<%@ Language=VBScript %> <% CheckState() CheckSub() %> Understanding the customer's relationship with a brand:the role of market segmentation in building stronger brands
MRS Conferences

Market Research Society Conferences

15 Northburgh Street, London, UK, EC1V 0JR
Tel: +44 (0)20 7490 4911, Fax: +44 (0)20 7490 0608

2001


Understanding the Customer�s Relationship With a Brand: The Role of Market Segmentation in Building Stronger Brands

Dr Tamsin Addison
Decision Science
Dr Michael O�Donohue
McKinsey & Company

INTRODUCTION

Market segmentation is widely practiced by marketing and research professionals in most industries. Most market research companies boast market segmentation as part of their ad hoc services and there is a specialist industry offering proprietary off the shelf market segmentation products.

As well as in practice much has been written about the place and role of market segmentation. Admap regularly carries features on segmentation and a special feature in Admap in June 1998, contained articles on 5 different approaches to consumer segmentation. Papers on the subject also regularly appear in the Journal of the Market Research Society, Journal of Advertising Research and Journal of Marketing. As of 1998, the subject has had its own biannual publication; Journal of Segmentation in Marketing, which is 'devoted to stimulating thought and enhancing the practice of market segmentation and target marketing'.

As well as papers on the applications of market segmentation there is also a substantial technical literature focused on refining existing techniques and developing and validating new tools (Green & Krieger, 1991; Dubow 1992).

All of this testifies the extent to which market segmentation has become a fundamental component of understanding the marketplace and an integral part of marketing strategy, targeting and planning.

However, notably absent from the literature is a cogent sense of the rationale behind market segmentation and the most effective approaches to segmenting a market.

In recent times a debate has grown up over the role and value of segmentation. In particular, proponents of one school or the other argue as to whether market segmentation studies reveal meaningful difference between groups or not (Clouter & Titford 1998; Jarvis & Brand, 1998).

THE OBJECTIVES OF MARKET SEGEMNTATION

As a departure point for this paper, we wanted to get a handle on how the marketing and marketing research perceive market segmentation. In particular, we were interested in how market segmentation has been defined. Illustrative quotes include:

'Segmentation, the process of dividing the market into consumer groups with similar needs, is essential for marketing success'

(Lilien & Rangaswany, 1992)

'Market segmentation is the division of a market into distinct groups of buyers who might require different products or marketing mixes'

(Kotler et al, 1994)

'Market segmentation traditionally deploys ad hoc research in the form of U&A studies to classify and describe fmcg and other market places'

(Passingham & Passingham�Hughes, 1997)

'��.to find ways of identifying groups, clusters or segments of consumers who can be approached in different ways'

(Admap editorial on segmentation and consumer profiling, 1998)

The most striking thing about these definitions is that they all define segmentation as the division of the marketplace. Faced with these definitions we were reminded of the one of the assumptions that underlies the statistical process of segmentation:

'individuals or objects can be grouped into different groups which are relatively homogenous within segments, but relatively heterogeneous between segments'

(Hair, Anderson, Tatham & Black, 1998)

'market segmentation is the process of dividing the market into consumer groups with similar needs'

(Kennedy & Ehrenberg, 2000)

While these definitions are technically accurate, they are surprisingly empty of content. By this we mean that they do not even begin to engage with the objectives that lies behind market segmentation. However, what concerns us is that this failure to engage with the objective behind segmentation characterizes much of thinking and practice of market segmentation. We believe that the definition of segmentation has become synonymous with its objectives for many practitioners. The implications of this we believe are that that in conducting a segmentation study, most practitioners rarely go beyond using segmentation as a tool for �describing differences between distinct groups�.

However, the objective of market segmentation is rarely to identify and describe different groups of consumers. This is merely a by�product of a set of statistical routines that groups data together; a generic output of any segmentation study. In essence there is no single unified purpose behind market segmentation. The objective of segmenting a market differs from study to study and from client to client. For example:

What is immediately evident is that in each of these situations the objectives of market segmentation are different � objectives that go well beyond a desire to identify groups of different consumers. The objective is clearly different from the definition.

What this means in practical terms is that tacking on a market segmentation to a U&A, without consideration of the objectives, will inevitably yield inadequate results. In order to get the most value out of a market segmentation it is necessary to understand both the objectives and application of segmentation.

We believe that this requires the investment of considerable time and intellectual capital in planning a segmentation. Moreover, as Jarvis & Brand (1998) point out, ownership of the segmentation must go beyond the research company or even the research manager and must reside at the heart of the company.

Thus far, we have argued that in thinking about market segmentation most researchers have focused on �describing differences between groups� and that this has become synonymous with the objectives of a segmentation study. This conclusion helps us to explain a number of things including why so much literature has in recent times grown up around whether market segmentation studies reveal meaningful difference between groups or not (Clouter & Titford 1998; Dawson, 1998; Jarvis & Brand, 1998; Ehrenberg, Long & Kennedy, 2000).

Moreover, it explains why many widely used market segmentation approaches are based primarily on �identifying� background variables such as demographics and lifestyle variables (Riquier, Luxton, & Sharp, 1997). It is this issue that we wish to take up in the next part of this paper.

Determining what variables to segment on

As we have already stated, the objectives of market segmentation usually go well beyond simply �describing differences between groups�. Moreover, the purpose varies depending on the marketplace and the client�s needs. Acknowledging these facts lead us to the issue for our second belief about market segmentation: that variables for market segmentation need to be chosen to reflect the objectives.

Much has been written about the importance of choosing the appropriate variables for segmentation. Early commentators such as Plummer (1974) and Well (1975) both stated that good segmentation variables are ones that explain the decisions of consumers. Moreover, these commentators seem to suggest that segmentation inputs need to be chosen to suit the objectives. Wind (1978) reflected that 'any attempt to use a single basis for segmentation (such as lifestyle, attitudes, brand preference, or product usage) for all marketing decisions may result in incorrect market decisions as well as a waste of resource'.

Yet, despite this, the majority of segmentation studies conducted today use attitudinal, lifestyle as the primary variables. Moreover, these variables are employed mainly as segment descriptors.

Therefore, while the output tends to accurately describe the customer, it rarely goes further. As a result, there is a gap between the data in hand and the desired usage of the output. In this gap is the danger that the output is segments, which though heterogeneous do not really vary in terms of their reaction to different marketing stimuli (Riquier, Luxton, & Sharp, 1997). To compound this problem, in bridging this gap, it is often the case that (questionable) assumptions are made about the relationship between these attributes and differences in consumer reaction to different marketing. As Paul Feldwick has said, quoted in an article reviewing the output of a lifestyle segmentation, 'it�s easy to get the numbers and to massage them'.

It is important to note that we certainly don�t question the need to understand who the consumers are. However, describing the consumers in a segment does not mean that we understand them or how they will react to different marketing initiatives.

Matching the variables with the objectives

It is widely recognized that demographics are poor predictors of behaviour, (Haley, 1968) since they are descriptive rather than causal factors. We believe it is time that it is recognised that the same is often true of other descriptive data such as consumer values.

However, we believe that a more important learning is that it is critical for practitioners to engage with the objectives that lie behind a segmentation to match the variables with the objectives. Jarvis & Brand (1998) advocated a similar course of action. In their paper, they argued that practitioners should think holistically about what drives a market place. In practice they suggest drawing on different aspects of the consumer � attitudes, behaviour, demographics, life�stage and needs � 'to create an analytical �melting pot� of many factors'.

We agree with the substance of this argument, though we would suggest that rather than focusing on all aspects of the consumer that we focus on those variables that specifically relate to the objectives of the particular study.

Building strong brands: some criticism of market segmentation

This paper has focused on articulating our beliefs about market segmentation in general. However, at this point we would like to specifically address the issue of market segmentation as a method of building strong and stronger brands.

A major criticism put forward by commentators is mass marketing rather than market segmentation remains more efficient and powerful in building strong brands (Anschuetz, 1997; Clouter & Titford, 1998). The most high profile questioning of the role and value of market segmentation has come from Kennedy, Ehrenberg & Long (2000) in an award winning MRS Conference paper, who argue strongly that because competing brands aim to be similar the value of market segmentation is small.

Kennedy et al analysis yields two primary findings:

  1. That demographic profiles of directly competing brands rarely differ;
  2. That different segments rarely differ in their use of brands.

From this data they conclude that 'brands therefore rarely differ from the average brand in the category and when they did so it was not by much, nor was it of practical importance'. Kennedy et al go on to argue that 'brand segmentation generally does not exist � substitutable brands usually compete in what for them is a single mass market'. In striving to be similar competing brands will almost inevitably attract similar types of consumers.

In conclusion, Ehrenberg et al suggest that the implications of these facts for brand positioning, targeting and media planning are that brands can operate in large unsegmented mass markets or in large sub markets.

While we agree with this conclusion, we would suggest that market segmentation continues to have a role in building strong brand. This reflects the fact that competitive advantage is founded not on the ability to identify and describe distinct segments but on gaining superior insights into why consumers behave in a particular way.

How to use segmentation to build strong brands

As in other contexts, market segmentation for the purposes of brand building is primarily used as a descriptive tool. This has resulted in an on�going debate over relative importance of �who buys� versus �how many buy�.

However, undue emphasis on these questions has obscured the real value of segmentation which is in delivering an understanding of why consumers prefer/buy one brand over another. As necessary steps along the way we expect to understand how many people buy our brand and who they are but more importantly, from the marketer�s perspective, is the need to understand why consumers behave in different ways and to determine how best to leverage this.

While Ehrenberg et al argue strongly that the user profile of competing brands hardly differ, we would suggest that segmentation of the market based on appropriate variables can generate considerable insight. This example supports Ehrenberg et al basic point (Figure 1).

However, a segmentation of the market based on consumers� commitment to their brands reveals a different picture (Figure 2).

Overlaying this with consumers evaluations of each brands features and benefits and their relative importance in making decision (Figure 3) delivers considerable understanding of why consumers are behaving differently.

In essence it comes back to the objectives of the segmentation. In this fmcg example, segmentation is used as an analytical tool to understand why consumers are behaving in a different way. The clients objective was to determine how best to position their brand to increase their share of the market. What this allowed the client to do was to understand the mass market and to focus resources in the areas that would maximise profitability for their brand.

As this example clearly demonstrates it is critical to understand the objectives of the segmentation and to use the right variables to achieve them. In choosing the right variables we should come back to the old comment that 'good segmentation variables are ones that help us to explain differences in consumer behaviour' (Well, 1975). More specifically, thinking about branding and understanding what drives brand preference is a different question to understanding who are the people consuming that brand.

In the example above, it was very clear from the outset that there was no point in operating in a segmented market. However, in other categories, particularly service industries, there is a need to position and deliver the value proposition in different ways to different customers. We would now like to turn to explain how market segmentation can be effectively used in this context.

The task for this client was to be able to deliver a relevant brand proposition to existing and potential customer groups, in order to maximize the value of each customer. It was hoped to provide a specific proposition for each segment tailored to the motivational drivers of purchasing to maximize value.

As is often the case with motivational data it was not available off the shelf from the client or other sources. Furthermore it is not possible to construct the information from data fusion or modeling lookalikes. Thus we had to establish the motivation of each new prospect rather than aggregate the information from our existing customers.

In trying to understand the drivers, the client found that the only way to establish this was to talk to each prospective customer. While this is no easy task, its also not as bad as it initially sounds. The solution was an ongoing commitment that went to the heart of onetoone marketing. In technical terms, cluster analysis followed by discriminant analysis was used in order to determine a short set of questions which could be used at multiple touch points to establish which were the key drivers of each customer. The touch points were call center inbound and outbound communications, in store facetoface questioning, direct mail questionnaires appended to each communication and web site activity. While long winded and certainly not a simple panacea, this was a truly credible and effective way of segmenting a market based on the driving motivation for purchase and building a brand around a segmentation.

Segmentation need to be tailored to different needs

The shortfall of the above approach stands out like a sore thumb. This method did not allow us to pick up new customers easily by magically giving the right message to each one. But it did allow us to seek customers in the most appropriate segment for the client and make sure that the 80/20 rule was exploited to maximum effect. It also allowed the client to direct the business to develop in the most appropriate way. Advertising could be directed to attract the segments which were most profitable, and we could attempt to minimise the number of customers who failed to provide lifetime value.

Equally, in terms of existing customers the client was able to cuddle those customers who were really profitable to the business and those that tended to feed from the system were allowed to be the churn.

Once the segmentation and analyses had been completed and the segments were truly understood the majority of the hard work was complete. It then became possible to integrate the learning from segmentation into the fabric of the company culture. Collecting the information for segmentation became part of the standard data collection on each new customer application form. In order to backfill the information on customers already on the base, a programme was devised to obtain the information through the touch point which best suited the customer.

In terms of marketing application different levels of the segmentation were utilised. So for a mailing requiring very different creative treatments the segments were limited to five main motivational segments. However, where it was possible to talk to customers on a more individual basis (web and call center activity), the number of segments were increased as appropriate.

As Figure 4 illustrates, the variety of factors often approaches a larger number than is manageable in terms of actionable marketing. In this figure you can see that the green segments all represent factors related to specialist knowledge and expertise. However, as Figure 5 demonstrates, there are a number of levels which can be utilised according to the sophistication and plasticity of the media.

Having said this there may be some circumstances where it is possible to be more targeted. In the following example a web promotion was able to utilise bigger segments than those highlighted in Figure 5, but it still remained inappropriate to utilise all the clusters initially highlighted. Thus Figure 6 illustrates the approach taken.

Taking this to its logical conclusion the approach we have indicated does involve more work than most segmentation studies. This is especially because the client organisation as a whole is required to buyin to the time and expense of the work which is before the return on investment is seen. This buyin is needed in all areas of the business, it is equally important in the boardroom as in the call center from the telephone operators. However in our experience the more emphasis and investment that is put into understanding each segment the greater the benefits.

CONCLUSIONS

We believe that market segmentation is little more than a catchall term for an analytical tool that allows us to divide consumers into different groups. We believe that this is meaningful and valuable activity for brands to engage in, but only if an adequate investment is made in understanding how the data can be utilised and actioned through marketing and communications. Practitioners should avoid the descriptive mentality which is invariably focused on understanding who customers are and not understanding how or why they are behaving differently. Market segmentation is not about describing different customer groups; this is a byproduct rather than an end result.

At its most fundamental level market segmentation is an analytical tool for understanding consumer behaviour. In order to segment meaningfully it is necessary to understand the objectives of the study and build these into the fabric of the design at the outset, rather than struggling to address them at the end of the study. In practical terms, many companies tack on segmentation exercises to U&A studies as a means of adding value to clients. As an industry we must acknowledge that market segmentation is only of value when it is specifically designed to meet the real needs and concerns of clients. Tacking segmentation on to U&A studies is not only unhelpful for clients, but is also giving a valuable analytical tool a bad name.

REFERENCES

Anschuetz, N. (1997). Building brand popularity: The myth of segmenting to brand success. Journal of Advertising Research, January/February

Dubow, J.S. (1992). Occasionbased vs. user based benefit segmentation: A case study. Journal of Advertising Research. 32, March/April, pp1118

Ehrenberg, A. Long, S. & Kennedy, R. (2000). Competitive brands user profiles hardly differ. Proceedings of the MRS Conference, 2000. Pp323332

Green, P.E. & Krieger, A.M. (1991). Segmenting markets with conjoint analysis. Journal of Marketing, 55, October, pp2031

Hair, J. F., Anderson, R.E., Tatham, R. L. & Black, W. C. (1998), Multivariate Data Analysis with readings, 4th Edition, PrenticeHall Inc: Engelwood Cliffs, New Jersey.

Haley, R. I. (1968). Benefit segmentation: A decision oriented research tool. Journal of Marketing, 32, pp3035

Kennedy, R. & Ehrenberg, A. (2000). Whats in a brand? Research, April, pp3032

Lilien, G. & Rangaswamy, A. (1998). Marketing Engineering. Reading, MA: AddisonWesley

Jarvis, S. & Brand, C. (1998). Holistic Segmentation. Admap, June 1998, pp2325

Kotler (1994), Marketing Management, analysis, planning, implementation and control. Prentice Hall International Editions.

Passingham, J. & PassinghamHughes, H. A method for market segmentation using continuous datasets. Proceedings of the MRS Conference, 1997. Pp233242

Plummer, J.T. (1974). The conceptual application of life style segmentation. Journal of marketing, 34, pp3337

Riquier, C., Luxton, S., & Sharp, B. (1997). Probabilistic segmentation modelling. Journal of the Market Research Society, 39, 4, October, pp571587

Titford, R. & Clouter, R. (1998). The case for mass marketing in an increasingly segmented world. Admap, 33, 10, 3739

Well, W.D. (1975). Psychographics: A critical review. Journal of Marketing Research, 11, pp196213

Wind, Y. (1978). Issues and advances in segmentation research. Journal of Marketing Research, 15, August, pp31737


http://www.warc.com
MRS. All right reserved.