Customers, Segmentation, and Target Marketing CHAPTER 5 G A INTRODUCTION T In this chapter, we begin our discussion of marketing strategy by examining customers, segments, and target markets. In Chapter 1, weE referred to a market as a collection of buyers and sellers. Now, we focus our S attention on the buyers who collectively make up the major portion of most markets. From this perspective, we , concern ourselves with markets as individuals, institutions, or groups of individuals or institutions that have similar needs that can be met by a particular product offering. As we shall see, firms can attempt to reach all buyers in a market, smaller groups D or segments of the market, or even specific buyers on an individual level. Whether the firm aims for the entire market or smaller market E segments, the goal of marketing strategy is to identify specific customer needs, then Adesign a marketing program that can satisfy those needs. To do this effectively, the firm must have a comprehenN including their motivasive understanding of its current and potential customers, tions, behaviors, needs, and wants. D The ability to determine in-depth information about customers is a fairly recent R technology and marketing phenomenon in marketing. Fifty years ago, for example, know-how were less sophisticated. Marketers of the day A were unable to fully understand customers’ needs and wants, much less make fine distinctions among smaller segments of the total market. Marketers tended to offer products that came in only one variety, flavor, or style. Today, market segmentation 1 is critical to the success of most firms. Segmentation allows marketers to more precisely define and understand 1 customer needs, and gives them the ability to tailor products to better suit those needs. As discussed in Beyond the Pages 5.1, the level2of detailed information available about customers today has changed the way firms do business. However, the 3 use of such information raises concerns about consumer privacy. Still, without segmentation we would not enjoy the incredible varietyTof products available today. Consider the number of choices we have in categories Ssuch as soft drinks, cereals, packaged goods, automobiles, and clothing. In many respects, segmentation has improved our standard of living. Customers now expect firms to delve into their needs and wants, and to tailor products accordingly. This fact makes market segmentation a vital part of marketing strategy. Until a firm has chosen and analyzed a target market, it cannot make effective decisions regarding other elements of the marketing strategy. In this chapter, we examine issues associated with buyer behavior in both consumer and business markets. We also discuss traditional and individualized approaches to market segmentation, the criteria for successful market segmentation, and specific target marketing strategies. The potential combinations of target 119 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 120 Chapter 5 • Customers, Segmentation, and Target Marketing BEYOND THE PAGES 5.1 Companies Learn Our Secrets Through Data Mining1 Consider a world where what you eat, read, wear, listen to, watch, buy, and do can be reduced to a mathematical formula. Every move you make is tracked with such a level of specificity that your entire life can be captured in a computer model. Sound far-fetched? It’s not. Today, the combination of computer science, mathematics, and business is changing our view of consumers and their behavior. The ability to track consumer behavior has never been more advanced than it is today. The new insights gained from the mathematical modeling of consumer behavior is creating new avenues for business, allowing marketers to develop one-to-one relationships with consumers, and causing a fair amount of anxiety. It is also causing a sharp increase in the hiring of math graduates from our nation’s universities. Through advanced math, computer modeling, and data mining, businesses have been able to track consumer attitudes and behaviors for some time. The difference today is the unprecedented access to data made available via the Internet and other technologies. Over the past 10 years, a sizable portion of the consuming public has moved its work, play, conversation, and shopping online. These integrated networks collect vast amounts of data and store our lives in databases that can be connected in ways that allow us to capture a more complete picture of consumer behavior. For example, researchers at companies like Facebook, Yahoo!, Google, and Amazon are developing mathematical models of customers. These firms are also working with other companies and government agencies to develop models that can predict voting behavior, how patients respond to disease intervention, or which employee is best suited for a job assignment. For example, Target’s data mining expertise raised a few eyebrows when the New York Times uncovered that the retailer was able to tell when a customer was pregnant or about to deliver. Target’s statisticians are able to tie millions of purchases together to reveal patterns in their data. One of their insights: When women become pregnant, they buy a lot of supplements such as calcium, magnesium, and zinc. When their delivery date is close, pregnant women tend to buy a lot of scent-free products, large bags of cotton balls, hand sanitizer, and washcloths. Target uses this information to target ads and coupons to the right consumers. Data mining results like these are one of the reasons for Target’s incredible growth from $44 billion in revenue in 2002 to roughly $72.5 billion in 2013. Retailers are not the only companies that use data mining. The advertising and media industries are perhaps the most affected by this G shift. As mass audience advertising has declined, A marketers have been looking for ways to target customers more directly. Google is a pioneer in T this effort because the company has amassed an E unfathomable amount of data on what customers do online. Other companies now provide S data mining solutions. In research conducted , with SPSS, for example, Italian carmaker Fiat was able to improve customer relations and increase customer retention by 6 to 7 percent. D Microsoft uses its own analytical techniques to the productivity of its workforce. FurtherE study more, Harrah’s Entertainment (a major player in A the casino industry) has increased their annual rate by using computer models to preN growth dict which customers will respond to the comD pany’s targeted advertising and promotional R offers. Of course, all of this sophistication comes at A a price. The ability of companies to track customers and model their behavior raises a number of privacy concerns. Although most companies 1 take great pains to protect individual consumer 1 identities and their private information, major issues often arise. For example, that same data 2 warehouse Target uses to reach its customers 3 was hacked in late 2013. The hackers stole perinformation and credit card numbers for T sonal over 70 million Target customers. Major proS blems like this are still relatively rare; however, the continuing erosion of consumer privacy is likely to continue. A key question for marketers is at what point will consumers say enough is enough? How far can firms push the boundaries of data collection and analysis before consumers mount a backlash? 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing markets and marketing programs are essentially limitless. Choosing the right target market from among many possible alternatives is one of the key tests in developing a good marketing strategy. BUYER BEHAVIOR IN CONSUMER MARKETS Trying to understand the buyer behavior of consumers is a very trying and challenging task. The behavior of consumers is often irrational and unpredictable. Consumers often say one thing but do another. Still, the effort spent trying to understand consumers is valuable because it can provide needed insight on how to design products and marketing programs that better meet consumer needs and wants. One of the most recent trends in learning about customers is the rising use of ethnography, a qualitative research technique designed to understand cultural phenomena such as communication, shared meanings, and personal interests. Computer maker Lenovo, for example, has used ethnographic research to learn more about how families in G India use consumer electronics. One interesting finding is that the family social center in Indian homes is the parents’ bedroom. The kitchen A serves the same social function in American homes. Lenovo uses this type of information to develop consumer T electronics that better fit differing family lifestyles in India and the United States. E have been scouring social With the continuing growth of the Internet, marketers media such as Facebook, Twitter, and Instagram to gain S cultural insights about consumers. One of the most useful of these sites is Pinterest, where people can “pin” , growth (up 111 percent in anything that interests them. Pinterest’s phenomenal 2014) and its open nature make it a treasure trove of information about American culture. Marketers see Pinterest as a great way to showcase brands, especially D among women (42 percent of all women online use Pinterest). The number of male 2 users has also been growing—up 73 percent in 2014. E In this section, we look at key issues with respect to buyer behavior in consumer A and the factors that alter markets. Here, we examine the consumer buying process the ways consumers buy goods and services. As we will N see, successful marketing strategy depends on a clear understanding of customers with respect to who they D Although this understandare, what they need, what they prefer, and why they buy. ing clearly has relevance for designing the product offering, R it also impacts the pricing, distribution, and promotion decisions in the marketing program. A The Consumer Buying Process 1 The consumer buying process shown in Exhibit 5.1 depicts five stages of activities that consumers may go through in buying goods and1services. The process begins with the recognition of a need, and then passes through 2 the stages of information search, evaluation of alternatives, purchase decision, and postpurchase evaluation. 3 A marketer’s interest in the buying process can go well beyond these stages to include actual consumption behaviors, product uses, and T product disposal after consumption. As we consider each stage of the buying process, it is important to keep a S few key issues in mind. First, the buying process depicts the possible range of activities that may occur in making purchase decisions. Consumers, however, do not always follow these stages in sequence and may even skip stages en route to making a purchase. For example, impulse purchases, such as buying a pack of chewing gum or a newspaper, do not involve lengthy search or evaluation activities. On the other hand, complex purchases like buying a home are often quite lengthy as they incorporate every stage of the buying process. Likewise, consumers who are loyal to a product or brand will skip some stages and are most likely to simply purchase the same product they bought last time. Consequently, marketers have a difficult time promoting brand 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 121 122 Chapter 5 • Customers, Segmentation, and Target Marketing EXHIBIT 5.1 The Consumer Buying Process. Stages Key Issues Need Recognition • • • • • Information Search • Evaluation of Alternatives • • • • • Purchase Decision • Postpurchase Evaluation • • Consumer needs and wants are not the same. An understanding of consumer wants is essential for market segmentation and the development of the marketing program. Marketers must create the appropriate stimuli to foster need recognition. Consumers trust internal and personal sources of information more than external sources. The amount of time, effort, and expense dedicated to the search for information depends on (1) the degree of risk involved in the purchase, (2) the amount of experience the consumer has with the product category, and (3) the actual cost of the search in terms of time and money. Consumers narrow their potential choices to an evoked set of suitable alternatives that may meet their needs. Consumers translate their needs G into wants for specific products or brands. Consumers evaluate products as bundles of attributes that have varying abilities to satisfy their A needs. T product is in the evoked set of potential alternatives. Marketers must ensure that their Marketers must take steps toE understand consumers’ choice criteria and the importance they place on specific product attributes. S A consumer’s purchase intention , and the actual act of buying are distinct concepts. Several factors may prevent the actual purchase from taking place. Marketers must ensure that their product is available and offer solutions that increase possession utility. D Postpurchase evaluation is theEconnection between the buying process and the development of long-term customer relationships. A Marketers must closely follow consumers’ responses (delight, satisfaction, dissatisfaction, N the product’s performance and its ability to meet customers’ cognitive dissonance) to monitor expectations. D R A switching because they must convince these customers to break tradition and take a look at what different products have to offer. 1 Second, the buying process often involves a parallel sequence of activities associated with finding the most suitable merchant of the product in question. That is, 1 while consumers consider which product to buy, they also consider where they 2 might buy it. In the case of name brand products, this selection process may focus 3 on the product’s price and availability at different stores or online merchants. A specific model of Sony television,Tfor example, is often available from many different retailers and may even be available at Sony’s website. Conversely, in the case of private-label merchandise, theS choices of product and merchant are made simultaneously. If a customer is interested only in Gap brand clothing, then that customer must purchase the clothing from a Gap store or the Gap website. Third, the choice of a suitable merchant may actually take precedence over the choice of a specific product. In some cases, customers are so loyal to a particular merchant that they will not consider looking elsewhere. For example, many older consumers are fiercely loyal to American car manufacturers. These customers will limit their product selection to a single brand or dealership, greatly limiting their range of potential product choices. In other cases, customers might be loyal to a particular merchant because they hold that merchant’s credit card or are a member of its frequent-user customer program. Finally, some merchants become so well known 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 G A T E When consumers purchase products like candy or gum on impulse, S they rarely go through each stage of the buying process. , David R. Frazier Photolibrary, Inc. / Alamy Chapter 5 • Customers, Segmentation, and Target Marketing D their buying process with for certain products that customers just naturally execute those merchants. Sears, for example, is well known for E its selection of name-brand appliances and tools. For many customers, Sears is the natural place to go when they are in the market for a new refrigerator, washer, A or wrenches. N D The buying process begins when consumers recognize that they have an unmet need. R This occurs when consumers realize that there is a discrepancy between their existing level of satisfaction and their desired level of satisfaction. Consumers can recogA Need Recognition nize needs in a variety of settings and situations. Some needs have their basis in internal stimuli, such as hunger, thirst, and fatigue. Other needs have their basis in external stimuli, such as advertising, window shopping, 1interacting with salespeople, or talking with friends and family. External stimuli can also arouse internal 1 responses, such as the hunger you might feel when watching an advertisement for Pizza Hut. 2 Typically, we think of needs as necessities, particularly with respect to the 3 health, or love). However, necessities of life (food, water, clothing, safety, shelter, this definition is limited because everyone has a different T perspective on what constitutes a need. For example, many people would argue that they need a car when S their real need is for transportation. Their need for a car is really a “want” for a car. This is where we draw the distinction between needs and wants. A need occurs when an individual’s current level of satisfaction does not equal their desired level of satisfaction. A want is a consumer’s desire for a specific product that will satisfy the need. Hence, people need transportation, but they choose to fulfill that need with a car, rather than with alternative products like motorcycles, bicycles, public transportation, a taxi, or a horse. The distinction between needs and wants is not simply academic. In any marketing effort, the firm must always understand the basic needs fulfilled by their products. For example, people do not need drills; they need to make holes or 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 123 124 Chapter 5 • Customers, Segmentation, and Target Marketing drive screws. Similarly, they do not need lawnmowers; they need shorter, wellmanicured grass. Understanding these basic needs allows the firm to segment markets and create marketing programs that can translate consumer needs into wants for their specific products. An important part of this effort involves creating the appropriate stimuli that will foster need recognition among consumers. The idea is to build on the basic need and convince potential consumers to want your product because it will fulfill their needs better than any competing product. It is also important to understand that wants are not the same thing as demand. Demand occurs only when the consumer’s ability and willingness to purchase a specific product backs up their want for the product. Many customers want a luxury yacht, for example, but only a few are able and willing to buy one. In some cases, consumers may actually need a product, but not want it. So-called “unsought products” like life insurance, cemetery plots, long-term health insurance, and continuing education are good examples. In these cases, the marketer must first educate consumers on the need for the product, and then convince consumers to want their products over competing products. For example, G Allstate’s “Are You in Good Hands?” campaign specifically questions whether potential customers are sure about their insurance Adoubt in the consumer’s mind is a good first step coverage. Creating the seed of toward educating potential customers about the need for adequate insurance. T Understanding consumers’ needs and wants is an important consideration in E market segmentation. Some markets can be segmented on the basis of needs alone. College students, for example,Shave needs that are very different from senior citizens, and single consumers have very different needs than families with small children. However, the marketing, of most products does not occur on the basis of need-fulfillment alone. In the automobile market, for example, essentially no manufacturer promotes their products as being the best to get you from Point A to Point B D (the basic need of transportation). Rather, they market their products on the basis of E (Lexus), image (Mercedes), sportiness (Jaguar), consumer wants such as luxury durability (Ford trucks), fuel economy (Honda Civic), and value (Kia). These wants A are the hot buttons for consumers, and the keys to promoting further activity in the N buying process. D Information Search R When done correctly, marketing Astimuli can prompt consumers to become interested in a product, leading to a desire to seek out additional information. This desire can be passive or active. In a passive information search, the consumer becomes more attentive and receptive to information, such as noticing and paying attention to auto1 mobile advertisements if the customer has a want for a specific car brand. A con1 sumer engages in an active information search when he or she purposely seeks additional information, such as 2 browsing the Internet, asking friends, or visiting dealer showrooms. Information can come from a variety of sources. Internal 3 sources, including the personal experiences and memories, are typically the first type of information that consumers T search. Information can also come from personal sources, including word-of-mouth advice from friends, family, or coworkers. ExterS nal sources of information include advertising, magazines, websites, packaging, displays, and salespeople. Although external sources are the most numerous, consumers typically trust these sources less than internal and personal sources of information. The amount of time, effort, and expense dedicated to the search for information depends on a number of issues. First, and perhaps most important, is the degree of risk involved in the purchase. Consumers by nature are naturally risk averse; they use their search for information to reduce risk and increase the odds of making the right choice. Risk comes in many forms, including financial risk (buying a home), social risk (buying the right clothing), emotional risk (selecting a wedding 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing photographer), and personal risk (choosing the right surgeon). In buying a car, for example, consumers regularly turn to Consumer Reports magazine, friends, and government safety ratings to help reduce these types of risk. A second issue is the amount of expertise or experience the consumer has with the product category. If a first-time buyer is in the market for a notebook computer, they face a bewildering array of choices and brands. This buyer is likely to engage in an extensive information search to reduce risk and narrow the potential set of product choices. The same buyer, several purchases later, will not go through the same process. Finally, the actual cost of the search in terms of time and money will limit the degree to which consumers search for information. In some situations, such as time deadlines or emergencies, consumers have little time to consult all sources of information at their disposal. Throughout the information search, consumers learn about different products or brands and begin to remove some from further consideration. They evaluate and reevaluate their initial set of products or brands until their list of potential product choices has been narrowed to only a few products or brands that can meet their needs. This list of suitable alternatives is called the evoked G set, and it represents the outcome of the information search and the beginning of the next stage of the buying A process. T E Evaluation of Alternatives In evaluating the alternative product or brand choices S among the members of the evoked set, the consumer essentially translates his or her need into a want for a spe, cific product or brand. The evaluation of alternatives is the black box of consumer behavior because it is typically the hardest for marketers to understand, measure, or influence. What we do know about this stage of the buying process is that consuD mers base their evaluation on a number of different criteria, which usually equate E with a number of product attributes. Consumers evaluate products as bundles of attributes A that have varying abilities to satisfy their needs. In buying a car, for example, each potential choice represents a bundle of attributes, including brand attributes (e.g.,Nimage, reputation, reliability, safety), product features (e.g., power windows, automatic D transmission, fuel economy), aesthetic attributes (e.g., styling, sportiness, roominess, color), and price. Each consumer has a different opinion as to the R relative importance of these attributes—some put safety first, while others consider A price the dominant factor. Another interesting feature of the evaluation stage is that the priority of each consumer’s choice criteria can change during the process. Consumers may visit a dealership with price as their dominant criterion, only to leave 1 the dealership with price dropping to third on their list of important attributes. 1 There are several important considerations for marketers during the evaluation stage. First and foremost, the firm’s products must be2in the evoked set of potential alternatives. For this reason, marketers must constantly remind consumers of their 3 company and its product offerings. Second, it is vital that marketers take steps to T understand consumers’ choice criteria and the importance they place on specific product attributes. As we will see later in this chapter,S understanding the connection between customers’ needs and product attributes is an important consideration in market segmentation and target marketing decisions. Finally, marketers must often design marketing programs that change the priority of choice criteria or change consumers’ opinions about a product’s image. Microsoft, for example, has moved to combat the rapid growth of Apple’s iPad and MacBook Air by aggressively promoting its own Surface Pro 3. Microsoft touts the Surface Pro 3 as the first tablet that can replace a laptop by emphasizing uncommon tablet features such as a USB port, pen input, and a kickstand for standing the tablet upright on a desk. With the success of the Surface Pro 3, Microsoft will continue to push forward with a flurry of advertisements touting its highly rated tablet.3 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 125 Chapter 5 • Customers, Segmentation, and Target Marketing Purchase Decision After the consumer has evaluated each alternative in the evoked set, he or she forms an intention to purchase a particular product or brand. However, a purchase intention and the actual act of buying are distinct concepts. A consumer may have every intention of purchasing a new car, for example, but several factors may prevent the actual purchase from taking place. The customer may postpone the purchase due to unforeseen circumstances, such as an illness or job loss. The salesperson or the sales manager may anger the consumer, leading them to walk away from the deal. The buyer may not be able to obtain financing for their purchase due to a mistake in their credit file. Or the buyer may simply change his or her mind. Marketers can often reduce or eliminate these problems by reducing the risk of purchase through warranties or guarantees, making the purchase stage as easy as possible, or finding creative solutions to unexpected problems. Assuming these potential intervening factors are not a concern, the key issues G stage are product availability and possession for marketers during the purchase utility. Product availability is A critical. Without it, buyers will not purchase from you, but from someone else who can deliver the product. The key to availability— which is closely related to theTdistribution component of the marketing program— is convenience. The goal is toEput the product within the consumer’s reach wherever that consumer happens to be. Coca-Cola has long understood this issue, and S it is the reason for the company’s long-held business mantra to put Cola-Cola “within an arm’s length of desire.” In other words, it should always be very easy , for customers to find a Coke.4 This task is closely related to possession utility, or the ease of taking possession of a product. To increase possession utility, the marketer may have to offerDfinancing or layaway for large dollar purchases, delivery and installation of products like appliances or furniture, home delivery of E convenience items like pizza or newspapers, or the proper packaging and prompt shipment of items through theA mail. N D R A 1 1 2 3 T S Free delivery is one of the most common ways to increase possession utility during the purchase stage of the consumer buying process. 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 David R. Frazier Photolibrary, Inc. / Alamy 126 Chapter 5 • Customers, Segmentation, and Target Marketing Postpurchase Evaluation In the context of attracting and retaining buyers, postpurchase evaluation is the connection between the buying process and the development of long-term customer relationships. Marketers must closely follow consumers’ responses during this stage to monitor the product’s performance and its ability to meet consumers’ expectations. In the postpurchase stage, consumers will experience one of these four outcomes: • • • • Delight—the product’s performance greatly exceeds the consumer’s expectations Satisfaction—the product’s performance matches the consumer’s expectations Dissatisfaction—the product’s performance falls short of the consumer’s expectations Cognitive Dissonance (Postpurchase Doubt)—the consumer is unsure of the product’s performance relative to their expectations Consumers are more likely to experience dissatisfaction G or cognitive dissonance when the dollar value of the purchase increases, the opportunity costs of rejected A alternatives are high, or the purchase decision is emotionally involving. Firms can manage these responses by offering liberal return T policies, providing extensive post-sale support, or reinforcing the wisdom of the consumer’s purchase decision. E not only is a key to creatThe firm’s ability to manage dissatisfaction and dissonance ing customer satisfaction, but also has a major influence S on the consumer’s intentions to spread word-of-mouth information about the company and its products. , Factors that Affect the Consumer Buying Process D As we have mentioned previously, the stages in the buying process depict a range of E purchase decisions. Consupossible activities that may occur as consumers make mers may spend relatively more or less time in certain A stages, they may follow the stages in or out of sequence, or they may even skip stages entirely. This variation in N the buying process occurs because consumers are different, the products that they D make purchase decisions buy are different, and the situations in which consumers are different. There are a number of factors that affect the consumer buying process, R including the complexity of the purchase and decision, individual influences, social A each factor. influences, and situational influences. Let’s briefly examine Decision-Making Complexity 1 The complexity of the purchase and decision-making process is the primary reason 1 with the same consumer in why the buying process will vary across consumers and different situations. For example, highly complex decisions, such as buying a first 2 home, a first car, selecting the right college, or choosing elective surgery, are very 3 characterized by high perinvolving for most consumers. These purchases are often sonal, social, or financial risk; strong emotional involvement; and the lack of experiT ence with the product or purchase situation. In these instances, consumers will S spend a great deal of time, effort, and even money to help ensure that they make the right decision. In contrast, purchase tasks that are low in complexity are relatively non-involving for most consumers. In some cases, these purchase tasks can become routine in nature. For example, many consumers buy groceries by selecting familiar items from the shelf and placing them in their carts without considering alternative products. For marketers, managing decision-making complexity is an important consideration. Marketers of highly complex products must recognize that consumers are quite risk averse and need a great deal of information to help them make the right decision. In these situations, access to high-quality and useful information should 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 127 128 Chapter 5 • Customers, Segmentation, and Target Marketing be an important consideration in the firm’s marketing program. Firms that sell less complex products do not have to provide as much information, but they do face the challenges of creating a brand image and ensuring that their products are easily recognizable. For these marketers, issues such as branding, packaging, advertising, and point-of-purchase displays are key considerations in the marketing program. Individual Influences The range of individual influences that can affect the buying process is quite extensive. Some individual factors, such as age, life cycle, occupation, and socioeconomic status, are fairly easy to understand and incorporate into the marketing strategy. For the most part, these individual factors dictate preferences for certain types of products or brands. Married consumers with three children will clearly have different needs and preferences than young, single consumers. Likewise, more affluent consumers will have the same basic needs as less affluent consumers; however, their “wants” will be quite different. These individual factors are quite useful for marketers G development, and promotional strategy. in target market selection, product Other individual factors, such as perceptions, motives, interests, attitudes, opiA nions, or lifestyles, are much harder to understand because they do not clearly coinT cide with demographic characteristics such as age, gender, or income levels. These individual factors are also veryEdifficult to change. For that reason, many marketers adapt their products and promotional messages to fit existing attitudes, interests, or lifestyles. For example, Kia hasSused human-size rapping hamsters to market its Soul wagon since its introduction in,2008. The hip-hop inspired ads are targeted at a younger, nonconformist demographic that loves music and social activities.5 Social Influences D Like individual influences, there E is a wide range of social influences that can affect the buying process. Social influences such as culture, subculture, social class, reference groups, and family have aAprofound impact on what, why, and how consumers buy. Among these social influences, N none is more important than the family. From birth, individuals become socialized with respect to the knowledge and skills needed D adults, consumers typically exhibit the brand and to be an effective consumer. As product preferences of their parents. R The influence of children on the buying process has grown tremendously over the last 50 years. A leaders also have an important impact on consuReference groups and opinion mers’ buying processes. Reference groups act as a point of comparison and source of product information. A consumer’s purchase decisions tend to fall in line with the 1 advice, beliefs, and actions of one or more reference groups. Opinion leaders can be part of a reference group or1may be specific individuals that exist outside of a reference group. When consumers feel like they lack personal expertise, they seek the 2 advice of opinion leaders, who they view as being well informed in a particular field of knowledge. In some cases, 3 marketers will seek out opinion leaders before trying to reach more mainstream consumers. Software manufacturers, for example, release T beta (test) versions of their products to opinion leaders before a full-scale launch. S the bugs out of the product, it also starts a wordNot only does this practice work of-mouth buzz about the upcoming software release. Situational Influences There are a number of situational influences that can affect the consumer buying process. Exhibit 5.2 illustrates some of the most common situational influences, many of which affect the amount of time and effort that consumers devote to the purchase task. For example, hungry consumers who are in a hurry often grab the quickest lunch they can find—even if it comes from a vending machine. This fact accounts for the quick success of Pret a Manger (“ready to eat” in French), a chain of 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing EXHIBIT 5.2 Common Situational Influences in the Consumer Buying Process. Situational Influences Physical and spatial influences Examples Retail atmospherics Retail crowding Store layout and design Social and interpersonal influences Shopping in groups Sales people Other customers Temporal (time) influences Lack of time Emergencies Convenience Purchase task or product usage influences Special occasions Buying for others Buying a gift Consumer dispositional influences Stress Anxiety Fear Fatigue Emotional involvement Good/bad mood Potential Influences on Buying Behavior A comfortable atmosphere or ambience promotes lingering, browsing, and buying. Crowded stores may cause customers to leave or buy less than planned. Consumers are more susceptible to the influences of other consumers when shopping in groups. Rude sales people can end the buying process. Obnoxious “other” customers may cause the consumer to leave or be dissatisfied. Consumers will pay more for products when they are in a hurry or face an emergency. Lack of time greatly reduces the search for information and the evaluation of alternatives. G Consumers with ample time can seek information on many different product alternatives. A Consumers may buy higher quality products for gifts or Tspecial occasions. The E evoked set will differ when consumers are buying for others as opposed to themselves. S Consumers suffering from stress or fatigue may not buy at all or they may indulge in certain products to make themselves , feel better. Consumers who are in a bad mood are exceptionally difficult Dto please. An increase in fear or anxiety over a purchase may cause Econsumers to seek additional information and take great pains to make the right decision. A N D grab-and-go restaurants that offers prepackaged meals focusing on fresh, all-natural, R and organic foods. The company strives to serve customers in 60 seconds or less.6 Furthermore, consumers facing emergency situationsAhave little time to reflect on their product choices and whether they will make the right decision. Consumers may also devote less time and effort to the buying process if they are uncomfortable. For this reason, sit-down restaurants should be inviting 1 and relaxing to encourage longer visits and add-ons such as dessert or coffee after the meal. 1 choices. For example, if Other situational influences can affect specific product you have your boss over for dinner, your product choices 2 would likely differ from those you make in everyday purchases of food and drink. Likewise, customers may 3 purchase more expensive items for gifts, or when they shop with friends. Product T for someone else, such as choices also change when customers make the purchase buying clothing for children. In fact, many parents will purposely buy less expensive S clothing for their children if they are growing rapidly or are exceptionally active. These parents want to save money on clothing that will quickly wear out or become too small. BUYER BEHAVIOR IN BUSINESS MARKETS As we shift our attention to buyer behavior in business markets, keep in mind that business markets and consumer markets have many things in common. Both contain buyers and sellers who seek to make good purchases and satisfy their personal or 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 129 130 Chapter 5 • Customers, Segmentation, and Target Marketing organizational objectives. Both markets use similar buying processes that include stages associated with need identification, information search, and product evaluation. Finally, both processes focus on customer satisfaction as the desired outcome. However, business markets differ from consumer markets in important ways. One of the most important differences involves the consumption of the purchased products. Consumers buy products for their personal use or consumption. In contrast, organizational buyers purchase products for use in their operations. These uses can be direct, as in acquiring raw materials to produce finished goods, or indirect, as in buying office supplies or leasing cars for salespeople. There are four types of business markets: • • • • Commercial Markets. These markets buy raw materials for use in producing finished goods, and they buy facilitating goods and services used in the production of finished goods. Commercial markets include a variety of industries, such as aerospace, agriculture, mining, construction, transportation, communication, and utilities. Reseller Markets. These markets consist of channel intermediaries such as wholesaG buy finished goods from the producer market and lers, retailers, or brokers that resell them at a profit. As we A will see in Chapter 6, channel intermediaries have the responsibility for creating the variety and assortment of products offered to T consumers. Therefore, they wield a great deal of power in the supply chain. E Government Markets. These markets include federal, state, county, city, and local governments. Governments buy a wide range of finished goods ranging from airS craft carriers to fire trucks to office equipment. However, most government pur, provided to citizens, such as education, fire and chases are for the services police protection, maintenance and repair of roads, and water and sewage treatment. D Institutional Markets. These markets consist of a diverse group of noncommercial E organizations such as churches, charities, schools, hospitals, or professional organizations. These organizations primarily buy finished goods that facilitate A their ongoing operations. N Unique Characteristics ofDBusiness Markets Business markets differ from consumer markets in at least four ways. These differR ences concern the nature of the decision-making unit, the role of hard and soft A costs in making and evaluating purchase decisions, reciprocal buying relationships, and the dependence of the two parties on each other. As a general rule, these differences are more acute for firms attempting to build long-term client relationships. In 1 business markets, buying needed products at the lowest possible price is not neces1 Since many business transactions are based on sarily the most important objective. long-term relationships, trust, reliability, and overall goal attainment are often much 2 more important than the price of the product. 3 The Buying Center T The first key difference relatesSto the role of the buying center—the group of people responsible for making purchase decisions. In consumer markets, the buying center is fairly straightforward: The adult head-of-household tends to make most major purchase decisions for the family, with input and assistance from children and other family members as applicable. In an organization, however, the buying center tends to be much more complex and difficult to identify, in part because it may include three distinct groups of people—economic buyers, technical buyers, and users—each of which may have its own agenda and unique needs that affect the buying decision. Any effort to build a relationship between the selling and buying organization must include economic buyers—those senior managers with the overall responsibility of achieving the buying firm’s objectives. In recent years, economic buyers have 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing become increasingly influential as price has become less important in determining a product’s true value to the buying firm. This has made economic buyers a greater target for promotional activities. Technical buyers—employees with the responsibility of buying products to meet needs on an ongoing basis—include purchasing agents and materials managers. These buyers have the responsibility of narrowing the number of product options and delivering buying recommendations to the economic buyer(s) that are within budget. Technical buyers are critical in the execution of purchase transactions and are also important to the day-to-day maintenance of longterm relationships. Users—managers and employees who have the responsibility of using a product purchased by the firm—comprise the last group of people in the buying center. The user is often not the ultimate decision maker, but frequently has a place in the decision process, particularly in the case of technologically advanced products. For example, the head of information technology often has a major role in computer and IT purchase decisions. Hard and Soft Costs G The second difference between business and consumer markets involves the signifiA cance of hard and soft costs. Consumers and organizations both consider hard costs, T costs such as shipping and which include monetary price and associated purchase installation. Organizations, however, must also consider E soft costs, such as downtime, opportunity costs, and human resource costs associated with the compatibility of S systems, in the buying decision. The purchase and implementation of a new payroll system, for example, will decrease productivity and ,increase training costs in the payroll department until the new system has been fully integrated. Reciprocity D The third key difference involves the existence of reciprocal buying relationships. E With consumer purchases, the opportunity for buying and selling is usually a oneway street: The marketer sells and the consumer buys.A Business marketing, however, is more often a two-way street, with each firm marketing N products that the other firm buys. For example, a company may buy office supplies from another company that in D turn buys copiers from the first firm. In fact, such arrangements can be an upfront condition of purchase in purely transaction-based marketing. Reciprocal buying is R less likely to occur within long-term relationships unless it helps both parties achieve A their respective goals. Mutual Dependence 1 Finally, in business markets, the buyer and seller are more likely to be dependent on 1 level of dependence tends one another. For consumer–marketer relationships, this to be low. If a store is out of a product, or a firm goes 2 out of business, customers simply switch to another source to meet their needs. Likewise, the loss of a particu3 lar customer through brand switching, relocation, or death is unfortunate for a company, but not in itself particularly damaging. The onlyT real exception to this norm is when consumers are loyal to a brand or merchant. In these cases, consumers S become dependent on a single brand or merchant, and the firm can become dependent on the sales volume generated by these brand loyal consumers. This is not the case in business markets where sole-source or limited-source buying may leave an organization’s operations severely distressed when a supplier shuts down or cannot deliver. The same is true for the loss of a customer. The selling firm has invested significantly in the client relationship, often modifying products and altering information or other systems central to the organization. Each client relationship represents a significant portion of the firm’s profit, and the loss of a single customer can take months or even years to replace. For example, after Rubbermaid’s relationships with Walmart, Lowe’s, and Home Depot soured in the mid-1990s, these 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 131 132 Chapter 5 • Customers, Segmentation, and Target Marketing retailers pulled Rubbermaid products from their shelves and turned to Sterilite, a small Massachusetts-based manufacturer, to supply plastic products (storage bins, containers, etc.) for their stores. Along with damaging Rubbermaid’s reputation and profits, the considerable buying power of Walmart, Lowe’s, and Home Depot turned Sterilite into a major competitor for Rubbermaid. Today, Sterilite is the world’s largest independent manufacturer of plastic housewares in North America.7 The Business Buying Process Like consumers, businesses follow a buying process. However, given the complexity, risk, and expense of many business purchases, business buyers tend to follow these stages in sequence. Some buying situations can be quite routine, such as the daily or weekly purchase and delivery of raw materials or the purchase of office consumables such as paper and toner cartridges. Nonetheless, business buyers often make even routine purchases from prequalified or single-source suppliers. Consequently, virtually all business purchasesG have gone through the following stages of the buying process at one time or another: A 1. Problem Recognition. The recognition of needs can stem from a variety of T such as employees, members of the buying center, internal and external sources, or outside salespeople. Business E buyers often recognize needs due to special circumstances, such as when equipment or machinery breaks or malfunctions. S 2. Develop Product Specifications. Detailed product specifications often define , business purchases. This occurs because new purchases must be integrated with current technologies and processes. Developing product specifications is typically done by the buying center. D Qualification. Business buyers must ensure that 3. Vendor Identification and potential vendors can deliver E on needed product specifications, within a specified time frame, and in the needed quantities. Therefore, business buyers will A conduct a thorough analysis of potential vendors to ensure they can meet their N qualify and approve the vendors that meet their firm’s needs. The buyers then criteria to supply goods and services to the firm. D 4. Solicitation of Proposals or Bids. Depending on the purchase in question, the R qualified vendors submit proposals or bids. These buying firm may request that proposals or bids will detailAhow the vendor will meet the buying firm’s needs and fulfill the purchase criteria established during the second stage of the process. 5. Vendor Selection. The buying firm will select the vendor or vendors that can 1 vendor is not necessarily the one offering the lowbest meet its needs. The best est price. Other issues such 1 as reputation, timeliness of delivery, guarantees, or personal relationships with the members of the buying center are often more 2 important. 6. Order Processing. Often 3 a behind-the-scenes process, order processing involves the details of processing the order, negotiating credit terms, setting T final technical assistance needed to complete the firm delivery dates, and any purchase. S 7. Vendor Performance Review. The final stage of the buying process involves a review of the vendor’s performance. In some cases, the product may flawlessly fulfill the needed specifications, but the vendor’s performance is poor. In this stage, both product and vendor specifications can be reevaluated and changed if necessary. In the end, the result of these evaluations will affect future purchase decisions. Like consumer markets, there are a number of factors that can influence the business buying process. Environmental conditions can have a major influence on buyer behavior by increasing the uncertainty, complexity, and risk associated with 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing a purchase. In situations of rapid environmental change, business buyers may alter their buying plans, postpone purchases, or even cancel purchases until things settle down. Environmental conditions not only affect the purchase of products, but also affect decisions regarding the recruitment and hiring of employees. Organizational factors can also influence corporate buying decisions. These factors include conditions within the firm’s internal environment (resources, strategies, policies, objectives), as well as the condition of relationships with business or supply chain partners. A shift in the firm’s resources can change buying decisions, such as a temporary delay in purchasing until favorable credit terms can be arranged. Likewise, if a supplier suddenly cannot provide needed quantities of products or cannot meet a needed delivery schedule, the buying firm will be forced to identify and qualify new suppliers. Internal changes in information technology can also affect the buying process, such as when technicians integrate electronic procurement systems with the legacy systems of the firm and its vendors. Finally, interpersonal relationships and individual factors can affect the buying process. A common example occurs when members of the buying center are at odds G over purchase decisions. Power struggles are not uncommon in business buying, and they can bring the entire A such as a manager’s perprocess to a halt if not handled properly. Individual factors, sonal preferences or prejudices, can also affect business buying decisions. The T importance of interpersonal and individual factors depends on the specific buying E situation and its importance to the firm’s goals and objectives. Major purchases typically create the most conflict among members of the buying S center. , MARKET SEGMENTATION Understanding the processes that consumers and businesses use to make purchase D decisions is critical to the development of long-term, mutually beneficial relationE ships with customers. It is also a necessary first step in uncovering similarities among groups of potential buyers that can be used inA market segmentation and target marketing decisions. From a strategic perspective, we define market segmentation N as the process of dividing the total market for a particular product or product category into relatively homogeneous segments or groups.D To be effective, segmentation should create groups where the members within the group R have similar likes, tastes, needs, wants, or preferences, but where the groups themselves are dissimilar from A each other. As noted in Beyond the Pages 5.2, the increasing diversity of the U.S. population creates a number of challenges when it comes to segmenting markets. In reality, the most fundamental segmentation decision is really whether to segment at all. When a firm makes the decision to pursue1the entire market, it must do so on the basis of universal needs that all customers 1 possess. However, most firms opt to target one or more segments of the total market because they find that they can be more successful when they tailor products to2 fit unique needs or requirements. In today’s economy, segmentation is often mandated by customers due to 3 their search for unique products and their changing uses of communication media. T even more fragmented and The end result is that customer segments have become more difficult to reach. Many firms today take segmentation S to the extreme by targeting small niches of a market, or even the smallest of market segments: individuals. Traditional Market Segmentation Approaches Many segmentation approaches are traditional in the sense that firms have used them successfully for decades. It is not our intention to depict these approaches as old or out-of-date, especially when compared to individualized segmentation strategies that we discuss later. In fact, many of today’s most successful firms use these tried-and-true approaches. Some organizations actually use more than one type of segmentation, depending on the brand, product, or market in question. 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 133 134 Chapter 5 • Customers, Segmentation, and Target Marketing BEYOND THE PAGES 5.2 • The Challenges of Targeting a Diverse Population8 Although there are obvious differences among the members of our population, many people are surprised to learn that the United States is more diverse than they would have realized. However, we should not be surprised. After all, the United States was founded as a melting pot of cultures. That pot of cultural differences creates many challenges and opportunities in finding and serving target markets. Consider the following statistics: • • • • Today, roughly one-third of the U.S. population is a minority. If these consumers were a separate country, they would be the 12th largest in the world. By 2045, approximately half of the U.S. population will be part of a minority group. Texas, California, Hawaii, New Mexico, and the District of Columbia now have “majority– minority” populations where more than 50 percent of the population is part of a minority group. Minority populations have a large middleclass with strong buying power. For instance, the combined buying power of minorities stands at $2 trillion today. Hispanics alone account for half of that, making the U.S. Hispanic population the 15th largest economy in the world. The defining characteristics of minority markets are not based on skin color or language. Instead, core values such as family, faith, nationalism, respect for the elderly and community leaders, and cultural institutions are the dominant features that define minority populations. Mass Marketing • Minority populations have stopped trying to “fit in” with traditional U.S. customs. Instead, these groups work hard to preserve their ethnic values and customs. Distinct minority populations have little in common with each other, other than their emotional connections to their own ethnic traditions. Given these stark facts, it becomes clear that firms will have a hard time reaching a mass audience of U.S. consumers using a onesize-fits-all marketing approach. So, how can a G firm reach across segments of society for maximum marketing effectiveness and efficiency? A The truth is that most firms don’t bother. Still, T targeting specific minority groups has become difficult. The tactics of yesterday—simple E more language translation, hiring diverse employees, S or using photos of ethnic minorities in promoimages—won’t work anymore. , tionalSeveral companies have been singled out as having successful approaches to reaching D the Hispanic market. McDonald’s, for example, uses a consistent focus on Latino research to E target Hispanic consumers. The company also A employs three separate marketing directors for the Asian American, African American, and HisN panic markets. AT&T successfully expanded its D branding among millennials by using Spanglish in its ads targeting Hispanic consumers. R Toyota’s marketing to Hispanics has been so A successful that it has been the top-selling car brand among Hispanic consumers for over 10 years. The success has been based on hiring 1 Hispanic executives to help establish deeper in the Hispanic communities around 1 relationships the country. 2 3 T S It seems odd to call mass marketing a segmentation approach, as it involves no segmentation whatsoever. Companies aim mass marketing campaigns at the total (whole) market for a particular product. Companies that adopt mass marketing take an undifferentiated approach that assumes that all customers in the market have similar needs and wants that can be reasonably satisfied with a single marketing program. This marketing program typically consists of a single product or brand (or, in the case of retailers, a homogeneous set of products), one price, one promotional program, and one distribution system. Duracell, for example, offers a collection of different battery sizes (D, C, A, AA, AAA, 9-volt), but they are all disposable batteries marketed to consumers for use in toys and small electronic devices. They also offer a 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing line of rechargeable and ultra-power batteries for high-power devices. Likewise, the WD-40 Company offers an assortment of brands—including WD-40, 3-IN-ONE Oil, Lava Soap, 2000 Flushes, Carpet Fresh, and X14 Cleaner—used in a variety of household tasks. Mass marketing works best when the needs of an entire market are relatively homogeneous. Good examples include commodities like oil and agricultural products. In reality, very few products or markets are ideal for mass marketing, if for no other reason than companies, wanting to reach new customers, often modify their product lines. For most of its existence, Vaseline manufactured and offered a single product. To reach new customers, Vaseline modified this strategy by launching its Intensive Care line of products and extending customers’ perceptions of Vaseline’s uses to various needs in the home, including in the garage/workshop. Furthermore, think of the many products that contain Arm & Hammer Baking Soda, a product that at one time was sold only as a baking ingredient. Although mass marketing is advantageous in terms of production efficiency and lower marketing costs, it is inherently risky. By offering G a standard product to all customers, the organization becomes vulnerable to competitors that offer specialized products that better match customers’ needs. InAindustries where barriers to entry are low, mass marketing runs the risk of being seen T as too generic. This situation is very inviting for competitors who use more targeted approaches. Mass marketing is also very risky in global markets, where evenEglobal brands like Coca-Cola must be adapted to match local tastes and customs. S , Differentiated Marketing Most firms use some form of market segmentation by (1) dividing the total market D into groups of customers having relatively common or homogeneous needs, and E to one or more of these (2) attempting to develop a marketing program that appeals groups. This approach may be necessary when customer A needs are similar within a single group, but their needs differ across groups. Through well-designed and careN needs of each market segfully conducted research, firms can identify the particular ment to create marketing programs that best match those D needs and expectations. Within the differentiated approach there are two options: the multisegment approach R and the market concentration approach. buyers in more than one marFirms using the multisegment approach seek to attractA ket segment by offering a variety of products that appeal to different needs. Firms using this option can increase their share of the market by responding to the heterogeneous needs of different segments. If the segments 1 have enough buying potential, and the product is successful, the resulting sales increases can more than offset the 1 increased costs of offering multiple products and marketing programs. The multisegment approach is the most widely used segmentation2strategy in medium- to largesized firms. It is extremely common in packaged goods and grocery products. 3 Maxwell House, for example, began by marketing one type of coffee and one brand. Today, this division of Kraft Foods offers 69 differentTflavor and package varieties under the Maxwell House brand alone. Kraft also markets S coffee under the Sanka and Yuban labels, in addition to providing private label brands for retailers. A walk down the cereal aisle of your local supermarket offers additional examples. Firms such as Kellogg’s and Nabisco offer seemingly hundreds of brands of breakfast cereals targeted at specific segments, including children (e.g., Fruity Pebbles, Apple Jacks), health-conscious adults (e.g., Shredded Wheat, Total), parents looking for healthier foods for their children (e.g., Life, Kix), and so on. Firms using the market concentration approach focus on a single market segment. These firms often find it most efficient to seek a maximum share in one segment of the market. For example, Armor All markets a well-known line of automotive cleaners, protectants, and polishes targeted primarily to young, driving-age males. 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 135 136 Chapter 5 • Customers, Segmentation, and Target Marketing The main advantage of market concentration is specialization, as it allows the firm to focus all of its resources toward understanding and serving a single segment. Specialization is also the major disadvantage of this approach. By “putting all of its eggs in one basket,” the firm can be vulnerable to changes in its market segment, such as economic downturns and demographic shifts. Still, the market concentration approach can be highly successful. In the arts, where market concentration is almost universal, musical groups hone their talents and plan their performances to satisfy the tastes of one market segment, divided by genres of music such as country, rock, or jazz. Niche Marketing Some companies narrow the market concentration approach even more and focus their marketing efforts on one small, well-defined market segment or niche market that has a unique, specific set of needs. Customers in niche markets will typically pay higher prices for products that match their specialized needs. One example of successful niche marketing is found in the gym industry. For example, Curves—a health club for women—has G 10,000 locations in 90 countries around the world. Other niche gyms for children and the over-55 age group are popping up around the A United States. The Little Gym—designed for kids ages 4 months through 12 years— T The goal of these gyms is to create highly customhas over 300 locations worldwide. ized workout experiences forE niche markets that don’t fit the profile of a typical health club member.9 As the gym industry has learned, the key to successful niche S meet the needs of target customers so completely marketing is to understand and that, despite the small size of ,the niche, the firm’s substantial share makes the segment highly profitable. An attractive market niche is one that has growth and profit potential, but is not so appealing that it attracts competitors. The firm should also possess a specialization or provide a unique offering that customers find highly D desirable. E A Individualized Segmentation Approaches N Due to advances in communication and Internet technology, individualized segmenD These approaches are possible because organizatation approaches have emerged. tions now have the ability to track R customers with a high degree of specificity. By combining demographic data with past and current purchasing behavior, organizaA programs in ways that allow them to precisely tions can tweak their marketing match customers’ needs, wants, and preferences. Three types of individualized segmentation approaches are one-to-one marketing, mass customization, and permis1 sion marketing. 1 One-to-One Marketing 2 When a company creates an entirely unique product or marketing program for each 3 customer in the target segment, it employs one-to-one marketing. This approach is common in business markets where T companies design unique programs and/or systems for each customer. For example, providers of enterprise software—such as Oracle, S SAP, and Business Objects—create customized solutions that allow firms to track customers, business processes, and results in real time. Insurance companies or brokers, such as Britain’s Sedgwick Group, design insurance and pension programs to meet a corporation’s specific needs. The key to one-to-one marketing is personalization, where every element of the marketing program is customized to meet the specifics of a particular client’s situation. Historically, one-to-one marketing has been used less often in consumer markets, although Burger King was an early pioneer in this approach, with its “Have It Your Way” effort that continues today. One-to-one marketing is quite common in luxury and custom-made products, such as when a consumer buys a large sailboat, airplane, or a 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing custom-built home. In such instances, the product has significant modifications made to it to meet unique customer needs and preferences. Many service firms—such as hairstylists, lawyers, doctors, and educational institutions—also customize their marketing programs to match individual consumer needs. One-to-one marketing has grown rapidly in electronic commerce where customers can be targeted very precisely. Amazon, for example, maintains complete profiles on customers who browse and buy from its site. These profiles assist Amazon with the customization of web pages in real time, product suggestions, and reminder e-mails sent to customers. Mass Customization An extension of one-to-one marketing, mass customization refers to providing unique products and solutions to individual customers on a mass scale. Along with the Internet, advances in supply chain management—including real-time inventory control— have allowed companies to customize products in ways that are both cost-effective and practical. For example, Dell builds thousands of custom-ordered computers G of options (storage, screen every day. Each customer gets to choose from a variety sizes, colors, etc.) to configure a computer as they want A it. Dell gets to take advantage of scale economies because it builds thousands of the same basic computer for its other customers. Other firms that use T mass customization include 1-800-Flowers.com (custom flower arrangements, plants, E or other gifts) and BuildA-Bear Workshop (custom teddy bears or other animals). S Through a buying firm’s Mass customization also occurs in business markets. electronic procurement system, employees can order, products ranging from office supplies to travel services. The system allows employees to requisition goods and services via a customized catalog—unique to the firm—where the buying firm has D like these have become negotiated the products and prices. E-procurement systems quite popular for good reason: They allow firms to save a great deal of money—not E only on prices but also on the costs of placing orders. Selling firms benefit as well by A them to sell more goods customizing their catalogs to specific buying firms, allowing and services at a reduced cost. N D Permission marketing, although similar to one-to-one R marketing, is different in that customers choose to become part of a firm’s market segment. In permission marketing, A Permission Marketing customers give companies permission to specifically target them in their marketing efforts. The most common tool used in permission marketing is the opt-in e-mail list, where customers permit a firm—or a third-party partner 1 of the firm—to send periodic e-mail about goods and services that they have interest in purchasing. This sce1 nario is ubiquitous in business-to-consumer e-commerce, so much so that many consumers fail to notice it. When customers order products online, they receive the 2 option of receiving or not receiving future e-mail notifications about new products. 3 In many cases, the customer must deselect a box at the end of the order form or T they will be added to the e-mail list. Permission marketing has a major advantage overSother individualized segmentation approaches: Customers who opt-in have already shown interest in the goods and services offered by the firm. This allows the firm to precisely target only those individuals with an interest in their products, thereby eliminating wasted marketing effort and expense. For example, many airlines have the permission of their customers to send weekly e-mail notices of airfare and other travel-related specials. This system is in stark contrast to traditional mass media advertising where only a portion of the viewing or reading audience has a real interest in the company’s product. One-to-one marketing, mass customization, and permission marketing will become even more important in the future because their focus on individual 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 137 138 Chapter 5 • Customers, Segmentation, and Target Marketing customers makes them critical to the development and maintenance of long-term relationships. The simple truth is that customers will maintain relationships with firms that best fulfill their needs or solve their problems. Unfortunately, individualized segmentation approaches can be prohibitively expensive. To make these approaches viable, firms must be mindful of two important issues. First, the delivery of the marketing program must be automated to a degree that makes it cost efficient. The Internet makes this possible by allowing for individual customization in real time. Second, the marketing program must not become so automated that the offering lacks personalization. Today, personalization means much more than simply calling customers by name. We use the term to describe the idea of giving customers choices—not only in terms of product configuration, but also in terms of the entire marketing program. Firms like Dell and Amazon offer a great deal of personalization by effectively mining their customer databases. Customers can choose payment terms, shipping terms, delivery locations, gift-wrapping, and whether to opt-in to future e-mail promotions. Also, by monitoring click stream data in real time, the best e-commerce firms can offer product suggestions on the fly—while customers visit G their sites. This sort of customized point-of-sale information not only increases A sales, but also better fulfills customers’ needs and increases the likelihood of establishing long-term customer relationships. T E Criteria for Successful Segmentation S It is important to remember that , not all segmentation approaches or their resulting market segments are viable in a marketing sense. For example, it makes little sense to segment the soft drink market based on eye color or shoe size, as these characteristics have nothing to do with D the purchase of soft drinks. Although markets can be segmented in limitless ways, the segmentation approach must make sense in terms of at least five related criteria: E • • • • • A The characteristics of the segment’s members Identifiable and Measurable. must be easily identifiable.N This allows the firm to measure identifying characteristics, including the segment’s size and purchasing power. D Substantial. The segment must be large and profitable enough to make it worthR potential must be greater than the costs involved in while for the firm. The profit creating a marketing program A specifically for the segment. Accessible. The segment must be accessible in terms of communication (advertising, mail, telephone, etc.) and distribution (channels, merchants, retail outlets, etc.). 1 Responsive. The segment1must respond to the firm’s marketing efforts, including changes to the marketing program over time. The segment must also respond 2 differently than other segments. Viable and Sustainable.3 The segment must meet the basic criteria for exchange, including being ready, willing, and able to conduct business with the T firm. The segment must also be sustainable over time to allow the firm to effectively develop a marketingS strategy for serving the needs of the segment. It is possible for a market segment to meet these criteria, yet still not be viable in a business sense. Markets for many illegal products, such as illicit drugs or pornography, can easily meet these criteria. However, ethical and socially responsible firms would not pursue these markets. Other markets, such as gaming or gambling, may be legal in some geographical areas, but are often not in the best interests of the firm. More commonly, firms will identify perfectly viable market segments; however, these segments will rest outside of the firm’s expertise or mission. Just because a market segment is viable or highly profitable does not mean the firm should pursue it. 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing IDENTIFYING MARKET SEGMENTS A firm’s segmentation strategy and its choice of one or more target markets depend on its ability to identify the characteristics of buyers within those markets. This involves selecting the most relevant variables to identify and define the target market or markets. Many of these variables, including demographics, lifestyles, product usage, or firm size, derive from the situation analysis section of the marketing plan. However, a new or revised marketing strategy often requires changes in target market definition to correct problems in the previous marketing strategy. Target markets also shift in response to required changes in specific elements of the marketing program, such as reducing price to enhance value, increasing price to connote higher quality, adding a new product feature to make the benefits more meaningful, or selling through retail stores instead of direct distribution to add the convenience of immediate availability. In short, the target market and the marketing program are interdependent, and changes in one typically require changes in the other. Beyond the Pages 5.3 outlines how major cereal companies have addressed changing custoG mers’ demands in the cereal market. A T Segmenting Consumer Markets The goal in segmenting consumer markets is to isolateE individual characteristics that distinguish one or more segments from the total market. S The key is to segment the total market into groups with relatively homogeneous needs. As you may recall from our earlier discussion, consumers buy products ,because the benefits they pro- vide can fulfill specific needs or wants. The difficulty in segmenting consumer markets lies in isolating one or more characteristics that closely align with these needs and wants. For example, marketers of soft drinks do D not necessarily concern themselves with the age or gender of their customers, but E rather in how age and gender relate to customers’ needs, attitudes, preferences, and lifestyles. A at segmentation in conIn the discussion that follows, we look more closely sumer markets by examining the different factors that Ncan be used to divide these markets into homogeneous groupings. As Exhibit 5.3 illustrates, these factors fall D into one of four general categories: behavioral segmentation, demographic segmentation, psychographic segmentation, and geographic segmentation. R Behavioral Segmentation A Behavioral segmentation is the most powerful approach because it uses actual consumer behavior or product usage to make distinctions among 1 market segments. Typically, these distinctions are tied to the reasons that customers buy and use products. Consequently, behavioral segmentation, unlike other types1of consumer segmentation, is most closely associated with consumers’ needs. A common use of behavioral seg2 mentation is to group consumers based on their extent of product usage—heavy, 3 medium, and light users. Heavy users are a firm’s bread-and-butter customers, and they should always be served well. Marketers often use T strategies to increase product usage among light users, as well as nonusers of the product or brand. One of the S best uses of behavioral segmentation is to create market segments based on specific consumer benefits. Exhibit 5.4 illustrates how benefit segmentation might be applied in the snack food market. Once different benefit segments have been identified, marketers can conduct research to develop profiles of the consumers in each segment. Behavioral segmentation is a powerful tool; however, it is also quite difficult to execute in practice. Conducting research to identify behavioral segments is quite expensive and time consuming. Also, the personal characteristics associated with behavioral segments are not always clear. For example, although some consumers buy a new car solely for transportation, most buy specific makes and models for other reasons. Some consumers want cars that are sporty, fun to drive, and that 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 139 140 Chapter 5 • Customers, Segmentation, and Target Marketing BEYOND THE PAGES 5.3 Shifting Strategies in the Cereal Market10 Cereal has long been thought of as a healthy breakfast. Yet in terms of sugar, parents might as well feed their children a cookie to start their day. Some sugary cereals are as much as 50 percent sugar. Kellogg’s Honey Smacks, for example, contains 15 grams of sugar per serving, which is 3 grams more than in a glazed donut. In spite of their poor nutritional profiles, it is often the sweetest cereals that are targeted toward children. In response, many upset parents filed lawsuits against cereal companies. In order to deal with the backlash and to gain a competitive advantage, companies like Kellogg’s have worked to reformulate and reposition their cereals as healthy breakfast choices. Cereal companies began specifically marketing to children in the 1950s, the same decade in which sugar became a common additive in cereal. As one might imagine, kids gravitated toward these sugary sweets. Cereal companies also introduced cartoon characters to get kids interested in their brands. Tony the Tiger and Tricks, the Trix Rabbit, became beloved child icons. Companies also began placing free toys into cereal boxes. These marketing ploys worked; children craved these fun cereals, making sugary cereals a popular item on the breakfast table for decades. In a string of lawsuits filed over the past 20 years, consumers have argued that cereal companies, such as Kellogg’s and General Mills, engage in deceptive advertising regarding nutritional information and in making exaggerated claims about physical strength, happiness, or even magical powers. Today, cereal companies have reworked their advertising and most have stopped co-branding their products with wellknown cartoon characters. Other lawsuits have focused on nutritional content or labeling, such as a suit filed against Kellogg’s Froot Loops by a woman who was upset that the cereal did not actually contain fruit. In response to these concerns, Kellogg’s took a proactive stance to shift its marketing strategy. The company stopped advertising cereals that do not meet the Institute of Medicine G and World Health Organization’s health guideA lines for cereal. No longer will you find a Kellogg’s cereal advertised if it contains over T 12 grams of sugar or 200 calories per serving. E The company also created guidelines advising consumers to eat sugary cereals in moderation. S Other sugary cereals shifted to more health, conscious appeals with claims that they contain essential vitamins and minerals. A few brands, such as Frosted Flakes, introduced reduced D sugar versions. In recent years, more nutritious like Special K and the Kashi brand have E cereals become popular, although these cereals will A never hold the same cache with children as Charms or Fruity Pebbles. Many major N Lucky cereal companies are going further to respond to D criticisms by listing health benefits prominently R on cereal labels. However, even health benefits can land a company in hot water. Kellogg’s, A for example, was fined $4 million by the FTC for misleading claims that its Frosted Mini-Wheats would improve kids’ attentiveness, memory, and 1 other cognitive functions. 1 2 3 lies in identifying the characteristics of these conenhance their image. The problem sumers. Are they older or younger, T men or women, single or married, and do they live in urban or suburban areas? In some cases, consumer characteristics are easy S to identify. Families purchase minivans because they want more room for their children and cargo. Older consumers tend to opt for comfortable and luxurious models. The key to successful behavioral segmentation is to clearly understand the basic needs and benefits sought by different consumer groups. Then this information can be combined with demographic, psychographic, and geographic segmentation to create complete consumer profiles. Demographic Segmentation Demographic segmentation divides markets into segments using demographic factors such as gender (e.g., Secret deodorant for women), age (e.g., Abercrombie & Fitch 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing EXHIBIT 5.3 Common Segmentation Variables Used in Consumer Markets. Category Behavioral Segmentation Variables Benefits sought Product usage Demographic Segmentation Occasions or situations Price sensitivity Age Gender Income Occupation Education Family life cycle Psychographic Segmentation Generation Ethnicity Religion Nationality Social class Personality Lifestyle Geographic Segmentation Motives Regional City/county size Population density Examples Quality, value, taste, image enhancement, beauty, sportiness, speed, excitement, entertainment, nutrition, convenience Heavy, medium, and light users; nonusers; former users; first-time users Emergencies, celebrations, birthdays, anniversaries, weddings, births, funerals, graduation Price sensitive, value conscious, status conscious (not price sensitive) Newborns, 0–5, 6–12, 13–17, 18–25, 26–34, 35–49, 50–64, 65+ Male, female Under $15,000, $15,000–$30,000, $30,000–$50,000, $50,000– $75,000, $75,000–$100,000, over $100,000 Blue collar, white collar, technical, professional, managers, laborers, G retired, homemakers, unemployed A graduate, some college, college graduate, graduate High school degree T Single, married no children, married with young children, married with teenageEchildren, married with grown children, divorced, widowed Generation S Y, Generation X, baby boomers, seniors Caucasian, , African American, Hispanic, Asian Protestant, Catholic, Muslim, Hindu American, European, Japanese, Australian, Korean D middle class, lower class, working class, poverty level Upper class, Outgoing, E shy, compulsive, individualistic, materialistic, civic minded, anxious, controlled, venturesome A Outdoor enthusiast, sports-minded, homebody, couch potato, familycentered, Nworkaholic Safety, status, relaxation, convenience D Northeast, Southeast, Midwest, New England, Southern France, South Africa R Under 50,000; A 50,000–100,000; 100,000–250,000; 250,000–500,000; 500,000–1,000,000, over 1,000,000 Urban, suburban, rural 1 1 2 clothing for teens and young adults), income (e.g., Lexus automobiles for wealthy 3 consumers), and education (e.g., online executive MBA programs for busy profesT widely used basis for segsionals). Demographic segmentation tends to be the most menting consumer markets because demographic information is widely available S and relatively easy to measure. In fact, much of this information is easily obtainable during the situation analysis through secondary sources. Some demographic characteristics are often associated with true differences in needs that can be used to segment markets. In these cases, the connection between demographics, needs, and desired product benefits can make demographic segmentation quite easy. For example, men and women have clearly different needs with respect to clothing and health care. Large families with children have a greater need for life insurance, laundry detergent, and food. Children prefer sweeter-tasting food and beverages than do adults. Unfortunately, demographic segmentation becomes less useful when the firm has a strong interest in understanding the motives 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 141 142 Chapter 5 • Customers, Segmentation, and Target Marketing EXHIBIT 5.4 Benefit Segmentation of the Snack Food Market. Weight Watchers Low calorie, quick energy Guilty Snackers Low calorie, good tasting Types of Fruits, Snacks Eaten vegetables, cheeses Yogurt, vegetables Yogurt, cookies, crackers, candy Snack Consumption Level Percentage of Snackers Demographic Characteristics Light Light Heavy 23% 15% Benefits Sought Nutritional Snackers Nutritious, all-natural ingredients Better educated, have young children Psychographic Self-assured, Characteristics controlled G A Younger, single Less educated, T lower incomes E Outdoorsy, Anxious, isolated S influential, , venturesome 10% Party Snackers Can be served to guests, goes well with beverages Potato chips, nuts, crackers, pretzels Indiscriminant Snackers Good tasting, satisfies hunger cravings Economical Snackers Low price, best value Average Candy, ice No specific cream, cook- products ies, potato chips, pretzels, popcorn Heavy Average 16% 16% 19% Middle aged, suburban Teens Better educated, larger families Sociable, outgoing Hedonistic, Self-assured, time deprived price sensitive SOURCE: Adapted from Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing, 7th ed. (Mason, OH: Cengage Learning, 2004), p. 224. D E or values that drive buying behavior. Often, the motives and values that drive actual purchases do not necessarily have anything to do with demographics. For example, A how would you describe the demographic characteristics of a price sensitive, valueN answer, remember that Walmart customers come conscious consumer? Before you from all walks of life. Likewise, D how would you describe the demographics of an adventuresome, outdoor-oriented consumer? When Honda first introduced its R Element utility vehicle, the company targeted adventuresome, high school and college-aged consumers. To itsA surprise, Honda quickly discovered that the Element was just as popular with 30- and 40-somethings who used it to haul kids and groceries. The problem in understanding consumer motives and values is that these variables depend more on what 1 consumers think and feel rather than whom they are. Delving into consumer thoughts and feelings is the subject of psychographic 1 segmentation. 2 3 Psychographic Segmentation Psychographic segmentation deals T with state-of-mind issues such as motives, attitudes, opinions, values, lifestyles, interests, S and personality. These issues are more difficult to measure, and often require primary marketing research to properly determine the makeup and size of various market segments. Once the firm identifies one or more psychographic segments, they can be combined with demographic, geographic, or behavioral segmentation to create fully developed consumer profiles. One of the most successful and well-known tools of psychographic segmentation is VALS, developed by Strategic Business Insights.11 VALS, which stands for “values and lifestyles,” divides adult U.S. consumers into one of eight profiles based on their level of resources and one of three primary consumption motives: ideals (knowledge and principles), achievement (demonstrating success to others), or self-expression (social or physical activity, variety, and risk taking). Exhibit 5.5 describes the eight 9781337669078, Marketing Strategy: Text and Cases, Seventh Edition, O.C. Ferrell - © Cengage Learning. All Rights Reserved. No distribution allowed without express authorization. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-240 Chapter 5 • Customers, Segmentation, and Target Marketing EXHIBIT 5.5 VALS Profiles of U.S. Consumers. Innovators These consumers have abundant resources and high self-esteem. Innovators are successful, sophisticated consumers who have a taste for upscale, innovative, and specialized goods and services. Innovators are concerned about image as an expression of self, but not as an expression of status or power. Example products: fine wines, upscale home furnishings, lawn maintenance services, recent technology, luxury automobiles Thinkers Thinkers are well-educated consumers who value order, knowledge, and responsibility. These consumers like to be as well informed about the products they buy as they are about world and national events. Although Thinkers have resources that give them many choices or options, they tend to be conservative consumers who look for practicality, durability, functionality, and value. Example products: news and information services, low-emission vehicles, conservative homes and home furnishings Achievers G a place of worship, and career. Achievers are conventional, The lifestyle of an Achiever is focused and structured around family, conservative, and respect authority and the status quo. These A individuals are very active consumers who desire established, prestigious products and services that demonstrate their success. Achievers lead busy lives; hence, they value products that T can save them time and effort. Ecareer enhancement, online shopping, swimming pools Example products: SUVs, family vacations, products that promote Experiencers S consumers , Experiencers are young, enthusiastic, and impulsive who are motivated by self-expression. These consumers emphasize variety, excitement, the offbeat, and the risky. Experiencers enjoy looking good and buying “cool” products. Example products: fashion, entertainment, sports/exercise, outdoor recreation and social activities D E Believers are conservative, conventional consumers who hold steadfast beliefs based on traditional values related to family, religion, A they follow established routines centered on family, commucommunity, and patriotism. These consumers are predictable in that nity, or organizational membership. Believers prefer familiar and well-known American brands and tend to be very loyal customers. N Example products: membership in social, religious, or fraternal organizations; American made products; charitable organizations D Strivers R Strivers are motivated by achievement, yet they lack the resources to meet all their desires. As a group, Strivers are trendy, fun A These consumers see shopping as a social activity and an loving, and concerned with the opinions and approval of others. Believers opportunity to demonstrate their purchasing power up to the limits imposed by their financial situations. Most Strivers think of themselves as having jobs rather than careers. 1 1 Makers 2 Makers, like Experiencers, are motivated by self-expression. However, these consumers experience the world by engaging in many do-it-yourself activities such as repairing their own cars, 3 building houses, or growing and canning their own vegetables. Makers are practical consumers who value self-sufficiency and have the skills to back it up. Makers are also unimpressed by T material possessions,...
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