BT4211

Data-Driven Marketing
Product: Segmentation, Targeting

April 4, 2018 1
Segmentation, Targeting &
Positioning Approach

 STP approach
– Segmentation
• Groups customers with similar wants, needs, and
responses
– Targeting
• Determines which groups a firm should try to serve
(and how)
– Positioning
• Addresses how well the firm’s offering competes with
other offerings in the targeted segment

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Segmentation, Targeting &
Positioning Approach

 Benefits of STP
• Marketing resources are focused to better meet
customers’ needs and deliver more value
• Customers develop preference for brands that better
meet their needs and deliver more value
• Customers become brand/supplier loyal, repeat
purchase, communicate favorable experiences
• Brand/supplier loyalty leads to increased market share
and creates a barrier to competition
• Fewer marketing resources are needed over time to
maintain share due to brand or supplier loyalty
• Firm’s profitability increases
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Overview of Segmentation

 Definitions
– Market segment
• A group of actual or potential customers who can be
expected to have same types of needs & problems, and
respond in a similar way to a product or service offering
– Market segmentation
• Business process of finding profitable groups of
customers who are similar on specific criteria of relevance
to the firm’s strategic context, such as needs, how they
value an offering, behaviors, age, sex, or income, and
differ from customers in different groups on those criteria

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Segmentation Analysis

 Evaluation criteria for segmentation models

– Homogeneity
• Degree to which potential customers in a segment have
similar responses to marketing variables of interest and
differ from other groups of customers
– Parsimony
• Degree to which the segmentation would make every
potential customer a unique target
– Accessibility
• Degree to which marketers can reach segments
separately using observable characteristics of the
segments (descriptor variables) 7
Segmentation Analysis

 Segmentation model
– Basis, clustering or dependent variable
• Describe why customers behave differently
– Differences in their valuations of offerings, needs, or wants
– Descriptors, discrimination or independent variables
• Characterize segments in terms of attributes
– Age, income, education, media use, web pages viewed,
new/returning customer, usage intensity, etc.
• Help marketers deliver different offerings to various
customer segments

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Segmentation Analysis
 Segmentation
basis
examples
– Wind (1978)

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Segmentation Phases

 Phase 1
• Segment the market using basis variables (e.g.,
customer needs, wants, benefits sought, problem
solutions desired, preferences, values, usage
situations)
 Phase 2
• Describe the market segments identified using
variables that help the firm understand how to serve
those customers, how to talk to these customers, and
buyers’ switching costs

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Segmenting Markets (Phase 1)

 A priori segmentation
• Use industry knowledge or marketing research to
segment customers by observable characteristics,
assuming these are related to differences in needs
 Traditional segmentation methods
• Analytic methods to segment customers on the basis of
a single composite measure developed from a set of
observable characteristics
 Latent class segmentation methods
• Probabilistic models to segment customers in ways that
cannot be described just in terms of observable mean
differences between segments 11
Cluster Analysis

 Overview
– Exploratory data analytic technique
• Group subjects into an arbitrary number of homogeneous
segments in terms of their characteristics or variables
• Subjectivity involved in determining number of clusters &
selecting clustering algorithm with a similarity measure
• No underlying statistical model or theory that hypothesizes
a true underlying grouping that needs to be discovered

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Cluster Analysis

 Steps in cluster analysis

– Select variables on which to cluster
– Select a similarity measure and scale variables
– Select a clustering method
– Determine the number of clusters
– Conduct the cluster analysis, interpret the results,
and apply them

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Cluster Analysis:
Select Clustering Variables
 Clustering variables
– Benefits sought
– Benefits in a product or service that customers deem to be important
– Psychographics
– Attitudes and behaviors relevant to a specific category
– Demographics
– Age, income, region, employment, etc.
– Geo-demographics
– Variables inferred by where the customer lives, e.g., home ownership
– Behavior
– Recency, frequency, monetary value, sales channels, etc.

– Competitive measures
– Share of wallet, competitor preferences and transactions

– Customer value
– Responsiveness to marketing, CLV, customer lifetime duration, customer risk 14
Cluster Analysis:
Select Similarity Measures

 Distance-type similarity measures

• Appropriate if variables are measured on a common metric
• Euclidean distance

» Euclidean dist(A,B) = 51/2

» Euclidean dist(B,C) = 3
• Minkowski distance

» Minkowski dist(A,B,m=1) = 3
» Minkowski dist(A,C,m=1) = 6

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Cluster Analysis:
Select Similarity Measures

 Matching-type similarity measures

• Appropriate if variables are measured on a categorical
basis
• Measure similarity between two customers as the
degree of matching, specifically, the ratio of the number
of matching attributes to the total number of attributes
considered
– Example
» Customer A:
» Customer B:
» Similarity between customers A and B is 0.6

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Cluster Analysis:
Select Similarity Measures

 Scaling and weighting

– Advisable to rescale variables if they are measured
on different units or scales
• Rescale from 0 to 1

• Standardize to means of 0 and variances of 1

• Weighting of variables
– Account for managerial importance of different clustering variables
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Cluster Analysis:
Select Clustering Method

 Overview

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Cluster Analysis:
Select Clustering Method

 Agglomerative clustering
– Starts with n clusters given n customers (each customer is its
own cluster), and then successively merges customers in terms
of similarities until all subjects are classified into a single cluster

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Cluster Analysis:
Select Clustering Method

 K-means clustering
• Procedure steps
– Given number of clusters k specified by the user, randomly
choose k points among n customers that become the initial
cluster centers
– Each of remaining customers is assigned to one of k cluster
centers according to the Euclidean distance
– Once all customers are grouped into k clusters, new cluster
centers are calculated, typically as the mean values of each
clustering variable
– Each customer is reassigned according to the distances to
these new cluster centers
– Stop iterations when no more reassignments occur

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Cluster Analysis:
Select Clustering Method

 K-means clustering
– B,C as initial centers
– Cluster A with C
• Dist(A,B) = 1000.5 = 10
• Dist(A,C) = 680.5 = 8.2
– Cluster D with B
• Dist(D,B) = 80.5 = 2.8
• Dist(D,C) = 160.5 = 4
– A is not reassigned
• Dist(A,AC) = 170.5 = 4.1
• Dist(A,BD) = 1220.5 = 11.0
– Reassign C with BD
• Dist(C,AC) = 170.5 = 4.1
• Dist(C,BD) = 100.5 = 3.2

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Cluster Analysis:
Select Clustering Method

 Probabilistic clustering (finite mixture model)

• Continuous mixing distribution approximated by a
discrete distribution, denoted by with a
finite number, m, of support points
• Marginal (mixture) distribution

– Restriction

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Cluster Analysis:
Select Clustering Method

 Probabilistic clustering (finite mixture model)

– Dimension of parameters estimated =
– Brand choice model example
• Kamakura and Russell (1989)

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Cluster Analysis:
Determine Number of Clusters

 Sum of square of distances & differences

– Maximize

 Bayesian information criterion (BIC)

– Minimize

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Describing Market Segments
(Phase 2)

 Descriptions criteria
• Variables that describe market segments should
– Highlight profit potential of segment (e.g., price sensitivity & size)
– Suggest how the firm can serve these segments
• Two general types of variables are available for this
purpose, those that
– Outline broad market characteristics, and
– Provide insight into serving one or more segments
• Variables that help shape the firm’s strategy should
– Measure size and purchasing power of segments
– Determine degree to which it can reach and serve segments
– Develop effective programs to attract customers
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Describing Market Segments
(Phase 2)

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Targeting Phases

 Phase 3
• Evaluate attractiveness of a segment using variables
that quantify demand levels, costs of serving and
producing offerings for the segment, and the fit between
firm’s core competencies & target market opportunity
 Phase 4
• Select target segments to serve on the basis of their
profit potential and fit with the firm’s strategy; determine
the level of resources to allocate to those segments
 Phase 5
• Find and reach targeted customers and prospects
within targeted segments 27
Evaluating Segment Attractiveness
(Phase 3)

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Evaluating Segment Attractiveness
(Phase 3)
 Example: home computer market

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Selecting Target Segments &
Allocating Resources (Phase 4)

 Segment selection options

– Concentrate on a single segment
– Nokia, Blackberry, iRobot
– Select a few segments in which to specialize
– McDonald’s, Kentucky Fried Chicken, Dell, Apple
– Provide a range of offerings to a specific segment
– DuPont, ICI, 3M
– Provide one offering to many segments
– Boeing, Intel, MGM, Hertz, Avis
– Cover the whole market (all offerings to all segments)
– Marriott (Courtyard by Marriott, Springfield Suites, Fairfield Inns)
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Selecting Target Segments &
Allocating Resources (Phase 4)

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Finding Targeted Customers
(Phase 5)
 Methods
• Customer self-selection
– Customers self-select into product offerings that best fit their needs
• Demographic sorting
– Firm arbitrarily selects a target list, using customer characteristics
like age, income, or the like, depending on the product category
• RFM modeling
– Score for each customer or prospect based not on demographics
but on related purchase behaviors in terms of RFM
• Choice modeling
– Use actual customer choice behavior to model and understand
customer value and develop a targeting strategy
• Online real-time targeting
– Target customers based on referral sources, geo-locations, time of
day/visit, device attributes, purchase/browsing behaviors 32
Finding Targeted Customers
(Phase 5)
 Methods
• Cluster geo-targeting
– Target clusters defined based on geographic reference, affinity,
and lifestyle reference groups, e.g., PRIZM cluster database

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