Summary Principles of Marketing Engineering and Analytics
Gary L. Lilien, Arvind Rangaswamy, Arnaud de Bruyn
Chapter 3 – Segmentation and Targeting
Market segment = customers within a market segment are all looking for the offering to provide the
same types of benefits or solutions to their problems, or they respond in a similar way to a company’s
marketing communications.
Market segmentation = a business process that enables a firm to evaluate the attractiveness of each
group (segment) and select those segments that it is able to serve effectively and profitably.
Three fundamental factors provide the conditions that create the opportunity for a firm to segment a
market successfully:
1. The heterogeneity of customer needs and wants
2. Customers must cluster into specific groups within which members’ needs are more similar to
those of other customers in that group than they are to the needs of customers in other groups
3. The overall costs of serving customers in a segment must be equal to or less than the prices
they are willing to pay, even if those costs are higher than the costs of serving an average
customer
The segmentation, targeting, and positioning approach
Segmentation is best viewed as the first step in the three-step process of segmentation, targeting, and
positioning (STP).
Segmentation analysis
The market segments identified by the model ideally satisfy three conditions:
- Homogeneity/heterogeneity
- Parsimony
- Accessibility
1
,A segmentation model requires a dependent variable, usually called a segmentation basis, and
independent variables, or segment descriptors.
The segmentation basis should describe why customers respond differently, whereas segment
descriptors help marketers deliver different offerings to various customer segments. The management
problem at hand, combined with costs and information about availability, should point to the est
approach.
The STP approach
Segmentation consists of two phases:
1. Segment the market using basis variables (e.g., customer needs, wants, benefits sought)
2. Describe the market segments identified using variables that help the firm understand how to
serve those customers (e.g., shopping patterns, geographic location), how to talk to these
customers (e.g., media preferences and use, etc.) and buyer switching costs (costs associated
with changing products or suppliers).
Targeting consists of three phases:
3. Evaluate the attractiveness of each segment using variables that quantify the demand levels
and opportunities associated with each segment (e.g., growth rate), the costs of serving each
segment (e.g., distribution costs), the costs of producing the offerings that customers want, and
the fit between the firm’s core competencies and the target market opportunity
4. Select one or more target segments to serve on the basis of their profit potential and fit with
the firm’s corporate strategy; determine the level of resources to allocate to those segments
5. Find and reach targeted customers and prospects within targeted segments in a variety of
ways, including direct mail contact, advertising in selected media vehicles, targeted sales force
presentations, and the like.
Following these phases, the firm must identify a positioning concept for its products and services that
attracts target customers and enhances its desired corporate image.
Segmenting markets (phase 1)
There are three types of segmentation methods:
1. Priori segmentation = firms can directly segment customers according to their observable
characteristics, assuming such criteria are related to differences in their underlying needs.
2. Traditional segmentation methods = employ analytic methods to segment customers on the
basis of a single composite measure developed from a set of observable characteristics.
3. Latent class segmentation = customers belong to groups that differ in ways that cannot be
described just in terms of observable mean differences between segments. Latent class
methods require much larger sample sizes than do traditional methods.
Step 1: Outlining the role of market segmentation in the strategy.
Step 2: Selecting a set of segmentation variables. The chosen variables should isolate groups of
customers whose needs are similar within a group but differ from the needs of other groups.
Step 3: choosing the mathematical and statistical procedures to aggregate individual customers into
homogeneous groups or segments. This aggregation entails an implicit strategic decision: Should
customer segments be discrete (each customer constitutes only one segment), overlapping (a customer
can appear in two or more groups), or fuzzy (each customer is assigned proportional membership in
each segment)?
2
, Step 4 & 5: Making two crucial decisions: Specify the maximum number of segments to construct
according to the segmentation variables and search across those segments to determine how many to
target. Firms must decide on the number of segments to target using both statistical criteria and
managerial judgment.
Describing market segments (phase 2)
After isolating various segments in a market, firms need effective descriptions of them. The variables
that describe the market segments should highlight the profit potential (e.g., price sensitivity, size) of
each segment and how the company can serve these segments. Two general types of variables are
available for this purpose:
1. Those that outline broad market characteristics
2. Those that provide insight into serving one or more segments
In determining their strategy, firms should select variables that help:
- Measure the size and purchasing power of the segments
- Determine the degree to which they can effectively reach and serve the segments
- Develop effective programs to attract customers
Evaluating segment attractiveness (phase 3)
In the next phase, firms choose one or more markets to serve. Factors to evaluate the attractiveness of
a segment of customers:
1. Pertains to the size of the segment and its growth potential.
2. Relates to the structural characteristics of the segment and includes four criteria: competition,
segment saturation, protectability, environmental risk.
3. Product-market fit, includes relationships with other segments and profitability
A company should ask at least three types of screening questions:
1. Does serving a particular segment fit the company’s strengths and desired corporate image?
2. Can the company gain any synergy from serving this segment?
3. Can the company sustain the costs of entering this segment, and can it price its products and
services to achieve the desired margins and returns on investments?
Selecting target segments and allocating resources to segments (phase 4)
Five basic options:
1. Concentrate on a single segment
2. Select segments in which to specialize
3. Provide a range of offerings to a specific segment
4. Provide one offering to many segments
5. Cover the whole market
A possible process:
1. Specify drivers of each dimension. Determine those factors that are most important to its
own specific, overall strategy.
2. Weight drivers. The firm should assign relative importance weights to the drivers.
3. Rate segments on each driver.
4. Multiply weights by ratings for each segment
5. View resulting group
6. Review/sensitivity analysis
3
Gary L. Lilien, Arvind Rangaswamy, Arnaud de Bruyn
Chapter 3 – Segmentation and Targeting
Market segment = customers within a market segment are all looking for the offering to provide the
same types of benefits or solutions to their problems, or they respond in a similar way to a company’s
marketing communications.
Market segmentation = a business process that enables a firm to evaluate the attractiveness of each
group (segment) and select those segments that it is able to serve effectively and profitably.
Three fundamental factors provide the conditions that create the opportunity for a firm to segment a
market successfully:
1. The heterogeneity of customer needs and wants
2. Customers must cluster into specific groups within which members’ needs are more similar to
those of other customers in that group than they are to the needs of customers in other groups
3. The overall costs of serving customers in a segment must be equal to or less than the prices
they are willing to pay, even if those costs are higher than the costs of serving an average
customer
The segmentation, targeting, and positioning approach
Segmentation is best viewed as the first step in the three-step process of segmentation, targeting, and
positioning (STP).
Segmentation analysis
The market segments identified by the model ideally satisfy three conditions:
- Homogeneity/heterogeneity
- Parsimony
- Accessibility
1
,A segmentation model requires a dependent variable, usually called a segmentation basis, and
independent variables, or segment descriptors.
The segmentation basis should describe why customers respond differently, whereas segment
descriptors help marketers deliver different offerings to various customer segments. The management
problem at hand, combined with costs and information about availability, should point to the est
approach.
The STP approach
Segmentation consists of two phases:
1. Segment the market using basis variables (e.g., customer needs, wants, benefits sought)
2. Describe the market segments identified using variables that help the firm understand how to
serve those customers (e.g., shopping patterns, geographic location), how to talk to these
customers (e.g., media preferences and use, etc.) and buyer switching costs (costs associated
with changing products or suppliers).
Targeting consists of three phases:
3. Evaluate the attractiveness of each segment using variables that quantify the demand levels
and opportunities associated with each segment (e.g., growth rate), the costs of serving each
segment (e.g., distribution costs), the costs of producing the offerings that customers want, and
the fit between the firm’s core competencies and the target market opportunity
4. Select one or more target segments to serve on the basis of their profit potential and fit with
the firm’s corporate strategy; determine the level of resources to allocate to those segments
5. Find and reach targeted customers and prospects within targeted segments in a variety of
ways, including direct mail contact, advertising in selected media vehicles, targeted sales force
presentations, and the like.
Following these phases, the firm must identify a positioning concept for its products and services that
attracts target customers and enhances its desired corporate image.
Segmenting markets (phase 1)
There are three types of segmentation methods:
1. Priori segmentation = firms can directly segment customers according to their observable
characteristics, assuming such criteria are related to differences in their underlying needs.
2. Traditional segmentation methods = employ analytic methods to segment customers on the
basis of a single composite measure developed from a set of observable characteristics.
3. Latent class segmentation = customers belong to groups that differ in ways that cannot be
described just in terms of observable mean differences between segments. Latent class
methods require much larger sample sizes than do traditional methods.
Step 1: Outlining the role of market segmentation in the strategy.
Step 2: Selecting a set of segmentation variables. The chosen variables should isolate groups of
customers whose needs are similar within a group but differ from the needs of other groups.
Step 3: choosing the mathematical and statistical procedures to aggregate individual customers into
homogeneous groups or segments. This aggregation entails an implicit strategic decision: Should
customer segments be discrete (each customer constitutes only one segment), overlapping (a customer
can appear in two or more groups), or fuzzy (each customer is assigned proportional membership in
each segment)?
2
, Step 4 & 5: Making two crucial decisions: Specify the maximum number of segments to construct
according to the segmentation variables and search across those segments to determine how many to
target. Firms must decide on the number of segments to target using both statistical criteria and
managerial judgment.
Describing market segments (phase 2)
After isolating various segments in a market, firms need effective descriptions of them. The variables
that describe the market segments should highlight the profit potential (e.g., price sensitivity, size) of
each segment and how the company can serve these segments. Two general types of variables are
available for this purpose:
1. Those that outline broad market characteristics
2. Those that provide insight into serving one or more segments
In determining their strategy, firms should select variables that help:
- Measure the size and purchasing power of the segments
- Determine the degree to which they can effectively reach and serve the segments
- Develop effective programs to attract customers
Evaluating segment attractiveness (phase 3)
In the next phase, firms choose one or more markets to serve. Factors to evaluate the attractiveness of
a segment of customers:
1. Pertains to the size of the segment and its growth potential.
2. Relates to the structural characteristics of the segment and includes four criteria: competition,
segment saturation, protectability, environmental risk.
3. Product-market fit, includes relationships with other segments and profitability
A company should ask at least three types of screening questions:
1. Does serving a particular segment fit the company’s strengths and desired corporate image?
2. Can the company gain any synergy from serving this segment?
3. Can the company sustain the costs of entering this segment, and can it price its products and
services to achieve the desired margins and returns on investments?
Selecting target segments and allocating resources to segments (phase 4)
Five basic options:
1. Concentrate on a single segment
2. Select segments in which to specialize
3. Provide a range of offerings to a specific segment
4. Provide one offering to many segments
5. Cover the whole market
A possible process:
1. Specify drivers of each dimension. Determine those factors that are most important to its
own specific, overall strategy.
2. Weight drivers. The firm should assign relative importance weights to the drivers.
3. Rate segments on each driver.
4. Multiply weights by ratings for each segment
5. View resulting group
6. Review/sensitivity analysis
3
