Marketing Management - Market Segmentation

Segmentation (final)

ALAN COBER

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Segmentation (final)

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M A R K E T I N G

A segmentation you can

act on

John Forsyth, Sunil Gupta, Sudeep Haldar, Anil Kaul, and Keith Kettle Value-based segments usually don’t fit neatly into demographic ones | Some solutions step around the problem; others meet it head on

R

emember when marketing was simple? Your division operated

in a manageable geographic region. You defined your consumer targets by age, say, and by income. If you were in a business-to-business market, you divided up companies by size. But the wild proliferation of brands and channels in rapidly globalizing markets now flusters even the most sophisticated marketers. In this environment, how should your sales force tailor its strategies to its accounts? Different customers have different attitudes, needs, and preferences, but the old distinctions no longer take you very far. What should you be looking at today? The current purchasing behavior of your customers? The benefits they seek to obtain? Demographics or its business-to-business equivalent: “firmographics”?

Ford’s Model T strategy—any color you wanted, so long as it was black— worked until customers had an alternative. Soon-to-be-deregulated utilities, among other companies, are now miserably aware of this reality. How will the utilities build loyalty among the most profitable customers before competition takes them away? Utilities had so little need for marketing in the past that some know very little about them and have no idea what products and services might keep them loyal after the coming of choice. John Forsyth is a principal in McKinsey’s Stamford office; Sunil Gupta is a professor at the Columbia Business School; Sudeep Haldar is a consultant in the Chicago office; Anil Kaul is an alumnus of the Chicago office; and Keith Kettle is senior vice president of The M/A/R/C Group. Copyright © 1999 McKinsey & Company. All rights reserved.

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Companies often address this problem by developing segmentation schemes breaking down markets into sets of customers or potential customers who share attributes that might be based on demography (income, say, or age) or on values or needs.1 Consider some obvious examples. Video camera manufacturers capitalize on the fact that families expecting their first children are likely customers. Telephone companies try to sell call waiting to families with teenage children. The USAA insurance agency targets military personnel because it has come to believe, correctly, that this group is likely to be significantly more loyal, and therefore more profitable, than others. Unfortunately, easy cases permitting marketers to establish meaningful differences among groups of customers and then to identify them— a phenomenon we call “actionable segmentation”—are rare. More often, despite decades of research and many refinements in the basic model, the segmentation process creates very real difficulties for marketers. No doubt such methodologies as conjoint or latent-class analyses permit them to use values, needs, and attitudes to devise groups (for instance, price-, service-, and quality-oriented segments) that include almost all customers. Yet it How do you find customers usually turns out to be very difficult who care mainly about service to identify the flesh-and-blood people without interrogating actually inhabiting the segments. them all? How do you find customers who care mainly about service or quality without interrogating them all? A leading insurance company based in the United States spent a lot of time, trouble, and money dividing its world into segments, only to run into exactly this problem. In the end, the company abandoned segmentation entirely. The basic difficulty is that value-based segments generally don’t fit neatly into demographic ones. Many companies therefore start with the simpler task of identifying differences based on demography or on the different attributes of different companies. Companies in consumer markets, for example, typically divide their customers into baby boomers, generation Xers, and so forth. Likewise, many companies that sell to other businesses 1

It has become fashionable to suggest that customer-relationship marketing, the interactive character of the Internet, and the ability of today’s computers to collect, process, and retrieve detailed information about huge numbers of customers have moved business toward segment-of-one marketing and away from marketing by traditional segmentation. But we think it unlikely that this kind of “mass customization”—for example, custom-fitted Levi’s jeans—will replace segmentation as the basis of strategic decision making. First, designing products and services for individual customers probably won’t be cost effective anytime soon. Second, even if companies have sufficiently large databases to customize services for their current customers, they rarely have enough information to do so for their competitors’ customers or for nonusers. The information revolution thus will probably strengthen the tendency of companies to use information about thousands or millions of customers by organizing them into segments.

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A S E G M E N TAT I O N Y O U C A N A C T O N

segment customers on the basis of such characteristics as their size, the volumes of their accounts, and the industries in which they compete. Unfortunately, though advertising agencies and sales forces find this approach easy to understand and to implement, it really is no more effective than value-based segmentation schemes: by no means do all baby boomers have the same preferences and purchasing behavior, and businesses of the same size, account volume, and industry may very well have rather different values and needs. Segmentation based on demographics or company characteristics thus is not very actionable; these approaches don’t help you get to your customer with the right offer. In what follows, we describe four ways of solving the segmentation dilemma. Targeting and self-selection, the simplest of them, step around the problem; scoring models and dual-objective segmentation deal with it head on.

Targeting Sometimes a segmentation strategy works even if you can’t identify who is in which segment. In the early 1990s, price wars at the pump threatened the profitability of oil companies. To turn the situation around, Mobil Oil queried 2,000 customers in a segmentation study revealing that only 20 percent of gasoline buyers were price shoppers, who spent an average of $700 annually, while customers in other Segmentation schemes segments spent as much as $1,200. based on demographics or Although Mobil could not distincompany characteristics are guish price-sensitive shoppers from not extremely actionable price-insensitive ones, the news that 80 percent of its customers were price-insensitive, heavier users shifted the company’s focus away from pricing. As a result, Mobil reaped an extra $118 million a year in earnings from an additional two cents a gallon on its gas—a major accomplishment.2 In general, selecting targets is the first task of any segmentation strategy. Before worrying about how to identify and reach individual customers in any given segment, it is worth attempting to determine whether the collective traits of a market segment might themselves suggest profitable strategies. 2

Wall Street Journal, January 30, 1995.

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Self-selection The basic idea of self-selection is to reverse the roles of a company and its customers: instead of trying to find, say, price-sensitive people, the company figures out what segments it wants to reach and gives the consumers in them ways of finding it. Companies most commonly try to get customers to select themselves by multiplying stock-keeping units (SKUs); different sizes of cereal packets or washing powders are the most obvious example. The segments walk up to the supermarket shelf and buy the most appropriate offering. Coupons, which allow consumers to select themselves on the basis of price sensitivity, are another classic mechanism. Although everyone receiving coupons has the option of getting a discount, only customers who are both price-sensitive and relatively indifferent to the trouble of clipping and saving coupons tend to redeem them. As a result, supermarkets earn smaller margins—mostly on the fraction of their transactions precipitated by the coupons—and get the full price from consumers happy to pay it. Similarly, airlines often have lower airfares for people willing to include Saturday night stays in their trips. These companies realize that consumers in the price-sensitive segment will sacrifice flexibility for low cost but may not know who these customers are. EXHIBIT 1 Sniffing a discount, however, these Segmentation through product design people come looking for the airline. The hopefuls The fearfuls Brand name Conceive RapidVue Price $9.99 $6.99 Packaging Pink box, smiling baby Mauve background, no baby Shelf position Near ovulation-testing kits Near condoms

Packaging the same product in different ways can also do the trick. Quidel, a company based in San Diego, California, specializes in developing rapid diagnostic tests. One of its products can detect pregnancies in their earliest stages. Until recently, Quidel undertook almost no consumer marketing, focusing instead on doctors. In 1993–94, its pregnancy and ovulation products had almost an 80 percent share of the medical market but just 18 percent of its consumer counterpart.

Quidel conducted a market segmentation study whose findings prompted it to target two kinds of women separately: those who want to get pregnant (the “hopefuls”) and those afraid that they might be pregnant (the “fearfuls”). Not surprisingly, demographics and related characteristics didn’t help the company distinguish between the two segments, so it created different packages for them. Exhibit 1 shows the correspondence