New Segmentation Methods and CLV Gerald E. Smith MK719 DEFINITIONS • MARKET SEGMENTATION: Customer oriented -- identifies customer subgroups of the market as they currently exist. • PRODUCT DIFFERENTIATION: Product oriented -- identifies subgroups of competing products. RULE OF MARKET SEGMENTATION • Maximize homogeneity within market segments • Maximize heterogeneity between market segments BASES FOR SEGMENTING MARKETS CONSUMER: • Geographic • Demographic (age, income, marital, occupation, ethnicity, etc. • Psychographic (AIO, lifestyles) • Behavioral (occasions, user status, usage rate, loyalty status, hierarchy of needs) • Benefits BUSINESS TO BUSINESS: • Demographic (industry, size, location) • Customer Variables (technology, user/nonuser, loyalty status) • Purchasing(centralized/de centralized, functional orientation, contracts vs. bids vs. lease) • Situational (urgency, order size, product application) PSYCHOGRAPHIC SEGMENTATION • • • • • • • • Actualizers (taste, finer things) Fulfilleds (functionability, value, durability) Believers (established products/brands) Achievers (visibility to peers) Strivers (emulation) Experiencers (experiential consumption) Makers (basic practical possessions) Strugglers (urgent basic needs) BENEFIT SEGMENTATION Toothpaste Category Prevents Cavities Freshens Breath Provides Medical Benefits Demographics Families with children at home Young and middle aged parents Moderate income Moderate to higher education Moderate to high incomes Single adults Young adults, teens Working incomes Working or going to school Moderate incomes Empty nesters, mature adults Senior citizens, “Mod Maturity”’s Fixed income More educated Wealth driven Psychographics (Lifestyles) Believers, Fulfilleds, driven by principle Involvement with school and community activities Education is important Hygiene is important Achievers, Strivers, Experiencers driven by status, acceptance Active social lives, social goals Active physical activities Appearance is important Avoiding halitosis is important Makers, Believers, Strugglers, driven by survival, health Active health interests Diet, exercise Regular medical visits Medical education, lectures, etc. Usage Use Occasions: At least 2x daily Time of Use: Morning/Evening Related Behaviors: Regular dental checkups, floss usage Loyalty: More Usage Level: Heavy Attitudes: Primary product Use Occasions: Incidental Time of Use: Prior to social interactions Related Behaviors: Use with breath products Loyalty: Less Usage Level: Light Attitudes: Secondary product Use Occasions: Several times daily Time of Use: Morning/Evening, after meals Related Behaviors: Regular dental checkups, doctor visits, floss usage, special dental products Loyalty: More, dependent on doctor direction Usage Level: Moderate Attitudes: Supplementary product Most Important Attributes Fluoride Cavity preventing attributes Taste Strength of taste Breath freshening attributes Medical ingredients Effects, and side effects Endorsements Segmentation Using Means End Laddering Source: Perry, Strategic Marketing Management (2001). Segmenting Using Means End Laddering Segmentation Framing Source: Barron and Hollingshead, “Making Segmentation Work,” Marketing Management (2002). Segmenting by Frames of Reference and Contrasting Reference Value Profiles $14-$16 per small parcel $10-$12 per small parcel Point-to-Point Shipping Service Document Security Service e.g., UPS e.g., Federal Express Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002). Segmenting by Value Delivery Model and Composite Channel Customer Value Models Commercial Volume Driven Segment Extra Installers $36,000 Positive Incremental Value $234,000 Experienced Installers Opp Cost $19,000 Experienced Installers $22,000 Product Failure Opp Cost $21,000 Product FailureReinstall $18,000 Info Accuracy-Lost Sales $25,000 Delivery Errors-Lost Cust $20,000 Delivery Errors-Rep Bus $12,500 Management Time Lost $12,500 Experienced Installers $19,000 Product FailureReinstall $21,000 Positive Incremental Value $158,000 Brand Likelihood of Purchase $42,000 Reference Value $500,000 Negative Incremental Value $70,000 Brand Tie-In Purchase $36,000 Brand Tie-In Purchase $31,000 Brand Awareness $45,000 Residential High Service Segment Net Economic Value $664,000 Brand Likelihood of Purchase $41,000 Brand Awareness $41,000 Reference Value $400,000 Info Accuracy-Lost Sales $20,000 Delivery Errors-Lost Cust $16,000 Delivery Errors-Opp Cost $16,000 Delivery Errors-Rep Bus $10,000 Out of Stock-Lost Bus $11,500 Out of Stock-Rep Bus $12,000 Management Time Lost $10,000 Carpet Products Probs $7,000 Out of Stock-Opp Cost $11,500 Net Economic Value $444,000 Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002). Negative Incremental Value $114,000 Contrasting Differentiation Value Profiles Best Brand Retailers Volume Driven Retailers Custom Flooring Installers $340 Differentiation Value Reference Value Availability of Complementary Products $280 Flooring Installer Availability $325 Consumer Confidence Top Tier Brands $425 Trained Flooring Installers $185 Brand Awareness $335 Location Awareness $275 $2,000 Differentiation Value Consumer Confidence Second Tier Brands $305 $2,000 Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002). Reference Value Evaluating Segments Using Economic Value Pools Economic Value per Kit $2,500 $1,655 $1,300 $900 $400 $30 Pharmaceutical Drug Discovery Academic Research Labs Clinical Services (paternity, inheritance, infidelity) Courts and Law Enforcement Agencies Immigration Reference Value Millions of kits of market potential Source: Nagle and Hogan, The Strategy and Tactics of Pricing (2006). Evaluating Segments Using Profit Pools Source: Gadiesh and Gilbert, Harvard Business Review (1998). Evaluating Segments Using Profit Pools Source: Gadiesh and Gilbert, Harvard Business Review (1998). Evaluating Segments Using Profit Pools Source: Gadiesh and Gilbert, Harvard Business Review (1998). CALCULATING CUSTOMER LIFETIME VALUE 1. Customer Acquisition Costs 2. Customer Break-even Analysis 3. Lifetime Value Analysis CUSTOMER ACQUISITION COSTS Prospecting Costs: Production, Mailing, Advertising, Lists AC = _____________________ Response Rate RETENTION AND SURVIVAL (t-1) Survival (t) = Retention Rate CUSTOMER LIFETIME VALUE CUSTOMER LIFETIME VALUE Infinite Life QuickTime™ and a TIFF (LZW) decompressor are needed to see this picture. BREAK-EVEN ANALYSIS Frequent Buyers QuickTime™ and a TIFF (LZW) decompressor are needed to see this picture. BREAK-EVEN ANALYSIS Occasional Buyers QuickTime™ and a TIFF (LZW) decompressor are needed to see this picture. LIFETIME VALUE ANALYSIS Frequent Buyers QuickTime™ and a TIFF (LZW) decompressor are needed to see this picture. LIFETIME VALUE ANALYSIS Occasional Buyers QuickTime™ and a TIFF (LZW) decompressor are needed to see this picture. Segmenting Using CLV • Likely value of each customer • Buying patterns of each customer • Optimal marketing strategies – For different customer segments – For each customer over time or situation