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Learning Objectives

After studying this chapter, you should be able to:

• Describe consumers’ Purchase Decision Process and summarize the three catego- ries of factors influencing it.

• Explain why marketers need an understanding of consumers’ emotions and motivations.

• Recall nine criteria an effective segmentation strategy must meet.

• Give an example of a marketing strategy driven by insights from the CRM approach.

• Describe three levels that buyer-seller relationships pass through as they deepen.

Target Markets

7 Science Faction/Corbis

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

Introduction

In the first chapter of this book, you began building insights into consumer buying behavior. In that chapter your view was framed by the concept of consumers’ search for value, expressed as the Customer Value Equation. In the second chapter you built on that knowledge as you learned about the marketing process. You learned that insights into consumer behavior are necessary inputs to several steps in that process.

Consumer behavior was never far from the discussion as you progressed through chap- ters on each of the marketing mix decisions (the four p’s). Now, you’ve come full circle. Consumer buying behavior is again the focus of study. This time, instead of framing the discussion of consumers in terms of their search for value, we’ll discuss how the innate aspects of consumer behavior interact with marketing practice. We’ll also look at how marketers leverage knowledge about consumers to generate profitable transactions and long-term relationships.

7.1 Consumer Purchasing Behavior

Consumers—the individuals who buy goods and services for personal or house-hold consumption—create a mind-boggling market opportunity. More than 7 bil-lion people inhabit the planet, and all of them consume. In the United States alone, there are over 112 million consumer households with a median 2009 income of $50,221 (U.S. Census Quick-Facts, 2010). That’s a lot of purchasing power.

With so many consumer dollars on the move, it’s not hard to see why marketers study purchasing behavior. Data on what consumers buy, as well as where and how much, are relatively easy to find in a company’s own sales transaction records. But what about the “why” behind the buy? What drives consumers’ actions?

Given the diversity of the population, there is no one answer to that question. Various envi- ronmental, cultural, group, and individual characteristics influence consumer behavior.

Marketers would like to figure out how consumers respond to various marketing efforts— stimuli that produce responses, in the language of social scientists. Some of those stimuli are under marketers’ control, produced by marketing mix strategies regarding the four p’s of Place, Price, Product, and Promotion. Marketers must also take into account the stimuli they cannot influence, just as sailors must factor in the direction and force of winds they cannot control.

Sociocultural factors influencing purchasing behavior are summarized in Table 7.1. A closer look at each of the four categories follows.

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

Marketers cannot control or even exert influence on most factors influencing purchase behavior, but they need to understand the role these factors play in consumers’ purchase behavior.

Environmental factors include economic, political, and technological forces that influence consumer behavior; these will be explored in Chapter 8.

Cultural factors exert their influence from an early age, shaping wants and motivations. Culture consists of learned values, perceptions, needs, and behaviors. Marketers focus on cultural shifts that may bring to light new marketing opportunities. Subcultures are groups of people within the larger culture who share life experiences, situations, and val- ues. Most culture shifts emerge from subcultures. These can be defined by traits such as race or ethnicity, by generational cohort, by geographic region, or by social class. A cohort is a group whose members share a significant experience or have similar character- istics. For example, people born in the same span of years belong to a generational cohort. Women who smoke belong to a cohort within the subculture of smokers. Even lifestyles can be a strong enough organizing principle to produce a subculture, such as homeschool- ers or single parents. When a cultural group is large enough to have significant spending power, it often becomes the basis for target marketing.

Group factors influence individual behavior through the desire to belong or conform. One may be an official member of a group, aspire to be a member, or simply be influenced by a dominant group. Reference groups share attitudes, behavior, beliefs, opinions, prefer- ences, and values that an individual uses as the basis for judgment. Members of a college fraternity, for example, might form a reference group for an arriving freshman. That indi- vidual need not be (or even want to be) a member of a reference group to be influenced by it. Likewise, one’s family group has a strong influence on purchase behavior. Even young children have a role in family buying decisions. One’s role and status within a group adds an element of influence, as people seek the general esteem of the society around them. People’s purchases often reflect the groups they belong to, take cues from, or aspire to join.

Table 7.1: Sociocultural factors influencing purchasing behavior

Environment Culture/Subculture Group Individual

Technology Race/ethnicity Membership Occupation

Ecology Social class Reference Income/wealth

Economy Cohort Aspiration Education

Politics Geographic region Family Beliefs and attitudes

Legal issues Lifestyle Role/status Age/life stage

Psychology

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

Individual factors influence buying behavior in terms of the goods and services sought. These change with shifts in occupation, income or wealth, education, age/life stage, and psychology (motivations, perceptions, beliefs, and attitudes). A closer look at the psycho- logical factors of emotion and motivation follows in Section 7.2. But first, let us consider how this framework for understanding the factors that influence purchase behavior is evolving as today’s consumer changes.

Consumers Are Changing Today’s consumers are active participants in the marketing process. They influence each other by sharing opinions and experiences. They expect to have input into customizing products and developing marketing messages. They are increasingly anxious about envi- ronmental pressures ranging from the economy to globalization. A creative class is emerg- ing, consisting of professionals and artisans with an increasing desire for meaning in their lives. All of these factors are affecting contemporary consumers’ purchase behavior.

Consumers across the United States suffered when the recession began in late 2007 (Isa- dore, 2008). Consumers’ perception of the Customer Value Equation may have been fun- damentally altered by this experience; an economic recovery may not bring consumers back to previous behavioral patterns. In switching to lower-priced consumer goods at the recession’s outset, they discovered that the quality of the lower-priced brand was higher than expected (Bohlen et al., 2009).

Consumers in a financially constrained but humanity-centric world may demonstrate different purchasing behavior. Consumers’ interest in environmentally sound products illustrates the dilemma.

A relatively modest number of American consumers adopted an environmental stewardship ethos in the 1960s or 1970s, waxing and waning since then under various forces, including the political climate, the econ- omy, and social trends. After Al Gore’s movie “An Inconvenient Truth” was released in 2006, consumer demand for environ- mentally sound products grew sharply, resulting in a “green” movement that sent marketers into a frenzy of developing new products for eco-conscious con- sumers (Lash, 2012). Suddenly green products, from recycled toilet paper to cleaning supplies, were flying off store shelves.

Sales of environmentally sound products illustrate the dilemma consumers face in a financially constrained but humanity- centric world; green products generally cost more due to more expensive components and smaller sales volume.

PR Newswire

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

But these products generally came at a higher cost. This was due in part to more expen- sive components but also to smaller volume sales. What consumers considered a good value when the economy was booming suddenly changed when the economy turned sharply downward in 2008. With reduced incomes and greater uncertainty about their future, many consumers were no longer willing to pay more for the added value of a form/function that promised to be kinder to the planet. Consumers still wanted to help the environment but felt they could not afford the extra cost. Fewer consumers purchased green products. Many waited for sales that would set the Customer Value Equation back to a balance they could afford (Clifford & Martin, 2011). Whether the financial constraints on consumers ameliorate over time or not, a new “normal” for purchase behavior will likely emerge.

What can we assume about these fundamentally different consumers? It’s clear that they seek engagement. The Internet has greatly expanded individuals’ ability to find people with whom they share common interests. They connect with ideas that feel meaningful to them—even if they’re just discussing their favorite celebrity’s latest gaffe.

Marketers have been quick to respond to the demand for dialogue and engagement—for example, by using technology to extend invitations to join a community around a specific product or brand. The QR (quick-response) bar codes in print ads that lead to a product’s website when photographed with a smartphone are just one example.

Consumers’ changing behavior reflects the change in the macro-environment around them. Shifts in any factor influencing purchasing behavior will cause consumers to con- tinue to change over time.

The Purchase Decision Process The behavior of individuals as they move through mental tasks from recognizing a need to making a purchase follows a predictable process. Each step triggers a new set of thoughts and feelings. To design effective strategies, marketers need awareness of each psychological task consumers face as they move from step to step, as illustrated in Table 7.2 and Figure 7.1.

Table 7.2: Purchase decision process

Step Description

1. Needs Recognition Triggered by a stimulus, an individual recognizes a need or desire.

2. Information Search Motivated to find out more, the individual pays attention to information including relevant marketing messages, developing purchase criteria that reflect his or her expectations and beliefs about what will satisfy the need.

3. Alternative Evaluation Newly armed with information, the individual develops a consideration set made up of acceptable alternatives.

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

4. Purchase Decision Having considered each alternative, the individual (knowingly or not) assigns each a value in terms of its Customer Value Equation, and thus decides which to buy.

5. Postpurchase Behavior The individual experiences either satisfaction or dissatisfaction, based on whether expectations of the purchase were met. Post-purchase behavior might take the form of a future repurchase or new purchase decision process, as well as positive or negative buzz.

Figure 7.1: Purchase decision process illustrated

Table 7.2: Purchase decision process (continued)

Step Description

Needs recognition

Alternative evaluation

Postpurchase behavior

Information search

Purchase design

Theoretical process

Situational influences

The purchase decision process carries an individual from one step to the next, with pauses and backtracks caused by situational influences.

Source: Kotler, 2006

Individuals’ purchase decision process is seldom completely linear, and each step may require a different amount of time. New information may cause a shopper to backtrack. Individuals frequently pause at a stage—perhaps the purchase is not urgent, or the shop- ping process itself is pleasurable. In some situations the individual never reaches the step of purchasing at all, because other needs or desires arise and cut the process short.

Many major purchases, because of the complexity of purchase criteria to be met, leave the consumer with some degree of dissatisfaction. Some trade-off will have taken place, leav- ing an opening for the cognitive dissonance known as buyer’s remorse. Since customer

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

satisfaction is essential to building long-term relationships, marketers need to manage their consumers’ post-purchase emotions with supportive information such as testimoni- als, warranties, and after-sales service.

Is the purchase decision process different for businesses buying from other businesses? Yes and no. The process is similar in that influences on decision-makers come from envi- ronmental factors. These include organizational factors such as policies, procedures, and systems and interpersonal factors such as authority, status, control of rewards, and per- suasiveness. All the individual factors influencing consumer purchases described previ- ously also influence business buying decision processes, since people don’t stop being who they are when they get to work each day.

The business buying decision process differs from the consumer buying process in that businesses often require significant time to identify requirements, put out requests for proposals, and/or engage in extensive negotiations. In addition, most business purchases are based on derived demand and the buyers themselves are less often involved in the actual consumption of the product or service than in consumer buying processes.

When buyers in business-to-business situations need to make purchases, they may be looking for a:

• Straight rebuy (a routine reorder, requiring little thought or process), • Modified rebuy (in which the situation is complicated by the need for a new

consideration set to meet changes sought in specifications, prices, terms, or sup- pliers), or a

• New task (in which the full purchase decision process will take place, virtually identical to the consumer process described previously).

A business buying process may include additional steps of assigning responsibility for the purchase decision, identifying selection criteria per the needs of those who will actually use the purchased product or service, and establishing a selection procedure that includes a team made up of users, influencers, and the actual individual(s) with buying authority.

Degree of Involvement The degree of involvement a consumer feels affects the consumer’s purchase decision process. Some buying decisions require a high level of involvement. If the purchase reflects a high level of personal, social, or economic significance, a consumer is likely to feel deeply invested in the outcome and will put a good deal of energy and thought into making a choice. The information search step will take longer than for lower- involvement purchases, and the potential for buyer’s remorse is higher. Think about buying a loaf of bread and buying a car. The cost and the lifespan (and therefore the fre- quency of purchase) are quite different between the two. The buyer’s degree of involve- ment is quite different as well.

Consumers’ degree of involvement can be judged by considering the category a purchase falls in (previously introduced in Chapter 3):

1. Convenience products call for routine problem solving. These purchases are typi- cally a matter of habit, reflecting a low degree of involvement in the outcome.

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CHAPTER 7Section 7.1 Consumer Purchasing Behavior

Consumers have little concern whether a convenience offering is likely to meet their expectations of value.

2. Shopping products call for limited problem solving. Several brands might be evalu- ated, depending on the time and effort the consumer has to spend, but the out- come does not carry enough risk to require greater effort.

3. Specialty products call for extended problem solving. Purchases in this category require high consumer involvement to differentiate a long list of features and attributes, with far-reaching consequences to the decision, such as when a person shops for a car or a computer.

4. Unsought products may call for routine, limited, or extended problem-solving depending on the offering—but only after consumers have become aware of them and recognize a need or desire. Purchasing $25 in wrapping paper to sup- port a local cause would call for a low degree of involvement. Getting a vision screening might call for limited problem solving to choose an optometrist. Choosing a charity to name as beneficiary in one’s will would call for extended problem solving.

Exceptions to these categories exist, of course. Sometimes people choose different brands just for the variety, like trying a new brand of pizza because it’s on sale or new to the market, or trying frozen yogurt just to see if it tastes as good as higher-calorie ice cream. Sometimes the situation is such that consumers must take what’s offered. The person who drops into a convenience store for cough drops is not likely to agonize like the purchaser of a car or computer—or even ice cream or pizza. When the purchase is a gift for someone else, that too affects the decision process in subtle ways. These categories merely offer a framework on which fuller understanding of consumer behavior can be built.

Influences on the Purchase Decision Process We have discussed sociocultural influences and the level of involvement the consumer brings to the task of making the decision. But more is going on here. The situational influ- ences surrounding the purchase decision process include:

• Marketing mix: The strategies regarding Product, Price, Promotion, and Place that marketers have chosen to make the offering appeal to the consumer.

• Customer Value Equation: The buyer’s own beliefs about which benefits consti- tute a “good enough” or—better yet—a “great” value at a given price.

• The purchase task: Specifics of the level of involvement, number of brands, sell- ers, product attributes, and information sources required to make a purchase decision.

• Social surroundings: Presence of others can alter how a purchase decision is made.

• Physical surroundings: The retail environment affects what is purchased; mer- chandise assortments, traffic flow, displays, and perceptual cues (such as sale signs) all matter.

• State of mind: The buyer brings to the purchase decision certain attitudes and beliefs. Hunger, fatigue, or a recent glance at bank balances can positively or negatively influence willingness to spend.

Add to what you have learned about sociocultural and situational influences the discus- sion coming up of psychological influences—motivation—and you will have a complete,

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CHAPTER 7Section 7.2 “It’s All In Their Minds”—Emotions and Motivations

Field Trip 7.1: Changing Consumer Demand

As you study this chapter, what is the current temperament of the typical consumer, caught between a desire for meaningful engagement and a household budget that may yet be pinched by recession? Environmentally sound products function as an indicator of consumers’ relative optimism.

Enter the phrase “consumer demand for environmental products” in your favorite search engine to find recent articles that may shed light on the changing consumer.

In summary, the three types of factors influencing the purchase decision process (sociocul- tural influences, degree of involvement, and situational influences) come to bear as con- sumers complete the five tasks in the purchase decision process. Consumers are changing, but as a means to understand them, study of the factors influencing buying behavior will remain useful.

360-degree view of the influences on the consumer purchase decision process. How these will evolve as an increasingly diverse population of consumers changes is not yet known.

Questions to Consider

Consider a recent purchase you made that would qualify as a “shopping” experience requiring limited problem solving, or a “specialty” experience requiring extended problem solving. Describe your own behavior as you completed each task of the Purchase Decision Process. Describe the situational and other influences affecting you as you faced each task.

7.2 “It’s All In Their Minds”—Emotions and Motivations

Underlying all consumer behavior are individual factors driven by human psychol-ogy—the perceptions, beliefs, and attitudes that influence personal behavior. Indi-viduals have always experienced wants and needs, many of them strong enough to demand satisfaction. That inner drive is called motivation.

Multiple frameworks exist for understanding motivation, emerging since the growth of psychology in the early twentieth century. Today’s marketers study the psychology of motivation to stimulate purchasing a specific product, supporting a cause, or expressing loyalty to a brand.

One of the most prominent psychologists to develop a theory of human motivation was Abraham Maslow, whose concept of the Hierarchy of Needs suggested that, once basic physiological needs are met, people will seek fulfillment of higher-level needs, including safety, belonging, esteem, and eventually reaching (if they are lucky) the level of seeking self-actualization, where finding meaning in life becomes their priority.

Maslow’s Hierarchy of Needs laid the groundwork for our contemporary understanding of the drives that propel consumers. Subsequent research takes that groundwork in new directions relevant for marketers.

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CHAPTER 7Section 7.2 “It’s All In Their Minds”—Emotions and Motivations

Today’s theories of motivation recognize that purchasing behavior includes both cognitive and emotional components. Needs may be utilitarian needs or hedonic needs. To under- stand the difference, consider how you feel about two purchases: a washing machine and concert tickets. The former fills a need, but it isn’t likely to move you aesthetically or help you express yourself the way the latter will. Utilitarian needs derive from a practical service the purchase will perform. Utilitarian needs trigger little emotional response, so advertising for utilitarian products and services focuses on facts that help the consumer evaluating service utility.

Hedonic needs reflect a desire to achieve pleasure, not just service, from the offering. Hedonic needs open the door to aesthetic appreciation, self-expression, fantasy, and adventure. Marketing messages for offerings that fill hedonic needs usually play on the emotions.

More Influences on Motivation: Self-Expression, Brand Loyalty In a consumer society individuals show each other who they are by what they have. The behavior starts early, as children experiment with forming identities, either copying the style of individuals they admire or inventing their own. Children quickly learn which brand names confer status.

As children grow into adults they become more sophisticated at using their purchasing power for self-expression. Almost everyone enjoys purchasing the props that project spe- cific identities, whether that means camping gear, runway fashion, or the latest personal technology.

Virginia Postrel in her book The Substance of Style makes the case that “The more choices we have, the more responsibility we face—whether or not we want it—to define ourselves aestheti- cally. Because others make simi- lar selections, for similar rea- sons, I like this becomes I’m like this.” Postrel is talking about the power of brands to confer status (2003).

A line of clothing based on a video game illustrates Postrel’s point. Konami, the company that makes Metal Gear Solid, introduced the clothing line to allow Metal Gear Solid fans to incorporate the brand into their lifestyles (Newman, 2011).

A clothing line based on the video game Metal Gear Solid reflects that consumers define themselves aesthetically through purchases, making a connection between “I like this” and “I am this.”

Associated Press

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CHAPTER 7Section 7.2 “It’s All In Their Minds”—Emotions and Motivations

Why would a person want to wear clothing that takes its design cues from characters in a video game? The reason could be to draw on the strength of its hero, like a shaman who wears a bearskin to take on the attributes of the bear. It could be to display membership in the Metal Gear Solid community. Or one could choose the jacket just to feel the connection between “I like this” and “I am this.”

When purchases allow us to feel affiliated with others—part of a tribe—they meet social needs. When purchases make us feel confident and strong, they meet self-esteem needs. The wants and needs of individuals making their way up Maslow’s Hierarchy of Needs can be seen as drivers of humanity-centric Marketing 3.0 consumer behavior, accepting the responsibility to define oneself aesthetically as described by Virginia Postrel.

More recently, researchers have begun to tie people’s use of consumption for self-expres- sion to brand loyalty. Consumers may develop brand loyalty motivated by a desire to conform to a reference group. Following fashion trends illustrates the use of brands to fulfill a hedonic need to belong.

Alternatively, consumers’ hedonic motivation to break away from the present environ- ment can translate to loyalty to the brands that represent freedom from conforming to the constraints of a mass-market society. The Harley-Davidson brand community, whose members integrate the brand into multiple facets of their lives from community events to fashion statements, illustrate consumption of a brand as a sanctuary in which the con- sumer experiences “a transcendental escape from the mundane” (Labreque et al., 2011). Either hedonic need—conformity or escapism—can have a positive influence on brand loyalty. This is good news for marketers who want to use psychological principles to stim- ulate and direct consumer purchase behavior.

The Role of Emotions One more aspect of consumer behavior deserves attention: the role of emotions. Moti- vations can be experienced as either positive or negative emotions. Emotions produce feelings that trigger the urge to act. People act on positive motivations to achieve desires; they act on negative motivations to avoid worry and uncertainty. Purchasing a motorcycle fulfills a desire to satisfy a positive emotion. Purchasing life insurance fulfills a desire to avoid a negative emotion.

Not only do emotions move a person to make a purchase; emotions can influence that consumer’s decision about whether the purchase is a good value. Pleasant emotional experiences often lead to customer loyalty, while unpleasant emotional experiences lead to negative word-of-mouth. Provoking a favorable emotional response through engage- ment with potential consumers is a fundamental task of advertising and marketing.

Emotions can lead directly to consumer purchases, through the process shown in Figure 7.2.

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CHAPTER 7Section 7.2 “It’s All In Their Minds”—Emotions and Motivations

Figure 7.2: Consumer emotions influence on purchase decisions

Emotion awakens a need within a consumer.

The consumer becomes consciously aware of that need.

The consumer feels motivated to fulfill the need in order to end

the discomfort the needy emotion has created.

The consumer makes a purchase.

Emotions lead to motivation that influences purchase decisions.

Source: Consumer Behavior for Dummies, p. 77.

Marketers make use of this insight to trigger consumers’ motivation to purchase by posi- tioning their offerings on emotional benefits. The benefit may promise a positive emotion, such as increased happiness or greater energy, or a promise of reduced negative emotion, such as stress relief.

Follow Field Trip 7.2 to practice using what you have learned in this chapter about con- sumer motivation.

Field Trip 7.2: E-readers

Consider the growing popularity of e-readers, with features such as size and screen composition, that deliver benefits such as portability and comfortable reading. Visit websites advertising e-readers, such as:

www.amazon.com/kindle

www.barnesandnoble.com/nook

What type of need does an e-reader fill?

Does purchasing an e-reader constitute consumption as self-expression, as Virginia Postrel describes?

Is purchasing an e-reader more likely to satisfy a desire for conformity or for escapism?

What emotions might be involved in choosing an e-reader?

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www.amazon.com/kindle
www.barnesandnoble.com/nook
CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

7.3 The “STP” Approach: Segmentation, Targeting, and Positioning The STP fuel additive was designed to increase engine performance and fuel efficiency. “STP” for marketing performs a similar feat—increasing marketing campaign perfor- mance while making fuel (money) go further in terms of results (as measured by return on investment, or ROI).

The approach is simple: Companies segment their market to identify clusters of potential customers, and then target those customers for specific marketing communications, which are designed to position the company’s offering and brand to stand out from competitors.

The STP approach works because it leverages the fundamental insight of market segmen- tation: Not everybody will buy a company’s goods and services. Some are more likely to buy than others, and for different reasons. When marketers use their understanding of buying behavior to divide the total market into smaller, relatively homogeneous groups, they can deliver greater value to customers, more efficiently and cost-effectively.

No More “One Size Fits All” A market segment consists of a group of people who share a similar set of needs and wants, usually because they share other traits, such as geography, age, income, and/or lifestyle. Because of their commonalities, people within a segment are likely to share per- ceptions of the specific Customer Value Equation for a particular offering. For example, mothers are likely to value Avon Skin So Soft for its usefulness as a bath oil safe for chil- dren’s tender skin, while outdoor enthusiasts value the same product for its effectiveness as a nontoxic insect repellent.

In conclusion: Marketers study consumer behavior, motivation, and emotions because they need to understand how consumers shop and decide what to buy. Marketers need to understand how buyers see the world: what stimulates them to feel a need, what trig- gers them to act, what purchase criteria matter to them, and what mental and emotional processes they go through to decide which item gets rung up as a sale.

Knowing enough about consumer psychology to recognize “where prospective buyers are coming from” is important for any marketer. But as you’re about to learn, all of that pales in usefulness compared to the insights possible from tracking and analyzing hard data about consumer purchases. Behavioral profiling yields more marketing insight than psychology. And so, we move on to the data-driven strategy of segmentation, targeting, and positioning.

Questions to Consider

How might you apply your knowledge of consumer psychology to develop marketing tactics? Recall what you learned about the four p’s in previous chapters. Suggest how insights into consumer motiva- tions and emotions might be applied to each of the four areas of the marketing mix: Product, Place, Price, and Promotion.

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CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

Marketers use the insight that some segments are more likely to buy than others to concentrate resources on the probable buyers. Once a seg- ment has been identified as potentially profitable, marketers focus on identifying the behaviors and motivations that affect the segment’s buying deci- sions. Only with a clear understanding of those factors can marketers develop marketing mix strategies that deliver value to that segment.

Marketers may conduct primary research or pur- chase secondary research (defined in Chapter 2) to understand market segments. This may result in positioning an existing offering differently or developing a product extension or even a new product innovation to meet an unfilled need that has come to light.

Information about market segments can be pur- chased from outside firms, or derived from cus- tomer transactions in a company’s database or customer relationship management (CRM) sys- tem. CRM is a strategy for tracking a company’s interactions with customers and prospects and organizing information from sales, marketing, and customer service activities. CRM software functions as a central location for all data about customers and prospects. Later in this chapter CRM is covered in more detail.

STP is not the only approach to reaching customers. Marketers have at their disposal the undifferentiated strategy, in which all consumers are treated the same. When the offer- ing is a commodity—all competitors’ offerings are about the same in terms of features and price—segmentation may offer little additional profit potential to offset the cost of more complex marketing strategies.

Segmentation strategies call for tough choices. The number of variables that differentiate consumers within any given product category can be bewildering. Marketers need criteria to narrow down the possible approaches to those most likely to be both productive and cost-effective.

Selecting Market Segments to Target Target marketing focuses marketing resources on those groups of potential customers who are likely to have greater demand for a product or service. Target marketing requires

People within a segment are likely to value a product for the same reason. Can you think of another product like Avon’s Skin So Soft oil that has such disparate market segments?

Associated Press

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CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

choosing a specific market segment, with the intent of developing a product offering and promoting a specific value proposition that will motivate that group of people to act.

A segment must meet certain criteria to qualify as a target worthy of its own marketing strategy. A target segment must be:

• Available in the marketplace in sufficient numbers to merit the expense, • Readily identifiable, and • Able to be profitably served.

If a target segment fails to meet any of these three conditions, the company should not pursue it. All segments meeting these conditions are theoretically worthy of targeting, but there are other considerations. In addition to the target segment being large enough to merit investment, readily identifiable, and potentially profitable, consider the following criteria:

• How well is this segment being served by competitors? • Is this segment expected to grow? • Is this segment a good fit with the company’s brand image and market position?

If a segment is already targeted and well-served by competitors, there may not be an opening for a new company to create meaningful positioning. It will be too late to market on a message strategy of being “first” or “best.” Finding another position on which suc- cessful marketing messages can be built may be difficult. And even if a workable basis for differentiation can be found, it may not be one that fits well with the company’s existing brand image. A company known for low prices or quality will have difficulty creating a new strategy around a contradictory position. If a segment fails to meet these criteria, it’s a weak choice.

Consider three more measures of a target market’s suitability for segmentation strategy:

• Do individuals in the segment share common needs? • Are they likely to respond similarly to a marketing action? • Is the segment reachable? (Are message channels available?)

These three criteria help marketers estimate the likelihood that effective campaigns can be designed for this market segment. Individuals who share common needs will tend to appreciate the same benefits, making persuasive marketing messages possible. However, if no message channel exists that reaches the segment cost-effectively, that can be a deal- breaker. A marketer may desire to offer left-handed office supplies to that sizeable group (10 percent of the population) but lack mailing lists or magazines through which to reach lefties. In that case, the left-handed niche is best given a pass.

Table 7.3 summarizes the nine criteria segments must meet to justify use of a segmentation strategy. Only market segments meeting these criteria for effective segmentation should be considered further.

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CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

Table 7.3: Nine criteria for effective segmentation

Is a market segment a suitable target for segmentation strategy? Consider. . .

1. Do enough individuals meet the segment description to merit the expense?

2. Is membership in the market segment readily identifiable?

3. Can members of the segment be profitably served?

4. How well is this segment being served by competitors?

5. Is this segment expected to grow?

6. Is this segment a good fit for the company’s brand image and market position?

7. Do individuals in the segment share common needs?

8. Are they likely to respond similarly to a marketing action?

9. Is the segment reachable? (Are message channels available?)

Market segments must meet nine criteria to qualify as promising for a target marketing strategy.

Segmentation Variables The first criterion indicating whether a market niche is suitable for a segmentation strat- egy is the size of the population meeting the segment description. This raises the question: what description?

Variables used to identify seg- ments have gone through sev- eral stages.

Initially, market researchers relied on demographic segmen- tation, because of the availabil- ity of information collected by the U.S. Census Bureau about education, income, and occupa- tion, as well as physical attri- butes such as gender, race, and age. These variables proved reliable predictors for different consumption patterns and thus a workable basis for segmenta- tion strategies (Kotler, 2005).

Segmenting on a single variable, such as ethnic group, gender, or age, can be quite effective. Mar- keting to racial/ethnic groups

Marketers now recognize the rise in spending power among minority demographics. In 2010 Hennessy unveiled a limited edition bottle in the United States to commemorate the 200th anniversary of Mexican independence.

AP Images for Hennessy

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CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

has grown in recent years as marketers have recognized the rapidly rising spending power among Hispanics, African Americans, and Asian Americans. Marketing to women has increased dramatically as research revealed that female consumers influence the pur- chase of 85 percent of all products and services (Quinlan, 2003). Young people (8 to 24) have been called the next “Big Spenders.” A large percentage of children and teens make their own buying decisions, particularly on clothing and entertainment. Plus, with more time, skill, and interest in online product comparison, they exert considerable influence over their parents’ purchases (Gioia, 2011).

Segmenting markets by age groups became popular in the 1990s to leverage the sociologi- cal concept known as the cohort effect—the tendency of members of a generation to be influenced by significant events occurring during their formative years (Smith & Clur- man, 1998). Terms like “Generation X” and “Baby Boomer” identify specific generational cohorts. A shared influence—be it Pearl Harbor or Pearl Jam—can have a lasting effect on a segment’s buying habits and response to marketing stimuli.

Marketers have also used geographic segmentation, based on where consumers live or work, to find groups with common needs and desires. As researchers grew more sophis- ticated about segmentation, these two techniques blended into geodemographic segmen- tation. This added variables such as consumers’ location relative to city center, suburb, or rural area, and type of homes, reflecting the fact that people in similar areas tended to exhibit similar consumption patterns.

Geodemographic segmentation worked, but it left a wealth of useful information still unexplored, leading researchers to develop behavioral segmentation. In this approach, marketers classify people according to their motivations and attitudes, including reasons for purchases and quantities consumed. Studying a company’s own transaction records generates a description of a foundation segment already in the customer base. Augment- ing that description with data from the Consumer Expenditure Survey on the buying hab- its of U.S. consumers (discussed in Chapter 2) can lead to more sophisticated and effective use of specific variables to define market segments.

Using combinations of these three approaches, marketers have based successful segmen- tation strategies on variables such as demographics, geography, and behavior including features/benefits sought, usage rate, and degree of loyalty.

But many companies lack the resources to build their own sophisticated segmentation system around the demographics, geography, and behaviors of their customers and pros- pects. Service providers developed psychographic segmentation systems available for purchase that accomplished fine-grained targeting by weaving together demographics, geography, and life stage/lifestyle descriptors. These systems assign households to spe- cific clusters based on predictions about their behaviors, needs, and lifestyles. Companies could now purchase data sets based on clusters of households that “look like” their own best customers and fold those prospective customers into their data warehouses.

Segmentation helps marketers understand potential customers in order to focus on those whose needs they can ultimately satisfy. It’s not uncommon to mix and match segmenta- tion approaches. For instance, marketers might combine geodemographic segmentation with segmentation on benefits sought, to design effective strategies. Figure 7.3 lists the steps in the process of executing a segmentation strategy.

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CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

Step 2

• Group potential buyers into target market segments (using one or more of the approaches discussed in this section: demographic; geographic; geodemographic; behavioral; psychographic)

• Group products to be sold into categories potential buyers can relate to.

• Estimate potential for return on investment from the segmentation strategy by analyzing the fit of the target segment to the product groupings.

• Select target markets according to the nine criteria discussed earlier (see Table 7.3).

Step 1

Step 3

Step 4

Step 5 • Develop and deploy marketing actions to reach

the selected target market.

Figure 7.3: The segmentation process

To execute a segmentation strategy, marketers must perform these five steps.

Segmenting business markets can be accomplished using the same process. B2B segmen- tation approaches can be geographic or demographic based on characteristics of the busi- nesses targeted; this is sometimes referred to as firmographics. Size in sales or number of employees, customer business model, and industry are all useful variables on which to segment. The North American Industry Classification System (NAICS) maintained by the U.S. Census Bureau is the standard used for classifying businesses and the source from which firmographic data can be retrieved, sorted, and aggregated for purposes of target marketing.

Field Trip 7.3: B2B Segmentation Uses NAICS

The North American Industry Classification System maintained by the U.S. Census Bureau is the stan- dard used for segmenting businesses by their characteristics, such as sales, number of employees, customer business model, or industry. Follow this link to the NAICS directory online. Pick a category that interests you, such as nutrition or entertainment, and use the Search tool to find the NAICS clas- sifications for that segment.

http://www.census.gov/eos/www/naics/

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http://www.census.gov/eos/www/naics/
CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

Behavioral segmentation, based on factors like motivations or usage rates, end-use appli- cation, product specifications, or stage in the customer relationship (newly acquired, existing, satisfied, or at-risk), is widely used in B2B marketing.

Psychographic segmentation has not proven as useful in B2B marketing. The more com- plex makeup of the buying team (as opposed to an individual consumer), as well as the idiosyncrasies of specific industries, make the psychographic approach less useful in sell- ing to businesses (Barry & Weinstein, 2009).

Positioning: The STP Approach’s Final Step Marketers, having a segmentation strategy to execute and a target market segment to address, face one more strategic task. They must now decide how to position the offering. As you’ve learned from earlier chapters, positioning is the practice of creating an identity in the minds of prospective customers that allows one offering to stand out among many. The concept of positioning was discussed in Chapter 6.

In the 1960s to 1980s, the period in which the STP approach emerged, it was not uncom- mon for marketers to go head-to-head in pursuit of a target market. They positioned offer- ings directly against competitors with similar product attributes. An often-used example from that era is the marketing of the rental car companies Avis and Hertz. Avis’s “we try harder” campaign positioned the company as the alternative with greater customer ser- vice spirit. During this era the rapid increase in goods and services available led to more emphasis on competitive differentiation, as marketers sought to stand out in smaller, less- competitive market niches.

Developing positioning strategy is part of the creative work of the campaign develop- ment step of the marketing process. Marketers write positioning statements that identify the target market and the need/desire that creates demand. The positioning statement describes how the offering delivers a solution that is unlike any competitor’s. The posi- tioning statement is usually part of the creative brief, developed for use within the mar- keting department.

SnackWell’s, Nabisco’s line of nonfat and low-fat snacks, reached $490 million in sales when introduced but lost its lead as Kraft aggressively marketed its 100-calorie packs. To fight back, SnackWell’s developed a new product line that emphasized portion control (head-to-head positioning against Kraft) but with a twist. The positioning statement for the new offering might have read, “To health-conscious consumers left unsatisfied by 100-calorie snack packs, SnackWell’s chocolate and vanilla brownies in 150-calorie packs let the consumer be bad and still be good.” Some variation on that positioning statement often ends up in the resulting advertising campaign, as with SnackWell’s “Be bad. Snack well.” slogan that debuted in 2011 (Newman, 2011).

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CHAPTER 7Section 7.3 The “STP” Approach: Segmentation, Targeting, and Positioning

Positioning strategy reflects three components:

1. The target market’s perception of the Customer Value Equation for products in the consideration set,

2. The product offering’s Unique Selling Proposition (the promised benefit so com- pelling it motivates action), and

3. Assessment of competitors’ positioning strategies.