetEconomic

Value$444,000

Info Accuracy-Lost Sales$20,000

Delivery Errors-Lost Cust$16,000

Delivery Errors-Opp Cost$16,000

Delivery Errors-Rep Bus$10,000

Out of Stock-Lost Bus$11,500

Out of Stock-Rep Bus$12,000

Management Time Lost$10,000

Carpet Products Probs$7,000

Out of Stock-Opp Cost$11,500

Residential High ServiceSegment

Brand Awareness$45,000

Brand Likelihood ofPurchase $42,000

Brand Tie-In Purchase$31,000

Product Failure-Reinstall $18,000

Product FailureOpp Cost $21,000

Reference Value$500,000

PositiveIncremental

Value$234,000

NegativeIncremental

Value$70,000

NetEconomic

Value$664,000

Experienced Installers$22,000

Experienced InstallersOpp Cost $19,000

Extra Installers$36,000

Info Accuracy-Lost Sales$25,000

Delivery Errors-Lost Cust$20,000

Delivery Errors-Rep Bus$12,500

Management Time Lost$12,500

Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002).

Location Awareness$275

Consumer ConfidenceSecond Tier Brands

$305

$2,000

Trained Flooring Installers$185

Flooring InstallerAvailability

$325

Brand Awareness$335

Consumer ConfidenceTop Tier Brands

$425

Availability ofComplementary Products

$280

Custom Flooring Installers$340

$2,000

DifferentiationValue

ReferenceValue

DifferentiationValue

ReferenceValue

Best Brand Retailers Volume Driven Retailers

Contrasting Differentiation Value Profiles

Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002).

Evaluating Segments UsingEconomic Value Pools

$30 Reference Value

Courts and Law Enforcement Agencies

Academic Research Labs

Pharmaceutical Drug Discovery

Clinical Services(paternity,

inheritance, infidelity)

Immigration

$1,655

$2,500

$400

Millions of kits of market potential

Eco

nom

ic V

alu

e p

er

Kit

$900

$1,300

Source: Nagle and Hogan, The Strategy and Tactics of Pricing (2006).

Evaluating Segments UsingProfit Pools

Source: Gadiesh and Gilbert, Harvard Business Review (1998).

Evaluating Segments UsingProfit Pools

Source: Gadiesh and Gilbert, Harvard Business Review (1998).

Evaluating Segments UsingProfit Pools

Source: Gadiesh and Gilbert, Harvard Business Review (1998).

CALCULATING CUSTOMER LIFETIME VALUE

1. Customer Acquisition Costs2. Customer Break-even Analysis3. Lifetime Value Analysis

CUSTOMER ACQUISITION COSTS

AC = _____________________

Prospecting Costs:Production, Mailing,Advertising, Lists

Response Rate

RETENTION AND SURVIVAL

Survival (t) = Retention Rate(t-1)

CUSTOMER LIFETIME VALUE

CUSTOMER LIFETIME VALUE

Infinite Life

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BREAK-EVEN ANALYSISFrequent Buyers

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BREAK-EVEN ANALYSISOccasional Buyers

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LIFETIME VALUE ANALYSIS

Frequent Buyers

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LIFETIME VALUE ANALYSIS

Occasional Buyers

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Segmenting Using CLV

• Likely value of each customer• Buying patterns of each customer

• Optimal marketing strategies– For different customer segments– For each customer over time or situation