Empirical Marketing - Week 1

What are the 5 sources of customer heterogeneity?

1. Individual differences: favorite colour, Big 5 personality traits

2. Life experience: child raised in certain climate

3. Functional needs: income, quality, size, waterproof

4. Self-identity/image: motorcycle riders wearing leather

5. Marketing activities: target the desired potential customers

Why customer heterogeneity may be latent or hidden?

• Customers vary on some underlying preferences, but no firms are supplying offerings that fit their desires, so those preferences are not evident.

• Customers might not even know of their diverse preferences, because they have no options to evaluate.

What are the inputs to the managing customer heterogeneity framework?

• All potential customers (needs, desires, and preferences across customers in an industry, geographic region, market segment, or product category)

• Your company (an inventory of the company’s strengths, weaknesses, opportunities, and threats or SWOT analysis)

• Your competitors (an inventory of your competitor’s strengths, weaknesses, opportunities, and threats or SWOT analysis)

  —> 3C

What are the outputs of managing customer heterogeneity?

• Industry segmentation: describes industry segments and includes, for each named segment, salient purchase preferences, demographic variables, and potential demand opportunities.

  • How can the marketplace be described using homogeneous groups?

  • What does each group of potential customers want?

• Target segmentation: moves from the overall market landscape to the specific segment(s) of interest, such that it extends the first output by providing a very detailed description of each target segment.

  • What set of segments will the firm pursue?

  • How does the firm identify each group of target customers?

• Positioning statements: encapsulate the three questions into one concise statement that firms use to direct their internal and external marketing activities: who should the firm target, what needs and benefits are being fulfilled, and why does this offering provide a relative advantage over competitive offerings.

• Building customer centricity: building a customer centric organization is different from executing an STP process, in that it requires a top-down, enduring commitment from senior leaders to institute a customer-centric philosophy across the firm’s entire organization.

Which structure are firms shifting toward to?

A customer-centric structure, rather than relying on a structure focused on the company’s discrete product lines, company brings the structure into five market-focused units.

In the evolution of approaches for managing customer heterogeneity, what is the mass marketing era?

Used mass media to appeal to an entire market with a single message, is a marketing strategy in which a firm mostly ignores customer heterogeneity, with the assumption that reaching the largest audience possible will lead to the largest sales revenue.

In the evolution of approaches for managing customer heterogeneity, what is the niche marketing era?

Focused marketing efforts on well-defined, narrow segments of consumers, and by specializing, this method seeks to give the firm a competitive advantage.

In the evolution of approaches for managing customer heterogeneity, what is the one-to-one marketing era?

Firms attempt to apply marketing strategies directly to specific customers.

Across all three eras, what is the underlying method for dealing with customer heterogeneity?

Focus on smaller and smaller groups of customers, such that the needs for each group are more similar as they get subdivided into smaller units, until the focus reaches an individual customer.

What is the approach to managing customer heterogeneity?

Segmenting, targeting, and positioning (STP) approach in order to better match heterogeneous customer needs, firms focus their efforts on small “homogeneous” customer groups.

What is segmenting?

Dividing the market into groups of customers where:

• Customers within group have very similar needs.

• Customers across groups have different needs.

Needs: needs and benefits desired by customers for your offering:

• Segment on needs/benefits not descriptors.

• Uses one of the “Cs” as input: customers.

Descriptors: observable customer characteristics that help you find and classify customers (gender, age, income, size, education)

What are the segmentation steps?

1. Identify and refine potential customers’ needs and descriptors (qualitative research).

2. Collect data from random assortment of potential customers on importance of needs to purchase decision.

3. Use needs to segment the market into homogeneous customer groups.

4. Name segments (communication tool).

In the segmentation steps, cluster analysis is used, what is it and how it works?

• Cluster analysis is a technique that can be used to identify and classify a large set of heterogeneous consumers or companies into a small number of homogeneous segments. We need 2 steps: segmenting and describing and we need to collect 2 kinds of variables: base and descriptors.

• Segmentation step: identify underlying subsamples of customers that are homogeneous in their bases and markedly different from other subsamples.

• Describing step: descriptor variables to explain how the subsamples differ and thereby can derive efficient targeting strategies, tailored to each subsample.

What is hierarchical clustering procedure dendogram?

• A hierarchical clustering procedure aim to minimize the sum of square of errors, starts by assuming each customer is its own cluster. Numbers represent amount of variance explained.

• Pick number of clusters where variance explained is relatively large.

• To find the limited loss of information, we find the mean of the 2 clusters, then we use the formula for sum of square (x - x avergae)² …

What is targeting?

A market needs to select segments to target based on certain selection criteria:

• Market attractiveness (size, growth rate, price sensitivity)

• Competitive strength (captures the relative strength of a firm, versus competitors, at securing and maintaining market share in a given segment).

Uses all three “Cs” as input: customer, company, and competitors.

What criteria for an ideal target segment?

1. Based on customer needs (customer care)

2. Different than other segments (little crossover competition)

3. Differences match firm’s competences (firm can execute within resource constraints).

4. Sustainable (can keep customers).

5. Customers are identifiable (can find targeted customers).

6. Financially valuable (valuable in long term).

What method is used for targeting?

GE matrix:

• Axes represent market attractiveness and the firm’s competitive strength.

• Bubble size represents segment size.

What is the criteria for the validity of the segmentation/targeting?

1. Identifiability: the segment represents a group of customers that differ distinctly.

2. Stability: the key characteristics of customers in the segment are not likely to change over time.

3. Responsiveness: the targeted segment will respond to the planned marketing strategies.

4. Viability: the company can achieve its desired financial objectives with the segmentation scheme.

What is positioning?

Process of improving your relative advantage in the minds of your targeted customers:

• Changing both your actual (innovation) and perceived offering (branding, relationships).

• Uses all three “Cs” as inputs.

Nearly everything you do impacts your positioning:

• Place (Channel): Samsung dropping Kmart

• Price: no discounts at Tiffany

• Promotion: Tiger Woods at Nike, Starbucks.

• Product: Bose, Apple.

What method is used for positioning?

Perceptual maps: analysis tool to aid in positioning decisions.

What is repositioning?

Process by which a firm shifts its target market.

What are the key questions that a positioning statement must address?

1. Who are the customers?

2. What is the set of needs that the product or service fulfills?

3. Why is this product/service the best option to satisfy your needs (relative to competition or substitute; support for why?)

What is factor analysis?

Factor analysis is a data reduction technique that can be used to identify a small number of latent factors that explain the major variation in a large number of observed variables.

When to use factor analysis?

• To condense large pool of potential customer needs, wants, and preferences into a short set of similar characteristics.

• To reduce high correlation among predictors.

What are the types of factor analysis?

• Exploratory (EFA): look for structure in the data (“let the data speak”)

• Confirmatory (CFA): confirm theoretically derived structure