In this chapter, you learned about the major elements of a customer value–driven marketing strategy: segmentation, targeting, differentiation, and positioning. Marketers know that they cannot appeal to all buyers in their markets—or at least not to all buyers in the same way. Therefore, most companies today practice target marketing—identifying market segments, selecting one or more of them, and developing products and marketing mixes tailored to each.
A customer value–driven marketing strategy begins with selecting which customers to serve and determining a value proposition that best serves the targeted customers. It consists of four steps. Market segmentation is the act of dividing a market into distinct groups of buyers who have different needs, characteristics, or behaviors and who might require separate marketing strategies or mixes. Once the groups have been identified, market targeting evaluates each market segment’s attractiveness and selects one or more segments to serve. Differentiation involves actually differentiating the market offering to create superior customer value. Positioning consists of positioning the market offering in the minds of target customers. A customer value–driven marketing strategy seeks to build the right relationships with the right customers.
There is no single way to segment a market. Therefore, the marketer tries different variables to see which give the best segmentation opportunities. For consumer marketing, the major segmentation variables are geographic, demographic, psychographic, and behavioral. In geographic segmentation, the market is divided into different geographical units, such as nations, regions, states, counties, cities, or even neighborhoods. In demographic segmentation, the market is divided into groups based on demographic variables, including age, life-cycle stage, gender, income, occupation, education, religion, ethnicity, and generation. In psychographic segmentation, the market is divided into different groups based on social class, lifestyle, or personality characteristics. In behavioral segmentation, the market is divided into groups based on consumers’ knowledge, attitudes, uses, or responses concerning a product.
Business marketers use many of the same variables to segment their markets. But business markets also can be segmented by business demographics (industry, company size), operating characteristics, purchasing approaches, situational factors, and personal characteristics. The effectiveness of the segmentation analysis depends on finding segments that are measurable, accessible, substantial, differentiable, and actionable.
To target the best market segments, the company first evaluates each segment’s size and growth characteristics, structural attractiveness, and compatibility with company objectives and resources. It then chooses one of four market-targeting strategies—ranging from very broad to very narrow targeting. The seller can ignore segment differences and target broadly using undifferentiated (or mass) marketing. This involves mass producing, mass distributing, and mass promoting the same product in about the same way to all consumers. Or the seller can adopt differentiated marketing—developing different market offers for several segments. Concentrated marketing (or niche marketing) involves focusing on one or a few market segments only. Finally, micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Which targeting strategy is best depends on company resources, product variability, product life-cycle stage, market variability, and competitive marketing strategies.
Once a company has decided which segments to enter, it must decide on its differentiation and positioning strategy. The differentiation and positioning task consists of three steps: identifying a set of possible differentiations that create competitive advantage, choosing advantages on which to build a position, and selecting an overall positioning strategy.
The brand’s full positioning is called its value proposition—the full mix of benefits on which the brand is positioned. In general, companies can choose from one of five winning value propositions on which to position their products: more for more, more for the same, the same for less, less for much less, or more for less. Company and brand positioning are summarized in positioning statements that state the target segment and need, the positioning concept, and specific points of difference. The company must then effectively communicate and deliver the chosen position to the market.
Differentiation (p 188)
Positioning (p 189)
Product position (p 204)
Value proposition (p 208)
Go to mymktlab.com to complete the problems marked with this icon .
7-1 Why have companies moved away from mass marketing and toward target marketing? Outline the steps in a customer value-driven strategy. (AACSB: Communication)
7-2 How is demographic segmentation used in consumer markets? Provide an example where marketers have used demographic segmentation. (AACSB: Communication; Reflective Thinking)
7-3 Discuss the challenges marketers face with international market segmentation. (AACSB: Communication)
7-4 There are many ways to segment a market, but not all segmentations are effective. Explain the five requirements for effective market segmentation. (AACSB: Communication)
7-5 Describe micromarketing, local marketing, and individual marketing. When should marketers consider using these segmentation strategies? (AACSB: Communication; Reflective Thinking)
7-6 How can a company gain competitive advantage through differentiation? Describe an example of a company that illustrates each type of differentiation discussed in the chapter. (AACSB: Communication)
7-7 Identify a product you use every day. Assume you are the marketer of the product and want to convey the ways your product differs from competing products in the marketplace. Create a differentiation strategy to promote your product and create a competitive advantage. (AACSB: Communication; Reflective Thinking)
7-8 Manfluencers is a term that describes a new marketing trend. To what does this term refer? Describe two examples of how marketers have responded to the manfluencers trend. (AACSB: Communication; Reflective Thinking)
7-9 In a small group, create an idea for a new business. Using the steps described in the chapter, develop a customer value–driven marketing strategy. Describe your strategy and conclude with a positioning statement for this business. (AACSB: Communication; Reflective Thinking)
Local marketing is an effective tool used by marketers to reach intended market segments. Groupon has capitalized on this concept by tailoring brands and marketing to the needs and wants of local customer segments—cities, neighborhoods, and even specific stores. According to its website, Groupon “offers a vast mobile and online marketplace where people discover and save on amazing things to do, see, eat, and buy. By enabling real-time commerce across local businesses, travel destinations, consumer products, and live events, shoppers can find the best a city has to offer. Groupon is redefining how small businesses attract and retain customers by providing them with customizable and scalable marketing tools and services to profitably grow their businesses.” This concept lies at the heart of Groupon’s mission: “to connect local commerce, increasing consumer buying power while driving more business to local merchants through price and discovery.” To help consumers make those connections, Groupon offers a mobile app, online marketplace, and social media touchpoints where customers can readily access information on its daily deals.
7-10 How does Groupon use target marketing? Provide examples. Discuss the ways in which small businesses can utilize local social media marketing in your community. (AACSB: Communication; Use of IT; Reflective Thinking)
7-11 Do you use Groupon? Is it effective in helping local businesses to meet the challenges of local marketing? Why or why not? (AACSB: Communication; Reflective Thinking)
Discretionary income. It’s the amount of money we have left over after paying for life’s necessities. And many teens have plenty of it. According to a recent Nielsen survey, 29 percent of teens live in homes where household income is $100,000 or higher. These teens aren’t just buying for themselves, either. In addition to having discretionary income, teens have a strong influence on the purchasing decisions of their parents. According to Mary Leigh Bliss, trends editor at youth-focused market research firm YPulse, “Teens are now passing technology down to their parents, not the other way around.” This presents significant opportunities for marketers. However, some critics worry that teens may be especially vulnerable to targeted marketing messages and offers from high-powered or unscrupulous marketers.
7-12 Discuss how companies can reach their teen markets using socially responsible target marketing. Cite an example of a company being responsible in targeting teens and another example where a company is not responsible.
7-13 The bombardment of commercial messages is turning teens into some of the most sophisticated and skeptical consumers in the world, increasing their resistance to conventional advertising tactics. As this highly sought-after teen target market ages, how can marketers prepare to tap into the consumers of the future?
USAA is a financial services company formed in 1922 by 25 Army officers who came together to insure each other’s automobiles because they were deemed too high-risk to insure. USAA now has almost 25,000 employees and more than 9 million member customers. It consistently ranks in the top 10 automobile insurance companies and offers other types of insurance as well as banking, investment, retirement, and financial planning services. USAA practices a niche marketing strategy—it targets only active and former military personnel and their immediate families. Members earn the right to be customers by serving in the military and can pass that on to their spouses and children. The company was originally even more restrictive, targeting only military officers. However, in 1996, eligibility was extended to enlisted personnel and is now extended to anyone who served and was honorably discharged from the military and their immediate family members.
7-14 Discuss the factors used to evaluate the usefulness of the military segment. (AACSB: Communication; Reflective Thinking)
7-15 Using the chain ratio method described in Appendix 2: Marketing by the Numbers, estimate the market potential in the military (active duty and veterans) market. Be sure to state any assumptions you make. (AACSB: Communication; Use of IT; Analytical Reasoning)
In the world of children’s television programming, Sprout is a relative newcomer. Owned by NBCUniversal, Sprout airs PBS Kids programming as well as additional acquired material. A true multi-platform network, Sprout can be accessed as regular cable programming, as on-demand programming through Comcast, and online through Sproutonline.com.
Sprout does not target only kids, however. It targets preschool families—households that have one or more preschool-age children. Parents need to be involved with their children’s viewing of interactive content, multiple access points, and 24-hour programming. For this reason, Sprout’s promotional efforts are geared toward parents as well as children.
After viewing the video featuring Sprout, answer the following questions:
7-16 Why does Sprout target preschool families rather than focusing solely on children? Give examples.
7-17 Which target marketing strategy best describes Sprout’s efforts? Support your choice.
7-18 How does Sprout use differentiation and positioning to build relationships with target customers?
After an exceptionally frustrating day at the office, Jessica set out to unwind in one of her favorite third places. The mood lighting immediately brought her blood pressure down as she walked in and took a deep, relaxing breath. She was happy that her favorite spot was available—a comfy leather chair in the back corner of the room, where she used the touchscreen at the table in front of her to order her favorite drink. Then, putting on a set of noise-canceling headphones, Jessica began catching up on her favorite TV show with her own personal entertainment portal.
If this sounds like a local Starbucks or trendy nightclub, think again. Jessica had just boarded a flight on Virgin America, one of the youngest airlines in the United States. It’s also the hottest airline, besting all competition in various industry and customer surveys. And after just six years in business, Virgin America also reached profitability faster than any other airline in all of airdom.
How does a startup airline break into one of the most competitive industries in the world, notorious for barriers to entry? For Virgin America, the answer is two-fold—by putting customers first and by targeting the right customer segment.
Virgin America first took to the skies in 2007. This wouldn’t be the first shot at starting an airline for Richard Branson—founder of parent company Virgin Group. Virgin’s international airline, Virgin Atlantic, had been crossing the pond between the United States and Europe since 1984. But Virgin America would be an entirely independent enterprise. And while Branson and other Virgin Group executives make no day-to-day decisions at Virgin America, the unorthodox Virgin culture—fun, creative, even whacky—is unmistakable.
One of Branson’s core values that permeates Virgin America is this: Take care of your people first and profits will follow. In an industry characterized by customer complaints about service, it would seem that a customer-centric approach would be enough to gain a foothold in the market. But when Virgin started air service in the United States, at least a few other airlines had already established themselves based on a “customer first” mantra, including industry leader Southwest Airlines. And Virgin America knew that it could not expect to succeed by playing the low-price game. Not only was Southwest the reigning champion on value, but the bulk of airline competitors were already beating each other up for low-price dominance.
Virgin America found a different competitive hook. It targeted a segment of frequent fliers who were young, savvy, influential, and willing to pay just a little bit more for an airline that would take care of them—the Silicon Valley faction. By providing exceptional service and amenities that appeal to this particular slice of airline customers, Virgin America has been able to charge slightly higher fares and still establish a growing base of fiercely loyal patrons.
Offering unique amenities in the airline business is a challenge for any company. But from the beginning, the Virgin America experience was designed with its target customer in mind. Its fleet consists of 61 Airbus A300 series planes, each brand new when it went into service, minimizing the unexpected delays due to maintenance and repairs. Custom-designed leather seats are roomier and more comfortable than average coach seating. And that mood lighting? Not only does it bathe the aircraft cabin in an appealing purplish glow, it automatically adjusts to one of 12 different shades based on outside light.
To appeal to tech gurus, Virgin America focused on equipping its planes with the latest hardware and software. From day one, Virgin was the only domestic carrier to offer fleetwide in-flight Wi-Fi—a distinction that it maintains to this day, even as it has stayed ahead of the competition by upgrading the network to ensure the fastest in-flight speeds available. Every seat has its own power outlet, USB port, and 9-inch video touchscreen with a QWERTY keyboard/remote control.
That touchscreen provides access to the most advanced entertainment and information system in U.S. skies. Virgin America’s proprietary Red system allows each guest to choose on-demand movies, TV programs, music, or video games. Red also allows patrons to track their flight on interactive Google Maps, engage in seat-to-seat chat with other customers, and order food and drinks for themselves or anyone else on board. It’s a system designed to give passengers a feeling of control during an experience that is otherwise mostly out of their control.
Many of these ideas came by way of Virgin America’s techy clientele. It’s no accident that the company’s headquarters are located in Burlingame, California, just a few short miles from the San Francisco airport. In fact, Virgin America is the only airline based in Silicon Valley. Not only is the company constantly experimenting with every aspect of the business, it has made strong efforts to involve Silicon Valley entrepreneurs and executives in the process, helping Virgin to think like its disruptive clientele. “We see ourselves as more of an incubator,” says Luanne Calvert, Virgin America’s chief marketing officer.
Take VX Next, for example—a group of 30 or so frequent fliers who act as a brain trust for Virgin America, generating ideas for the company at no charge. Among other winning ideas, this group was instrumental in developing the company’s recent interactive promotional campaign. At the center of the campaign is a slick cinematic site that provides viewers with a virtual tour of a Virgin America flight. Demonstrating the airline’s in-flight perks are founders and CEOs of companies such as Pandora, Gilt, and Pitchfork. As part of the tour, visitors to the site discover that several of the passengers onboard are Virgin America frequent fliers and Silicon Valley celebrities who have made creative contributions to the airline’s services with things such as curating in-flight music and menu items.
Virgin America’s home-brewed tech panel was also instrumental in creating the company’s latest safety video. When the company started operations, it delighted customers with a safety video like none other—an animated short featuring a techie nun and a matador with his bull. Posted online as well, the video racked up millions of views and cemented Virgin America’s image as a company that could find creative alternatives to just about anything, even a federally mandated reminder to wear seatbelts. That image has carried over to Virgin America’s new safety video—one created by a top Hollywood director and world-class choreographers that features 10 So You Think You Can Dance alums, two former Olympians, and one American Idol finalist. Debuting in Times Square and getting plenty of coverage from the press, the new safety video racked up 6 million views in less than two weeks.
Although there is plenty of anecdotal evidence that Virgin America’s customers are thrilled with its service, it’s the industry quality ratings that count. Virgin America is coming through with flying colors there as well. In fact, Virgin America has been number one in the annual Airline Quality Report—a survey that ranks airlines based on mishandled baggage, customer complaints, denied boardings, and on-time percent—for the past three years in a row. In a recent Consumer Reports survey for customer satisfaction in the airline, not only did Virgin America take top honors, it came away with the highest score achieved by any U.S. airline in many years.
Despite all of Virgin America’s success, the airline industry is a tough place to survive and thrive. In the United States, just four airlines control more than 80 percent of the market. Virgin America knows that maintaining its high rankings will be a challenge, especially as it expands into new markets—particularly markets with cold climates, a factor that increases the likelihood of canceled or delayed flights. As the number of passengers on flights increases, boarding and deplaning times will also increase, affecting multiple customer service metrics. And with Virgin’s techy and connected clientele, any slip-up is likely to be texted, tweeted, or otherwise broadcast for all the world to see. Playing the features and amenities game is also problematic. Things that delight customers today become ho-hum tomorrow, especially when competitors are constantly trying to improve their offerings as well.
To remain competitive as it moves into the future, Virgin America recently announced that it has agreed to be acquired by Alaska Airlines—another small West Coast–based airline known for its high level of service and customer loyalty. With more than 1,200 daily flights and 280 aircraft, the combined airline will provide much stronger competition on the West Coast, even with the largest airlines. This should be a boon for customers of each airline who have been frustrated by limited route options in the past.
But with such a strong and unique positioning targeted toward a specific segment of the industry, many are wondering what effect the union of these two airlines will have on Virgin America’s style and quality of service. After all, if “hip” best describes Virgin America’s style, Alaska Airlines is best described as “practical.” “My hope is that Alaska goes in with an open mind and that they learn some things,” says one travel industry analyst. “It’s not hip, it’s not sexy, but Alaska has a lot going for it.”
The deal is still subject to approval by regulators, and airline mergers can take years to complete. But one thing is for sure. Alaska Airlines is not only acquiring an airline with a strong service record, it’s taking on an unusually profitable airline. Virgin America achieved an annual profit after just six years. Flying in the face of skeptics, the brash young airline continued on its upward trajectory by posting strong increases in profits in each of the two years since. For the most recent year, Virgin America achieved $201 million in profit on $1.5 billion in revenues—139 percent higher profits than the year before and the highest ever for a young airline. The company also recently went public in the second-largest airline IPO in history. The question is this: Will the new Virgin America continue to do what it has done in the past—wow every customer with exceptional service while giving the tech community a little something extra? Or will that special Virgin America brand personality slowly disappear in the shadow of older, more established Alaska Airlines brand?
7-19 Using the full spectrum of segmentation variables, describe how Virgin America segments and targets the market for airline services.
7-20 Which market targeting strategy is Virgin America following? Justify your answer.
7-21 Write a positioning statement for Virgin America.
7-22 What are the potential issues for Virgin America following the Alaska Airlines acquisition? Will Virgin America continue to appeal to the same types of customers? Why or why not?
Sources: Matt Krupnick, “Virgin America Fans Ask If Alaska Airlines Takeover Will Mean Loss of Cool,” New York Times, April 11, 2016, www.nytimes.com/2016/04/12/business/virgin-america-fansaskif-alaska-airlines-takeover-will-mean-loss-ofcool.html; Melanie Hanns, “Airline Quality Rating: 2015,” Embry-Riddle Newsroom, April 4, 2016, www.news.erau.edu/top-news/airline-quality-rating-report-reveal-top-carriers-2015; Lauren Schwartzberg, “Most Innovative Companies: 2015, Virgin America,” Fast Company, March, 2015, pp. 135–137; Matt Richtel, “At Virgin America, a Fine Line between Pizazz and Profit,” New York Times, September 8, 2013, p. BU1; Charisse Jones, “Virgin America Posts Record Profit for 2014,” USA Today, February 18, 2015, www.usatoday.com/story/money/2015/02/18/virgin-america-posts-record-profit/23608205/; and information from www.virginamerica.com/cms/about-our-airline/corporate-facts.html and www.virginamerica.com/cms/news/virgin-america-merger-with-alaska-airlines, accessed June 2016.
Go to mymktlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions:
7-23 Describe how marketers segment international markets. What is intermarket segmentation?
7-24 Describe how marketers manage service differentiation, other than through pricing, and describe an example of a service provider that has successfully differentiated its offering from competitors.
18.227.102.111