Content Intelligence Blog

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Demographic Segmentation Can Cover Up Real Customer Differences: A Case Study

Apr 19, 2016 10:56:11 AM

The goal of market segmentation is to identify groups of customers who differ in their needs and responses to marketing efforts. This allows businesses to target their strategies to increase effectiveness.

Often, demographic variables are used to segment customers. While demographics describe consumers and business customers, they often offer little insight into those customers’ needs, the benefits they seek, or the true drivers of their purchase decisions.

Although this problem has been recognized for decades, demographics are still often used as the primary basis for segmentation. Why is this? Perhaps it’s because we underestimate the problem or are unclear of the solution.

Let’s take a closer look at the story of Skechers to understand the fundamental problem.

Starting out on the wrong foot

Sketchers is a brand of shoes known for skateboarding and casual wear. In the last few years, the company has extended its product line into running shoes with the aim of selling to serious runners.

Sales of Sketchers’ running shoes have benefited from sponsorship of an elite marathoner named Meb Keflezighi.(1) On a comeback at age 35, Keflezighi was passed over by Nike, only to be signed by Skechers in 2011. He subsequently won a number of races, including the Boston Marathon in 2014. As a result, Skechers gained credibility in the runner community.
Data from an October 2015 growth strategy study(2) assesses Skechers’ positioning against other top running shoe brands. Let’s consider the predictive power of a key demographic characteristic – gender. In the study, Nike outpaces Skechers for both men and women by the exact same margin. The Table 1 data below show no impact of gender on shoe brand ownership.

Table 1

Percentage owning Men Women Full sample
Nike 44% 42% 43%
Skechers 27% 25% 26%

The survey that was implemented for the study (constructed and analyzed within the Vennli software platform) measured the perceived importance of a variety of benefits and features of shoes as well as beliefs about how each brand performs on each feature.

We can visualize these insights to identify competitive positioning as follows:

Figure 1

Figure1

In the Venn diagram above, the circle on the upper right represents customer needs – i.e., the important value that the customer seeks. The circle on the upper left represents the customer’s perception of Skechers’ value, and the bottom circle shows their perception of Nike’s value.

The intersections are strategically meaningful. The positions are determined by aggregate responses to survey questions about importance and beliefs about Skechers and Nike on each of several attributes (or what we call choice factors). For example, the Green Zone represents Skechers’ unique competitive advantage, while the Orange Zone captures Nike’s. In the center, the Gray Zone illustrates points-of-parity.

By measuring choice factor importance and beliefs about each brand, the Vennli software distributes those factors across the seven Venn categories. When we break value down to the level of choice factors, it becomes clear why Nike is winning.

First, for men:

Figure 2

Figure2-Men

For example, we see that men perceive Nike’s unique value to be driven by brand reputation, style, fit to surfaces they run on and, narrowly, comfortable fit (all pins in the orange zone). The choice factor lightweight is a solid point-of-parity (in the middle of the Gray Zone). Low price is believed to be owned by Skechers, but is of lower importance (Blue Zone).

Skechers appears to be in trouble; it ends up looking like the less expensive shoe with nothing unique to offer.

The results for women (Figure 3 below) are almost exactly the same, with only slight shifts in the benefits lightweight and my surfaces.

Figure 3

Figure3-Women

The similarity between men and women illustrates why brand ownership shares are independent of gender in the data. Nike dominates Skechers for both men and women. When we look at the market through the perspective of gender, we find no difference in running shoe preference.

From a different starting line

When we start with demographics in segmenting the market, we’re assuming that men (a demographic group) all want the same thing and that women (another group) all want the same thing but something different from men.

This is simply not correct.

There are differences in preference within each group. To truly understand potential differences in preference, you need to start with the needs that people have in the category.

Segmenting by customer benefits

A common analytic technique called cluster analysis can be used on the choice factor importance measures to uncover benefit segments (e.g. groups of customers seeking the same benefit or value). One technique called K-means clustering was applied to the importance ratings in the Skechers data and identified four interpretable customer benefit segments, two of which are shown below in Table 2. This reveals that the two benefit segments differ not on the actual benefits sought but on how many different benefits are sought.

The Basic Fit segment focuses only on a few benefits. They want a functional shoe that fits, is light, and works on their training surfaces.

The second benefit segment, Function and Symbol, wants that and more. They also seek brand names and innovative characteristics that make the shoe more durable and stable.

But here’s the really interesting twist. Once we identify these two segments, we discover that gender actually does make a difference.

Men make up 64% of the Basic Fit segment (versus 59% overall in the sample), but make up only 48% of the Function and Symbol segment. Therefore, it looks like women are somewhat more likely to seek a broader set of benefits from their running shoes.

By segmenting customers first by the benefits they seek, we get a richer view of market ownership. Nike holds steady across the two benefit segments, but the first benefit segment – Basic Fit – LOVES Skechers.

Table 2

Benefit segments
Basic fit
(37% of sample)
Function and symbol
(36% of sample)
Full sample
Highly important benefits
  • comfortable fit
  • applicable for my surface
  • lightweight
  • comfortable fit
  • applicable for my surface
  • lightweight
  • reputable brand
  • appealing style
  • durable
  • enhances stability
  • prevents injuries
Percentage men 64% 48% 59%
Percentage owning
Nike 45% 44% 43%
Skechers 40% 19% 26%

In short, identifying segments based upon the benefits they seek is far more predictive of brand ownership than gender by itself. To understand the explicit trade-offs made by the Basic Fit segment, consider this visualization of male Skechers’ shoe owners:

Figure 4

Figure4-SkechersOwnersMen

This segment sees Skechers as superior in meeting their needs (for lightweight comfort) relative to Nike. Even more interesting is the very clear separation between the more and less important choice factors. The men who are purchasing Skechers really want those top benefits and not much else.

This reality paints a very different picture for Skechers than does the bleak scenario we saw in the initial Venns for men and women runners. And it also helps explain the brand’s recent success. According to the Wall Street Journal, Skechers has jumped into second place in the sports footware category.(3)

The moral?

Demographics do matter. However, understanding customer needs and the benefits they seek matters more. Demographics don’t predict marketplace behavior very well. Benefits do.

Therefore, start by grouping customers around needs or desired benefits, and then (and only then) see how those groups differ demographically. This approach gives you much greater power in being able to align your offering and resources – especially product/service, price, and promotion – to the real needs of the market.

Joe Urbany
Written by Joe Urbany

Cofounder of Vennli and Professor at the University of Notre Dame

Joe is a core marketing faculty member in Notre Dame’s MBA program and past Associate Dean of the Mendoza College of Business with numerous publication credits related to customer decision making and growth strategy.

In 2010, Joe Urbany co-wrote a book entitled Grow by Focusing on What Matters: Competitive Strategy in 3-circles. The premise of the book is that growth and competitive advantage are about effective positioning. The model facilitates speed of understanding and action by focusing strategic attention on what impacts customer decisions. It has been applied in over 800+ MBA projects at Notre Dame. Co-founded in 2013 by Joe, Vennli is based on this proven model. Vennli brings the model to life through the use of collaborative technology and providing a platform that makes an already faster and more intuitive process even more accelerated and streamlined.

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