Segmentation and

Value Proposition Design

©2003 Mohan Sawhney

Kellogg School of Management
Northwestern University
 Steps in strategic target marketing

Understanding market segmentation

The process of market segmentation

Acting upon segmentation

Target market selection

Value Proposition design

©2002 Mohan Sawhney Page 2

 Defining market segmentation

Market segmentation is the process of dividing a

potential market into meaningfully distinct groups of
customers, such that customers within a group (i.e.,
segment) have similar needs and values, and each
group can be identified and offered a different marketing
mix plan.

Market segmentation is a selective demand stimulation

strategy, as opposed to a primary demand stimulation
strategy.

©2002 Mohan Sawhney Page 3

 Why practice segmentation?

• Customers differ in what they care about, how they decide, where
they buy, and how they use products. So a company cannot be
“everything to everybody” with the same offering. Market
segmentation is a “divide and conquer” strategy that recognizes
the differences across customers, and creates focused strategies
for each segment.
• Firms that recognize that recognize differences across groups of
customers and create segment-specific strategies can deploy
marketing resources more effectively and productively.
• Customers are willing to pay more for offerings that exactly meet
their needs, and are more loyal to firms that understand and speak
to their needs better
• Market segmentation produces increased costs to the firm in the
short run. But these increased costs are generally offset by
increasing sales in the long run.

©2002 Mohan Sawhney Page 4

 Steps in strategic target marketing

Understanding market segmentation

The process of market segmentation

Acting upon segmentation

Target market selection

Value Proposition design

©2002 Mohan Sawhney Page 5

 Market segmentation approaches

Traditional Approach
Who customers are What customers want/do
(Identifier variables) (Response Variables)
Response-Based Approach

● Traditional (“A Priori”) Segmentation Approach:

– Start with segments based on identifiable customer/firm characteristics
and then work forward to see if these segments have meaningful distinct
needs/behavior or if these segments seek different benefits

● Response-based (“Post-Hoc”) Segmentation Approach:

– Start with collecting data on customer buying characteristics to determine
distinct groups of customers and then work backwards to see if these
groups can be identified in terms of demographic/firmographic
characteristics.

©2002 Mohan Sawhney Page 6

 Post-hoc segmentation

Process
– Conduct research on identifying key customer buying characteristics.
– Cluster on those characteristics to find customers who have “similar”
needs, care-abouts, and buying behavior.
– Determine the profile of customers belonging to a cluster/segment in
terms of their demographics/firmographics such that they can be
offered an appropriate marketing-mix plan.

Rationale
• Customer buying behavior = f (needs, behavior, care-abouts)
• Cluster/segment profile = f (demographics/firmographics)
– Outcomes from “post hoc” approach may become a useful basis for
future “a-priori” segmentation

©2002 Mohan Sawhney Page 7

 Segmenting the PCS market:
Traditional (“A Priori”) Approach

Segment Identities
Response Random Cellular Pager Teens/
Variable Sample Users Users 20-25
Monthly Bill 80 71 69 76
Coverage Area 63 69 68 65
Handset Price 70 69 68 65
Ability to Walk/Ride 54 68 63 58
Phone Size/Weight 37 36 32 29
Replaces Work Phone 23 18 27 27

First Define Then Search for

Segment Identities Response Differences

©2002 Mohan Sawhney Page 8

 Response-based approach (Step 1)

Response Segments
Response Segment 1 Segment 2 Segment 3 Segment 4
Variable "Cost" "Price" "Coverage""Mobility"
Monthly Bill 99 68 68 65
Coverage Area 51 57 96 72
Handset Price 60 98 51 58
Ability to Walk/Ride 48 48 56 97
Phone Size/Weight 36 40 41 46
Replaces Work Phone 17 21 25 18
Own Cellular Phone? 30% 29% 45% 60%
Will Definitely Use PCS 58% 54% 70% 70%
Use These to Define First Identify
Benefit Segments Response Differences
©2002 Mohan Sawhney Page 9
 Response-based approach (Step 2)
Response Segments
Identifier Cost Price Coverage Mobility
Variable Segment Segment Segment Segment
Income > 35 K 77 80 92 86
Married 45 46 57 52
Children 37 33 50 37
Work in suburbs 29 31 60 49
Live in suburbs 45 44 70 54
Same Office Everyday 66 67 55 51
Drive to Work 45 49 76 67
Take Train to Work 18 23 10 15
Work Backward Define Response
to Identify Segments Segments
©2002 Mohan Sawhney Page 10
 Lenses versus objects:
Segmentation variables versus segments

Range of Hypothetical segment description:

Mobility • White collar executive
• Wide-area roaming
Applications • 50% time traveling
Occupation
used • Carries laptop, cell phone
• Poor landline access
Road • Needs persistent email connectivity
Warrior • Not technically savvy

Degree of Devices
Tips for segmentation
Mobility used • Look for good identifier “proxies”
• Search for patterns across variables
• Limit number of segments to 4-6
Contextual • Form multi-dimensional description
factors
• Validate with observational research
©2002 Mohan Sawhney Page 11
 Steps in strategic target marketing

Understanding market segmentation

The process of market segmentation

Acting upon segmentation

Target market selection

Value Proposition design

©2002 Mohan Sawhney Page 12

 Strategic options after segmentation

● Adapt the core product

● Customize the product without modifying the core

● Reconfigure the services you offer with the product

● Modify the channels you use to go to market

● Modify the pricing approach for the product

● Modify the customer service levels you offer

● Alter perceptions about you or your competitor’s product

● Alter importance weights that customers attach to the

various benefits
● Make important benefits “table stakes”

● Call attention to neglected or new dimensions

©2002 Mohan Sawhney Page 13

 Segmented offerings at Fidelity

Segment Planning & Services Trading

guidance commission
High net ● Personalized and ●Dedicated $14.95
worth frequent interactions representatives
● Quarterly portfolio

reviews
Active ● Comprehensive research ● Dedicated $14.00
traders ● Advanced decision tools team
● Special trading software ● Deep

brokerage
experience
Core ● Annual portfolio review ●Access to $29.95
customers ● Self-guided tools pooled reps

Retirees ● Retirement income ●Retirement $29.95

planning consultants

©2002 Mohan Sawhney Page 14

 Segmented service model at Fidelity

Access level Customer type Reps to

customer ratio
Private access > $5mm in assets 116:1

Premium access $500K-$5mm in assets 250:1

Active traders >36 trades/year 440:1

Preferred access $100K-$500K in assets 440:1

Standard access < 100K in assets 1,500:1

“Penalty box” 9,000 problem 900:1

customers

©2002 Mohan Sawhney Page 15

 Steps in strategic target marketing

Understanding market segmentation

Approaches to market segmentation

The process of market segmentation

Target market selection

Putting segmentation into action

©2002 Mohan Sawhney Page 16

 Overview of target market selection

Benefit
Customer Segments
Analysis
Segment Attractiveness Segment
Attractivenes
High Low s
Profitability
Industry
Analysis Value
Chain
Strong
Competitor
Analysis
Company
Capabilities
Weak

Company
Analysis

Aim: Select segment where company position is strong and market is attractive

©2002 Mohan Sawhney Page 17

 A template for segment evaluation
Attractiveness Relative Attractiveness Attractiveness
Criteria Importance Rating (0-10) Score
Market Attractiveness
 Segment size 0.40 6 2.40
 Growth rate 0.30 3 0.90
 Profit Margins 0.20 4 0.80
 Cost to serve 0.10 8 0.80
TOTAL 4.90
Competitive Environment
 Number of competitors 0.20 8 1.60
 Advantage over substitutes 0.30 3 0.90
 Degree of differentiation 0.20 5 1.00
 Strength of competitors 0.30 7 2.10
TOTAL 5.60
Company Fit
 Channel fit 0.40 5 2.00
 Branding fit 0.10 6 0.60
 Customer base fit 0.30 3 0.90
 Technology fit 0.20 8 1.60
TOTAL 5.10

Relative Weights of Relative Factor Weighted

Attractiveness Factors Weight Score Score
Market Attractiveness 0.30 4.90 1.47
Competitive Environment 0.40 5.60 2.24
Company Fit 0.30 5.10 1.53
OVERALL RATING 5.24

©2002 Mohan Sawhney Page 18

 Targeting strategies

Mass Niche
S1 S2 S3 S1 S2 S3
O1 O1
O2 O2
O3 O3

Horizontal Vertical
S1 S2 S3 S1 S2 S3
O1 O1
O2 O2
O3 O3
©2002 Mohan Sawhney Page 19
 Steps in strategic target marketing

Understanding market segmentation

The process of market segmentation

Acting upon segmentation

Target market selection

Value Proposition design

©2002 Mohan Sawhney Page 20

 What is positioning?

The position is the place that your offering occupies in

your prospects’ minds and hearts on attributes that are
important to them, relative to competing alternatives that
they may consider.

Positioning is defined from the customer frame of

reference, not the company’s. Positioning is defined
relative to competing alternatives, not in absolute terms.

The objective of positioning is to define a value

proposition - the promise you make to specific
audiences of prospects to win their minds and hearts.
(points of difference)

©2002 Mohan Sawhney Page 21

 The positioning statement

“For __________________________”
(target customers or prospects)

______________________ provides ______________

(your product/service offering) (Key benefits)

because
(your product/service) (key benefits)
____________________________________________.
(points of differentiation/reasons to believe)
(points of difference)

©2002 Mohan Sawhney Page 22

 Examples of positioning statements

AVIS
“For business people who rent cars, Avis is the company who will provide
the best service because the employees own the company.”

HOME DEPOT
“For do-it-yourselfers, Home Depot offers the best prices because we are
the largest building supply company.”

BODY SHOP
“For people seeking wellness, the Body Shop offers the most natural bath
and cosmetic products because we are the most environmentally friendly
cosmetics company.”

SOUTHWEST AIRLINES
“For short-route travelers, Southwest Airlines offers the best prices with
reasonable and dependable service because we operate point-to-point
service and don’t charge more for last minute bookings.”
©2002 Mohan Sawhney Page 23
 Covering your bases in positioning:
The “positioning diamond”

What? For whom?

Definition of Target customers
offering or prospects
and benefits

Why? Against whom?

Points of Competing alternatives
differentiation

©2002 Mohan Sawhney Page 24

 Dimensions of value in positioning

• Key features and their benefits

Functional value • Intended end-uses
• Intended end-users
What the product • Deployment experience
does • Usage experience
• Maintenance experience
• Service experience
ACT
(BODY)

• TCO (Total Cost of Ownership)

• EVC (Economic Value to Customer)
• Time savings
• Value of ownership • Cost savings
• Value of affiliation • Quality improvements
• Value of relationship FEEL THINK • Flexibility enhancement
• Emotional significance (HEART) (MIND)
Emotional value Economic value
How it makes What that means in
you feel time and money
©2002 Mohan Sawhney Page 25
 Positioning statements versus value
propositions
● The positioning statement attempts to summarize the key
benefits and points of differentiation in a way that
addresses the shared values and priorities of multiple
audiences and target segments. The positioning
statement is like a “platform” or “umbrella” that should be
general enough to work for all relevant audiences.

● Value propositions are statements of key benefits offered

by the product to specific audiences and specific
segments. Value propositions are derived from the
positioning statement, but focus on the unique values
and priorities of each audience and target segment.
©2002 Mohan Sawhney Page 26
 Positioning statements versus value
propositions: An example
● Positioning Statement : The Windows .NET Server
operating system is the most productive infrastructure
platform for powering connected applications, networks,
and Web services from the workgroup to the data center.

● Value Proposition (tailored to the IT Implementer):

For IT Implementers, who want to be empowered to
control their network infrastructure, Windows .NET Server
provides reliable deployment, management, and use of
the network infrastructure that allows you to respond
faster than you can on any other platform.

©2002 Mohan Sawhney Page 27

 Messaging tag lines:
The articulation of positioning

● IBM - “the next utility”

● Nokia – “human technology”
● HP – “invent”
● Hertz – “exactly”
● Compaq – “inspiration technology”
● Accenture – “innovation delivered”
● Ernst & Young – “from thought to finish”
● Lexus – “the exhilarating pursuit of perfection”
● Boeing – “forever new frontiers”
©2002 Mohan Sawhney Page 28
 Six tests to evaluate your positioning

● Relevance test: Do customers care? Does the positioning get at a

strong “pain point”?
● Clarity test: Will customers “get” it? Does the positioning express
the benefits in a clear and customer-friendly way? It is specific and
focused, or ambiguous and vague? Does the positioning lend itself
to clear translation into messaging and product strategy decisions?
● Credibility test: Will customers believe it? Can we offer solid
support points or evidence to substantiate our positioning?
● Uniqueness test: Is the position unique? Does is set us apart from
competition in a meaningful way? It the position already “owned” by
a competitor? Is it a “me-too” position?
● Attainability test: Can we get there? Are we making claims that
are achievable, or are we selling hopes, dreams and vaporware?
● Sustainability test: Can this position be maintained over time? To
what extent will it remain relevant in the future, even as technology
and products change?

©2002 Mohan Sawhney Page 29

 Summary: A positioning framework

Product Name:
Target Audience:
Specific Audience Needs:
Functional Benefits:
Emotional Benefits:
Economic Benefits:
Positioning Statement (across audiences):
Value Proposition (tailored to this audience):
Key Positioning Pillars: (prioritized)
Pillar 1 Pillar 2 Etc.

Audience 1 Relevance to Customer:

Degree of Differentiation:
Believability by Customer:
Support Points:
Proof Points: (attached)

Audience 2 Relevance to Customer:

Degree of Differentiation:
Believability by Customer:
Support Points:
Proof Points: (attached)

Adapted from: Joan Giese Positioning Framework document Page 30

©2002 Mohan Sawhney