Customer Segmentation and Targeting

Management Consulting Training
Customer Segmentation and
Targeting
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Define Scope
Hypothesise
Segmentation
Criteria
Gather Data Analyse Data
Select Target
Segment
CUSTOMER DATABASE

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Contents
Customer Segmentation Overview
Segmentation Approach
Statistical Techniques
Cluster and Factor Analysis
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Customer segmentation allows us to analyze customers, find niche
opportunities, and create a competitive advantage
Presentation Overview
This presentation will focus on the second phase of the Customer Analysis
process: Segment Customers and Derive Insight.
Customers segment their customer base to better understand their customers.
The overall objective of customer segmentation is to analyze customers, find
niche opportunities, and create a sustainable competitive advantage.
In this presentation, we will discuss the segmentation process. We will also
explore various segmentation methods, criteria, and techniques—including
statistical analyses.

First, let’s review our 5-phase approach to Customer Analysis
Customer Analysis Approach
Get Customer
Data
Segment
Customers
and Derive
Insight
Evaluate
Customer
Relationship
Strategy and
Customer
Value
Develop
Value
Proposition
Build
Appropriate
Customer
Experience
Technology

Companies use customer segmentation to answer key strategic questions
The overall objective of customer segmentation is to analyze customers, find niche
opportunities, and create a sustainable competitive advantage.
Overall ObjectiveExample Questions
Who are our customers and how can they
be differentiated by group?
– What are their needs?
– What are their relevant characteristics?
– What makes them “happy”?
What customers are profitable?
– How big and valuable are the segments?
– What products and channels are bought/used?
– Are we serving the right customers?
What are the market opportunities and
threats?
– How well are we serving them vs competitors?
– Where are the new opportunities?
– How well could we serve them vs competitors?
To better understand customers
leading to increased customer
satisfaction:
– To increase profitability
– To increase competitive
advantage

Customer segmentation is only one part of the process to improve how
companies serve their customers
High-level Approach to Improved Customer
Relationships
Segmentation is only an intellectual exercise unless followed by a practical targeting
process that allows concrete action to be taken.
Source: Philip Kotler, “Market Management: Analysis, Planning, Implementation & Control“ (1991)
Customer
Segmentation
Customer
Targeting
Ongoing
Prioritization of
Customers for
Specific Actions
Long Term
Customer
Relationship
Management
• The process of
partitioning markets
into groups of potential
customers…
• ... with similar needs
and/or characteristics...
• …who are likely to
exhibit similar purchase
behaviour
• The process of
evaluating the
attractiveness of each
segment...
• …and selecting one or
more for target activity

Actionable segmentation and targeting will combine the work of the three
sub-streams
Segmentation Sub-streams
Market Research Financial Model Capabilities
Customer Enthusiasm: Scenario Building
Target Segments How to address them and the
financial impacts of doing so
Segment
descriptions: What
levers affect their
decisions most?
Which levers can the
client address with
competitive
advantage?
How big are the
segments and what
is the client’s share?
Which segments are
most profitable for
the client?
1 2 3

Segmentation allows companies to differentiate customer groups and
strategies to prioritise activities and investment
Example Targeting Matrix
Strategies Based on Targeting Matrix
High-desirability/high-capability segments:
– Sustain investment to maintain & enhance
capabilities.
– Ensure competitive defence strategies target these
groups.
– Design programmes and products for these groups.
High-desirability/low-capability or medium-
desirability/high-capability segments:
– Invest heavily to develop capability or improve
desirability.
– Design programmes and products for these groups.
– Ensure we do not lose them.
Low-desirability/low-capability segments:
– Tactical marketing of products and programmes
designed for develop/defend segments.
– Reduce costs to serve.
DefendDefend
DevelopDevelop
HarvestHarvest
Technology
Exploiters
Market
Desirability
Sharpeners
Co-ordinators
Evolutionaries
Growing
Ambitious
Personal
Experts
Conjurers
Persuaders
Capability to Meet
Segment Needs
HIGH
HIGH
LOW
LOW

Financial modeling demonstrates the value and allows assessment of the
feasibility of different segment strategies
Example Segmentation Breakdown
Assessment of the current and potential size and profitability (and thus attractiveness) of
different segments.
Cost to excel at elements
of the offering
Price people are willing
to pay
Customers will only pay a
premium for their key criteria
Revenue Cost
Hygiene Factors
Image
Design
Financial deal
Performance
Comfort
Technology
Hygiene Factors
Key criterion
Secondary factorTertiary factor
Other factors
Cost to beat other
companies at all
these elements

Capability analysis provides a relative rating of the company’s ability to
serve new and existing segments
Example Capability Analysis
Competition Serves
Needs Better
The client Serves
Needs Better
No one Serves
Needs Well
The client & Competition
Serve Needs Equally Well
Information to determine scale:
• Raw score comparison between the client & its key competitors
• Benchmarking data comparing the client & other players’ capabilities
• Supporting evidence included from analysts in workteam
• Subjective understanding of our strategic ability to meet the need as opposed to our competition
• Players’ state of readiness to enter the market
• Scenario analysis from Competitive Analysis
• Strategic enablers that may affect future strengths
• Usage, satisfaction data from quantitative surveys
- 2 - 1 0 1 2
Infotechs
Long-Lifers
Leveragers
Express
Linkers
Contenders
Empowerers Provisional
Touches
Insatiables
Interactives

While segmentation is extremely useful, it does have limitations!
Segmentation – Strengths & Limitations
HOW WE USE IT
Isolates sections of market for which
distinct strategic propositions must be
defined:
– Finds niche opportunities and identifies
customers more likely to undertake a
given attitude.
Evaluates segments and chooses one or
more for target activity.
– Identifies which customer groups the
company should focus.
Identifies appropriate products, services,
and marketing for different segments
(based on defined Value Propositions)
Provides insight on the usefulness of
present marketing strategies.
STRENGTHS
Provides greater customer-focus:
– Allows the organisation to gain a clear picture of
each segment and its service needs.
Focused approach which helps increase revenue
and margin.
Foundation on which all other marketing actions
can be based.
LIMITATIONS
Can be difficult to define needs in an “actionable”
way - don’t necessarily map onto current
products & processes
Requires a major corporate commitment - Can
cost more than a mass marketing approach.
Can become too reliant on statistically significant
segments at the expense of industry
experience/business sense.
It is unlikely that customer needs data is already
available - Time consuming to collect information
required.

Contents

Any group of customers can be segmented in a wide variety of ways
Methods of Segmentation
TANGIBLE DIFFERENTIATION CRITERIA INTANGIBLE DIFFERENTIATION CRITERIA
Geographic
Demographic
Socio-economic
Geo-demographic
Product usage
Profitability
Psychographic:
− Lifestyle
− Behavioural
− Needs-based
Benefit
Attitude
An Integrated Approach is Becoming Increasingly Common
Clusters defined by needs-based segmentation
Common tangible descriptive variables overlaid on the segments
Easy to do and link to existing
processes and customer data,
. . . but of limited use
Harder, more resource intensive,
potentially more useful

We focus on integrated approaches built around the “needs-based” variety
of segmentation
Needs-based Segmentation
But the right approach will ultimately depend upon the client situation and what they intend
to do with the output of the segmentation and targeting.
Tangible Differentiation Criteria Intangible Differentiation Criteria
Good for ‘push’ based targeting Good for ‘pull’ based targeting
Why “Needs-based” Segmentation?
What’s a need?
− A constrained “want” - a more realistic purchasing outcome
Splits current and/or prospective customers into homogeneous groups based on product and/or service
needs
It defines customers in terms of what they want - it’s more actionable
We often use a “needs-based” approach as it is linked heavily with the Building Market Focused
Organisation (BMFO) methodology

There are two basic techniques for segmenting a market, one primarily
deductive, the other primarily inductive
Segmentation Techniques
A Priori
Cluster
(Statistical Approach)
Little additional time and
expense involved
Good for understanding
differences in behavior among
known segments
Easier to drive action through
existing data and processes
Pre-determined -
hypothesis/sector driven
− Small vs. Medium vs.
Large cars
− Young vs. Middle-aged
vs. Old people
Customer data driven:
− Benefits segments
− Needs based segments
− Attitude segments
TANGIBLE DIFFERENTIAL
CRITERIA ADVANTAGES DISADVANTAGES
Pre-determined groupings may
bear little relation to behavior
Groupings may be sub-optimal
Less likely to drive genuinely
new insights
Customer driven, not based on
management guesses
Much more likely to drive
genuinely new insight
No clean, ‘right’ answer, art as
well as science (Not simple to
relate to existing segmentation
models - segments are unlikely
to divide neatly by
demographics etc)
New data sets required
Targeted action may require
new business processes

There are two basic techniques for segmenting a market, one primarily
deductive, the other primarily inductive
Define Scope
Hypothesise
Segmentation
Criteria
Gather Data Analyse Data
Select Target
Segment
• Establish research
objectives
• Review
segmentation
viability/segment
formation criteria:
– Time available
– Level of detail
required
• Seek guidance
from experts or
books
• Choose type of
market
segmentation:
– Generate hypothesis
about market needs
• Determine,
criteria/variables for
segmentation
– Qualitative pretests
etc
• Design and choose
data gathering
approach, e.g.:
– Identify information
required
– Test approach with
joint team
• Plan/conduct data
gathering:
– Phone surveys
– Day in life of studies
– Workshops
– Focus/groups
– Sampling
• Identify attributes
captured during
customer
interviews
• Use statistical
techniques to
groups
respondents,
including:
– Cluster analysis
• Group the
attributes in a
manageable
number of
segments:
– Profile each
segment
– Can segment be
ranked?
– Can segment be
reached?
– Will segment
respond?
• Evaluate the attractiveness
of each segment (see
example overleaf):
– Size and growth
(on the basis of your
sampling
procedure assumptions,
infer
segment size)
– Key Purchase Criteria vs.
your
value proposition
– Profitability vs. efforts
needed
to serve segment
– Accessibility
• Select the target segment
for your activities:
– Validate segments
– Conduct gap analysis
• Assess capabilities/ability
to serve potential
segments:
– Existing v. required
CUSTOMER DATABASE

An actionable target segment must be identifiable and reachable, as well as
attractive to serve
Customer Segment Selection Criteria
Measurability:
– Can you quantify the segment by size and product usage?
– Can you rank the buying factors that are meaningful to your customers?
Accessibility:
– How efficient are the channels at serving each segment?
Substantiality:
– Are the segments large enough to warrant the resources and effort necessary for a targeted marketing effort?
Profitability
– Is the segment potentially profitable enough to make the effort worthwhile?
Competitive Opportunity:
– How interested in the segment are your major competitors?
– Are they actively pursuing it, or are they showing only a mild interest?
Effectiveness:
– Does your sales force have the skills and resources needed to serve the segment effectively for the long haul?
Defendability:
– Can your company defend this segment against attack by a major competitor?
1
2
3
4
5
6
7

Each segment must then be profiled to highlight who customers are and
what they want
An Illustrative Segment Profile
NEEDS LOW PRIORITIES
• Availability and reliability dominate all other needs
• Reliability deliveries
• Mixed pallets not required
• Few display pallets
• Promotions are important for some
• Understanding of needs is important
• Most will have EDI and scanning
• Cross-docking and back-hauling unlikely in 3-5 years
time
• Many will require non-standard pack sizes
• Handling of returns and credits
• Secondary packaging specification
• Multi-functional contact
Importance and Performance Ratings
0
100
200
300
400
500
600
700
800
900
1,000
DeliveryReliability
ProductAvailability
NeedsUnderstanding
PromotionType
PromotionExclusivity
DeliveryLeadTime
InnovationLeadTime
PromotionFrequency
PartnershipApproach
EDICapability
ContentAccuracy
RegularRange
Rationalisation
PromotionLeadTime
InformationProvision
LowDPC
ComplaintsResponse
CommunicationsFrequency
OrderTakingEfficiency
EfficientInvoicing
GoodArrivalCondition
DeliveryConfiguration
Multi-FunctionalContact
EfficiencyofOff-Loading
Spec.ofSecondary
Packaging
HandlingofReturns/Credits
CHARACTERISTICS
• Chiefly supermarket chains
• Few delivery points
• Warehouse deliveries
KEY PERFORMANCE GAPS
(Competitor Performance vs. Lever
Performance)
• Delivery reliability
– From Lever today: +/- 2.5 hours
– From best in class today: +/- 2.5 hour
– Future need: +/- 1 hour
• Product availability
– From Lever today: 97%
– From best in class today: 99%
– Future need: 100%
• Understanding of needs
• Promotion type and exclusivity
– Some require twice as many exclusive
promotions
• Delivery lead time
– From Lever today: 3.5 days
– From best in class today: 3.5 days
– Future need: 1 day

Here are several important tips to follow when conducting customer
segmentation
Hints & Pitfalls
Pitfalls - DONTsHints - DOs
Consider needs along the whole value chain (i.e.
consumer-customer-supplier)
Make sure you validate your segmentation
criteria—test with people who will use it
Consider using a market research agency to carry
out survey, tabulate results, and perform cluster
analysis
Ensure segments are targetable
—ensure sufficient demographic data
Address the processes by which the output will
be assessed and used as well as the research and
analysis process itself
Be specific about how you are going to reach
and serve each segment
− Consider the changes that might be required to associated
business processes (and mindsets)
Let time and budget constraints lead to
unrepresentative or too small sample size
Assume existing data sets are complete, of good
quality, comparable or being correctly interpreted.
Rely on market research agencies to ensure
integrity of data or to carry out the interpretation
of the statistical analysis
Assume information systems are capable of cross
communication
Try to do this in a limited timeframe
Be side-tracked by recent ups or downs in the
clients service level, and how this impacts
customer perception

Contents

We use combinations from a wide range of tools to analyse customer data
and identify segments
Multivariate Statistical Techniques (1 of 2)
Good for getting a clearer
picture when you have a huge
amount of data.
Good to use at initial stage of
analysis.
Factor Analysis
Analyses a large number of
variables and reduces them to a
smaller number of key factors
to better explain a given
marketing situation:
− Useful in psychographic and
benefit research.
TYPE OF TECHNIQUE ADVANTAGES DISADVANTAGES
Does not always reduce
variables into sensible factors.
Can lose descriptive power of
the variables.
Provides groups that are easy
to work with.
Is a flexible technique:
− Possible to choose range
yourself.
Clusters may not make much
sense:
− Clusters may not be
operational.
No right or wrong answer.
Cluster Analysis
A set of related objects or
variables (e.g. demographic,
socio-economic and/or
psychographic are analyzed:
− Through grouping techniques,
segments are formed that
have similarities.

More advanced techniques such as statistical decision trees, are also
available
Multivariate Statistical Techniques (2 of 2)
Can help new product
researchers develop and test
the attractiveness of alternative
product concepts.
Conjoint Analysis
(Multiple Trade-off Analysis)
Measures the impact of varying
product attribute mixes on the
purchase decision.
Ranks customer perceptions
and preferences towards
products:
− Often used for new product
design and price-benefit
studies
TYPE OF TECHNIQUE ADVANTAGES DISADVANTAGES
Good for identifying which
customers to target.
Possible to work with two or
more independent variables.
Much numerical data required.
Need to have an idea of final
outcome before you start.
Potential problems with errors
and correlation in variables.
Multiple Regression Analysis
Useful in analyzing
associations among marketing
variables.
− Predicting product usage as a
function of age and household
income is one example of
regression analysis.

Contents

What is factor analysis?
Factor Analysis Overview
A statistical technique used to identify a relatively small number of factors that
represent relationships amongst a set of many interrelated variables.
− e.g. Answers of strongly agree to items such as ‘sends me flowers’, ‘listens to my
problems’,'laughs at my jokes’ may lead you to conclude that love is in the air.
− Thus, love is not a single measurable entity but a construct which is derived from
measurements of other, directly observable variables.
Identification of such underlying dimensions -- factors -- greatly simplifies the
description and understanding of complex phenomena like social interactions
… and needs based customer segments!
The output from factor analysis is a key input into cluster analysis.

Cluster analysis is used to identify, characterise and size segments
Cluster Analysis – Strengths & Limitations
OVERVIEW & INSIGHTS
Cluster analysis is part of a statistical process
which aims to generate segments:
− A cluster (or segment) consists of a group of
customers with similar features (i.e. needs,
buying criteria, etc.)
− A cluster results from the extraction within a
wide statistical population of “similar” individuals
based on responses to a questionnaire
Allows you to interpret any market as the sum
of several clusters
Can be used to identify needs-based segments
We use cluster analysis to build a strong fact-
based segmentation:
− Identifying segments
− Characterizing segments
− Sizing clusters relative to each other
STRENGTHS
Key to achieve a rigorous
segmentation of a large potential
customer base (i.e. consumer
marketplaces)
LIMITATIONS
Cumbersome process when criteria for
segmentation are complex
Doesn’t necessarily consider
reality/common sense if performed in a
vacuum

The cluster analysis process is a four-stage data crunch process relying on
“factor analysis”
Cluster Analysis Process
Determine criteria for
clustering
Choose best-fit cluster
solution
Reality check
clusters into
segment profiles
Analyze potential
criteria
• Set your targets:
– What do you need to
understand from your
population
– What dimensions characterise/
influence your market:
• Validate your target
criteria:
– Workshops
– Focus groups
– Analysis of customer surveys
• Choose clusters by
looking at a number of
different criteria to see
which result in the most
distinct segments
• Using either a spreadsheet
or specific software,
clusters are extracted from
a customer database
• Group individuals
according to their scores in
the dimensions previously
identified:
– Anyone within a cluster is nearer
to the mid-point of that cluster
than any other
• Try multiple criteria to see
which form the best cluster
solution
• Run cluster breaks
against all statements
• Examine the “hard”
demographic data
available for each
cluster
• Develop
“pen-portraits” for
each segment
• Conduct upfront
factor analysis to
determine factors
• Apply industry
hypotheses
• Allow client to
include the
parameters which
they think
differentiate their
market
Iterative Loop
• Why are clusters emerging?
• Can we act on these clusters?
1 2 3 4

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1
Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
• Media/PR
press@flevy.com
• Billing
billing@flevy.com

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