Answer 2 questions of Marketing

Oct 4th, 2017
Anonymous
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Business Finance
Price: $15 USD

Question description

Answer the 2 questions from the module that is in the word document. The answers have to be related to marketing, please do long answers to each question. You can add online research

I also attached the chapter 5 of the book the sections 5.1 and 5.2 focus on the answers for these 2 questions ( mainly section 5.2)

Please do not copy answers from other websites nor send me the same answer from other students. Last time I had a problem with study pool due to the fact that they send me the same answers of another student.

Module 5 • Segmentation and Targeting • Cases • ©Backbone Press, 2009 Case 5: The Perils of Presenting a New Segmentation Framework Imagine that your first assignment in your new job is to create a segmentation scheme for your firm's major service-market. You spend four weeks working through piles of secondary data, old market research and talking to industry experts, sales managers and distributors. Halfway through presenting your new suggested market segments to the senior and junior marketing, operations and management teams, it is evident that you have lost control of the presentation. A vigorous, sometimes heated discussion about market segmentation occurs among the executives in your audience. Questions 1. Should you have a sinking feeling in your stomach? Why? 2. Do you feel a sense of opportunity and excitement? Why? 1
Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Marketing Principles and Processes Module 5 Segmentation, Targeting and Positioning (STP) A Quality function deployment matrix for a segment of the pencil market Product positioning for a pencil manufacturer is designing its pencils so that they rate highly on the benefits the segment seeks from using the product. The other positioning component is to fit your contact channels to customer search and shopping behavior and, most importantly, to focus both product design and channel design on your most profitable customers and prospects. Benefits sought, channel preferences and profitability are the three dimensions of customer segmentation. Such segmentation and the resulting product positioning is far more than a way of thinking about customers. As we shall now discover, it must be embedded in product design, the marketing processes and the organization of the company. Peter R. Dickson © Backbone Press 2014 Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 1. Customer Focus and Positioning Customer focus is about how you focus your efforts to attract, serve and retain customers, and which customers you focus on with such efforts. How you focus your efforts to serve customers is also called targeting or product/service positioning. For example, a computer distributor CDW (www.cdw.com) who has to compete against Dell’s direct marketing targets the small to medium sized business with same-day order shipping and expert sales advice (CDW has lower employee turnover than competitors, thus more experienced employees). CDW salespeople often become the proxy chief technical officer for many of their customers. 1 A company TV advertising theme says it all, “No one provides service like CDW.” With such product advice differentiation and delivery differentiation, features that are both highly arket segmentation is desired by many small businesses, CDW has created its own market niche of profitable and loyal customers that it targets and serves. Notice dividing the market into groups the word “created.” It has created its market opportunity by of customers by their emphasizing competence in the capabilities that are needed to serve profitability and preferences, small companies who want their hand held when it comes to IT but are then determining what drives otherwise very profitable businesses. For high service need customers, each group’s profitability and those who effectively want to outsource some of their IT function, preferences. Positioning is CDW is the best positioned to serve them. It has invested/deployed designing the features/functions resources to become very good at serving the needs of this group of your offering to satisfy a (segment) of customers. customer segment that you have M selected to target. In practice, such positioning is called quality function deployment (QFD). You are deploying your quality to improve the functions that are most useful to your target segment, for a product or service. Focusing on profitable customers, superior analysis of their needs and fitting your offering to their needs and benefits sought are key elements of competitive thinking and positioning. What is Marketing explained how changing customer preferences changes demand, which changes seller supply, that in turn changes consumer preferences and demand. This is how we must think when we make market decisions. To simplify such thinking, take the variation in demand across all consumers and cluster it into segments where demand varies relatively little between consumers in a segment and varies a lot between segments (birds of a feather are “flocked” together). We do this intuitively or by the statistical cluster analysis of customer information that we have in a database. The conventional advice in marketing principles texts is to try segmenting customers by the segment variables listed below in Figure 5.1. Each of these variables or combinations of variables should be considered and tried to find the “best way” to segment the market using criteria such as substantiality (segment size), accessibility (segment can be reached efficiently) and fit (with company capabilities) as the “best way” criteria. This seems like an awful lot of trial and error effort and it does not focus on customer profitability. In the following two sections, we describe product benefit/feature segmentation and reach/channel segmentation. Both are essential for successful marketing management. We then describe 3D customer focus and the 3D customer focus process. But first, let’s talk a little more about customer profitability. 1 Anne T. Coughlan et al., Marketing Channels, Upper Saddle River, NJ: Prentice-Hall, 2005: 75-79. 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel Segmentation Variables for Consumer Markets Geographic: World region, climate zone, local weather, trading block, country, country region, state, province, county, city, suburb, city block, town, village Demographic: Genetics, body type, physical handicaps, height, weight, age, life-stage, cohort generation, family size, education, intelligence, language, income, wealth, occupation, ethnicity, nationality, tribal identity, family identity, heritage, religion, political party membership Psychographic: Lifestyle, interests, hobbies, personality, sociability, social class, values Behavioral: Product consumption, channel usage, channel loyalty, features used, product benefits sought, brand loyalty, early adopter, usage occasion characteristics Figure 5.1 Segmentation Variables for Consumer Markets Focusing on Customer Profitability “A common conclusion is that a small group of customers who demand a disproportionate amount of ‘free’ support resources (e.g., after-sales service, customized products or shipping and credit terms) and order small volume or low-margin products are unprofitable. ‘Hidden loss’ customers subsidize ‘hidden profit’ customers.” (p. 491) 2 Do you prefer a large pile of cash to a small pile? A silly, condescending question isn’t it? Then should it not be just as obvious that if you run a business, or help run a business, you will prefer to focus your efforts on selling to customers whose business relationship is highly profitable to you? The result is a larger pile of cash. We all need to think about this a bit right now and agree on this customer focus principle. If your job is to manage a business for its owners, then your job is to increase shareholder value by increasing both the average profitability of your customers and the number of profitable customers. The goal of increasing the number of your customers is set by senior managers to make sure that average customer profitability is not increased at the expense of total profitability by simply getting rid of less profitable business! The first step in such a customer focus is to identify the direct determinants (often called drivers) of customer profitability. They are: 1. customer purchases of high margin products and services 2. the sheer quantity of purchases made per year (size of the customer) 3. low selling costs to the customer, low delivery costs and low after-sales service costs The fourth less direct, but still very important, driver of customer profitability is the new profitable business a very satisfied customer brings to the company through referrals, recommendations and casual and explicit endorsements of your products and services. 2 Shannon W. Anderson, “Managing Costs and Cost Structure throughout the Value Chain: Research on Strategic Cost Management,” in Christopher S. Chapman, Anthony G. Hopwood and Michael D. Shields (Eds.), Handbook of Management Accounting Research, Vol. 2, Elsevier, Amsterdam, 2007: 481-506. 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel The second step is positioning. The firm deploys or invests its resources in what it believes to be the key drivers of customer profitability so as to develop profitable competences and competitive advantage. A sole proprietor running a small business closely observes his/her relationships with customers and develops an intuitive sense of what drives customer profitability. The proprietor then behaves accordingly. A more sophisticated, professionally managed firm develops a customer database. It then uses data-mining to identify customer profitability, relate this profitability to product purchase mix and costs of doing business, and then develops profiles of profitable customer types created by cluster analysis. For example, by analyzing its database of customers, Best Buy was able to identify its most profitable customers (“angels’) and its least profitable customers (“devils”). The least profitable customers were those who kept returning merchandise that was often purchased on sale. 3 Best Buy enforced a re-stocking fee of 15% on all returns to discourage customers who made a habit of returning merchandise. The angels, who tended to pay full price on higher quality electronics, consisted of five segments: technology enthusiasts, upper-income men, young family men, suburban mothers and small business owners. Store managers were directed to analyze their local market, focus on the two of these segments that were the largest in their local market and cater to their needs (e.g., by stocking their favorite merchandise, providing special in-store service touches for them, etc.). Harrah’s, the gambling conglomerate, is famous for its customer relationship management. It identified its most profitable segment not to be the high rollers (they were too expensive to service), but the heavy and frequent slot machine players. Promotions focused on this most profitable segment, such as a frequent gambler card, were developed. ING Direct launched an online-only savings bank that offers high interest rates of around 5% on savings accounts. It could do this because of the simplicity of its service and business model that results in operating costs that are up to one sixth of conventional banks. But it fires thousands of customers a year who are asking for special expensive services or making many costly-to-serve telephone calls a year and who do not have large saving accounts. This may sound like a lot of lost customers, but the new bank serves over two million customers and over $30 billion in assets. On the positive side: Continental Airlines launched a Customer Information System in the late 1990s where every one of its 40,000 gate, reservation and service agents has access to the history and value of the customer. An attached expert system also suggests remedies, perks such as upgrades and coupons for service delays. For their top customers, they even know if they put on eye-shades when they go to sleep. This emphasis on higher service to the most profitable customers, the percentage of Continental customers who pay higher cost unrestricted fares, rose from 38% to 47%.4 Segmenting the market by customer profitability requires a database and database analysis that produces the metrics described in the following table. You can generate a customer measurement metric from the Figure 5.2 scorecard by adding up the yes answers to the information reporting questions. A company or division with a score of 10 or more is practicing customer relationship management at a high level. A company with a score of 5 or less is a dinosaur when it comes to customer relationship management. Remember the system’s control maxim: “The better you measure, the better you manage. The worse you measure, the worse you manage.” The latter is the flying blind principle of marketing metrics. Measuring the lifetime value of a customer often requires some assumptions and analysis, but it can be done. 3 4 http://www.twice.com/article/252410-Best_Buy_Gives_Details_On_Customer_Centricity_.php Brady, Diane, “Why Service Stinks,” BusinessWeek, October 23, 2000, p.124. 3. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel A Firm’s Scorecard on Measuring Customer Profitability Only check the box if you are sure that the answer is yes: 1. Does the reporting system report results by SKU*?........................................ ___ 2-6 What? Sales…………………………………………………………........... ___ Returns……………………………………………………………... ___ Average net selling price…………………………………………... ___ Selling price range…………………………………………………. ___ Average contribution per SKU…………………………………….. ___ 7. Does the reporting system report costs per distribution activity/process?........ ___ 8. Does the reporting system report channel sales?............................................. ___ 9. Does the reporting system report channel profits?........................................... ___ 10. Does the reporting system report individual customer profitability history?... ___ 11. Does the reporting system report trading/servicing costs by customer?.......... ___ 12. Does the reporting system report results by market segment?......................... ___ 13. Does the reporting system provide an estimate of the future profitability…... ___ of the customer or their life time value?.......................................................... ___ 14. Does the reporting system flag customer profitability to frontline Employees?…………………………………………………………………… ___ 15. Does the reporting system flag customer service preferences to frontline Employees?…………………………………………………………………… ___ * SKU stands for stock keeping unit. A model or item in a product line is a SKU. Figure 5.2 Scorecard on Measuring Customer Profitability Study Questions 5.1 1. Changing customer preferences changes demand, which changes seller supply, which in turn changes _______________. a) The market b) Company competitiveness c) Company profitability d) Customer preferences and demand 2. You take the variation in demand across all consumers and cluster it into segments where demand _________________. a) Varies relatively little between consumers in a segment and varies a lot between segments b) Varies a lot between consumers in a segment and varies little between segments c) Varies relatively little between consumers in a segment and varies little between segments d) Varies a lot between consumers in a segment and varies a lot between segments 3. The traditional way of segmenting is by using: a) Theory b) Past experience c) Senior management guidance d) Trial and error 4. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 4. Conventional wisdom is that you try which of the following in segmenting a market? a) Geographic criteria b) Demographic criteria c) Pyschographic criteria d) Behavioral criteria e) All of the above 5. Which of the following is not a major, actionable segmentation criterion? a) Profitability segmentation b) Demographic segmentation c) Benefit-feature segmentation d) Channel segmentation e) All are actionable segmentation criteria 6. Which of the following is not a psychographic segment variable? a) Life styles b) Passions c) Channel loyalty d) Personality e) Social class f) All of the above 7. The conventional way to evaluate segment criteria is by ____________. a) Profitability, accessibility and fit b) Substantiality, profitability and fit c) Substantiality, accessibility and fit d) Profitability, accessibility and fit 8. The direct determinant of customer profitability is: a) Customer purchases of high margin products and services b) The sheer quantity of purchases made per year (size of the customer) c) Low selling costs to the customer, low delivery costs and after sales service costs d) All of the above are determinants 5. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 2. Benefit-Feature Segmentation Underlying the benefits that we seek and the features we choose in a product or service is a very simple goal-directed theory of consumer behavior, presented below in Figure 5.3. Consumers use product benefits and features as instruments or tools to achieve a new desired state, be it physical, emotional, intellectual or spiritual. Our behavior is motivated by a desire (sometimes called a need or a want) to move from our current perceived situation to a new physical/intellectual/emotional/spiritual state. Some of this motivation is conscious, goal-directed behavior; some of it is not so conscious. We use product and service use as part of the “path” from our currently perceived situation to a new desired state/situation. When products and services help us along the path, they deliver desired benefits. The path from current situation to desired situation is often not straight, but has to negotiate around situational realities such as a lack of resources (income and/or time), other obligations, moral constraints, etc. The utility or quality of a product or service is the sum of all the benefits it delivers in moving us along the paths to our physical, emotional, intellectual and spiritual goals. Sometimes a product surprises us with the benefits it delivers. That is when a product or service more than satisfies us, it delights us. Figure 5.3 Consumer Paths to Self Fulfillment How we choose our values, our goals, our priorities and the instruments (products and services) we use to achieve them is very complicated. But most basically, first we seek to have our survival needs met, which means water, food, shelter and medical care. Then we tend to seek emotional and sexual goals, although some of us put spiritual goals before all. Yet others put the pursuit of learning and knowledge before their spiritual and emotional goals. A pop psychologist named Abraham Maslow developed a priority of needs theory, with physical needs our first priority, love and affection our next priorities, and finally a state of “self-actualization” (a sort of Zen state) that a select few seek to achieve. 5 Our use of products and services to get us to a new “state” (see above Figure 5.3) is further complicated by cultural norms and constraints, time constraints, wealth constraints, willingness to postpone gratification and a dozen other factors taught in consumer behavior courses. Innovators need to know how and why products and services are used, and with what end in mind, to make products and services ever better and more delightful. Let us use quenching one’s thirst as an example. Every day we must find enough water to drink or we will die of thirst. It is a basic physical need. Once upon a time our options for quenching our 5 http://www.cit.gu.edu.au/~davidt/self-actualisation.htm see also http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel thirst were rather limited. Today, at least in prosperous cultures, companies offer a wide range of beverages to meet very different needs and deliver very different benefits. We also vary a lot in our preferences (see Figure 5.4 below). This Figure does not reflect the fact that some religions use wine to meet spiritual needs, as an instrument of worship and in the affirmation of beliefs. Other religions completely ban the consumption of any alcoholic beverage! The Figure also does not recognize how fresh water, once considered a commodity, can be bottled and sold at a price higher than other beverages! How important is it for beverage companies to track such trends in the benefits sought that change drink preferences? Ask Coca-Cola, an otherwise great American company that allowed Pepsi Cola to get a two year jump on the bottled water market and out maneuver Coke by purchasing Gatorade. Both Coke and Pepsi did not “see” the market opportunity for a high octane caffeine drink. The guys who invented Red Bull did and made a fortune….they understood that a segment of customers really wanted a supercharged caffeine drink, a legal “upper” to stay awake and crank up alertness and mental concentration. But Coca-Cola is not the only great company that failed to understand how beverage demand has changed. Starbucks came along and taught the whole coffee industry an old lesson. Coffee is a social drink and consumers, as they did 300 years ago in Coffee Houses, will pay a premium to drink coffee in coffee houses that possess the right social atmosphere and the right patrons. It is not just a good-tasting stimulant to maintain alertness and concentration. Starbucks coffee is consumed in coffee houses as an instrument for achieving intellectual and social goals. It is an alternative to a bar…and driving and drinking! Excellent coffee is a social drink and this aspect has high utility for many Starbuck’s customers. That is why they are prepared to pay over $3 for a cup of coffee. There is another reason. Twenty years ago the major brands switched away from making their coffee using the Arabica beans, the top quality beans for taste. They mixed the much less flavorful coffee bean, Robusta, into their coffee. Starbucks coffee, well prepared with filtered water tasted so very much better than the traditional coffee. It was a taste treat. It is a great example of product positioning and quality deployment. Student beverage preferences Benefit sought: To relieve throat irritation Coffee Tea Milk 5% 30% 11 % Beer Cola Noncola Other 2 % 16% 6 % 30 % 6 13 46 0 12 8 18 32 5 5 1 42 3 11 To help you unwind and mentally relax 3 5 2 38 11 3 39 To settle an upset stomach 0 14 33 0 20 23 10 To help your digestion To provide energy and pep you up To provide nutrition and vitamins 0 0 63 2 0 5 31 To stimulate your taste buds 3 5 7 13 32 12 27 To relieve a headache 4 24 9 5 10 10 38 To quench your thirst 0 5 3 8 35 11 38 Which of the above would you choose to meet each benefit/need? How would your choices change if bottled water and Gatorade were added to the choice set? Figure 5.4 Beverage Preferences by Benefits Sought 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel The idea of finding out what different customers want and designing products with the features that cater to these desires is not new. Shoes and clothing sizes are obvious examples. Offering a basic low price product and a higher quality product that lasts longer, one that is more rugged and durable and can be used all day by professionals, offering more features for the enthusiast, or offering conspicuous luxury for those who wish to display their wealth… all of these different versions of a product have been around for a long time. Think about all the different sorts of carts and carriages that were offered in the 6,000 year-old market for horse drawn transportation. Then along comes the invention of the automobile. Its power is cleverly described in terms that would impress customers in the early 20th century (e.g., 10 horse-powers) who were accustomed to relying on horses for transportation. Right from the start, cars were designed with different features for different user needs. The popular folklore is that there was only one mass produced Ford Model T and people could have this one model in any color they liked provided it was black! That is the story, illustrating the stifling conformity of the industrial revolution. In fact, Ford offered several model choices, even a Model T designed for a chauffeur to drive the lady of the house around, the way that the lady had been driven around before the car; in a horse and carriage driven by a groomsman who groomed and tended the horses and drove the carriage. He was very likely employed in the household and married to a female servant. The groomsman dropped his buggy whip, picked up the driving goggles and became a chauffeur. This Chauffeur model faded out when the electric starter came along that enabled the adventurous woman to drive herself. Notice how a new convenient product feature-benefit opened up the auto market to women and the elderly who were previously unable to crank start a car. New segments enter a market as new models or features are designed around their special needs and benefits sought. Innovation in supply directed toward attracting new customers and creates new market segments. It is the practice of What is Marketing’s theory of dynamic competition. We can also see in Ford’s original product line the embryos of today’s major automobile segments, not surprising as they have their origins in ancient forms of horse transportation, going back thousands of years. The convertible Tourer was the replacement for the horse carriage that traveled from town to town and was used for out-of-town trips. For around town, Ford also offered two models, a family sedan and a two door, sporty version called the Couplet, which became the modern coupe. The latter replaced the handsome Hansom Cab and the racy light Gig or Surrey with the fringe on top that was part of the identity of the “fast-set” of young (and not so young) urban male show-offs. We still have fast men in fast cars showing off. How will electric cars change all of that? Not much. Same goal (end), different tool (means). The Chauffer Driven Model T The Tourer Model T Figure 5.5 Two models of Ford Model T’s 3. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel The above Model T Tourer was somewhat of an off-road vehicle as well. They had to be because country roads were often mud tracks. Notice the high clearance of both models. The Model T was designed with being driven in mind. Ford ultimately lost out in market share to General Motors. Why? Not because it failed to segment the market and serve the different segments with a line of models. Ford lost out because GM marketed cars that were better designed, targeted and priced to the needs of the market segments that Ford had created. In recent times, both GM and Ford have been out-competed by better targeted, designed and priced foreign competition. Here, it is useful to pause, step back and see this as an excellent example of how markets evolve as described in What is Marketing. What is happening is that the variance in consumer preferences and demand across buyers is always changing as a result of a myriad of technological innovation and the diffusion of such innovations across markets and economies, such as the introduction of cell phones around the globe. Market segments are based on the structure of such variance and as the structure of this variance changes, so market segments change, morphing around new product features, services and channels of distribution. The MP3 player market has grown from a single product market into new segments served by different models with different features, such as storage capacity, thinness, weather-proofing, gender preferred colors, video and cell phones. It is interesting to reflect on what Sony, the inventor and marketer of the hugely successful Walkman line of products, was thinking and doing. Why did they not dominate the next generation product, the MP3 player that wiped out the Walkman? Sony was so successful that it dominated the market through the 1980s and 1990s. How did it lose the portable personal music player market to Apple? Sony lost its nerve and verve and the value of Sony stock fell a lot. First, it was because the managers who were marketing the last of the Walkmans got in the way. So did the managers who were marketing Sony’s CDs. Apple did not have that old technology loyalty problem. Second, Sony had also developed its MP3 player. However, because Sony’s music division and its lawyers were concerned about royalties, Sony was hopelessly slow in launching a music website where it was very easy to download a lot of music and there was a lot of choice. Other music labels also did not want to sell their music on a site owned by Sony, a competing label. Again, Apple did not have that problem. Apple beat them to the punch with its cool iPod and easy to use iTunes download site. Sony is now nowhere and sorry. This is an excellent example of how an innovative firm can make a market, completely dominate it, and then lose it to the next innovator who comes along with a technology and design that has superior usage features and service support. As long as there is technological innovation, market segments will be changing because benefits sought and feature preferences will be changing and firm’s had better be aware of how their behavior and rivals behavior are modifying segment demand. Nintendo’s Wii comes along with primitive graphics, but a game controller that engages and involves your whole body. It has revolutionized videogame playing. It created a whole new “fun exercise for the elderly” usage segment. But be careful. The number of features offered can also become overwhelming for both buyers and sellers, such as in the market for computers where sellers have provided many new benefits and features (see following Table). Consumer Reports March 2006 ratings of desktop computers involved 15 benefit/feature dimensions! Consumer Reports tried to simplify the choice by segmenting the market into a Budget segment for general use and photo-editing and a Workhorse segment for playing games and video-editing. Now, marketers of PCs do the same. 4. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel Benefits-Features Desired in a Computer Respondents were asked the importance of each of the following benefits-features in their decision to acquire a new personal computer (using a 1= not at all important to 10 = extremely important scale). 1. Is one of the most reliable available 2. Is on the leading edge of technology 3. Has one of the highest resolution screens available 4. Is able to store a large number of files and data 5. Is one of the lightest available 6. Allows the user to print high-quality output, including words and graphics. 7. Uses the same size diskettes as other personal computers or technical workstations that the user needs to interact with 8. Connects easily to a local area network 9. Has good workmanship 10. Is easy to expand with additional hard disk storage capacity 11. Does not take up much space 12. Allows several computing tasks to be performed simultaneously 13. Has one of the very lowest prices available 14. Is sold by people who are well informed about computer technology 15. Is easy for a non-technical person to get up and running in a few hours the first time 16. Is portable 17. Is sold by people who will always help with user problems 18. Uses icons and a mouse to operate the software 19. Can operate on a battery 20. Has software that is very easy to learn 21. Is sold by people who provide software and hardware together in a tailored package 22. Allows the user to easily combine graphics, words and numbers on a page 23. Runs the same operating system as other computers that the user needs to interact with 24. Is sold by people who will provide training 25. Is one of the fastest available 26. Communicates easily with large computers 27. Allows the user to do very complex graphics 28. Is sold by people who will fix it in a few hours if it breaks 29. Is made by a company your management approves of 30. Uses software that operates the same way as software the user is familiar with 31. Is able to run a very large selection of software 32. Will not become obsolete quickly 33. Is easy to expand with additional add-on purchases 34. Runs only custom-designed software that performs a very specific task or function 35. Is acquired from a location that sells at the lowest prices but provides little assistance 36. Runs software designed specifically for your industry. Source: Gary E. Mullet, “Benefit Segmentation in Practice,” Journal of Segmentation in Marketing, 3(1), 1999: 13-36. 5. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel Study Questions 5.2 1. All products and services are _________ to achieve an end? a) Means b) Instruments c) Tools d) All of the above 2. Which of the following is not a new desired state that products and services create? a) Metaphysical b) Emotional c) Intellectual d) Spiritual e) All of the above are 3. Which of the following drinks are most preferred by students to relieve a headache? a) Coffee b) Tea c) Milk d) Cola e) Non-cola 4. New _________ are often created in a market by benefit-feature innovation. a) Demand b) Customers c) Segments d) All of the above 5. The basic benefits sought ________ as the automobile replaced the horse and cart. a) Changed b) Evolved c) Did not change d) Transformed 6. The Nintendo Wii has apparently “got more game” than its Microsoft and Sony competitors. Which of the following benefits-features does it not possess? a) Superior, almost virtual-like graphics b) Greater user involvement in the game c) Physical stretching and exercise 6. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 3. Positioning: Fitting Features to Benefits Desired It is said that beauty is in the eye of the beholder. In terms of marketing decision-making, quality is in the eye of the target benefit segment. Buyers will choose a product based on quality when they perceive a product’s quality to be higher than a competitor’s quality in product benefits provided and on quality dimensions important to them. In practice, a customer focus means a product positioning and design focus on product quality/benefits desired by the target segment. The changing reputation of Japanese products over the past fifty years helps explain what it means to design a quality product. In the 1950s and early 1960s, most Japanese exports were of a trinket nature sold in discount stores. They were poorly designed and soon broke. However, in the 1960s, American consumers and product critics started to become aware of a change. Superior quality Japanese electronic products, such as transistor radios, began to flood the market. Everything about the radios was quality in comparison to American radios. They came in higher quality packaging. They came with batteries that lasted longer than the replacement American batteries. They had more features (such as lighted dials), more range and a superior tone. The Japanese radios also looked more stylish and were better assembled. In sum, the Japanese transistor radio was better designed, constructed and offered superior performance. This was achieved by caring about design details and assembly quality control. The same quality reputation developed for Japanese cameras, brands of motorcycles, cars and almost everything else. It also explains why the Apple iPod dominates Sony in the MP3 player market. Every student reading this knows why the iPod won out – easier access to software/music, ease of use and a really cool design. The respected Juran best practice process used to design such quality into a product or service is presented below in Figure 5.6. 6 Identify customer needs, what qualities the product or service must have to meet and exceed customer needs, and then deliver such quality. It is very similar to the QFD process that is now explained. Activities Outputs Apply measurement throughout Establish quality goals List of quality goals Identify those impacted – the customer List of customers Determine customer needs List of customer needs Develop product features Product designs Develop process features Process designs Establish process controls, transfer to operations Process ready to produce Juran’s Quality Planning Road Map: Juran, J.M. Juran on Quality by design: the new steps for planning quality into goods and services, The Free Press, New York, NY. Figure 5.6 Juran’s Quality Planning Process 6 J.M. Juran, Juran on Quality by Design, New York, The Free Press, 1992. 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel Quality function deployment (QFD) was developed by Yoji Akao, a brilliant Japanese professor, in the late 1960s and is used by most large Japanese manufacturing companies. QFD is the deployment of quality, technology and the resources of the firm to ensure a product or service is competitively positioned to target and deliver the desired customer function, benefits and satisfaction. 7 In the centre is a matrix made up of circles and triangles that visually represent the connection (correlation) between customer needs/benefits and the measured product specifications of the product/service (see the following Figure 5.7). Notice that there is a strong connection/correlation between the “does not roll benefit” and the hexagonality (six-sidedness) of the pencil. There is a strong connection between the “point lasts” benefit and the measured time between sharpening and a weaker connection between “point lasts” and measured amount of lead dust per line. The importance of each pencil benefit to the segment is indicated by its importance rating. If the connections/correlations between a segment’s most important benefits and the product’s features are not there, then the product is poorly positioned to serve the needs of the customer segment. It’s back to the drawing board for designers and engineers to develop features and deploy quality that deliver the most desired functions/benefits. On the far right hand side, the customer ratings of the major rival’s products are presented and broken down by benefits sought. The market researchers provide this information. Figure 5.7 Quality Function Deployment Matrix of a Pencil Market Segment In Figure 5.7, notice that the most important benefit is “point lasts” and the Writesharp (now) pencil is at a competitive disadvantage because it scores a 4 on this benefit where Competitor X 7 QFD also involves seamlessly connecting product specifications to the appropriate manufacturing and production processes. This QFD knitting together of quality-added features and production system control processes is taught in Operations courses. 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel scores a 5. It is positioned between Competitor X and Competitor Y on this benefit. Improving the engineering of the Writesharp (new) pencil so that it at least matches the Competitor X score of 5 should be a priority, and we can see that it has been achieved. Note that the engineering performance ratings of each of the rival offerings are presented in the bottom matrix. Engineers and designers provide this information. The product quality added and engineering ratings, when compared, enable us to understand whether there is a perception/marketing problem or an engineering/design problem, or both. For example, the Veterans Affairs Department in the U.S. runs a nationwide federal hospital system of 154 hospitals and 875 clinics. It provides the best medical care in the United States and, because of its digital patient-record database, also operates at far lower cost than private hospitals. 8 Engineering-wise, it is rated the best on quality of care, customer satisfaction, technology use and cost efficiency; yet from the recent health care debate, it is very clear that politicians, the media and the general public are unaware of its exemplary excellence. The VA hospital system has a positioning perception problem, not a design/engineering problem. The quality function deployment process involves the following activities: 1. Identify the benefits desired by the target segment and measure their importance. 2. Obtain segment perceptions of each of the alternatives’ performance on each benefit. 3. Weight each segment’s average perception rating of each benefit delivered by its importance rating. Sum for each alternative: e.g., The Writesharp (new) quality/utility score = 3x4+4x5+5x5+2x4 = 65. 4. List product specifications/features and alternatives’ engineering ratings on each specification/feature. 5. Connect product engineering specifications/features to benefits in the benefit-specification matrix. 6. Develop and design new product with new specifications and features that have a strong correlation with the most important benefits that you can most profitably add. 7. Measure and compare the new product’s quality/utility score. According to the matrix in Figure 5.7 above, the Writesharp (now) pencil scores high on easy to hold and does not smear benefits, but on the most important benefit, “point lasts” it is perceived as inferior to Competitor X. The Writesharp (new) ratings indicate it completely dominates the competition. Importantly, if we look down below we can see it is not just a perception. The new Writesharp also dominates on all of the engineering benchmark ratings, particularly the time between sharpening, which has a strong correlation with the most important benefit sought by the consumers surveyed – point lasts. This matrix approach is a way of visually connecting in your mind engineering and product specifications to the consumers’ most valued benefits. It puts into practice the fundamental principle of matching product features with customer benefits sought of matching supply with customer preferences and, hence, increasing demand. It also rates how your product is competitively positioned in terms of both the perceptions of the consumer segment and in terms of engineering ratings of the product’s specifications. Now, think about how first-grade children think about a pencil and how they use it, how they like sharpening it using a pencil sharpener, the importance of the eraser, how they grip the pencil, how they use it to draw, to doodle, to think, to be creative, to develop their confidence in mastering writing, in expressing themselves in writing and drawing, how they treasure their pencils, how they envy their friends’ pencils and why. How would this change the importance weightings in the above QFD matrix? What other benefit dimensions and product features should be added to cater to children’s needs? Add a large eraser? Soft lead? Yes, but perhaps the most important feature for 8 Catherine Arnst, “The Best Medical Care in the U.S.” BusinessWeek, July 17, 2006: 50-56. 3. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel children might be to give their pencils an identity. For example, paint it purple and put a Barney (The Dragon) sticker on it. It makes the whole writing or drawing experience for kids more magical and fun. It reduces the threatening nature of the pencil that can be a demanding first tool for a child to learn to hold and use. It increase the value of the pencil in a child’s eyes and, hence, respect and caring for the tool. It clearly is important because look at the number of “identity pencils” sold to kids. Sound silly? Consider the number of Mont Blanc “identity” pens sold to adults! Having introduced you to benefit segmentation and product positioning, we now discuss segmenting customers by their purchase rather than their usage behavior: by their use of channels of distribution and communication and how they prefer to be contacted. Study Questions 5.3 1. QFD stands for? a) Quality function determinants b) Quality feature determinants c) Quality feature deployment d) Quality function deployment 2. QFD is the deployment of _____________so the design features of a product or service deliver the desired customer benefits and satisfaction. a) Quality b) Technology c) Resources d) All of the above 3. QFD also involves seamlessly connecting product specifications to the ___________. a) Appropriate manufacturing and production process b) Customer c) Customer benefits sought d) Corporate mission 4. A QFD specification matrix helps managers convert benefits desired into _________________. a) Profitability b) Customer satisfaction c) Features desired d) Unique product positioning 5. A strong correlation between a benefit and a feature in the QFD matrix is indicated by a(n) _________________. a) Triangle b) Circle c) Asterisk d) Box 6. Comparing consumer perception measures with engineering measures identifies ________________. a) A product design positioning problem b) A product image positioning problem c) Whether a product has an image positioning problem or a design positioning problem d) None of the above 4. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 7. When applying a QFD matrix to a different segment, what changes? a) The benefit and their importance b) The product specifications or design attributes c) Everything d) Nothing 8. Competitor Y’s quality/utility score is: a) 14 b) 28 c) 40 d) 42 e) 50 9. Competitor X’s quality/utility score is: a) 15 b) 50 c) 56 d) 60 e) 64 10. The old Writesharp’s (current) quality/utility score is: a) 16 b) 50 c) 56 d) 58 e) 60 5. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 4. Channel/Contact Segmentation Customer focus and segmentation around the customers’ distribution/communication channel usage is very common: i.e., the Internet User segment or the Ace Hardware customer segment. Target marketing implementation is then very efficient and effective. It guarantees segment accessibility. But these segments are almost always further sub-segmented into different product benefit/feature usage segments to which various products or models in the product line are targeted. These sub-segments are then tracked for their profitability and the team responsible for, say, high-end, high-performance Fuji digital cameras sold on the Internet will have profit contribution goals and responsibility, along with associated achievement incentives. Traditional banks face a long-term problem in contacting and keeping their Internet savvy customers. Companies like LendingTree.com are increasing competition by drawing bank customers to their site and then helping them select the best mortgage offers from hundreds of lenders. New pure Internet banks such as ING Direct (http://home.ingdirect.com) in the United States are also offering higher interest rates on customer accounts, reflecting their lower operating costs. When the customers of a traditional bank ask for an Internet banking service, the bank finds it very difficult to offer its Internet customers the high savings account rates that the new Internet bank entrants offer and not offer the same rates to their regular branch customers. The result is that their savings accounts are not viewed as competitive by the Internet savvy customer. Nor can the traditional bank offer them the best mortgage deal search like LendingTree.com can offer them. Bankers must decide strategically whether and/or how much they are going to focus on the Internet channel user segment; will they offer unique services only to this channel segment, be it high return savings accounts, mortgage search services, bill-payment, portfolio management, transfers, etc.? And if you are a traditional banker, what are you going to offer through your Internet channel? What unique services and products can you offer your regular customers to retain them against the threats of the new channel entrants? Canadian banks such as RBC have found that returning to traditional, high-service neighborhood branch banking and steering customers online for routine banking needs is one answer. If Walmart is ever allowed to develop a package of financial services desired by Walmart customers, then another new “Walmart customer” channel segment (a new banking channel segment) will be created that will send shock waves through the retail banking industry. Channel segmentation is very important today because a lot of innovation in communication and distribution to customers is occurring around the global marketplace. Such innovation is changing traditional ways of doing business, distributing products and how to best segment markets by contact/channel. The search engine is a great example of a new technology that has opened up a whole new contact subsegment that identifies very hot prospects by their Internet search activity. If you can detect shoppers who are searching for a specific product/feature or service, then such shoppers become a very attractive growth segment, worth paying quite a lot of money to identify and to send a tailored message or to have your Internet site address put on the top of such a customer’s search list. That is Google’s brilliant economic model (see the Advertising module) and it is changing the way many company’s prospect for new customers. Because of its efficiency in reaching a highly desirable segment, Google can charge a premium for putting the name of the company in front of hot prospects. The huge increase in Google’s 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel share price and shareholder value suggests that investors believe that this way of prospecting for new customers and selling to them will ultimately take a lot of the dollars currently being spent by companies in specialized magazines and cable TV channels to reach particular life-style/benefit segments. They are probably right. Google and Craig’s List are killing newspaper classified advertising revenues and classified advertising readership and, hence, newspaper readership. Newspapers have failed to evolve fast enough. It is an example of creative destruction where a new technology changes consumers’ search and shopping preferences. In this case, the Internet search engine has changed the way sellers contact customer prospects forever. Along with its incredible search capability, the Internet offers consumers channel access to a vast selection of supply (products or services) that a single brick and mortar channel could never stock or offer. Where traditional channels stock and sell best sellers, the Internet can cater to much broader and varied tastes and preferences. The result is that the Internet has opened up an abundance of choice (see “The Long Tail,” http://www.wired.com/ wired/archive/12.10/tail.html.). The prosperity and prospects of the companies offering old technologies to reach customers (such as selling prescription drugs through pharmacies, renting movies through video stores, selling real-estate) are under threat of destruction by the new technology. The old ways of reaching customers and doing business with customers are being destroyed by the new ways of doing business with customers, using new global supply chains that deliver niche products to every corner of the world. This is what contact segmentation and modern channel management is about: catering to a much greater range of customer preferences and demand. Study Questions 5.4 1. 2. Customer segmentation around the customers’ distribution/communication channel usage _______________. a) Guarantees segment accessibility b) Is very common c) Is very hard to do d) A and B above e) B and C above What is the channel segmentation problem for long-established banks like Bank America? a) Identifying the customers who want to bank on the Internet b) The Internet channel segment is unprofitable c) Offering different prices for the same products in the different channels d) All of the above e) None of the above 3. If Walmart is allowed to develop a package of financial services desired by Walmart customers, then __________________. a) A lot of banks will be happy because they will lose low income customers b) A lot of banks will be unhappy because of the increased competition c) A new channel segment will be created d) Walmart will never be free to create a Walmart bank 4. Channel segmentation is very important today because a lot of innovation in communication and distribution to customers is occurring ____________. a) Around the global marketplace b) In North America c) In consumer markets d) In business markets 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 5. The search engine is an example of ______________. a) American enterprise b) Western enterprise c) Google enterprise d) Creative destruction 3. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 5. 3D Customer Focus What we have learned so far is that it makes common sense to design products and services that fit their features and price to the usage situation. This is achieved by designing and ever updating a product line of models or brands whose features are matched with the benefits sought in different usage situations by different users and the major drivers of consumer choice (determinant attributes in the purchase process decision). Why design products that do not deliver the benefits that are desired and expected and that determine choice and satisfaction? A second common sense goal of customer segmentation should be to identify how the customer prefers to interact with the company, such as via the Internet or telephone or through a particular distributor or retailer, then do it. The customer relationship services and selling/marketing/service campaigns are then designed around the customer’s contact and channel preferences, how they wish to trade with you. Contact segmentation is crucial to the implementation of campaigns introducing new products and services directed at customers identified to be very good, profitable prospects. Contact and channel preference segmentation is also crucial in encouraging customers to adopt less costly ways of doing business and/or marketing redesigned services and cross-selling campaigns to unprofitable customers. This reminds us that you should never take your focus off your most profitable customer relationship prospects. Even the most modest entrepreneur understands this marketing principle. You identify your most profitable business prospects and your most profitable customer prospects and you focus and concentrate your resources and skills around such prospects. What all this common sense means is that managers need to think in three dimensions (3D) about each customer. The three dimensions are: D1. Customer profitability or potential profitability. What drives customer profitability? D2. Customer choice drivers and desired features. How do they use the product? What are the determining features that most influence choice and, hence, are the most important features for a firm to focus on and use to differentiate its products and models? D3. Customer contact drivers and desired features. How do they prefer to conduct their business with the company, that is, through what contact, communication, selling, financial and distribution channels? When managers think about customer focus in 3D, either intuitively or through customer database analysis, they are fairly assured of success, or at least avoiding costly mistakes. Think about the hardworking, successful entrepreneur running a small local business. She understands her individual customer product and service preferences and how they wish to do business or trade with her. The savvy entrepreneur is also very conscious of which customers are most profitable and in need of the most gracious and obliging service. This 5,000 year-old “understanding the differences between customers” skill or capability also needs to be possessed by the modern large company. It also needs to understand its customers changing product and service preferences, sometimes leading them, sometimes following them and always trying to do business with the customer according to his or her wishes. And it needs to make a special effort to do so with their most profitable customers. It is 3D customer focused thinking. 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel Firms without sophisticated customer databases can still undertake a common sense segmentation of customers by profitability. They use a simple way of assessing which are the most profitable customers and which are the least profitable or unprofitable customers, and categorize customers in this way mentally (for example, a refrigerator salesperson judges the wealth of a potential customer by the quality and ‘scuffedness’ of his shoes). It is “profitability profiling” built around exemplary customers who may even be remembered down the family business history. As we shall see in the next section, more sophisticated system controls undertake an objective analysis of information in a customer database, but the principle is the same. Identify the important drivers of customer profitability and then manage the extremes of the customer profitability distribution separately by segmenting the extremes into the highly profitable customers and the unprofitable customers. Study Questions 5.5 1. It makes sense to design products and services to be most useful and cost effective in the fit between their features and their price and the__________? a) Market b) Company c) Usage situation d) All of the above 2. The first two dimensions of the 3D focus are customer profitability or potential profitability and customer choice drivers (benefits sought) and the most important product features. What is the third? a) Customer attitudes, interests and opinions b) Customer demographics (age, sex, education etc) c) Customer contact drivers and desired contact features d) None of the above 3. When managers think about customer focus in 3D, either intuitively or through customer data-base analysis, they______________________. a) Are fairly assured of success, or at least avoiding costly mistakes b) Will make optimal decisions c) Are knowledge managers d) All of the above 4. The 3D way of thinking about different customers is _________ years old. a) 50 b) 100 c) 1,000 d) 5,000 5. An alternative to using sophisticated customer databases to undertake a segmentation of customers by profitability is_____________. a) To hire a company to develop a customer database for you b) Ask your accountant to segment your customers c) Use common sense d) There is no alternative 6. An exemplar customer is____________________. a) A customer who is used to set an example to other customers b) A model customer who receives the very highest service c) A well known model customer used in profitability profiling d) All of the above 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 6. 3D Segmentation Process Step 1: Capture customer purchase histories and measure profitability First record the history of the purchases made by the customer, including after-market services such as purchase financing. This is obtained from sales and billing records. After-market supplies, consumables and parts also need to be included in the purchase history. From understanding the contribution margins on the products sold to the customer/account and the cost of all of the marketing, selling and servicing of the individual account (based on some form of activity based cost accounting), the profitability of the customer can be assessed. Do this intuitively in your head if it cannot be calculated from the firm’s accounting system. It requires some new ways to account for costs and profits around customers, rather than around products and functions. Companies who do such accounting and identify customers by profitability are FedEx, Hallmark, Bank of America and The Limited. Many small service companies have surprisingly good ways of tracking customer profitability using their accounting systems. The customer is now categorized into a profitability segment, the most simple segment structure being customers with a history of being profitable and customers with a history of being unprofitable. Every business can pretty much make this segmentation intuitively and then manage its customers accordingly. “Centura Banks Inc. of Raleigh, N.C. now rates its 2 million customers on a profitability scale from 1 to 5. The real moneymakers get calls from service reps several times a year for what Controller Terry Earley calls “a friendly chat,” and even an annual call from the CEO to wish them happy holidays.” 9 In the late 1990s, Fidelity Investments contacted 25,000 high cost “serial” callers who were told they must use the company website or the automated call system for account and price information. When they called in the future, they were routed to a special representative who directed them back to the automated system. 10 AT&T routes customers to different call centers based on the profitability of the customer. Service standards and features are different between the call centers. Many other companies also do this. Rogers and Bell routes calls to reps and adjusts call priority based on customer value. After profiling profitable customers, the unprofitable customers are profiled with a focus on the likely drivers of un-profitability, such as (1) needing extensive (expensive) service support, (2) always buying on sale, (3) only buying the loss leaders, or (4) infrequent purchases of very little. These are the opposite drivers of customer profitability which are again: frequent purchase of a lot, purchase of high margin products and services, and low transaction/servicing costs. Step 2: Profile customer benefit segments The deeper the customer profiling, the more you will know your customers and understand them. Through such understanding, you create a very important competitive capability and advantage over rivals who do not understand their customers as well. Superior information about your 9 10 Brady, Diane, “Why Service Stinks,” BusinessWeek, October 23, 2000, p.124. Brady, Diane, ibid. 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel customers and their profit potential, as well as how to trade with them, is vital private information that earns economic rents (super profits) for the possessor. Continental Airlines launched a Customer Information System in the late 1990s in which every one of its 40,000 gate, reservation and service agents has access to the history and value of the customer. An attached expert system also suggests remedies, perks such as upgrades and coupons for service delays. For their top customers, they even know if they put on eye-shades when they go to sleep. With this emphasis on higher service to the most profitable customers, the percentage of Continental customers who paid higher cost unrestricted fares rose from 38% to 47%. 11 This is why the depth of your customer profiling (crudely measured by the number of variables in the customer file) is a good measure of the quality of your customer focus. For example, is the segment membership specified and profiled by their demographics, amount and mix of products and services purchased, where they purchased under what terms, what service calls have they made about what and what services have been provided at what expense? If possible, other measures of hobbies, activities, interests, passions and purchases in other categories might be captured on warranty cards returned by buyers. They all add richness and new insights to the customer profiling. It is in-depth segment profiling that enables highly targeted messages and customer support. It is the basis of the customer relationship marketing (CRM) best practice that is detailed further in the Selling, Advertising and Distribution modules. Let us assume that we are fortunate enough to have a rich customer database that captures past and present customer profitability and describes each customer in terms of the following segmentation criteria: geographical location, age, gender, ethnicity, marital status, dependents, life-stage, education, occupation, income, wealth, activities, interests, passions, use of Internet, use of media and use of different retailers. This could be obtained when signing up for a service or a warrantee, or through survey research. The soundest way of segmenting these customers is to use what is called Cluster Analysis in market research; to cluster the profitable customers into segments that have similar profiles of products, models or services purchased. Once the clustering is done on these purchase criteria, you then study the big differences between the clusters on measures such as location, demographics, life-stage, lifestyle, interests, etc. These differences will give you clues not only as to the different routes to customer profitability, but also clues to how you should tailor different new products and services to the different clusters of profitable customers. Each will probably become known by a short title that is often associated with the particular features or services they seek. For example, the first generation mobile phones were launched 25 years ago and by 2010, it is estimated that nearly three billion phones will be in use around the world. Here is British Telco’s clustering of benefit segments based on a study of 10,000 users in four countries. Six Segment Clustering of the Cell Phone Market12 Laggards Do not like phones, particularly text messaging, low communication needs (for emergency calls only) Basic Communicators Conservative, practical users of phone and text messaging. Nothing more sophisticated or fun. Wannabes 11 12 Brady ibid, p.126. Based on 10,000 samples in four countries for British Telco, as reported in Sally Dibb and Lyndon Simkin, Market Segmentation Success: Making it Happen, New York, The Hayworth Press, 2008: 77-84. 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel Not in the in-crowd but want to be. Like trendy hand-sets to show off, but mainly use them as MP3 players and cameras. Trendy Talkatives Talk around clock. Heavy time user. Interested in all applications and services, younger, fashionoriented socializer. Big into social scene and have a strong need for communication. Gaming Youths Game addicts, but also into images and brands that keep them up to date with the latest fads. Mainly male, live fast and play hard, young and very tech savvy. Heavy time user. Sophisticated Careerists Used a lot in their business and to organize their lives, but are not emotionally attached to phone and demand value for the money. Customer care and respect is very important. Big into technology (internet use), are very mobile and have a lot of contacts. So which segment do you belong to and which segment do you think is most profitable to Telco? Nokia who sells about one in three hand-sets around the world has identified from consumer usage and lifestyle studies its own six basic benefit segments for its cell phones: 13 1. 2. 3. 4. 5. 6. Basic low-income consumers who want a no frills, very inexpensive, phone Expression consumers, young consumers who want to customize their phone Active consumers who want a rugged, tough phone with outdoor features Classic consumer who wants a traditional phone with some features Fashion consumer who wants ever thinner, ever smaller, ever more stylish Premium consumers who want all the latest features and services Do these six segments match Telco’s segments? Pretty much, although Telco does not seem to be serving the Active outdoor segment. But Nokia is updating its segments. It has created a special Communicator product line for business users who want to use the phone for Internet access, streaming video, etc. Nokia also markets another line of N-gage phones that are mostly for playing games. These are emerging new segments associated with particular usage situations and benefits sought. The first business segment may merge with and dominate the Premium Segment. The second game segment is probably a sub-segment of the young consumer segment, but more for the introverts rather than the extroverts who seek a phone to help them define their identity. It is the Games segment identified by Telco. Sometimes you lead in creating and serving new profitable segments, other times you follow. And then there is the new tracking phone that uses GPS Navigation or some other tracking technology and then sends a message indicating where it is to the parent of a teenager. It is new in the United States; however it has been available in South Korea since 2000 and by 2005 had created a new market segment of four million customers! 14 Where does this segment fit into Nokia’s benefit segments described above? Is it time for Nokia to add another customer segment – concerned parents? And what about the elderly who need a phone to make a 911 call in a few panicky seconds before they lose it? Nice to have a GPS locator on that phone. And how about renting a phone to tourists for making calls back home and that also has GPS mapping that features tourist attractions and a dial-in tourist commentary/guide to the attractions? You pick up the phone at the airport and you drop it off at the airport. In between, it is your navigator, tour guide, link to home, link to emergency services, restaurant recommender, transport adviser and 13 14 See http://www.nokiausa.com Moon Ihlwan and Andy Reinhardt, “Working late won’t work anymore, new services can track you – or your loved ones – by cell phone,” BusinessWeek, October 31, 2005, p. 40. 3. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel booking service. 15 Clearly, there is a lot of person-usage situation segmentation potential in cell phone services. Step 3: Understand how customers use the product or service Each benefit/feature segment’s distinctive demographic characteristics, lifestyles, activities, interests, passions, etc. can be further explored in visits to segment customers. These visits will identify why the customer chose the product and service features they did. The unique performance benefits that the customer seeks can be discussed and the specific situation reasons for wanting and specifying such features explained (see the Understanding the Customer module on customer visits best practice). It is what really good engineers are really good at. This is likely to lead to better product and service design, as discussed in the next module on Branding and Product Development. Sometimes the unique needs of a situation are not related so much to personal differences as they are to situation features. For example, there are distinct climate zones in North America, and all gardening and landscaping products and services have to pay attention to these situational climate zones, no matter who the customer is. Other usage situations are related to the unique characteristics of a town or community. Applebee’s has over 1,500 “Neighborhood” restaurants primarily located in rural towns and suburban neighborhoods. The interior decoration of the store is fitted to the local community by the use of photos of local sport teams, community groups and other local memorabilia. This ambience, along with location convenience and family food, is a winning combination. In other locations, there are high concentrations of ethnic minorities whose tastes in food must be considered by local supermarkets, take-outs and restaurants. Yet other locations have high concentrations of the elderly who are attractive prospects for health care providers. Let us say we are P&G and the Tide Team that focuses on the premium Tide brand of laundry detergent, which continues to be improved with one patented innovation after another. Tide is not your Grandmother’s laundry detergent. It has been vastly improved over the decades by dozens of patented improvements. But to stay ahead, P&G has to ask, answer and re-answer situation usage questions such as: How and why might demand vary for adding bleach to a low temperature laundry detergent in the global marketplace? Demand will vary depending on the existence of washing machines, what types of washing machines (the length of their cycle times, the harshness of the wash on fabric), typical cold water temperature, what impurities and chemicals are in the water, the nature of the fabrics worn, the nature of the dyes used to color the fabric, the frequency with which clothes are washed, the type of food consumed that produces stains, the type of work that produces stains, the standards of cleanliness in the culture and how consumers judge cleanliness. All of these are likely to vary across and within national markets. To explore these situation usage issues, you need to talk to people, and then you also need to talk to the people who make and sell washing machines to them, then you need to talk to water experts about the type and temperature of the water, you need to talk to the people who make and sell garments around the world. You need to talk to the cleaning professionals - the laundry services about the nature of the stains and customer expectations and judgments. 16 What P&G found when it did such market research was that there were two distinct customer segments whose product usage required extra stain removing power, something that Tide did not provide. This led to the 15 16 Roaming Holiday, The Economist Technology Quarterly, December 2, 2006, p. 14. David Sharp, "The Evolving Dialogue With the Global Customer," The Changing World of Marketing, Marketing Science Institute Report # 92-112, May 1992, Boston MA: 7-8. 4. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel launch of Era, a detergent for getting stains out of work clothing and children’s clothing, and for the really, really tough baby and toddler stains, there is the super-poop cleaner laundry detergent brand called Dreft. Clearly, these two brands are targeted respectively to the needs of work and young families, and they deliver a distinct feature quality to address a distinct need. Tide is the biggest and most successful brand of laundry detergent marketed by P&G, but it has developed other very successful brands that deliver special benefits in use Era for stain cleaning and Deft for baby laundry. These needs were discovered by observing customer usage and uncovering them did not require huge statistical studies. Small firms and entrepreneurs can do this sort of needs analysis in a common sense and intuitive way. Ask good questions. This simple, straightforward, go-look-andobserve-and-ask-questions-and-answer-questions-observe-reactions-to-your-answers-and-takephotos-and-most-of-all-listen process is often more informative to product and service engineering and understanding consumer behavior than the use of focus groups to understand the needs of different market segments. The steps involved in usage situation market research and the use of focus groups in consumer research was discussed in detail in the previous Understanding the Customer module. You study the individual in his/her usage situation. You keep studying individuals in their usage situations. This is at the core of developing a deep understanding of your customer segment. Go and visit, take photos, put them on the wall of the segment team meeting room and the offices of the team, and keep adding new photos. One idea is for each and every segment team member to make at least one in-usage-situation, in-depth visit with a member of the customer segment (or set of accounts the team has to manage) per month. At times of rapid product and new service development, a lot more times a month. The marketing member of the team can be expected to be out in the field visiting with customers and resellers the majority of the time, along with sales. It is called staying close to your customers. It is not rocket science. Every business should do it and can do it. This ethnographic, in-depth observation and analysis of segments, first categorized by their profitability profile is one typical and very robust process that emerges out of the customer relationship management (CRM) consulting literature. It is a process to build a cross-functional team organization all around. In the following figure, the above process and steps within the process are described. It is presented to reinforce the principles of deep segmentation, which are to probe and then probe further: peeling down the layers of the onion. It keeps probing: yes, but what explains the explainer? Such explaining the explainer, cause-and-effect analysis is called laddering, and that is what we are doing with the above segmentation process. It is 3D laddering. Customer profitability is first measured and then linked to purchase behavior. This purchase behavior is studied to identify its drivers. To understand these drivers of behavior, you have to go study the consumer and customer when they are purchasing and when they are using the product. What is their current state of nature? What is their desired state of nature? Ten years ago, a leading expert on market segmentation reported a meta-analysis test of how well different variables performed in explaining and segmenting demand. 17 In 37 case studies, the benefits consumers wanted from a product performed best in 19 of the cases, product beliefs performed best in 15 of the cases and life-styles performed best in only three of the cases. 17 Russell I. Haley, "Benefit Segmentation - 20 Years Later," Journal of Consumer Marketing, 1986: 5-13. 5. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel But based on Figure 5.8 below, what is fundamentally wrong with this test? If you understand what is wrong with this analysis you get segmentation. If you do not you are not there yet. What is wrong with such a comparison is the following. Because beliefs and lifestyles are related to benefits sought, it is not a question of choosing benefits, beliefs or lifestyles, but rather using them all because they are all cause-and-effect related. Lifestyles help to explain the benefits sought. Benefits sought help to explain beliefs and preferences, purchase history and finally profitability. You cannot choose between them because they are not independent choices, they are all laddered together as Figure 5.8 illustrates! The 3D Laddering (Onion Peeling) Process 1. Customer profitability analysis 2. Analysis of product features purchased and benefits wanted 3. Usage observation 4. User differences: Income Life cycle stage Life-style, interests 5. Situ differences: Physical surrounds Social context Psychological view Figure 5.8 The 3D Laddering Process Step 4: Sub-segment by contact channel For this segmentation, the customer profile is analyzed by his or her purchase, contact and delivery preferences, and responsiveness to direct campaigns. This information is then used by channel managers, such as the Internet manager, to advise the segment teams on how to cluster their segment by contact preferences, and which customers are hot prospects for an Internet or e-mail campaign, or a price promotion offer sent by direct mail. The segment team is thus managing a segment identified by its profitability and product features/benefits/services sought, which is then sub-segmented into contact sub-segments (contact personally, contact by phone, contact by Internet, contact by mail, contact through mall kiosks etc.). Such 3D segmentation is actionable because distribution can be designed to satisfy the segment members’ preferred contact channels and products and services can be designed to satisfy the segment members’ benefits-features sought. These are the four steps involved in the 3D segmentation approach. How is business to business segmentation different? As seen from the B2B segmentation Table below, it is not much different: it involves segmenting business customers by their profitability, product features-benefits sought and preferred purchase and support channels. 6. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel A B2B Segmentation Process Segmentation Planning • • Get commitment from senior management and sales to segment based on customer relationship management Understand market definition/segmentation and the 3D customer focus Segmenting the Market • • • • • • Define the market geographically by trading region, district Identify most profitable customers Analyze product usage patterns Undertake benefit/feature-desired-in-product-usage segmentation Assess firmographics (business demographics) variables such as industry, location, size, technology use Undertake how-they-wish-to-purchase-and-what-sort-of-servicedo-they-need segmentation Segmentation Implementation • • Organize teams around segments of customers or potential customers Develop new products, new delivery services, new reordering convenience services, new after-sales services and after-market products for the segment Source: Adapted from Art Weinstein, Handbook of Market Segmentation, Hayworth Press, New York, NY, p.156. This is a recommended B2B segmentation process. However, almost all marketing in B2B is one-toone selling and hence segments are far less important, or not needed. Notice its basic similarity to the 3D process recommended in this module. Study Questions 5.6 1. The sequence of steps in the 3D segmentation process is? a) Capture purchase history and measure profitability, profile customer benefit segments, understand how consumers use the product or service and subsegment by contact channel b) Understand how consumers use the product or service, capture purchase history and measure profitability, profile customer benefit segments and sub-segment by contact channel c) Profile customer benefit segments, capture purchase history and measure profitability, understand how consumers use the product or service and subsegment by contact channel d) Profile customer benefit segments, understand how consumers use the product or service, capture purchase history and measure profitability, and sub-segment by contact channel 7. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 2. The driver of customer unprofitability is that they ______________. a) Need extensive, expensive service support b) Always buy on sale c) Only buy loss leaders d) Infrequent purchases of very little e) All of the above are drivers of customer unprofitability 3. The _____________ is a good measure of the quality of your customer focus. a) Attitude of management b) Number of variables in the customer file c) Amount spent on consumer research d) Emphasis on customer profitability 4. In the Telco Segment clustering of the cell phone market, “Not in the in-crowd. Like trendy hand-sets to show off but mainly use them as MP3 players and cameras” describes which segment? a) Laggards b) Basic communicators c) Wannabes d) Trendy talkative e) Gaming youths f) Sophisticated careerists 5. Which of the following is not a Nokia benefit segment? a) Expression consumers, young consumers who want to customize their phones b) Premium consumers who want all the latest features and services c) Wants a rugged, tough phone that is ever more stylish d) Classic consumer who wants a traditional phone with some features 6. Explaining the explainer, cause-and-effect analysis is called _________. a) Causality analysis b) Ethnography c) Snaking d) Laddering 7. Which of the following activities starts 3D laddering? a) An analysis of product features purchased and benefits wanted b) Usage observation c) Customer profitability analysis d) None of the above 8. Which of the following activities comes second in 3D laddering? a) Analysis of product features purchased and benefits wanted b) Usage observation c) Customer profitability analysis d) None of the above 9. Usage behavior is driven by? a) User difference drivers b) Usage situation drivers c) User difference drivers and usage situation drivers 10. Segmentation in B2B is far less important than in B2C because _______________. a) Almost all marketing in B2B is one to one selling b) Consumer behavior varies a lot less in B2B c) B2C markets are much bigger than B2C markets d) All of the above 8. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 7. Organizing around Customer Segments From the above analysis, it is clear that in large, team-managed companies, the marketing and sales functions must organize special, cross-functional teams to manage the most important and most profitable accounts either individually or as segments. It is also clear that a second set of special teams need to be formed to manage campaigns directed at customers who appear to be hot prospects and have high growth and profitability potential. Many organizations also first focus their efforts on retention: retaining their most profitable customers. Companies use customer relations management to predict defection and mitigate this risk, as described in the module on Selling. The third set of cross-functional teams focuses on unprofitable customers who are dead beats. The mission of this type of team is to develop and implement debt collection processes, special crossselling initiatives, campaigns to improve profitability or redirect customers to less costly service support sites, and all as graciously as possible. The goal is to lose some of the customers in this segment. This goal and its means of achievement is so different from the goal of gaining customer business and its means of achievement, that it is best that their management be separated organizationally from the teams that manage profitable segments or potentially profitable segments. They are focusing on different ends of the customer profitability distribution. What this implies is that within an organization’s management culture, politics and chain of command structure, there should somehow be three discernible cross-functional teams focused on the very profitable customers, the high potential customers and the very unprofitable customers. Within each of these target segments will be created distinctive brand/feature teams that focus on products that deliver the desired features and benefits. Separately, there will be channel management teams that line-manage say, the Internet, and view the customers they interact with as their target contact segment. The point is that a company must not just position its products and services to target market segments. It must also position its organization. The result should be the creation of the following centers of organization team and individual skills, firm capabilities and competitive advantage: 1. Expertise in retaining highly profitable customers and growing the business 2. Expertise in prospecting for, incubating and growing new highly profitable business 3. Expertise in selecting and “culling” resource draining, highly unprofitable customers 4. Expertise in feature technologies and designs that fit a desired customer benefit 5. Expertise in managing trading relationships with channel specific customers (e.g., Internet customers.) It is not nearly as important how such a set of teams is put together, and who reports to whom, as it is to have such a set of teams in the organization that is well led. This is a very important principle and it is marketing’s responsibility to see that this somehow happens within the political constraints of the organization. According to McDonald and Dunbar, who have written a recommended handbook on market segmentation, segment thinking must be embedded in organization processes and teams where 1. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel everyone knows and can even picture the segment. 18 To achieve this is not easy; it requires quite a lot of political skill. This political skill is described at the end of the What is Marketing module: The biggest obstacle to implementing a segmented approach to marketing successfully can often be the company itself, because of a reluctance to change. Early anticipation of potential difficulties, along with the development and implementation of counter measures designed to win over the hearts and minds of key decision-makers in the organization, will be time well spent. In most cases, this can often be achieved by engaging them in the project, preferably as a member of the overall team, or at least by seeking their view and keeping them up to date with progress. (McDonald and Dunbar 2004, p. 55). The active interest of the chief executive and top management is vital if any formalized approach to segmentation is to be successful. (p. 424). Accepting political realities In natural evolution, there is a principle of cumulative design which says that each evolutionary adaptation is a change of the previous design that was created by all previous adaptations. Design is cumulative in natural evolution. Design is also cumulative in the evolution of an organization, as it changes from one organizational form to another. Seldom is a complete organization swept aside by senior management who then start from scratch. Rather, change management is incremental, slow, often bogged down in personal and inter-silo politics. When this happens, the result can be that all the air is sucked out of the balloon and change comes to a halt. Thus, the goal is team-based reorganization of the marketing function with high quality datamining support, but it is an ideal for firms to move toward. If the firm is sales–dominated, then have sales lead each segment team and then integrate the campaigns with sales management. Sales cannot then say they were not brought in early enough, as they will lead the segmentation initiative. If the current marketing organization is product and brand driven, then encourage product managers to become product-segment team leaders. This way, R&D and engineering will be able to work closely with the segment teams. Segment teams effectively replace or morph from product teams and these segment teams direct product development and new service development toward groups of customers with similar product or service feature needs. The leading market strategy scholar of the last two decades, Professor George Day, recommends such re-organization. 19 The point is that a firm should change by building on its current organization strengths and its most capable teams and people, as execution skills are crucial. The goal is for each team to focus on a segment of customers and a set of brands and services designed to meet the needs of this segment. Of much more importance than making the cosmetic name shift from a product team to a segment team is that the management is really and truly team management. The team behaves as if it is running its own little business. A senior manager should be assigned to each team as a champion. His or her job is to provide support and talk to other senior managers to make sure the team gets the resources and collaboration from functions it needs. The role of senior management should be to make team management work and not to jerk chains and encourage budgeting quarrels between teams and functions. 18 19 Malcolm McDonald and Ian Dunbar, Market Segmentation, Amsterdam, Elsevier, 2004. George S. Day, The Market Driven Organization, New York, The Free Press, 1999; George S. Day, “Managing Market Relationships,” Journal of the Academy of Marketing Science, 28.1, 2000: 24-30. 2. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel In small family businesses, from the times of the great Italian merchant families to today, team management around the breakfast table, lunch table and dinner table is a given. Yes, there is a team leader, a strong-man or woman, but over many years of mentoring and shared experiences, the team members possess and understand each-others’ specific labor specialties and skills and they trust each other. Team membership is not turning over every 3-5 years as managers are promoted, fired or move on to other firms as often happens as a matter of human resource policy in many large companies. This is disastrous for team management. There is a depth of solidarity, loyalty and trust in a family business that is seldom matched in large firms. The team management abilities of small firms give them huge advantages over larger firms. It is one of the best reasons for working in a small firm, until a major family succession fight breaks out. Geographical segmentation and organization The global market is always going to be segmented into country or regional markets. Some of the reasons are historical (affected by the principle of cumulative design). Others reasons are associated with the merger and acquisition of companies that remain decentralized in their distribution, marketing and sales operations. Yet other reasons are related to national chauvinism, language use and dramatic differences between country markets in terms of prosperity, development and culture. Locals know their own markets best (most of the time) and it is also (most of the time) less expensive to service the markets locally rather than centrally. It thus makes sense that regional marketing managers take the lead on advertising and distribution decisions, and global product managers take the lead on product and price with extensive consultation with the regional managers. If you think about it, these same reasons often explain how sales territories are created within a country and why such territory organizations tend to have very strong self-protection, territorial instincts. A successful medium to large sized company is therefore likely to evolve organizationally with powerful product/brand managers who understand the technology used and operational/manufacturing processes and a separate set of powerful sales managers who have a deep understanding of operating in a regional market. If an organization is to be reorganized around segments, how is this to be achieved in the presence of powerfully entrenched product/brand based and region/sales based organizations? Not easily. One answer is to treat each sales region as a sub-market within which there are micro-segments identified by their profitability, product features desired, and their contact and supply features desired. The profitable/unprofitable customers are identified, and then each is identified as belonging to a benefit-feature segment and a trading channel segment. Everyone is then made aware of the customer’s categorization. The major, most profitable and high growth “AA” customers (often called accounts) are managed directly by senior management or special account teams that include experts in their preferred supply chain and experts in the product technology and features they desire (see the Selling module). Similar teams of sales reps, service reps and marketing campaign managers are put together to service industries with particular product feature needs associated with their production processes or to service retail channels with similar end customers. These teams direct both product development and the marketing campaigns designed to support the sales efforts in the country or territory. Separate analytical skill teams are created to support these line management teams. 3. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel If such integration between product production managers, sales managers and segment managers is not made organizationally, then resources will surely be ineffectively deployed as a result of political in-fights for resources between product and brand managers, between sales regions and countries, between customer benefit segment managers and between product managers and sales managers, between product managers and segment managers, and between sales managers and segment managers. The potential political combinations that can produce conflict, misunderstanding and coordination failures are numerous. For senior management to suggest that such “friendly” rivalry between these groups in the budgeting and resource deployment process is good and an effective way of allocating resources has no rationality in economic theory. So finally, we arrive at the last principle of customer focus and market segmentation. It is not enough to reorganize around teams, each with a different customer focus. Senior management and Boards of Directors must also change the way they deploy resources and make budgeting decisions. They must change the budgeting processes they require their operating divisions and middle management to follow. Changing these how-the-money-is-spent processes in a firm can be often extremely difficult. But it is a crucial organizational goal of a market segmentation strategy that focuses on the most profitable customers. Study Questions 5.7 1. _____ types of special, cross-functional teams need to be discernable in an organization’s structure and processes. a) Two b) Three c) Four d) Five 2. To serve its target segments, a business must position its ____________. a) Products b) Products and services c) Products, services and prices d) Products, services and organization 3. What is most important in organizing around segments? a) Creating the teams and having them well led b) How the teams are put together c) Who reports to whom d) The size of the team 4. The active interest of ____________is vital if any formalized approach to segmentation is to be successful. a) The salesforce b) The chief executive and top management c) The chief marketing officer d) The chief financial officer 5. Design is ____________ in the evolution of an organization. a) Important b) Dynamic c) Incremental d) Cumulative 4. Course material is for personal use only. Downloads are monitored by Student ID#5489241 ID#admin Profitability, desired features, desired channel 6. The role of senior management team champions is to: a) Knock heads together b) Encourage budgeting quarrels between the team and the business functions c) Ensure that other senior managers and their functions support the team d) Lead the team 7. The advantage of small business team management is that: a) Disputes can be settled more readily b) Team politics are less c) Very low team membership turnover d) All of the above 8. In export markets, local managers take the lead on: a) Pricing b) Advertising and distribution c) Distribution and product positioning d) Product positioning, distribution, pricing and advertising 9. Powerful product managers and powerful sales managers: a) Naturally emerge in a successful company b) Cannot exist together c) Should be encouraged to compete for resources d) Is a recipe for disaster 10. A crucial organization goal of a segmentation strategy that focuses on most profitable customers is _________________________. a) To measure customer profitability b) To minimize politics c) To maximize management expertise d) To change how-the-money- is-spent (budgeting) processes in the firm 5.

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Marketing: The Perils of Segmentation
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Should you have a sinking feeling in your stomach? Why?
Well, being a new employee and it being my first assignment, a sinking feeling in the

stomach would be experienced, but it is best to avoid it. The reason why I should not have this
feeling is that if I do, I will lose the audience and nobody will understand the co...

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