University of Washington EMBA Program North America 5 Marketing Management “Segmenting Markets, Process and Assessment” Instructor: Elizabeth Stearns

The S tearns G roup Purpose of Forming Market Segments To form the closest possible match between customers’ needs or wants and priorities, and the firm’s offer, such that customer satisfaction is maximized and competitive advantage is created. As a result, unit volume and/or price increases, and profits are enhanced

Market Segmentation The process of grouping actual and potential customers in a market for the purpose of selecting targets for effort and designing marketing strategies and programs for them Market Segment A group of actual or potential customers with similar characteristics, who seek similar sets of benefits and attach the same importance to their satisfaction

Segmentation Dividing up the market into groups of consumers who share similar needs and who respond similarly to marketing mix variables –Account for customers’ diverse needs and differing behaviors in its strategy –Design the marketing mix to more closely match customer needs –Improve efficiency and effectiveness of resource allocation

Questions to Ask of Individual Market Segments Worthwhile? How does the attractiveness of this segment compare with other segments? Is it an appropriate size to warrant our effort? Can we expect a reasonable return relative to our investment of time and resources? Winable? Can we develop a property that enables us to deliver important customer benefits better than competition? Do we have the appropriate skills and resources (e.g., production, service, distribution, dealers) to implement this concept? Synergistic? Will our entry into this segment affect our position or performance in other market segments?

Who are your 3 million annual buyers? Which of these Customers provide the highest profit?

Some Customers are Worth More! $$$$ $$$$$ $ $$ $$$$$$$ $$

Economic Value to Keeping Customers 2% Retention equals approximately 10% reduction in costs

Why Customers Are More Valuable Over Time Company Profit Time Base Profit Increased Purchases & Higher Balances Reduced Operating Costs Referrals Price Premium Customer Acquisition Cost Profit Comes from Different Sources “Zero Defections” Reichheld & Sasser, Jr.

Some Confusion on Who is Target and Who Has Responsibility for Targets’ Future Sales Product/Brand Distribution specific Demo/Geo-demo specific Other? Profit, Future Value/Lifetime Value

GM Cars “Ladder of the American Dream” $$$ Volume Saturn? GEO? Chevrolet Pontiac Buick Oldsmobile Cadillac

$$$$$$$$$

So…who are they really? A B A B C A C E A D E X Y Z ## $$$ CharacteristicQuantity

Segments Defined by Shopping & Purchase Behavior? DM- Direct Marketing, D- Bricks and Mortar, I- Internet D DM D / DM DM / D I D / DM / I DM / D / I I / D / DM

Segments Defined by Churn / Share of Wallet? (share of liver?!) “Never Churns” 1 to 2 Brands 2+ Brands

By Customer/Product Profitability ? P1P1 Highly profitable product P2P2 Profitable product P3P3 Losing product P4P4 Mixed-bag product ProductsProducts ++ High profit customer ++ - B/E: Avg customer Losing customer S1S2S3 Customers

By Communications Stream/Response? Person Mail Phone Fax Web TV Radio Outdoors POS Person Mail Phone Fax Web How Cos. Communicate How Customers Respond

By Communications Stream/Response? Person Mail Phone Fax Web TV Radio Outdoors POS Person Mail Phone Fax Web How Cos. Communicate How Customers Respond Dr. Gary Bridge, IBM Wireless

Value Segmentation Approach Are the groups of appropriate size for us to consider? Are the groups measurable? Are there significant differences among groups in segment attempt? Are benefits sought by customers understood? Are customers perceptions of relative importance understood? Are there differences among customers in importance of benefits sought? Conduct Market Research Start Stop Collapse or group finer Try different groupings Targeting Decision Try different groupings Yes No

Frank Horner

Thank You!

Market Segmentation Matrix Example: French Fries Fastfood Corporate Tablecloth Institutions Government Priority ordering Tastes real like in Paris Easy to hold, (Easy to serve, cook) Easy to store, ship Affordable Customer needs/ required benefits

Market Segmentation Matrix Example: French Fries Fastfood Corporate Tablecloth Institutions Government Priority ordering Tastes real like in Paris Easy to hold, (Easy to serve, cook) Easy to store, ship Affordable Customer needs/ required benefits 1

Market Segmentation Matrix Example: French Fries Fastfood Corporate Tablecloth Institutions Government Priority ordering Tastes real like in Paris Easy to hold, (Easy to serve, cook) Easy to store, ship Affordable Customer needs/ required benefits 1 Segment 1 Segment 2

A Customer Loyalty Segmentation Scheme Your CustomersCompetitors’ Customers LoyalSwitchersLoyalSwitchers USAGE HeavyMediumLight

USAGE BEHAVIOR Customer Loyalty Paradigm Heavy Medium Light SwitchersLoyal

USAGE BEHAVIOR Customer Loyalty Paradigm Heavy Medium Light SwitchersLoyal

USAGE BEHAVIOR Customer Loyalty Paradigm Heavy Medium Light SwitchersLoyal

Inactive or ex-customers Customer Development Over Time PartnersAdvocatesClients Repeat customers First-time customers Suspects Prospects Disqualified prospects ©2000 Prentice Hall

S et Business and Customer Objectives by Segment TheoryPractice Reality Break-Even Profit Investment Spend