In early 2012, while moderating a focus group investigating consumer attitudes about a new, green HVAC product, the staff at the Illinois Institute for Rural Affairs at Western Illinois University made a handful of discoveries about consumer attitudes that warranted more inquiry. The group suggested that biomass residential heating solutions were certainly a more natural and environmentally benign way to heat homes, but were ultimately&nbsp; too laborious to maintain.&nbsp; This premise prompted follow-up research that revealed that the biomass heating industry&rsquo;s marketing communications were not addressing the ease-of-use issue. In business, correct strategy is more important than correct execution. If the strategy is wrong, then everything that follows&ndash;&ndash;product, advertising, and pricing&ndash;&ndash;is likely to be wrong too.&nbsp; To research the business strategies of the biomass residential heating sector, the research team at the IIRA approached the USDA&rsquo;s Federal State Marketing Improvement Program with a research proposal to address marketing strategy issues in the biomass heating appliance industry.&nbsp; FSMIP agreed to partially fund a market segmentation study.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Marketing Segmentation Segmentation involves separating the total group of potential buyers of a product into two or more subgroups.&nbsp; In today&rsquo;s big data environment or networked world, it has become fashionable to talk about individual, micro, or segment-of-one marketing.&nbsp; We believe that this approach to mass customization is not yet scalable for most, if not all, businesses. Consider the difficulty of profiling millions of &ldquo;other-brand users&rdquo; or competitors&rsquo; customers and non-users of the product using Web intelligence such as social media, and then tailoring offerings to each one of them.&nbsp; The enormity of such a project dictates that it will never be undertaken. In fact, a true mass customization strategy would require a company to secure access to the most valuable data (for example, salesforce feedback, current and past customers&rsquo; feedback, potential customers&rsquo; needs, etc.), and develop unique or competitive advantage-generating insights by combining advanced analytics with creativity.&nbsp; The reality, however, is marketing executives largely report that their companies have access to only basic demographic information on each customer, and fewer than 4 percent say that they have the analytical skills to gain marketplace insights from big data analysis (Harrysson et al 2012).&nbsp; In short, if companies don&rsquo;t group potential buyers into segments, their marketing efforts would regress toward a theoretical &ldquo;average&rdquo; customer and thus would fail to deliver results in the marketplace. Research To understand and generate customer segments for the biomass residential heating sector, the team at IIRA&nbsp; engaged in three types of research: situation audit; qualitative research, and quantitative research. A situation audit consists of background or secondary research into all factors that could affect company or industry performance.&nbsp; Qualitative research or, more specifically, interviews with potential and actual customers of biomass home-heating products, is completed to gain information about people who use those products and their opinions about the product category.&nbsp; Adding quantitative research, in this case, a consumer survey, to the prior qualitative research allowed the research team to classify more precise target market subgroups or market segments, and profile those market segments. Briefly, the situation audit revealed that: &bull; The pellet stove product category is in the growth stage of its life, and biomass-furnace category (central heating) is in the introductory stage of its life. &bull; The industry&rsquo;s expenditure on advertising and marketing is a low 0.5 percent. In general, for products in the introductory or the growth stage of life cycle, not only must the product be readily available, but the buyer must be aware of the product and its benefits. Given a 0.5 percent sales-to- advertising ratio for the industry, it is doubtful that customers are being educated about biomass home heating. The qualitative research consisted of 30 husband/wife interviews.&nbsp; It helped the team learn that: &bull; Biomass home heating is a new form of a product in a familiar product class, namely home heating. &bull; The consumer evaluates biomass heating products as better or worse on these choices or purchase criteria: safety, cost and labor intensiveness. Results The survey revealed&nbsp; two customer segments. Group 1, or the biomass-loyal segment includes respondents who reported they had a higher than 80 percent probability of buying a biomass heating appliance. Group 2,&nbsp; or &ldquo;other loyal&rdquo; reported having&nbsp; &ldquo;very slight possibility&rdquo; (10 percent chance) or lower of purchasing a biomass heating appliance. The target cluster, the biomass loyal, has 32 percent female head of household compared to 40 percent females in the other loyal segment.&nbsp; The median age is 52 for cluster 1 and 58 for cluster 2.&nbsp; Education wise, a typical group 1 member has a bachelor&rsquo;s degree, works for pay and lives in a home built on or before 1970 valued at around $250,000.&nbsp; Based on the survey results, one-third&nbsp; of the households in the Lower 48 (44.3 million) can be classified as biomass loyal.&nbsp;&nbsp; Gaining social approval, living an active or exciting life, and a mature understanding of life or wisdom are the primary motives that influence the biomass loyal segment to engage in purchases that satisfy their life goals of competency and affection.&nbsp; Indeed, research by Athiyaman (2013, 2014a) shows that households with biomass heating tend to have members with do-it-yourself mentality (capable members) and often, the love for their family influences biomass heating appliance purchases.&nbsp; Additionally, it was discovered that the primary heating equipment (that is, the heating equipment that provides the most heat for the home) for the biomass-loyal segment is electric or natural gas-powered central furnace with ducts to individual rooms (48 percent), followed by heating stove that burns wood or biomass pellets (29 percent). Practically, these findings boil down to one simple conclusion for the biomass heating sector: To increase topline revenue, target group 1 households (biomass loyal) with 10-plus years-old primary heating equipment (Athiyaman, 2014b), would, at a high likelihood (80 percent chance), need to buy a biomass heating appliance to replace their old central furnace.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In general, the biomass-loyal segment relies more on interpersonal sources of information.&nbsp; Among commercial sources, newspaper and magazine ads are consulted to gain information about biomass heating: Home service-type magazines are read by 33 percent, and 45 percent subscribe to an area newspaper. Online App As mentioned the heating appliance industry would be wise to target biomass-loyal households that have 10 years or older primary heating equipment.&nbsp; To identify such households in the lower 48 states, we developed an interactive computer application based on the heuristic algorithm shown in Figure 1.&nbsp; The heuristic program highlights that not all geographical locations are attractive markets for the biomass residential heating sector.&nbsp; Using this heuristic in screening potential markets allows&nbsp; the retailer&nbsp; to concentrate on the one-third of the households in the Lower 48 that are biomass loyal. Their&nbsp; time is put to much better use in screening and evaluating a finite number of concentrations of demand.&nbsp;&nbsp; To insure targeting that segment of the households producing the greatest revenue, the program evaluates N micro segments or clusters of households that have 10-plus&nbsp; years-old primary heating equipment; N ranges from 1 = heat pump, to 8 = hydronic heaters.&nbsp; Then, it eliminates from consideration clusters that do not meet or exceed profit objectives; of course, the profit objective has to be input by the manager.&nbsp; Finally, the bumped micro clusters are assessed for their potential to increase sales of residential heating products of different forms, for example, electric or gas central furnaces.&nbsp; Think of it as a scenario analysis of lost sales to competitors. The interactive app is available online at www.instituteintelligence.com. At the moment, it is available only for Illinois,&nbsp; however, anyone with knowledge of object-oriented programming can calibrate the heuristics model for any state.&nbsp; The app starts with geographical input.&nbsp; Once the county is chosen, the manager will be asked to input the expected sales revenue per customer or household in the geographical region.&nbsp; For demonstration, we use $1,500 as the expected revenue per household, which, according to the Alliance for Green Heat, is the selling price of a pellet stove. Then, the manager will input the cost of sale per customer.&nbsp; Again, we use $42 as cost of sales per customer (Athiyaman, 2015a). Based on these two numbers, the application will compute expected profit margins for a set of eight segments, the eight segments are shown in Sidebar 1.&nbsp; Finally, based on the managerial input of profit objective, the program will list the attractive segments, and highlight the implications of bumping segments. Summary And Conclusion Our research has shown that the biomass residential heating industry operates in a marketplace populated by two different groups of customers: one who likes biomass heating and the other group with little or no intention of adopting biomass heating.&nbsp; Without our research, the biomass industry will be targeting the average of these two groups and in high likelihood waste resources on average customersand might imagine positioning the product as a low-cost alternative to home heating when the actual benefit sought is &ldquo;ease of use&rdquo; of the product.&nbsp;&nbsp;&nbsp; To insure that the industry targets this segment, we have developed an interactive computer application that highlights households that would produce the greatest revenue for the industry. The program evaluates eight microsegments or clusters of households that have 10 plus years-old primary heating equipment ranging from heat pump, to hydronic heaters, and eliminates from consideration clusters that do not meet or exceed company profit objectives.&nbsp; In conclusion, this research facilitates the biomass residential heating sector to target the right customer.&nbsp; It is now up to the industry to utilize the tools and optimize the marketing program.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Author: Adee Athiyaman Professor of Marketing, Illinois Institute for Rural Affairs 309.298.2272 a-athiyaman@wie.edu

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Putting Pencil to Paper: The interface developed as an extension of this research allows appliance retailers to pre-qualify selected markets. The application allows users to input both the anticipated sales price as well as the cost-of-sale. The appl

Gauging Customer Likelihood Of Purchasing Biomass Heating

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