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Part 2: Understand Consumers’ Value Needs Chapter 7 Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management I. CHAPTER OVERVIEW As small children, we are often taught to treat everyone alike. However, after reading this chapter, students will quickly learn that this strategy does not work in marketing. The goal of marketing is to create value and satisfy needs. However, everyone’s needs are not the same. Understanding needs is a complex task. In this chapter, students learn why segmentation is important and the different dimensions used by marketers to segment the population. How marketers evaluate and select potential market segments is explained, as is the development of a targeting strategy. Students understand how a firm develops and implements a positioning strategy and creates a customer-relationship management strategy to increase long-term success and profits. After careful study, students will learn that it is not only okay to treat people differently but is a requirement in successful marketing. II. CHAPTER OBJECTIVES 1. 2. 3. 4. 5. Identify the steps in the target marketing process. Understand the need for market segmentation and the approaches available to do it. Explain how marketers evaluate segments and choose a targeting strategy. Understand how marketers develop and implement a positioning strategy. Explain how marketers increase long-term success and profits by practicing customer relationship management. III. CHAPTER OUTLINE ►MARKETING MOMENT INTRODUCTION Ask students to identify two magazines—one for women and one for men. How does the marketing mix for each magazine differ? How does the marketing mix reflect the preferences of the target market? p. 183 1. REAL PEOPLE, REAL CHOICES─HERE’S MY PROBLEM AT SPROUT The Sprout marketing team faced three significant challenges when they launched the channel in 2005. First, Sprout was and is considered an “emerging network,” relatively small compared to the more established kids networks (Disney Channel, Nickelodeon, etc.). The second marketing challenge was that Sprout is essentially a “library channel”; its programming mainly consists of previously aired kid’s shows, repackaged and represented around short original content and brand identity links. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management The third and most significant challenge was that Sprout is not a brand that is fully distributed (available in all U.S. television households). In early 2007, Sprout began work on its’ first-ever consumer targeted brand awareness advertising campaign. The critical marketing decision was to decide which audience to target: should the upstart channel target viewers of Sprout, nonviewers of Sprout, or should it somehow find a way of reaching both audiences with the same campaign? Jim and the Sprout marketing team considered their options: 1. Target Sprout viewers with the marketing campaign. 2. Produce a campaign that was specifically designed for non-viewers of Sprout. 3. Target both Sprout viewers/awares as well as non-viewers, all within the same creative campaign. The vignette ends by asking the student which option he/she would choose. Jim chose option #3. Use Website Here: http://www.sproutonline.com/sprout/home/jump.aspx p. 184 2. TARGET MARKETING STRATEGY: SELECT AND ENTER A MARKET Understanding people’s needs is an even more complex task today because technological and cultural advances in modern society have created a condition of market fragmentation. This means that people’s diverse interests and backgrounds divide them into numerous groups with distinct needs and wants. Because of this diversity, the same good or service will not appeal to everyone. Marketers must balance the efficiency of mass marketing where they serve the same items to everyone, with effectiveness that comes when they offer each individual exactly what she wants. Marketers select a target marketing strategy in which they divide the total market into different segments based on customer characteristics, select one or more segments, and develop products to meet the needs of those specific segments. p. 185 Activity: List the criteria used for determining whether a segment may be a good candidate for targeting. 3. STEP 1: SEGMENTATION Segmentation is the process of dividing a larger market into smaller pieces based on one or more meaningfully shared Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Figure 7.1 Steps in the Target Marketing Process Part 2: Understand Consumers’ Value Needs characteristics. Segmentation is often necessary in both consumer and industrial markets. The marketer must decide on one or more useful segmentation variables—that is, dimensions that divide the total market into homogeneous groups, each with different needs and preferences. p. 185 p. 186 3.1 Segment Consumer Markets We can slice the larger consumer “pie” into smaller pieces in a number of ways, including demographic, psychographic, and behavioral differences. In the case of demographic segmentation there are several key sub-categories of demographics: age (including generational differences), gender, family life cycle, income and social class, ethnicity, and place of residence – sometimes referred to separately as geographic segmentation. Generation Y—people born between 1979 and 1994. 3.1.1 Segment by Demographics: Age Demographics are statistics that measure observable aspects of a population, including size, age, gender, ethnic group, income, education, occupation, and family structure. These descriptors are vital to identify the best potential customers for a good or service. Because they represent objective characteristics they usually are easy to identify, and then it is just a matter of tailoring messages and products to relevant groups. Figure 7. 1 Segmenting Consumer Markets Apple iPhone photo Consumers of different age groups have different needs and wants. Members of a generation tend to share the same outlook and priorities. We call such a focus generational marketing. Israeli skincare product ad By one estimate, American children aged 4 to 12 have a say in family-related purchases of more than $130 billion a year. Teens are also an attractive market segment. The 12 to 17-year-old age group is growing nearly twice as fast as the general population— and teens and tweens (kids between the ages of 8 and 14) spend an average of $3,000 per year. The Cutting Edge: Ford Fiesta Look for Gen Y “Where they Live” Sometimes labeled the “Baby Boomlet,” Generation Y is made up of the 71 million children of the baby boomers. They are the first generation to grow up on-line and are more ethnically diverse than earlier generations. Generation Y is an attractive market for a host of consumer products because of its size (approximately 26 percent of the population) and free-spending nature—as a group they spend about $200 billion annually. The group of consumers born between 1965 and 1978 consists of 46 million Americans known as Generation X . They have Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management developed an identity for being an entrepreneurial group. One study revealed that Xers are already responsible for 70 percent of new start-up businesses in the United States. Many people in this segment seem to be determined to have stable families after being latchkey children themselves. Seven out of ten regularly save some portion of their income, a rate comparable to that of their parents. Xers tend to view the home as an expression of individuality rather than material success. Baby boomers, consumers born between 1946 and 1964 and who are now in their 40s, 50s, and 60s, are an important segment to many marketers—if for no other reason than that there are so many of them who make a lot of money. Boomers are willing to invest a ton of money, time, and energy to maintain their youthful image. p. 189 Currently, there are nearly 40 million Americans aged 65 or older—a 22 percent increase in this age segment since 1990. Many mature consumers enjoy leisure time and continued good health. 3.1.2 Segment by Demographics: Gender Many products, from fragrances to footwear, specifically appeal to men or women. Segmenting by gender starts at a very early age—even diapers come in pink for girls and blue for boys. In some cases, manufacturers develop parallel products to appeal to each sex. Boomer hair care ad Phone for mature callers ad Personal care product ad Metrosexual is a straight, urban male who is keenly interested in fashion, home design, gourmet cooking, and personal care. Metrosexuals are usually well-educated urban dwellers that are in touch with their feminine side. An interesting trend related to gender segmentation has been fueled by the recent recession. Men now are increasingly likely to marry wives with more education and income than they have, and the reverse is true for women. Use Website Here: http://shop.avon.com/shop/product_list.asp?level1_id=300&level2_id=309&cat_type=C Avon targeting metrosexual males Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs p. 190 p. 190 p. 191 3.1.3 Segment by Demographics: Family Life Cycle Because family needs and expenditures change over time, one way to segment consumers is to consider the stage of the family life cycle they occupy. Consumers in different life cycle segments are unlikely to need the same products, or at least they may not need these things in the same quantities. As family’s age and move into new life stages, different product categories ascend and descend in importance. 3.1.4 Segment by Demographics: Income and Social Class The distribution of wealth is of great interest to marketers because it determines which groups have the greatest buying power. Marketers, obviously, are often more interested in high-income consumers. In the past, it was popular for marketers to consider social class segments, such as upper class, lower class, and lower class. However, many consumers buy not according to where they may fall in the schema but rather according to the image they wish to portray. 3.1.5 Segment by Demographics: Ethnicity A consumer’s national origin is often a strong indicator of his preferences for specific magazines or TV shows, foods, apparel, and choice of leisure activities. Marketers need to be aware of these differences and sensitivities—especially when they invoke outmoded stereotypes to appeal to consumers of diverse races and ethnic groups. African Americans, Asian Americans, and Hispanic Americans are the largest ethnic groups in the United States. The Census Bureau projects that by the year 2050, non-Hispanic whites will make up just less than 50 percent of the population (compared to 74 percent in 1995) as these other groups grow. African Americans account for about 12 percent of the U.S. population. This percentage has held steady for 20 years. Asian Americans are the fastest-growing minority group in the United States. The Asian American population is projected to grow from 11.3 million in 2000 to 19.6 million in 2020. The American advertising industry spends between $200 million and $300 million to court these consumers. The Hispanic American population is the real sleeping giant, a segment that mainstream marketers today actively cultivate. . Hispanics have overtaken African Americans as the nation’s largest minority group. Following are five factors making the Hispanic segment attractive to marketers: Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall South African TV show ad Ad in Ebony magazine Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management Hispanics tend to be brand loyal, especially to products made in their country of origin. Hispanics tend to be highly concentrated by national origin, which makes it easy to fine-tune the marketing mix to appeal to those who come from the same country. This segment is young (the median age of Hispanic Americans is 23.6, compared with the U.S. average of 32), which is attractive to marketers because it is a great potential for youth-oriented products. The average Hispanic household contains 3.5 people, compared to only 2.7 people for the rest of the United States. For this reason, Hispanic households spend 15 to 20 percent more of their disposable income than the national average on groceries and other household products. In general, Hispanic consumers are very receptive to relationship-building approaches to marketing and selling. As such, strong opportunities exist to build loyalty to brands and companies through emphasizing relationship aspect of the customer encounter. Latino youth are changing mainstream culture. By the year 2020, the Census Bureau estimates that the number of Hispanic teens will grow by 62 percent compared with 10 percent growth in teens overall. The term “Hispanic” is a misnomer. For example, Cuban Americans, Mexican Americans, and Puerto Ricans may share a common language, but their history, politics, and culture have many differences. Marketing to them as a homogeneous segment can be a big mistake. An important outcome of the increase in U.S. multiethnicity is the opportunity for increased cultural diversity in the workplace and elsewhere. Cultural diversity, a management practice that actively seeks to include people of different sexes, races, ethnic groups, and religions in an organization’s employees, customers, suppliers, and distribution channel partners, is today business as usual rather than an exception. Marketing organizations benefit from employing people of all kinds because they bring different backgrounds, experiences, and points of view that help the firm develop strategies for its brands that will appeal to diverse customer groups. ►Marketing Moment In-Class Activity Ask students to look around at their classmates and determine how they might segment the class. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs What products might be appropriate for the different segments they develop? Use Website Here - http://www.hnmagazine.com Hispanic Network online newsletter for Latinos p. 193 3.1.6 Segment by Demographics: Place of Residence Recognizing that people’s preferences often vary depending on where they live, many marketers tailor their offerings to appeal to different regions. When marketers want to segment regional markets even more precisely, they sometimes combine geography with demographics by using a technique called geodemography. A basic premise of geodemography is that people who live near one another share similar characteristics. Companies can customize web advertising by geocoding so that people who log on in different places will see ad banners for local businesses. Use Website Here - PRIZM (geodemographic system): www.claritas.com Website that classifies zip codes into segments. Also use: www.mybestsegments.com p. 194 Harley riders 3.2 Segment by Psychographics Psychographics segments consumers in terms of psychological picture and behavioral similarities such as shared activities, interests, and opinions, or AIOs. Toyota ad VALS™ (Values and Lifestyles) is based on psychological traits that correlate with consumer behavior. VALS™ divides U.S. adults into eight groups according to what drives them psychologically as well as by their economic resources. Figure 7. 2 VALSTM Framework Three primary consumer motivations are key to the system: ideals, achievement, and self-expression. Consumers who are motivated primarily by ideals are guided by knowledge and principles. Consumers who are motivated primarily by achievement look for goods and services that demonstrate success to their peers. In addition, consumers who are motivated primarily by self-expression desire social or physical activity, variety, and risk. VALS™ helps match products to particular types of people. ►Marketing Moment In-Class Activity If you go to www.strategicbusinessinsights.com and click on “VALS™ Survey”, you can complete a brief questionnaire free to find out your own VALS™ type (you might be surprised). Use Website Here— http:///www.sric-bi.com/VALS VALS survey p. 196 3.3 Segment by Behavior Behavioral segmentation slices consumers based on how they act toward, feel about, or use a product. One way to segment based on behavior is to divide the market into users and nonusers of a product. In addition to distinguishing between users and Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management nonusers, marketers can describe current customers as heavy, moderate, and light users. They often do this according to a rule of thumb we call the 80/20 rule: 20 percent of purchasers account for 80 percent of the product’s sales (the ratio is an approximation, not gospel). This rule means that it often makes more sense to focus on the smaller number of people who are really into a product rather than on the larger number who are just casual users. An approach called the long tail turns traditional thinking about the virtues of selling in high volume on its head. The basic idea is that we need no longer rely solely on big hits (like blockbuster movies or best-selling books) to find profits. Companies can also make money when they sell small amounts of items that only a few people want—if they sell enough different items. Another way to segment a market based on behavior is to look at Biltmore Estate usage occasions, or when consumers use the product most. We photo associate many products with specific occasions, whether time of day, holidays, business functions, or casual get-togethers. Businesses often divide their markets according to when and how their offerings are in demand. p. 197 3.4 Segmenting Business-to-Business Markets Organizational demographics also help a business-to-business marketer to understand the needs and characteristics of its potential customers. These classification dimensions include the size of the firms either in total sales or number of employees, the number of facilities, whether they are a domestic or a multinational company, purchasing policies, and the type of business they are in. Business-to-business markets may also be segmented based on the production technology they use and whether the customer is a user or a nonuser of the product. Use Website: Hoovers Online (www.hoovers.com), which provides subscribers with up-to-date information on private and public companies worldwide. p. 198 4. STEP 2: TARGETING The next step is targeting, in which marketers evaluate the attractiveness of each potential segment and decide in which of these groups they will invest resources to try to turn them into customers. The customer group or groups they select are the firm’s target market. p. 198 4.1 Targeting in Three Steps The three phases of targeting are: evaluate market segments, develop segment profiles, and choose a targeting strategy. p. 198 4.1.1 Evaluate Market Segments Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Figure 7. 3 Phases of Targeting Part 2: Understand Consumers’ Value Needs Just because a marketer identifies a segment does not necessarily mean that it is a useful one to target. A viable target segment should satisfy the following requirements: Are members of the segment similar to each other in their product needs and wants and, at the same time, different from consumers in other segments? Can marketers measure the segment? Is the segment large enough to be profitable now and in the future? Can marketing communications reach the segment? Can the marketer adequately serve the needs of the segment? p. 199 p. 199 4.1.2 Develop Segment Profiles Once a marketer identifies a set of usable segments, it is helpful to generate a profile of each to really understand segment members’ needs and to look for business opportunities. This segment profile is a description of the “typical” customer in that segment. For example, a segment profile includes customer demographics, location, lifestyle information, and a description of how frequently the customer buys the product. Figure 7.5 4.1.3 Choose a Targeting Strategy A basic targeting decision is how finely tuned the target should Choose a Target be. Marketing Strategy An undifferentiated targeting strategy is one that appeals to a wide-spectrum of people. If successful, this type of operation can Ripped from the be very efficient, especially because production, research, and Headlines: promotion costs benefit from economies of scale—it’s cheaper to Ethical/ develop one product or one advertising campaign than to choose Sustainable several targets and create separate products or messages for each. Decisions in the The company must be willing to bet that people have similar Real World needs or differences among them that are trivial. A company that chooses a differentiated targeting strategy develops one or more products for each of several customer groups with different product needs. A differentiated strategy is called for when consumers are choosing among brands that are well known in which each has a distinctive image in the marketplace and in which it is possible to identify one or more segments that have distinct needs for different types of products. Differentiated marketing can also involve connecting one product with different segments by communicating differently to appeal to those segments. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management When a firm offers one or more products to a single segment, it uses a concentrated targeting strategy. Smaller firms that do not have the resources or the desire to be all things to all people often do this. Ideally, marketers should be able to define segments so precisely that they can offer products and services that exactly meet the unique needs of each individual or firm. A custom marketing strategy is common in industrial contexts in which a manufacturer often works with one or a few large clients and develops products and services that only these clients will use. p. 201 p. 202 Of course, in most cases this level of segmentation is neither practical nor possible when mass-produced products such as computers or cars enter the picture. However, advances in computer technology, coupled with the new emphasis on building solid relationships with customers, have focused managers’ attention on devising new ways to tailor specific products and the messages about them to individual customers. Thus, some forward-looking, consumer-oriented companies are moving toward mass customization in which they modify a basic good or service to meet the needs of an individual. 5. STEP 3: POSITIONING The final stage of developing a target marketing strategy is to provide consumers who belong to a targeted market segment with a good or service that meets their unique needs and expectations. Positioning means developing a marketing strategy to influence how a particular market segment perceives a good or service in comparison to the competition. To position a brand, marketers have to clearly understand the criteria target consumers use to evaluate competing products and then convince them that their product, service or organization will meet those needs. 5.1 Steps in Positioning Marketers use four steps to decide just how to position their product or service: analyze competitors’ positions, define your competitive advantage, finalize the marketing mix, and evaluate responses and modify as needed. A change strategy is repositioning, and it is common to see a company try to modify its brand image to keep up with changing times. Repositioning also occurs when a marketer revises a brand thought to be dead or at least near death. Sometimes these products arise from their deathbeds to ride a wave of nostalgia and return to the marketplace as retro brands—venerable brands like Oxydol laundry detergent, Breck Shampoo, Ovaltine cereal, Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Blacksocks ad Figure 7. 4 Stages in a Positioning Decision Part 2: Understand Consumers’ Value Needs and Tab cola have gotten a new lease on life in recent years. p. 203 p. 204 5.2 Bring a Product to Life: The Brand Personality A positioning strategy often tries to create a brand personality for a good or service—a distinctive image that captures its character and benefits. Part of creating a brand personality is developing an identity for the product that the target market will prefer over competing brands. How do marketers determine where their product actually stands in the minds of consumers? One solution is to ask consumers what characteristics are important and how competing alternatives would rate on these attributes, too. Marketers use this information to construct a perceptual map, which is a vivid way to construct a picture of where products or brands are “located” in consumers’ minds. 6. CUSTOMER RELATIONSHIP MANAGEMENT (CRM): TOWARD A SEGMENT OF ONE Currently many highly successful marketing firms embrace customer relationship management (CRM) programs that involve systematically tracking consumers’ preferences and behaviors over time in order to tailor the value proposition as closely as possible to each individual’s unique wants and needs. CRM allows firms to talk to individual customers and to adjust elements of their marketing programs in light of how each customer reacts. The CRM trend facilitates one-to-one marketing, which includes several steps. 1. Identify customers and get to know them in as much detail as possible. 2. Differentiate these customers in terms of both their needs and their value to the company. 3. Interact with customers and find ways to improve cost efficiency and the effectiveness of the interaction. 4. Customize some aspect of the goods or services that you offer to each customer. A CRM strategy allows a company to identify its best customers, stay on top of their needs, and increase their satisfaction. p. 205 6.1 CRM: A New Perspective on An Old Problem CRM is about communicating with customers, and about customers being able to communicate with a company “up close and personal.” CRM systems are applications that use computers, specialized computer software, databases, and often the Internet to capture information at each touch point, which is any point of direct interface between customers and a company (online, by phone, or in person). It is through CRM that companies act upon and manage the information they gather from their customers. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Figure 7. 5 Perceptual Map Sobe products photo Table 7.1 The Four Steps of One-to-One Marketing Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management p. 206 CRM has become a driving philosophy in many successful firms. 6.2 Characteristics of CRM Followers of CRM look at four critical elements, as portrayed in Figure 7.8: share of the customer, lifetime value of a customer, customer equity, and customer prioritization. p. 206 6.2.1 Share of the Customer Historically, marketers have measured success in a product category by their share of market. Because it is always easier and less expensive to keep an existing customer than to get a new customer, CRM firms focus on increasing their share of customer—the percentage of an individual customer’s purchase that is a single brand—not share of market. p. 207 6.2.2 Lifetime Value of a Customer Lifetime value of a customer is the potential profit generated by a single customer’s purchase of a firm’s products over the customer’s lifetime. Lifetime value is calculated by estimating a customer’s future purchases across all products from the firm over the next 20 or 30 years. The goal is to try to figure out what profit the company could make from the customer in the future. The lifetime value of the customer would be the total profit the revenue stream generates. p. 208 6.2.3 Customer Equity Today an increasing number of companies are considering their relationships with customers as financial assets. Such firms measure success by calculating the value of the customer equity—the financial value of a customer throughout the lifetime of the relationship. p. 208 6.2.4 Focus on High-Value Customers Using a CRM approach, the organization prioritizes its customers and customizes its communications to them accordingly. Discussion: What is CRM? How do firms practice CRM? p. 209 REAL PEOPLE, REAL CHOICES: HERE’S MY CHOICE AT SPROUT Jim chose option #3. Brand YOU Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Figure 7. 6 Characteristics of CRM Part 2: Understand Consumers’ Value Needs Great brands are NOT all things to all people. The best brands target their customers and understand what is important to them. Learn how to target your brand and work smarter, not harder to land your perfect job. Chapter 7 in Brand You helps your job search come into focus. ►Marketing Moment In-Class Activity Ask students to identify products/brands that they remember using at home. Do they still buy/use them at college? Will they continue to buy/use them when they graduate? (Hint: Food products such as cereal, fast food, ketchup, peanut butter, etc., work well with this exercise). To further illustrate the power of lifetime value, have students estimate (based on current usage) how many boxes of cereal they will consumer throughout their life. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management IV. END-OF-CHAPTER ANSWER GUIDE Chapter Questions and Activities CONCEPTS: TEST YOUR KNOWLEDGE 1. What is market segmentation and why is it an important strategy in today’s marketplace? Market segmentation is a process whereby marketers divide a large customer group into segments that share important characteristics. Market segmentation and target marketing are important strategies in today’s marketplace because of market fragmentation—that is, the splintering of a mass society into diverse groups due to technological and cultural differences. Thus, marketers must determine if they can better satisfy customers with a massmarketing strategy or target marketing based on strategy efficiency and effectiveness. 2. List and explain the major demographic characteristics frequently used in segmenting consumer markets. 3. Generational: consumers of different age groups have very different needs and wants. Gender: segmenting by sex starts at a very early age. Many marketers are looking to gender segmentation as a means of expanding markets. For example, hair dryers sold to men dramatically expanded the industry’s sales. Family structure: using the family life cycle, marketers can segment based on family status and position occupied. Newlyweds will have different needs and desires than empty nesters. Income and social class: the distribution on wealth has great interest to marketers because it determines what groups have the greatest buying power and market potential. Social class designations also affect purchasing patterns based on one’s appreciation of status in his or her life. Race and ethnicity: membership in the various racial and ethnic groups within our country accounts for many changes in the way a consumer receives information, develops tastes, and makes purchases. Submarkets (such as the Hispanic market) are receiving increased attention from marketers because of their size and increased affluence. Geography: though not as dynamic as the other categories, geography does affect tastes and purchase behavior. Many marketers use geography to tailor their offerings to appeal to different regions of the country. Explain consumer psychographic segmentation. Psychographics is useful to help understand differences among consumers who may be statistically similar to one another, but whose needs vary. Psychographic segmentation examines shared attitudes, interests, and opinions. VALS (Values and Lifestyles) is the most well known system used to divide the American population into eight groups. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs 4. What is behavioral segmentation? Consumer markets may also be segmented based on how consumers behave toward the product—brand loyalty, usage rates (heavy, moderate, or light), usage occasions, product type purchased, and/or reasons for using a product (benefit segmentation) are all options that can be used to more narrowly define segments. 5. What are some of the ways marketers segment industrial markets? Categories similar to those in the consumer market are frequently used for segmenting business-to-business markets. Organizational demographics include industry and/or company size, (total sales, number of employees, or number of facilities), whether they are domestic or multinational firm, purchase policies, the type of business they are in and production technology. North American Industry Classification System (NAICS) is used to obtain information about the size and number of companies in a particular industry. 6. List the criteria marketers use to determine whether a segment may be a good candidate for targeting. There are several criteria for determining whether a segment may be a good candidate for targeting. To choose one or more segments to target, marketers examine each segment and evaluate its potential for success as a target market. A viable target segment should have positive answers to the following requirements: Are members of the segment similar to each other in their product needs and wants and, at the same time, different from consumers in other segments? Can marketers measure the segment? Is the segment large enough to be profitable now and in the future? Can marketing communications reach the segment? Can the marketer adequately serve the needs of the segment? 7. Explain undifferentiated, differentiated, concentrated, and customized marketing strategies. What is mass customization? Strategies include: Undifferentiated marketing strategy: a marketing strategy that 1) assumes the majority of customers have similar needs and 2) attempts to appeal to a broad spectrum of people. Differentiated marketing strategy: a market strategy in which a firm develops one or more products for each of several distinct customer groups. Concentrated marketing strategy: a marketing strategy in which a firm focuses its efforts on offering one or more products to a single segment. Custom marketing strategy: a marketing strategy in which a firm develops a separate marketing mix for each customer. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management Mass customization: a marketing strategy in which a firm modifies a basic good or service to meet an individual customer’s needs. 8. What is product positioning? What do marketers mean by creating a brand personality? How do marketers use perceptual maps to help in developing effective positioning strategies? Product positioning is developing a marketing strategy aimed at influencing how a particular market segment perceives a good or service in comparison to the competition. A brand personality is a distinctive image that captures a good or service’s character and benefits. Creating a brand personality means developing an identity for the product that the target market will prefer over competing brands. Perceptual maps construct a picture of where products or brands are “located” in consumers’ minds. Asking consumers what characteristics are important and how competing alternatives rate on the attributes develops perceptual maps. 9. What is CRM? How do firms practice CRM? Customer Relationship Management are programs that allow companies to talk to the individual customers and adjust elements of their marketing programs in light of how each customer reacts to elements of the marketing mix. Firms practice CRM by communicating with customers and customers being able to communicate with the company one-to-one. There are four steps in CRM marketing: Identify customers and get to know them in as much detail as possible. Differentiate these customers in terms of both their needs and their value to the company. Interact with customers to find ways to improve cost efficiency and the effectiveness of the interaction. Customize some aspect of the products or services they offer to each customer. 10. Explain the concepts of share of customer, lifetime value of a customer, customer equity, and customer prioritization. Because it is always easier and less expensive to keep an existing customer than to get a new customer, CRM firms focus on increasing their share of customer, not share of market. Share of customers is the percentage of an individual customer’s purchase of a product that is a single brand. Lifetime value of a customer is the potential profit generated by a single customer’s purchase of a firm’s products over the customer’s lifetime. With CRM, a customer’s lifetime value is identified and it the true goal. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs Customer equity is the financial value of a customer relationship throughout the lifetime of the relationship. Using a CRM approach, the organization prioritizes its customers and customizes its communications to them accordingly. For example, banks use CRM systems to generate a profile of each customer based on factors such as value, risk, attrition, and interest in buying new financial products. This automated system helps the bank decide which current or potential customers it will target with certain communications or how much effort it will expend to retain an account—all the while cutting its costs by as much as a third. ACTIVITIES: APPLY WHAT YOU’VE LEARNED 1. Assume that a small regional beer brewery has hired you to help them with their target marketing. They are unsophisticated about marketing – you will need to explain some things to them and provide ideas for their future. In the past, the brewery has simply produced and sold a single beer brand to the entire market—a mass-marketing strategy. As you begin work, you come to believe that the firm could be more successful if it developed a target marketing strategy. Write a memo to the owner outlining the following: a. The basic reasons for doing target marketing in the first place b. The specific advantages of a target marketing strategy for the brewery c. An initial “short list” of possible target segment profiles This question asks students to review what they have learned about target marketing and the justifications for target marketing. Implied in this question is the idea that the brewery must consider a change in its basic approach to the marketplace. Some firms do quite well with a niche strategy (where a unique market is found and exploited). A small firm will have a great deal of trouble following a mass-marketing strategy where it tries to be all things to all people. This could be a competitive misstep. To aid the students in their answer, suggest that they consider local or regional breweries that have rejected the mass-marketing approach (i.e., Samuel Adams or Shiner Bock in Texas). Visit websites to explore strategic approaches. 2. As the marketing director for a company that is planning to enter the business-to-business market for photocopy machines, you are attempting to develop an overall marketing strategy. You have considered the possibility of using mass-marketing, concentrated marketing, differentiated marketing, and custom marketing strategies. a. Prepare a summary explaining what each type of strategy would mean for your marketing plan in terms of product, price, promotion, and distribution channel. b. Evaluate the desirability of each type of strategy. c. What are your final recommendations for the best type of strategy? First, students should get some basic information on the photocopy industry (see Canon or Xerox on the web). Next, consider the industrial side of the market. Call a local supplier if necessary. Once information has been obtained, the students should move to matching the information with the different types of marketing strategies mentioned. Students are free to choose (just as businesses are free to choose), however, no matter what their choice is, and Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management justification must be supplied. Be sure that students state any assumptions that might affect understanding of the issue at hand. A firm recommendation should be reached. 3. As an account executive for a marketing consulting firm, your newest client is a university— your university. You have been asked to develop a positioning strategy for the university. Develop an outline of your ideas, including the following: a. Who are your competitors? b. What are the competitors’ positions? c. What target markets are most attractive to the university? d. How will you position the university for those segments relative to the competition? This is an excellent exercise to get the class involved with a real issue. Have students do research on the university by examining documents, literature, brochures, advertisements, websites, and/or conduct interviews with appropriate university officials. Examine pertinent competitive websites for an idea of what they are doing. Next, students must make an appraisal of potential target markets for the university. The Admissions Office is an excellent place to begin. Recruiters are often even willing to come to class to discuss the issue. Should the university continue its present strategy, reposition, or devise a new strategy? The students should be challenged to find the answer. 4. Assume that a firm hires you as marketing manager for a chain of retail bookstores. You believe that the firm should develop a CRM strategy. Outline the steps you would take in developing that strategy. In order to accomplish this project successfully, students should first review material in the text on the CRM process. Next, go to Amazon.com, Barnes & Noble at www.bn.com or other online booksellers to examine how these companies use CRM to their advantage. Now students are ready to proceed with the construction of a CRM plan. The plan should include an appraisal of which customers are at present, services provided for the customer, how the company ensures information flow. It should also include how the company can keep track of customers and their expenditures (such as a reading club card, credit card purchases, online purchases, etc.). Students should examine how customers are kept in a database, and what is done with database information, and specific plans for gaining feedback, meeting needs, providing services, and stimulating sales and loyalty of customers. If students can get all these topics incorporated into a report, they will be well on their way to understanding CRM. MARKETING METRICS EXERCISE In the chapter discussion about CRM, you read about four key characteristics of CRM: share of customer, lifetime value of a customer, customer equity, and customer prioritization. Each of these elements is discussed in the context of monitoring and assessing the effectiveness of a CRM initiative. Consider JC Penny’s relatively new loyalty program JCP Rewards. Go out to their website (www.jcprewards.com) and click on “How it works.” In what ways could JC Penny expect to Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs measure the four elements of CRM above within the context of a reward program such as this? How would data be collected for each element, and how might management at JC Penny utilize that data to provide loyal customers with a very strong relationship with the firm? The chapter provides the following information regarding the four key CRM characteristics: Share of customer: the percentage of an individual customer’s purchase of a product that is a single brand. In addition to its own purchase data for each customer, JC Penny would need to survey the customer about purchasing competitor brands. Lifetime value of a customer: the potential profit a single customer’s purchase of a firm’s products generates over the customer’s lifetime. JC Penny must first estimate a customer’s future purchases across all products from the firm over the next 20 or 30 years. The goal is to try to figure out what profit the company could make from the customer in the future (obviously, this will just be an estimate). Customer equity: the financial value of a customer throughout the lifetime of the relationship. To do this, JC Penny must compare the investments they make to acquire customers and then to retain them to the financial return they will get on those investments. Customer prioritization: using a CRM approach, the organization prioritizes its customers and customizes its communications to them accordingly. JC Penny can use CRM systems to generate a profile of each customer based on factors such as value, risk, attrition, and interest in buying new products. This automated system would help JC Penny decide which current or potential customers it will target with certain communications or how much effort it will expend to retain a customer—all the while cutting its costs. CHOICES: WHAT DO YOU THINK? 1. Some critics of marketing have suggested that market segmentation and target marketing lead to an unnecessary proliferation of product choices that wastes valuable resources. These critics suggest that if marketers did not create so many different product choices, there would be more resources to feed the hungry, house the homeless, and provide for the needs of people around the globe. Are the results of segmentation and target marketing harmful or beneficial to society as a whole? Should firms be concerned about these criticisms? Why or why not? As far back as 1920 Al Sloan (a pioneering marketer at Ford’s rival General Motors), realized that consumer’s tastes and needs are different. There are many ways to deal with the need to improve the social environment but the dissolution of product choice for the consumer is probably not one of the better alternatives. For many years, the Soviet Union followed a policy of “one product fits all needs.” That solution did not satisfy consumers nor did it fix their social system. In fact, one could argue that by striving to match the needs and wants of the individual consumer more social good will be the result because the consumer would be able to better direct their resources and use the remainder for social causes (if they so choose). Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management 2. One of the criteria for a usable market segment is its size. This chapter suggests that to be usable, a segment must be large enough to be profitable now and in the future and that some very small segments are ignored because they can never be profitable. So, how large should a segment be? How do you think a firm should go about determining if a segment is profitable? Have technological advances made it possible for smaller segments to be profitable? Do firms ever have a moral or ethical obligation to develop products for small, unprofitable segments? When? The students may produce a variety of answers to the questions cited above. Some of their answers will be the result of the role that they perceive that marketing plays in the firm and in society in general. With respect to size of market segments, demand must be measured and applied to short- and long-term goals and profit projections. There is no magic number. Profitability is a question of costs, resources, and competition. Most firms today are in business to make a profit and are responsible to their owners or shareholders for their performance record. Some unprofitable activities can be undertaken as long as they are subsidized by profitable activities (the unprofitable activities of today may become the profitable activities of tomorrow). Technology (such as the Internet, computer information systems, and databases) has certainly helped the firm to be able to profitably deal with small customer segments. The moral or ethical obligation is part of the corporate management and cultural structure of the firm. Students may cite whether or not pharmaceutical companies should develop and sell drugs that save the lives of a very few consumers who get certain diseases. 3. A few years ago, Anheuser-Busch Inc., created a new division dedicated to marketing to Hispanics and announced it would boost its ad spending in Hispanic media by two-thirds, to more than $60 million, while Miller Brewing Co. signed a $100 million, three-year ad package with Spanish-language broadcaster Univision Communications Inc. However, Hispanic activists immediately raised public-health concerns about the beer ad blitz because it targets a population that skews young and is disproportionately likely to abuse alcohol. Surveys of Hispanic youth show that they are much more likely to drink alcohol, get drunk, and to engage in binge drinking, than their white or black peers drink. A senior executive at Anheuser Busch responded, “We would disagree with anyone who suggests beer billboards increase abuse among Latino or other minority communities. It would be poor business for us in today’s world to ignore what is the fastest-growing segment of our population.” Manufacturers of alcohol and tobacco products have been criticized for targeting unwholesome products to certain segments of the market—the aged, ethnic minorities, the disabled, and others. Do you view this as a problem? Should a firm use different criteria in targeting such groups? Should the government oversee and control such marketing activities? This could lead to an interesting discussion among the students. There are those who would feel that marketing to this segment of the population might be socially irresponsible. From a marketing perspective, there will be students that feel that this is a market segment is growing and would be representative of a growing market segment. Should the firm use different criteria in targeting such groups? This will also link to the decisions made on the first part of this question. The marketers must determine if they can Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs better satisfy customers with a mass-marketing strategy or a target marketing strategy based on the strategy efficiency and effectiveness. The government overseeing and controlling marketing activities will lead to an interesting discussion without a predetermined answer. There will be those how feel the government should control and those who feel the government has too much control now. This is a good area of discussion, and can lead to expression of very different views. 4. Customer relationship management (CRM) relies on data collected from customers to create customized or one-to-one experiences for those customers. Data are collected at various touch points—places in which the customer interfaces with the firm to provide information, such as at a checkout lane, on the phone, on the website, and so on. Do firms have an obligation to explain to customers that they are collecting information from them to populate and drive their CRM initiatives? On the other hand, is it inherently obvious in today’s world that such practices are routine? In general, what is your personal viewpoint of databasedriven positioning strategies? What are the potential pros and cons to the company and to the customer? Students will have different opinions about these questions—encourage an open debate on these topics. MINI-PROJECT: LEARN BY DOING This mini-project will help you to develop a better understanding of how firms make targetmarketing decisions. The project focuses on the market for women’s beauty-care products. 1. Gather ideas about different dimensions useful for segmenting the women’s beauty products market. You may use your own ideas, but you probably will also want to examine advertising and other marketing communications developed by different beauty care brands. 2. Based on the dimensions for market segmentation that you have identified, develop a questionnaire and conduct a survey of customers. You will have to decide which questions should be asked and which consumers should be surveyed. 3. Analyze the data from your research and identify the different potential segments. 4. Develop segment profiles that describe each potential segment. 5. Generate several ideas for how the marketing strategy might be different for each segment based on the profiles. Develop a presentation (or write a report) outlining your ideas, your research, your findings, and your marketing strategy recommendations. There are five specific questions individuals or marketing teams are asked to review: 1. Different dimensions of segmenting the women’s beauty products market: 2. Develop a questionnaire and conduct a survey of consumers 3. Analyze data and identify potential segments 4. Develop segment profiles that describe each potential segment, 5. Generate ideas on how marketing strategy might be applied to each segment based on profiles. Students (or student teams) should research this industry carefully before proceeding with the mini-project. Before conducting any human subject research, students or teams should Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management familiarize themselves with the rules for interviewing and conducting research (see any appropriate university or college guidelines). Instructors may wish to extend the deadline for this assignment so students have many opportunities to conduct the research and report the findings. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs V. MARKETING IN ACTION CASE: REAL CHOICES AT SUBARU Summary of Case Subaru has decided to move away from its traditional customer profiles in regions like the North American Rocky Mountains, New England, and the Pacific Northwest. Obviously, that leaves a large swath of customers in the many other regions of the country. Edwards states that the average household income of a Subaru owner is $88,000, the same as Honda Motor and $10,000 more than Toyota. The average owner is younger than the industry average and more likely to be college educated. Subaru customers are cost-conscious and do not make automobile purchases that stretch their budgets. This market seeks to purchase experiences, however, not at a cost that brings with it economical burdens. All of these facts lead to a customer base that most carmakers would want to build a connection. Its own research uncovered that this group is particularly ecofriendly. One of the brand-building strategies was to build a manufacturing plant located in an official wildlife preserve with no landfills waste. Another, is at an annual sales event customers can donate $250 of their Subaru purchase to one of five charities. Subaru takes a holistic approach to marketing its brand with the goal to demonstrate to customers that it "cares about their passion points." Subaru managers believe that the market for the upscale buyer who values freedom and frugality exceeds 60 million. There are currently 2.4 million Subarus in use, which makes for a huge opportunity. In order to maintain or grow market share the firm will have to attract more customers. Its past tactics may or may not work in the other regions of the country. If Subaru has to adjust its marketing tactics, will it harm its relationships with current customers? Suggestions for Presentation This case could be assigned for various out-of-class or in-class discussion activities. Out of class Research Subaru via their website. Identify their current positioning and describe how they have implemented the strategy. Evaluate if there are expansion opportunities for the automobile market. In class Companies with competing interests in this market include Honda and Toyota. Evaluate each of their strengths and weaknesses. Discuss how targeted marketing can help identify the market segment that would be interested in this market. Conduct a brainstorming session to identify the key characteristics of potential customers that would seek Subaru cars. Suggested Answers for Discussion Questions Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management 1. What is the decision facing Subaru? Students may come up with a number of different decisions that Subaru might make such as: Subaru must identify potential new target markets and develop a positioning strategy for their vehicles that will enable the company to compete effectively against Honda and Toyota. 2. What factors are important in understanding this decision situation? The following factors are important in understand this decision situation: The focus of Subaru's promotional campaign is to build the connection of fun and adventure with the Subaru brand. Internationally, the Subaru brand is identified by its use of boxer engines and the all wheel drive train layout. Subaru has traditional customer profiles in regions like the North American Rocky Mountains, New England, and the Pacific Northwest. The average household income of a Subaru owner is $88,000, the same as Honda Motor and $10,000 more than Toyota. The average owner is younger than the industry average and more likely to be college educated. Subaru customers are cost-conscious and do not make automobile purchases that stretch their budgets. This market seeks to purchase experiences, however, not at a cost that brings with it economical burdens. Subaru takes a holistic approach to marketing its brand with the goal to demonstrate to customers that it "cares about their passion points." 3. What are the alternatives? Students might recommend a variety of different marketing strategies. Some possibilities are: Conduct research to evaluate how Subaru is positioned against other competitors in the automobile. Position its automobiles in different, nontraditional ways compared to its current positioning. Conduct extensive marketing research among non-customers to see what directions Subaru can go in terms of its product line. 4. What decision(s) do you recommend? Students may focus on several of the alternatives developed. They should be encouraged to discuss which alternative actions are more critical. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Part 2: Understand Consumers’ Value Needs 5. What are some ways to implement your recommendations? Students may make a variety of suggestions for implementation depending on their recommendations. These may include specific promotion activities, specific pricing, research activities and many others. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 7: Sharpen the Focus: Target Marketing Strategies and Customer Relationship Management WEB RESOURCES Prentice Hall support link: http://247.prenhall.com Sprout Website: http://www.sproutonline.com/sprout/home/jump.aspx Avon targeting metrosexual males: http://shop.avon.com/shop/product_list.asp?level1_id=300&level2_id=309&cat_type=C Hispanic Network online newsletter for Latinos: http://www.hnmagazine.com Nike: www.nike.com Weather Channel: www.weather.com PRIZM (geodemographic system): www.claritas.com MyBestSegments (Consumer Segments, Defined and Described Detailed Customer Segmentation Profiling): www.mybestsegments.com SRI Consulting Business Intelligence (developed VALS2TM): www.sric-bi.com/VALS Hoovers Online (provides subscribers with up-to-date information on private and public companies worldwide): www.hoovers.com Blacksocks.com (mail order sock company that only makes black dress socks): www.blacksocks.com Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall