Four indicators, one goal

Editor’s note: Brian F. Blake is director of the graduate consumer-industrial research program at Cleveland StateUniversity, Cleveland, Ohio. Bridget A. Durica is a marketing research analyst with Malone Advertising, Akron, Ohio.

Tom feels as though he is teetering on the edge of a very high cliff. A hypothetical market researcher working for a manufacturer of kitchen appliances, he has encountered a problem that plays out again and again among marketing researchers and product managers around the country. To obtain a clear picture of the current and potential customers for the firm’s market line, Tom worked with an outside research vendor to conduct an in-depth market segmentation. The portrait of each consumer segment that emerged was truly multifaceted, incorporating demographics, purchasing patterns, attitudes toward the product class, etc.

Now it is time to prioritize the segments and to select segments with the best sales potential for targeted marketing programs. Belatedly, it dawns on Tom that he may be in a bind.

He needs a set of straightforward indicators to identify the segments with the most sales potential. He senses that without these indicators, the product managers and other executives in the company who are his internal clients will become bogged down in the swamp of facts and figures pertaining to each segment. He is concerned that this information overload will drive them to base target selection decisions on simplistic subjective reasoning (“My gut instincts tell me…”). Tom fears that with all the data they may lose track of the basic targeting question: Where is the sales potential likely to be?

Tom knows that he can turn to academic researchers for quantitative procedures to target segments. He feels certain that, as a group, these techniques would incorporate a wide range of factors and would provide a wealth of insights. Yet he finds many of them to be too complex to understand, too dependent upon statistical packages he rarely uses or may not even have available, and/or requiring the investment of substantial time in dredging up data on profit margins, national sales figures and other types of internal data. Further, he suspects that he will not be able to communicate these fairly complicated ideas to his manager clients.

Worst of all, he fears that with all the complexity built into the selection procedure, his managers may still lose track of the fundamental question of which segments have the best sales potential. The vendor Tom was working with had offered to use its proprietary analytic technique, but judging from the vendor’s statements, Tom feels that the technique is something of a black box (“I can’t describe the step-by-step mathematical procedures, but it works. Trust me!”). And Tom is not about to trust the project to an analytic tool he doesn’t thoroughly understand!

To further complicate matters, he anticipates that he will play a prime role in meetings with product managers focused upon turning the segmentation study into marketing action. In those meetings he will be asked numerous what-if questions, such as, “Would we be more successful if we targeted Segments A and B jointly and downplayed Segment C, or if we went after Segments A and C solely?” In these meetings he could well be asked about scenarios that he had not previously analyzed. He would then have to make targeting assessments on the fly and would have to recalculate the indicators quickly and confidently on the spot.

Tom needs a set of targeting indicators that: 1) uses only a few numbers; 2) can be readily calculated by the working practitioner; 3) is easily communicated to non-researchers; 4) is objective; 5) can validly flag the segments with greater sales potential; and 6) involves little or no extra cost for the firm.

Keep it simple

He decides to follow the KISS rule (Keep it simple, stupid!). He looks around for a straightforward procedure that he (not just the vendor) can calculate and still get the job done efficiently.

Let’s consider a set of four related indicators - size, hit rate, return and coverage - that Tom might consider using, either alone or in combination with more exhaustive procedures (such as the technique proffered by Tom’s vendor). As a set, these indicators meet all six criteria Tom is seeking. In fact, the first two indicators (size and hit rate) are now widely used by practitioners, but the last two (return and coverage) are actually more generally useful.

The survey instrument Tom and his vendor used to develop the segmentation contained, among other things: a) “definitional” variables to identify the segments (e.g., a consumer’s purchasing tendencies, appliance feature preferences); and b) “targeting” variables indicating the likely sales potential of an individual respondent (e.g., number of the company’s appliances purchased, readiness to purchase the firm’s brand). The survey was administered to a cross-sectional sample of 1,000 respondents screened for potential purchase of home appliances.

Grouping procedures yielded five segments: Convenience Firsts, Prestige-Conscious, Bargain Hunters, Quality-Insistent and Joy of Cooking. Each respondent’s scores on the sales potential variables were integrated into a single dichotomous score (high-low). High potential reflected a level of sales potential adequate to justify the firm’s attempting to attract a given consumer to its line (e.g., the consumer has purchased more than one of the firm’s products in the last year and also intends to consider the firm’s product line in the next appliance purchase). A total of 179 of the 1,000 respondents were judged to have high value. Table 1 shows the number of respondents (“cases”) and the number of persons with high sales potential (“highs”) in each segment. These are the data points from which the four indicators are constructed.

These indicators are used as a set to select segments; each fills in a different piece of the targeting puzzle.

  • Size is the proportion of the market found in a segment, estimated by the percent of the sample respondents found in each group. Here, 190 respondents (19 percent of the sample) fall into the Convenience First segment.

Size is widely used by some managers (“Let’s go after the largest segment!”). But this indicator has an obvious Achilles’ heel. It can be misleading when there are great differences among the segments in their readiness to purchase a given firm’s products. A segment may have a large number of consumers, but they may be the wrong consumers! In our example, the Bargain Hunters segment has by far the largest number of consumers (310), but fairly few of them (31) are ready to buy Tom’s products. In fact, for this reason, the two prime indicators, return and coverage, show the Bargain Hunters to be middle-of- the-pack in targetability.

  • Hit rate is the estimated probability of a segment member purchasing the firm’s product. It is calculated as the proportion of respondents assigned to a segment that has high value. Here, of the 190 Convenience Firsts, 57 or 30 percent have a high value score.

Hit rate is also widely requested by managers (“Where can I find consumers most likely to buy my products?”). This indicator is especially valuable when the cost of each sales contact is fairly high, e.g., when sales depend on direct contacts by sales representatives. In such a case, the number of non-productive sales contacts must be kept to a minimum. On the other hand, when making a fairly large number of unproductive sales contacts does not involve a major cost penalty (e.g., when sales are generated through mass media ads), hit rate is less informative. We can see in our example that the Prestige-Conscious segment provides the highest hit rate (40 percent).

On the down side, hit rate can be misleading when applied to small segments. A segment can have a high hit rate, but still not command enough high-value consumers to be profitable. Here, for example, the Prestige-Conscious segment has the highest hit rate but does not have the highest number of valued consumers.

  • Return is a relative index of the sales potential which a segment is likely to deliver to the firm. It is estimated as a product of the segment’s size and hit rate. For the Convenience Firsts, this would be 30 percent of 19 percent, or 5.7 percent. It may also be calculated quickly as the percentage of the sample (here, 1,000 cases) that both falls into a given segment and also has high value (57 for Convenience Firsts).

Return is perhaps the most valuable of the four indicators for general use, as it incorporates the benefits of both size and hit rate. Of the four, it is the single best guide to how many customers might be expected to be delivered from each segment. Return does not have either of the shortcomings noted for size and hit rate.

  • Coverage is a segment’s share of the total sales potential found in that market. It is gauged by the proportion of those with high value found in each segment. For Convenience Firsts, that would be 57 of the 179, or 32 percent. It can be roughly translated as how much of the expected sales in that market is commanded by a particular segment.

While it is mathematically the flip side of return, coverage is an easy-to-read index when targeting multiple segments. It reflects how much business may be “left on the table” after one’s targeting choices. Here, our targeting Convenience Firsts addresses 32 percent of the valued customers, but leaves 68 percent of the likely buyers unaddressed. If it were possible to simultaneously target both Convenience Firsts and the Prestige-Conscious, Tom’s firm would focus upon fully 61 percent of the likely customers, the backbone of the sales found in that market.

Workable guide

While more elaborate approaches to assessing targetability are available, these four indicators provide a workable guide to target selection that can spot where the sales potential can be found, is quick to calculate, and is easy to communicate. Further, given that they do not require any additional analyses or consultation costs, these four truly shine for those “quickie” segmentation projects with a limited budget and a tight time frame.

Interestingly, this set of indicators has salvaged a project on more than one occasion in the first author’s 30+ years of experience. In those instances, a technically more elaborate targeting procedure was used but it “blew up” due to missing data. The four-indicator set fortunately provided a fall-back option.

Even when used in conjunction with more elaborate targeting procedures, it has consistently resonated with manager clients. It gets the job done.