CHAPTER 6. Customer-Driven Marketing Strategy: Creating Value for Target Customers

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1 CHAPTER 6 Customer-Driven Marketing Strategy: Creating Value for Target Customers

2 Why Target Marketing Target Marketing -- Selecting which segments an organization can serve profitably. 20/80 Rule or 80/20 Rule 20% of your customers provide you with 80% of your sales. When you try to please everybody, you end up pleasing nobody. It s just basic math.

3 20/80 Rule You spend $20 (expense) on customers. Customers spend $80 (sales) on you. The result: $80 sales - $20 expense = $60 profit. Why spend $80 (expense) on customers that spend $20 (sales) with you. The result: $20 sales - $80 expense = ($60) loss. When you please everybody, the result: $60 sales ($60) sales = $0 profit. Nobody wins. Sometimes its good to run off customers who are costing you money. Remember one of objectives of the Marketing Philosophy is profit as an objective. So why do companies try to please everybody? Probably for two reasons. One, they don t know who their target market is; and/or two, they have a production or sales philosophy of marketing.

4 Targeting Marketing Marketers develop strategies that will best match a company s product offerings to the needs of a target market. A business organization segments its markets so it can respond more effectively to the needs of potential buyers and increase its sales and profits. The appropriate strategy is essential to a company s success. The four basic strategies or approaches that a company can use are: 1) Undifferentiated Marketing 2) Differentiated Marketing 3) Concentrated Marketing 4) Micromarketing

5 Target Marketing Strategies or Approaches

6 Differentiated Marketing Differentiated marketing strategy uses different marketing mixes for different markets. This strategy allows a company to provide more customer satisfaction for each of its target markets and can produce more sales than the differentiated strategy. But costs are greater. For example, production costs are usually higher because additional products mean shorter production runs and longer setup time. Inventory costs increase because of more storage space needed for products. Promotional costs increase because different promotional mixes are needed for each market. Although the costs are greater, a company may be forced into differentiated marketing to remain competitive.

7 Undifferentiated Marketing Undifferentiated marketing strategy markets to all customers using one marketing mix. This strategy is often called Mass Marketing and is more efficient in lowering costs from a production standpoint. Although the strategy tries to satisfy all consumers in the market with one standard product faces a potential problem from competitors who offer specialized products to smaller segments of the total market that better satisfies the needs of consumers in that segment.

8 Concentrated Marketing Concentrated marketing strategy focuses on obtaining a large share of the market by serving a single or few smaller segments only. This strategy is often called Niche Marketing. For example, a company sells boats. But there are various types of boats a consumer can buy in the boating market --- fishing, sports, pleasure, house, yachts, etc. The company decides to sell yachts and only yachts; in other words, concentrated marketing. The strategy appeals to smaller companies that lack the ability and resources of their competitors. But a problem for the company is its growth is tied to a particular market segment. If the market decreases in size, consumer buying patterns change, new competitors that appeal to the same market segment, the company could see a drop in sales and experience financial problems.

9 Micromarketing The most narrowly focused strategy in micromarketing. Micromarketing targets potential customers at the basic level. Such as by ZIP code, specific occupation, lifestyle, individual household, or even the individuals themselves. For example, McDonald s found that 50% to 70% of customers stop by a store on impulse, and these customers often make the decision to stop by a store only three to five minutes before arriving at the door. Also about 70% of the store s customers come from a residential, work, or shopping area within a three minute walk or drive. Therefore many MacDonald s stores target customers in the immediate area.

10 Forms of Market Segmentation Market segmentation selects characteristics or factors that separates a certain group of consumers from the overall market. The four commonly used methods of segmentation are: 1) Demographic, 2) Geographic, 3) Psychographic, and 4) Behavioral. Other types associated with behavioral segmentation are: 1) Volume segmentation, and 2) Benefit segmentation.

11 Forms of Market Segmentation DEMOGRAPHIC SEGMENTATION Variable Examples Gender Male; female Age Under 6 years; 6-11 years; years; years, etc. Race/Ethnicity African American; Asian; Hispanic; White/Caucasian; etc. Life Stage Infant; Preschool; Child; Youth; Collegiate; Adult; Senior; etc. Birth Era Baby Boomer; Generation X; Generation Y; etc. Household Size 1; 2; 3-4; 5 or More, etc. Marital Status Never Married; Married, Separated; Divorced; Widowed, etc. Income Under $15,000; $15,000-$24,999; $25,000-$34,999, etc. Education High School Diploma; 2-Year Degree, 4-Year Degree, etc. Occupation Managerial; Professional; Technical; Sales; Retail; etc.

12 Forms of Market Segmentation Variable Region City Size Density Variable Attitudes Interest Opinions Personality Lifestyle GEOPRAPHIC SEGMENTATION Examples Northeast; Midwest; South; West; Southeastern; etc. Under 10,000; 10,000-24,999; 25,000-49,999, etc. Urban; Suburban; Small Town; Rural; etc. PSYCHOGRAPHIC SEGMENTATION Examples Pro Life or Pro Choice; Republican or Democrat; Protestant or Catholic, etc. Scuba Driving Club; Skydiving Club; Model Boats Club, etc. Build New Road or Don t, Build New Walmart or Don t; etc. Compulsive; Extroverted; Aggressive; Ambitious; etc. Constantly On Go; Shut-ins; 65 or Older Communities; etc.

13 Forms of Market Segmentation Variable Usage/Volume Benefit: Buying A Watch Buying Toothpaste BEHAVIORAL SEGMENTATION Examples Light User; Moderate User; Heavy User, etc. Person goes to a particular store or buys product/service based on the attributes that benefits them for going to a particular store or buying a particular product/service. A person wants to buy a watch to tell time. They probably would go to Walmart or Target to buy a watch for themselves. A person wants to buy a watch as a gift for a relative. The person probably would go to a nice department or jewelry store to buy the watch. (Research shows consumers have a tendency to buy better for others than for themselves). The person wants to buy a watch as a status symbol. They would go to an upscale department store, Rolex Store, or specialty retail store. Do you buy toothpaste to fight cavities, for tartar control, make breath smell fresh, to whiten teeth, fight gum decease, etc.

14 Forms of Market Segmentation Multiple segmentation methods can be used at the same time to identify a particular target market. This process is called Cross Tabulation. Table 1 shows the cross tabulation of the Demographic variables Income and Age to identify a target market. Table 2 shows the cross tabulation of Psychographic variables two Lifestyle variables to determining potential markets. Table 3 shows the cross tabulation of the Demographic variable Gender and the Geographic variable Region.

15 Table 1 Cross Tabulation Age Income 24 and Below and Over Less than $10,000 $10,000 - $19,999 $20,000 - $29,999 $30,000 or More = Target Market

16 Table 2 Cross Tabulation Markets Products Soft Pillow Medium Pillow Firm Pillow Stomach Sleepers L M M Back Sleepers M L M Side Sleepers S M L = Large Market = Medium Market = Small Market

17 Table 3 Cross Tabulation Region Gender Male Female Northeast 10% Southeast 13% 25% Midwest 7% 18% Southwest 15% 12% Northwest 30% 14% California 10% 12% Hawaii 3% 5% Alaska 1% 4%

18 Engel s Laws Studies done on the impact of household income and changes in consumer spending patterns resulted in the creation of Engel s Laws. Many times, marketers can use Engel s Laws in explaining how consumer behavior changes within market segments. According to Engel s Laws, as family income increases: 1) A smaller percentage of expenditures go for food, 2) The percentage spent on housing, household operations, and clothing remains constant, and 3) The percentage spent on other items, such as recreation and education, increases.

19 Engel s Laws Example A family income is $100. The family spends 20% on food, 50% on housing, and 30% on recreation. The family budget would be: $20 for food, $50 for housing, and $30 for recreation. Now family income increases to $200, or additional $100 added to the family income. Of the additional $100 added to the family income, the family spends 15% on food, 50% on housing, and 35% on recreation. Or $15 on food, $50 on housing, and $35 on recreation. Now the family budget is $35 ($20 + $15) for food, $100 ($50 + $50) for housing, and $65 ($30 + $35) for recreation.

20 Engel s Laws As a Family s Income Increases: The percentage of income spent on food decreases. The percentage of income spent on housing, household operations, & clothing remains constant. The percentage of income spent on other items increases. (such as recreation)

21 Positioning Product positioning refers to the place a product occupies in the consumers minds on important attributes relative to competitive products. By understanding where consumers see a company s product or brand today, marketers can seek to change its future position in consumers minds if needed. This requires product repositioning, which is changing the place a product occupies in a consumer s mind relative to competitive products. Marketers follow two main approaches in positioning a product within the market. One is Head-to-Head Positioning, which involves competing directly with competitors on similar product attributes in the same target market. Dollar rental car competes directly with Avis and Hertz. The second approach is Differentiation Positioning, which involves a less competitive smaller market niche to locate a brand.

22 Positioning Map: Large Luxury SUVs A perceptual map is a means of displaying in two dimensions the location of products or brands in the minds of consumers. This allows a marketer to see how consumers perceive competing products or brands, as well as the firm s own product or brand. The map below is based on the dimensions of Luxury vs. Performance and Low Price vs. High Price.

23 SELF CHECK Answer the following questions

24 1. The 80/20 rule is a concept which suggests that A. eighty percent of a firm s inventory should be readily available, and twenty percent should be reserved for emergency demand. B. eighty percent of a firm s first time users will become brand loyal and twenty percent of the firm s first time users will use the product only once. C. eighty percent of a firm s products will ultimately be sold at the original markup price, and twenty percent will not. D. eighty percent of a firm s sales are obtained from twenty percent of its customers. E. eighty percent of consumers will believe a company s advertising, and twenty percent will not.

25 2. Using one marketing mix to appeal to all coffee drinkers would be using the target marketing approach. A. concentrated B. undifferentiated C. differentiated D. smart E. micromarketing

26 3. Grouping consumers together based on their interest in nude sky diving would be segmentation. A. demographic B. geographic C. psychographic D. benefit E. volume

27 4. Grouping consumers together based on their income would be segmentation. A. demographic B. geographic C. psychographic D. benefit E. volume

28 5. Grouping consumers together based on whether they live in the county or city would be segmentation. A. demographic B. geographic C. psychographic D. benefit E. volume

29 6. Grouping consumers together based on whether they eat small portions or large portions would be segmentation. A. demographic B. geographic C. psychographic D. benefit E. volume

30 7. Grouping consumers together based on whether a mouthwash prevents bad breath, tastes good, or fights gum disease would be segmentation. A. demographic B. geographic C. psychographic D. benefit E. volume

31 8. If a person making $30,000 a year gets a $5,000 raise, he/she would A. spend more on food items. B. spend more on recreation. C. spend less on household operations. D. spend more on clothing. E. do none of the above.

32 9. Compared with undifferentiated marketing, differentiated marketing is more likely to lead to. A. reduced sales in each market segment B. weaker product position in each market segment C. higher costs of doing business D. redundancy in product design across market segments E. smaller market share in the industry

33 10. Unlike other car rental agencies that are based in airports to serve travelers, Wheelz-On-Rent has a network of neighborhood offices. The firm strives to serve people who need car rentals for reasons other than vacation, such as when their own cars are being repaired. Wheelz-On-Rent caters to a small share of the large car rental market. From this description, it can be concluded that Wheelz- On-Rent most likely practices. A. undifferentiated marketing B. multi-segmented marketing C. individual marketing D. local marketing E. concentrated marketing

34 ANSWERS 1. D 2. B 3. C 4. A 5. B 6. E 7. D 8. B 9. C 10. E