Unit B: Marketing Function

What you’ll learn to do: briefly explain the concepts of segmentation and targeting

We have established that the customer is at the center of marketing and arguably of business, as well. How do businesses find and communicate with customers?

Let’s think about a couple of realities in the business world. First, every organization has limited resources. Organizations simply cannot do everything and be all things to all people. They have to prioritize and choose. Second, marketing is always most effective when it’s relevant to the potential customer. How can an organization create the right products, services, messages and experiences for a potential customer? Answer: through segmentation and targeting.

The starting point for understanding your potential customer is figuring out exactly whom you want to reach. That process is called segmentation. The next step is focusing on those customer segments that are most promising customers. That’s where targeting comes in. Targeting helps organizations use their resources wisely and customize what they do much more specifically for those who will see the greatest value from their offering.

Whom Are You Trying to Reach?

Suppose you are selling automotive detailing products. Is your target “anyone with money to pay for your product?” Or are you focusing your efforts on a tightly defined market niche of people with an identified need for what you are selling? “Anyone with money” is such a broad audience that it’s difficult to make any impact at all with your marketing efforts or convince very many people that they need your product.  If you narrow and carefully define your target market, though, your efforts will be more fruitful because they’re focused on people with a preexisting need or interest in what you offer.

Step 1: Identify the Business Need You Address

To define your total market, start by stating the needs you will fulfill: Who are your products or services intended for? Who do you want to do business with? What is unique about your product? If you’re selling products used in automotive detailing, your total market consists of vehicle owners—that is, all the people who could potentially buy your product. Your business will help them keep their vehicles clean and shiny.

Step 2: Segment Your Total Market

Next, break down this large market into smaller sections, using a process known as segmentation. You can use a variety of approaches to segment your total market into groups with common wants or needs. In this case, we can segment by vehicle ownership and related behavior. Specific segments might include the following:

• People who restore classic automobiles
• People who drive old clunkers and run them through the car wash occasionally
• People who own “status” cars
• Truck drivers
• Motorcycle owners

Which of these subgroups are likely to be your most productive market niche(s)? You recognize that auto owners who don’t care about keeping their cars clean and shiny probably won’t be very interested in your products. Then there are those who care, but they lack the time and interest to do the work themselves. They take their vehicle to a shop. Others only worry about auto detailing only when it’s time for a trade-in.

You reject these segments as unsuitable for your niche market because they probably don’t care enough about what you offer. After further consideration and research, you decide that your market segment will be automobile owners who have both the time and the interest to do their own detailing work—people who enjoy puttering with their vehicles, who have the time to spend, and who take pride in their vehicle’s appearance.

You need to conduct research to confirm that there are enough potential customers in that group to support your business. You should also do competitive analysis to confirm that what you are offering is not readily available to them elsewhere. With this validation, you move to step three.

Step 3: Profile Your Target Customer Segment(s)

Next, develop profiles of your target customer(s) to get a true picture of the people you’re trying to serve. Describe these potential customers as fully as you can. Who will actually buy your product? What do you know about them? Where are they situated geographically? How much do they spend on car detailing? What are they likely to spend on your products? Where do they shop? What is their annual income? What languages do they speak? What kinds of automobiles do they drive? If you are selling online, what methods do they prefer for online payment? What type of Web sites do they visit? How do they want their product delivered?

Identify your customer profile before you conduct market planning, so that your planning is a good fit for your customers’ behavior, interests, and needs.

Step 4: Research and Validate Your Market Opportunity

Now that you have fully identified your target market, conduct research to verify that there will be enough business in this group to support your company in its growth. This process confirms that the need actually exists and that it’s not just wishful thinking on your part.

Use both primary and secondary sources in your research. You might consult business directories, obtain statistics regarding automobile owners and their car-care practices, or locate newspaper articles and magazine stories written on the subject. You can also conduct your own market research using techniques such as surveys, focus groups, interviews, and so forth.

Your research should also determine the size of the market opportunity in terms of revenue as well as your potential market share.

You can use primary and secondary sources to find out how many potential customers there are in the geographic area you have defined and how many businesses are directly or indirectly competing with you. Your market share will be the number of customers likely to buy from you rather than from your competition.

Having defined and validated your target market, you are now better positioned to develop a marketing plan that will reach your potential customers. Perhaps your sales will take off right away—a great problem to have!

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

• Revision and adaptation. Provided by: Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
• Outcome: Segmentation and Targeting Introduction. Provided by: Lumen Learning. License: CC BY: Attribution

• Boundless Marketing. Provided by: Boundless.  License: CC BY-SA: Attribution-ShareAlike
• Car wash. Located at:  License: CC0: No Rights Reserved
• Ford Thunderbird. Authored by: Walter. License: CC BY: Attribution
• Customer Profile Dimensions. Authored by: fogfish.  License: CC BY-SA: Attribution-ShareAlike

What you’ll be able to do: define and communicate an organization’s value proposition in a competitive marketplace

Once you know your target market, you must have a compelling way to communicate your value proposition. This requires the marketer to answer a number of questions:

• What is value? Each customer will weigh the benefits and the costs of an offering differently and determine whether it is providing value. It is important to understand how customers perceive value.
• What is the value this offering provides to the target customer? You hope that you have selected target customers that view the value that you provide favorably, but the marketer has to test and refine the assumption that the offering is actually providing value to the target customer.
• How is the value provided different from the value that competitors provide? Each time a competitor shifts its offering(s), that change will have an impact on the perceived value of your offering. In a competitive marketplace, it becomes important to understand and react to changes, but also to identify the value that you provide that is most difficult for others to copy.
• How are you communicating the promise of value to target customers? With so many marketing channels and messages all around, customers have a very short attention span. The marketer has to grab that attention and communicate value to customers in only a few seconds.

What Is Value?

Earlier in this module we discussed that marketing exists to help organizations understand, reach, and deliver value to their customers. In it’s simplest form, value is the measure of the benefit gained from a product or service relative to the full cost of the item.

Value = benefit – cost

In the process of the marketing exchange, value must be created. Let’s look at the simplest example: If you and I decide to give each other a $5 bill at the same moment, is value created? I hand my $5 bill to you, and you hand yours to me. It is hard to say that either of us receives a benefit greater than the $5 bill we just received. There is no value in the exchange.

Now, imagine that you are passing by a machine that dispenses bus tickets. The machine is malfunctioning and will only accept $1 bills. The bus is about to arrive and a man in front of the machine asks if you would be willing to give him four $1 bills in exchange for a $5 bill. You could, of course, decide to make change for him (and give him five $1 bills), but let’s say you agree to his proposal. In that moment a $1 bill is worth $1.25 to him. How does that make sense in the value equation? From his perspective, the ability to use the bus ticket dispenser in that moment adds value in the transaction.

This is where value becomes tricky for marketers. Value is not simply a question of the financial costs and financial benefits. It includes perceptions of benefit that are different for every person. The marketer has to understand what is of greatest value to the target customer, and then use that information to develop a total offering that creates value.

Value Is More Than Price

You will notice that we did not express value as value = benefit – price. Price plays an important role in defining value, but it’s not the only consideration. Let’s look at a few typical examples:

• Example One: Two products have exactly the same ingredients, but a customer selects the higher-priced product because of the name brand. For the marketer, this means that the brand is adding value in the transaction.

• Example Two: A customer shopping online selects a product but abandons the order before paying because there are too many steps in the purchase process. The inconvenience of filling in many forms, or concerns about providing personal information, can add cost (which will subtract from the value the customer perceives).

• Example Three: An individual who is interested in a political cause commits to attending a meeting, but cancels when he realizes that he doesn’t know anyone attending and that the meeting is on the other side of town. For this person, the benefit of attending and participating is lower because of costs related to personal connection and convenience.

As you can begin to imagine, the process of determining the value of an offering and then aligning it with the wants and needs of a target customer is challenging, indeed. Throughout this course, though, you will gain a deeper understanding of the tools and processes that marketers use to do it effectively.

Value in a Competitive Marketplace

As if understanding individual perceptions of value weren’t difficult enough, the presence of competitors further complicates perceptions of value. Customers instinctively make choices between competitive offerings based on perceived value.

Imagine that you are traveling to Seattle, Washington, with a group of six friends for a school event. You have the option to stay at a Marriott Courtyard Hotel that is located next to the event venue for $95 per night. If you pay the “additional person fee,” you could share the room with one friend for a cost of $50 per night. However, one of your friends finds an AirBnB listing for an entire apartment that sleeps six people. Cost: $280 per night. That takes the price down to $40 per night, but the apartment is five miles away from the venue and, since there are seven of you, you would likely be sleeping on a couch or fighting for a bed. It has a more personal feel and a kitchen, but you will really be staying in someone else’s place with your friends. It’s an interesting dilemma. Regardless of which option you would really choose, consider the differences in the value of each and how the presence of both options generates unavoidable comparisons: the introduction of the AirBnb alternative has the effect of highlighting new shortcomings and benefits of the Marriott Courtyard hotel room.

Alternatives generally fall into two categories: competitors and substitutes. A competitor is providing the same offering but is accentuating different features and benefits. If, say, you are evaluating a Marriott Courtyard hotel room vs. a Hilton Hampton Inn hotel room, then you are looking at competitive offerings. Both offerings are hotel rooms provided by different companies. The service includes different features, and the price and location vary, the sum of which creates different perceptions of value for customers.

AirBnb is a service that allows individuals to rent out their homes, apartments, or a single room. AirBnb does not offer hotel rooms; it offers an alternative to, or substitute for, a hotel room. Substitute offerings are viewed by the user as alternatives. The substitution is not a perfect replication of the offering, which means that it will provide different value to customers.

Competitors and substitutes force the marketer to identify the aspects of the offering that provide unique value vis-à-vis the alternatives. We refer to this as differentiation. Differentiation is simply the process of identifying and optimizing the elements of an offering that provide unique value to customers. Sometimes organizations refer to this process as competitive differentiation, since it is very focused on optimizing value in the context of the competitive landscape.

Finally, organizations seek to create an advantage in the marketplace whereby an organization’s offerings provide greater value because of a unique strategy, asset, or approach that the firm uses that other cannot easily copy. This is a competitive advantage. The American Marketing Association defines competitive advantage as “as total offer, vis-à-vis relevant competition, that is more attractive to customers. It exists when the competencies of a firm permit the firm to outperform its competitors.” When a company can create greater value for customers than its competitors, it has a competitive advantage.

What Is a Value Proposition?

We have discussed the complexity of understanding customer perceptions of value. As the company seeks to understand and optimize the value of its offering, it also must communicate the core elements of value to potential customers. Marketers do this through a value proposition, defined as follows:

A business or marketing statement that summarizes why a consumer should buy a product or use a service. This statement should convince a potential consumer that one particular product or service will add more value or better solve a problem than other similar offerings.^[1]

It is difficult to create an effective value proposition because it requires the marketer to distill many different elements of value and differentiation into one simple statement that can be easily read and understood. Despite the challenge, it is very important to create an effective value proposition. The value proposition focuses marketing efforts on the unique benefit to customers. This helps focus the offering on the customer and, more specifically, on the unique value to the customer.

A value proposition needs to very simply answer the question: Why should someone buy what you are offering? If you look closely at this question it contains three components:

• Who? The value proposition does not name the target buyer, but it must show clear value to the target buyer.
• What? The offering needs to be defined in the context of that buyer.
• Why? It must show that the offering is uniquely valuable to the buyer.

How Do You Create an Effective Value Proposition?

When creating or evaluating a value proposition, it is helpful to step away from the long lists of features and benefits and deep competitive analysis. Stick to the simple, and strive for focus and clarity.

A value proposition should be clear, compelling, and differentiating:

• Clear: short and direct; immediately identifies both the offering and the value or benefit
• Compelling: conveys the benefit in a way that motivates the buyer to act
• Differentiating: sets the offering apart or differentiates it from other offerings

Also, the value proposition is a message, and the audience is the target customer. You want your value proposition to communicate, very succinctly, the promise of unique value in your offering.

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COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com

What you’ll learn to do: evaluate examples of value propositions

If you were asked to evaluate the solution to an easy math problem, such as 24 + 17 = 45, you could definitely say whether it’s right or wrong. If, on the other hand, you were asked to evaluate a painting by a modern artist and judge it “good” or “bad,” you would have to make a judgment based on your own preferences and, perhaps, after reading some reviews by experts or others (who probably wouldn’t agree). Evaluating art is akin to evaluating a value proposition—it’s definitely a subjective process, and others may disagree with you. That said, below are a few pointers that can help you.

It is easy to recognize when a value proposition is bad:

• If it is so general or universal that it doesn’t articulate unique value, then it likely isn’t very good. (For years Tony the Tiger promoted Kellog’s frosted flakes saying, “They’re grrrrreat!” It’s a cute catch phrase for a tiger, but it’s not a value proposition.)
• If a value proposition has so many words that you need to read it twice—or worse, you stop reading and move on—then it’s bad. As noted in the Quick Sprout infographic from the previous reading, it should take five seconds or less to read a value proposition.
• If the value proposition does not provide clarity about the offering to the target market, then it isn’t providing value. The target customer should understand exactly what is promised.
• If the value proposition for an offering mimics the value proposition of a competitive offering, it isn’t good. In the technology industry, many critics have poked fun at Microsoft for imitating Apple’s simple marketing language and presentation style. No matter how compelling the value proposition for an offering is, copying it for a competitive offering doesn’t make sense or work. An offering can’t be unique if it’s exactly like something else.

In this section, you’ll get to review some value propositions that are quite good (in our view).  As you read them, them think about what they are doing right and how they could be improved.

The Value Proposition in Action

Let’s take a look at some real examples and evaluate them. Are they clear, compelling, and differentiating? Keep in mind that you may not be the target market for all of these examples. Your role as a marketer is to evaluate them from the perspective of the target customer.

 Pinterest

This value proposition doesn’t offer a lengthy description of what Pinterest is and how it works. It simply states the benefit Pinterest provides to its users.

Notice the use of the phrase “people like you.” The value proposition connects you to the site’s other users through your own interests. It implies that a friendly community of “people like you” awaits you and is interested in helping you.

Is the value proposition sufficiently clear to you? Does it give you enough information to know whether the offering is of interest to you?

The greatest challenge in creating an effective value proposition is striking a balance between being clear and communicating enough value.

Skype

The value proposition first highlights Skype’s broad use, which is an important feature for its network-based approach.

Next it describes the offering. Skype provides more information than Pintarest does about what its offering is—and it highlights the fact that it’s free. Pinterest is also free, but doesn’t disclose this in its value proposition. Is one approach better than the other? Why might a company want to emphasize that its product is free while another does not? In this case, it’s probable that Pinterest conducted research and learned that users expect Pintarest to be free, since that’s the case with many other social sharing sites. In contrast, since Skype is competing with traditional paid services like cell service providers, free access is an important differentiator.

Again, notice the use of the word “you” in the value proposition.

Salesforce.com

The value proposition for Salesforce.com includes the acronym CRM, which stands for customer relationship management software. Not everyone knows this acronym, but Salesforce is confident that its target customers do, and it’s betting that they are seeking such a system to improve sales management processes and results.

The value proposition cuts to the offering’s core benefit—improved sales results—and highlights its strong (“world’s #1”) market position.

Uber

This value proposition is very simple, but it says enough about the value that you may want to learn more about how it works.

In just a few words, the value proposition explains that you can get a ride when you need it using your phone. It emphasizes convenience in a number of ways by using the phrases “on demand” and “in minutes.” There is also a subtle use of the word “your.” Uber provides your ride. You are in charge.

Coffee Shop Marketing

Starbucks is a powerful global brand that brings with it a sense of being cool and new. A stodgy coffeeshop brand in the United Kingdom had to find a different value proposition to convince coffee drinkers that they were worth another try. Watch the video, below, to see what they tried:

Click here to read a transcript of the video.

COPYRIGHT

This courseware was assembled by Christopher VanOosterhout from a variety of resources copyrighted and openly licensed by multiple individuals and organizations.  See our Copyright and Attribution page for additional details.  For details about permission to use please contact me at c@vanosterhout.com with the phrase  Courseware Usage Inquiry.  If you believe that this courseware violates your copyright, please contact me at c@vanoosterhout.com with the phrase Copyright Inquiry in the subject.  Details about the collector of these resources and Licentia LLC can be found at www.vanoosterhout.com