Market Segmentation and Energy Efficiency Program

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Market Segmentation and Energy Efficiency Program

Prepared by

Steven J. Moss

With Assistance from
Kerry Fleisher
San Francisco Community Power

Prepared for CIEE Behavior and Energy Program
Edward Vine, Program Manager

California Institute for Energy and Environment
1333 Broadway, Suite 240
Oakland, CA 94612-1918

November, 2008

This report was prepared as an account of work sponsored by the California Public Utilities Commission. It does not necessarily
represent the views of the Commission or any of its employees except to the extent, if any, that it has formally been approved by
the Commission at a public meeting. For information regarding any such action, communicate directly with the Commission at
505 Van Ness Avenue, San Francisco, California 94102. Neither the Commission nor the State of California, nor any officer,
employee, or any of its subcontractors or Subcontractors makes any warranty, express or implied, or assumes any legal liability
whatsoever for the contents of this document.

Market Segmentation

Segmentation – identifying homogenous sub-populations within larger heterogeneous
populations – has emerged as an important marketing tool over the past half-century. The
technique is a response to the need to effectively communicate with, and motivate to action, an
increasingly diverse population of individuals, families and businesses, who rely on a rapidly
multiplying set of communication channels.

Attempts to segment energy efficiency markets began in earnest during the 1980s,
through such techniques as SRI Consulting Business Intelligence’s VALSTM method, which
focuses on categorizing populations along psychological traits and demographic characteristics.
However, until recently, most utility energy efficiency managers employed marketing approaches
that tended towards sectorization, as opposed to segmentation. That is, in part driven by
historical customer class definitions, energy efficiency programs have focused broadly on
agricultural, industrial, commercial, and retail customers, without a significant tailoring to reflect
segments within these sectors. Likewise, energy efficiency programs tend to be based on an
engineering economics approach, in which specific technologies are pushed without much
attention to what energy users want and how they behave in relationship to energy-using devices.

Over the past decade, utilities have made progress towards identifying segments and
crafting programs and marketing strategies based upon them. For example, recent energy
efficiency programs focus on wineries and dairies, which may have previously been lumped
together as part of agricultural programs; and lodging facilities and food service vendors, which
may have fallen into the broad retail category. These programs appear to more effectively reach
the segmented populations than previous sector-based initiatives.

It remains to be seen whether utilities will continue to advance in their use of
segmentation, and whether these entities are the most effective institutions to lead this effort. The
market eco-system in which energy efficient and conservation products are nested is diverse,
occupying an expanding number of niches that depend on a widening set of decomposed
communication channels. To effectively reach these (sub)segments, a multitude of products,
services, and marketing approaches will be needed, as supported by robust data analyses.

In addition, a number of basic elements need to be addressed if segmentation is going to
be a fully effective tool to assist California to reach its ambitious energy savings goals. For
example, greater thought needs to be given to product definition: is it energy efficiency in
general; specific products; or particular product attributes? Likewise, consumers’ resistance to
prematurely retiring “perfectly good equipment” – which harkens to a previous days’
understanding of conservation – needs to be more deeply considered.
Market Segmentation as Applied to Energy Efficiency 3

Market Segmentation

M.Cubed thanks those individuals who provided insights into and constructive
comments about market segmentation and early drafts of this paper. In particular, Mike
Sullivan of Freeman-Sullivan offered guidance on how to frame key segmentation
concepts; a number of anonymous reviewers gave essential advice about the paper’s
content and structure; and Edward Vine of the California Institute for Energy and
Environment was instrumental in providing keen insights into how to best craft the final
Market Segmentation as Applied to Energy Efficiency 4

Market Segmentation
Table of Contents

Executive Summary………………..……….............…………………………. 5

Introduction................ ........................................... ............................................. 7

Market Segmentation: A Basic Marketing Concept........................................... 7
1.1 Segmentation Emerged from Technological Diffusion Theories…........ 9

When to Apply Market Segmentation……….........…………………………... 11
2.1 How to Segment a Market…..…………….......…………………..……. 12
2.2 Barriers to Effective Implementation of Market Segmentation…........... 18

Examples of Market Segmentation…….............……………………………… 21
3.1 Existing Segmentation Models………………………………………….23

Demand-Side Management Segments………..............…….......……………....25
5.1 Segmentation as Applied in Utility Ratemaking..…......................…….. 26
5.2 Public Policies Dominate Potential Segmentation Strategies.................. 26
5.3 Segmentation Techniques Emerging from Electric Utilities.................... 28
5.4 Utility Energy Efficiency Programs Target Specific Segments............... 35
5.5 Integrated Approaches to Energy Management....................................... 35
5.6 Integrated Approaches in Utility Programs ............................................. 36
5.7 New Ways to Understand How Best to Define Segments........................ 37
5.8 Emerging Patterns..................................................................................... 39

Conclusion........................................….............……………………………… 41

Table of Tables

Table 1.
Segmentation Methods


Table 2
Sectors are not Segments


Table 3
Segmentation Models


Table 4
SCE Residential Market Segments


Table 5
PG&E Market Segments


Table 6
SCE Market Segments


Market Segmentation as Applied to Energy Efficiency 5

Market Segmentation
Executive Summary

Market segmentation – identifying populations which respond similarly to
commodities and marketing messages – can provide a powerful method from which to
design and spur the adoption of products, services, and ideas. While there are various
approaches to segmenting markets, methods by and large rely on (statistically) examining
qualitative or quantitative data to identify the relationships between social, economic, and
demographic characteristics, particular goods, services, and ideas and adoption behaviors.
Successful segmentation schemes identify the timing of and reasons behind key decision
factors related to different commodities for a given population, so that these elements can
be matched with products and messages. Market segmentation has been successfully
used to speed the creation and adoption of a wide array of consumer products, ranging
from automobiles to beverages, as well as part of campaigns to modify a variety of social
behaviors, particularly associated with public health (e.g., HIV/AIDS; tobacco use).

While electric utilities are increasingly experimenting with segmentation schemes
– with some notable successes – development of effective segments has been slowed by a
lack of comprehensive data, particularly related to such hard-to-reach but ubiquitous
sectors as small businesses; a tendency to base demand-side management programs on
traditional broad industry sectors, such as residential, commercial, and industrial
customers; and a energy regulatory process that emphasizes technological solutions to
demand-side management that are principally based on engineering economics analyses.
However, with encouragement from regulators and as a result of active third-party
solicitations, the state’s investor-owned utilities exhibit a greater use of segmentation in
their recently proposed energy efficiency programs.

Segmentation schemes tailored to residential customers typically focus on
attitudes and motivations. For example, attempts are made to demographically or
geographically isolate groups of consumers by whether they are likely to change their
products or behaviors as a result of environmental, economic, or social messages. Flex
Your Power’s messages, for instance, revolve around photographs of children selling
compact fluorescent light bulbs; the underlying theme is that its important to save energy
for future generations, and that to do so is child’s play.

Segmentation schemes for businesses also rely on motivating factors, and seek to
isolate similar energy end-use technologies, ownership patterns, economic characteristics,
and associated behaviors and match these with products and services. For example, the
hospitality sector may be useful segmented into independent economy hotels, economy
chains, and higher end hotels, and provided with devices that address a specific need
(e.g., free, direct installation of sensors that regulate air conditioning in vacant rooms).

Once a segment has been described, product and service development and
associated marketing efforts can be tailored to address identified segment-specific
problems or needs, or to prompt action to be taken. Examples of potentially successful
segments include:

Market Segmentation as Applied to Energy Efficiency 6

Market Segmentation
Corner markets: typically independently-owned, with old, inefficient lighting and
equipment, low profit margins, and minimal access to capital. This segment might
be addressed through direct installation programs that focus on lighting and
refrigeration. Marketing is best conducted door-to-door, with easy to read
materials and frequent references to neighboring stores that have adopted the

Warehouses: exhibit a variety of ownership patterns, and frequently do not pay,
or even see, their utility bills. This segment can be further deconstructed by end-
use activities, such as whether the operation is reliant on lighting, refrigeration or
battery-powered equipment. Because of split incentives (e.g., the energy bill may
be paid elsewhere, or the warehouse operators may rent), energy efficiency
measures must be simple and immediately adoptable (e.g., timers for load-shifting
battery-powered equipment). Because in many cases there will not be an energy
manager, it’s a difficult segment to market to, triggering the need for long-term
efforts (e.g., three to five years).

Low income families: may not own their homes, have old or inadequate
equipment, be poorly educated on energy uses, and have little time to manage
their energy use. Efficiency offerings need to provide a direct service, be low- or
no-cost, and, directly installed. To the extent that energy programs offer co-
benefits (e.g., outdoor sensors, which also increase security) they will be more
attractive. Marketing is best done by community-based groups that have a long-
term presence in the neighborhood and the necessary language and cultural skills.

As California attempts to achieve the ambitious energy-reducing goals associated
with reducing greenhouse gas emissions, regulators and utilities need to pay greater
attention to how best to apply market segmentation to the development and fielding of
efficiency programs. High benefit-cost ratios estimated by an engineering economics
framework that assumes significant adoption rates without clear marketing pathways
should be carefully examined. Without a comprehensive approach to developing and
marketing energy efficiency measures that is based on well described segments, programs
are unlikely to be fully successful.

In addition, energy regulators and utilities should be thoughtful about how fast
they move towards integrated approaches to demand-side management. Although in
many cases ratepayers will welcome comprehensive energy (and other resource) saving
measures, a significant portion of the population may prefer one-at-a-time solutions. In
particular, families and small businesses may not have the capacity to adopt multiple
measures simultaneously; for segments within these populations multi-year, stepwise
approaches to increasing efficiency may be preferably to all at once comprehensive
programs. Alternatively, if “whole house” tactics are strongly preferred by policymakers,
segment-specific barriers to adoption (e.g., financing; staffing capacity) need to be
identified and effectively addressed.

Market Segmentation as Applied to Energy Efficiency 7

Market Segmentation

The purpose of this paper is to describe the existing state of market segmentation
among California’s electric utilities, with an emphasis on the investor-owned utilities
(IOUs). In addition, how segmentation is applied in various other economic sectors is
reviewed, in part to provide a framework to identify potential practices that could be
effectively adopted in the utility industry.

Segmentation is an important marketing tool. If used effectively it can result in
the development of products and services that more closely match households’ and
businesses’ needs, inform marketing campaigns so that they can more successfully
motivate the populations of interest to action, and lead to faster and more widespread
adoption of new technologies. Indepth application of market segmentation has only
recently emerged within the utility sector as a way to implement demand-side
management programs among residential and non-residential ratepayers. Greater use of
this marketing approach could help the state achieve its ambitious energy efficiency and
conservation goals.

This paper is organized to provide a basic primer on market segmentation, with an
emphasis on how the technique is and can be applied to the electric utility sector. Section
2 reviews basic market segmentation concepts. Section 3 describes how to apply
segmentation, and how to overcome barriers to its implementation. Section 4 provides
example applications of market segmentation as used in various markets, as well as
segmentation models. Section 5 evaluates segmentation as applied to utility demand-side
management programs, including emerging patterns. A short conclusion is presented in
Section 6.

Market Segmentation as Applied to Energy Efficiency 8

Market Segmentation
Market Segmentation: A Basic Marketing Concept

Market segmentation can be defined as the subdividing of a market, or population,
into distinct, but possibly overlapping, subsets, where any subset may be selected as a
target for tailored marketing efforts.1 In this sense, segmentation falls into the broad
category of procedures for taxonomic classification which enable enterprises to better
understand how best to interact with populations of interest.2

Segmenting markets into distinct populations can help enterprises develop
products and associated marketing efforts in ways that improve the chances that
consumers will respond positively to them. Segmentation is one of the initial phases in
developing and implementing a marketing strategy for consumer and industrial markets,
and, in some cases, for education campaigns focusing on public health, resource
conservation, and other social goods.

Market segmentation is based on the assumption that customers demonstrate
heterogeneous preferences and buying behaviors. That is, most markets aren’t
monolithic, but instead consist of subpopulations which are relatively homogeneous in
terms of what they need or want, or how the respond to different messages and
messengers. Market heterogeneity can frequently be explained by differences in product
or user characteristics.

Market segments optimally consist of groups of people or organizations that are
similar in terms of how they respond to a particular marketing mix or in other ways that
are meaningful for marketing planning purposes. In this respect, to be useful for
marketing purposes subgroup segments should both be similar in certain ways (e.g.,
demographics, lifestyles, types of business/industry) and respond to a specific marketing
program differently than other groups.

Segmentation can offer the following benefits:

• It enables sellers to address consumer diversity by guiding how specific resource
mixes can be effectively applied to particular customer groups, thereby improving
the chances of overall adoption of the targeted product or service.

• It reveals concentrations of customers that can be marketed to and served cost-

1 Segmentation may go by other names in the marketing literature. For example, in a recent treatise on
emerging societal trends, it’s argued that marketers should pay attention to “micro-precincts” that have
better predictive value than historical segmentation schemes, such as sports fans, pet owners, international
travelers, and early risers; shopping destinations (e.g., Wal-Mart; Target); and secular spiritual attitudes
(Zogby 2008).
2 If a seller could know and effectively act upon each individual buyer’s purchasing trigger, they would of
course do so. Market segmentation is an attempt to group buyers that have similar purchasing triggers to
provide sellers with a better ability to act upon these triggers cost-effectively. In certain markets, such as
internet transactions, this type of near-individual tailoring of marketing efforts is increasingly possible.
Market Segmentation as Applied to Energy Efficiency 9

Market Segmentation
• It helps identify what marketing and delivery channels might be most effective for
a particular customer group. For example, community-based organizations may
be able to effectively work with low-income families; municipalities may be best
suited to developing building retrofit programs; and retailers are likely the best
channel to market specific household products.

• It can inform broadcast marketing and educational messages and enable sellers to
develop more effective outreach material by targeting customers who are
motivated by different messages and messengers, and have distinct adoption

• It can help focus products, services, and programs, so that they achieve economies
of delivery, material purchasing, and resources.

• It can provide a basis for strategies related to customer retention, both in terms of
sales of new products, and maintaining use of a product/service that’s already
been adopted.3

• It can provide the strategic basis for other marketing decisions, such as helping
enterprises fine-tune their products and services. Understanding customer
requirements can inform how operating systems can best be designed. For
example, utility databases could provide a rich data source on which to base
program design and marketing approaches if they adequately reflected ratepayer
characteristics associated with (non)adoption of energy efficiency offerings.

The need to effectively segment markets as a means to sell goods and services has
becoming increasingly acute, as society itself becomes more diverse. During times in
which consumers tend to conform to a standard norm, and rely on a narrow set of
communication channels, market segmentation is less important. During the first half of
the 20th century, consumers tended to be quite similar. In 1950, 90 percent of Americans
were of European descent; today, less than 70 percent are European-Americans, and by
2050, there will be no single ethnicity that accounts for a majority of the U.S. population
(U.S. Census Bureau, May 17, 2007). Similarly, placing chocolate bars and cigarettes in
soldiers’ supply kits during World War II solidified demand for these products, since
virtually all Americans either were in the armed forces or related to someone who was.
And when there were three or four television channels, these networks dominated
advertising communications, and, since everyone who watched television viewed these
channels, the social zeitgeist reinforced the messages.

Today, with the emergence of broadband cable, satellite radio, and the Internet,
among other things, consumers are increasingly fractionalized into different niches, with

3 It has been observed that it can cost upwards of five times more to gain a new customer than to keep an
existing one, and ten times more to get a dissatisfied customer back (Massnick 1997). In the case of energy
efficiency measures, some segments may be more apt to override a technology (e.g., sensors), fail to
maintain their equipment, or, when it breaks, to replace it with a less efficient model, than others, thereby
meriting different post-sales strategies.
Market Segmentation as Applied to Energy Efficiency 10