Every day we make trade-offs. We go to a convenience store and we pay a higher price for milk. You find a great deal on a product, but chances are you won't get much service or some other amenities. Go looking for a house, and it's filled with making trade-offs, including distance to work, tax rates, the nature of the neighborhood, and the scholastic rating of the schools. Indeed, trade-offs are not just between price and other benefits, but between all the benefits associated with any choice decision.

Since we make trade-offs, we tend to tend to place a higher weight on those benefits we really need, and trade-off by placing a lower weight on the other things. So, if convenience is important to you, you place a higher weight on convenience and a lesser weight on price (and this allows you to accept the higher price). These weights that we place on the various possible benefits are, what we call in marketing, preferences.

So how do we represent these trade-offs in marketing? One way might be to ask customers which benefits are most important to them, and you see this in the many surveys administered by marketing research and polling companies. Or you might ask them to rank the various benefits, putting them in order from most important to least important (or what we prefer the most to what we prefer the least). These different ways are shown below:

But notice how in the second column the benefits are essentially free (you could place a 7 on each benefit) and there are no trade-offs. This type of scale is essentially worthless for capturing preferences, but it's used all the time in practice (be skeptical of any results based on this type of preference scale).

The third column is better, since it begins to reflect this trade-off. But the fourth column is the best. By giving customers 100 points to spread across the various benefits (putting the highest number of points on the benefits they most prefer), we are truly representing the type of trade-offs customers make in the world. This is the way we represent customer trade-offs in academic marketing research.

Analytic techniques exist that measure these tradeoffs, and you can see a tutorial on one of these techniques (Conjoint Analysis).

THE CONSIDERATION SET ISSUE
(OR WHY ISN'T SAFETY IMPORTANT TO EVERYONE WHEN BUYING A CAR?)

When customers shop for products, they tend to reduce a complex buying decision by using what is known as a "consideration set". For example, you go to buy a stereo and reduce the buying decision complexity by only considering products whose benefits meet certain criteria (e.g., certain levels of fidelity or price). A firm makes purchases of computers, but forces employees to only consider certain products (in this case, the firm mandates the consideration set).

The implication of the existence of customer's consideration sets is that trade-offs must be measured at the level of the customer's consideration set. When you understand this idea, you can then understand why some customer's buying a car might place very few (of their 100) points on "safety". It's not that they don't want a car that is safe, it's that their consideration set includes only cars that meet a reasonable level of safety. But note that even with this consideration set, there are some customers (and they are in a segment) that care very deeply for safety beyond the consideration set level.

I first ran into this problem when I worked in the database industry. One of the benefits that customers consider when buying a database is scaleability (roughly speaking, the ability of the database to grow to handle larger amounts of data).

When I asked people how important scaleability is to customers when buying databases, I was told to place a 0 weight on this benefit. Why? Well, the answer lies in understanding the consideration set. Customers only consider databases that meet a certain level of scaleability (which most products now meet), and beyond that it's not important

Another way of thinking about this is that to be in the database business, you have to be able to scale to a certain acceptable level. Sometimes you hear the term "table stakes" to refer to this required level of a benefit.

WHAT DO I DO NOW?

With a list of benefits and abstract attibutes written down, and an understanding of how customer's make trade-offs, it is now reasonable to read the tutorial on How to Segment Markets.