Marketing Management CP5-6

CHAPTER 4 | Analyzing Business Markets 123
such as sales management, call centers, and customer Salesforce.com also streamlined the benefits offered
support. CRM software was installed and configured on the to companies. Compared to other CRM software providers,
purchaser’s premises by IT companies such as PwC, IBM, Salesforce.com stripped away excess features and
and Arthur Andersen. This system posed many difficulties for focused on the buyer’s most important needs. In particular,
customers. Salesforce.com’s applications targeted sales automation,
The first issue was that CRM software was expensive. digital marketing automation, and customer service and
For example, a CRM software license for a company of support. Reducing the number of features on its applications
200 users cost approximately $350,000. In addition to the allowed Salesforce.com to develop an easy-to-operate
licensing fees, companies had to spend money on hardware, and intuitive user interface. Salesforce.com also collects
installation, support and maintenance, upgrades, and hiring information on usage patterns and updates its applications
professionals to train employees. In total, the cost for a accordingly—for example, by placing frequently used buttons
200-user application could exceed over $1.8 million in just in more convenient locations.
one year. Following the success of software as a service, industry
The second issue was that integrating CRM software leaders that dominated software licensing began adding
into a customer’s business was time consuming. Factors on-demand CRM applications to their own portfolios.
such as training employees how to use the software and Salesforce.com maintained its position as the market leader
setting up the hardware and IT infrastructure meant it took by developing innovative software that gave it the competi-
an average of 18–24 months for customers to achieve full tive edge. Its Salesforce Customer 360 is an integrated CRM
functionality of their software. Furthermore, the CRM soft- platform, powered by AI, that unites marketing, sales, com-
ware that customers purchased often did not deliver prom- merce, IT and analytics departments, that gives these teams
ised results. Customers oftentimes could not try out the full a single, shared view of their customers so they can work
functionality of CRM software before purchasing it. As much together to build lasting, trusted relationships and deliver the
as 60 percent of CRM software implementations failed for personalized experiences their customers expect. In addition,
customers. Salesforce.com launched applications such as force.com,
Salesforce.com innovated the CRM software market which allowed external developers to create applications
by offering applications completely online, a system and host them on Salesforce.com servers. This application
called “on-demand CRM.” Based on cloud computing, allowed businesses to create a CRM environment tailored
Salesforce.com stored and delivered its software on central specifically to their needs. Salesforce also introduced a
servers. C ustomers gained access to the company’s private social networking application called Chatter, which
software by purchasing monthly or yearly plans. Simply by allowed employees to communicate in real time while
logging onto the Salesforce.com website, customers were doing their jobs, such as posting updates on project and
able to use CRM applications. Because no software had to customer status.
be installed, the cloud-based platform allowed customers to Salesforce.com’s offering of low-cost and easy-to-
access their applications on any device connected to deploy CRM applications appealed to small and medium-
the internet. sized companies that oftentimes lacked the resources to
Saleforce.com’s cloud computing platform addressed purchase and implement software licenses. In addition,
many of the issues of the traditional practice of purchas- Salesforce.com attracted companies of all sizes because of
ing software licenses. Customers no longer had to invest in its intuitive and functional user interfaces. Because of this,
expensive IT employees and the upfront cost of hardware Salesforce.com secured a strong foothold in the CRM soft-
infrastructure to use CRM applications. Salesforce.com ware market and maintained its dominance by developing
offered application services for $65 per month per user, new and innovative CRM applications.62
which reduced the cost per year for a company with 200
users to $156,000. In addition, customers were able to Questions
focus on learning to use the software immediately, without 1. Why has Salesforce.com been so successful? What did
having to first deploy an IT staff. Salesforce.com allowed the company do particularly well when it created and
customers to try out their desired applications, so custom- expanded Salesforce.com’s offerings?
ers could purchase services when they were fully confident 2. What are some of the challenges Salesforce.com faces
of their usage and benefits. If at any time customers found moving forward?
the application no longer useful, they could just cancel their 3. What other products and services might Salesforce.com
monthly plan. expand into next? Why?
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CHAPTER
5
Conducting Marketing Research
Firms across
the globe use
Qualtrics’ cloud-
based marketing
research
software to
manage key
aspects of their
business that
include attracting
and retaining
customers,
creating a
company culture,
and building
strong brands.
Source: Kristoffer
Tripplaar/Alamy Stock
Photo
M aking marketing decisions in a fast-changing world is both an art and a science. Successful
marketers recognize that the marketing environment is constantly presenting new opportuni-
ties and threats, and they understand the importance of continuously monitoring, forecasting, and
adapting to that environment. One company that helps marketers gain market insight and better
understand ever-changing customer needs is Qualtrics.
>>> Qualtrics is the leader in online marketing research software, offering an online platform that
c ompanies use to collect, manage, and act on experience data. The company was founded in a
basement in 2002 with the goal of helping businesses measure customer and client satisfaction.
Realizing the value of partnering with academic institutions that play a key role in building the skillset of
the next wave of business managers, Qualtrics established close relationships with many u niversities,
and by 2010 it partnered with over 1,000 universities and 95 of the top 100 business schools. By
2012, Qualtrics customers were sending more than a billion surveys, and a year later it was named
to Forbes’s list of “America’s Most Promising Companies.” Today, Qualtrics offerings are used by
teams, departments, and entire companies to manage the key aspects of their business—attract
124
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PART 2 | UNDERSTANDING THE MARKET
and retain customers, build an employee culture, develop distinct products and services, and build
strong brands—using a single cloud-based platform. Over 9,000 enterprises worldwide, including
more than 75 percent of Fortune 100 companies (such as Amazon, Boeing, Chevron, Citibank, ESPN,
FedEx, MasterCard, MetLife, Microsoft, PepsiCo, Prudential, Royal Caribbean, Southwest Airlines, and
Toyota) use Qualtrics to gain market insights and manage customer, collaborator, employee, and brand
experiences. In 2018, Qualtrics was acquired by SAP, the global market leader in enterprise applica-
tion software, for $8 billion. The acquisition enabled SAP to combine its experience in data manage-
ment with Qualtrics’ expertise in experience management. For SAP, Cloud applications like Qualtrics
are essential to its business strategy, as a differentiator from the likes of Amazon Web Services and
Microsoft. Acknowledging the value of Qualtrics’ expertise, SAP’s CEO referred to Qualtrics as the
“jewel in the crown of SAP.” In July 2020, less than two years after acquiring Qualtrics, SAP announced
that its plans to take the subsidiary public—a strategy that will enable Qualtrics to grow while remain-
ing SAP’s largest and most important go-to-market and research and development partner.1
To make the best possible tactical decisions in the short run and the most effective strategic decisions
in the long run, marketers need timely, accurate, and actionable information about consumers, the
competition, and brands. Gaining a marketing insight and understanding its implications can often
lead to a successful product launch or spur the growth of a brand.
In this chapter, we review the scope of marketing research and the steps involved in the market-
ing research process. We also consider how marketers can develop effective metrics for measuring
marketing productivity.
The Scope of Marketing Research

Marketing managers often commission formal marketing studies of specific problems and oppor-
tunities, like a market survey, a product-preference test, a sales forecast by region, or an advertising
evaluation. It’s the job of the marketing researcher to produce insight to assist in the marketing man-
ager’s decision making.
Marketing research is the function that links the consumer, customer, and public to the marketer
through information used to identify and define marketing opportunities and problems; generate,
refine, and evaluate marketing actions; monitor marketing performance; and improve understand-
ing of marketing as a process. Marketing research specifies the information required to address these
issues, designs the method for collecting information, manages and implements the data collection
process, analyzes the results, and communicates the findings and their implications.
IMPORTANCE OF MARKETING INSIGHTS

Marketing research is all about generating insights. Marketing insights provide diagnostic infor-
mation about how and why we observe certain effects in the marketplace and what that means to
marketers.
Learning Objectives After studying this chapter you should be able to:
5.1 Define the scope of marketing research. 5.3 Explain how to measure and forecast market
demand.
5.2 Explain the marketing research process, how
to gather and analyze market data, and how to 5.4 Define the different approaches to measuring
develop a research plan. marketing productivity.
125
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126 PART 2 | UNDERSTANDING THE MARKET
Good marketing insights often form the basis of successful marketing programs. Consider the
following examples:
When an extensive consumer research study of U.S. retail shoppers by Walmart revealed
that the store’s key competitive advantages were the functional benefit of “offers low prices”
and the emotional benefit of “makes me feel like a smart shopper,” its marketers used those
insights to develop its “Save Money, Live Better” campaign. The new campaign, which
replaced the 19-year-old “Always Low Prices. Always.” slogan, won Walmart a REBRAND
100 Global Award of distinction and put a positive spin on Walmart’s reputation for “cheap”
merchandise, shifting consumers’ focus from prices alone to how shopping at Walmart could
help them attain a better lifestyle.
When marketing research showed that consumers viewed Walgreens largely as a con-
venience store with a pharmacy in the back, the company took steps to reposition itself as
a premium health care brand, putting more emphasis on its wellness offerings, such as its
walk-in clinics. Three years later, revenue had risen by 14 percent in a sluggish economy.2
Gaining marketing insights is crucial for marketing success. To improve the marketing of
its $3 billion Pantene hair care brand, Procter & Gamble conducted a deep dive into women’s
feelings about hair, using surveys with mood scales from psychology, high-resolution EEG
research to measure brainwaves, and other methods. As a result, the company reformulated
Pantene products, redesigned packages, pared the line down from 14 “collections” to eight,
and fine-tuned the ad campaign.3
If marketers lack consumer insights, they often get in trouble. When Tropicana redesigned its orange
juice packaging, dropping the iconic image of an orange skewered by a straw, it failed to adequately test
for consumer reactions—with disastrous results. Sales
dropped by 20 percent, and Tropicana reinstated the old
package design after only a few months.4
In spite of the rapid growth of marketing research,
many companies still fail to use it suff iciently or
correctly. They may not understand the capabilities of
marketing research or may not provide the researcher
with a sufficiently specific definition of the problem
or opportunity that needs to be explored. In addition,
they may have unrealistic expectations about what
researchers can offer. Failure to use marketing research
properly has led to numerous gaffes, including the
following historic one.
General Foods. In the 1970s, a successful market-

ing research executive left General Foods to try a daring
gambit: bringing market research to Hollywood to give
film studios access to the same research that had spurred
General Foods’s success. A major film studio handed him
a science fiction film proposal and asked him to research
Source: World History Archive/Alamy Stock Photo
and predict its success or failure. His views would inform

the studio’s decision about whether to back the film. The
research executive concluded the film would fail. For
one, he argued, Watergate had made the United States
less trusting of institutions, and as a result, its citizens
in the 1970s prized realism and authenticity over sci-
ence fiction. This particular film also had the word war
in its title; the executive reasoned that viewers, suffering
post-Vietnam hangover, would stay away in droves. The
film was Star Wars, which eventually grossed more than
$4.3 billion in box office receipts alone. What this
researcher delivered was information and opinion, not
>> A marketing researcher whose evaluation of a proposal for insight. He failed to study the script itself, to see that it
Star Wars was based more on opinion than insight gained through was a fundamentally human story—of love, conflict,
careful research predicted failure for the multibillion-dollar loss, and redemption—that happened to play out against
blockbuster. the backdrop of space.5
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CHAPTER 5 | Conducting Marketing Research 127
<< P&G’s Consumer

& Market Knowledge
Department analyzes
market trends, consumer
behavior, and competitor
actions and plays an
integral role in all phases
of the life cycle of
company brands.
Source: Casimiro/Alamy Stock Photo

WHO DOES MARKETING RESEARCH?
Most companies use a combination of resources to study their industries, competitors, audiences, and
channel strategies. They normally budget marketing research at 1 to 2 percent of company sales and
spend a large percentage of that on the services of outside firms. In addition, most large companies
have their own marketing research departments, which often play crucial roles within the organiza-
tion. Here is how Procter & Gamble describes its marketing research department.
Procter & Gamble The Consumer & Market Knowledge (CMK) Department is Procter &
Gamble’s key internal compass, guiding and championing decisions related to brand and customer
business development strategy based on in-depth analysis of consumers, shoppers, and the retail
trade. CMK leads analysis of market trends and consumer habits/motivations, shopper behavior,
and customer and competitive dynamics. It also designs and analyzes qualitative and quantitative
consumer and shopper research studies, as well as syndicated market data. CMK is an integral
partner, involved in all the stages of the brand life cycle, from design of a concept through final
product development and all the way to the in-market launch driving business growth. CMK brings
to life Procter & Gamble’s stated global strategy, “Consumer is Boss.”6
Marketing research firms fall into three categories: (1) Syndicated-service research firms, such
as the Nielsen Company, Kantar Group, Westat, and IRI, gather consumer and trade information that
they sell for a fee. (2) Custom marketing research firms carry out specific projects. (3) Specialty-line
marketing research firms provide specialized research services (e.g., a field-service firm that sells field
interviewing services to other firms).
Companies need not break their budgets to get helpful marketing research data. Libraries, univer-
sities, and chambers of commerce are all great sources of information. Government agencies, including
the U.S. Census Bureau and Department of Commerce, have a wealth of free or inexpensive informa-
tion available to entrepreneurs that can offer insights into growing or emerging markets. And the
internet is bursting with valuable information on just about any topic. Buying mailing lists or using
an inexpensive online tool like SurveyMonkey can also help smaller firms collect marketing informa-
tion that will help them get their products to growing markets that contain the target customers they
want to reach.
Alternatively, a company might gain market insights by observing its competitors. Many busi-
nesses, such as restaurants, hotels, and specialty retailers, routinely visit competitors to learn about
changes they have made. Tom Stemberg, who founded the office supply superstore Staples, made
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weekly unannounced visits to his own stores, competitors’ stores, and other stores outside his category,
Define the problem always focused on “what the store was doing right” to get ideas for improving Staples.7
A company might gather market insights by tapping into employee knowledge and experience.
No one may come into more contact with customers and understand a company’s products, services,
and brands better than its employees. Software maker Intuit puts employees into four- to six-person
“two-pizza” teams. These teams aid market research efforts by going out and observing customers in
Develop the research plan all walks of life in order to identify problems Intuit might be able to solve. Intuit takes all the employ-
ees’ proposed solutions and experiments with them, building products based on the ideas that seem
to work best.8
The Marketing Research Process

Collect the information
To take advantage of all the resources and practices available, good marketers adopt a formal market-
ing research process that follows the five steps shown in Figure 5.1. We illustrate these steps in the
Analyze the information following situation.9
Consider the marketing research underlying American Airlines’ decision to offer entertainment
options on all of its flights, starting with the first-class passengers on long-haul flights. The airline was
considering several options: (1) ultra-high-speed Wi-Fi service, (2) 124 channels of high-definition
Make the decision
satellite cable TV, and (3) a personal video entertainment system that lets each passenger have a custom-
ized in-flight experience. The marketing research manager was assigned to investigate how first-class
passengers would rate ultra-high-speed Wi-Fi, and how much extra they would be willing to pay. One
FIGURE 5.1 source estimated revenues of $70 million from Wi-Fi access over 10 years if enough business-class
passengers paid $25. AA could thus recover its costs in a reasonable time, given that making the con-
The Marketing
nection available would cost $90,000 per plane.
Research Process
DEFINING THE PROBLEM

Marketing managers must be careful not to define the problem too broadly or too narrowly for the
marketing researcher. A marketing manager who says, “Find out everything you can about first-class
air travelers’ needs” will collect a lot of unnecessary information. One who says, “Find out whether
enough passengers aboard a B777 flying direct between Chicago and Tokyo would pay $25 for ultra-
high-speed Wi-Fi service so we can break even in one year on the cost of offering this service” is taking
too narrow a view of the problem.
To broaden and clarify the research parameters, the marketing researcher might ask, “Why does
Wi-Fi have to be priced at $25 as opposed to $15, $35, or some other price? Why does American have
to break even on the service, especially if it attracts new customers, who will bring in more revenue?”
Another relevant question might be “How important is it to be first in the market, and how long can
the company sustain its lead before competition forces it to drop the price or offer the service free?”
These questions focus on the key issues that the manager must address and, at the same time, are
specific enough to be actionable.
The marketing manager ultimately defines the business question as follows: “Will offering high-
speed Wi-Fi service create enough incremental preference and profit to justify its cost against other
service enhancements American might make?” This question can be broken down into several sub-
questions: (1) Should American offer high-speed Wi-Fi service? (2) If so, should it be offered to first-
class only or include business class and possibly economy class? (3) What price(s) should be charged?
(4) On what types of planes and lengths of trips should the service be offered?
Next, the manager can translate the business questions into specif ic research objectives:
(1) Determine what types of first-class passengers would respond most to ultra-high-speed Wi-Fi
service. (2) Ascertain how many are likely to use it at different price levels. (3) Find out how many
might choose American because of this new service. (4) Estimate how much long-term goodwill
this service will add to American’s image. (5) Find out how important ultra-high-speed Wi-Fi
service is to first-class passengers relative to other services, such as a power plug or enhanced
entertainment.
Marketing research varies with the type of information it aims to generate. Some is exploratory; its
goal is to identify the problem and suggest possible solutions. Some is descriptive; it seeks to quantify
demand, such as how many first-class passengers would purchase ultra-high-speed Wi-Fi service at
$25. Some research is causal; its purpose is to test a cause-and-effect relationship.
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DEVELOPING THE RESEARCH PLAN

The second stage of marketing research consists of developing the most efficient plan for gathering
the needed information and then discovering what that will cost. Suppose American made a prior
estimate that launching ultra-high-speed Wi-Fi service would yield a long-term profit of $50,000. If
the manager believes the marketing research will lead to an improved pricing and promotional plan
and a long-term profit of $90,000, he should be willing to spend up to $40,000 on this research. If the
research will cost more than $40,000, it’s not worth doing. The cost of the market research should be
in line with its estimated benefits.
To design a research plan, we need to make decisions about the data sources, research approaches,
research instruments, sampling plan, and contact methods.
Data Sources. The researcher can gather secondary data, primary data, or both. Secondary data
are data that were collected for another purpose and already exist somewhere. Primary data are data
freshly gathered for a specific purpose or project.
After determining the type of data, researchers usually start their investigation by examining
whether some of the data that the company has already collected can be useful in addressing the
research question. The next step involves utilizing the rich variety of low-cost and readily available
secondary data from outside sources to partly or wholly solve the problem without collecting costly
primary data. For instance, auto advertisers looking to get a better return on their online car ads might
purchase a copy of a J.D. Power and Associates survey that gives insights into who buys specific brands
and where advertisers can find them online.
When the needed data do not exist or are dated or unreliable, the researcher will need to collect
primary data. Most marketing research projects do include some collection of primary data.
Research Approaches. Marketers collect primary data in five main ways: through observation,
focus groups, surveys, behavioral data, and experiments.
Observational Research. With observational research, researchers can gather fresh data by
observing unobtrusively as customers shop or consume products. Sometimes researchers equip con-
sumers with pagers and instruct them to write down or text what they’re doing whenever prompted,
or they hold informal interview sessions at a café or bar.10 Photographs and videos can also provide
a wealth of detailed information. Although privacy concerns have been expressed, some retailers are
linking security cameras with software to record shopper behavior in stores. In its 1,000 retail stores,
T-Mobile can track how people move around, how long they stand in front of displays, and which
phones they pick up and for how long.11
Ethnographic research uses concepts and tools from anthropology and other social sciences to pro-
vide deep cultural understanding of how people live and work.12 The goal is to immerse the researcher into
consumers’ lives to uncover unarticulated desires that might not surface in any other form of research.13
Fujitsu Laboratories, Herman Miller, Steelcase, and Xerox have embraced ethnographic research to design
breakthrough products. Technology companies like IBM, Microsoft, and Hewlett-Packard have anthro-
pologists and ethnologists working alongside systems engineers and software developers.14
Any type of firm can benefit from the deep consumer insights of ethnographic research. To boost
sagging sales for its Orville Redenbacher popcorn, ConAgra spent nine months observing families
at home and studying weekly diaries of how they felt about various snacks. Researchers found a key
insight: The essence of popcorn is that it is a “facilitator of interaction.” Four nationwide TV ads fol-
lowed with the tagline “Spending Time Together: That’s the Power of Orville Redenbacher.”
Ethnographic research isn’t limited to consumer products. UK-based Smith & Nephew, a global
medical technology business, used extensive international ethnographic research with patients and
clinicians to understand the physical and emotional toll of wounds, developing ALLEVYN Life, a new
wound-management dressing, in the process.15 In a business-to-business setting, a sharper focus on
end users helped propel Thomson Reuters to greater financial heights.
Thomson Reuters Just before it acquired Reuters in 2008, global information services
giant Thomson Corporation embarked on extensive research to better understand its ultimate
customers. Thomson sold to businesses and professionals in the financial, legal, tax and
accounting, scientific, and health care sectors, and it wanted to know how individual brokers and
investment bankers used its data, research, and other resources to make day-to-day investment
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decisions for clients. Segmenting the market by its end users, rather than by its corporate
purchasers, and studying the way they viewed Thomson versus competitors allowed the firm to
identify market segments that offered growth opportunities. Thomson then conducted surveys
and “day in the life” ethnographic research on how end users did their jobs. Using an approach
called “three minutes,” researchers combined observation with detailed interviews to understand
what end users were doing three minutes before and after they used one of Thomson’s products.
Insights from the research helped the company develop new products and make acquisitions that
led to significantly higher revenue and profits in the year that followed.16
To gather insight into the American Airlines Wi-Fi question, researchers might meander around
first-class lounges to listen to how travelers talk about different carriers and their features or sit next to
passengers on planes. They can also fly on competitors’ planes to observe in-flight services.
Focus Group Research. A focus group is a gathering of 6 to 10 people carefully selected for
demographic, psychographic, or other considerations and convened to discuss various topics at length
for a small payment. A professional moderator asks questions and probes for participants’ opinions
based on the marketing managers’ agenda. The goal is to uncover consumers’ real motivations and the
reasons why they say and do certain things. Sessions are typically recorded, and marketing managers
often observe from behind two-way mirrors. To allow more in-depth discussion, focus groups are
trending smaller in size.
Focus group research is a useful exploratory step, especially if a series of focus groups has revealed
consistent preferences and attitudes. Even then, however, researchers must avoid generalizing because
the preferences of the small number of people involved may not accurately reflect the market as a
whole. Some marketers feel this research setting is too contrived and prefer less artificial means.
In the American Airlines research, the moderator might start with a broad question, such as “How do
you feel about first-class air travel?” Questions then might move to how people view the different airlines,
different existing services, different proposed services, and, specifically, ultra-high-speed Wi-Fi service.
Survey Research. With survey research, companies undertake surveys to assess people’s knowl-
edge, beliefs, preferences, and satisfaction. A company such as American Airlines might prepare its
own survey instrument, or (at a much lower cost) it might add questions to an omnibus survey that
carries the questions of several companies. It can also pose questions to an ongoing consumer panel
run by itself or another company. It may do a mall intercept study by having researchers approach
people in a shopping mall and ask them questions. Or it might add a survey request at the end of calls
to its customer service department.
When conducting surveys—online, by phone, or in person—companies must feel the informa-
tion they’re getting from the mounds of data makes it all worthwhile. Hotels, which live or die by what
guests think, leave questionnaires in guest rooms and use a variety of electronic means to measure
guest satisfaction. They also keep tabs on what is said about them on rating sites like TripAdvisor and
on social media and travel sites. Survey data can affect the services they offer, the room rates they can
charge, and even employee compensation. Other entities in the hospitality field also use surveys to
tweak service. Based on feedback from passengers on overnight flights, El Al Airlines combined food
and beverage service so that passengers could finish meals and get to sleep more quickly. In response
to a common customer complaint, Crystal Cruises simplified its pricing for internet access.17
Of course, companies may risk creating “survey burnout” and seeing response rates plummet.
Keeping a survey short and simple is one key to drawing participants. Offering incentives is another.
Walmart, Rite-Aid, Petco, and Staples sweeten an invitation to fill out a survey on the cash register
receipt with a chance to win a prize.
Behavioral Research. Customers leave traces of their purchasing behavior in store scanning data,
catalog purchases, and customer databases. Behavioral research uses these data to gain a better
understanding of customers and their actions. Actual purchases reflect consumers’ preferences and
often are more reliable than statements consumers offer to market researchers. For example, grocery
shopping data show that, contrary to what they might state in interviews, high-income people don’t
necessarily buy the more expensive brands, and many low-income people buy some expensive brands.
There is a wealth of online data to collect from consumers. Clearly, American Airlines can learn many
useful things about its passengers by analyzing ticket purchase records and online behavior.
Experimental research is designed to capture cause-and-effect relationships by eliminating com-
peting explanations for the findings. If the experiment is well designed and executed, research and
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marketing managers can have confidence in the conclusions. Experiments call for selecting matched
groups of subjects, subjecting them to different treatments, controlling extraneous variables, and
checking whether observed differences in responses are statistically significant. If we can eliminate
or control extraneous factors, we can relate the observed effects to the variations in the treatments or
stimuli.18
American Airlines might experiment by introducing ultra-high-speed Wi-Fi service on one of
its regular flights from Chicago to Tokyo, charging $25 one week and $15 the next week. If the plane
carried approximately the same number of first-class passengers each week and the particular calendar
weeks made no difference, the airline could relate any significant difference in the number of passen-
gers using the service to the price charged.
Research Instruments. Marketing researchers have a choice of three main research instru-
ments in collecting primary data: questionnaires, qualitative measures, and technological devices.
Questionnaires. A questionnaire consists of a set of questions presented to respondents. Because
of its flexibility, it is by far the most common instrument used to collect primary data. The form,
wording, and sequence of the questions can all influence the responses, so testing and de-bugging
are necessary.19 Closed-end questions specify all the possible answers, and the responses are easier to
interpret and tabulate. Open-end questions allow respondents to answer in their own words. They are
especially useful in exploratory research, where the researcher is looking for insight into how people
think, rather than measuring how many think a certain way. Table 5.1 provides examples of both
types of questions.
Qualitative Measures. Some marketers prefer qualitative methods for gauging consumer opinion
because they believe that consumers’ actions don’t always match their answers to survey questions.
Qualitative research techniques are relatively indirect and unstructured measurement approaches, limited
only by the marketing researcher’s creativity, that permit a range of responses. Such methods can be
an especially useful first step in exploring consumers’ perceptions because respondents may be less
guarded and may reveal more about themselves in the process.
Qualitative research does have its drawbacks. The samples are often very small, and results may
not generalize to broader populations. And different researchers examining the same qualitative results
may draw very different conclusions.
Nevertheless, interest in using qualitative methods is increasing. Popular methods follow.20
• Word association. To identify the range of possible brand associations, ask subjects what words
come to mind when they hear the brand’s name. “What does the Timex name mean to you? Tell
me what comes to mind when you think of Timex watches.”
• Projective techniques. Give people an incomplete or ambiguous stimulus and ask them to com-
plete or explain it. In “bubble exercises” empty bubbles, like those in cartoons, appear in scenes of
people buying or using certain products or services. Subjects fill in the bubbles, indicating what
they believe is happening or being said. In comparison tasks, people compare brands to people,
countries, animals, activities, cars, nationalities, or even other brands.
• Visualization. Visualization requires people to create a collage from magazine photos or draw-
ings to depict their perceptions.
• Brand personification. This asks subjects to compare the brand with a person (or even an ani-
mal or object): “If the brand were to come alive as a person, what would it be like, what would it
do, where would it live, what would it wear, who would it talk to if it went to a party (and what
would it talk about)?” For example, the John Deere brand might make someone think of a rugged
Midwestern male who is hardworking and trustworthy.
• Laddering. A series of increasingly specific “why” questions can reveal consumer motivation
and deeper goals. Ask why someone wants to buy a Nokia cell phone. “They look well built”
(attribute). “Why is it important that the phone be well built?” “It suggests Nokia is reliable” (a
functional benefit). “Why is reliability important?” “Because my colleagues or family can be sure
to reach me” (an emotional benefit). “Why must you be available to them at all times?” “I can help
them if they’re in trouble” (a core value). The brand makes this person feel like a good neighbor,
ready to help others.
Marketers don’t have to choose between qualitative and quantitative measures. Many use both,
recognizing that their pros and cons can offset each other. For example, companies can recruit
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TABLE 5.1 Types of Questions

Name Description Example
A. Closed-End Questions
Dichotomous A question with two possible answers In arranging this trip, did you personally phone American?
Yes No
Multiple choice A question with three or more answers With whom are you traveling on this flight?
u No one u Children only
u Spouse u Business associates/friends/relatives
u Spouse and children u An organized tour group
Likert scale A statement with which the respon- Small airlines generally give better service than large ones.
dent shows the level of agreement / Strongly Disagree Neither Agree Strongly
disagreement disagree agree nor agree
disagree
1_____ 2_____ 3_____ 4_____ 5_____
Semantic differential A scale connecting two bipolar words. I find American Airlines . . .
The respondent selects the point that Large ___________________________________________ Small
represents his or her opinion. Experienced _____________________________ Inexperienced
Modern __________________________________ Old-fashioned
Importance scale A scale that rates the importance of To me, airline in-flight service is
some attribute Extremely Very Somewhat Not very Not at all
important important important important important
1_____ 2_____ 3_____ 4_____ 5_____
Rating scale A scale that rates some attribute from American in-flight service is
“poor” to “excellent” Excellent Very Good Good Fair Poor
1_____ 2_____ 3_____ 4_____ 5_____
Intention-to-buy scale A scale that describes the respondent’s If ultra-high-speed Wi-Fi service were available on a long flight, I would
intention to buy Definitely Probably Not sure Probably Definitely
buy buy not buy not buy
1_____ 2_____ 3_____ 4_____ 5_____
B. Open-End Questions
Completely unstructured A question that respondents can answer What is your opinion of American Airlines?
in an almost unlimited number of ways
Word association Words are presented, one at a time, and What is the first word that comes to your mind when you hear the
respondents mention the first word that following?
comes to mind. Airline_________________________________________
American_________________________________________
Travel________________________________________
Sentence completion An incomplete sentence is presented and When I choose an airline, the most important consideration in my
respondents complete the sentence. decision is __________________________________________ .
Story completion An incomplete story is presented, and “I flew American a few days ago. I noticed that the exterior and
respondents are asked to complete it. interior of the plane had very bright colors. This aroused in me the
following thoughts and feelings. . . .” Now complete the story.
Picture interpretation A picture of two characters is presented,

with one making a statement. Respon-
dents are asked to identify with the other
and fill in the empty balloon.
someone from an online panel to participate in an in-home product use test by capturing his or her
reactions and intentions with a video diary and an online survey.
Measurement Devices. Technology enables marketers to use skin sensors, brain wave scanners,
and full-body scanners to get consumer responses. For example, biometric-tracking wrist sensors can
measure electrodermal activity, or skin conductance, to note changes in sweat levels, body tempera-
ture, and movement.21 Many advances in visual techniques studying the eyes and face have benefited
marketing researchers and managers alike.
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<< Eye-tracking
technology that notes
which products grab and
hold consumers’ eyes
and facial recognition
software that estimates
users’ age and gender
are among the methods
companies can use to
target interactive ads to
appropriate groups.
Source: Martin BondAlamy Stock Photo

Physiognomy A number of increasingly cost-effective methods of studying the eyes and
faces of consumers have been developed in recent years with diverse applications. Packaged
goods companies such as P&G, Unilever, and Kimberly-Clark combine 3-D computer simulations
of product and packaging designs with store layouts and use eye-tracking technology to see
where consumer eyes land first, how long they linger on a given item, and so on. After doing
such tests, Unilever changed the shape of its Axe body wash container, the look of the logo,
and the in-store display. In the International Finance Center Mall in Seoul, Korea, two cameras
and a motion detector are placed above the LCD touch screens at each of the 26 information
kiosks. Facial recognition software estimates users’ age and gender, and interactive ads targeting
the appropriate demographic then appear. Similar applications are being developed for digital
sidewalk billboards in New York, Los Angeles, and San Francisco. Facial recognition cameras and
software are being tested to identify and reward loyal U.S. customers of retailers and restaurants
via opt-in smart-phone updates. In one commercial application, SceneTap uses cameras with
facial detection software to post information about how full a bar is, as well as the average age
and gender profile of the crowd, to help bar hoppers pick their next destination.22
As an alternative to traditional consumer research, some researchers have begun to develop

sophisticated techniques adopted from neuroscience that monitor brain activity to better gauge con-
sumer responses to marketing efforts. The term neuromarketing describes brain research on the effects of
marketing stimuli. Firms are using EEG (electroencephalograph) technology to correlate brand activity
with physiological cues such as skin temperature or eye movement and thus gauge how people react
to ads.
Researchers studying the brain have found different results from conventional research methods.
One group of researchers at UCLA used functional magnetic resonance imaging (fMRI) to find that
the Super Bowl ads for which subjects displayed the highest brain activity were different from the ads
with the highest stated preferences. Other research found little effect from product placement unless
the products in question played an integral role in the storyline. In addition, several studies have found
higher correlations with brain wave research and behavior than with surveys. For example, brain waves
predicted music purchases better than stated music preferences did.
Although it may offer different insights from conventional techniques, neurological research can
still be fairly expensive and has not been universally accepted. Given the complexity of the human
brain, many researchers caution that it should not form the sole basis for marketing decisions. The
measurement devices to capture brain activity can also be highly obtrusive, using skull caps studded
with electrodes or creating artificial exposure conditions.23
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COLLECTING THE INFORMATION

The data collection phase of marketing research is generally the most expensive and error prone.
Some respondents will be away from home, offline, or otherwise inaccessible and must be contacted
again or replaced. Others will refuse to cooperate or will give biased or dishonest answers. In order
to control costs while maintaining high-quality responses, a company must develop a meaningful
sampling and data collection plan.
Sampling Plan. After choosing the research approach and instruments, the marketing researcher
must put together a sampling plan designed to obtain high-quality responses while keeping costs in
line. This calls for three decisions:
• Sampling unit. The key question here is Whom should we survey? In the American Airlines survey,
should the sampling unit consist of only first-class business travelers, only first-class vacation
travelers, or both? Should it include travelers under age 18? Both traveler and spouse? With the
sampling unit chosen, marketers must next develop a sampling frame so everyone in the target
population has an equal or known chance of being sampled.
• Sample size. The key question here is How many people should we survey? Large samples give more
reliable results, but it’s not necessary to sample the entire target population. Samples of less than
1 percent of a population can often provide good reliability with a credible sampling procedure.
• Sampling procedure. The key question here is How should we choose the respondents? Probability
sampling allows marketers to calculate confidence limits for sampling error and makes the sample
more representative. Thus, after choosing the sample, marketers could conclude that “the interval
of five to seven trips per year has 95 chances in 100 of containing the true number of trips taken
annually by first-class passengers flying between Chicago and Tokyo.”
Contact Methods. The marketing researcher must decide how to contact the subjects: online, in
person, by mail or e-mail, or by telephone.
Online. The internet offers many ways to do research. A company can embed a questionnaire in its
website and offer an incentive for answering, or it can place a banner on a frequently visited site, inviting
people to answer questions and possibly win a prize. Online product testing can provide information
much faster than traditional new-product marketing research techniques.
Marketers can also host a real-time consumer panel or virtual focus group or sponsor a chat room,
bulletin board, or blog where they introduce questions from time to time. They can ask customers to
brainstorm or have the company’s Twitter followers rate an idea. Insights from Kraft-sponsored online
communities helped the company develop its popular line of 100-calorie snacks.
Del Monte tapped its 400-member, handpicked online community called “I Love My Dog” when
it was considering a new breakfast treat for dogs. The consensus request was for something with a
bacon-and-egg taste and an extra dose of vitamins and minerals. Working with the online community
throughout product development, the company introduced fortified “Snausages Breakfast Bites” in
half the time usually required to launch a new product.
A host of new online survey providers have entered the market, such as SurveyMonkey, Survey-
Gizmo, Qualtrics, and Google Consumer Surveys. Founded in 1999, SurveyMonkey has over 15 million
registered users. Members can create surveys to quickly post on blogs, websites, Facebook, or Twitter. Like
any survey, however, online surveys need to ask the right people the right questions on the right topic.
Other means to use the internet as a research tool include tracking how customers clickstream
through the company’s website and move to other sites. Marketers can post different prices, headlines,
and product features on separate websites or at different times to compare their relative effectiveness.
Online researchers also use text messaging in various ways—to conduct a chat with a respondent, to
probe more deeply with a member of an online focus group, or to direct respondents to a website. Text
messaging is also a useful way to get teenagers to open up on topics.
In Person. Personal interviewing is the most versatile method. The interviewer can ask more ques-
tions and record additional observations about the respondent, such as dress and body language. Per-
sonal interviewing is also the most expensive method, is subject to interviewer bias, and requires more
planning and supervision. In arranged interviews, marketers contact respondents for an appointment
and frequently offer a small incentive or payment. In intercept interviews, researchers stop people at a
shopping mall or busy street corner and request an interview on the spot. Intercept interviews must
be quick, and they run the risk of including nonprobability (not random) samples.
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Mail and E-mail. The mail questionnaire is one way to reach people who would not give personal
interviews or whose responses might be biased or distorted by the interviewers. Mail questionnaires
require simple and clearly worded questions. Unfortunately, responses are usually few or slow.
Telephone. Telephone interviewing allows the interviewer to gather information quickly, clarify ques-
tions if respondents do not understand them, and follow up on responses that have the potential to provide
additional valuable information. Interviews must be brief and not too personal. Although the response
rate has typically been higher than for mailed questionnaires, telephone interviewing in the United States
is getting increasingly difficult because of consumers’ growing antipathy toward telemarketers.
Data Mining. Through data mining, marketing statisticians can extract, from the mass of data,
useful information about individuals, trends, and segments.24 Data mining uses sophisticated statistical
and mathematical techniques such as cluster analysis (grouping objects to ensure that objects in the
same group or cluster are more similar to one another than to those in other groups), predictive mod-
eling (forecasting outcomes of uncertain events), and cognitive modeling (simulating human decision
making and problem solving using a computerized model).
In general, companies can use their data in several ways to create customer value and gain com-
petitive advantage:
• To identify prospects—Many companies generate sales leads by advertising their product or ser-
vice and including a response feature (such as a link to a home page, a business reply card, or a
toll-free phone number) in order to build a database from customer responses. The company
sorts through the database to identify the best prospects and then contacts them by mail, e-mail,
or phone to try to convert them into customers.
• To decide which customers should receive a particular offer—Companies interested in selling,
up-selling, and cross-selling set up criteria describing the ideal target customer for a particular
offer. Then they search their customer databases for those who most closely resemble the ideal. By
noting response rates, a company can improve its targeting precision. Following a sale, it can set up
an automatic sequence of activities: One week later e-mail a thank-you note; five weeks later e-mail
a new offer; 10 weeks later (if the customer has not responded) e-mail an offer of a special discount.
• To deepen customer loyalty—Companies can build interest and enthusiasm by remembering cus-
tomer preferences and sending appropriate gifts, discount coupons, and interesting reading material.
• To reactivate customer purchases—Automatic mailing programs (automatic marketing) can send
out birthday or anniversary cards, holiday shopping reminders, or off-season promotions. The
database can help the company make attractive or timely offers.
• To avoid serious customer mistakes—A major bank confessed to a number of mistakes it had
made by not using its customer database well. In one case, the bank charged a customer a penalty
for a late payment on his mortgage, failing to note that he headed a company that was a major
depositor in this bank. The customer quit the bank. In a second case, two different staff members
of the bank phoned the same mortgage customer offering a home equity loan at different prices.
Neither knew the other had made the call. In a third case, the bank gave a premium customer only
standard service in another country.
ANALYZING THE INFORMATION AND MAKING

THE DECISION
The next-to-last step in the process is to extract findings by tabulating the data and developing sum-
mary measures. The researchers compute averages and measures of dispersion for the major vari-
ables and apply some advanced statistical techniques and decision models in the hope of discovering
additional findings. They may test different hypotheses and theories, applying sensitivity analysis to
test assumptions and the strength of the conclusions.
The main survey findings for the American Airlines case showed that
• Passengers would use ultra-high-speed Wi-Fi service primarily to stay connected and to receive
and send large documents and e-mails. Some would also surf the Web to download videos and
songs. They would charge the cost to their employers.
• At $25, about 5 of 10 first-class passengers would use Wi-Fi service during a flight; at $15,
about 6 would. Thus, a fee of $15 would produce less revenue ($90 = 6 * $15) than a $25 fee
($125 = 5 * $25). Assuming the same flight takes place 365 days a year, American could collect
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$45,625 ($125 * 365) annually. Given an investment of $90,000 per plane, it would take two years
for the service on each plane to break even.
• Offering ultra-high-speed Wi-Fi service would strengthen American Airlines’ image as an innova-
tive and progressive carrier and earn it some new passengers and customer goodwill.
The American Airlines managers who commissioned the research need to weigh the evidence.
If their confidence in the findings is low, they may decide against introducing ultra-high-speed Wi-Fi
service. If they are predisposed to launching it, the findings support their inclination. They may even
decide to study the issue further and do more research. The decision is theirs, but rigorously done
research provides them with insight into the matter.
When analyzing the available information and making a decision, it is important to draw a line
between market data and market insights. Information is not knowledge, noted Albert Einstein. Like-
wise, market data alone are typically is not very useful unless they offer insights that improve managers’
understanding of the problem and enhance the cost-effectiveness of their actions. Thus, interpreting
the data and relating them to the problem at hand play a crucial role in managerial decision making.
Measuring Market Demand

Understanding the marketing environment and conducting marketing research can help to identify
marketing opportunities. The company must then measure and forecast the size, growth, and profit
potential of each new opportunity. Sales forecasts prepared by marketing are used by finance to raise
cash for investment and operations; by manufacturing to establish capacity and output; by purchas-
ing to acquire the right amount of supplies; and by human resources to hire the needed workers. If
the forecast is off the mark, the company will face excess or inadequate inventory. Because it is based
on estimates of demand, managers need to define exactly what they mean by “market demand.”
DuPont’s Performance Materials group knew that even when DuPont Tyvek had the dominant
share of the $100-million market for air-barrier membranes in construction, there was greater oppor-
tunity to tap into the entire multi-billion-dollar U.S. home construction market with additional prod-
ucts and services.
KEY CONCEPTS IN DEMAND MEASUREMENT

The major concepts in demand measurement are market/company demand, market forecast, com-
pany sales forecast, market potential, and company sales potential. We discuss these concepts in
more detail next.
Market demand for an offering is the total volume that could be bought by a defined customer
group in a defined geographic area in a defined time period in a defined marketing environment under
a defined marketing program.
Company demand is the company’s estimated share of market demand at alternative levels of com-
pany marketing effort in a given time period. It depends on how the company’s products, services, prices,
and communications are perceived relative to those of competitors. Other things equal, the company’s
market share depends on the relative scale and effectiveness of its market expenditures. As noted previ-
ously, marketing model builders have developed sales response functions to measure how a company’s
sales are affected by its marketing expenditure level, marketing mix, and marketing effectiveness.25
The market demand corresponding to the actual level of industry marketing expenditure is called
the market forecast.
The company sales forecast is the expected level of company sales based on a chosen marketing
plan and an assumed marketing environment. Two other concepts are important here. A sales quota is
the sales goal set for a product line, company division, or sales representative. It is primarily a mana-
gerial device for defining and stimulating sales effort, and it is often set slightly higher than estimated
sales to stretch the sales force’s effort. A sales budget is a conservative estimate of the expected volume
of sales, primarily for making current purchasing, production, and cash flow decisions. It’s based on
the need to avoid excessive risk and is generally set slightly lower than the sales forecast.
Total market potential consists of the maximum sales available to all firms in an industry dur-
ing a given period, under a given level of industry marketing effort, and under extant environmental
conditions. The market forecast shows expected market demand, not maximum market demand. For
the latter, we need to visualize the level of market demand resulting from a very high level of industry
marketing expenditure, where further increases in marketing effort would have little effect. Market
potential is the limit approached by market demand as industry marketing expenditures approach
infinity for a given marketing environment. The phrase “for a given market environment” is crucial.
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Consider the market potential for automobiles. It’s higher during prosperity than during a recession.
A common way to estimate total market potential is to multiply the potential number of buyers by the
average quantity each buyer purchases and then by the price.
Company sales potential is the sales limit approached by company demand as company marketing
effort increases relative to that of competitors. The absolute limit of company demand is, of course, the
market potential. The two would be equal if the company captured 100 percent of the market. In most
cases, company sales potential is less than the market potential, even when company marketing expendi-
tures increase considerably. Each competitor has a hard core of loyal buyers unresponsive to other compa-
nies’ efforts to woo them, which makes it challenging to capture all competitors’ customers in the market.
FORECASTING MARKET DEMAND

Forecasting is the art of anticipating what buyers are likely to do under a given set of conditions. For
major consumer durables such as appliances, research organizations conduct periodic surveys of
consumer buying intentions, asking questions like Do you intend to buy an automobile within the next six
months? Surveys also inquire into consumers’ present and future personal finances and expectations
about the economy. They combine bits of information into a consumer confidence measure (Confer-
ence Board) or a consumer sentiment measure (Survey Research Center of the University of Michigan).
In most markets, good forecasting is a key factor in success.
Companies commonly prepare a macroeconomic forecast first, followed by an industry forecast,
followed by a company sales forecast. The macroeconomic forecast projects inflation, unemployment,
interest rates, consumer spending, business investment, government expenditures, net exports, and
other variables. The end result is a forecast of gross domestic product (GDP) that the firm uses, along
with other environmental indicators, to forecast industry sales. The company derives its sales forecast
by assuming it will win a certain market share.
How do firms develop forecasts? They may create their own or buy forecasts from outside sources,
such as marketing research firms that interview customers, distributors, and other knowledgeable
parties. Specialized forecasting firms produce long-range forecasts of particular macroenvironmental
components such as population, natural resources, and technology. Examples are IHS Global Insight
(a merger of Data Resources and Wharton Econometric Forecasting Associates), Forrester Research,
and the Gartner Group. Futurist research firms such as the Institute for the Future, Hudson Institute,
and the Futures Group produce speculative scenarios.
All forecasts are built on one of three information bases: what people say, what people do, or what
people have done. Using what people say requires surveying buyers’ intentions, composites of sales
force opinions, and expert opinion. Building a forecast on what people do means putting the product
into a test market to measure buyer response. To use the final basis—what people have done—firms
analyze records of past buying behavior or use time-series analysis or statistical demand analysis.
• Industry Sales and Market Shares. The industry trade association will often collect and publish
total industry sales, although it usually does not list individual company sales separately. With
this information, however, each company can evaluate its own performance against that of the
industry as a whole. If a company’s sales are increasing by 5 percent a year and industry sales are
increasing by 10 percent, the company is losing its relative standing in the industry.
Another way to estimate sales is to buy reports from a marketing research firm that audits
total sales and brand sales. Nielsen Media Research audits retail sales in various supermarket and
drugstore product categories. A company can purchase this information and compare its per-
formance to that of the total industry or of any competitor to see whether it is gaining or losing
share, overall or by brand. Because distributors typically will not supply information about how
many competitors’ products they are selling, business-to-business marketers operate with less
knowledge of their market share results.
• Survey of Buyers’ Intentions. For business buying, research firms can carry out buyer-intention
surveys for plant, equipment, and materials, usually falling within a 10 percent margin of error.
These surveys are useful in estimating demand for industrial products, consumer durables, prod-
uct purchases that require advance planning, and new products. Their value increases to the extent
that buyers are few, the cost of reaching them is low, and they have clear intentions that they
willingly disclose and implement. One popular survey-based statistical technique used in market
research is conjoint analysis, which helps determine how consumers value different attributes
(product features, service benefits, and price) that make up a particular offering.26
• Composite of Sales Force Opinions. When interviewing buyers is impractical, the company
may ask its sales representatives to estimate their future sales. Sales force forecasts do yield a
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number of benefits. Sales reps might have better insight into developing trends than any other
group, and forecasting might give them greater confidence in their sales quotas and more incen-
tive to achieve them. A “grassroots” forecasting procedure provides detailed estimates broken
down by product, territory, customer, and sales rep.
Few companies use these estimates without making some adjustments, however. Sales rep-
resentatives might be pessimistic or optimistic, they might not know how the company’s market-
ing plans will influence future sales in their territory, and they might deliberately underestimate
demand so the company will set a low sales quota. To encourage better estimating, the company
could offer incentives or assistance, such as information about marketing plans or how past fore-
casts compared with actual sales.
• Expert Opinion. Companies can also obtain forecasts from experts, including dealers, distribu-
tors, suppliers, marketing consultants, and trade associations. Dealer estimates are subject to the
same strengths and weaknesses as sales force estimates. Many companies buy economic and
industry forecasts from well-known economic-forecasting firms that have more data available
and offer more forecasting expertise.
Occasionally, companies will invite a group of experts to prepare a forecast. The experts
exchange views and produce an estimate as a group (group-discussion method) or individually, in
which case another analyst might combine the results into a single estimate (pooling of individual
estimates). Further rounds of estimating and refining follow (the Delphi method).27
• Past-Sales Analysis. Firms can develop sales forecasts on the basis of past sales. Time-series analysis
breaks past sales into four components (trend, cycle, seasonal, and erratic) and projects them into the
future. Exponential smoothing projects the next period’s sales by combining and the most recent sales,
giving more weight to the latter. Statistical demand analysis measures the impact of a set of causal fac-
tors (such as income, marketing expenditures, and price) on the sales level. Econometric analysis builds
sets of equations that describe a system and statistically derives the different parameters that make
up the equations. Advanced machine learning techniques are revolutionizing marketing by automat-
ing and speeding up tasks that range from analyzing sales and revenue to spotting industry trends.
• Market-Test Method. When buyers don’t plan their purchases carefully or experts are unavail-
able or unreliable, a direct market test can help forecast new-product sales or the sales of estab-
lished products in a new distribution channel or territory.
Measuring Marketing Productivity

Although we can easily quantify marketing expenses and investments as inputs in the short run, the
resulting outputs (such as broader brand awareness, enhanced brand image, greater customer loyalty,
and improved new-product prospects) may take months or years to manifest themselves. Meanwhile,
internal changes within the organization and external changes in the marketing environment may
coincide with the marketing expenditures, making it hard to isolate their effects.28
Nevertheless, marketing research must assess the efficiency and effectiveness of marketing activi-
ties. Two complementary approaches to measuring marketing productivity are (1) marketing metrics to
assess marketing effects and (2) marketing-mix modeling to estimate causal relationships and measure
how marketing activity affects outcomes. Marketing dashboards are a structured way to disseminate
the insights gleaned from these two approaches.
MARKETING METRICS
Marketers employ a wide variety of measures to assess marketing effects.29 Marketing metrics is the
set of measures that help marketers quantify, compare, and interpret their performance.30
The CMO of Mary Kay cosmetics would focus on four long-term brand strength metrics—
market awareness, consideration, trial, and 12-month beauty consultant productivity—as
well as a number of short-term, program-specific metrics such as ad impressions, website
traffic, and purchase conversion.
The VP of marketing at Virgin America would look at a broad set of online metrics—cost
per acquisition, cost per click, and cost per thousand page impressions (CPM). She would also
look at total dollars driven by natural and paid search and online display advertising, as well
as at tracking results and other metrics from the offline world.
Marketers choose one or more measures based on the particular issues or problems they face.
Mindbody, a Web-based business management software provider for wellness and beauty industries
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worldwide, tracks numerous online analytics, including landing-page conversions, click-through rates for
online ads, and rankings on Google search. In addition, Mindbody monitors the following online metrics on
a weekly basis: (1) Website analytics detail site navigation and online interaction. (2) Social media presence shows
demographic and geographic responses to social media channels across different markets. (3) Permission
marketing statistics measure interactions and engagement with consumers from automated emails.
London Business School’s Tim Ambler believes that firms can split evaluation of marketing per-
formance into two parts: short-term results and changes in brand equity.31 Short-term results often
reflect profit-and-loss concerns as shown by sales turnover, shareholder value, or some combination
of the two. Brand-equity measures could include customer awareness, attitudes, and behaviors; market
share; relative price premium; number of complaints; distribution and availability; total number of
customers; perceived quality, and loyalty and retention.32
Companies can also monitor an extensive set of internal metrics, such as innovation. For example,
3M tracks the proportion of sales resulting from its recent innovations. Ambler also recommends
developing employee measures and metrics, arguing that “end users are the ultimate customers, but
your own staff are your first; you need to measure the health of the internal market.”
MARKETING-MIX MODELING
Marketing accountability also means that marketers must more precisely estimate the effects of dif-
ferent marketing investments. Marketing-mix models analyze data from a variety of sources such as
retailer scanner data, company shipment data, as well as pricing, media, and promotion expenditure
data, to understand more precisely the effects of specific marketing activities.33 To deepen understanding,
marketers can conduct multivariate analyses, such as regression analysis, to investigate how each mar-
keting element influences marketing outcomes such as brand sales or market share.
Especially popular with packaged-goods marketers such as Procter & Gamble, Clorox, and Col-
gate, the findings from marketing-mix modeling help allocate or reallocate expenditures. Analyses
explore which part of ad budgets are wasted, what optimal spending levels are, and what minimum
investment levels should be.
Although marketing-mix modeling helps to isolate effects, it is less effective at assessing how differ-
ent marketing elements work in combination. Wharton’s Dave Reibstein also notes that it has three other
shortcomings:34 (1) Marketing-mix modeling focuses on incremental growth instead of on baseline sales
or long-term effects. (2) The integration of important metrics such as customer satisfaction, awareness,
and brand equity into marketing-mix modeling is limited. (3) Marketing-mix modeling generally fails
to incorporate metrics related to competitors, the trade, or the sales force (the average business spends
far more on the sales force and trade promotion than on advertising or consumer promotion).
MARKETING DASHBOARDS
Firms also employ organizational processes and systems to make sure they maximize the value of all
these different metrics. Management can assemble a summary set of relevant internal and external
measures in a marketing dashboard for synthesis and interpretation. Marketing dashboards are like
the instrument panel in a car or plane, visually displaying real-time indicators to ensure proper func-
tioning. Formally, marketing dashboards are “a concise set of interconnected performance drivers to
be viewed in common throughout the organization.”35 Company input to the marketing dashboard
should include two key market-based scorecards: one that reflects performance and one that provides
possible early warning signals.
Dashboards are only as good as the information on which they’re based, but sophisticated visual-
ization tools are helping bring data alive. Color-coding, symbols, and different types of charts, tables,
and gauges are easy to use and effective. Some companies are also appointing marketing controllers to
review budget items and expenses. Increasingly, these controllers use business intelligence software to
create digital versions of marketing dashboards that aggregate data from internal and external sources.
Marketing dashboards provide all the up-to-the-minute information necessary to run the business
operations for a company—such as sales versus forecast, distribution channel effectiveness, brand-
equity evolution, and human capital development. An effective dashboard will focus thinking, improve
internal communications, and reveal where marketing investments are paying off and where they
aren’t. There are four common measurement “pathways” marketers pursue today.36
• The customer metrics pathway looks at how prospects become customers, from awareness to pref-
erence to trial to repeat purchase, or some less linear model. This area also examines how the
customer experience contributes to the perception of value and competitive advantage.
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• The unit metrics pathway reflects what marketers know about sales of product/service units—how
much is sold by product line and/or by geography, the marketing cost per unit sold as an efficiency
yardstick, and where and how margin is optimized in terms of characteristics of the product line
or distribution channel.
• The cash-flow metrics pathway focuses on how well marketing expenditures are achieving short-term
returns. Program and campaign ROI models measure the immediate impact or net present value
of profits expected from a given investment.
• The brand metrics pathway tracks the longer-term impact of marketing through brand-equity mea-
sures that assess both the perceptual health of the brand from customer and prospective customer
perspectives and the overall financial health of the brand.
Ideally, over time the number of metrics on the dashboard will be reduced to a few key drivers.
Meanwhile, the process of developing and refining the marketing dashboard will undoubtedly raise
and resolve many key questions about the business.
Some executives worry that they’ll miss the big picture if they focus too much on a set of numbers
on a dashboard. Critics are concerned about privacy and the pressure the technique places on employ-
ees. But most experts feel the rewards offset the risks.
marketing
INSIGHT Six Ways to Draw New Ideas
from Your Customers
Customers—consumers and businesses—can be an and aging. In response, Minolta produced a camera
effective source for generating new ideas that could lead with two lenses, one for rendering softer images of
to successful market offerings. Several popular strategies the subjects.
for gathering insights from current and potential custom- • Actively solicit feedback from customers. Levi Strauss
ers are outlined below. uses youth panels to discuss lifestyles, habits, val-
• Observe how customers are using your product. ues, and brand engagements, Cisco runs Customer
Medtronic, a medical device company, has sales- Forums to improve its offerings, and Harley-Davidson
people and market researchers regularly observe solicits product ideas from its one million H.O.G.
spine surgeons who use their products and competi- (Harley Owners Group) members. P&G’s corporate
tive products to learn how the company’s products global website includes a Share Your Thoughts sec-
can be improved. After living with lower-middle-class tion to solicit advice and feedback from customers.
families in Mexico City, Procter & Gamble research- • Form a brand community of enthusiasts who dis-
ers devised Downy Single Rinse, a fabric softener cuss your product. Harley-Davidson and Apple
that removed an arduous step from the partly manual have strong brand enthusiasts and advocates. Sony
laundry process there. engages in collaborative dialogs with consumers to
• Ask customers about their problems with your prod- co-develop its PlayStation products. LEGO draws
ucts. Komatsu Heavy Equipment sent a group of on kids and influential adult enthusiasts for feed-
engineers and designers to the United States for six back on new product concepts in early stages of
months to ride with equipment drivers and learn how development.
to make Komatsu products better. Procter & Gamble, • Encourage or challenge your customers to change
recognizing the frustration of consumers with potato or improve your product. Salesforce.com wants its
chips that break and are difficult to save after open- users to develop and share new software applica-
ing the bag, designed Pringles to be firmer and tions using simple programming tools. International
uniform in size so as to be encased in a protective, Flavors & Fragrances gives a toolkit to its customers
tennis-ball-type can. to modify specific flavors, which IFF then manufac-
• Ask customers about their dream products. Ask your tures. LSI Logic Corporation also provides customers
customers what they want your product to do, even if with do-it-yourself toolkits so customers can design
the ideal sounds impossible. One 70-year-old camera their own specialized chips. And BMW posted a
user told Minolta he would like the camera to make toolkit on its website to let customers develop ideas
his subjects look better and not show their wrinkles using telematics and in-car online services.37
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summary
1. Marketing research is all about generating insights. companies survey buyers’ intentions, solicit the input of
arketing insights provide diagnostic information
M their sales forces, gather expert opinions, analyze past
about how and why we observe certain effects in the sales, or engage in market testing. Mathematical mod-
marketplace and what that means to marketers. Good els, advanced statistical techniques, and computerized
marketing research is characterized by the scientific data collection procedures are essential to all types of
method, creativity, multiple research methods, accurate demand and sales forecasting.
model building, cost–benefit analysis, healthy skepti- 4. Marketing research must assess the efficiency and
cism, and an ethical focus. effectiveness of marketing activities. Two complemen-
2. The marketing research process consists of defining tary approaches to measuring marketing productivity
the problem, developing the research plan, collecting are (1) marketing metrics to assess marketing effects
information, analyzing the information, and mak- and (2) marketing-mix modeling to estimate causal
ing the decision. In conducting research, firms must relationships and measure how marketing activity
decide whether to collect their own (primary) data or affects outcomes. The insights gleaned from these two
use data that already exist (secondary data). They must approaches must be disseminated within the organi-
also choose a research approach (observational, focus zation. Marketing dashboards provide all the up-to-
group, survey, or behavioral) and research instruments the-minute information necessary to run the business
(questionnaires, qualitative measures, or technological operations for a company—such as actual sales versus
devices). In addition, they must decide on a sampling forecast, distribution channel effectiveness, brand-
plan, contact methods (online, in person, mail or e-mail, equity evolution, and the development of human
or telephone), and data-mining strategies. capital. Company input to the marketing dashboard
3. To estimate current demand, companies need to should include two key market-based scorecards that
determine the size, growth, and profit potential of reflect performance and provide possible early warn-
each market opportunity. To estimate future demand, ing signals.
marketing
SPOTLIGHT
Tesco
Source: Ian Dagnall/Alamy Stock Photo

Tesco PLC is the United Kingdom’s biggest grocery retailer
and the world’s fifth largest, with nearly half a million e
mployees,
pre-tax revenues exceeding £63 billion, and over 7,000 stores
globally, with operations in countries around the world.
Tesco’s origins can be traced back to 1918, when
21-year-old Jack Cohen began selling army surplus food from
a barrow in Hackney. By 1924, Cohen had launched his first
own-brand product—tea, the British staple. Combining the
initials of his supplier, Thomas Edward Stockwell, with letters
from his own name, he created the name “Tesco.” Since the its shelves. It even made a move into selling fuel, turning its
first shop officially opened in 1929, Tesco has made a keen stores into complete purchasing experiences for the customer.
effort to cater to the mass market. World War I ended with the Tesco was the first British supermarket to learn what
United Kingdom still in a state of austerity, and Tesco recog- customers wanted and translate it into a formal marketing
nized the value in adopting the positioning of high volumes strategy. At first, its big insight was simply acknowledging that
of goods offered at low prices, which soon earned Cohen consumers wanted their money to go further. This evolved into
the nickname “Slasher Jack.” In the 1960s, Tesco began sell- a strategy for producing customer loyalty in a landscape that
ing household goods and clothing as well and aggressively was getting increasingly competitive; it then began to lever-
expanded throughout the United Kingdom. They also leaned age that loyalty to find out what customers really wanted. The
into the low-price positioning through marketing campaigns introduction in 1995 of the Clubcard has been hailed as the
such as “Sir Save-a-lot” and the Green Shield stamp system, single most important factor in Tesco’s success. This loyalty
whereby stamps collected at checkout could be traded in card was introduced at a time when the internet and personal
for a range of goods. By the 1970s, Tesco had introduced computers were new tools in marketing research. Not only
the superstore, stocking both food and nonfood goods on did the Clubcard foster a new class of return customer, but
( continued )
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Tesco was also able to collect raw data on the purchasing purchasing habits and promote use of the program, as there
habits of Clubcard members, allowing it to get an instant idea was no longer the risk of customers misplacing or forgetting
of demand trends. Moreover, Tesco could now offer personal- their plastic cards when they did their shopping. Moreover,
ized discounts and rewards to ensure that customers would the move has been widely read as an effort by Tesco to bun-
keep coming back. Tesco didn’t originate the concept of a dle its grocery, mobile, and banking offerings; Clubcard Plus
loyalty card, but where other loyalty cards were little more members were eligible for a Tesco Bank credit card, thereby
than fleeting promotional campaigns, Tesco revolutionized the incentivizing customers who signed up to turn to Tesco for
concept by recognizing the potential of the plethora of data it more and more of their needs. Some have likened this to
could now generate. Amazon’s Prime scheme, describing the move as Tesco
The Clubcard enabled data analysis that not only trying to inculcate “stickiness” in its customer base; that is, it
allowed Tesco to adapt to changes in consumer trends but was using the subscription service to change their custom-
also provided the information needed to fine-tune marketing ers’ behavior in favor of yet more Tesco offerings.
strategies. Clive Humby, a customer insights specialist, says During the 2020 COVID-19 pandemic, Tesco doubled
Tesco continues to succeed with this data-driven approach down on their market research. Beset with supply chain dis-
even today because they put in the time to effectively analyze ruptions and severely reduced in-store traffic, Tesco relied
it. Where other competitors may spend millions on a cquiring heavily on customer insights and worked to improve its
the data, few are ready to spend still more millions on ana- responsiveness. The process of collecting feedback from
lyzing it; instead, they attempt to determine the impact on stores and customers was sped up from weekly to daily,
sales of various marketing programs. However, these out- and Tesco began relying on daily insights from YouGov’s
comes may be obfuscated and unrepresentative of the actual BrandIndex tool, allowing it to stay on top of the rapidly
results. Tesco, on the other hand, doesn’t shy from spending shifting situation. For example, Tesco learned that cooking
on granular analysis to the level of which sale was tied to at home had become popular among customers, many of
which promotion, and whether that sale was a direct result of whom were now forced to work from home. That insight fed
a promotion or representative of preexisting buying patterns. into the “Food Love Stories” campaign, which tried to offer a
In 2019, Tesco rolled out the augmented Clubcard Plus semblance of positivity in an otherwise trying time.38
program. For a monthly fee of £7.99 a month, members were
entitled to discounts across all Tesco stores and on in-house Questions
brands as well as mobile phone contracts with Tesco Mobile. 1. How do you think a concept like the Clubcard would
Aimed at households who were established as big spend- fare today, now that the internet is commonplace and
ers at Tesco outlets, the scheme included discounts of up to customer data analysis is an industry of its own?
£200 off a customer’s total in-store bill twice a month. Where 2. As more and more customers have shifted to online
the regular Clubcard scheme had relied on users to present purchasing, how might this impact Tesco’s ability to gain
their physical card, the Clubcard Plus scheme required sub- customer insights based on their purchases, given that
scribers to download a smartphone app and register them- the new Clubcard Plus system is exempt from online
selves online. This increased Tesco’s ability to track customer shopping?
marketing
SPOTLIGHT
LEGO
Source: Hemis/Alamy Stock Photo
LEGO is one of the world’s most recognizable toys. The

small, colorful building blocks have spawned countless
sets, figurines, video games, and even movies and theme
parks. LEGO is built on a very simple concept: Each block
fits together with every other block, which creates an end-
less combination of buildings, robots, cars, and anything
else the user can think of. LEGO employs a design-thinking
approach to its product innovation, keeping things fresh with
new releases that utilize the colorful bricks in creative ways. The LEGO company began in 1932, in a small shop
In 2017, LEGO became the world’s largest toy manufacturer located in Billund, Denmark. Carpenter Ole Kirk Christiansen
and is one of the strongest brands across all industries. sold wooden toys, stepladders, and ironing boards with his
M05_KOTL4813_16_GE_C05.indd 142 07/09/2021 19:03

son Godtfred. Two years later, the pair named their business the success of its product releases. In 2011, the company
LEGO, short for the Danish words leg godt, which translate launched the LEGO Friends line, an effort to attract more
to “play well.” During the next several years, LEGO expanded girls to the brand. The company’s market research led to the
its product line to include wooden ducks, clothes hangers, insight that girls preferred to use their LEGO sets for roleplay,
and simple wooden bricks. It wasn’t until 1947, when LEGO whereas boys enjoyed strong narratives and backstories,
purchased a plastic injection-molding machine, that it began such as those offered by the Ninjago and Legends of Chima
to mass produce plastic toys that served as the predecessor sets. Both girls and boys enjoyed the building aspect of
of the modern LEGO brick. In 1957, LEGO created the inter- LEGOs. The LEGO Friends line offered more sets and loca-
locking plastic brick, and the following year it introduced the tions like shopping malls, juice bars, and creative labs, so
stud-and-tube coupling mechanism that became the model girls could use their figurines to roleplay. The line caught on
for all future LEGO toys. LEGO bricks became wildly popu- strongly in markets worldwide, including China, Germany,
lar among customers, and the company began expanding and the United States.
worldwide in the early 1960s. In 1964 the company started LEGO also established the Future Lab, a secretive
selling sets, which included the parts and instructions to con- research and development team that is responsible for cre-
struct a particular model. Soon thereafter, theme sets from ating some of its most innovative and successful toy lines
movies and books such as the Harry Potter, Star Wars, and ever. Future Lab teams are made up of industrial design-
Jurassic Park series became some of the most sought-after ers, programmers, marketers, and even master builders,
children’s toys in the world. who brainstorm to generate modern products. During an
LEGO’s growth and expansion slowed at the end of the annual one-week field trip to Barcelona, Future Lab teams
20th century. Birth rates had declined, and children were less extensively brainstorm and produce prototypes from the
interested in toys that didn’t offer instant gratification. The bins of bricks, animation software, and professional-quality
many theme parks that LEGO opened around the world failed digital cameras available. The most successful prototypes
to turn a profit because of the company’s unfamiliarity with generated are pursued back in Denmark, where viable
the hospitality industry. LEGO began churning out increas- ideas are launched into production. LEGO toy lines created
ingly complex and unique sets to draw in more customers, by the Future Lab include LEGO Mindstorms, a robotics
but sales failed to grow. The increased complexity of LEGO platform created in partnership with MIT; LEGO Fusion, an
bricks also made production more complicated and inven- augmented-reality application; and LEGO Architecture, col-
tory harder to manage. Major retailers ended up with large lections that model the world’s most famous buildings.
portions of inventory unsold, even during holiday seasons. In 2017, LEGO surpassed rival Mattel to become the
In 1998, the company suffered its first financial loss, and by biggest toy manufacturer in the world. Though LEGO has
2003, LEGO was on the verge of bankruptcy. enjoyed great financial success since its all-time low in 2003,
In 2004, Jorgen Knudstorp was promoted to CEO, only company studies have indicated that kids spend less and
three years after arriving at the company. Knudstorp, who less time playing with physical toys every year. In an increas-
had previously worked at McKinsey & Company, began ingly digital age, LEGO must continue researching its cus-
turning the company around and improving businesses pro- tomers and experimenting with innovative product lines to
cesses, cutting costs, and better managing cash flow, which stay at the top of the toy industry.39
stabilized the company. To revive the popularity of LEGO
toys, Knudstorp focused heavily on innovation and empha- Questions
sized market and consumer research. Knudstorp believed 1. How does LEGO manage to constantly reinvent its
that in order to rekindle the emotional connection between business?
customers and LEGO toys, LEGO had to deeply understand 2. What role did marketing research play in LEGO’s market
each customer’s desires and behavior. success?
LEGO’s shift toward basing decisions on extensive 3. What differentiates LEGO from its competitors? Is
research reduced complexity in production and ensured LEGO’s competitive advantage sustainable?
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CHAPTER
6
Identifying Market Segments
and Target Customers
When canned
soup consumption
dropped along
with its share
of the market,
Campbell set
out to study the
habits of Millennial
consumers face-
to-face, which
resulted in a new
line of ready-
to-eat, more
exotically flavored
soups promoted
entirely online.
Source: Radu Bercan/
Alamy Stock Photo
C ompanies cannot connect with all customers in large, broad, or diverse markets. They need
to identify the market segments they can serve effectively. Identifying these market segments
requires a keen understanding of consumer behavior and careful strategic thinking about what makes
each segment unique and different. Identifying and uniquely satisfying the right market segments
are key to marketing success. Campbell is one of many companies trying to come to grips with the
younger Millennial consumer.
>>> Campbell Soup Company’s iconic red-and-white soup cans represent one of the most famous
U.S. brands and were even the subject of an Andy Warhol portrait. Several years ago, though, the
century-and-a-half-old company suffered a double whammy: Overall consumption of canned soup
declined 13 percent, and Campbell’s market share dropped from 67 percent to 53 percent due to
the popularity of fresh and premium soups. To stop the sales slide, Campbell set out to better under-
stand the 18-to-34-year-olds who make up 25 percent of the U.S. population and will profoundly
affect the company’s future. Adopting an anthropological research approach, Campbell sent execu-
tives to study Millennial consumers face to face in “hipster market hubs” such as London; Austin,
144
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PART 3 | DEVELOPING A VIABLE MARKET STRATEGY
TX; Portland, OR; and Washington, DC. The executives engaged in “live-alongs,” where they shopped
and ate at home with young consumers, and “eat-alongs” where they dined with them in restau-
rants. The key insight? Millennials loved spices and ate more exotic food than their parents. They
just couldn’t cook it at home! Campbell’s solution was a new line—Campbell’s Go! Soup ready-to-
eat meals in six flavor varieties, such as Moroccan Style Chicken with Chickpeas, Spicy Chorizo and
Pulled Chicken with Black Beans, and Coconut Curry and Chicken with Shiitake Mushrooms. Sold in
pouches rather than cans to convey freshness and at a price ($3) more than three times the basic
red-and-white soups, the product line was promoted entirely online, including on music and humor
sites, gaming platforms, and social media. Campbell also sells Swanson broths and stocks; V8 veg-
etable juices; Pace salsa, sauces, and dips; and Prego pasta sauce. Yet soups account for half its
revenue, so marketing success for the new line was crucial.1
To compete more effectively, many companies are now embracing target marketing. Instead of scat-
tering their marketing efforts, they’re focusing on those consumers they have the greatest chance of
satisfying. Effective targeting requires that marketers:
1. Identify distinct groups of buyers who differ in their needs and wants (segmentation).
2. Select one or more market segments to enter (targeting).
3. For each target segment, establish, communicate, and deliver the right benefit(s) for the com-
pany’s market offering (developing a value proposition and positioning).
This chapter will focus on the first two steps: how to segment the market and identify target
customers. Chapter 10 discusses the third step: how to develop a value proposition and positioning to
build viable market offerings that grow over time and withstand competitive attacks.
Identifying Target Customers

There are many techniques for identifying target customers.2 Once the firm has identified its market
opportunities, it must decide how many and which ones to target. Marketers are increasingly combin-
ing several variables in an effort to identify smaller, better-defined target groups in order to develop
an offering that can fulfill these customers’ needs better than the competition. Thus, a bank may not
only identify a group of wealthy retired adults but also, within that group, distinguish several seg-
ments depending on current income, assets, savings, and risk preferences. This has led some market
researchers to advocate a needs-based targeting approach.
Targeting is the process of identifying customers for whom the company will optimize its offer-
ing. Simply put, targeting reflects the company’s choice of which customers it will prioritize and which
customers it will ignore when designing, communicating, and delivering its offering. The logic of iden-
tifying target customers and the strategic and tactical aspects of this process are discussed in more
detail in the following sections.
Learning Objectives After studying this chapter you should be able to:
6.1 Explain the essence of targeting. 6.4 Explain how to develop strategies to target
multiple market segments.
6.2 Define the key principles of strategic targeting.
6.5 Describe how to segment consumer markets.
6.3 Describe how to effectively communicate and
deliver offerings to target customers. 6.6 Describe how to segment business markets.
145
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146 PART 3 | DEVELOPING A VIABLE MARKET STRATEGY
THE LOGIC OF TARGETING

In mass marketing, the firm ignores segment differences and goes after the whole market with one
offer. It designs a marketing program for a product with a superior image that can be sold to the broad-
est number of buyers via mass distribution and mass communications. Undifferentiated marketing is
appropriate when all consumers have roughly the same preferences and the market shows no natural
segments. Henry Ford epitomized this strategy when he offered the Model-T Ford in one color, black.
The argument for mass marketing is that it creates the largest potential market, which leads to
the lowest costs, which in turn can lead to lower prices or higher margins. The narrow product line
keeps down the costs of research and development, production, inventory, transportation, marketing
research, advertising, and product management. The undifferentiated communication program also
reduces costs. However, many critics point to the increased splintering of the market and the prolifera-
tion of marketing channels and communication, which make it difficult and increasingly expensive
to reach a mass audience.
When different groups of consumers have different needs and wants, marketers can define mul-
tiple segments. The company can often better design, price, disclose, and deliver the product or service
and also fine-tune the marketing program and activities to better counter competitors’ marketing.
In targeted marketing, the firm sells different products to all the different segments of the market.
Cosmetics firm Estée Lauder markets brands that appeal to women (and men) of different tastes: The
flagship brand, the original Estée Lauder, appeals to older consumers; Clinique and M∙A∙C cater to
young women; Aveda to aromatherapy enthusiasts; and Origins to eco-conscious consumers who
want cosmetics made from natural ingredients.3
The ultimate level of targeting is the one-to-one approach in which each market segment comprises
a single customer.4 As companies have grown proficient at gathering information about individual
customers and business partners (suppliers, distributors, retailers), and as their factories have been
designed more flexibly, they have increased their ability to individualize market offerings, messages,
and media.
Consumers can buy customized jeans, cowboy boots, and bicycles that cost thousands of dollars.
Peter Wagner started Wagner Custom Skis in Telluride, Colorado, in 2006. His company now makes
about 1,000 snowboards and pairs of skis a year, with prices that start at $1,750. Each ski or snowboard
is unique and precisely fitted to the preferences and riding style of its owner. Strategies such as using
NASA-like materials and making adjustments of thousands of an inch send a strong performance
message, matched by the attractive aesthetic of the skis.5
One-to-one marketing is not for every company. It works best for firms that normally collect a
great deal of individual customer information and carry a lot of products that can be cross-sold, need
periodic replacement or upgrading, and offer high value. For others, the required investment in infor-
mation collection, hardware, and software may exceed the payout. The cost of goods is raised beyond
what the customer is willing to pay.
Mass customization is the ability of a company to meet each customer’s requirements—to pre-
pare on a mass basis individually designed products, services, programs, and communications.6 MINI
Cooper’s online “configurator” enables prospective buyers to virtually select and try out many options
for a new MINI. Coke’s Freestyle vending machine allows users to choose from more than 100 Coke
brands or custom flavors, and even to create their own.
Services are also a natural setting for customized marketing. Airlines, hotels, and rental car agen-
cies are attempting to offer more individualized experiences. Even political candidates are embracing
customized marketing. On Facebook, politicians can find an individual’s preferences by observing
the groups or causes he or she joins. Then, using Facebook’s ad platform, the campaign team can
test hundreds of ad messages designed to reflect the theme of these other interests. Hikers may get an
environmentally themed message; members of particular religious groups may get a Christian-themed
message.
STRATEGIC AND TACTICAL TARGETING

Targeting can be strategic or tactical based on the criteria a company uses to zero in on target custom-
ers. Strategic targeting focuses on customers whose needs the company can fulfill by ensuring that
its offerings are customized to their needs. Tactical targeting identifies the ways in which the company
can reach these strategically important customers. Strategic and tactical targeting are not mutually
exclusive; they are two integrally related components of the process of identifying target customers.
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CHAPTER 6 | Identifying Market Segments and Target Customers 147
<< As part of a broad

trend toward personal-
ization, Coca-Cola has
introduced Freestyle dis-
pensing machines that
allow users to customize
their soft drink choices.
Source: Scott Keeler/ZUMAPRESS/Newscom

The goals of strategic and tactical targeting, however, do differ. Strategic targeting calls for a trad-
ing market size that yields a better fit between the offering’s benefits and the customers’ needs. Thus,
rather than trying to reach the target audience with one offering that endeavors to lure a wide range
of customers with diverse needs, strategic targeting is based on the deliberate choice to ignore some
customers to better serve other customers with an offering that matches their specific needs. Tactical
targeting takes the opposite approach. Rather than excluding any potential customers, tactical target-
ing strives to reach all strategically important customers in an effective and cost-efficient manner.
Because of their divergent goals, strategic and tactical targeting have different priorities. Whereas
the focus of strategic targeting is on the value that the company can create for and capture from target
customers, tactical targeting concentrates on the means the company can use to reach these customers.
Together, strategic and tactical targeting seek to answer two questions, the first focusing on strategy
and the second on tactics: Who are the customers that the company can establish a mutually beneficial
relationship with? and How can the company reach these customers most effectively and efficiently?
The two aspects of targeting, strategic and tactical, are discussed in more detail in the following
sections.
Strategic Targeting
Identification of target customers is directed by the company’s capability to develop an offering that
can meet the needs of these customers more effectively than the competition, while also creating value
for the company.7 This requires that strategic targeting start with pinpointing the customer need(s)
that the company’s offering will be designed to fulfill.
Effective strategic targeting requires the company to make an important but difficult tradeoff:
the calculated decision to deliberately forgo some potential customers to more effectively meet the
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needs of other customers. Companies have failed because of their unwillingness to sacrifice market
breadth and focus only on customers for whom their offering could create superior value. Targeting
is not based solely on identifying customers that the company intends to serve: It must also be based
on a meaningful assessment of customers it deliberately chooses not to serve, and without such an
assessment, a viable market strategy is impossible.
A manager must address two key questions when evaluating the viability of a particular customer
segment: Can the company create superior value for these customers? Can these customers create superior value for
the company?
The answer to the first question hinges on the degree to which company resources are compatible
with target customers’ needs. The company must have the assets and competencies necessary to design
an offer that creates customer value. The answer to the second question is determined by the attractive-
ness of the target customers. That is, do they have the ability to create value for the company? These
two principles of strategic targeting—target compatibility and target attractiveness—are discussed in
greater detail in the following sections.
TARGET COMPATIBILITY
Target compatibility is a reflection of the company’s ability to outdo the competition in fulfilling the
needs of target customers—in other words, to create superior customer value. Target compatibility is a
function of the company’s resources and its capacity to use these resources in a way that creates value
for target customers. The right resources are important because they allow the company to create an
offering that can deliver superior value to customers in a manner that is both effective and cost efficient.
Essential resources for the success of a company’s targeting strategy include factors such as:
• Business infrastructure, which includes assets such as manufacturing infrastructure that
houses the company’s production facilities and equipment; service infrastructure like call cen-
ters and customer relationship management solutions; supply-chain infrastructure that includes
procurement infrastructure and processes; and management infrastructure that encompasses
the company’s business management culture.
• Access to scarce resources gives the company a distinct competitive edge because it restricts the
strategic options of competitors. For example, securing unique natural resources, prime manu-
facturing and retail locations, and a memorable web domain can be highly beneficial for the
company.
• Skilled employees with technological, operational, and business expertise—especially those
involved in research and development, education, and consulting—are prime strategic assets.
• Technological expertise, the expertise required to develop an offering that addresses a particular
customer need, includes a company’s proprietary processes, its technological processes, and its
intellectual property such as patents and trade secrets.
• Strong brands enhance value by conferring unique identification on the offering and generat-
ing meaningful associations that create value over and above the value created by the offering’s
attributes. Brands are of particular importance in commoditized industries where only minor
differences exist among the competitive products and services.
• Collaborator networks include vertical networks of collaborators in the company’s supply chain
(suppliers and distributors) and horizontal networks of research and development, manufactur-
ing, and promotion collaborators that help the company create its offering and inform customers
about it.
An important aspect of assessing a company’s resources is identifying its core competencies.8
A core competency has three characteristics: (1) it is a source of competitive advantage and makes a
significant contribution to perceived customer benefits, (2) it has applications in a wide variety of mar-
kets, and (3) it is difficult for competitors to imitate.9 Companies today outsource less critical resources
if they can obtain better quality or lower cost. Many textile, chemical, and computer/electronic product
firms use offshore manufacturers and focus on product design and development and marketing, their
core competencies. The key to success is to own and nurture the resources and competencies that make
up the essence of the business.10
Although the ability of a company to create value for target customers is an essential component,
successful targeting necessitates another important criterion: Target customers also must be able to
create value for the company, meaning the target must be attractive to the company. The following
section discusses the main factors involved in evaluating target attractiveness.
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TARGET ATTRACTIVENESS
Target attractiveness reflects the ability of a market segment to create superior value for the com-
pany. Thus, the company must carefully select customers for whom to tailor its offering based on the
degree to which they can contribute value to the company and assist the company in reaching its goal.
Target customers can create two kinds of value for a company: monetary and strategic.
Monetary Value. Monetary value consists of the capability of customers to engender profits for
the company. Monetary value includes both the revenues a particular customer segment generates and
the costs of serving these customers.
• Customer revenues involve money received by the company from customers for the right to
own or use its offering. A number of market and customer factors influence revenue volume.
These include market size and rate of growth, as well as the buying power of customers, their
brand loyalty, and their price sensitivity; the pricing power of the company; the intensity of com-
petition in the market; and context factors such as the economy, government regulations, and the
physical environment.
• Costs of serving target customers include the expense of tailoring the offering’s benefits to
the needs of target customers, along with communicating and delivering the offering to them. In
addition, the cost of serving target customers can include the expense of acquiring and retaining
these customers, providing them with post-purchase support, and offering incentives and loyalty
programs.
Many companies tend to focus almost exclusively on the monetary aspect of value created by
target customers because customer revenues and costs are more easily quantified. By espousing this
narrow view, they overlook the fact that the strategic value that target customers create can be a sig-
nificant factor in the value they contribute to the company.
Strategic Value. Strategic value refers to nonmonetary benefits that customers bring to the com-
pany. The three main types of strategic value are social value, scale value, and information value.
• Social value reflects the influence of target customers on other potential buyers. Customers
might be as attractive to the company for their social networks and ability to impact the opinions
of other buyers as for the revenues they offer to the company. Companies routinely target opinion
leaders, trendsetters, and mavens because of their capacity to promote and endorse the company’s
offering via social networking.
• Scale value denotes the benefits derived from the scale of the company’s operations. The eco-
nomics of its business model might lead a company to target low-margin or sometimes even
unprofitable customers, as is the case with airlines, hotels, and cruise lines that have large fixed
costs and smaller variable costs. A company in its early growth stages might decide to target
low-margin customers to build a product and user base that will serve as a platform for future
growth. The rapid growth of Uber, Airbnb, Microsoft, eBay, and Facebook illustrates the benefits
of building large-scale user networks.
• Information value is the worth of the information that customers provide. One reason why a
company might target customers is for the wealth of data they can furnish the company about
their needs and profile. This information can help the company design, communicate, and deliver
value to other customers with similar needs. A company might also target customers who are
likely to be early adopters of the company’s offering, preceding mass market adoption. These
“lead users” allow the company to glean feedback on how it can modify and enhance the offering
to attract more buyers.
Assessing the strategic value of different customer segments is more challenging than assessing
their monetary value. Strategic value is not as readily observable and can be difficult to quantify. A
customer’s ability to influence others often cannot be discerned directly, and even if it can be quanti-
fied by assessing the number of followers on social media, the customer’s impact on the preferences
of others is difficult to gauge. In spite of the difficulty of determining strategic value, when choosing
target customers it cannot be overlooked, either as a complement to their monetary value or as the
main component of their value to the company. Some highly influential customers who might never
generate a dollar for the company directly may exert significant influence on broader and more profit-
able segments of the market that decide to purchase the company’s offering.
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Tactical Targeting
Although tactical targeting involves identifying target customers, as does strategic targeting, it has
a different objective: to determine which customers to target and which to ignore, and to determine
how the company’s offering can be effectively and cost-efficiently communicated and delivered to
the target customers that have already been selected. The following sections discuss the key aspects
of tactical targeting in more detail.
DEFINING THE CUSTOMER PROFILE

After the company decides on a strategically viable target market, it must garner information on
the profile of these customers to communicate the offering’s attributes and deliver it to them.
Tactical targeting identifies the most cost-effective ways to accomplish this by linking the customer
need that the offering wants to fulfill with observable customer characteristics. These observable
factors—the customer profile—involve demographic, geographic, behavioral, and psychographic
descriptors.
• Demographic factors include age, gender, income, occupation, level of education, religion, eth-
nicity, nationality, employment status, population density (urban or rural), social class, household
size, and stage in the life cycle. If the company’s target customers are not individuals but other
companies, they are identified by factors referred to as firmographics, which include size, orga-
nizational structure, industry, growth, revenues, and profitability.
• Geographic (geolocation) factors reflect the physical location of target customers. Geo-
graphic data describe where the customers are located, in contrast to demographic data,
which describe who the target customers are. Some geographic indicators can be relatively
enduring (e.g., a customer’s permanent address), whereas other geolocation factors are
dynamic and change frequently (e.g., the current location of a customer at a particular time).
The ubiquity of mobile devices that identify individual customers and can pinpoint their
exact location in real time has dramatically increased the importance of geographic factors
in targeting.
• Behavioral factors describe customers’ actions. These factors can include customers’ prior
experience with the company’s offering, which can be as current customers, competitors’ cus-
tomers, or new-to-the-category customers. Behavior factors also categorize customers by the
frequency with which they purchase the offering, the quantity they purchase, their price sensi-
tivity and sensitivity to the company’s promotional activities, their loyalty, their online versus
offline purchases, and the retail outlets they patronize most often. Other behavioral factors of
interest are customers’ role in the decision process (e.g., as initiator, influencer, decider, buyer,
or user), and what stage of the customer decision journey they are in. Behavioral factors can also
include the manner in which customers learn about new products, how they socialize, and what
they do in their spare time.
• Psychographic factors involve aspects of an individual’s personality—such as attitudes, value
system, interests, and lifestyle. Psychographics link observable and unobservable characteristics
of target customers, which is where they differ from demographic, geographic, and behavioral
factors. Whereas values, attitudes, interests, and lifestyles can be established by directly question-
ing customers, psychographic factors often are not readily discernable and must be inferred from
the observable characteristics and behavior of customers. A customer’s interest in sports, which is
a psychographic factor, can be confirmed by behaviors such as subscribing to sports magazines,
viewing sports programming, membership in a tennis club, and the purchase of sports equipment
and tickets to sports events.
The importance of psychographics, like that of geolocation factors, has been sharpened by the
proliferating use of online communication and e-commerce, which have made the moral values, atti-
tudes, interests, and lifestyles of customers more transparent to companies. Social media companies
such as Facebook, Google, YouTube, and Twitter can construct actionable psychographic customer
profiles from the demographic, geographic, and behavioral data of their customers. The same can be
said for traditional media companies, credit card providers, and online retailers that accrue data link-
ing individuals’ demographics, geographics, and behavioral profiles with their value system, attitudes,
interests, and lifestyle.
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ALIGNING CUSTOMER VALUE AND CUSTOMER PROFILE

An essential element of tactical targeting is ascertaining the profile characteristics of strategically
important customer segments. Although strategic targeting’s focus on creating market value is crucial
to the success of the company’s offering, it has an important disadvantage: Value is not observable,
which means it cannot readily be acted on to reach target customers. Tactical targeting addresses this
shortcoming by identifying the demographic, geographic, psychographic, and behavioral charac-
teristics of strategically selected target customers so that the company can reach out to them. Thus,
strategic and tactical targeting are complementary and inseparable facets of the process of identifying
target customers.
An example of this process is a company that decides to launch a new credit card with a loyalty
program that rewards customers with travel benefits such as airline tickets and hotel stays. The com-
pany’s strategically important customers are those who want a credit card and would appreciate the
card’s travel benefits (customer value), would use the card frequently, and would not default on pay-
ments (company value). Because customer needs are unobservable, it is difficult to pinpoint those
consumers who might enjoy the travel benefits offered by the card. Also unobservable are customers’
future use of the credit card and the likelihood that they will not default on paying for their purchases.
In addition to complicating the process of targeting attractive and compatible customer segments,
these unobservable characteristics make it harder for the company to effectively communicate with
and deliver the card to target customers.
Solving this dilemma entails linking the value-based customer segment with the observable char-
acteristics of customers in this segment. To identify customers who would probably use the card often
without defaulting on payments, the company might consider customers’ credit scores, demograph-
ics, and geolocation, as well as their purchase behavior, including buying patterns, type and quantity
of items purchased, and frequent payment by credit card. To identify those customers seeking travel
rewards for whom it can create value, the company might look for customers who read travel maga-
zines, watch travel shows, purchase luggage, frequent online travel sites, and seek the help of travel
agents. Thus, the company might use travel-related communication channels to promote its new card
and its offerings. By focusing on customers with profiles that are aligned with the value-based target
segment, a company can optimize its targeting activities.
To achieve optimal outcomes when evaluating the company’s tactical targeting options, marketing
managers should follow the two main principles of tactical targeting: effectiveness and cost efficiency. The
effectiveness principle reflects the degree to which the company is able to reach all strategically viable
customers whose needs can be fulfilled in a way that benefits the company and its collaborators, make
them aware of the company’s offering, and give them access to the offering. The cost-efficiency principle
mandates that the company’s communication and distribution reach only the customers it has targeted.
The goal of the cost-efficiency principle is to curtail the waste of resources on customers whose needs
the company’s offering cannot effectively address and who are unable to create value for the company.11
BRINGING TARGET SEGMENTS TO LIFE WITH PERSONAS

To bring all their acquired information and insights to life, some researchers develop personas.
Personas are detailed profiles of one, or perhaps a few, hypothetical target consumers, imagined
in terms of demographic, psychographic, geographic, or other descriptive attitudinal or behavioral
information. Photos, images, names, or short bios help convey how the target customer looks, acts,
and feels so that marketers can incorporate a well-defined target-customer point of view in all their
marketing decision making. Many software companies have used “personas” to help improve user
interfaces and experiences, and marketers have broadened the application. For example:
Unilever’s biggest and most successful hair care launch, for Sunsilk, was aided by insights
into the target consumer the company dubbed “Katie.” The Katie persona personified the
20-something female’s hair care needs along with her perceptions and attitudes and the way
she dealt with her everyday “dramas.”
Specialty tool and equipment maker Campbell Hausfeld relied on the many retailers it sup-
plied, including Home Depot and Lowe’s, to help it keep in touch with consumers. After
developing eight consumer profiles, including a female do-it-yourselfer and an elderly con-
sumer, the firm was able to successfully launch new products such as drills that weighed less
or that included a level for picture hanging.
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Although personas provide vivid information to aid marketing decision making, it’s important not
to overgeneralize. Any target market may have a range of consumers who vary along a number of key
dimensions, so marketers often account for these differences by developing multiple personas, each
reflecting the characteristics of a particular consumer segment. Using quantitative, qualitative, and
observational research, Best Buy developed five customer personas to guide the redesign and relaunch
of GeekSquad.com, its national computer-support service: “Jill”—a suburban mom who uses her com-
puter daily and depends on the Geek Squad as on a landscaper or plumber; “Charlie”—a 50-plus male
who is curious about technology but needs an unintimidating guide; “Daryl”—a technologically savvy,
hands-on experimenter who occasionally needs a helping hand; “Luis”—a time-pressed small business
owner whose primary goal is to complete tasks as expediently as possible; “Nick”—a prospective Geek
Squad agent who views the site critically and needs to be challenged.
Clearly, the customer persona does not represent all target customers. Characterizing the target
segment with a representative individual, however, makes it easier to visualize the company’s target
customers and better understand how likely they are to respond to the company’s offering.12
Single-Segment and Multi-Segment

Targeting
The discussion so far has focused on a scenario in which a firm identifies and targets a single customer
segment. Single-segment marketing, however, is the exception rather than the rule. Most offerings
exist as part of a product line, with different offerings targeting different customer segments. Single-
segment and multi-segment targeting, as well as the key principles underlying the decision to target
multiple segments, are discussed in the following sections.
SINGLE-SEGMENT TARGETING
With single-segment concentration, the firm markets to only one particular segment. Porsche con-
centrates on the sports car enthusiast and Volkswagen on the small-car market; its foray into the
large-car market with the Phaeton was a failure in the United States. Through concentrated marketing,
a firm gains deep knowledge of the segment’s needs and achieves a strong market presence. It also
enjoys operating economies by specializing its production, distribution, and promotion.
Companies targeting single segments often focus on smaller, well-defined groups of customers
that seek a distinctive mix of benefits. For example, whereas Hertz, Avis, Alamo, and others special-
ize in airport rental cars for business and leisure travelers, Enterprise has focused on the low-budget,
insurance-replacement market by primarily renting to customers whose cars have been wrecked or
stolen. By offering low cost and convenience in an overlooked niche market, Enterprise has been highly
profitable. Another up-and-coming niche marketer is Allegiant Air.
Allegiant Air When the prolonged recession that began in 2008 wreaked havoc on the
financial performance of all the major U.S. domestic airlines, up-and-comer Allegiant Air managed
to turn a profit quarter after quarter. Founded in Eugene, OR, in 2007, Allegiant has developed
a highly successful niche strategy by providing leisure travelers with affordable nonstop flights
from smaller markets such as Great Falls, MT; Grand Forks, ND; Knoxville, TN; and Plattsburgh,
NY, to popular vacation spots in Florida, California, and Hawaii and to Las Vegas, Phoenix, and
Myrtle Beach. By staying off the beaten track, it avoids competition on all but a handful of its
100-plus routes. Much of its passenger traffic is additive and incremental, attracting tourist travel
that might not otherwise have happened. If a market doesn’t seem to be taking hold, Allegiant
quickly drops it. The carrier carefully balances revenues and costs. It charges for services—
such as in-flight beverages and overhead storage space—that are free on other airlines. It also
generates additional revenue by cross-selling vacation products and packages. Allegiant owns
its 64 used MD-80 planes and also cuts costs by flying to specific destinations only a few times
a week, instead of a few times a day like most airlines. It even fixes its seats at a pitch halfway
between fully upright and fully reclined, because adjustable seats add weight, burn fuel, and are a
“maintenance nightmare.”13
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<< While major U.S.

airlines suffered during
the recession that began
in 2008, Oregon-based
Allegiant Air stayed
Source: Michael Matthews/Alamy Stock Photo

profitable with a niche
strategy that offered
affordable nonstop
flights from smaller
markets to popular
vacation spots, skirting
the competition and
attracting customers
who otherwise might not
have traveled at all.
What does an attractive niche segment look like? Niche customers have a distinct set of needs;
they will pay a premium to the firm that best satisfies them. The niche market is fairly small but has
size, profit, and growth potential. It also is unlikely to attract many competitors, and it gains certain
economies through specialization. As marketing efficiency increases, niches that seemed too small
may become more profitable.
TARGETING MULTIPLE SEGMENTS

As markets become more fragmented, an increasing number of companies develop offerings target-
ing a greater number of smaller customer segments. Even companies that start with a single offering
aimed at a specific target market achieve wider customer adoption over time. As their customer base
becomes more diverse, these companies transition from a single offering to a product line containing
offerings that fit the needs of the diverse customers it serves.
The process of identifying multiple customer segments is similar to that of identifying a single
customer segment, the main difference being that the targeting analysis yields several viable segments.
Thus, a direct consequence of the decision to target multiple customer segments is the need to develop
unique offerings that satisfy the disparate requirements of each segment. Indeed, because different cus-
tomer segments vary in their needs and in the value they can create for the company, the company must
develop a portfolio of offerings that address these distinct needs in a way that benefits the company.
With selective specialization, a firm selects a subset of all the possible segments, each objectively
attractive and appropriate. There may be little or no synergy among the segments, but each segment
promises to be a moneymaker. When Procter & Gamble launched Crest Whitestrips, for example,
initial target segments included newly engaged women and brides-to-be, as well as gay males. The
multi-segment strategy also has the advantage of minimizing the firm’s risk by diversifying its offerings
across different customer segments.
A firm can increase the appeal of its offerings to target customers by focusing on different prod-
ucts and/or markets. With product specialization, the firm sells a certain product to several different
market segments. A microscope manufacturer, for instance, sells to university, government, and com-
mercial laboratories, making different instruments for each and building a strong reputation in the
specific product area. The downside risk is that the product may be supplanted by an entirely new
technology. With market specialization, on the other hand, the firm concentrates on serving many needs
of a particular customer group, such as by selling an assortment of products only to university labo-
ratories. The firm gains a strong reputation among this customer group and becomes a channel for
additional products its members can use. A firm that excels in developing differentiated products of
its target customers is Hallmark Cards.
Hallmark Hallmark’s personal expression products are sold in more than 40,000 retail
outlets nationwide and in 100 countries worldwide. Each year the company produces
10,000 new and redesigned greeting cards, as well as related products including party goods,
gift wrap, and ornaments. Its success is due in part to its vigorous segmentation of the greeting
M06_KOTL4813_16_GE_C06.indd 153 15/09/2021 14:33

>> Hallmark’s worldwide

line of greeting
cards—which range
from the sentimental,
humorous, and musical
to online and interactive
greetings—are aimed
at specific market
segments that include
new mothers, parents,
grandparents, and
customers of different
ethnic backgrounds, as
Source: store_signs/Alamy Stock Photo

well those who want to
benefit charities such as
UNICEF.
card business. In addition to popular sub-branded card lines, such as the humorous Shoebox
Greetings, Hallmark has introduced lines targeting specific market segments. Fresh Ink targets
18- to 39-year-old women. The Simple Motherhood line targets moms, with designs featuring
fresh photography and simple, relatable sentiments. Hallmark’s four ethnic lines— Eight Bamboo,
Golden Thread, Uplifted and Love Ya Mucho—target Chinese, Indian, African American and
Latino consumers, respectively. Specific greeting cards also benefit charities such as (PRODUCT)
RED™, UNICEF, and the Susan G. Komen Race for the Cure. Hallmark has also embraced
technology. Musical greeting cards incorporate sound clips from popular movies, TV shows, and
songs. Hallmark recently introduced its Magic Prints line of interactive products, with “magic mitt”
technology that lets kids leave an imprint of their hand on an insert in a card or other keepsake for
parents or grandparents. Online, Hallmark offers e-cards as well as personalized printed greeting
cards that it mails for consumers. For business needs, Hallmark Business Expressions offers
personalized corporate holiday cards and greeting cards for all occasions and events.14
When targeting multiple customer segments, some companies make the mistake of not aligning
the attributes of their offerings with the distinct value sought by target customers in each segment.
This often occurs when companies create offerings based on their product development capability
and production capacity, instead of devising offerings designed to satisfy explicit customer needs.
Such an approach is problematic, because unless the company is clear on how its individual offerings
will address the needs of each segment targeted, the offerings may end up competing for the same
customer segment(s) while the needs of other segments are ignored. In addition, target customers
might be confused and find it difficult to distinguish among multiple offerings that lack the ability to
deliver the specific value they seek. Thus, it is essential to the success of the company’s multi-segment
targeting strategy to tailor the attributes of the company’s offerings to the needs of each customer
segment targeted.
Segmenting Consumer Markets

Market segmentation divides a market into well-defined slices. A market segment consists of a
group of consumers who share a similar set of needs and/or profile characteristics. Common types
of segmentation include demographic, geographic, behavioral, and psychographic. We discuss these
types of segmentation in the following sections.
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DEMOGRAPHIC SEGMENTATION
One reason variables such as age, family size, family life cycle, gender, income, occupation, education,
religion, race, generation, nationality, and social class are so popular with marketers is that these vari-
ables are often associated with consumer needs and wants. Another is that they’re easy to measure.
Even when we describe the target market in non-demographic terms (say, by personality type), we
may need to link back to demographic characteristics in order to estimate the size of the market and
the media we should use to reach it efficiently.
Here’s how marketers have used certain demographic variables to segment markets.
Age. Marketers often group customers based on their age into different generations. For example,
one of the commonly used demographic factors is that of generation, such as the Silent Generation
(1925–1945); Baby Boomers (1946–1964); Generation X (1965–1981); Generation Y, also referred to
as Millennials (1982–2000); and Generation Z (2001–present). Each generation is profoundly influenced
by the times in which it grows up—the music, movies, politics, and defining events of that period.
Members share the same major cultural, political, and economic experiences and often have similar
outlooks and values. Marketers may choose to advertise to a cohort by using the icons and images
prominent in its experiences. They can also try to develop products and services that uniquely meet
the particular interests or needs of a generational target.
For example, nutrition supplement companies develop different products based on consumers’
age. Centrum—a brand of multivitamins produced by Pfizer—markets two different types of vitamins:
Centrum Adults that targets adult men and women and Centrum Silver Adults that is designed for
adults 50+. Centrum Silver Adults contains multivitamins that are age adjusted with a broad spectrum
of micronutrients that help support the health of older adults. Other age-specific products include
diapers, baby foods, college loans, and retirement communities.
Stage in the Life Cycle. People in the same part of the life cycle may still differ in their life
stage. Life stage reflects a person’s major concern, such as going through a divorce, entering a sec-
ond marriage, taking care of an older parent, deciding to cohabit with another person, and buying a
new home. These life stages present opportunities for marketers who can help people cope with the
accompanying decisions.
For example, the wedding industry attracts marketers of a vast range of products and services. It’s
no surprise that the average U.S. couple spends close to $40,000 on their wedding.15 Marketers know
marriage often means that two sets of shopping habits and brand preferences must be blended into
one. Procter & Gamble, Clorox, and Colgate-Palmolive include their products in “Newlywed Kits,”
distributed to couples applying for a marriage license. Marketers pay a premium for newlywed name
lists to assist their direct marketing because of the high expected return on their promotional efforts.
But not everyone goes through that life stage at a certain time—or at all, for that matter. More than
a quarter of all U.S. households now consist of only one person—a record high. It’s not surprising that
this $1.9 trillion market is attracting interest from marketers: Lowe’s has run an ad featuring a single
woman renovating her bathroom; De Beers sells a “right-hand ring” for unmarried women; and at the
recently opened, ultra-hip Middle of Manhattan 63-floor tower, two-thirds of the occupants live alone
in one-bedroom and studio rental apartments.16
Singles Day Singles Day is a popular Chinese holiday on which young people celebrate their
pride in being single. The holiday was named Singles Day because its date, November 11 (11/11),
consists of four “ones.” The holiday has become the largest offline and online shopping day in the
world, with the Chinese e-commerce giants Alibaba and JD.com generating around $115 billion in
sales for the duration of the sales event running from November 1 to midnight on November 12.
Alibaba and other retailers and manufacturers have embraced the holiday as a means to reach
single young adults and have launched a barrage of targeted promotions to persuade them to
shop. Taobao, the world’s biggest e-commerce website (owned by Alibaba), even added a feature
to its app to show how users’ spending that day ranked against that of other people in their area.17
Gender. Men and women have different attitudes and behave differently, based partly on genetic
makeup and partly on socialization.18 Research shows that women have traditionally tended to be more
communal minded and men more self-expressive and goal directed; women have tended to take in more of
the data in their immediate environment, and men have tended to focus on the part of the environment
that helps them achieve a goal.
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Gender differences are shrinking in some other areas as men and

women expand their roles. One Yahoo survey found that more than
half of men identified themselves as the primary grocery shoppers in
their households. Procter & Gamble now designs some ads with men
in mind, such as ads for Gain and Tide laundry detergents, Febreze
air freshener, and Swiffer sweepers. On the flip side, according to
some studies, women in the United States and the United Kingdom
make 75 percent of decisions about buying new homes and purchase
60 percent of new cars.19
Nevertheless, gender differentiation has long been applied in
clothing, hairstyling, and cosmetics categories. Avon, for one, has
built a $6 billion-plus business by selling beauty products to women.
Gillette has found similar success with its Venus razor. More recently,
however, a number of companies have begun to question the value of
gender differentiation and eliminate gender traits from their products
in response to consumers’ skepticism about the benefit of gender-
Source: Roman Tiraspolsky/Alamy Stock Photo differentiated products. For example, Bic introduced Made For YOU,
a line of genderless razors and grooming products, joining compa-
nies like Non Gender Specific, Aēsop, and MALIN+GOETZ that offer
gender-neutral skin care products.20
Venus Razor Gillette’s Venus razor has become the most

successful women’s shaving line ever—holding more than 50
percent of the global women’s shaving market—as a result of
insightful consumer research and extensive market testing of
product design, packaging, and advertising. The razor was a
marked departure from earlier designs, which had essentially
>> Extensive consumer
been colored or repackaged versions of men’s razors. Venus
research and market
was designed specifically to meet women’s needs. Extensive research identified unique shaving
testing of a razor crafted
needs for women, including a shaving surface that is nine times greater than the male face, as well
to meet the unique shav-
as shaving in a wet environment and across the curves of the female body. The resulting design
ing needs of women
included an oval shaped cartridge to better fit into tight areas like underarms and the bikini area
resulted in Gillette’s
Venus razor garnering
and additional lubrication for better glide. Furthermore, after discovering that women change their
more than 50 percent of grip on a razor about 30 times during each shaving session, Gillette designed the Venus razor with
the global female shav- a wide, sculpted, rubberized handle offering superior grip and control. It also commissioned Harris
ing market. Interactive (now Harris Insights & Analytics) to conduct an online study among more than 6,500
women in 13 countries that found seven of 10 wanted so-called goddess skin, defined as smooth
(68 percent), healthy (66 percent), and soft (61 percent), leading to the introduction of the new
Gillette Venus & Olay razor.21
Income. Income segmentation is a long-standing practice in such categories as automobiles, clothing,

cosmetics, financial services, and travel. However, income does not always predict the best customers
for a given product. Despite the high price of early color television sets, blue-collar workers were among
the first to purchase them; it was cheaper for them to buy a television than go to movies and restaurants.
Many marketers are deliberately going after lower-income groups, in some cases discovering fewer
competitive pressures or greater consumer loyalty. Procter & Gamble launched two discount-priced
brand extensions in 2005—Bounty Basic and Charmin Basic—which have met with some success.
Other marketers are finding success with premium-priced products. When Whirlpool launched its
pricey Duet washer line, sales were double their forecasts in a weak economy, thanks primarily to
middle-class shoppers who traded up.
Increasingly, companies are finding their markets are hourglass-shaped, as middle-market U.S.
consumers migrate toward both discount and premium products. Companies that miss out on this new
market risk being “trapped in the middle” and seeing their market share steadily decline. After recog-
nizing that its channel strategy emphasized retailers like Sears selling primarily to the middle class,
Levi-Strauss introduced premium lines such as Levi’s Made & Crafted to upscale retailers Bloomingda-
les and Saks Fifth Avenue, and the less-expensive Signature by Levi Strauss & Co. line to mass market
retailers Walmart and Target.
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Race and Culture. Multicultural marketing reflects awareness that different ethnic and cultural
segments have sufficiently different needs and wants to require targeted marketing activities and that a
mass market approach is not refined enough for the diversity of the marketplace. Consider that McDon-
ald’s generates a significant share of its U.S. revenues with ethnic minorities. A recent survey showed
that 25 percent of African American respondents, 24 percent of respondents of Hispanic origin, and
20 percent of Asian American respondents stated that McDonald’s is the fast-food restaurant they eat
at most often. The company’s highly successful “I’m Lovin’ It” campaign was rooted in hip-hop culture
but has had an appeal that transcended race and ethnicity.22
The Hispanic American, African American, and Asian American markets and their numerous
submarkets are growing at two to three times the rate of non-multicultural populations, and their buy-
ing power is expanding. Multicultural consumers also vary in whether they are first, second, or a later
generation and whether they are immigrants or were born and raised in the United States. Accordingly,
marketers need to factor the norms, language nuances, buying habits, and business practices of multi-
cultural markets into the initial formulation of their marketing strategy rather than adding these as an
afterthought. All this diversity also has implications for marketing research; it takes careful sampling
to adequately profile target markets.
Multicultural marketing can require different marketing messages, media, channels, and so on.
Specialized media exist to reach virtually any cultural segment or minority group, although some
companies have struggled to provide financial and management support for fully realized programs.
Fortunately, as countries become more culturally diverse, many marketing campaigns targeting a spe-
cific cultural group can spill over and positively influence others. To launch its new Explorer model,
Ford developed a TV ad featuring comedian Kevin Hart that initially targeted the African American
market, but it also became one of the key ads for the general market launch.23
GEOGRAPHIC SEGMENTATION
Geographic segmentation divides the market into geographic units such as nations, states, regions,
counties, cities, or neighborhoods. The company can operate in one or a few areas, or it can operate
in all areas while heeding local variations. In that way, it can tailor marketing programs to the needs
and wants of local customer groups in trading areas and neighborhoods, and it can even cater to the
needs of individual customers. Going online to reach customers in a particular geographic location
can open a host of local opportunities, as Yelp has found out.
Yelp Founded in 2004, Yelp.com wants to “connect people with great local businesses” by
targeting consumers who seek or want to share reviews of local businesses. Almost two-thirds of
the website’s millions of vetted online reviews are for restaurants and retailers. Yelp was launched
in San Francisco, where monthly parties with preferred users evolved into a formal program, Yelp
Elite, now used to launch the service in new cities. The company’s mobile app allows it to bypass
the internet and connect with consumers directly; more than half of searches on the site now come
from its mobile platform. Yelp generates revenue by selling designated Yelp Ads to local merchants
via hundreds of salespeople. The local advertising business is massive, with digital ads overtaking
traditional ads in local markets. Local businesses also benefit from Yelp: Several research studies have
demonstrated the potential revenue payback from having reviews of their businesses on the site.24
Regional differences matter. Consider the following facts: People in Salt Lake City (and Utah) eat
the most Jell-O; Long Beach, CA, residents eat the most ice cream; and New York City dwellers buy
the most country music CDs.25 Regional marketing increasingly means marketing right down to a
specific zip code. Many companies use mapping software to pinpoint the geographic locations of their
customers, learning, say, that most customers are within a 10-mile radius of the store and are further
concentrated within certain zip+4 areas.
Some approaches combine geographic data with demographic data to yield even richer descrip-
tions of consumers and neighborhoods. Market research and data analytics company Claritas has
developed a geoclustering approach called PRIZM Perimeter that defines households with 68 demo-
graphically and behaviorally distinct segments reflecting consumers’ likes, dislikes, lifestyles, and
purchase behaviors. The 68 segments are defined according to socioeconomic rank, including charac-
teristics such as income, education, occupation, home value, urbanization, age, socioeconomic rank,
and presence of children at home.26 The inhabitants in a segment are presumed to lead similar lives,
drive similar cars, have similar jobs, and read similar magazines.
M06_KOTL4813_16_GE_C06.indd 157 15/09/2021 14:33

>> Local advertising

allows Yelp.com or
the Yelp app to share
millions of reviews from
customers who want to
relate their experiences
with local businesses
with those who are
looking for specific
services and products
such as restaurants and
retailers.
Source: bigtunaonline/Alamy Stock Photo

Geoclustering helps capture the increasing diversity of the U.S. population. Geoclustering seg-
mentations such as PRIZM have been used to answer a variety of questions: Which neighborhoods
or zip codes contain our most valuable customers? How deeply have we already penetrated these seg-
ments? Which distribution channels and promotional media work best in reaching our target clusters
in each area? By mapping the densest areas, the retailer can rely on customer cloning, assuming the best
prospects live where most of the customers already come from.
BEHAVIORAL SEGMENTATION
In behavioral segmentation, marketers divide buyers into groups on the basis of their actions. Many
marketers believe variables related to users or their usage—user status, usage rate, buyer-readiness
stage, loyalty status, and occasions—are good starting points for constructing market segments.
• User status. Based on their prior experience with the company’s offering, consumers can be clas-
sified into nonusers, potential users, first-time users, regular users, and ex-users. Understanding
customers’ experience with the company is important because different types of experience tend
to require different marketing strategies. Included in the potential-user group are consumers who
will become users in connection with some life stage or event; for example, mothers-to-be are
potential users who will turn into heavy users. The key to attracting potential users, or possibly
even nonusers, is understanding the reasons why they are not using. Do they have deeply held
attitudes, beliefs, or behaviors? Or do they just lack knowledge of the product or brand benefits?
• Usage rate. We can segment markets into light, medium, and heavy product users. Heavy users
often are a small slice but account for a high percentage of total consumption. Heavy beer drinkers
account for 87 percent of beer consumption—almost seven times as much as light drinkers. Many
marketers would rather attract one heavy user than several light users. A potential problem, how-
ever, is that heavy users often are either extremely loyal to one brand or never loyal to any brand and
always looking for the lowest price. They may also have less capacity to expand their purchasing and
consumption. Light users, on the other hand, may be more responsive to new marketing appeals.27
• Buyer-readiness stage. Some people are unaware of the product, some are aware, some are
informed, some are interested, some desire the product, and some intend to buy. To help char-
acterize how many people are at different stages and how well they have converted people from
one stage to another, marketers break the market into buyer-readiness stages. The proportions
of consumers at different stages have a significant effect on the design of a marketing program.
Suppose a health agency wants to encourage women to have an annual Pap test to detect cervi-
cal cancer. At the beginning, most women may be unaware of the Pap test. The marketing effort
should launch awareness-building advertising using a simple message. Later, the advertising
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should dramatize the benefits of the Pap test and the risks of not getting it. A special offer of a free
health examination might motivate women to actually sign up for the test.
• Loyalty status. Based on brand loyalty status, consumers can be divided into four main seg-
ments: hard-core loyal consumers who buy only one brand all the time, split-loyal consumers
who are loyal to two or three brands, shifting-loyalty consumers who move from one brand to
another, and switchers who show no loyalty to any brand. Accordingly, a company might focus
its efforts on (1) retaining loyal customers and increasing their usage rate and (2) increasing the
company’s share of purchases among the segments who are less loyal.
• Occasions. Consumers buy a company’s products and services for different reasons. We can
distinguish buyers according to the occasions when they develop a need, purchase a product, or
use an offering. For example, air travel is triggered by occasions related to business, vacation, or
family. Flowers can be purchased as a gift or for decorating one’s own home. Wine can be used for
drinking or for cooking. Understanding usage occasions is important because different occasions
are associated with different needs, and the value that a product or service can create for customers
is likely to vary across occasions.
PSYCHOGRAPHIC SEGMENTATION
In psychographic segmentation, buyers are divided into groups on the basis of psychological traits,
lifestyle, or values. Psychographic segmentation is important because demographic, geographic, and
behavioral characteristics of consumers do not always accurately reflect their underlying needs. For
example, people within the same demographic group can exhibit very different psychographic pro-
files: Some older consumers may be psychologically young, as Honda’s experience shows.
Honda Element To target 21-year-olds with its boxy Element, which company officials
described as a “dorm room on wheels,” Honda ran ads depicting sexy college kids partying near
the car at a beach. So many Baby Boomers were attracted to the ads, however, that the average
age of Element buyers turned out to be 42! With Baby Boomers seeking to stay young, Honda
decided the lines between age groups were getting blurred. After sales fizzled, Honda decided to
discontinue sales of the Element. When it was ready to launch a new subcompact called the Fit,
the firm deliberately targeted Gen Y buyers as well as their empty-nest parents.28
One of the oldest marketing classification systems based on psychographic measurements is

the VALS framework. VALS is based on people’s psychological traits and classifies U.S. adults into
eight primary groups in terms of their responses to a questionnaire featuring four demographic and
35 attitudinal questions.29 The main dimensions of the VALS segmentation framework are consumer
<< After ads for

Honda’s Element
targeting 20-somethings
also attracted the
attention of Baby
Boomers, boosting the
average buyer age to
40-plus, the car
company deliberately
marketed its
subcompact Fit not only
Source: Drive Images/Alamy Stock Photo
to Gen Y buyers but

also to their empty-nest
parents.
M06_KOTL4813_16_GE_C06.indd 159 15/09/2021 14:33

motivation and consumer resources. Consumers are inspired by one of three primary motivations:
ideals, achievement, and self-expression. Those primarily motivated by ideals are guided by knowledge
and principles. Those motivated by achievement look for products and services that demonstrate suc-
cess to their peers. Consumers whose motivation is self-expression desire social or physical activity,
variety, and risk. Personality traits such as energy, self-confidence, intellectualism, novelty seeking, inno-
vativeness, impulsiveness, leadership, and vanity—in conjunction with key demographics—determine
an individual’s resources. Different levels of resources enhance or constrain a person’s expression of
her or his primary motivation. Although the VALS approach can provide a richer understanding
of consumers, some marketers fault it for being somewhat removed from actual consumer behavior.30
Psychographic segmentation can also be based on consumers’ sexual orientation and gender
identification. The lesbian, gay, bisexual, and transgender (LGBT) market is estimated to make up
around 7 percent of the population and to have approximately $917 billion in buying power.31 More
than 75 percent of LGBT adults and their friends, family, and relatives say they would switch to brands
that are known to be LGBT friendly. Many firms have recently created initiatives to target this mar-
ket. American Airlines created a Rainbow Team with a dedicated LGBT staff and a website that has
emphasized community-relevant services such as a calendar of gay- and lesbian-themed national
events. Volvo, Nike, Kimpton, AT&T, Target, P&G, General Mills, and Kraft are also often identified as
among the most gay- and lesbian-friendly businesses. Hyatt’s online appeals to the LGBT community
target social sites and blogs where customers share their travel experiences. Some firms worry about
backlash from organizations that criticize or even boycott firms supporting gay and lesbian causes.
Although Pepsi, Campbell, and Wells Fargo all experienced such boycotts in the past, they continue
to advertise to the gay and lesbian communities.
Segmenting Business Markets

We can segment business markets with some of the same variables that we use in consumer m
arkets—
for example, geography, benefits sought, and usage rate—but business marketers also use other vari-
ables. Some of the common segmentation variables for business markets are as follows:32
• Demographic factors such as industry (e.g., Which industries should we serve?), company size
(e.g., What size companies should we serve?), and location (e.g., What geographic areas should
we serve?)
• Operating variables such as technology (e.g., What customer technologies should we focus on?),
user or nonuser status (e.g., Should we serve heavy users, medium users, light users, or nonusers?),
and customer capabilities (e.g., Should we serve customers needing many or few services?)
• Purchasing approaches such as purchasing-function organization (e.g., Should we serve compa-
nies with a highly centralized or a decentralized purchasing organization?); power structure (e.g.,
Should we serve companies that are engineering dominated? financially dominated?); nature of
existing relationship (e.g., Should we serve companies with which we have strong relationships
or simply go after the most desirable companies?); general purchasing policies (e.g., Should we
serve companies that prefer leasing? service contract? systems purchases? sealed bidding?); and
purchasing criteria (e.g., Should we serve companies that are seeking quality? service? price?)
• Situational factors, such as urgency (e.g., Should we serve companies that need immediate deliv-
ery or service?); specific application (e.g., Should we focus on a certain application of our product
rather than all applications?); and size of order (e.g., Should we focus on large or small orders?)
• Personal characteristics such as buyer–seller similarity (e.g., Should we serve companies whose
people and values are similar to ours?); attitude toward risk (e.g., Should we serve risk-taking or
risk-avoiding customers?); and loyalty (e.g., Should we serve companies that show high loyalty
to their suppliers?)
The previous list identifies major questions that business marketers should ask in determining
which segments and customers to serve. A rubber-tire company can sell tires to manufacturers of auto-
mobiles, trucks, farm tractors, forklift trucks, or aircraft. Within a chosen target industry, it can further
segment by company size and set up separate operations for selling to large and small customers.
A company can segment further by purchase criteria. Government laboratories need low prices and
service contracts for scientific equipment, university laboratories need equipment that requires little
service, and industrial labs need equipment that is highly reliable and accurate.
Business marketers may divide the marketplace in many different ways to choose the types of
firms to which they will sell. Finding the sectors with the greatest growth prospects, most profitable
customers, and most promising opportunities for the firm is crucial, as Timken found out.
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Timken When Timken, which manufactures bearings and rotaries for companies in a variety
of industries, saw its net income and shareholder returns dip compared with those of competitors,
the firm became concerned that it was not investing in the most profitable areas. To identify
businesses that operated in financially attractive sectors and would be most likely to value its
offerings, it conducted an extensive market study and discovered that some customers generated
a lot of business but offered little profit potential, whereas for others the opposite was true. As
a result, Timken shifted its attention away from the auto industry and into the heavy-processing,
aerospace, and defense industries. It also addressed customers that were financially unattractive
or minimally attractive. A tractor manufacturer complained that Timken’s bearings prices were too
high for its medium-sized tractors. Timken suggested that the firm look elsewhere but continued
to sell bearings at the higher price for the manufacturer’s large tractors—to the satisfaction of
both sides. By adjusting its products, prices, and communications to appeal to the right types of
firms, Timken experienced record revenue despite a recession.33
marketing
INSIGHT Chasing the Long Tail
The advent of online commerce, made possible by tech- the filtering of product recommendations based on user
nology and epitomized by Amazon.com, eBay, iTunes, preferences, which vendors can provide; and the word-of-
and Netflix, has led to a shift in consumer buying patterns, mouth network of internet users.
according to Chris Anderson, editor-in-chief of Wired With a new ability to match potential customers to
magazine and author of The Long Tail. niche offerings tailored to their tastes, a number of com-
In most markets, the distribution of product sales con- panies have started to derive increasing value from the
forms to a curve weighted heavily to one side—the “head”— long tail. Larger companies have benefited from the long
where the bulk of sales are generated by a few products. tail by being able to offer increasingly varied products
The curve falls rapidly toward zero and hovers just above it that remain viable even at relatively low sales volumes.
far along the X-axis—the “long tail”—where the vast major- And thanks to the lower costs of designing, communi-
ity of products generate very little sales. The mass market cating, and delivering their offerings, smaller companies
traditionally focused on generating “hit” products that have benefited by being able to enter the market with
occupy the head, disdaining the low-revenue market niches products that cater to niche tastes. Still, not every market
that the tail comprises. The Pareto principle–based “80–20” has been transformed by the long tail. In categories that
rule—that 80 percent of a firm’s revenue is generated by 20 involve highly complex production or very high inventory
percent of a firm’s products—epitomizes this thinking. costs, offerings remain limited. For example, the automo-
Anderson asserts that, as a result of the growth of tive, aircraft, and shipbuilding industries remain largely
e-commerce, the long tail holds significantly more value reliant on a relatively small number of mass-produced
than before. In fact, he argues, the internet has directly offerings, each serving larger customer segments.
contributed to the shifting of demand “down the tail, from Some critics challenge the notion that old business
hits to niches” in a number of product categories includ- paradigms have changed as much as Anderson suggests.
ing music, books, clothing, and movies. According to this Especially in entertainment, they say, the “head” where
view, the rule that now prevails is more like “50–50,” with hits are concentrated is valuable not only to the content
lower-selling products adding up to half a firm’s revenue. creators but also to consumers. One critique argued that
Anderson’s long-tail theory is based on three premises: “most hits are popular because they are of high quality,”
(1) lower costs of distribution make it economically easier to and another noted that the majority of products and ser-
sell products without precise predictions of demand; (2) the vices making up the long tail originate from a small con-
more products available for sale, the greater the likelihood centration of online “long-tail aggregators.”
of tapping into latent demand for niche tastes unreachable Although some academic research supports the long-
through traditional retail channels; and (3) if enough niche tail theory, other research is more challenging, finding that
tastes are aggregated, a big new market can result. poor recommendation systems render many very-low-share
Anderson identifies two aspects of e-commerce that products in the tail so obscure and hard to find that they
support these premises. First, the increased inventory and disappear before they can be purchased frequently enough
variety afforded online permit greater choice. Second, to justify their existence. For companies selling physical
the search costs for relevant new products are lowered products, the inventory, stocking, and handling costs can
as a consequence of the wealth of information online; outweigh any financial benefits of such products.34
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summary
1. Targeting is the process of identifying customers for relative to the competition. To this end, a company must
whom the company will optimize its offering. Target- identify markets in which it has superior resources rela-
ing reflects the company’s choice of which customers it tive to the competition.
will prioritize and which customers it will ignore when 6. Tactical targeting involves identifying effective and cost-
designing, communicating, and delivering its offering. efficient ways to reach strategically viable customers.
Targeting involves two types of decisions: strategic and Tactical targeting links the (typically unobservable)
tactical. value-based segments to specific observable and action-
2. Strategic targeting involves identifying which customers able characteristics. Such observable characteristics, also
(segments) to serve and which to ignore. Strategic tar- referred to as the customer profile, include demographic
geting is guided by two key factors: target compatibility (e.g., age, gender, and income), geographic (e.g., perma-
and target attractiveness. nent residence and current location), psychographic
3. Target compatibility reflects a company’s ability to cre- (e.g., moral values, attitudes, interests, and lifestyle), and
ate value for customers. It is a function of a company’s behavioral (e.g., purchase frequency, purchase quantity,
resources, including business infrastructure, scarce and price sensitivity) factors.
resources, skilled employees, collaborator networks, 7. Tactical targeting is guided by two key factors: effec-
know-how, strong brands, an established ecosystem, tiveness (a company’s ability to reach all target cus-
and capital. tomers) and cost efficiency (a company’s ability to
4. Target attractiveness reflects customers’ potential to deploy its resources in a way that reaches only its target
create value for the company. It is a function of mon- customers).
etary factors such as the revenues generated by a 8. Segmentation is a categorization process that groups
particular customer segment and the costs associated customers by focusing on those differences that are rel-
with serving this segment, as well as strategic fac- evant for targeting and ignoring those differences that
tors such as a segment’s social value, scale value, and are irrelevant. Segmentation enables managers to group
information value. customers into larger segments and develop offerings
5. A key principle of strategic targeting is that the company for the entire segment, rather than for each individual
should be able to create superior value for its customers customer.
marketing
SPOTLIGHT
Superdry
Superdry is a popular fashion brand in the United Kingdom Source: Flo Smith/Alamy Stock Photo
that markets clothes made of premium fabrics for men and

women. Stylish, casual, sporty, washed-out yet modern,
and bearing intricate, hand-drawn graphics, the brand rep-
resents a true instance of cultural blending—it combines
American vintage-style fashion, Japanese graphics, and a
British focus on quality and design detail.
Superdry was founded in 2003 as a partnership
between Julian Dunkerton and James Holder in Cheltenham,
in the United Kingdom. Dunkerton began his own journey lead to the creation of the skate-wear brand Bench. When
in the fashion industry with a small stall in the Cheltenham the two entrepreneurs met, they were impressed by each
market that sold vintage American-inspired clothing, which other’s interests in product design, fabric, vintage fashion,
grew into the brand Cult Clothing. Meanwhile, Holder had and graphics. They decided to blend their creative ideas
an interest in design, typography, and screen printing, which and went on an inspiration trip to Tokyo. The brand name
M06_KOTL4813_16_GE_C06.indd 162 15/09/2021 14:33

Superdry and its logo were created during a brainstorming After 16 years of rapid growth, in 2019, the brand’s
session in a Tokyo bar, where Holder and Dunkerton noticed sales started to slow down. Some consumers said that
that the word “super” was used on the packaging of nearly the brand was not as trendy as it used to be, while indus-
every Japanese product they saw. Since then, the word try experts said that it lacked social engagement with its
“super,” written in Japanese kanji, has been a part of their target audience. For example, Superdry only had a tenth
clothing brand and its logo. of the follower count that Hollister, a competing brand,
From a collection of five T-shirts, Superdry has grown enjoyed on Instagram. Superdry decided to reemphasize its
to become a global brand with over 500 branded stores coolness factor by focusing more on influencer marketing
around the world and a cult celebrity following—it has been through social media and by developing new campaigns like
worn by celebrities such as David Beckham, Justin Bieber, Summer or Nothing, which targeted the youth. Launched
and Kate Winslet. Its marketing strategy has included across all of Superdry’s Digital platforms globally, the cam-
advertising, sales promotions, digital marketing programs, paign aimed to build a strong connection with Millennials
sponsorships, collaborations, as well as events such as the by depicting the various fun possibilities that summer has
Superdry Sound Summer Music Festival. In the first decade to offer, like surfing, beach ball, skateboarding, pool parties,
of its launch, Superdry’s popularity grew immensely, espe- and cliff jumping.
cially among younger consumers, but the company also In August 2019, Superdry expanded its communication
wanted to increase its appeal among the older segments. In strategy to include TikTok in its marketing program. When
2015, Superdry launched a 250-piece premium range called it invited three Australian TikTok influencers to one of its
IDRIS in collaboration with 42-year-old British actor Idris store openings, the result was a huge lineup of more than
Elba, who was voted one of GQ’s Best Dressed Men in the 300 people outside the store. For Christmas 2019, Superdry
United Kingdom that same year. Superdry and Elba went on launched its One for Me, One for You TikTok campaign
to produce a documentary titled Cut from a Different Cloth, in Australia and New Zealand. In this promotion, popular
which presented a new side of the actor as a designer and TikTok influencers gifted matching pairs of Superdry Slides
entrepreneur. to each other for Christmas. It was a huge success—even
In 2018, the brand had annual sales of over $1.8 billion, before its launch, the campaign had achieved an organic
with an online presence in 148 countries and stores in more reach of 2.8 million across the influencer channels. Superdry
than 60. Its online division accounted for more than 25 per- has clearly been able to connect successfully with its target
cent of its retail revenue, and the company now referred to audience with a solid communication mix, one that not
itself as a “global digital brand.” Superdry used YouTube for only encourages interactive engagement but, by driving
sales promotions to drive online and in-store sales on Black store visits and purchases, also influences direct behavioral
Friday, Cyber Monday, and Christmas in 2018. It believed responses.35
that its customers did not make a significant distinction
between online and offline channels and moved smoothly Questions
between the two. For Superdry, YouTube became an impor- 1. Discuss Superdry’s IMC strategy. Going forward, what
tant part of its communication mix, as it could engage the type of communication objective should it pursue?
brand’s audience online while supporting its in-store sales. 2. Discuss the pros and cons of using celebrities as
Superdry’s “This Is the Jacket” video on YouTube was based message sources. Do you think it should do more
on the idea that the amount of time someone spends wear- celebrity endorsements and collaborations like it did
ing their jackets in winter becomes part of their identity. The with Idris Elba?
campaign was a success, helping to increase brand engage- 3. Discuss the effectiveness of Superdry’s social media
ment and achieve measurable sales responses. strategy of using YouTube and TikTok.
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marketing
SPOTLIGHT
Chase Sapphire
Source: Nicole Glass Photography/

Chase Bank, a commercial and consumer banking subsidiary
of the largest U.S. bank, JPMorgan Chase, offers services
such as personal banking, credit cards, mortgages, and
auto financing. Chase Bank is known for its high customer
satisfaction rating, ranking the highest among the six largest
Shutterstock
U.S. banks. Serving nearly half of U.S. households, Chase
Bank has over 93 million cardholders and 5000 branches
nationwide.
In 2006, Chase Bank initiated a substantial market
research project in order to strengthen its credit card opera- having to enter their credit card number. By the end of the
tions. The project focused on deeply understanding the year, over 905 of Sapphire cardholders reported overall sat-
various consumer segments in the credit card market. When isfaction with the card, and 85 percent indicated they would
segmenting the market, credit card companies often use recommend it to others.
two types of demographics: age group and asset amount. Building on the success of Sapphire, Chase introduced
In addition, credit cards are differentiated by factors such as a new card called the Chase Sapphire Preferred in 2011 to
the annual fee, rewards such as cash back and proprietary obtain a larger share of the affluent market. This new card
rewards (points), and factors such as interest rates, credit had an annual fee of $95 but offered cardholders 50,000
lines, and creditworthiness. Chase’s market research project points if they spent over $4,000 in the first three months. Pre-
showed that competing in the affluent customer segment of ferred cardholders also enjoyed better points-per-dollar con-
the consumer credit card market would be valuable in build- version rates on dining and travel and could redeem points
ing a stronger presence for the company. According to the for exclusive events called Chase Experiences. Unlike most
research, this demographic represented 15 percent of U.S. credit cards at the time, the Chase Sapphire Preferred card
cardholders at the time but generated over 50 percent of total had a metal core between the two plates of plastic, making
credit card spending. it heavier and more substantial. Customers reported that the
In 2009, Chase Bank introduced five primary sub-brands card made a satisfying “thunk” when placed down for pay-
in its credit card portfolio to address different market segment, giving the card a unique identity.
ments. These included JP Morgan for private banking cus- The cornerstone of the Chase Sapphire portfolio, the
tomers, Chase Sapphire for affluent consumers, Chase Ink Sapphire Reserve card, came about when further research
for small business owners, Chase Freedom for consumers showed that a portion of consumers within the affluent seg-
who prioritized cash back, and Chase Slate for consum- ment, mainly 25- to 44-year-olds with incomes of more than
ers focused on paying off credit card debt. Chase Sapphire $150,000, heavily prioritized travel benefits and utilized point
appealed to affluent consumers by offering competitive rewards. Chase not only had to design its new card to dis-
rewards and top-tier customer service. At the time, this por- tinguish it from the Sapphire Preferred card but also had to
tion of the market was dominated by American Express. appeal to Millennials and deter the behavior of those it called
Amex’s Platinum Card offered perks such as 24-hour cus- “churners.” By 2013, many Millennials were careful about
tomer service, access to exclusive clubs, and amenities at applying for new credit cards because of the significant stu-
hotels, resorts, and restaurants worldwide. These features dent loan debt they had amassed. However, Chase found
were attractive to the businesspeople and vacationers who that Millennials were also attracted by reward systems and
made up a significant portion of the affluent segment. To that a substantial enough incentive could change their atti-
gain entry into the market, Chase offered Sapphire with no tude. Churners were those who signed up for multiple credit
annual fee. Customers earned 2 points per dollar spent on cards to take advantage of sign-on bonuses and low intro-
airline travel and 1 point per dollar spent elsewhere. Custom- ductory rates; these credit cards would often go unused after
ers who spent $500 on the card during the first three months the rewards were spent.
would also receive 10,000 bonus points, easily redeemed The new Chase Sapphire Reserve card was launched
for rewards on a user-friendly web page called Ultimate in August 2016. It carried a $450 annual fee, offered
Rewards. In addition, all calls made by Chase Sapphire card- 3 points per dollar spent on travel and dining, a greater
holders were answered by live advisors without customers points-per-dollar conversion rate toward travel, annual travel
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credit, and access to Chase Experiences. For Millennials, Chase found itself at the top of the premium credit card
this represented a credit card that was flexible and perfect market through understanding the behavior and demograph-
for a traveling lifestyle. At launch, Chase offered an unprec- ics of its target customers. Chase recognized that Millennials
edented 100,000-point bonus, earned after a customer were bargain minded and that they looked for experiences
spent $4,000 within the first three months. Chase recog- over material things. The Sapphire line perfectly addressed
nized that Millennials were more easily persuaded by social this—from the weight of the card to the excellent customer
media influencers than traditional television advertising. To service and market-leading rewards programs. Chase created
advertise the card Chase partnered with directors, design- a cult-brand by designing an attractive product that fit into
ers, and models to deliver their shared experiences across the Millennial lifestyle.36
social media, which created a greater sense of exclusivity
than mass advertising. Questions
Demand for the Sapphire Reserve card greatly exceeded 1. Who are the customers targeted by Chase with the Sap-
Chase’s expectations. Within 10 days of the launch, Chase phire card? What are the key value and profile character-
had run out of the metal alloy sandwiched within their cards. istics of these customers?
Call centers were overwhelmed with interested applicants. 2. What value does the Sapphire card create for custom-
The card reached its new customer acquisition goal within ers? From a customer’s perspective, what are the pros
two weeks of launch. The high sign-on points bonus racked and cons of the Sapphire card compared to other credit
up big costs for Chase. Months later, Chase announced cards?
that the sign-on bonus would be reduced to 50,000 points. 3. What role did promotional incentives such as the bonus
However, Chase viewed the costs as an investment that points play in creating customer demand? Would Mil-
dedicated and engaged customers would pay off in the years lennials remain loyal customers once they had taken
to come. This sentiment was confirmed after one year, when advantage of the initial offer? Would the Sapphire card
Chase revealed that the Reserve renewal rate was extremely continue to be attractive to Millennials if its promotional
high at approximately 90 percent, thus addressing the incentives were reduced and became similar to other
churner issue. credit card offerings?
M06_KOTL4813_16_GE_C06.indd 165 15/09/2021 14:33

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CHAPTER 4 | Analyzing Business Markets 123

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The Scope of Marketing Research

IMPORTANCE OF MARKETING INSIGHTS

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General Foods. In the 1970s, a successful market-

and predict its success or failure. His views would inform

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<< P&G’s Consumer

Source: Casimiro/Alamy Stock Photo

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The Marketing Research Process

DEFINING THE PROBLEM

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DEVELOPING THE RESEARCH PLAN

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TABLE 5.1 Types of Questions

Picture interpretation A picture of two characters is presented,

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Source: Martin BondAlamy Stock Photo

As an alternative to traditional consumer research, some researchers have begun to develop

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COLLECTING THE INFORMATION

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ANALYZING THE INFORMATION AND MAKING

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Measuring Market Demand

KEY CONCEPTS IN DEMAND MEASUREMENT

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FORECASTING MARKET DEMAND

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Measuring Marketing Productivity

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Source: Ian Dagnall/Alamy Stock Photo

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LEGO is one of the world’s most recognizable toys. The

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Identifying Target Customers

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THE LOGIC OF TARGETING

STRATEGIC AND TACTICAL TARGETING

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<< As part of a broad

Source: Scott Keeler/ZUMAPRESS/Newscom

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DEFINING THE CUSTOMER PROFILE

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ALIGNING CUSTOMER VALUE AND CUSTOMER PROFILE

BRINGING TARGET SEGMENTS TO LIFE WITH PERSONAS

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Single-Segment and Multi-Segment