Strategy Dynamics Briefing 43: Customer segments and the choice pipeline

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It is often valuable to replicate the choice pipeline to capture the contrasting dynamics of distinct customer segments. For Coca-Cola for example, there are considerable differences between how teenagers are distributed along the pipeline’s stages and how parents of young children are distributed. There are also big differences between males and females within each of these segments. The dynamics of these segments also differ considerably between the sub-brands the company offers, and there are cross-flows of consumers between these brands as well as to / from competing products. This has important implications not only for advertizing and promotion efforts, but also for issues such as product packaging and distribution.

The complexity of the multiple dimensions involved in this case is considerable, but the value at stake makes it worthwhile for the company to adopt rigorous pipeline-based analysis and the market research needed to deploy that analysis in planning and implementing its global brand marketing. Without this segment-based analysis of consumer states and the rates of movement between them, targeting of marketing efforts cannot be accurate, resulting in wasted money and under-achieving brands.

One clear demonstration of choice-pipeline analysis for distinct customer segments arose in the case of pregnancy testing products. These are of interest to two distinct groups — couples wanting to have children, and women, often young and single, who do not. The choice pipeline was adapted to capture the distribution of each group of customers separately, resulting in quite different packaging styles for each segment. Retail distribution also differed, with one packaging style featuring in the maternity section of retail stores and the other in the birth-control section.

Another special feature arose in this case. The pipeline often addresses a relatively stable overall population of actual and potential customers —mostly the same people are buying the type of product or service this year as last. In this case, the potential customer-pool is transient, only being potentially interested in the product-type for a short window of time. Similar conditions apply in other cases, such as for providers of wedding products or funeral services. The temporary availability of potential customers in such cases introduces unique challenges in winning awareness and interest quickly before the need is passed.

Early and late adopters

One characteristic on which customers often differ is their willingness to adopt new products and services. Some are always keen to get hold of the latest gizmos, whilst others need some convincing, and a further group only buy long after the majority has done so. The same phenomenon arises in certain B2B cases – many large organizations, for example, stayed with the Microsoft Windows 2000 operating system for many years after Windows XP became available, and hesitated once again to switch to Windows Vista.

It may be possible to identify clear differences between several groups, each progressively more cautious and therefore slower in its uptake. This framework needs to be developed further, though, because customers are not as tidy in their behavior as the figure suggests. People who are inclined to be innovators will not necessarily all purchase within the first period. Nor will people inclined to be early adopters all wait until innovators have bought and make their own purchases in the second distinct period.

Figure 1: Adoption rates and timing for different customer groups.

Adoption rates and timing for different customer groups.

Companies are sometimes disappointed when the enthusiastic take-up of early adopters fails to be followed by a flood of purchases by the larger majority of customers, a challenge known as “crossing the chasm.” In Figure 2, a company is launching a product for which it believes there are one million potential customers. After six months, it has sold some 40000 units and — given the large potential market — it expects the rate to continue growing strongly. It is also about to reach breakeven, with gross profit on sales nearly covering total marketing costs of $0.9 million per month. Immediately after this point, however, sales growth slows dramatically, and the product struggles to do much more than break even.

Figure 2: Disappointing sales and profits following early growth for a consumer electronic product.

Disappointing sales and profits following early growth for a consumer electronic product.

The company has been misled by the existence of just two distinct segments — “early adopters” and a “late majority,” each of which develops up its own choice pipeline. The initial burst of demand reflects the enthusiastic uptake by early adopters, and the slower progress thereafter is due to the more cautious behaviour of the late majority.

Until next time…

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Aging

Many of the customer pipeline cases we have discussed assume that the population of actual and potential customers is stable, but this is often not the case – customers often “age” at the same time as they move along the choice pipeline. The impact of this aging may be relatively minor in cases where products appeal to people across many years of their life, but the more transient the need, the more important it becomes to account for aging, both as it brings new potential customers within reach and as it moves them out of reach.

An intriguing example concerns the recent troubles of Barbie, the fashion doll, who has delighted children for many decades. Although a few adults retain an affection for Barbie, most children move on to other interests at some time during their teenage years. Barbie therefore faces a continuous need to attract awareness, interest and purchase from each year’s cohort of new children. The Walt Disney Company realized in 2001 that it could capture a large part of the same market with its ready-made cast of “princesses” (Snow-White, Cinderella, etc.). They already had considerable awareness and understanding amongst potential doll buyers, and those customers would actually pay to be marketed to when they watched the movies. The princesses had the further advantage of catching children just a few years before they were likely to identify with the more grown-up character, Barbie. By 2006, the princesses were available in over 90 countries and had captured over $3bn in worldwide sales.

This briefing summarises material from chapter 6 of Strategic Management Dynamics, pages 356-361.

Read more about the book on the strategy Dynamics website

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