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So far, you’ve learned what marketing is and about the importance of understanding consumers and the marketplace environ- ment. With that as background, you’re now ready to delve deeper into marketing strategy and tactics. This chapter looks further into key customer-driven marketing strategy decisions: dividing up markets into meaningful customer groups ( segmentation ), choosing which cus- tomer groups to serve ( targeting ), creating market offerings that best serve targeted customers ( differentiation ), and positioning the offer-
growing cadre of online and direct retailers, ranging from com- puter maker Dell to Web giant Amazon.com. To better differentiate itself in this more crowded market- place, Best Buy needed to stake out its own turf—to identify its best customers and serve them in ways that no discount or on- line competitor could. Rather than trying to make all customers happy all the time, Best Buy needed to segment its market, nar- row its targeting, and sharpen its positioning. The answer: cus- tomer centricity. The customer-centricity strategy draws on the research of consultant Larry Selden, a Columbia University emeritus busi- ness professor. Selden argues that a company should see itself as a portfolio of customers , not product lines. His research identified two basic types of customers: angels and demons. Angel cus- tomers are profitable, whereas demon customers may actually cost a company more to serve than it makes from them. In fact, Selden claims, serving the demons often wipes out the profits earned by serving the angels. Following this logic, Best Buy assigned a task force to ana- lyze its customers’ purchasing habits. Sure enough, the analysts found both angels and demons. The angels included the 20 per- cent of Best Buy customers who produced the bulk of its profits. They snapped up HDTVs, portable electronics, and newly re- leased DVDs without waiting for markdowns or rebates. In con- trast, the demons formed an “underground of bargain-hungry shoppers intent on wringing every nickel of savings out of the big retailer. They loaded up on loss leaders... then flipped the goods at a profit on eBay. They slapped down rock-bottom price
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here’s no such thing as a bad customer. Right? And the more customers, the merrier. Makes sense, right? After all, more customers mean more money in the till. As it turns out, however, that’s often not so. These days, many mar- keters are discovering a new truth: Some customers can be way, way wrong for the company—as in unprofitable. And trying to serve any and all customers can mean serving none of them well. Instead, companies need to make certain that they are serving the right customers and serving them in the right way. They need to de- cide who their best potential customers are—and who they aren’t. Few companies do that better than Best Buy, the nation’s leading consumer electronics retailer. Six years ago, Best Buy embarked on a “customer-centricity” segmentation strategy, by which it set out to identify its best customers and win their loy- alty by serving them better. At the same time, it identified less at- tractive customers and began to send them packing—off to Walmart or some other competitor. Best Buy began in 1966 as a small Minnesota home and car stereo chain. It has since blossomed into a profitable $45 billion mega retailer, with 1,023 U.S. stores and another 2,835 stores worldwide. Today’s Best Buy stores are huge, warehouselike emporiums featuring a treasure trove of goods—from consumer electronics, home office equipment, and appliances to software, CDs, and DVDs—all at low discount prices. A decade ago, how- ever, Best Buy saw an influx of new competitors encroaching on its profitable consumer electronics turf. On one side was Wal- mart, the world’s largest retailer and now number two in store sales of consumer electronics. On the other side was a fast-
ings in the minds of consumers ( positioning ). The chapters that follow explore the tactical marketing tools—the four Ps—by which marketers bring these strategies to life. To start our discussion of the ins and outs of segmentation, tar- geting, differentiation, and positioning, let’s look at Best Buy, the na- tion’s largest consumer electronics retailer. Best Buy knows that it can’t make all its customers happy all the time. Instead, it has segmented its market carefully and concentrates on serving its best customers better.
Part 1: Defining Marketing and the Marketing Process (Chapters 1–2) Part 2: Understanding the Marketplace and Consumers (Chapters 3–6) Part 3: Designing a Customer-Driven Strategy and Mix (Chapters 7–17) Part 4: Extending Marketing (Chapters 18–20)
Customer-Driven
Marketing Strategy
Creating Value for Target Customers
Best Buy: Embracing the Angels and Ditching the Demons
quotes from Web sites and de- manded that Best Buy make good on its lowest-price pledge.” Ac- cording to a senior Best Buy execu- tive, these demon customers could account for up to 100 million of Best Buy’s 500 million customer visits each year. “They can wreak enormous economic havoc,” he says. Further segmentation analysis revealed that the angels fell into eight groups of typical Best Buy shoppers, such as “Barrys,” high- income men; “Jills,” suburban moms; “Buzzes,” male technology enthusiasts; “Rays,” young family men on a budget; or “Charlies and Helens,” empty nesters with money to spend. Each group has unique needs and spending habits. Take “Ray.” He’s “no ordinary cus- tomer,” notes one analyst. “He loves Best Buy, [he’s] a hardcore ‘techno-tainment’ enthusiast, and he’s the company’s ‘bread- and-butter,’ accounting for over 20 percent of [the retailer’s] sales.” And although “Helen” is “by no means a Best Buy regu- lar, she is rediscovering ‘me time’ and is open to being sold tech- nology that will keep her connected to her community.” Based on these segmentation findings, Best Buy set out to embrace the angels and ditch the demons. To attract the angels, the retailer began stocking more merchandise and offering bet- ter service to them. For example, it set up digital photo centers and the “Geek Squad,” which offers one-on-one in-store or at- home assistance to high-value buyers. It established a Reward Zone loyalty program, in which regular customers can earn points toward discounts on future purchases. To discourage the demons, Best Buy removed them from its marketing lists, re- duced the promotions and other sales tactics that tended to at- tract them, and installed a 15 percent restocking fee. In line with its customer-centricity approach, Best Buy then combed through customer databases and began remodeling each store to align its product and service mix to reflect the store’s make-up of core customer segments. At customer-centric stores, sales clerks now receive hours of training in identifying desirable customers according to their shopping preferences and behavior.
At one store targeting upper-income Barrys, blue-shirted sales clerks prowl the DVD aisles looking for promising candidates. The goal is to steer them into the store’s Mag- nolia Home Theater Center, a store within a store that fea- tures premium home-theater systems and knowledgeable, no-pressure home-theater consultants. Unlike the usual tele- vision sections at Best Buy stores, the center has easy chairs, a leather couch, and a basket of popcorn to mimic the media rooms popular with home-theater fans. At stores popular
with young Buzzes, Best Buy has cre- ated videogame areas with leather chairs and game players hooked to mammoth, plasma-screen televi- sions. The games are conveniently stacked outside the playing area, and the glitzy new TVs are a short stroll away. How is Best Buy’s customer-centricity strategy working? Very well. Early customer-centricity stores clobbered Best Buy’s traditional stores, with many posting sales gains more than triple those of stores with conventional for- mats. Since rolling out the new strategy six years ago, Best Buy’s overall sales (and profits) have more than doubled. And despite the recently gloomy economy, which has seen competitors such as Circuit City, Tiger Direct, and CompUSA biting the dust or under- going major restructuring, Best Buy has seen profit growth year after year. Revenue grew nearly 13 percent last year. And accord- ing to a recent survey, Best Buy is rated as the preferred place to shop for consumer electronics by 40 percent of U.S. shoppers, with Walmart a distant second at 14 percent. “We started this [customer-centricity] journey by learning how to see the differences in the desires of our customers, and then learning how to meet them,” says former CEO Brad Anderson. Customer-centricity means “listening to understand how customers are going to deploy the stuff they buy from us and use it to enrich their lives,... rather than worrying about selling the product.” Best Buy wants to focus on customers’ individual wants and needs— to become “that trusted advi- sor capable of helping cus- tomers use technology the way they dreamed,” says Anderson. “That unlocks enormous horizons of growth opportunities for us.”^1
At Best Buy, customer-centricity means listening to target customers and helping them use technology the way they dreamed. “We’re about people. People just like you. We really mean it. Really.”
Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 189
Best Buy’s “customer-centricity” strategy serves its best
customer segments better while sending less attractive
customers packing. The result: Sales are jumping
despite the recently gloomy economy.
Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 191
Demographic segmentation Dividing the market into segments based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation, and nationality.
Geographic segmentation Dividing a market into different geographical units, such as nations, states, regions, counties, cities, or even neighborhoods.
Select customers to serve Decide on a value proposition
Create value for targeted customers
Segmentation Divide the total market into smaller segments
Targeting Select the segment or segments to enter
Differentiation Differentiate the market offering to create superior customer value
Positioning Position the market offering in the minds of target customers
In concept, marketing boils down to two questions: (1) Which customers will we serve? and (2) How will we serve them? Of course, the tough part is coming up with good answers to these simple-sounding yet difficult questions. The goal is to create more value for the customers we serve than competitors do.
FIGURE (^) | 7.
Designing a Customer-
Driven Marketing Strategy
Segmenting Consumer Markets
There is no single way to segment a market. A marketer has to try different segmentation variables, alone and in combination, to find the best way to view market structure. Table 7. outlines the major variables that might be used in segmenting consumer markets. Here we look at the major geographic , demographic , psychographic , and behavioral variables.
Geographic Segmentation Geographic segmentation calls for dividing the market into different geographical units, such as nations, regions, states, counties, cities, or even neighborhoods. A company may de- cide to operate in one or a few geographical areas or operate in all areas but pay attention to geographical differences in needs and wants. Many companies today are localizing their products, advertising, promotion, and sales efforts to fit the needs of individual regions, cities, and even neighborhoods. For example, Walmart operates virtually everywhere but has developed special formats tailored to spe- cific types of geographic locations. In strongly Hispanic neighborhoods in Texas and Ari- zona, Walmart is now testing Hispanic-focused Supermercado de Walmart stores, which feature layouts, signage, product assortment, and bilingual staff to make them more rele- vant to local Hispanic customers. In markets where full-size superstores are impractical, Walmart has opened supermarket-style Marketside grocery stores. Marketside stores are one-third the size of Walmart’s other small-store format, Neighborhood Market super- markets, and one-tenth the size of one of its supercenters.^2 Similarly, Citibank offers different mixes of branch banking services depending on neighborhood demographics. And Baskin- Robbins practices what it calls “three-mile marketing,” emphasiz- ing local events and promotions close to each local store location.^3
Demographic Segmentation Demographic segmentation divides the market into segments based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation, and na- tionality. Demographic factors are the most popular bases for seg- menting customer groups. One reason is that consumer needs, wants, and usage rates often vary closely with demographic vari- ables. Another is that demographic variables are easier to mea- sure than most other types of variables. Even when marketers first define segments using other bases, such as benefits sought or behavior, they must know a segment’s demographic characteristics to assess the size of the target market and reach it efficiently.
Age and Life-Cycle Stage. Consumer needs and wants change
with age. Some companies use age and life-cycle segmentation , offering different products or using different marketing approaches for different age and life-cycle groups. For example, for children,
Geographic segmentation: Walmart has developed special formats tailored to specific types of geographic locations, from Hispanic-focused Supermercado de Walmart stores to smaller Marketside and Neighborhood Market supermarkets.
Age and life-cycle segmentation Dividing a market into different age and life-cycle groups.
192 Part Three | Designing a Customer-Driven Strategy and Mix
Oscar Mayer offers Lunchables, full of fun, kid-appealing finger food. For older genera- tions, it markets Deli Creations, “with all the warmth, flavor, and fresh-baked taste you look forward to—in a microwave minute without having to go out.” Other companies focus on the specific age of life-stage groups. For example, although consumers in all age segments love Disney cruises, Disney Cruise Lines focuses primarily on families with children, large and small. Most of its destinations and shipboard activities are
TABLE (^) | 7.1 Major Segmentation Variables for Consumer Markets
Geographic
World region or country North America, Canada, Western Europe, Middle East, Pacific Rim, China, India, Brazil
Country region Pacific, Mountain, West North Central, West South Central, East North Central, East South Central, South Atlantic, Middle Atlantic, New England
City or metro size Under 5,000; 5,000–20,000; 20,000–50,000; 50,000–100,000; 100,000–250,000; 250,000–500,000; 500,000–1,000,000; 1,000,000–4,000,000; over 4,000,
Density Urban, suburban, exurban, rural
Climate Northern, southern
Demographic
Age Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65 and over
Gender Male, female
Family size 1–2, 3–4, 5 or more
Family life cycle Young, single; married, no children; married with children; single parents; unmarried couples; older, married, no children under 18; older, single; other
Income Under $20,000; $20,000–$30,000; $30,000–$50,000; $50,000–$100,000; $100,000–$250,000; over $250,
Occupation Professional and technical; managers, officials, and proprietors; clerical; sales; craftspeople; supervisors; farmers; students; homemakers; unemployed; retired
Education Primary school or less; some high school; high school graduate; some college; college graduate, advanced degree
Religion Catholic, Protestant, Jewish, Muslim, Hindu, other
Race Asian, Hispanic, Black, White
Generation Baby boomer, Generation X, Millennial
Nationality North American, South American, British, French, German, Russian, Japanese
Psychographic
Social class Lower lowers, upper lowers, working class, middle class, upper middles, lower uppers, upper uppers
Lifestyle Achievers, strivers, survivors
Personality Compulsive, outgoing, authoritarian, ambitious
Behavioral
Occasions Regular occasion; special occasion; holiday; seasonal
Benefits Quality, service, economy, convenience, speed
User status Nonuser, ex-user, potential user, first-time user, regular user
User rates Light user, medium user, heavy user
Loyalty status None, medium, strong, absolute
Readiness stage Unaware, aware, informed, interested, desirous, intending to buy
Attitude toward product Enthusiastic, positive, indifferent, negative, hostile
194 Part Three | Designing a Customer-Driven Strategy and Mix
Income. The marketers of products and services such as automobiles, clothing, cosmetics,
financial services, and travel have long used income segmentation. Many companies tar- get affluent consumers with luxury goods and convenience services. For example, luxury hotels provide special packages to attract affluent travelers. The Four Seasons Miami re- cently offered a Five Diamond package that included a two-carat Graff diamond eternity band (or another diamond piece designed to your specifications) and a stay in the presiden- tial suite with a bottle of 1990 Dom Pérignon Oenothéque champagne, caviar for two, and an 80-minute in-suite couples massage using a lotion infused with real ground diamonds. The price tag: “From $50,000.”^6 Other marketers use high-touch marketing programs to court the well-to-do. Consider these examples:^7
Seadream Yacht Club, a small-ship luxury cruise line, calls select guests after every cruise and offers to have the CEO fly out to their home and host, at Seadream’s expense, a brunch or reception for a dozen of the couple’s best friends. The cruisers tell the story of their cruise. Seadream offers a great rate to their guests and sells several cruises at $1,000 per person per night—not to mention the friends of the couple telling their friends. This has been so successful for Seadream that it has abandoned most tradi- tional advertising. Similarly, when Steinway sells a Steinway grand piano, it offers to host a social event for buyers in their homes, including having a Steinway artist per- form. Such highly personal marketing creates a community of “brand evangelists” who tell the story to prospective affluent buyers and friends—precisely the right target group.
However, not all companies that use income segmentation target the affluent. For ex- ample, many retailers—such as the Dollar General, Family Dollar, and Dollar Tree store chains—successfully target low- and middle-income groups. The core market for such stores is represented by families with incomes under $30,000. When Family Dollar real- estate experts scout locations for new stores, they look for lower-middle-class neighbor- hoods where people wear less-expensive shoes and drive old cars that drip a lot of oil. With their low-income strategies, dollar stores are now the fastest-growing retailers in the nation. The recent troubled economy has provided challenges for marketers targeting all in- come groups. Consumers at all income levels—including affluent consumers—are cutting back on their spending and seeking greater value from their purchases. In many cases, lux- ury marketers targeting high-income consumers have been hardest hit. Even consumers who can still afford to buy luxuries appear to be pushing the pause button. “It’s conspicu- ous non consumption,” says one economist. “The wealthy still have the wealth, [but] it’s the image you project in a bad economy of driving a nice car when your friends or colleagues may be losing their businesses.”^8
Psychographic Segmentation Psychographic segmentation divides buyers into different segments based on social class, lifestyle, or personality characteristics. People in the same demographic group can have very different psychographic characteristics. In chapter 5, we discussed how the products people buy reflect their lifestyles. As a re- sult, marketers often segment their markets by consumer lifestyles and base their market- ing strategies on lifestyle appeals. For example, car-sharing nicher Zipcar rents cars by the hour or the day. But it doesn’t see itself as a car-rental company. Instead it sees itself as en- hancing its customers urban lifestyles and targets accordingly. “It’s not about cars,” says Zipcar’s CEO, “it’s about urban life.” (See Real Marketing 7.1.) Marketers also use personality variables to segment markets. For example, cruise lines tar- get adventure seekers. Royal Caribbean appeals to high-energy couples and families by pro- viding hundreds of activities, such as rock wall climbing and ice skating. Its commercials urge travelers to “declare your independence and become a citizen of our nation—Royal Caribbean, The Nation of Why Not.” By contrast, the Regent Seven Seas Cruise Line targets more serene
Income segmentation Dividing a market into different income segments.
Psychographic segmentation Dividing a market into different segments based on social class, lifestyle, or personality characteristics.
Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 195
Real Marketing 7.
Zipcar: “It’s Not about Cars; It’s about Urban Life”
Imagine a world in which no one owns a car. Cars would still exist, but rather than owning cars, people would just share them. Sounds crazy, right? But Scott Griffith, CEO of Zipcar, the world’s largest car-share company, paints a picture of just such an imaginary world. And he has 325,000 passionate customers, or “Zip- sters” as they are called, who will back him up. Zipcar specializes in renting out cars by the hour or day. The service isn’t for every- one—it doesn’t try to be. Instead, it zeros in on narrowly defined lifestyle segments, people who live or work in densely populated neigh- borhoods in New York City, Boston, Atlanta, San Francisco, London, or one of the more than a dozen big cities in which Zipcar oper- ates (or on more than 100 college campuses across North America). For these customers, owning a car (or a second or third car) is diffi- cult, costly, and environmentally irresponsible. Interestingly, Zipcar doesn’t see itself as a car- rental company. Instead, it’s selling a lifestyle. “It’s not about cars,” says CEO Griffith, “it’s about urban life. We’re creating a lifestyle brand that happens to have a lot of cars.” Initially, Zipcar targeted mostly trendy, young, well-educated, environmentally con- scious urbanites. But, gradually, the Zipster profile is broadening, becoming more mature and mainstream. However, Zipsters share a number of common urban lifestyle traits. For starters, the lifestyle is rooted in environmen- tal consciousness. In fact, at first, Zipcar fo- cused almost exclusively on the benefits of reduced traffic congestion and carbon emis- sions. It targeted green-minded customers with promotional pitches such as “We ❤ Earth” and “Imagine a world with a million fewer cars on the road.” Zipcar’s vibrant green logo reflects this save-the-Earth philosophy. And Zipcar really does deliver on its environ- mental promises. Studies show that every shared Zipcar takes up to 20 cars off the road and cuts emissions by up to 50 percent per user. On average, Zipsters travel 44 percent fewer miles than when they owned a car. But if Zipcar was going to grow, it needed to move beyond just being green. “It is an im- portant part of the brand,” says Griffith, but “I don’t think people are going to use Zipcar
[just] because it’s green.” So the company has broadened its appeals to include other urban lifestyle benefits. One of those benefits is con- venience. Owning a car in a densely populated urban area can be a real hassle. Zipcar lets cus- tomers focus on driving, not on the complexi- ties of car ownership. It gives them “Wheels when you want them,” in four easy steps: “Join. Reserve. Unlock. Drive.” To join, you pay a $50 annual fee and re- ceive your personal Zipcard, which unlocks any of thousands of cars in urban areas around the world. Then, when you need a car, reserve one—minutes or months in advance—online, by phone, or using an iPhone app. You can choose the car you want, when and where you want it, and drive it for as little as $7 an hour, including gas, insurance, and free miles. When you’re ready, walk to the car, hold your Zipcard to the windshield to unlock the doors, and you’re good to go. When done, you drop the car off at the same parking spot; Zipcar wor- ries about the maintenance and cleaning. Zipcar not only elimi- nates the hassle of urban car ownership but also saves money. By living with less, the average Zipster saves $600 a month on car payments, insur- ance, gas, maintenance, and other car ownership expenses. Zipcar’s operating sys- tem is carefully aligned with its tight urban lifestyle tar- geting. For starters, Zipcar “pods” (a dozen or so vehi- cles located in a given neigh- borhood) are stocked with over 50 different models that trendy urbanites love. The vehicles are both hip and fuel efficient: Toyota Priuses, Honda CRVs, MINIs, Volvo S60s, BMW 328s, Toyota Tacomas, Toyota Siennas, Subaru Outbacks, and oth- ers. And Zipcar is now eyeing plug-in hybrids and full elec- tric vehicles. Each car has a
personality—a name and profile created by a Zipster. For example, Prius Ping “jogs in the morning; doesn’t say much,” whereas Civic Carlos “teaches yoga; loves to kayak.” Such personal touches make it feel like you’re bor- rowing the car from a friend, rather than be- ing assigned whatever piece of metal happens to be available. Zipcar’s promotion tactics also focus tightly on its narrowly defined urban seg- ments. The company targets urbanites within a 10-minute walk of its car pods—no easy task. “Even with today’s highly targeted Web, it’s hard to target at that hyper-local level,” says Griffith. “So our street teams do it block by block, zip code by zip code.” Thus, in addi- tion to local Web ads and transit advertising, Zipcar reps are beating the streets in true guerilla fashion. For example, in San Francisco, passersby got to swing a sledgehammer at an SUV, while on Harvard’s campus, students tried to guess how many frozen IKEA meatballs were stuffed inside a MINI. In Washington, D.C., Zipcar street teams planted a couch on a busy side- walk with the sign “You need a Zipcar to move this.” And the company has launched several “Low-Car Diet” events, in which it asks urban residents to give up their cars and blog about
Geographic segmentation: Car-sharing service Zipcar focuses only on densely populated areas, positioning itself as a low- cost alternative to urban car ownership. As it has grown, Zipcar has expanded its targeting to include a different type of urban dweller: businesses and other organizations.
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Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 197
Behavioral segmentation Dividing a market into segments based on consumer knowledge, attitudes, uses, or responses to a product.
Occasion segmentation Dividing the market into segments according to occasions when buyers get the idea to buy, actually make their purchase, or use the purchased item.
Benefit segmentation Dividing the market into segments according to the different benefits that consumers seek from the product.
uct. Benefit segmentation requires finding the major benefits people look for in a prod- uct class, the kinds of people who look for each benefit, and the major brands that deliver each benefit. Champion athletic wear segments its markets according to benefits that different con- sumers seek from their activewear. For example, “Fit and Polish” consumers seek a balance between function and style—they exercise for results but want to look good doing it. “Seri- ous Sports Competitors” exercise heavily and live in and love their activewear—they seek performance and function. By contrast, “Value-Seeking Moms” have low sports interest and low activewear involvement—they buy for the family and seek durability and value. Thus, each segment seeks a different mix of benefits. Champion must target the benefit segment or segments that it can serve best and most profitably, using appeals that match each seg- ment’s benefit preferences.
User Status. Markets can be segmented into nonusers, ex-users, potential users, first-time
users, and regular users of a product. Marketers want to reinforce and retain regular users, attract targeted nonusers, and reinvigorate relationships with ex-users. Included in the potential user group are consumers facing life-stage changes—such as newlyweds and new parents—who can be turned into heavy users. For example, upscale kitchen and cookware retailer Williams-Sonoma actively targets newly engaged couples. Eight-page Williams-Sonoma inserts in bridal magazines show a young couple strolling through a park or talking intimately in the kitchen over a glass of wine. The bride-to-be asks, “Now that I’ve found love, what else do I need?” Pictures of Williams- Sonoma knife sets, toasters, glassware, and pots and pans provide some strong clues. The retailer also offers a bridal registry, of course, but it takes its registry a step further. Through a program called “The Store Is Yours,” it opens its stores after hours, by ap- pointment, exclusively for individual couples to visit and make their wish lists. This segment is very important to Williams-Sonoma. About half the people who register are new to the brand, and they’ll be buying a lot of kitchen and cookware in the future.^10
Usage Rate. Markets can also be segmented into light, medium, and heavy
product users. Heavy users are often a small percentage of the market but ac- count for a high percentage of total consumption. For example, Burger King targets what it calls “Super Fans,” young (ages 18 to 34), Whopper-wolfing males and females who make up 18 percent of the chain’s customers but ac- count for almost half of all customer visits. They eat at Burger King an aver- age of 13 times a month. Burger King targets these Super Fans openly with ads that exalt monster burgers containing meat, cheese, and more meat and cheese that can turn “innies into outies.”^11
Loyalty Status. A market can also be segmented by consumer loyalty. Con-
sumers can be loyal to brands (Tide), stores (Target), and companies (Apple). Buyers can be divided into groups according to their degree of loyalty. Some consumers are completely loyal—they buy one brand all the time. For example, as we discussed in the previous chapter, Apple has an almost cultlike following of loyal users. Other consumers are somewhat loyal—they are loyal to two or three brands of a given product or favor one brand while sometimes buying others. Still other buyers show no loyalty to any brand— they either want something different each time they buy, or they buy what- ever’s on sale. A company can learn a lot by analyzing loyalty patterns in its market. It should start by studying its own loyal customers. For example, by studying Mac fanatics, Apple can better pinpoint its target market and develop mar- keting appeals. By studying its less-loyal buyers, the company can detect which brands are most competitive with its own. By looking at customers who are shifting away from its brand, the company can learn about its mar- keting weaknesses.
Consumer loyalty: “Mac fanatics”—fanatically loyal Apple users—helped keep Apple afloat during the lean years, and they are now at the forefront of Apple’s burgeoning iPod, iTunes, and iPhone empire.
198 Part Three | Designing a Customer-Driven Strategy and Mix
Using Multiple Segmentation Bases Marketers rarely limit their segmentation analysis to only one or a few variables only. Rather, they often use multiple segmentation bases in an effort to identify smaller, better-defined tar- get groups. Thus, a bank may not only identify a group of wealthy, retired adults but also, within that group, distinguish several segments based on their current income, assets, sav- ings and risk preferences, housing, and lifestyles. Several business information services—such as Nielsen, Acxiom, and Experian—provide multivariable segmentation systems that merge geographic, demographic, lifestyle, and behav- ioral data to help companies segment their markets down to zip codes, neighborhoods, and even households. One of the leading segmentation systems is the PRIZM system by Nielsen. PRIZM classifies every American household based on a host of demographic factors—such as age, educational level, income, occupation, family composition, ethnicity, and housing—and behavioral and lifestyle factors—such as purchases, free-time activities, and media preferences. PRIZM classifies U.S. households into 66 demographically and behaviorally distinct segments, organized into 14 different social groups. PRIZM segments carry such exotic names as “Kids & Cul-de-Sacs,” “Gray Power,” “Bohemian Mix,” “Mayberry-ville,” “Shot- guns & Pickups,” “Old Glories,” “Multi-Culti Mosaic,” “Big City Blues,” and “Bright Lites L’il City.” The colorful names help to bring the clusters to life.^12 PRIZM and other such systems can help marketers segment people and locations into marketable groups of like-minded consumers. Each cluster has its own pattern of likes, dislikes, lifestyles, and purchase behaviors. For example, “Winner’s Circle” neighbor- hoods, part of the Elite Suburbs social group, are suburban areas populated by well-off couples, between the ages of 35 and 54, with large families in new-money neigh- borhoods. People in this segment are more likely to own a Mercedes GL Class, go jog- ging, shop at Neiman Marcus, and read The Wall Street Journal. In contrast, the “Bedrock America” segment, part of the Rustic Living social group, is populated by young, eco- nomically challenged families in small, iso- lated towns located throughout the nation’s heartland. People in this segment are more likely to eat at Hardee’s, buy a used vehicle, and read Parents Magazine. Such segmentation provides a powerful tool for marketers of all kinds. It can help companies identify and better understand key customer segments, target them more efficiently, and tailor market offerings and messages to their specific needs.
Segmenting Business Markets
Consumer and business marketers use many of the same variables to segment their markets. Business buyers can be segmented geographically, demographically (industry, company size), or by benefits sought, user status, usage rate, and loyalty status. Yet, business mar- keters also use some additional variables, such as customer operating characteristics , purchasing approaches , situational factors , and personal characteristics. Almost every company serves at least some business markets. For example, American Express targets businesses in three segments: merchants, corporations, and small busi- nesses. It has developed distinct marketing programs for each segment. In the merchants segment, American Express focuses on convincing new merchants to accept the card and managing relationships with those that already do. For larger corporate customers, the com- pany offers a corporate card program, which includes extensive employee expense and
Using Nielsen’s PRIZM system, marketers can paint a surprisingly precise picture of who you are and what you might buy. PRIZM segments carry such exotic names as “Brite Lites, L’il City,” “Kids & Cul-de-Sacs,” “Gray Power,” and “Big City Blues.”
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Segmenting international markets based on geographic, economic, political, cultural, and other factors presumes that segments should consist of clusters of countries. How- ever, as new communications technologies, such as satellite TV and the Internet, connect consumers around the world, marketers can define and reach segments of like-minded consumers no matter where in the world they are. Using intermarket segmentation (also called cross-market segmentation ), they form segments of consumers who have similar needs and buying behaviors even though they are located in different countries. For example, Lexus targets the world’s well-to-do—the “global elite” segment—regardless of their country. Coca-Cola creates special programs to target teens, core consumers of its soft drinks the world over. And Swedish furniture giant IKEA targets the aspiring global middle class—it sells good-quality furniture that ordinary people worldwide can afford.
Requirements for Effective Segmentation
Clearly, there are many ways to segment a market, but not all segmentations are effective. For example, buyers of table salt could be divided into blond and brunette customers. But hair color obviously does not affect the purchase of salt. Furthermore, if all salt buyers bought the same amount of salt each month, believed that all salt is the same, and wanted to pay the same price, the company would not benefit from segmenting this market. To be useful, market segments must be
- Measurable: The size, purchasing power, and profiles of the segments can be measured. Certain segmentation variables are difficult to measure. For example, there are approximately 30.5 million left- handed people in the United States, which is nearly the entire pop- ulation of Canada. Yet few products are targeted toward this left-handed segment. The major problem may be that the segment is hard to identify and measure. There are no data on the demograph- ics of lefties, and the U.S. Census Bureau does not keep track of left- handedness in its surveys. Private data companies keep reams of statistics on other demographic segments but not on left-handers.
- Accessible: The market segments can be effectively reached and served. Suppose a fragrance company finds that heavy users of its brand are single men and women who stay out late and socialize a lot. Unless this group lives or shops at certain places and is exposed to certain media, its members will be difficult to reach.
- Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars especially for people whose height is greater than seven feet.
- Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and pro- grams. If men and women respond similarly to marketing efforts for soft drinks, they do not constitute separate segments.
- Actionable: Effective programs can be designed for attracting and serving the segments. For example, although one small airline identified seven market segments, its staff was too small to develop separate marketing programs for each segment.
Market Targeting (pp 200–207)
Market segmentation reveals the firm’s market segment opportunities. The firm now has to evaluate the various segments and decide how many and which segments it can serve best. We now look at how companies evaluate and select target segments.
After dividing the market into segments, it’s time to answer that first seemingly simple marketing strategy question we raised in Figure 7.1: Which customers will the company serve?
Author Comment
The “leftie” segment can be hard to identify and measure. As a result, few companies tailor their offers to left-handers. However, some nichers such as Anything Left-Handed in the United Kingdom target this segment.
Intermarket segmentation (cross-market segmentation) Forming segments of consumers who have similar needs and buying behavior even though they are located in different countries.
Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 201
Undifferentiated (mass) marketing
Differentiated (segmented) marketing
Concentrated (niche) marketing
Micromarketing (local or individual marketing)
Targeting broadly
Targeting narrowly
This figure covers a broad range of targeting strategies, from mass marketing (virtually no targeting) to individual marketing (customizing products and programs to individual customers). An example of individual marketing: At myMMs.com you can order a batch of M&Ms with your face and personal message printed on each little candy.
FIGURE (^) | 7.
Market Targeting Strategies
Target market A set of buyers sharing common needs or characteristics that the company decides to serve.
Undifferentiated (mass) marketing A market-coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer.
Evaluating Market Segments
In evaluating different market segments, a firm must look at three factors: segment size and growth, segment structural attractiveness, and company objectives and resources. The com- pany must first collect and analyze data on current segment sales, growth rates, and the ex- pected profitability for various segments. It will be interested in segments that have the right size and growth characteristics. But “right size and growth” is a relative matter. The largest, fastest-growing segments are not always the most attractive ones for every company. Smaller companies may lack the skills and resources needed to serve larger segments. Or they may find these segments too competitive. Such companies may target segments that are smaller and less attractive, in an absolute sense, but that are potentially more profitable for them. The company also needs to examine major structural factors that affect long-run seg- ment attractiveness.^14 For example, a segment is less attractive if it already contains many strong and aggressive competitors. The existence of many actual or potential substitute prod- ucts may limit prices and the profits that can be earned in a segment. The relative power of buyers also affects segment attractiveness. Buyers with strong bargaining power relative to sellers will try to force prices down, demand more services, and set competitors against one another—all at the expense of seller profitability. Finally, a segment may be less attractive if it contains powerful suppliers who can control prices or reduce the quality or quantity of or- dered goods and services. Even if a segment has the right size and growth and is structurally attractive, the com- pany must consider its own objectives and resources. Some attractive segments can be dis- missed quickly because they do not mesh with the company’s long-run objectives. Or the company may lack the skills and resources needed to succeed in an attractive segment. For example, given the current economic conditions, the economy segment of the automobile market is large and growing. But given its objectives and resources, it would make little sense for luxury-performance carmaker BMW to enter this segment. A company should enter only segments in which it can create superior customer value and gain advantages over its competitors.
Selecting Target Market Segments
After evaluating different segments, the company must decide which and how many seg- ments it will target. A target market consists of a set of buyers who share common needs or characteristics that the company decides to serve. Market targeting can be carried out at several different levels. Figure 7.2 shows that companies can target very broadly (undif- ferentiated marketing), very narrowly (micromarketing), or somewhere in between (differ- entiated or concentrated marketing).
Undifferentiated Marketing Using an undifferentiated marketing (or mass marketing ) strategy, a firm might decide to ignore market segment differences and target the whole market with one offer. Such a strategy focuses on what is common in the needs of consumers rather than on what is different. The company designs a product and a marketing program that will appeal to the largest number of buyers.
Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 203
or niches. For example, Whole Foods Market has about 285 stores and $8 billion in sales, com- pared with goliaths such as Kroger (more than 3,600 stores and sales of $76 billion) and Wal- mart (8,400 stores and sales of $408 billion).^16 Yet, over the past five years, the smaller, more upscale retailer has grown faster and more profitably than either of its giant rivals. Whole Foods thrives by catering to affluent customers who the Walmarts of the world can’t serve well, offer- ing them “organic, natural, and gourmet foods, all swaddled in Earth Day politics.” In fact, a typical Whole Foods customer is more likely to boycott the local Walmart than to shop at it. Through concentrated marketing, the firm achieves a strong market position because of its greater knowledge of consumer needs in the niches it serves and the special reputation it acquires. It can market more effectively by fine-tuning its products, prices, and programs to the needs of carefully defined segments. It can also market more efficiently , targeting its products or services, channels, and communications programs toward only consumers that it can serve best and most profitably. Whereas segments are fairly large and normally attract several competitors, niches are smaller and may attract only one or a few competitors. Niching lets smaller companies fo- cus their limited resources on serving niches that may be unimportant to or overlooked by larger competitors. Many companies start as nichers to get a foothold against larger, more- resourceful competitors and then grow into broader competitors. For example, Southwest Airlines began by serving intrastate, no-frills commuters in Texas but is now one of the na- tion’s largest airlines. And Enterprise Rent-A-Car began by building a network of neighbor- hood offices rather competing with Hertz and Avis in airport locations. Enterprise is now the nation’s largest car rental company. In contrast, as markets change, some megamarketers develop niche products to create sales growth. For example, in recent years, as consumers have grown more health conscious, the demand for carbonated soft drinks has declined, and the market for energy drinks and juices has grown. Carbonated soft drink sales fell 3 percent last year; energy drink sales rose 11 percent. To meet this shifting demand, mainstream cola marketers PepsiCo and Coca- Cola have both developed or acquired their own niche products. PepsiCo developed Amp energy drink and purchased the SoBe and Izze brands of enhanced waters and juices. Sim- ilarly, Coca-Cola developed Vault and acquired the Vitaminwater and Odwalla brands. Says Pepsi-Cola North America’s chief marketing officer, “The era of the mass brand has been over for a long time.”^17 Today, the low cost of setting up shop on the Inter- net makes it even more profitable to serve seemingly miniscule niches. Small businesses, in particular, are re- alizing riches from serving small niches on the Web. Consider Etsy:
Etsy is “an online marketplace for buying and selling all things handmade”—from hand-knit leg warmers to Conan O’Brien cufflinks. Some- times referred to as eBay’s funky little sister, the Etsy online crafts fair site was launched five years ago by three New York University grads. The site makes money three ways: a 20-cent listing fee for every item, a 3.5 percent sales fee on every trans- action, and an internal advertising system that sells ad space to Etsy sellers who want to promote their items. A far cry from the old-fashioned street-corner flea market, thanks to the reach and power of the Web, Etsy now counts 5 million members and 5.7 million listings in 150 countries. Last year alone, Etsy more than doubled its gross sales to $180 million. And Etsy is more than an e-commerce site; it’s a thriving community. For example, it sponsors actual and virtual meet-ups
Concentrated marketing: Thanks to the reach and power of the Web, online nicher Etsy—sometimes referred to as eBay’s funky little sister— is thriving.
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organized by location (from Syracuse to Saskatchewan and Singapore), medium (papier-mâché, mosaic), and interest area (Chainmaillers Guild, Lizards, and Lol- lipops). Etsy’s main goal? According to former CEO Maria Thomas, it’s “to help peo- ple make a living by doing what they love and making things.”^18 Concentrated marketing can be highly profitable. At the same time, it involves higher- than-normal risks. Companies that rely on one or a few segments for all of their business will suffer greatly if the segment turns sour. Or larger competitors may decide to enter the same segment with greater resources. For these reasons, many companies prefer to diver- sify in several market segments.
Micromarketing Differentiated and concentrated marketers tailor their offers and marketing programs to meet the needs of various market segments and niches. At the same time, however, they do not customize their offers to each individual customer. Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and lo- cations. Rather than seeing a customer in every individual, micromarketers see the individ- ual in every customer. Micromarketing includes local marketing and individual marketing.
Local Marketing. Local marketing involves tailoring brands and promotions to the
needs and wants of local customer groups—cities, neighborhoods, and even specific stores. For example, Walmart customizes its merchandise store by store to meet the needs of local shoppers. The retailer’s store designers create each new store’s format according to neigh- borhood characteristics—stores near office parks, for instance, contain prominent islands featuring ready-made meals for busy workers. By using a wealth of customer data on daily sales in every store, Walmart tailors individual store merchandise with similar precision. For example, it uses more than 200 finely tuned planograms (shelf plans) to match soup assort- ments to each store’s demand patterns.^19 Advances in communications technology have given rise to a new high-tech version of location-based marketing. For example, retailers have long been intrigued by the prom- ise of cell phones, which live in people’s pockets and send signals about shoppers’ locations. The idea is to send people ads tailored to their location, like a coupon for cappuccino when passing a Starbucks. That idea is fast becoming a reality. Consider The North Face, an out- door apparel and gear retailer:^20 The North Face is trying a new tactic: sending people text messages as soon as they get near one of its stores. The new marketing campaign first singles out customers depend- ing on where they are, as gleaned from their phone’s GPS signal or location data pro- vided by a phone carrier. It uses “geo-fencing,” which draws half-mile-wide virtual perimeters around selected store locations. When someone steps into a geo-fenced area, The North Face sends a text message to consumers who have opted in. Within each geo-fence, it can personalize messages to local weather and other factors. For now, The North Face sends texts about promotions, like a free water bottle with a purchase or seasonal merchandise arrivals. A text message might say, for example, “TNF: The new spring running apparel has hit the stores! Check it out @ TNF Downtown Seattle.” But that’s just for starters. Eventually, the company plans to send branded texts when people arrive at a hiking trail or mountain to alert them about weather conditions or logistics for a ski competition, for example. It also created an iPhone app called The North Face Snow Report that provides local snow conditions and trail maps. The store doesn’t want to be intrusive, says the vice president of marketing. For brand fans who opt in, “We are bringing something to the table,” he says, some- thing that “connects to a person’s passions”—locally. Local marketing has some drawbacks. It can drive up manufacturing and marketing costs by reducing the economies of scale. It can also create logistics problems as
The North Face 1023 1st Ave Seattle, WA 98104 Radius: .5 Miles
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2 other unread message(s) Inbox 25787 New text message at 2:52 PM TNF: The new spring runningapparel has hit the stores! Check it out @ TNF Downtown Seattle
Local marketing Tailoring brands and promotions to the needs and wants of local customer segments—cities, neighborhoods, and even specific stores.
Micromarketing Tailoring products and marketing programs to the needs and wants of specific individuals and local customer segments; It includes local marketing and individual marketing.
Local marketing: The North Face uses “geo-fencing” to send localized text messages to consumers who get near one of its stores.
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Choosing a Targeting Strategy Companies need to consider many factors when choosing a market-targeting strategy. Which strategy is best depends on the company’s resources. When the firm’s resources are limited, concentrated marketing makes the most sense. The best strategy also depends on the degree of product variability. Undifferentiated marketing is more suited for uniform products, such as grapefruit or steel. Products that can vary in design, such as cameras and cars, are more suited to differentiation or concentration. The product’s life-cycle stage also must be considered. When a firm introduces a new product, it may be practical to launch one version only, and undifferentiated marketing or concentrated marketing may make the most sense. In the mature stage of the product life cycle (PLC), however, differentiated mar- keting often makes more sense. Another factor is market variability. If most buyers have the same tastes, buy the same amounts, and react the same way to marketing efforts, undifferentiated marketing is appro- priate. Finally, competitors’ marketing strategies are important. When competitors use differ- entiated or concentrated marketing, undifferentiated marketing can be suicidal. Conversely, when competitors use undifferentiated marketing, a firm can gain an advantage by using dif- ferentiated or concentrated marketing, focusing on the needs of buyers in specific segments.
Socially Responsible Target Marketing Smart targeting helps companies become more efficient and effective by focusing on the seg- ments that they can satisfy best and most profitably. Targeting also benefits consumers— companies serve specific groups of consumers with offers carefully tailored to their needs. However, target marketing sometimes generates controversy and concern. The biggest is- sues usually involve the targeting of vulnerable or disadvantaged consumers with contro- versial or potentially harmful products. For example, over the years, marketers in a wide range of industries—from cereal, soft drinks, and fast food to toys and fashion—have been heavily criticized for their marketing efforts directed toward children. Critics worry that premium offers and high- powered advertising appeals presented through the mouths of lovable animated characters will overwhelm children’s defenses. Other problems arise when the marketing of adult products spills over into the children’s segment—intentionally or unintentionally. For example, Victo- ria’s Secret targets its highly successful Pink line of young, hip, and sexy cloth- ing to young women from 18 to 30 years old. However, critics charge that Pink is now all the rage among girls as young as 11 years old. Responding to Victoria’s Secret’s designs and marketing messages, tweens are flocking into stores and buying Pink, with or without their mothers. More broadly, critics worry that mar- keters of everything from lingerie and cosmetics to Barbie dolls are directly or in- directly targeting young girls with provocative products, promoting a premature focus on sex and appearance.^22
Ten-year-old girls can slide their low-cut jeans over “eye-candy” panties. French maid costumes, garter belt included, are available in preteen sizes. Barbie now comes in a “bling-bling” style, replete with halter top and go- go boots. And it’s not unusual for girls under 12 years old to sing, “Don’t cha wish your girlfriend was hot like me?” American girls, say experts, are increasingly being fed a cultural catnip of products and images that pro- mote looking and acting sexy. “The message we’re telling our girls is a sim- ple one,” laments one reporter about the Victoria’s Secret Pink line. “You’ll have a great life if people find you sexually attractive. Grown women struggle enough with this ridiculous standard. Do we really need to start worrying about it at 11?” To encourage responsible advertising, the Children’s Advertising Review Unit, the advertising industry’s self-regulatory agency, has published extensive children’s advertising guidelines that recognize the special needs of child audi-
Socially responsible targeting: Victoria’s Secret targets its Pink line of young, hip, and sexy clothing to young women from 18 to 30 years old. However, critics charge that Pink is now all the rage among girls as young as 11 years old.
Chapter 7 | Customer-Driven Marketing Strategy: Creating Value for Target Customers 207
ences. Still, critics feel that more should been done. Some have even called for a complete ban on advertising to children. Cigarette, beer, and fast-food marketers have also generated controversy in recent years by their attempts to target inner-city minority consumers. For example, McDonald’s and other chains have drawn criticism for pitching their high-fat, salt-laden fare to low- income, urban residents who are much more likely than suburbanites to be heavy con- sumers. Similarly, big banks and mortgage lenders have been criticized for targeting consumers in poor urban areas with attractive adjustable rate home mortgages that they can’t really afford. The growth of the Internet and other carefully targeted direct media has raised fresh concerns about potential targeting abuses. The Internet allows more precise targeting, letting the makers of questionable products or deceptive advertisers zero in on the most vulnerable audiences. Unscrupulous marketers can now send tailor-made, deceptive mes- sages by e-mail directly to millions of unsuspecting consumers. For example, the FBI’s In- ternet Crime Complaint Center Web site alone received more than 336,000 complaints last year.^23 Not all attempts to target children, minorities, or other special segments draw such crit- icism. In fact, most provide benefits to targeted consumers. For example, Pantene markets Relaxed and Natural hair products to women of color. Samsung markets the Jitterbug, an easy-to-use phone, directly to seniors who need a simpler cell phone that is bigger and has a louder speaker. And Colgate makes a large selection of toothbrush shapes and toothpaste flavors for children—from Colgate SpongeBob SquarePants Mild Bubble Fruit toothpaste to Colgate Dora the Explorer character toothbrushes. Such products help make tooth brushing more fun and get children to brush longer and more often. Thus, in target marketing, the issue is not really who is targeted but rather how and for what. Controversies arise when marketers attempt to profit at the expense of targeted segments—when they unfairly target vulnerable segments or target them with questionable products or tactics. Socially responsible marketing calls for segmentation and targeting that serve not just the interests of the company but also the interests of those targeted.
Differentiation and Positioning (pp 207–215)
Beyond deciding which segments of the market it will target, the company must decide on a value proposition —how it will create differentiated value for targeted segments and what positions it wants to occupy in those segments. A product’s position is the way the prod- uct is defined by consumers on important attributes—the place the product occupies in con- sumers’ minds relative to competing products. Products are made in factories, but brands happen in the minds of consumers. Tide is positioned as a powerful, all-purpose family detergent; Ivory is positioned as the gentle detergent for fine washables and baby clothes. At IHOP, you “Come hungry. Leave happy.”; at Olive Garden, “When You’re Here, You’re Family”; and Chili’s wants you to “Pepper in Some Fun.” In the automobile market, the Nissan Versa and Honda Fit are posi- tioned on economy, Mercedes and Cadillac on luxury, and Porsche and BMW on perfor- mance. And Toyota positions its fuel-efficient, hybrid Prius as a high-tech solution to the energy shortage: “Harmony between man, nature, and machine.” Consumers are overloaded with information about products and services. They cannot reevaluate products every time they make a buying decision. To simplify the buying process, consumers organize products, services, and companies into categories and “posi- tion” them in their minds. A product’s position is the complex set of perceptions, impres- sions, and feelings that consumers have for the product compared with competing products. Consumers position products with or without the help of marketers. But marketers do not want to leave their products’ positions to chance. They must plan positions that will give their products the greatest advantage in selected target markets, and they must design mar- keting mixes to create these planned positions.
At the same time that the company is answering the first simple-sounding question (Which customers will we serve?), it must be asking the second question (How will we serve them?). For example, The Ritz-Carlton serves the top 5 percent of corporate and leisure travelers. Its parallel value proposition is “The Ritz- Carlton Experience”—one that “enlivens the senses, instills a sense of well-being, and fulfills even the unexpressed wishes and needs of our guests.”
Author Comment
Product position The way the product is defined by consumers on important attributes—the place the product occupies in consumers’ minds relative to competing products.
