DEVELOPING LISTS AND DISCOVERING MARKETS

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1 CHAPTER 3-2/E DEVELOPING LISTS AND DISCOVERING MARKETS Summary Most direct marketers conduct market segmentation to better serve consumer needs and wants. Lists are important market segmentation tools. There are three basic types of lists: house, response, and compiled. Each list is of value for direct marketers, although house lists are considered the most valuable. The list industry is comprised of list owners, list users, list brokers, list managers, list compilers, and service bureaus. Each member plays an important role in the list rental activities of direct marketers. Direct marketers strive to keep lists current and accurate. House lists normally hold a customer s name, address, and pertinent contact information. In addition, most direct marketers rent lists in an attempt to prospect for new customers. List rental strategies are made simple today due to computerized databases services with search techniques, such as NextMark s list services. List selections afford direct marketers the opportunity to further segment a list using a variety of segmentation variables. Direct marketers segment final consumers according to geographic, demographic, social, psychological, and behavioral characteristics. Often times, multiple variables are used to segment markets, such as geodemographic segmentation. Direct marketers also segment businesses or industrial consumers according to SIC codes or the NAICS. Direct marketers consider ZIP code areas to be geographic market segments that provide important customer information. Learning Objectives After completing this chapter, students should: understand the importance of market segmentation and the role that lists serve in direct marketing be familiar with the five bases (geographic, demographic, social, psychological and behavioral) used in segmenting the consumer market be able to compare and contrast the Standard Industrial Classification System (SIC) with the North American Industrial Classification System (NAICS) and understand their relevance in segmenting industrial consumers understand the importance of Zip Codes as a geographic segmentation tool, the criteria used to create a Zip Code and what each digit of the Zip Code represents

2 be able to differentiate between house, response and compiled lists and be able to critically evaluate the value of each for direct marketers be able to explain how the list industry operates and the interaction between the various members in this industry Key Terms Cookie- an electronic tag on the consumer s computer that enables the website to follow consumers as they shop and recognize them on return visits. Compiled lists- lists that have been generated by a third party or market research firm of individuals who do not have a response history. Demographics- identifiable and measurable statistics that describe the consumer population. Global Positioning System- a segmentation tool that associates latitude and longitude coordinates with street addresses. House lists- lists of an organization s own customers (active as well as inactive). Hotline names- the most recent names acquired by specific list owners, but there is no uniformity as to what chronological period recent describes. Key code- a unique identifier placed on the response device or order form prior to mailing a promotional piece. List brokers- those who serve as intermediaries who bring list users and list owners together. List compilers- organizations that develop lists and data about them, often serving as their own list managers and brokers. List managers- managers who represent the interest of list owners and have responsibility to be in contact with list brokers and list users. List owners- those who describe and acquire prospects (as market segments) that show potential of becoming customers of the list user. Market segmentation- a marketing strategy devised to attract and meet the needs of a specific sub-market. Market segments- placing people (customers or potential customers) into homogeneous groups based on certain attributes such as age, income, stage in the family cycle, etc.

3 Product differentiation- a strategy that uses innovative design, packaging, and positioning to make a clear distinction between products and services serving the same market segment. Product positioning- a marketing strategy that enables marketers to understand how each consumer perceives a company s product or service based on important attributes (also called positioning ). Psychographics- the study of life-styles, habits, attitudes, beliefs, and value system of individuals. Reference groups- the people a consumer turns to for reinforcement. Reference individuals- persons a consumer turns to for advice. Response lists- lists of those who have responded to another direct marketer s offer. Service bureaus- provide data processing, data mining, outsourcing, on-line analytical processing (OLAP), etc. to support the interchange of lists and database information. Review Questions 1. What is market segmentation and how do direct marketers use it? (p. 20) Market segmentation is a marketing strategy devised to attract and meet the needs of a specific sub-market. Direct marketers use it to differentiate products for particular market segments and to position these products so that they will have special appeal to the intended market 2. How is segmenting industrial markets different from segmenting final consumer markets? (pp ) Segmenting industrial markets is different from segmenting final consumer markets based on purchase behavior and the type of segmentation bases used to classify consumers into respective market segments. Industrial consumer market segmentation is based on industrial classifications (SIC Codes and NAICS) while final consumer market segmentation is based on geographic, demographic, social, psychological and behavioral dimensions. 3. Overview the differences between SIC Codes and NAICS. Name some companies who might use industrial classifications in segmenting their industrial or business consumer market. (pp ) SIC Codes and NAICS have a variety of distinct differences. SIC codes classify establishments by the type of activity in which the business is primarily engaged, whereas, NAICS is based on a production-oriented, or a supply-based, conceptual framework. Other differences include the SIC code has a 4-digit

4 code and the NAICS has a 6-digit code. The SIC code lacked current information while the NAICS will be reviewed every five years so classifications will change with the economy. The divisions of the sectors has increased 10 times the amount of the SIC codes as the economy has provided for the increase in production. The companies who might use industrial classifications in segmenting their industrial or business consumer market might include health care, real estate, or arts, entertainment, and recreation, to name a few. 4. What are psychographics? In what way are they useful to direct marketers? (p. 27) Psychographics is the study of life-styles, habits, attitudes, beliefs, and value system of individuals. Psychographics are useful to direct marketers when they can identify and measure influences such as environment, self-perception, and lifestyles. This will help in effectively segmenting the mailing lists and thus predict potential consumer response by recognizing and evaluating the simultaneous appearance of a prospect s name on a variety of lists. 5. In the four-digit extension of an original five-digit ZIP code, what does each of the numbers stand for? (pp ) In the four-digit extension of an original five-digit ZIP code, each of the numbers stands for different locations. The sixth and seventh digits denote a sector and the last two denote a segment within a sector. For example, digits 6 and 7 could denote the location of a specific organization, like a university. The digits 8 and 9 could represent a specific segment or department within the university, perhaps the office of admissions. 6. How can ZIP codes help achieve product differentiation or promotional strategy? (pp ) ZIP codes can help achieve product differentiation or promotional strategy by enabling direct marketers to know more about their markets and to organize them according to local transportation patterns. For example, many major coupon distributors segment their markets on the basis of ZIP code areas. These companies also know which ZIP code areas possess a heavy concentration of residential households and coupon users. 7. What type of list is most important to an organization? Why? (p. 7) The house list is the most important list to an organization. The house list includes lists of an organization s own customers, active as well as inactive. They are the most productive mailing lists available in terms of future response and cost much less than that of acquiring response lists. It is not uncommon for a house list to be four times, or even ten times, as productive as an outside response list with which there is no existing customer relationship. 8. Identify a few products or services that probably incur response differences attributable to timing. (p. 18)

5 There are many products or services that probably incur response differences attributable to timing. Some direct marketers try to time their promotional efforts so as to avoid arrival during any type of holiday event, especially those that take people outdoors. For example, Land s End would not send sweater catalogs in the early portion of summer when consumers are wearing light summer clothing. Ballys fitness center receives a greater response to their direct marketing efforts during the months of January and February, although they are open for business 12 months a year. Timing is an important part of direct marketing and should be closely observed to improve response rates. 9. Explain the difference between a list user and a list owner. (pp ) A list user rents/buys response lists under an arrangement allowing them to make a specific one-time use of the data. List owners are those who describe and acquire prospects that show potential of becoming customers. 10. What are list brokers, list managers, and list compilers each responsible for? (pp ) List brokers, list managers, and list compilers are middlemen that are each responsible for bringing list users together with list owners. List brokers are those who serve as intermediaries who bring list users and list owners together. List managers represent the interest of list owners and have responsibility to be in contact with list brokers and list users. List compilers are those organizations that develop lists and data about them, often serving as their own list managers and brokers.