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Chapter 7 CUSTOMER-DRIVEN MARKETING STRATEGY: CREATING VALUE FOR TARGET CUSTOMERS MARKETING STARTER: CHAPTER 7 Dunkin’ Donuts: Targeting the Average Joe Synopsis Dunkin’ Donuts is rapidly expanding into a national coffee powerhouse on par with Starbucks, the nation’s largest coffee chain. Its research has confirmed a simple fact: Dunkin’ is not Starbucks. To succeed, Dunkin’ must have its own clear vision of just which customers it wants to serve and how to serve them. Dunkin’ and Starbucks target very different customers, who want very different things. Dunkin’ Donuts built itself on serving simple fare at a reasonable price to working-class customers. To broaden its appeal and fuel expansion, the chain has recently been spiffing up its stores and adding new menu items. However, as it inches upscale, Dunkin’ Donuts is being careful not to alienate its traditional customer base. Dunkin’ Donuts’ research has shown that although loyal customers want nicer stores, they are bewildered and turned off by the atmosphere at Starbucks. And they can’t understand why anyone would pay so much for a cup of coffee. The Starbucks customers that Dunkin’ studied were equally uneasy in Dunkin’ shops. In refreshing its positioning, Dunkin’ Donuts has stayed true to the needs and preferences of the Dunkin’ tribe. Dunkin’ Donuts’ positioning and value proposition are pretty well summed up in its popular ad slogan ―America Runs on Dunkin’.‖

Discussion Objective A focused discussion of the chapter-opening Dunkin’ Donuts story will illustrate the basics of segmentation, targeting, differentiation, and positioning. Dunkin’ knows that it can’t make all of its customers happy all the time. Instead, it has segmented its market carefully and concentrates on serving its best customers better. The discussion should emphasize that Dunkin’ Donuts not only knows which customers it wants— it also knows which customers it doesn’t want. Once it identified its best target segments, Dunkin’ updated its stores, menu offerings and other marketing mix elements that position it strongly among these customers.

Starting the Discussion To get a feel for the ―Dunkin’ Tribe‖ and how Dunkin’ Donuts targets them, show several of the many ―America Runs on Dunkin’‖ YouTube videos and relate them to company’s different customer segments. What do students notice about the store settings, product choices, customers and customer preferences depicted in the videos? Which key messages clearly stand out in each segment? What makes members of the ―Dunkin’ Tribe‖ so different from the ―Starbucks Tribe?‖ You should also spend time discussing how Dunkin’ Donuts works to give ―tribe‖ members exactly what they want.

Discussion Questions 1.

How would you describe Dunkin’s Donuts’ approach to market segmentation? (As with most marketers, Dunkin’ Donuts uses a combination of different segmentation variables. Discuss how the company might draw upon geographic, demographic, psychographic, and behavioral variables in determining its market structure. Ask students to provide some examples of each type. As a class, try to determine which variables appear to be most important to Dunkin’ in targeting the ―Average Joe.‖)

2.

Picture a typical member of the ―Dunkin’ Tribe.‖ How does he/she dress? In what type of neighborhood does he/she live? What kind of job might he/she have? What kind of vehicle does he/she drive? What might be his/her attitude toward spending money? Now, do the same thing for a typical member of the ―Starbucks Tribe.‖ What key differences can you find, and how are they important to Dunkin’ Donuts? (Answers will vary. However, it should be clear that Dunkin’ Donuts customers tend to be ―Average Joes‖ – working men and women who want to be part of a crowd. They want fresh, tasty food and beverages for their money without all of the frills. Broadly speaking, Starbucks’ customers tend to view themselves as upwardly mobile individuals who spend money at Starbucks because they can afford it. They enjoy the couches,

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eclectic music, and art-splashed walls. To Dunkin’ Donuts, these differences are profound, and powerfully shape its market segmentation strategy.) 3.

How does the chapter-opening Dunkin’ Donuts story relate to the segmentation and positioning concepts that follow in Chapter 7? (Dunkin’ knows that it can’t serve kind every customer, or every customer in the same way. Instead, it succeeds by segmenting its market, targeting the best segments, and differentiating and positioning itself to best serve the needs of target consumers. That’s pretty much what this chapter is all about.)

CHAPTER OVERVIEW Use Power Point Slide 7-1 Here This chapter looks further into key customer-driven marketing strategy decisions—how to divide up markets into meaningful customer groups (segmentation), choose which customer groups to serve (targeting), create market offerings that best serve targeted customers (differentiation), and position the offerings in the minds of consumers (positioning). Then, the chapters that follow explore the tactical marketing tools—the Four Ps—by which marketers bring these strategies to life.

CHAPTER OBJECTIVES Use Power Point Slide 7-2 Here 1. Define the four major steps in designing a customer-driven marketing strategy: market segmentation, market targeting, differentiation, and positioning. 2. List and discuss the major bases for segmenting consumer and business markets. 3. Explain how companies identify attractive market segments and choose a market targeting strategy. 4. Discuss how companies differentiate and position their products for maximum competitive advantage.

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CHAPTER OUTLINE p. 190

INTRODUCTION Dunkin’ Donuts is rapidly expanding into a national coffee powerhouse on par with Starbucks, the nation’s largest coffee chain. Its research has confirmed a simple fact: Dunkin’ is not Starbucks. To succeed, Dunkin’ must have its own clear vision of just which customers it wants to serve and how to serve them.

P. 191 Ad: Dunkin’Donuts vs. Starbucks

Dunkin’ and Starbucks target very different customers, who want very different things. Dunkin’ Donuts’ research has shown that although loyal customers want nicer stores, they are bewildered and turned off by the atmosphere at Starbucks. In refreshing its positioning, Dunkin’ Donuts has stayed true to the needs and preferences of the Dunkin’ tribe.  Opening Vignette Questions 1. Consider yourself as a coffee and pastry consumer. Do you think you fall into the Dunkin’ Tribe or the Starbucks’ Tribe? Explain. 2. Recall the slogan, ―America Runs on Dunkin’.‖ What does it mean, and how is it central to Dunkin’s segmentation strategy? 3. Think of another company that sells a product or service you enjoy. What are some possible ways that company might separate the angels from the demons in their market segment? p. 192

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Most companies have moved away from mass marketing Objective 1 and toward target marketing—identifying market segments, selecting one or more of them, and developing products and marketing programs tailored to each. p. 192 Key Terms: Market Figure 7.1 shows the four major steps in designing a Segmentation, customer-driven marketing strategy. Market Targeting (Targeting), Market segmentation involves dividing a market into Differentiation, smaller groups of buyers with distinct needs, characteristics, Positioning or behaviors that might require separate marketing strategies or mixes.

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Market targeting (or targeting) consists of evaluating each market segment’s attractiveness and selecting one or more market segments to enter. Differentiation involves actually differentiating the firm’s market offering to create superior customer value. Positioning consists of arranging for a market offering to occupy a clear, distinctive, and desirable place relative to competing products in the minds of target consumers.  Assignments, Resources Use Discussion Question 1 here Use Think-Pair-Share 1 here Use Web Resource 1 here p. 193

MARKET SEGMENTATION

Objective 2

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Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs.  Segmenting consumer markets  Segmenting business markets  Segmenting international markets  Requirements for effective segmentation

p. 193 Figure 7.1 Designing a Customer-Driven Marketing Strategy p. 191 Photo: Walmart

p. 193 PPT 7-6

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p. 192 Segmenting Consumer Markets using Geographic Table 7.1: Major segmentation, Demographic segmentation, Segmentation Psychographic segmentation, and Behavioral Variables for Consumer Markets segmentation Table 7.1 outlines the major variables that might be used in p. 193-194 Key Terms: segmenting consumer markets. Geographic Segmentation, Geographic Segmentation Demographic Geographic segmentation calls for dividing the market Segmentation, Age into different geographical units such as nations, regions, and Life-Cycle Segmentation states, counties, cities, or even neighborhoods. p. 194: Domino’s Pizza

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Demographic Segmentation Demographic segmentation divides the market into Copyright©2014 Pearson Education

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groups based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation, and nationality. p. 193 Key Term: Gender Demographic factors are the most popular bases for Segmentation segmenting customer groups. p. 194 Age and Life-Cycle Stage means offering different Ad: Kia Soul products or using different marketing approaches for different age and life-cycle groups. Gender segmentation has long been used in clothing, p. 195 Photo: Mënaji cosmetics, toiletries, and magazines.

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Income segmentation has long been used by the marketers of products and services such as automobiles, p. 195-196 Key Terms: Income clothing, cosmetics, financial services, and travel. Segmentation, Psychographic Psychographic Segmentation Segmentation Psychographic segmentation divides buyers into different groups based on social class, lifestyle, or personality characteristics. p. 196 Ad: VF Corporation Marketers also use personality variables to segment markets. Behavioral Segmentation

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p. 198 Behavioral segmentation divides buyers into groups Key Terms: based on their knowledge, attitudes, uses, or responses to a Behavioral product. Segmentation, Occasion Occasion segmentation means grouping buyers Segmentation, according to occasions when they get the idea to buy, Benefit actually make their purchase, or use the purchased item. Segmentation Benefit segmentation means grouping buyers according to the different benefits that they seek from the product. User Status means segmenting markets into nonusers, exusers, potential users, first-time users, and regular users of a product. Usage Rate means grouping markets into light, medium, and heavy product users.

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Loyalty Status means dividing buyers into groups according to their degree of loyalty. Using Multiple Segmentation Bases

p. 200 PPT 7-12

p. 199 Ad: Apple

Marketers rarely limit their segmentation analysis to only one or a few variables. PRIZM is a leading segmentation systems that classifies p. 200 every American household based on a host of demographic Photo: Nielsen’s factors. PRIZM Segmenting Business Markets

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p. 200

Consumer and business marketers use many of the same variables to segment their markets. Business marketers also use some additional variables, such as customer operating characteristics, purchasing approaches, situational factors, and personal characteristics. Segmenting International Markets Companies can segment international markets using one or a combination of several variables.  

p. 201



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Geographic location: Nations close to one another will have many common traits and behaviors. Economic factors: Countries may be grouped by population income levels, or by their overall level of economic development. Political and legal factors: Type and stability of government, receptivity to foreign firms, monetary regulations, and the amount of bureaucracy. Cultural factors: Grouping markets according to common languages, religions, values and attitudes, customs, and behavioral patterns.

Intermarket segmentation is segmenting of consumers p. 202 who have similar needs and buying behavior even though Ad: H&M Tokyo they are located in different countries. p. 201 Key Term: Intermarket

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Segmentation  Assignments, Resources Use Discussion Questions 2 and 3 here Use Critical Thinking Exercise 1 here Use Marketing Technology here Use Additional Projects 1, 2 and 3 here Use Small Group Assignment 1 here Use Outside Example 2 here Use Web Resource 2, 3, and 4 here Troubleshooting Tip  Understanding the concept of a market segment can be difficult for students. Breaking down a market, such as their own university, into separate groups can help tremendously, as can drawing a big box on the board, and then breaking the box down into separate sections to represent pieces of a larger market. p. 202

Requirements for Effective Segmentation

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To be useful, market segments must be: p. 200 

Measurable: The size, purchasing power, and profiles of the segments can be measured.

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Accessible: The market segments can be effectively reached and served.

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Substantial: The market segments are large or profitable enough to serve.

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Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs.

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Actionable: Effective programs can be designed for attracting and serving the segments.

 Assignments, Resources Use Critical Thinking Exercise 2 here Use Individual Assignment 1 here Use Think-Pair-Share 2, 3, and 4 here Use Outside Example 1 here p. 202

MARKET TARGETING

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Objective 3

p. 202 Evaluating Market Segments In evaluating different market segments, a firm must look at three factors: 1. Segment size and growth 2. Segment structural attractiveness 3. Company objectives and resources The largest, fastest-growing segments are not always the most attractive ones for every company. The company also needs to examine major structural factors that affect long-run segment attractiveness.   

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A segment is less attractive if it already contains many strong and aggressive competitors. The existence of many actual or potential substitute products may limit prices and the profits. The relative power of buyers also affects segment attractiveness.

A segment may be less attractive if it contains powerful p. 203 Key Terms: Target suppliers who can control prices. Market, Undifferentiated Selecting Target Market Segments (Mass) Marketing A target market consists of a set of buyers who share common needs or characteristics that the company decides to serve. . p. 203 Figure 7.2: Undifferentiated Marketing Marketing Using an undifferentiated marketing (or mass- Targeting Strategies marketing) strategy, a firm might decide to ignore market segment differences and target the whole market with one offer. p. 203 This mass-marketing strategy focuses on what is common in Key Term: Differentiated the needs of consumers rather than on what is different. (Segmented) Marketing Differentiated Marketing Using a differentiated marketing (or segmented p. 204

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marketing) strategy, a firm decides to target several market Photo: Hallmark segments and designs separate offers for each. Concentrated Marketing p. 204 Using a concentrated marketing (or niche marketing) Key Term: strategy, instead of going after a small share of a large Concentrated market, the firm goes after a large share of one or a few (Niche) Marketing smaller segments or niches. p. 205 It can market more effectively by fine-tuning its products, Web Site: prices, and programs to the needs of carefully defined ModCloth.com segments.

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It can market more efficiently, targeting its products or p. 205 services, channels, and communications programs toward Key Terms: Micromarketing, only consumers that it can serve best and most profitably. Local Marketing Micromarketing Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals p. 205 and locations. Photo: Local Micromarketing includes local marketing and individual Marketing marketing. Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups—cities, neighborhoods, and even specific stores. Local marketing has drawbacks. 

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It can drive up manufacturing and marketing costs p. 208 by reducing economies of scale. Key Term: Individual  It can create logistics problems. Marketing Individual marketing is the tailoring of products and marketing programs to the needs and preferences of p. 205 Photos: Nike individual customers. Individual marketing has also been labeled one-to-one marketing, mass customization, and markets-of-one marketing. Choosing a Targeting Strategy

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PPT 7-25 Which strategy is best depends on:     

Company resources Product variability Product’s life-cycle stage Market variability Competitors’ marketing strategies

 Assignments, Resources Use Real Marketing 7.1 here Use Discussion Questions 4 here Use Small Group Assignment 2 here Use Individual Assignment 2 here Troubleshooting Tip  It may also be difficult for students to understand the concept that there is no one, single way to segment a market. Students will often point out that companies segment on a single variable frequently, not understanding that the concept is much broader than that. Using a simple pen as an example, you can point out the various segmentation variables, such as income, occasion (such as graduations), and lifestyle that a pen manufacturer could study to determine effective segments. Although Mont Blanc might segment based on income and occasion factors, Bic could very well look at lifestyle or even age. p. 209

Socially Responsible Target Marketing

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Target marketing sometimes generates controversy and concern. Issues usually involve the targeting of vulnerable p. 209 or disadvantaged consumers with controversial or Photo: Barbie potentially harmful products. Marketers of a wide range of industries have been criticized for their marketing efforts directed toward children. Problems arise when marketing adult products to kids, whether intentionally or unintentionally. The growth of the Internet and other carefully targeted direct media has raised new concerns about potential targeting abuses. The issue is not so much who is targeted, but how and for

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what. Controversies arise when marketers attempt to profit by unfairly targeting vulnerable segments or target them with questionable products or tactics. Socially responsible marketing calls for segmentation and targeting that serve not just the interests of the company, but also the interests of those targeted.  Assignments, Resources Use Marketing Ethics here p. 210

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p. 210 PPT 7-28

DIFFERENTIATION AND POSITIONING

Objective 4

Value proposition: How a company will create differentiated value for targeted segments and what positions it wants to occupy in those segments. p. 210 Key Term: Product A product position is the way the product is defined by Position consumers on important attributes. Positioning Maps Perceptual positioning maps show consumer perceptions p. 211 of their brands versus competing products on important Figure 7.3: Positioning Map buying dimensions.

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Choosing a Differentiation and Positioning Strategy The differentiation and positioning task consists of three steps:

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1. Identifying a set of differentiating competitive p. 210 advantages upon which to build a position Key Term: 2. Choosing the right competitive advantages Competitive 3. Selecting an overall positioning strategy Advantage Identifying Possible Value Differences and Competitive Advantages To the extent that a company can differentiate and position itself as providing superior customer value, it gains competitive advantage.

p. 212

It can differentiate along the lines of product, service, p. 212 Ad: Singapore channel, people, or image. Airlines

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Choosing the Right Competitive Advantages How Many Differences to Promote p. 213 Ad man Rosser Reeves believes a company should develop Ad: Gatorade a unique selling proposition (USP) for each brand and stick to it. Other marketers think that companies should position themselves on more than one differentiator.

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Which Differences to Promote A difference is worth establishing to the extent that it satisfies the following criteria: Important: The difference delivers a highly valued benefit to target buyers. Distinctive: Competitors do not offer the difference, or the company can offer it in a more distinctive way. Superior: The difference is superior to other ways that customers might obtain the same benefit. Communicable: The difference is communicable and visible to buyers. Preemptive: Competitors cannot easily copy the difference. Affordable: Buyers can afford to pay for the difference. Profitable: The company can introduce the difference profitably.

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Selecting an Overall Positioning Strategy

p. 214 Key Term: Value The full positioning of a brand is called the brand’s value Proposition proposition. (see Figure 7.4) More for More positioning involves providing the most p. 215 upscale product or service and charging a higher price to Figure 7.4: Possible cover the higher costs. Value Propositions More for the Same positioning involves introducing a brand offering comparable quality but at a lower price. The Same for Less positioning can be a powerful value proposition—everyone likes a good deal.

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p. 215

Less for Much Less positioning is offering products that offer less and therefore cost less. This involves meeting p. 214 consumers’ lower performance or quality requirements at a Photo: Hearts on much lower price. Fire More for Less positioning is the winning value proposition. In the long run, companies will find it very difficult to sustain such best-of-both positioning. Developing a Positioning Statement

p. 216

p. 216 Ad: Evernote

Company and brand positioning should be summed up in a p. 216 positioning statement. Key Term: Positioning The statement should follow the form: To (target segment Statement and need) our (brand) is (concept) that (point of difference).

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Once it has chosen a position, the company must take strong steps to deliver and communicate the desired position to target consumers. All the company’s marketing mix efforts must support the positioning strategy.

 Assignments, Resources Use Real Marketing 7.2 here Use Discussion Questions 5 and 6 here Use Company Case here Use Critical Thinking Exercise 3 here Use Marketing by the Numbers here Use Additional Project 4 here Use Video Case here

END OF CHAPTER MATERIAL Discussion Questions 1. How does market segmentation differ from market targeting? (AACSB: Communication) Copyright©2014 Pearson Education

Answer: Market segmentation involves dividing a market into smaller groups of buyers with distinct needs, characteristics, or behaviors that might require separate marketing strategies or mixes. The company identifies different ways to segment the market and develops profiles of the resulting market segments. Market targeting (or targeting) consists of evaluating each market segment’s attractiveness and selecting one or more market segments to enter. 2. Name and describe the four major sets of variables that might be used in segmenting consumer markets. Which segmenting variables does Starbucks use? (AACSB: Communication; Reflective Thinking) Answer: Consumer markets are typically segmented using four major variables: geographic, demographic, psychographic, and behavioral variables. Geographic segmentation calls for dividing the market into different geographical units such as nations, regions, states, counties, cities, or even neighborhoods. Demographic segmentation divides the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation, and nationality. Psychographic segmentation divides buyers into different groups based on social class, lifestyle, or personality characteristics. People in the same demographic group can have very different psychographic makeups. Behavioral segmentation divides buyers into groups based on their knowledge, attitudes, uses, or responses to a product. Buyers can be grouped according to (1) occasions when they get the idea to buy, actually make their purchase, or use the purchased item, (2) the benefits people look for in the product class, (3) user status (nonusers, ex-users, potential users, firsttime users, and regular users of a product), (4) usage rate (light, medium, and heavy product users), and (5) loyalty status. Starbucks Coffee uses a combination of geographic, demographic, behavioral, and psychographic segmentation. It started primary in urban locations (in some cases locating two or more outlets within sight of each other) but now has expanded into suburbs as well. Paying $3 or more for a cup of coffee is beyond many consumers’ means, so Starbucks in not targeting every consumer. Psychographic segmentation is being used as well, encouraging customers to hang around the neighborhood barista, listen to and purchase trendy music, and satisfy cultural interests, such as environmentalism and movies that are often promoted through Starbucks outlets. Behavioral segmentation is being used as well, by offering variety in different coffee drinks as well as rewarding loyalty with its new loyalty program, by which

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customers can load a Starbucks card and register it on the Starbucks Web site. This allows Starbucks to capture behavioral data and reward loyal customers.

3. Name and describe the levels at which market targeting can be carried out. Give an example of a company using each. (AACSB: Communication; Reflective Thinking) Market targeting can be carried out at several different levels. Companies can target very broadly (undifferentiated marketing), very narrowly (micromarketing), or somewhere in between (differentiated or concentrated marketing). Using an undifferentiated marketing (or mass marketing) strategy, a firm might decide to ignore market segment differences and target the whole market with one offer. Such a strategy focuses on what is common in the needs of consumers rather than on what is different. The company designs a product and a marketing program that will appeal to the largest number of buyers. Using a differentiated marketing (or segmented marketing) strategy, a firm decides to target several market segments and designs separate offers for each. Toyota Corporation produces several different brands of cars—from Scion to Toyota to Lexus—each targeting its own segments of car buyers. And P&G markets six different laundry detergent brands in the United States, which compete with each other on supermarket shelves. Using a concentrated marketing (or niche marketing) strategy, instead of going after a small share of a large market, a firm goes after a large share of one or a few smaller segments or niches. For example, Whole Foods thrives by catering to affluent customers that the Walmarts of the world can’t serve well. Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Rather than seeing a customer in every individual, micromarketers see the individual in every customer. Micromarketing includes local marketing and individual marketing. For example, Harley-Davidson’s H-D1 factory customization program lets customers explore some 8,000 ways to ―configure a HarleyDavidson motorcycle to create your own masterpiece—a truly one-of-a-kind ride. 4. Explain how companies segment international markets. (AACSB: Communication) Answer: Companies can segment international markets using one or a combination of several variables. They can segment by geographic location, grouping countries by regions such as Western Europe, the Pacific Rim, the Middle East, or Africa. Geographic segmentation assumes that nations close to one another will have many common traits and behaviors. World markets can also be segmented on the basis of economic factors. Countries might be grouped by population income levels or by their overall level of economic development. A country’s economic structure shapes its population’s product and service needs and, therefore, the marketing opportunities it offers. Countries can also be segmented by political and legal factors such as the type and stability of government, receptivity to foreign firms, monetary regulations, and amount of bureaucracy. Cultural factors can also be used, grouping markets according to common languages, religions, values and attitudes, customs, and behavioral patterns. Segmenting international markets based on geographic, economic, political, cultural, and other factors assumes that segments should consist of clusters of

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countries. However, as new communications technologies, such as satellite TV and the Internet, connect consumers around the world, marketers can define and reach segments of like-minded consumers no matter where in the world they are. Using intermarket segmentation (also called cross-market segmentation), they form segments of consumers who have similar needs and buying behaviors even though they are located in different countries. 5. Explain how a company differentiates its products from competitors’ products. (AACSB: Communication) Answer: A company can differentiate itself from competitiors along the lines of product, services, channels, people, or image. Through product differentiation, brands can be differentiated on features, performance, or style and design. Beyond differentiating its physical product, a firm can also differentiate the services that accompany the product. Some companies gain services differentiation through speedy, convenient, or careful delivery. Firms that practice channel differentiation gain competitive advantage through the way they design their channel’s coverage, expertise, and performance. Companies can also gain a strong competitive advantage through people differentiation—hiring and training better people than their competitors do. Even when competing offers look the same, buyers may perceive a difference based on company or brand image differentiation. A company or brand image should convey a product’s distinctive benefits and positioning. Developing a strong and distinctive image calls for creativity and hard work. 6. In the context of marketing, what is a product’s ―position‖? How do marketers know what it is? (AACSB: Communication) Answer: A product’s position is the way the product is defined by consumers on important attributes—the place the product occupies in consumers’ minds relative to competing products. Marketers often prepare perceptual positioning maps to show consumer perceptions of their brands versus competing products on important buying dimensions. Figure 7.3 is an illustration, and the position of each circle on the map indicates the brand’s perceived positioning on two dimensions and the size of each circle indicates the brand’s relative market share. Students should understand that marketers actively try to influence a product’s position through their selection of a differentiation and positioning strategy.

Critical Thinking Exercises 1. Advertisers use market segmentation when promoting products to consumers. For each major consumer segmentation variable, find an example of a print ad that appears to be based Copyright©2014 Pearson Education

on that variable. For each ad, identify the target market and explain why you think the advertiser is using the segmentation variable you identified for that ad. (AACSB: Communication; Reflective Thinking) Answer: Students’ examples will vary. Most will realize, however, that marketers often use multiple segmentation bases, merging geographic, demographic, lifestyle, and behavioral aspects. 2. When Nissan introduced its large Titan pickup truck in the United States and Toyota introduced the Tundra, each thought it would sell around 200,000 vehicles per year and had planned capacity for hundreds of thousands more because of the huge U.S. market potential. After all, the ―big three‖ American manufacturers averaged sales in this market of almost 2 million trucks per year. But the two Japanese brands missed their sales goals by a wide margin. In a small group, discuss possible reasons for the dismal sales of the Titan and the Tundra in the U.S. market. (AACSB: Communication; Reflective Thinking) Answer: Students’ responses will vary. They should examine the consumers in the large pickup truck market segment. Some of them might even own an American pickup truck and feel very passionate about their vehicle and understand why the new entrants had difficulty cracking this market. One possibility why the foreign trucks sold so poorly in this market is because the manufacturers didn’t understand the American buyers of large pickup trucks. They tend to be very patriotic and perhaps not as open to foreign brands. An interesting article profiling the demographic and psychographic differences between Toyota Tundra owners and American pickup truck owners can be found at www.businessweek.com/magazine/content/10_42/b4199024791233.htm. Toyota truck owners are more refined than GM and Ford truck owners, choosing to dine at steakhouses, shop online, own golf clubs, and subscribe to Runner’s World. GM and Ford owners dine at restaurants like Cracker Barrel and are less tech-savvy than Toyota owners. American truck owners were more likely to have a gun rack in their truck because they are avid hunters, whereas the Toyota owners were more likely to have a bike rack to pursue their active lifestyles. (Note: The print version of this article had a nice graphic depicting the differences between the two types of buyers. It can be found at Jeff Green and Alan Ohnsman (October 11, 2010), ―Toyota’s Large-Pickup Identity Crisis, Businessweek, pp. 2425.) 3. Form a small group and create an idea for a new business. Using the steps described in the chapter, develop a customer-driven marketing strategy. Describe your strategy and conclude with a positioning statement for your business. (AACSB: Communication; Reflective Thinking) Answer: Figure 7.1 shows the four major steps in designing a customer-driven marketing strategy.

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Students should identify the target market for their business and identify the competitive advantage. That is, what does their business offer that others do not? A difference is worth establishing and promoting to the extent that it is important, distinctive, superior, communicable, preemptive, affordable, and profitable. Once value differences and competitive advantages are identified, the positioning statement should follow the form: To (target segment and need) our (brand—business in this case) is (concept) that (point of difference). Marketing Technology: Google’s Glasses Consumers enjoy having Google’s search power at their fingertips, but if things go as planned, we’ll have that Google power right before our very eyes, no fingers necessary. ―Augmented reality‖—the ability to project information in front of our eyes—is now being used in commercial and military operations. For example, the U.S. Air Force uses it to display weapons information in fighter pilot helmets. However, it has yet to take off in the consumer market. That’s because the required headgear has been uncomfortable, unattractive, and expensive. But Google is peering into the future and has tentative plans to sell its Google Glasses device to consumers in 2013. The sleek wraparound glasses place a single lens above a person’s right eye that displays digital information that can be voice- and gesture-controlled. Connecting the device to a smartphone opens up a world of possibilities. The only product close to Google’s glasses currently on the consumer market is a GPS device that skiers and snowboarders insert into goggles that displays speed information.

1. How would you market the Google Glass device in a 30-second commercial to consumers based on one of the segmenting variables you identified in the previous question? (AACSB: Communication; Reflective Thinking) Answer: Students’ answers will vary. Marketing to consumers based on lifestyle could focus on sports activities or cultural interests. For examples, skiers might want to know more than just speed information. Augmented reality can give information on weather conditions, slope conditions, trail maps, and where other skiers are located on a mountain. Consumers interested in history can receive information about buildings, battlefields, and art objects. Someone cooking can see a video on how to prepare a meal. The ideas are limited only by students’ imaginations.

Marketing Ethics: Targeting Young Consumers You would never know that consumers are more frugal these days if you look at the new children’s lines from fashion houses such as Fendi, Versace, and Gucci. Toddler high fashion is not new, but designers are taking it to new levels and extending it beyond special-occasion clothing to everyday wear. In the past, some of the little girls marching down fashion runways

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carried dolls with matching outfits. But now, many of the little children’s fashions are geared around matching mom and dad clothing. Jennifer Lopez and her little ones helped Gucci launch a line for babies and children aged 2 to 8 years old. A Gucci children’s outfit with a t-shirt, skinny jeans, a belt with the trademark double-G, a raincoat, and boots will set mom and dad back about $1,000. A Burberry children’s double-breasted trench coat for a baby runs $335, a bargain compared to mom’s matching $1,195 trench coat. The CEO of the Young Versace brand sees growth in this market and anticipates this brand making up 10 percent of the company’s global sales in only a few years. 1. What segmentation variables are marketers using in this example? (AACSB: Communication; Reflective Thinking) Answer: This is an example of using multiple segmentation bases. One is demographic segmentation because the clothing is created for children. And a family has to have a significant household income to purchase this clothing for their children. It is also psychographic segmentation, based on luxury lifestyles. Finally, this is an application of behavioral segmentation because the clothing is now ―all-occasion‖ instead of ―special occasion,‖ and perhaps ―benefits sought‖ might include status from wearing high-fashion everyday clothing.

Marketing by the Numbers: Kaplan University Recruits Veterans For-profit universities, such as Kaplan University, DeVry University, and the University of Phoenix, actively target military veterans. In fact, the University of Phoenix has more veterans enrolled than any other college. These schools rely heavily on students receiving federal financial aid, and federal law limits the proportion of for-profit university revenue that can be derived from federal aid to 90 percent. But enrolling veterans helps them stay below this threshold because the law does not count GI benefits as government assistance. With federal spending on veterans’ education more than doubling to almost $10 billion between 2009 and 2010, this market is even more attractive. Kaplan University is one of the most aggressive with a team of 300 representatives focused solely on recruiting military veterans, increasing its enrollment of veterans by almost 30 percent in just one year. 1. Discuss the factors used to evaluate the usefulness of the military veteran segment. (AACSB: Communication; Reflective Thinking) Answer: To be useful, market segments must be:  Measurable: The size, purchasing power, and profiles of the segments can be measured. The number of military veterans is measured and can be obtained through public information.  Accessible: The market segments can be effectively reached and served. There are several veterans’ organizations and career fairs targeted toward this group, and

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for-profit universities have utilized all of these channels for reaching veterans. These universities deliver their service online, so is it easy to serve this market. Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogenous group worth pursuing with a tailored marketing program. There are millions of veterans and the majority does not have college degrees. Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. These students are older than traditional college students and likely have families and jobs precluding them from pursuing a traditional college education. Actionable: Effective programs can be designed for attracting and serving the segments. It is possible to design programs specifically for this segment of students. For example, universities may have personnel devoted to helping veterans receive their GI Bill education benefits.

2. Using the chain ratio method described in Appendix 2: Marketing by the Numbers, estimate the market potential for undergraduate education in the veteran market. Be sure to state any assumptions. (AACSB: Communication; Use of IT; Analytical Reasoning) Answer: Students’ assumptions and estimates will vary, and instructors can use this exercise as an illustration that estimating market potential is not an exact science. The aim of this exercise is not to come up with the ―correct answer‖ per se—there is no single correct answer. There are several acceptable answers. Students will have to research and justify the numbers they use. The chain-ratio method described in Appendix 2 for estimating total market demand uses three variables: a) number of prospective buyers b) quantity purchased by an average buyer per year c) price of an average unit Market demand can be determined as follows: Q=nqp where Q = total market demand n = number of buyers in the market q = quantity purchased by an average buyer per year p = price of an average unit

For example, the U.S. Census Bureau reports there are 21,800,000 veterans in the United States as of 2010. However, this number must be discounted because some veterans already have

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college degrees and are not in the schools’ target market. One way to discount this number is to multiply it by the percentage of the U.S. population that does not have bachelor’s degrees. The U.S. Census also reports that 27.9% of persons age 25+ in the United States hold bachelor’s degrees, so the discount factor would be 72.1% (that is, 1 - 0.279). See http://quickfacts.census.gov/qfd/states/00000.html for this information (accessed June 19, 2012). Thus, one estimate of the number of potential veterans without college degrees is 22,894,578 × 0.721 = 16,506,990 veterans. However, another source indicates that the percentage of veterans 25 and older with at least a bachelor’s degree in 2010 was 26%, which is lower than the total population rate (see www.infoplease.com/spot/veteranscensus1.html, accessed June 19, 2012). In that case, the number of potential veterans would be higher: 21,800,000 × 0.74 = 16,132,000. Another factor that could discount this number is when the veterans served. For example, 35% of all veterans served during the Vietnam-era (1964-1975) and are likely not seeking to earn a bachelor’s degree, so the total number could be discounted by a factor of 0.65 (that is, 1 – 0.35): 16,132,000 × 0.65 = 10,485,800. Depending on assumptions students make, an estimate could be made as simply as using the number of veterans who served from 1990-present, which is 4.8 million, or the number of veterans who are younger than 35, which is 1.7 million (see www.infoplease.com/spot/veteranscensus1.html, accessed June 19, 2012). To determine the other elements of the chain ratio method, students will have to state their assumptions. For example, if using the cost of a degree as the ―average price per unit,‖ then the ―quantity purchased‖ would be 1 because most veterans will likely only earn one degree. However, if the ―average price per unit‖ is the cost for one year or one semester, then the ―quantity purchased‖ will be the number of years or semesters to complete a degree. To determine costs and time taken to graduate, students will have to research these institutions. It is interesting to note, that graduation rates are a dismal 22 percent at for-profit colleges, which would limit the market potential because most students drop out before receiving a degree (see www.bloomberg.com/news/2010-11-01/kaplan-quest-for-profit-at-taxpayer-expense-ensnaresdisabled-u-s-veteran.html).

Company Case Notes Darden Restaurants: Balancing Standardization and Differentiation Synopsis Darden isn’t a well-known name. But Olive Garden, Red Lobster, and LongHorn Steakhouse are. Darden runs these and a few other restaurant brands – a total of 1,800 restaurants a year that serve up over 400 million meals each year producing over $7 billion a year in revenue. The story in this case is Darden’s ability to standardize restaurant purchasing and operations in a way that customers don’t know it. Darden differentiates across each of its restaurant chains in ways that they appeal to different types of customers for different occasions. In many respects, Darden has pulled off the perfect blend of standardization and differentiation.

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Teaching Objectives The teaching objectives for this case are to: 1. 2. 3. 4.

Allow students to apply the concepts of market segmentation, targeting, and positioning. Consider the ways to segment the consumer market for dining. Allow students to develop positioning strategies. To provide students the opportunity to consider what companies in stagnant industries can do to fuel growth.

Discussion Questions 1. Using the full spectrum of segmentation variables, describe how Darden segments and targets the sit-down dining market. Certain things should be considered here. Most of Darden’s targeting is the same across all three of its main restaurant chains.  Income – The price range of Darden’s ―Big Three‖ is relatively similar and is moderate by sit-down dining standards. Thus, there is not much differentiation here. In this respect, Darden is targeting the same segments of customers as far as income goes.  Benefits – Across all Darden restaurants, customers are looking for convenience of location, a clean ―authentic‖ atmosphere, quality personalized service, and a consistent product.  Geographic – Olive Garden and Red Lobster are nationwide. Longhorn Steakhouse is in the eastern half of the U.S., although Darden is moving to change that. However, in some ways, Darden segments across its chains.  Country – The U.S. is the primary market. However, information not contained in the case reveals that Darden has struck a recent deal with American Group to develop at least 60 of its restaurants in the Middle East. It is looking to expand to other countries as well.  Occasions – While all Darden restaurants cater to regular occasions and special occasions, the biggest way that Darden segments customers across its chains is by the type of food that a customer likes or is in the mood for. Some Darden customers will go to all three chains. In this case, the chain is targeting based on what a customer wants on a specific day or occasion, ensuring that Darden has a little something for everyone. Other customers may only like one or two of the chains. In this respect, Darden is segmenting by ―Italian‖ customers, ―seafood‖ customers, and ―steak‖ customers. 2. Has Darden differentiated and positioned its brands effectively? Explain. In the restaurant business, a great deal of differentiation is based on cuisine. In this

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respect, Darden has applied a standardized formula to three different cuisines. Each of these chains is very different in that respect. One would need to scrutinize very carefully in order to determine the similarities and common ownership. Beyond that, these are clearly three very different brands each with menu items specific to itself. Olive Garden – positioned as an Italian family-style restaurant with décor and menu items to suggest such. Red Lobster – Seafood available nationwide for middle-America. Known as a fried seafood place, Red Lobster is now positioned as ―wood-grilled‖ seafood. Longhorn Steakhouse – positioned as a classic western-style steakhouse. Meats are fresh, not frozen. 3. Although Darden’s efforts to standardize across brands have contributed to its success, how might such practices backfire? The only thing that could backfire is that at some point, too much standardization would make all three restaurant experiences seem like ―same place, same thing.‖ Thus far, it does not seem that Darden faces that danger. So long as menus and atmosphere are kept distinct, this should not be an issue. One of the benefits for Darden is that even if similar items are sourced (meat, seafood, etc.), there is a lot of flexibility in how those things are prepared. 4. Given current conditions, will Darden Restaurants continue to dominate the market? Why or why not? The case presents some compelling information on this. Most notably, sit-down dining has been declining for at least 17 years. During that time, the number of casual-dining restaurants has grown twice as fast as the U.S. population. Thus, more companies in a declining market makes things very difficult as far as growth is concerned. All things equal, Darden would have to take share from other companies to fuel future growth. Darden is the biggest, but it is certainly not the only player in a massive industry that is comprised of many small companies. To say that Darden will continue to dominate is speculative at best. But Darden certainly has certain things going for it that play well. Scale of operations, expertise in execution, sharing across chains, and other strengths. 5. What recommendations would you make that will help Darden’s future growth? Saturate markets - In spite of the comments for question 4, much of the appeal of a Darden restaurant is familiarity and a reputation for consistency. In the past couple of decades, the restaurant industry has swung noticeably toward the national chain over local flavor. Many people want what they know. They don’t want to take chances. Thus, the first recommendation is to continue building restaurants in places where they do not have any. And because people only want to drive so far to go to dinner, there is still plenty of room for more Darden restaurants. Longhorn Steakhouse certainly has plenty of room for expansion in the western states. But even the other two chains would like do well even in places where there is another restaurant of the same chain within a distance that is too far for most people to run out and get a bite to eat. International expansion – The move into the Middle East is a good one. That may sound

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odd, but the Middle East alone is experiencing a massive expansion of American dining brands. TGI Friday’s is one casual dining chain that has made inroads there. The American Group, the company that is licensing Darden operations, already runs more than 1,200 restaurants in the Middle East region. Most of them are American chains. Darden should heavily invest there and other places that represent growth markets for dining. Proprietary items – Olive Garden has its breadsticks, Red Lobster has its cheesy biscuits. A few items like this per chain gets people coming back again and again.

Teaching Suggestions Prior to assigning this case, assign students (optional) to eat out at Olive Garden, Red Lobster, or Longhorn Steakhouse. Have them take notes on their experience there. Assign three students (one per chain) to report to the class on their experience; on the things they like or disliked, on what worked and what didn’t. After these presentations, have the students read the case in class (this only takes about 5 minutes). Then, have them work on questions in groups. Do the student experiences at the actual restaurants reflect the information in the case? This case could also be used with the marketing research chapter (Chapter 4) and the retailing chapter (Chapter 13).

ADDITIONAL PROJECTS, ASSIGNMENTS, AND EXAMPLES Projects 1. Go to iTunes (www.apple.com) or Rhapsody (www.rhapsody.com). What unique market segments appear to be the target of specific genres of music? How did you determine the segments? (Objective 2) 2. You’ve agreed to help a friend with a home furnishings business segment her market. Suggest a way to segment the market for her. Select a target market to go after, keeping in mind segment size and growth, structural attractiveness, and probable company resources. What target marketing strategy would you use? Explain your answers. (Objective 2) 3. There are many ways to segment a market. Using the four segmentation variables discussed in the chapter, discuss which variables would be most important for segmenting (a) candidates for cataract surgery and (b) possible enrollees in a culinary school. Explain your choices. (Objective 2) 4. Collect advertisements that demonstrate the positioning of different watch brands. Sort the various brands into categories of brands with similar positions. (Objective 4)

Small Group Assignments

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1. Form students into groups of three to five. Each group should read Real Marketing 7.1: W Hotels: Not Just a Room – It’s a Trendsetter Lifestyle. Then have them answer the following questions and share their answers with the class. (Objective 2 and 4) a. As a marketing manager for W Hotels, which segmentation variables might you use to best understand your market structure? b. What do you think of W Hotels’ strategy of integrating art, fashion and entertainment into the hotel experience? Which market segments does this address, and how does it uniquely position the hotel in the minds of guests? c. Think of another company that sells a product or service you enjoy. What are some possible market segmentation strategies the company might pursue? 2. The Federal Trade Commission (FTC) and citizen action groups have accused tobacco and beer companies of targeting underage smokers and drinkers. For instance, in the most recent Super Bowl, Bud Light and Budweiser ads ranked first through fourth in popularity among viewers under the age of 17. Also, underage listeners hear more than a third of radio ads for alcoholic beverages. Considering the foregoing, answer the following questions. (Objective 3) a. Do you believe the criticism that tobacco and alcohol companies have received is justified? Why or why not? b. What do you believe to be the most effective manner to advertise these products without exposing underage consumers?

Individual Assignments 1. You have been asked by your college/university to help develop a market segmentation strategy for them. What market segments would you encourage them to pursue and why? (Objective 2) 2. Consider the following comments by a reporter regarding Victoria’s Secret Pink line. ―The message we’re telling our girls is a simple one. You’ll have a great life if people find you sexually attractive… Do we really need to start worrying about it at 11?‖ Do you believe this criticism is justified? Why or why not? (Objective 3)

Think-Pair-Share Consider the following questions, formulate an answer, pair with the student on your right, share your thoughts with one another, and respond to questions from the instructor. 1. 2. 3. 4.

How would you define market segmentation? (Objective 1) How do geographic segmentation and demographic segmentation differ? (Objective 2) Which one segmentation form do you consider the most valuable? Why? (Objective 2) What is benefit segmentation? Give a good example. (Objective 2)

Outside Examples 1. Review the requirements for effective market segmentation. Now, log on to Rhapsody (www.rhapsody.com/). How are they attempting to segment their markets? Rate

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Rhapsody on each of the five requirements for effective segmentation. Do you believe they are doing a good job on each? What suggestions for improvement would you recommend? (Objective 2) Possible Solution: Rhapsody uses a differentiated marketing strategy. More specifically, they are using demographic, psychographic, and (to a lesser extent) behavioral-based segmentation variables. The requirements for effective segmentation and how well Rhapsody is doing in meeting each are:  Measurable—the size, purchasing power, and profiles of the segments can be measured. Rhapsody has a good idea as to the size of each of its targeted segments.  Accessible—the market segments can be effectively reached and served. Each of the targeted segments is reachable; however, some of the older and/or less computer-savvy users may not be adequately reached.  Substantial—the market segments are large or profitable enough to serve. Given that the costs of accessing each segment are minimal, the segments do seem sustainable.  Differentiable—the segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. Here Rhapsody appears to be having a bit of a problem. Through a review of their Web site, it appears Rhapsody uses basically the same marketing program to reach each segment.  Actionable—effective programs can be designed for attracting and serving the segments. As a follow-up to point above, Rhapsody does not appear to be effectively designing unique program to attract each segment. Rhapsody should concentrate more on designing marketing programs to reach underserved portions of its market. Additionally, if the segments are unique and viable, separate and unique, programs should be designed to reach each. 2. Lifestyle segmentation has many potential advantages. Your text discusses how lifestyle segmentation has been used by the cruise industry by citing Royal Caribbean and Regent Seven Seas as examples. Go to the home pages of three additional cruise lines and discuss how each uses lifestyle segmentation (Objective 2). Possible Solution: Students may come up with any number of examples.  

Carnival Cruise Line (www.carnival.com/) appeals to the value-oriented consumer as well as the cruiser looking for fun. Carnival states ―Fun for All and All for Fun.‖ Norwegian Cruise Line (www.ncl.com/nclweb/home.html) promotes ―Freestyle Cruising,‖ which allows their guest to dine ―with whom they want and when they

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want.‖ This appeals to the individualist, by allowing them the power to choose the ―design‖ of their own individual dining options. Holland America Cruise Line (www.hollandamerica.com) appeals to a more refined or ―well-heeled‖ traveler through the use of the line ―A Signature of Excellence.‖ Seabourn Cruises (www.seabourn.com/) refers to their ships as ―yachts,‖ thus giving their adventures an air of exclusivity appealing to those searching for elegance and relaxation.

Web Resources 1. http://247.prenhall.com This is the link to the Prentice Hall support link. 2. www.dunkindonuts.com Go here to see how this electronics giant is segmenting its markets. 3. www.homedepot.com Here you can learn all about the world of Home Depot. 4. www.lowes.com Take a look at this page and compare the differences in Lowes’ and Home Depot’s approach to segmentation. 5. http://chandon.com/ Chandon illustrates how benefit segmentation can be used effectively.

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