Market Segmentation

February 7, 2006

Perrier – over-responding to a crisis

Why is market share so important? Why can market share

be crushing?
What economic conditions are necessary for consumers to
successfully use price as an indicator of quality?
Why do people buy bottled water? What markets exist.
What motivations (concerns and interests) might one have
in the bottled water category?

Case Discussion

1
 Market segmentation

The process of understanding and characterizing

the diversity of demand that individuals bring to
the marketplace.
1. Identify bases for segmenting the market.
2. Develop segment profiles.
3. Develop measure of segment attractiveness.

Introduction

STRATEGIC MARKET MARKET BRAND

QUESTIONS DEFINITION SEGMENTATION POSITIONING

What geographic area e.g., domestic US

will we operate in?

What timeframe have we e.g., calendar 2003, 4

in mind?
Brand with attributes
What will we offer? Some version of product category responsive to DCCg
X Identify kinds of
To whom will we offer it? Define prospects demand-creating condition Prospects who experience
e.g., people who buy/use (DCCa - n); DCCg, i.e., targets
product category X or Assess state of want-satisfaction
engage in corresponding for each kind;
activity Y. Order DCC with a view to roi Specific price (e.g., $1.79)
What price will we charge? and choosing DCCx to
State broad price band target
How will we let them know (e.g., discount, premium)
about our offering?
State tentative ideas for media Media vehicles, Attentional
How/where will we engage type strategy, Brand claims
in exchange with them?
Specific exchange venues
Whom will we compete State tentative ideas for exchange
with? venue type

Competitors
State competitors implicated by Implicated by DCCg
choices on other dimensions

2
Step 1. Identify bases for
segmenting the market
Possible basis (classification) variables:
Descriptions of individuals/ firms
Demographics, psychographics, lifestyle, personality, social class/
purchasing approaches, expenditures.
Descriptions of environments
Geography (world region, country, city, metro size, density, climate),
occasions (weddings, camping trips, vacations), culture.
Descriptions of behavior
Marketplace: loyalty status, usage rate, price sensitivity.
In the context of everyday life/work: concerns and interests.

1. Basis Variables

Do traditional classification
variables work?
“The Effectiveness of Demographic and Psychographic
Variables for Explaining Brand and Product Use”

20,000 respondents from a study conducted by Simmons

Market Research.
52 product categories.
packaged goods typically found in grocery stores (e.g. beer,
shampoo, soda, toothpaste)
between 5 (charcoal) and 74 (candy bars) brands per category
Self-reported product and brand use.

Challenge Paper

3
 Predicting brand choice and
product use
Demo - Self Buying Attitudes Opinions
graphics concept style about
myself

Relative 0/52 0/52 0/52 0/52 0/52

Brand
Choice

Product 44/52 19/52 22/52 28/52 11/52

Use

Number of product categories where

variables are predictively useful

Challenge Paper

Implication
Descriptions of individuals and environments …
Useful for predicting product use.
Wealthy people are in the market for expensive cars, people in
northern climates are in the market for warm coats.
Not useful for predicting relative brand preference.
Meaning of a car (e.g., status symbol, reliable transport, thrill of the
road) or protection against elements not revealed by these
variables.

… do not reveal how an individual interacts with their

environment.

Challenge Paper

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Behavioral Relevance of a Brand
One or a few activities outside the marketplace.
Designed to address a subset of conditions that
prompt individuals to engage in a particular
activity.
Tiny range in comparison to the scope of needs,
traits and lifestyles.

Theory

Brand versus product-level analysis

Supply Side of the Demand Side of the

Market Market

Product Category Market Activity

Brands within Market Reasons for Activity

Product Category Segment (i.e., motivations)

Theory

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Conceptualizing User Wants

Personal Systems Brands As

Perceived
(Brand Beliefs);
Motivating Desired Brand
Action,
Conditions Attributes Consideration
Including
Set;
Brand Use
Brand
Environmental Preference
Systems Ordering

Ex-Ante
Analysis

Ex-Post
Analysis

Theory

Explanatory (basis) variables

Motivating conditions arise from the intersection of personal
and environmental systems
Demographics, general psychographics are person-specific
Geography and descriptions of activities (i.e. weddings, camping
trips) are environment-specific.

Common basis variables (general descriptors) cannot

explain motivating conditions.

1. Basis Variables

6
Classification variables for
brand-level segmentation

Motivations (concerns and interests) that lead us

to our everyday activities.

1. Basis Variables
Theory

Basis Variable for Brand-Level

Segmentation
Sticks Moving away from an
Solving immediate problems
Preventing potential problems
undesirable state.
Maintaining stable state

Carrots Moving toward a desirable

Exploring interest opportunities state.
Enjoying sensory pleasure

Displeasure in use Pushed back from the

marketplace.
Ineffective/frustrating outcome

1. Basis Variables

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 BRUSHING TEETH DAILY SWIMMING ATTENDING LIVE THEATER FEEDING THE CAT

Motivational Class The individual may be… Daily swimmer may be … Individaul may attend live theater … The cat-feeder may be…

1. Problem escaping from the unpleasant process of ameliorating a medical condition seeking restoration for a weary body and troubled by Cat's sluggish movements, dry
Solving bacteria in the mouth creating bad breath, or overtaxed mind; or relief from boredom, skin, overweight body, or lack of appetite
damaging teeth, or from the ugliness of teeth drudgery, banality, stultifying routine, or
discolored or stained from smoking from absorption with the concerns of young
cigarettes/drinking coffee/ eating glueberries or ailing charges; escaping from an
environment that is oppressive or distracting
or lacking in privacy

2. Problem preventing imagined criticisms from expressing self image as an individual who considering the implications of attending the catering to a spoiled child, nurturing a loyal
Prevention oneself/significant others on grounds that one knows how to care for themselves, who performance for his or her self-concept as a friend, tending an expensive status symbol
is lazy, careless of personal hygiene, lacking maintains the fitness of younger person (discerning) cultivator of the good life, a
in consideration for others generous provider/host, a thoughtful
lover/spouse/parent/child

3. Routine maintaining a system that needs only routine a routine activity engaged in as a matter of engaging in a routine with minimal mindlessly performing a routine chore
Maintenance attention course investment of thought and interest

4. Exploratory exploring an interesting question related to a skilled activity whose continued intrinsically interested in theater as a student "into" cat nutrition, finding interest in
Opportunity brushing techniques improvement is a subject of absorbing of human condition or the aficionado learning ever more and more about the
interest fascinated by the complexities and finer functions of various ingredients in Cat's diet
points of the theater arts

5. Sensory enjoying the sensory experiences associated an opportunity for a multitude of sensory considering the theater as an opportunity to empathizing with Cat, Leslie may take
Opportunity with bristle on gums, taste and tingle of pleasures, of moving water and physical feast the senses pleasure in presenting
dentifrice, and the sight of glistening pearly movements of the body an array of delectable meals to please Cat's
teeth palate

6. Product-related in addition to one or more of the preceding any of the preceding with, nevertheless, a Additionally perceiving attendance as doing any of the preceding while worried
Problems orientations, worrying about possible damage range of unpleasant aspects, such as cold entailing some troubling elements, such as about cost, trouble, waste, smell, and other
to enamel, irritation and strong taste changing rooms, chlorine smells, exposing expense, inconvenience, possibilities for considerations
one's body to comparative evaluation by self embarrassment, for feeling more "out of it"
and others than if one stayed home

7. Frustration With one or more of the preceding where currently available physical finding available theatre less enjoyable than "making do" with food delivery systems that
orientations, frustrated that toothpastes aren't conditions, suits, accessories, and gear are one would wish are deficient in some respect
strong enough to prevent cavities or claim poorly designed and hindrances to realizing
more than they can deliver the swimmer's desired outcome from the
activity

Motivations for brushing your teeth

Solving Immediate Problems: Exploring Interest Opportunities:
My teeth stain easily. I like to try different oral brushing
I wake up with a bad taste/feeling in my mouth. techniques/routines just for a change of pace.
I am concerned about the condition of my gums I’m interested in knowing about the science of oral
I am predisposed to having sensitive teeth. hygiene – including different kinds of brushes and
toothpastes.
I am concerned about tartar and plaque build-up on Enjoying Sensory Pleasure:
my teeth.
I am concerned about bad breath. I like the tingle I feel in my mouth after I brush.
My teeth are dull/not white enough. I enjoy the fresh taste I get from brushing.
I am predisposed to having cavities. I love to see my teeth gleaming like pearls.
I have trouble getting my kids to brush. Bubbling action adds to the sensory pleasure of
brushing.
I am concerned there are cavity prone places on my Displeasure in Use:
teeth.
I am concerned about germs and mouth infections. Toothpastes are too strong tasting.
I am concerned about not getting to hard to reach Toothpastes scratch the enamel on my teeth.
places. Toothpastes irritate my mouth.
Preventing Potential Problems: Toothpastes cost too much.
I would feel I’m letting myself down if I didn’t brush Toothpastes contain artificial ingredients.
regularly. Toothpaste packaging can be harmful to the
I believe that people expect me to brush regularly environment.
Maintaining Stable State: Ineffective/ Frustrating Outcome:
I don’t have problems, worries or interests regarding Toothpastes aren’t strong enough to prevent
my teeth. I just brush my teeth regularly. cavities.
For me, brushing my teeth is just something I do Toothpaste breath-freshening doesn’t last long
with little thought or interest. enough.
Toothpaste claim more than they can deliver.

1. Basis Variables

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 Motivations for preparing a family meal
Solving Immediate Problems: Maintaining Stable State:
I worry that I won’t have anything available to make a
dinner. For me, preparing weekday dinner is just a matter
of routine
I’m always pressed for time to make dinner.
Some days I just don’t feel like making dinner. Exploring Interest Opportunities:
I worry I’ll run out of menu ideas. Conversation around the table at dinner interests
I’m often too rushed/pressured preparing dinner to me.
enjoy eating it. I’m interested in making many different kinds of food
No relief from being the person to plan/cook dinner for dinner.
is a strain. It’s interesting to tweak favorite family dinner
recipes.
Preventing Potential Problems:
I’m letting myself/my family down if I don’t provide Enjoying Sensory Pleasure:
nutritious dinners.
I enjoy the different textures of foods for dinner.
I’m letting myself/my family down if I don’t provide
tasty dinners. Appetizing smells add to the enjoyment of dinner
prepared at home.
Preparing dinner is one way I show I’m a good family
person.
I’m letting myself/my family down if I don’t give each Displeasure in Use:
family member their choice of what to eat for My family often leave the dinner uneaten.
dinner. The kids often complain and refuse to eat dinner
I’m letting myself/my family down if I don’t provide Difficult clean-up afterward is a burden for me.
substantial dinners. Complicated or lengthy preparation is a burden for
I’m letting myself/my family down if I don’t provide me.
dinners that include salad/veggies. High cost keeps me from serving better dinners.
I’m letting myself/my family down if I don’t provide a Too much salt in food is a problem for me/my family.
home cooked dinner.
I’m letting myself/my family down if I don’t provide Ineffective/ Frustrating Outcome:
dinners that include meat.
I’m letting myself/my family down unless everyone Same old thing dinner every time is depressing.
including my kids and spouse love what I make. It’s upsetting to have dinner food left over.
It’s upsetting not to have enough food for dinner

Asking the question

Describes me…
Completely Very well Somewhat Slightly Not at all
1. My teeth stain easily. † † † † †
2. I wake up with bad taste/feeling
in my mouth. † † † † †
3. I am concerned about the condition of
my gums † † † † †
4. I am predisposed to having
sensitive teeth. † † † † †
5. I am concerned about tartar and
plaque build-up on my teeth † † † † †

.
.
.

1. Basis Variables

9
Empirical evidence
Yang, Sha, Greg M. Allenby and Geraldine Fennell (2002) "Modeling Variation in Brand
Preference: The Roles of Objective Environment and Motivating Conditions,"
Marketing Science, 21, 1, 14-31.

Study of beer preference in different consumption contexts. The unit of analysis is an individual
occasion of use; concerns and interests are strongly related to relative brand preference.

Fennell, Geraldine, and Greg M. Allenby (2003) "Conceptualizing and Measuring User
Wants: Understanding the Source of Brand Preference,“ working paper, Ohio State
University.

Concerns and interests (motivating conditions) are distinct from benefits and can be used to
improve predictions of conjoint analysis of attributes and benefits.

1. Basis Variables

What do we learn from

basis variables?

General Descriptors Domain-specific Descriptors

• Product use • Brand choice
• General Demographics and • Concerns and Interests
Psychographics • Context for activity
• Domain of activity • Resource deployment/utilization
• Resource allocation • Identifying diverse wants within a
• Defining a market market
• Segmentation research • Market segmentation research

1. Basis Variables

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Step 2. Develop segment profiles

Creation of groups of individuals with similar

classification variables

2. Grouping

Toothbrushing segment profiles

(Hypothetical)
Segment 1 (25%) concerned about dull teeth and stains, and feel that
current offerings are not responsive.

Segment 2 (30%) sensory feel and bubbling action is important,

generally satisfied with toothpastes.

Segment 3 (30%) don’t have problems, worries or interests regarding

their teeth – they just brush regularly.

Segment 4 (16%) generally dissatisfied with toothpaste and feel that

the current brands claim more than they can deliver.

2. Grouping

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Cluster analysis for
segmenting markets
Define a measure to assess the similarity of customers on the basis of
their needs.

Group customers with similar needs. The software uses the “Ward’s
minimum variance criterion” and, as an option, the K-Means
algorithm for doing this.

Select the number of segments using numeric and strategic criteria, and
your judgment.

Profile the needs of the selected segments (e.g., using cluster means).

2. Grouping

Doing cluster analysis

a = distance from member

to cluster center
b = distance from I to III

•
•
• •
•
III Perceptions or ratings data
Dimension 2
from one respondent
b

• • •
• • • •
a
I II

Dimension 1

2. Grouping

12
 Cluster analysis example:

152 MBA students interviewed

Preferences for each car
Low = 1
High = 10
Cars
BMW 328i Chrysler Town & Country
Ford Explorer Mercedes C280
Infiniti J30 Saab 9000
Jeep Grand Cherokee
Porsche Boxster
Volvo V90

2. Grouping

Typical Output:
Iteration Historya

Change in Cluster Centers

Iteration 1 2 3 4 5
1 4.155 4.497 5.408 5.190 5.221
2 .477 .618 1.175 1.232 .695
3 .609 .586 .790 .944 .433
4 .000 .452 .469 .373 .220
5 .288 .447 .000 .473 .256
6 .232 .237 .000 .287 .193
7 .301 .000 .257 .458 .400
8 .217 .000 .000 .277 .312
9 .000 .000 .000 .000 .000
a. Convergence achieved due to no or small change in cluster
centers. The maximum absolute coordinate change for any center
is .000. The current iteration is 9. The minimum distance between
initial centers is 11.269.

Number of Cases in each Cluster

Cluster 1 41.000
2 24.000
3 19.000
4 29.000
5 38.000
Valid 151.000
Missing 1.000
2. Grouping

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Choosing the number of clusters:
Pseudo-F

20

18

16

14

12

10 Pseudo-F

0
0 1 2 3 4 5 6 7 8 9

Number of clusters
2. Grouping

Two cluster solution:

Cluster Number
1 2 Total
BMW 6.15 6.55 6.35
FORD 5.61 3.97 4.77
INFINITI 3.12 4.65 3.90
JEEP 6.49 4.70 5.58
LEXUS 4.30 5.73 5.03
CHRYSLER 1.50 1.95 1.73
MERCEDES 4.86 6.79 5.85
SAAB 4.41 5.29 4.85
PORSCHE 6.14 5.35 5.74
VOLVO 2.86 4.39 3.64

4X4 Luxury

2. Grouping

14
 Six cluster solution:
Cluster Number
1 2 3 4 5 6 Total
BMW 4.13 6.12 5.80 6.89 7.25 7.11 6.35
FORD 6.47 4.36 3.00 6.22 3.64 5.84 4.77
INFINITI 3.60 3.19 3.10 4.89 5.43 2.89 3.90
JEEP 6.93 5.24 4.35 6.81 3.89 7.26 5.58
LEXUS 4.53 3.93 5.10 6.07 5.86 5.05 5.03
CHRYSLER 3.07 1.48 1.35 2.30 1.46 1.21 1.73
MERCEDES 5.20 5.50 6.00 6.70 6.64 4.58 5.85
SAAB 2.80 3.93 7.25 5.78 3.96 6.00 4.85
PORSCHE 3.47 7.57 5.35 7.93 3.96 3.37 5.74
VOLVO 6.47 1.90 6.15 4.52 2.68 2.79 3.64

Scandinavian

Utilitarian Porsche/ Porsche/

Not Lexus and Lexus

2. Grouping

Interpreting cluster analysis results

Select the appropriate number of clusters:
Are the bases variables highly correlated? (Should we reduce the
data through factor analysis before clustering?)
Are the clusters separated well from each other?
Should we combine or separate the clusters?
Can you come up with descriptive names for each cluster (eg,
professionals, techno-savvy, etc.)?
Segment the market independently of your ability to reach
the segments.

2. Grouping

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Step 3. Measures of segment
attractiveness
Within each segment, specify and assess:
Competition
Availability of substitute brands, power of buyers and sellers,
competitor intents and strategies.

State of want satisfaction

Brand variability.

Potential for brand inroads

Organization skills & resources need to succeed in the segment,
i.e., core competence.

3. Assessing

Criteria for assessing targets

Measurable
Size, purchasing power, profiles of segments can be measured.
Accessible
Segments can be effectively reached and served.
Substantial
Segments are large or profitable enough to serve.
Differential
Segments must respond differently to different marketing mix elements
and programs.
Actionable
Effective programs can be designed to attract and serve the segments

3. Assessing

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