Archive for Segmentation

Consumers in the Crisis

Grant McCracken writes about 4 ways in which consumer behaviour may change in the downturn as spending power (or perceived spending power) goes down. I’ve summarized his ideas below:

1. Elastic Consumers: spending less during the crisis but reverting to old habits once things get better

2. The Exception: spend less on most product categories but keep spending at the current level on one (or more).

3.  Trading-up: Spend less on some categories to spend more on others. (Which ones and why is an interesting and important question to answer!)

4.  Sticky Savers: reducing spending during the crisis and staying that way forever.

Read the original article here.

I did a little research to look for actual examples of these types of behaviour. Here are two of the more famous (but most probably apocryphal) ones:

The Lipstick Index (Via The Economist)

a term coined by Leonard Lauder, the chairman of Estée Lauder, a cosmetics firm, in the 2001 recession. In the autumn of that year, lipstick sales in America increased by 11%. Believers in the theory trace the phenomenon back to the Depression, when cosmetic sales increased by 25%, despite the convulsing economy.

If this theory were true, then lipstick could be an “Exception” or a “Trading-Up” category for many people. However, The Economist writes that while lipstick sales do increase during economically difficult times, they also increase during times of relative prosperity so there is no clear correlation. Click here to see a great chart showing the data.

The Mama Noodle Index (via Wikipedia)

In 2005, the Mama Noodles Index was launched to reflect the sales of Mama noodles, the biggest manufacturer in Thailand. The index was steady since the recovery from the East Asian financial crisis, but sales jumped by around 15% in the first seven months in 2005 on a year-to-year basis, which was regarded as a sign of recession. People could not afford more expensive foods, hence the increase in the purchase of instant noodles, as instant noodles is seen as an inferior good.

I haven’t been able to find data to prove or disprove this theory but the notion of instant noodles being an inferior good may not be the only explanation as this article by Christopher Solomon describes:

It is comfort food in the ultimate sense of the word: the comfort that you can eat, and feel as if you’ve eaten, for mere pennies. One does not hanker for instant ramen. One doesn’t dive into the cupboard in search of ramen and emerge with, say, tomato soup. It is almost always the other way around.Yet this meal of last resort is all the more satisfying, because the alternative — hunger — is unthinkable.

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The Five Types of Customers: New Lessons in Shopper Segmentation

Kevin Hillstrom writes about direct marketing and data mining; he has developed a segmentation framework to identify customers who will keep purchasing even when advertising is reduced. These aren’t necessarily the most valuable customers. Kevin’s framework was developed within the context of database marketing – typically the purview of e-commerce merchants, retailers and direct marketeers but it could be useful even to those who go to market through channels and intermediaries.

Customers who respond to begging (discounts, promotions, free-shipping)  are at the bottom of the ladder. We’ll need to market to them, and we’ll need to give them a reason to purchase. These may be profitable customers, but we’ll have to work hard at creating gimmicks to encourage them to purchase.

Customers who respond to advertising. These customers are unlikely to buy in the future unless they are marketed to.

Customers who use algorithms to purchase.  (Note: This behaviour may only be possible online).  These are the customers who use tools like paid search to purchase merchandise.  They don’t always respond to  advertising, and when they do respond, they combine advertising and algorithms to make decisions.

Social customers. Customers who write reviews, and customers who are referred from blogs to your site.

Organic customers. These are customers who do not need to be advertised to. Amazon.com gets a lot of organic business. Now it is true that maybe Amazon sent an e-mail at one time, and you bought because customers like you purchased certain texts. But that doesn’t explain the fact that you se”Outliers” discussed on a blog, so you go and buy the book on Amazon (that makes you a social customer!). Or maybe you read about the book in New York Magazine, then buy it on Amazon (that makes you an organic customer). Organic demand is the most important kind of demand to generate, because it comes without advertising cost. Retailers have thrived for centuries via organic demand. E-commerce is a hybrid of retailing (organic demand) and cataloging (advertising demand).

I think these segments are particularly useful for shopper marketing  or trade marketing as it’s sometimes known, although some thought is needed to translate the segments into the offline retail world.  A great deal of shopper marketing activity and budget is focused on the margins, at customers who respond to begging. Using this framework with actual data could re-focus resources on more profitable segments.

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Open a Bank Account, Drive a Ferrari

Alternative Marketing reports that banks in China are offering free rides in a Ferrari to customers who open new accounts with them.

Since foreign banks were permitted to start services in April this year, they have had to go all out to woo the Chinese customer. Persuading wealthier customers to walk in is proving to be tougher than they thought. So in come the freebies. Citibank has given out free Ferrari and Land Rover rides. Standard Chartered has offered wine tastings and luxury-goods promotions. HSBC has held seminars with economists flown up from Hong Kong.

I wonder if HSBC is on to something here…

Does it cost more to give a free ride in a Ferrari or to organize a seminar with an economist? Which kind of customer does each one appeal to? Which kind is more valuable?

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Segmentation in the Toy market (from BBC)

How could you segment the toy market?

Boys, Girls, Toddlers, Pre-schoolers, Tweens, Teens. Upper, middle and lower income. Classic mass-market demographic segmentation, right?

How about adult senior citizens? Japanese firms like Nintendo and Tomy have discovered a large, affluent and lucrative customer segment for toys by designing offerings targeted at the over-60 set.

Tomy, which is best known for making Transformers, designed a talking robotic doll which tells its owner how much it loves her and welcomes her home when she walks back into the house. The majority of buyers are retired women who live alone.

While there isn't any information about how Tomy developed this innovation, I'd bet a large sum that it comes down to observing what Peter Drucker called the "unexpected" source of innovation.

Another toy company that has tailored its products for adults is Nintendo. Its "Brain Training Game" has been a hit in Japan with people over the age of 60 who believe it will keep them mentally agile. The handheld computer game presents a series of puzzles based on mathematics and Japanese spelling. It also allows players to keep score of how sharp their responses are.

What lucrative, unexpected customer segments might you be missing in your market or business? And how could you go about finding them?

Via Putting People First.
Full story on BBC.

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