Identifying the target: segmentation & targeting

Giuliano Noci, Dipartimento di Ingegneria Gestionale

Politecnico di Milano
Index

✦ Objectives of segmentation
✦ Segments and their characteristics
✦ Advantages and disadvantages of segmenting

✦ The segmentation process:

✦ Segmentation types and variables:
• by product
• by customer (B2B v B2C)
✦ Methods of segmentation

✦ Analysis of the attractiveness of a segment and logic for

selecting the target

✦ Marketing strategies

✦ Marketing strategies for growth

✦ Customer journey
2
Why segmenting?

✦ Markets are too broad

✦ What is the food that you eat most often?
✦ What is your favorite activity for leisure?
✦ What is the product that you are most willing to spend more
money for?

✦ Too much diversity in the market

✦ desires/preferences
✦ available resources
✦ geographic locations
✦ attitudes and buying habits

3
 Why segmenting?

“All customers are similar” “Each customer is a market”

ONE PRODUCT
UNIQUE PRODUCTS, ONE PLAN
FOR EVERYONE, ONE PLAN FOR
FOR EACH CUSTOMER
ALL CUSTOMERS
“Customers are diverse, but I can detect
homogeneous groups with similar needs,
ways of using the product and
“UNDIFFERENTIATED “ONE-TO-ONE MARKETING”
expectations”
MARKETING” APPROACH (OR APPROACH
MASS MARKETING)

AD HOC PRODUCT AND APPROACH

FOR “SEGMENTS” OF CUSTOMERS
(GROUPS OF “HOMOGENOUS”
CUSTOMERS)

“Segment marketing” approach

4
Segmenting and segmentation

Segmentation
Marketing process through which the company divides
the market into various sub-groups – with different
demand profiles but internally homogenous – on the
basis of which management develops specific
marketing plans to best satisfy their requirements.

5
Market segments

✦ Two main characteristics:

✦ Internal similarity
✦ External diversity

Int ilar
er n
sim

In t
ally

ern lar
sim

all
i
y
In t
er
sim nal
ila ly
r

6
Characteristics of a “good” market segment

✦ Measurability: it must be possible to measure the size and buying

power of the segments

✦ Accessibility: real possibility of obtaining the segment using

marketing actions

✦ Homogeneity: within the segment as regards one or more

characteristics (describers); heterogeneity compared with other
segments

✦ Importance: a segment large enough to justify a targeted marketing

action

✦ Duration: possibility of exploiting the segment for a particular period

of time

7
Advantages and disadvantages of
segmentation

Advantages

✦ Reduction in diversity
✦ More focus of resources & professionals
✦ Possible creation of entry barriers
✦ Improvement in customer satisfaction
✦ Market share defence during maturity
✦ Higher control on marketing actions
✦ Risk hedging

8
Advantages and disadvantages of
segmentation

Disadvantages

✦ Different products for different segments (R&D, engineering)

✦ Increased production costs
✦ Increased stocks
✦ Fragmentation of advertising/promotion costs
✦ Increased market research costs
✦ Higher distribution costs
✦ Inefficient resource exploitation (e.g. duplication)

That’s why companies try to:

Standardize More external variety (breadth of range) v less
Modularize internal variety

9
 Segmentation process

Choice of the segmentation approach

• By product?
• By customer?

Choice of the segmentation method

• Mathematical?
• Heuristics?

Analyzing the segments obtained

• Segment validation
• Segment description
• Product/market matrix

10
Segmentation approaches

✦ By PRODUCT characteristics

✦ By CUSTOMER characteristics

11
 Example of segmentation by product

Mineral water market Industrial vehicle market

Sparkling 520 Mln litres (52%) Up to 5 tons 67.000

Still 380 Mln litres (38%) From 5 to 15 tons 38.000
Naturally-sparkling 100 Mln litres (10%) From 15 t 30 tons 15.000
Over 30 tons 21.000

Total 1000 Mln litres (100%)

Total 141.000

(N.B.: the used values are invented)

12
Advantages and constraints of segmentation
by product

ADVANTAGES CONSTRAINTS

• Simplicity • Does not consider the

• Immediacy variables related to the
customer’s characteristics
• Clarity and comprehensibility
• Little visibility of the
competition amongst products
• Simplistic

13
 Limits of segmentation by product: an
example

What they buy Fiat Panda Fiat Panda

Who they are ➢Wife of a medium-large car owner ➢Young worker
➢38 years of age ➢Single
➢Medium/high income ➢Medium “technical” knowledge of the product
➢Little/no “technical” knowledge of the ➢medium/low income
product

How they use the ➢Second family car ➢First car

➢City use ➢Mixed use
product

How they purchase ➢Joint husband/wife decision, strongly ➢Autonomous decision influenced the opinion of
determined by the husband (“expert”) friends and family
the product ➢Alternative considered: Yaris ➢Alternative considered: second-hand Fiat
Regata

What they look for ➢Manoeuvrability ➢Low cost

➢Easily found technical assistance ➢Reliability

Two different marketing plans would be necessary. One would be implemented if

we adopted the segmentation by product

14
Segmentation by customer

Three main approaches:

✦ segmentation by customer CHARACTERISTIC
✦ segmentation by customer BEHAVIOUR
✦ segmentation by customer NEED

The approaches suggest different segmentation bases according to the

customer type:
✦ Consumer customer
✦ Industrial customer

15
 Segmentation by customer - B2C markets

Approach Type of Characteristics Example of Variables

Age, gender, family size, family role, income, occupation,

Socio-demographic
social class, religion, etc.

Continent, country, region, type of residence and/or work area

Customer Characteristics Geographic
(city, suburb, or rural), population concentration, etc.

Psychographic Personality, lifestyle (e.g. VALSTM test)

User/non-user, brand-user/non-brand-user, intensity of usage,

Product usage
type of usage, time of usage, etc.
Customer Behavior
Frequency of purchase, point of sales used, duration of
Buying process purchase process, participants in the purchase process,
loyalty to brand or distributor, etc.

Price, quality, safety, variety, functionality, convenience,

Customer Needs Benefits sought
entertainment, indulgence, status, etc.

16
 Segmentation by customer - B2C markets
Customer Characteristics

What do we use the information on customer characteristics for?

✦ Estimate the size of a segment
✦ Assist in product design and pricing decisions
✦ Provide implication for the content and channel of marketing
communication
✦ Aware of ethically, politically, or religiously sensitive issues
✦ ...

17
Segmentation by customer - B2C markets
Customer Behavior

What do we use the information on customer behavior for?

✦ Sustain and even expand the usage of current users; Convince non-
users with the product/brand benefits over the competing
product/brand
✦ High usage intensity indicate customers loyal to the brand, who
purchase in multiple occassions and multiple POS
✦ If customers are loyal to POS instead, being present in the right
channel has higher priority
✦ Purchase process: regular or impulsive, etc.
✦ Roles in purchase process
✦ ...

18
Segmentation by customer - B2C markets
Customer Needs

What do we use the information on customer needs (benefits sought) for?

✦ Design the product addressing the needs
✦ Design the marketing communication addressing the motivation which
customers are more likely to respond to

19
 Segmentation by customer - B2B markets

Approach Type of Characteristics Example of Variables

Company size, sector, type of activity, type of

Socio-demographic management, etc.
Customer
Characteristics Continent, country, region, location (industrial/non-
Geographic industrial area), etc.

User/non-user, consumption volume, product

Product usage application type, etc.

Customer Behavior
Purchase lot size, complexity of buying process, roles in
Buying process burying process, distributor to purchase from, loyalty to
distributors, etc.

Punctuality of delivery, speed of delivery, supply

Customer Needs Benefits sought continuity, technical support, certification, price,
level of customization, etc.

20
 Segmentation by customer

✦ An insightful and actionable approach to segmentation does not

necessarily mean to choose one best from the different approaches,
but rather combining them in sensible way.

✦ We need to understand from our segmentation, who is included in the

segment (demographic/geographic characteristics), what are they
doing (behavior), and why are they doing that (needs)

✦ Different dimensions provide rich understanding of a segment. Their

relevance, however, may vary according to the decision in need to be
supported

21
Segmentation methods

✦ Mathematical
• Using statistical-mathematical techniques and algorithms.
• Require data (a representative sample) on which to make an analysis.

✦ Heuristic
• Empirical (generally qualitative) methods based on the experience of the
marketer

22
Statistical-mathematical methods

Survey research
• Information gathering about possible segmentation variables
• Focus groups or other qualitative research
• Questionnaires
• Etc.

Data analysis
• Elimination of correlated variables
• Definition of clusters

Segment profiling
• Description of the segments obtained
• Listing of the key characteristics

23
An example of mathematical segmentation: segmenting e-
government users in Regione Emilia Romagna

Background:
✦ Low penetration of e-government services
✦ Need to invest in marketing for promoting the use of services (high
investment in infrastructures to be paid back)

à Need to detect lead users, opinion leaders, and to segment for

implementing profiled marketing plans

24
 An example of mathematical segmentation: segmenting
e-government users in Regione Emilia Romagna

Focus groups
• Identification of the key benefits sought
• Preliminary testing of the impact of demographics (apparently irrelevant)

Survey research
• Extensive research on 3000 citizens (users, non-users, living in small and big
cities, towns, etc.)

Data analysis
• Factor analysis for identifying correlated benefits
• Cluster analysis for determining segments

Segment profiling
• Socio-demographic profile
• Usage of e-government services

25
 An example of mathematical segmentation: segmenting
e-government users in Regione Emilia Romagna

Focus groups
11 sought benefits detected:
• Identification of the key benefits sought
• Cost-saving
• Preliminary testing of the impact of demographics (apparently irrelevant)
• Time-saving
• 24/7 Accessibility
• Multichannel accessibility
Survey research • Operation security
• Extensive research on 3000
• Information citizens (users, non-users, living in small and big
security
cities, towns, etc.) • Democracy
• Transparency
Data analysis • User friendliness
• Interactivity
• Factor analysis for identifying correlated benefits
• System integration
• Cluster analysis for determining segments

Segment profiling
• Socio-demographic profile
• Usage of e-government services

26
 An example of mathematical segmentation: segmenting
e-government users in Regione Emilia Romagna

Focus groups
• Identification of the key benefits sought
• Preliminary testing of the
Questionnaire impact of demographics (apparently irrelevant)
structure:
• Demographics
• ICT devices
Survey research • Technology friendliness
• Extensive research
• Interneton 3000habits
usage citizens (users, non-users, living in small and big
cities, towns,use
• Previous etc.)
of e-government services
• Benefits sought in e-government (if interested in
e-government)
Data analysis
• Satisfaction with current services (if users)
• Factor
• Mediaanalysis
consumptionfor identifying correlated
(for grounding benefits
marketing
• Cluster analysis for plans) determining segments

Segment profiling
• Socio-demographic profile
• Usage of e-government services

27
 An example of mathematical segmentation: segmenting
e-government users in Regione Emilia Romagna

Focus groups
• Identification of the key benefits sought
• Preliminary
Factor analysis àtesting of factors
2 main the impact
aboutofbenefits
demographics (apparently irrelevant)
• Practicality:
• Cost-saving
Survey research • Time-saving
• Extensive research
• 24/7on 3000 citizens (users, non-users, living in small and big
Accessibility
cities, towns, etc.)
• User friendliness
• Operation security
• Information security
Data analysis • Customization:
• Factor analysis for identifying
• Multichannel correlated benefits
accessibility
• Cluster analysis for determining segments
• Democracy
• Transparency
• Interactivity
Segment profiling• System integration
• Socio-demographic profile
• Usage of e-government services

28
 An example of mathematical segmentation: segmenting
e-government users in Regione Emilia Romagna

Focus groups
• Identification of the key benefits sought
• Preliminary testing of the impact of demographics (apparently irrelevant)

Survey research
• Extensive research on 3000 citizens (users, non-users, living in small and big
cities, towns, etc.)

Data analysis
• Factor analysis for identifying correlated benefits
• Cluster analysis for determining segments

Segment profiling
• Socio-demographic profile
• Usage of e-government services

29
 An example of mathematical segmentation: segmenting
e-government users in Regione Emilia Romagna
% on the e-
% on the
governmen Main benefits Main criticalities
Segment
t users
expert Segment description User profile
sought emerged
users
population
Lowest average age, but wide
High expectations in both practility and
distribution in the age classes.
customization. Use of e-government in • Information
High level of education. Pre- • Time-saving
(almost) all the situations in which online update
Converted 18,5% 60,3% eminence of young couples with • Customization of
service provision is available. The 95% of • Search engine
children and of 35- y.o. living the interface
the cluster has experienced an interactive effectiveness
with their parents. Low
service (e.g., online payment or form filling)
concentration in small towns

Highest relevance of practicality benefits. Average age: 43. Lower level of

Positive attitude toward interactive services. education than Converted. High
• Time-saving • Tutorials
Converging 21,8% 15,2% They have experienced the services, they were presence of entrepreneurs and
• Cost-saving • Guided procedures
satisfied and they are increasing the use of e- professionals. Highest satisfaction
government among clusters

High presence of the middle-

Low relevance of customization benefits.
lower class, retired people and • Tutorials
Efficiency seekers. Low presence of • Error messages
Utilitarian 17,8% 2,0% housewives. Almost all live in • Search engine
interactive service users (3%), high • Time-saving
towns with more than 30,000 effectiveness
frequency of use.
inhabitants

Largest cluster. Low frequency of use, 26% of

Highest average age. High
members have experienced an interactive
presence of retired from work.
service. Use of e-government either for routine • Time-saving • Tutorials
Occasionals 33,2% 16,5% High presence of people living in
services (looking for the whole service on-line) • Quality • Completeness
small towns and of couples with
or for extraordinary services (looking for more
grown-up sons.
information)

High presence of people from

small towns. Lowest level of
Lowest satisfaction and lowest interest in • Completeness
education. High presence of • Error messages
Detached 8,6% 6,1% the services. Presence of people who • Search engine
couples with adult sons, • Quality
experienced the services and was delused. effectiveness
housewives and retired from
work. 30
Heuristic segmentation methods

✦ Successive elimination approach (Porter, 1987)

✦ Two-phase approach (Wind and Cardozo, 1974)

✦ Multi-phase approach, “Nested approach” (Bonoma and Shapiro,

1982)

31
 Successive elimination approach

1. Check-list of possible segmentation variables

Examples (both B2B and B2C)

•SIC or similar classifications (sector to which it

belongs) •Technological refinement
Intrinsic characteristics of •Number of employees •OEM/final user
the buyer •Strategies •Ownership
•Added value of production

•Buying policy •Average purchase order

Organizational aspects
•Buying process and procedure •Frequency of purchase

Personal characteristics of •Personality, character, attitude

•Expertise
the buyer •Decision-making culture/style

•Direct sales/through distributors

Distribution channels
Geographical aspects
Products
•Distributors/Brokers
•Exclusivist/Non exclusivist
•Distributor’s buying policy
•Country and its regions •Country’s stage of
•National/international markets development
•Climatic zones •Political/economic regime
•Functionality/service •Price
•Size
•Technology used/Operational characteristics •Assistance

32
 Successive elimination approach

SOCIO-ECONOMIC SIZE
Large Large Small
STRUCTURE independent independent
groups
Developing Developed

OWNERSHIP
country country
TECHNOLOGICAL

state Irrelevant Irrelevant

CULTURE

high

to 4
Irrelevant
USER’S

s
private

er
modest

v
crosso
OWNERSHIP AND SIZE

6
From 4 crossovers to 3
State/ Private/ Large Private/ Small

From
Private/
TECHNOLOGICAL CULTURE

Large group Large group independent independent

AND SOCIO-ECONOMIC
STRUCTURE OF THE

s
cross lification
Irrelevant
CUSTOMER’S

to 6
High/Developed
COUNTRY

ons
s
Irrelevant Irrelevant

i
r
Modest/Developed

t
e

a
From her simp
v

c
o

i
Irrelevant Irrelevant Irrelevant

ssif
Modest/ Developing

In cla
2
rt
1
h fu
TECHNOLOGICAL CULTURE

wi t
HIGH MODEST
Large state- Large state-
owned groups in Large owned groups in Large Small
developed Large
private developing independent independent
country groups independent
country
High quality/ Deep
perforation
PRODUCTS
RANGE OF

Standard quality /
Deep perforation

Standard quality/
superficial
perforation

33
Successive elimination approach

2. Variables identified as relevant are compared in pairs using a

matrix
3. Unimportant “crossovers” and contradictions are eliminated
4. Variables are gradually combined to reduce the number of
combinations
5. Products are entered according also to the different use functions
6. The final product-market (segments) matrix is built

34
Two-phase approach

Hierarchical selection of segmentation bases:

1. Macro segmentation based on the external characteristics
and purchase situations
2. Micro segmentation based on the characteristics of the
individuals

All potential customers

Mainly demographic
Basis for macro-segmentation
and operational variables

Macro segment 1 Macro segment 2 Macro segment N

Basis for micro-segmentation Mainly behavioural variables

Micro segment 1 Micro segment 2 Micro segment N

35
Multi-phase approach, “nested approach”

5 step hierarchical approach

The more we move towards the center, the harder is to find information

(e.g., activity type, sector, micro-sector,

DEMOGRAPHIC VARIABLES
size, location , age, etc.…)
(Technology, technical, operational and financial
OPERATIONAL VARIABLES
characteristics, existing customer or not, etc.)

BUYING PROCESS (roles in purchase processes, phases of buying

process, buying methods, criteria, etc.)

SITUATIONAL FACTORS (Quantity purchased, benefits sought, etc.)

PERSONAL
(Individual motivations, risk inclination, etc.)
FACTORS

36
 Definition and qualification of a segment

PRODUCT: SEGMENT:

SEGMENT SIZE

CUSTOMER CHARACTERISTICS

TYPE OF USE OF PRODUCT

LEVEL OF PURCHASES/YEAR

BUYING PROCESS METHODS

ROLES IN THE BUYING PROCESS

CUSTOMER’S PRINCIPAL NEEDS

CURRENT/EXPECTED TRENDS AND DEVELOPMENTS

37
Examples of segmentation (1/7)

Microsoft: segmentation of visitors to its web site

à choice among the categories :

✦ Sites by type of product: Back-office, Developer Tool, Office, Windows

✦ Web services: MSN, Office Services, Windows Update
✦ Sites by customer type: home & personal, companies, developers, schools,
professionals IT, partners/re-sellers

38
 Examples of segmentation (2/7)

Example of segmentation based on preferences (ice-cream)

Attribute 2
Attribute 2
(e.g. creaminess) HOMOGENOUS preferences POPULAR preferences
(e.g. creaminess)
(there are no natural segments)

Attribute 1
Attribute 1
(e.g. sweetness)
(e.g. sweetness)

Attribute 2
MASS preferences
(e.g. creaminess)
(natural segments)

Attribute 1
(e.g. sweetness)

39
Examples of segmentation (3/7)

Example of segmentation based on age and income

Customers Income Age

A 15 24

B 65 55

C 30 35

D 6 32

E 8 51

F 5 70

../..

40
 Examples of segmentation (4/7)

Example of segmentation based on age and income

A A
B
B
C
C
E E A C D BEF
D
F D
F
Income/ <30 31-49 >50
No segmentation Total segmentation Age

D - D E,F
< 10
E
< 30 F
A > 50 mln years A
11 - 49 mln
A 11-49 A C -
B B C
> 50
C C
years
E E B >50 - - B
D < 10 mln D F
F 31 - 49

Income Age

41
Examples of segmentation (5/7)

An airline company decides to attract first-time flyers.

1st variable: User status

Flyers Non flyers

2nd variable: Income

Low Medium High

3rd variable: Frequency

Occasional flyer Frequent flyer

42
Examples of segmentation (6/7)

Market Segments: Airlines - 1985

43
Examples of segmentation (7/7)

Market Segments: Airlines - now

44
Criteria for Target Market

1. Size
2. Expected Growth
3. Competitive position
4. Cost of reaching the market
5. Compatibility with the organization’s objectives and resources

45
 Segmentation and competitor analysis

SEGMENT 1 SEGMENT 2 SEGMENT 3 SEGMENT 4

COMPANY A X X

COMPANY B X

COMPANY C X X X X

COMPANY D X X X

Crowded segment

46
 Targeting strategies: choice of target segments

High-interest segments, but Segments with high

high investment entry/presence priority

Attractiveness of
segments

Segments of no interest Segments to defend only with

marginal spaces (self-
financing)

L
L Compatibility of segments with the company's new H
strategies and resources

47
Marketing strategies (1/3)

UNDIFFERENTIATED DIFFERENTIATED CONCENTRATED

A SINGLE MARKETING VARIOUS MARKETING A SINGLE MARKETING

PLAN FOR THE WHOLE PLANS FOR THE PLAN CONCENTRATED
MARKET DIFFERENT SEGMENTS ON ONLY ONE SEGMENT

48
 Marketing strategies (2/3)

It is possible to look at targeting strategies in more detail by identifying

5 possible approaches.

M1 M2 M3

P1

P2

P3

A SINGLE SEGMENT

49
 Marketing strategies (2/3)

It is possible to look at targeting strategies in more detail by identifying

5 possible approaches.

M1 M2 M3

P1

P2

P3
PRODUCT SPECIALIZATION

50
 Marketing strategies (2/3)

It is possible to look at targeting strategies in more detail by identifying

5 possible approaches.

M1 M2 M3

P1

P2

P3
MARKET SPECIALIZATION

51
 Marketing strategies (2/3)

It is possible to look at targeting strategies in more detail by identifying

5 possible approaches.

M1 M2 M3

P1

P2

P3

SELECTIVE SPECIALIZATION

52
 Marketing strategies (2/3)

It is possible to look at targeting strategies in more detail by identifying

5 possible approaches.

M1 M2 M3

P1

P2

P3
TOTAL COVERAGE

53
Marketing strategies (3/3)

54
Relationship between marketing and
business strategies

Marketing strategy Business strategy

Undifferentiated Cost leadership

Differentiated Differentiations

Concentrated Focalization

Impact on marketing plans

55
 Customer Journey

What is customer journey?

Customer Journey is the steps that the customer(s) go through in
engaging with a company.

Each customer journey could start and/or finish at different

point and pass through different route.
 Customer Journey

What is the objective of mapping customer journey?

Mapping customer journey is to illustrate customer journey with a

diagram. It helps the company to:
• Understand the experience of customers
• Identify areas that are important (or less important) to customers
• Identify gaps between departments and channels which cause
customers frustration

Thus, ultimately, through mapping customer journey a company aims to

design a seamless customer experience, which is truly valuable to the
customers and is also efficient and effective for the company.
 Persona

What is a persona in customer journey?

Customer personas are embodiments of a company’s target segment.

A persona has his/her needs, wants, beliefs, preferences, goals,
motivations, behavioral habits, and so on.

Customer journey is mapped as

the steps that a persona goes
through with a company.
 Persona

s a re a
er s o n a av io r
P v e b e h
e n t at i f o r a
repr es ro f il e
iv it y p
n d a c t b a s e .
a o m er
cust
Elements of Customer Journey

Elements of the Customer Journey:

• Stages of the purchase process (awareness, familiarity, consideration, purchase,

loyalty)

• Touchpoints (in-store, website, email etc…)

• Devices (PC, smartphones, tablet etc..)

• Customers’ activities (active and/or passive)

• Customers’ motivations and objectives

• Customers’ barriers

• Customers’ emotions

• … and any other element that is relevant to your business!

 Customer Journey Mapping - Example

Customer life cycle with a company

What does this customer journey map tells you?

 Customer Journey Mapping - Example

Channels

Activities

Emotions

Purchase process
 Customer Journey Mapping - Example

If the illustrated customer journey of the persona is representative

of a segment, what does it tell you?