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UGBA 106: Marketing
Segmentation and Targeting
Professor Ming Hsu
Haas School of Business
University of California, Berkeley
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Segmentation: A Popular Managerial Tool
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4.1
0% 20% 40% 60% 80%
Satisfact
ion
Usage
Strategic Planning
Downsizing
CRM
Voice of the
Customer
Innovation
Customer
Segmentation
Bain & Company. Management Tools and Trends 2009.
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Segmentation: process ofdividing the market into groups based upon important
consumer characteristics
Goal: Reduce complexityacross consumers, help formulate strategy
Targeting: process of evaluatingattractiveness of segment and selecting one or
more segments to enter
Goal: Maximize effectiveness of marketing dollars
Segmentation and Targeting
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Segments are collections of consumers
Customers within a segment should be as similaras possible
Customers between segments should be as differentas possible
What are Segments?
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Example: Harley-Davidson
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Levels of Market Segmentation
Mass Marketing (Shotgun Approach) Model T
Increasing Competition,
Fragmentation of markets
Segment Marketing
Information revolution
Flex and JIT Manufacturing
Credit-technology (Internet marketing)
Individual Marketing
Segments ofone throughthe Internet Information technologyand addressability
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In the 30s and 40s P&G successfully used a mass marketing approach for its
soaps, toothpaste.why?
Consumers had utilitarian preferences for household products. (One soap or toothpaste
for the entire family)
Consumers were convinced of P&G product quality.
In the 60s consumer needs fragmented
Competitors chipped away at P&G by offering differentiated products.
Colgate toothpaste bad breath, sparkling teeth segment, Levers in detergent
P&G today
Follows product proliferation to cater to every major segment
Regular Tide, Liquid Tide, Tide redi-packs, Ultra Tide with bleach.
Proctor & Gamble: Painful Transitions
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Demographics
Easiest, sometimesuseful
Often a poorpredictor ofbehaviors andattitudes
Attitudes
Attitudinalinformation
optimists v.pessimists
leaders v. followers
Benefits
Benefits soughtfrom
product/service
Behavior
Similar behavior
heavy users, lightusers
Segmentation Information
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Demographics: What consumers are?
Age
Lego, Vicks child formula, chewable 4-12, adult formula.
J&J baby shampoo vs. Gatorade for children...moving a company up or down the age
ladder can be an effective growth strategy.
Gender
AMEX interesting lives campaign
Clairol hair care for men, Lancome skin care take what you have and make it better.
Demographics
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Income
Holiday Inn
Geodemographic
Possible due to advances in information databasesDe Claritas uses census demographic information and groups the zip-codes into similar
neighborhoods (chain expansion).
Demographics
Affluent, businessCrowne Plaza
Middle incomeHoliday Inn
Budget conscious...Holiday Inn express
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Psychographics: Why do consumers buy?
Lifestyle
Goods consumed by people reflect their lifestyles.a composite of activities, opinions and
attitude to life variables
Levis 501
Personality
Endowing products with brand personalities (pillsbury, taco bell)
Psychographics
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Use, loyalty or response to a product
Usage occasions: e.g., camera (underwater, indoor parties, outdoor photography)
Usage Rates: 80-20 rule, eg., beer drinkers.
Should you always focus on the heavy users?
Loyalty Status
Hard-core Loyals: A A A A A A; Split Loyals: A B A B A B
Shifting Loyals: A A A B B B; Switchers: A B E A D B
How are demographics and psychographics and behavioral segmentation
related?
Behavioral
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Segments of ONE
One-to-one consumer addressability
Personalized promotions based upon loyalty status (e.g., credit cards)
Customized recommendations and prices (e.g., Amazon.com, Google)
Impact of the Internet and Information Technology
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Measurability
Accessibility
Profitable
Requirements For Effective Segmentation
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Segmenting Customer Base: Customer Pyramid
UGBA106 SP12 Haas School of Business
The Rest ofthe World
Suspects
Prospects
Inactive Customers
Top
Medium
Small
15%of Customers
5% of Customers
30% of Customers
Big
50% of Customers
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Year 1 Revenue: $20/month = $240 year
Year 1 Costs
$14/month = $168year
Free phone = $150
Year 1 Profit = 240 (168 + 150) = $78
Year 2 Profit = $240 $168 = $72
Two Year Profit = $78 + $72 = $6
Three Year Profit = -$6 + $72 = $66
Customer Value and Retention: Cellular Service
We need to keep the customer for3 years to make a positive profit.
What is an average customerworth to the firm?
We need the probability ofretention.
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Lets say probability of retention is 70%
Expected Value to the firm is .....
$78 + (.7 $72) + (.7 .7 $72) + ....
$78 + (.7 $72) + (.72
$72) + .... $78 + .7 ($72 + .7 $72 + .72 $72+ ....)
$78 + .7 $72 (1 + .7 + .72 + ....)
$78 + $50.4 [1/(1-.7)] =$90
If probability of retention = 80% then CLV is $210 = $78 + $57.6 (1/(1-.8))
Add Retention
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Example: Harley-Davidson
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Example: Wine Segments
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The top 20% of the active customers deliver 60%-80%of the revenues
The top 20% of the active customers deliver more than 80%of the profits
The majority of the marketing budgets is often spent on non-customers
3 Facts about Economics of Customers
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Customer basebehavior
Customer basebehavior
LoyalistsLoyalists
EmotiveEmotive
InertialInertial
DeliberativeDeliberative
Downwardmigrators
Downwardmigrators
LifestyleLifestyle
DeliberativeDeliberative
DissastifiedDissastified
Customer Retention Management: Segments
Rarely reassess purchase decisions
Strongly feel chosen brand is best for them
Infrequently reassess purchase decisions
Uninvolved; change not worth effort
Frequently reassess purchase decisions
Reaffirm chosen brand through rational criteria
Reassess purchase decisions because of
change in needs
Frequently reassess purchase decisions
Choose new brand through rational criteria
Actively dissatisfied
May be prompted to reevaluate
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Segmentation is both widely-used and valued by managers
Critical for understanding consumers and customer base
Ideal targets are identifiable segments that are accessible and profitable
Companies often do not know their most profitable customers!
Takeaways: Segmentation and Targeting
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What factors determine demand for blades? How can demand be increased?
How to determine product line mix and allocation of marketing expenditures?
Lifetime value of different segments?
Gillette Indonesia
UGBA106 SP12 Haas School of Business