Customer Analysis

1. Customer Analysis Segmentation, Targeting & Positioning

2. What did we learn from BMW? • The automobile market is divided into a number of “groups” or “segments.” Sub-Compact; Compact; Full-Size; Luxury, etc. • These divisions are however, product based, not customer based. However, customers have, over time, “adopted” this segmentation scheme • BMW in the luxury / performance segment. But wants to segment further based on “usage experience.” The Better Driver. Not product based, but customer / market based. • Usage experience + “Value pricing” for the segment key to differentiating the product offering from Mercedes, Lexus & Infiniti • Along with appropriate product and price, the promotions (advertisements) and place (channels) also aligned with strategy

3. Segmentation • What is Segmentation? • Why do we need Segmentation? • What do we do once we have “Segmented the Market” ?

4. Segmentation • Market Segmentation is the Process of Identifying Homogeneous Groups of Buyers Requiring Different Marketing Strategies to Influence their Consumption • Organizations have Limited Resources • Consumers may be too Numerous, Widely Scattered and Varied in their Needs • Competing Organizations may be Better able to Attract Certain Groups of Customers (Segments) in the Market • Each Organization Should, Therefore Identify the Most Attractive Parts of the Market That it Could Effectively Serve (Target Market).

5. RJ Reynolds • Focus on the Chicago market • Company has several brands - Winston, Salem, etc. • Question: How should RJR allocate its marketing resources in the Chicago market ? • The usage rate of RJR brand cigarettes varies across the city • This usage rate seems to be related to the socio-economic characteristics of the smokers • Higher education level smokers use low tar cigarettes; “Blue collar” folks smoke Winston, and African-American smokers prefer menthol (found in Salem) • Chicago’s North Shore area has high education levels; the South-East area is a blue-collar neighborhood and the South side has many African-American residences • So, RJR allocates its promotion money based on brand & geography

6. A Segmentation Model • In the above example, the usage rates of the different brands of cigarettes formed the basis for the entire segmentation scheme. Hence, this variable is referred to as a basis variable. • In a regression context, think of the basis variable as a “dependent variable.” • The basis variable should capture the heterogeneity of interest to the marketer, i.e., the differences across consumers. • The geographic and socio-economic characteristics in the RJR example are referred to as the descriptor variables. • In a regression context, think of the descriptor variables as the “independent variables.” • The descriptor variables help the marketer deliver different 4P levels to the different segments - different products (cigarette brands); prices (low / medium / high); promotions (advertising in specific magazines); place (different kinds of stores)

7. Descriptor Variables Irrelevant Descriptor Relevant Descriptor Own Microwave Do Not Own Microwave Low Education High Education Fraction of Customers 20% 80% 30% 40% Likelihood of Smoking Low-Tar Cigarettes given Smoker Likelihood of Smoking Low-Tar Cigarettes given Smoker

8. Bases: Needs, wants, benefits, solutions to problems, usage situation, usage rates Descriptors Demographics: Age, income, gender, family size, marital status, social class Psychographics: Lifestyle, values, personality Behavior: Use occasions, usage level, brand loyalty, complementary and substitute products used Decision making: Individual or group choice, low or high involvement purchase, attitudes and knowledge about product class, price sensitivity, etc. Media patterns: Level of use, types of media used, times of use, etc. Bases: Needs, wants, benefits, solutions to problems, usage situation, usage rates, size, industry Descriptors Industry, size, location,current suppliers, technology utilization Personality characteristics of decision makers Applications, order size, use occasions, usage level, brand loyalty, complementary and substitute products used Purchase procedures, size and composition of decision making group, use of outside consultants, purchasing criteria, (de)centralized purchasing, price sensitivity, switching costs, budget cycle, etc. Patronage at trade shows, receptivity to sales people, level of use, types of media used, times of use Consumer Industrial Segmentation Bases & Descriptors

9. Criteria for Segmentation A. IDENTIFIABLE A good segmentation scheme must have the following two characteristics B. ACCESSIBLE 1. MUTUALLY EXCLUSIVE C. RESPONSIVE 2. COLLECTIVELY EXHAUSTIVE D. SIGNIFICANT

10. Strategic Approach to Segmentation

11. Example: Category vs. Brand Building Basis: Use Product or Service BCI / CCI Analysis - Segments described by consumption levels BCI: Brand Consumption Index CCI: Brand Consumption Index Number of units of brand X consumed by consumer J BCI (J,X) = Average number of units of brand X consumed in the market (per capita) Number of units of the category consumed by consumer J CCI (J) = Average number of units of the category consumed per capita

12. CCI / BCI Analysis Combine BCI and CCI to Examine Descriptors of the (e.g.) High CCI / Low BCI cell CCI LOW HIGH LOW 1. 2. BCI 4. HIGH 3. Finding: Consumers in Cell #2, mostly live in the South-Western U.S. The firm may want to allocate more resources to this geographic region (descriptor)

13. Problem • Oftentimes, one needs to use multiple bases for segmentation. For example, size of firm, order size and nature of application in an industrial marketing application. Or in a financial services application, the bases might be - number of accounts held with the bank, frequency of ATM visits, volume of transactions, etc. • Suppose there are N such basis variables. Let each variable have L levels. Then the number of possible segments are NL. • Obviously, there may be too many segments to be meaningful • Hence, we need some procedure that can take the data across consumers on all the relevant bases variables and then group those consumers together who have similar values on the bases variables

14. Grouping consumers using their bases variables Volume of Transactions Group 1 Group 3 Group 5 Group 2 Number of Accounts Group 4

15. Profiling the Segments • When there are several bases variables, the statistical procedure that is used to group consumers is called cluster analysis. • Once the clusters (or segments) have been identified using the bases variables, the next step is to describe (or profile) them using the descriptor variables • For example, in the financial services case, one can compute the average income, age, family size, and media habits of the consumers belonging to each of the 5 groups in the figure • If the average profile of each group is “sufficiently” different, then we have “good” descriptors • Question: How do we decide how many segments to have? For example, in the figure, one could potentially combine groups 1 and 2 to get a single, larger group. Then we would have only 4 segments

16. 3 Steps in a Segmentation study • Survey stage • Gathering data on a random sample of consumers for several different bases and descriptor variables • Analysis stage • Cluster analysis • Profiling stage Later in the course, we will go through a specific application to a PDA product

17. Market Segmentation Survey Stage Analysis Stage Profiling Stage 1. Identify Segmentation Variables and Segment the Market 2. Develop Profiles of Resulting Segments

18. Targeting Opportunities for Profit * Size * Growth Potential TARGET MARKET SELECTION Competitive Intensity * Unmet Needs * Entry Barriers • Firm’s Objectives • Firm’s Capabilities • Synergies across Segments

19. The Multi-factor Targeting Model • Segment Attractiveness • Market / Customer Factors • Size, growth, life cycle stage, loyalty, • price sensitivity, cyclicality in demand • Economic & technological factors • Industry capacity, access to raw materials, • barriers to entry & exit • Competitive factors • Environmental factors • Firm’s Position • Market position factors • Relative share, change in share, company • image, breadth of product line • Economic and technological factors • Cost position, capacity utilization, techno- • logical position • Capabilities • Management, sales force, innovation, • financial, channels • Interaction with other segments • Market synergies, operating synergies • Select factors that drive segment attractiveness and the firm’s relative position • Attach a weight to each of the above factors. The weights reflect the relative importance of the factors • Rate each segment on each of the above attractiveness and position factors • Compute the weighted sum to give you an index of the attractiveness of each segment and an index of the firm’s position in each of the segments. • Select a mass marketing; multi-segment or niche marketing strategy • Sequential targeting is also possible

20. The Multi-factor Targeting Model Firm’s Position GROW BUILD High REINFORCE SUPPORT Segment Attractiveness Medium MAINTAIN HARVEST DIVEST Low High Medium Low

21. Market Targeting 3. Evaluate the Attractiveness of each Segment 4. Select the Target Segment(s). Multi-factor Model Firm resources & Strategy

22. Positioning • Now that we have segmented the market and picked out the segments we want to target with our offering, the next question is, how can we convince consumers in the target segment to choose our offering? • To do this, we have to convince this segment that our product / service / firm: • Meets (or exceeds) their needs • Does it better than competitive offerings • This is the role of Positioning in a firm’s marketing strategy

23. Needs • In evaluating their needs and how different offerings fulfill this needs, consumers look at the “value equation” • Firms typically think of the value equation as: • Value = Performance Quality  Price • Performance Quality = f (Product Attributes / Features) • However, consumers are more concerned with the performance quality relative to what they want • That is, consumers are more focused on the Benefits from the product, or Perceived Quality • Further, their Perceived Price could be different from the actual price of the product (e.g., costs associated with the down time of photocopy machine) • Value equation from consumer perspective is: • Value = Perceived Quality  Perceived Price = Benefits  Perceived Price

24. Example Suspension Turning Radius Sportiness Engine Capacity Roominess Wheelbase Quality Headroom Economy Miles / Gallon Maintenance Attributes Benefits Perceptions

25. ABCs of Positioning • Attributes. Understand the attributes of the product or service that drive the consumers’ perceived product or service ….. • Benefits. The next step is to differentiate your product or service offering from those of your competitors’ via your …. • Communication of Value. You can change your advertising message, your channels of distribution, your brand name, etc...

26. Finding the Attributes that Help in Differentiation Mapping the Consumption Chain - MacMillan & McGrath HBR • How does consumer become aware if need for your product / service? • How does consumer find your offering? • How does consumer make final selection? • How does consumer order and purchase your product or service? • How is your product / service delivered? • How is your product installed? • How is your product service paid for? • How is your product stored? • What is the customer really using the product for? (vinegar and coffee machines) • What does customer need help with while using the product? • What about returns and exchanges? • How is product repaired or serviced? • What happens when product is disposed of and no longer in use?

27. Positioning Analysis 1. The key to positioning is determining the needs of consumers along (several ?) important benefit dimensions 2. Consumers perceptions of the existing services / products / firms in the market (including yours ?) along each of these dimensions 3. Inferring opportunities / threats from the way in which consumers perceive the set of products (in 2.) relative to their needs (in 1.) • An important tool in Marketing that summarizes all this information is called the Perceptual Map • A perceptual map typically focuses on the two most important attributes or benefits that consumers seek. Hence, it is a 2-D map with each dimension corresponding to the attributes / benefits • The perceptual map contains consumers’ Ideal Points (i.e., their needs from 1. above) along each of the dimensions • It also contains Brand Locations, i.e., consumers’ perceptions of the brands in the market along the two dimensions of interest

28. A Perceptual Map Sportiness Porsche BMW Miata 4 Acura NSX 1 Jaguar Supra Prelude Celica 2 6 VW Golf Economy 5 3 Twingo Punto Corolla Civic Volvo V70 1~6: Clusters of Ideal Points Radius proportional to # of consumers

29. Collecting the Data

30. Positioning Statement • For [target segment], the [product] [most important claim] because [single most important support] • For business travelers, Avis provides the best customer service, because it’s #2 and tries harder.

31. Questions to ask when Positioning • What position do we own? • Find the answer in the marketplace • What position do we want? • Select one that does not become obsolete • Who must we out-gun? • Do we have enough money? • Spend enough to accomplish objective • Can we stick it out? • Expect internal pressures for change • Do ads match our position? • Don’t let creativity get in the way

32. Creating Value Through Positioning: Super Premium Vodka • Defined by Federal regulations as “neutral spirits so distilled or so treated after distillation with charcoal or other materials as to be without distinctive character, aroma, taste or color” • Stolichnaya (Russia); Absolut (Sweden); Finlandia (Finland); Denaka (Denmark); Elduris (Iceland); Tanqueray Sterling (UK) • Average price around $15 versus $8.50 for a 750 ml. bottle • “Ultra Premium” Stolichnaya Cristall priced at more than $20 per 750 ml.

33. Creating Value Through Positioning: Jaguar Automobiles • For years Jaguar was a “much admired, much ogled hunk of hardware that didn’t run very well or very often, but it reeked of prestige, status and the luxury image.” • Bought by Ford for $2.5-3.0 billion • Average buyer of XJ-6 is 48 years old, male, and makes more than $100000 per year

34. Positioning in the Cosmetics Industry • Why haven’t Japanese soap and cosmetic firms been as successful as Japanese automobile and electronics firms? • Unilever (Anglo-Dutch); P&G (American); L’Oreal (French) are international giants • Kao (Soaps) and Shiseido (Cosmetics) big Japanese firms • R&D: • Shiseido 3% of sales • Kao 4.5% of sales • 4 scientists on Board of Directors • P&G / Unilever 2.5% of sales • Image & Advertising • Mike Perry, Personal Products Director Unilever describes his job as “selling dreams in a bottle” • Sam Sugiyama, Manager of the London Office of Shiseido says that he spends almost nothing on advertising: “Technology and service mean success. Advertising is not a short cut.”

35. Example of Positioning: Beers as People

36. Positioning totally new products • First Automobile: “Horseless Carriage” • Similarly: “off-track” betting; “lead-free” gasoline; “tubeless” tire • “AGAINST” Position: Avis is only No. 2 in rent-a-cars, so why go to us? We try harder • “UGLY” Position: The 1970 VW will stay ugly longer • “UN” Position: 7Up: the Un-Cola • Reposition Competitor: You have tasted the German beer that is most popular in America (Lowenbrau). Now taste the German beer that is most popular in Germany (Beck's)

37. Positioning 5. Identify Possible Positioning Concepts for each Target Segment 6. Select, Develop and Signal the Chosen Positioning Concept Perceptual Map Positioning Statement

38. Summary • Segmentation is the concept that recognizes diversity in the marketplace. The process of segmenting the market produces clusters of people who are similar • Targeting a segment involves the identification of segments to which marketing effort will be directed. Marketers must select targets for which their product will meet a need. • Positioning requires designing a company and product image and developing a marketing mix to promote the image to the target segment(s)

39. S-T-P process Market Segmentation Market Targeting Product/Service Positioning 5. Identify Possible Positioning Concepts for each Target Segment 6. Select, Develop and Signal the Chosen Positioning Concept 1. Identify Segmentation Variables and Segment the Market 2. Develop Profiles of Resulting Segments 3. Evaluate the Attractiveness of each Segment 4. Select the Target Segment(s).

40. Competitive Leverage Analysis Bells & Whistles Hot Buttons Entry Tickets Penny Savers Unmet Needs Discriminating Power Importance