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Strategic Marketing Management - Free download as Powerpoint Alexander Chernev. Download as PPTX, PDF, TXT or read online from Scribd. Flag for. Strategic Marketing Management, 7th Edition ePub (Adobe DRM) download by Alexander Chernev. Strategic Marketing Management, 7th Edition. Alexander. Strategic Marketing Management (8th Edition) outlines the essentials of marketing theory and offers a structured approach to identifying, understanding, and.


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pdf. Strategic Marketing Management, 8th Edition by Alexander Chernev STRATEGIC MARKETING MANAGEMENT Alexander Chernev Kellogg School of . Editorial Reviews. About the Author. Alexander Chernev is a professor of marketing at the edition by Alexander Chernev, Philip Kotler. Download it once and read it on your Kindle device, PC, phones or tablets. Use features like bookmarks. Strategic Marketing Management, 8th Edition and millions of other books are available . The Marketing Plan Handbook, 4th Edition by Alexander Chernev Paperback $ Get your Kindle here, or download a FREE Kindle Reading App.

The particular way in which an offering creates value is reflected in its business model. Loss Aversion The loss-aversion aspect of the value function extends the principle of reference- point dependence to assert that people value the positive gains and negative losses deviations from the reference point in a different fashion, placing more weight on losses than gains. Unlike the strategy, which focuses on defining the value exchange among the relevant market entities, tactics define the key aspects of the particular offering that will create market value. Lifetime Customer Value: The need for different value propositions raises the question of whose value to prioritize. Lauren added it Jul 03, Whereas strategy focuses on defining the target market and the value exchange among the relevant market entities, tactics describe the particular aspects of the offering that will ultimately create market value.

Some of the limitations of the 4-P framework can be overcome by describing the marketing mix in terms of seven, rather than four, factors—product, service, brand, price, incentives, communication, and distribution—as implied by the 7-T framework discussed earlier in this chapter.

Thus, the 7-T framework can be viewed as a more refined version of the 4-P framework that offers a more accurate and actionable view of the key marketing mix variables. Figure 7. It is often used for strategic industry- level decisions, such as evaluating the viability of entering or exiting a particular industry. According to this framework, competitiveness within an industry is determined by evaluating the following five factors: In general, the greater the bargaining power of suppliers and buyers, the threat of new market entrants and substitute products, and the rivalry among existing competitors, the greater the overall industry competitiveness.

Figure 8. The Five Forces of Competition2 The Five Forces framework reflects an industry perspective whereby competitors are defined based on the industry in which they operate.

According to this view, cross-industry competition occurs through substitute products that can fulfill the same customer need as the products of within-industry companies. Furthermore, as suggested by its name, the focus of the Five Forces framework is on the competition; the process of creating customer value is captured rather indirectly.

The customer-centric focus of value analysis discussed in this chapter is not industry-specific and does not depend on whether the company and its competitors operate within the bounds of the same industry. Because competitors are defined based on their ability to fulfill customer needs rather than on their industry affiliation, the concept of substitutes is not particularly meaningful here and is captured by the broader concept of competitive offerings.

Johnson, Mark W. Upper Saddle River, NJ: Prentice Hall. Ohmae, Kenichi , The Mind of the Strategist: The Art of Japanese Business. McGraw- Hill. Action without vision is a nightmare. Such a systematic approach, which is outlined in this chapter, delineates the logic of strategic analysis and planning by advancing a comprehensive yet streamlined framework for developing actionable marketing plans. The goal identifies the ultimate criterion for success that guides all company marketing activities.

Setting a goal involves two decisions: Defining the strategy involves two decisions: Identifying the target market involves identifying five key factors the Five Cs: The value proposition, on the other hand, defines the value that an offering aims to create for the relevant participants in the market— target customers, the company, and its collaborators. The tactics outline a set of specific activities employed to execute a given strategy.

Defining the implementation involves three key components: Control involves two key processes: The key components of the marketing plan and the main decisions underlying each individual component are summarized in Figure 2 and discussed in more detail in the following sections.

Figure 2. The key aspects of the action plan are discussed in more detail in the following sections. Setting a Goal The action plan is formulated to achieve a particular goal; it starts with defining a goal and outlines a course of action that will enable the company to achieve this goal.

Based on their focus, two types of goals can be distinguished: Monetary goals involve monetary outcomes and typically focus on maximizing net income, earnings per share, and return on investment. Monetary goals are common for offerings managed by for-profit companies. Strategic goals involve nonmonetary outcomes that are of strategic importance to the company. Nonmonetary goals are common for nonprofit organizations, which aim to achieve nonmonetary outcomes, such as promoting social welfare.

Nonmonetary goals are also common in for-profit organizations by facilitating the achievement of other profit-related goals. Thus, an offering that is not profitable by itself might benefit the company by facilitating the sales of other, profit-generating offerings. Note that monetary goals and strategic goals are not mutually exclusive: One could argue that long-term financial planning must always include a strategic component in addition to setting monetary goals, and long-term strategic planning must always include a financial component that articulates how achieving a particular strategic goal will translate into a financial outcome.

Performance Benchmarks Performance benchmarks define the ultimate criteria for success. The two types of performance benchmarks—quantitative and temporal—are discussed in more detail below. Quantitative benchmarks define the specific milestones to be achieved by the company with respect to its focal goal.

Temporal benchmarks identify the time frame for achieving a particular milestone. Setting a timeline for achieving a goal is a key strategic decision, because the strategy adopted to implement these goals is often contingent on the time horizon. The goal of maximizing next-quarter profitability will likely require a different strategy and tactics than the goal of maximizing long-term profitability.

Market Objectives Based on their focus, goals vary in their level of generality. Some goals reflect outcomes that are more fundamental than others. Unlike the ultimate goal, which is typically defined in terms of a company- focused outcome, market objectives delineate specific changes in the behavior of the relevant market factors—customers, the company, collaborators, competitors, and context—that will enable the company to achieve its ultimate goal.

The different types of market objectives are outlined below. Customer objectives aim to elicit changes in the behavior of target customers e. To illustrate, the company goal of increasing net revenues can be associated with the more specific objective of increasing the frequency with which its customers repurchase the offering. Such actions might involve creating barriers to entry, securing proprietary access to scarce resources, and circumventing a price war.

Indeed, if there is no change in any of the five market factors the Five Cs , the company is unlikely to make progress toward its goals. In this context, market objectives help the company articulate the course of action aimed at achieving its ultimate goal.

Implementation involves three key components: For example, a company can form the business unit managing the offering by organizing employees based on their function e. Alternatively, a company might organize employees based on the type of product or market involved, such that each division is responsible for a certain product or market and is represented by different functions.

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These processes involve managing the flow of information, goods, services, and money. In this context, there are three common types of implementation processes: Market planning includes activities involved in the development of the marketing plan.

Resource management involves activities focused on acquiring and managing human resources e. Marketing mix management involves activities focused on managing the marketing tactics. This includes designing e.

Implementation Schedule The process of setting an implementation schedule involves deciding on the timing and the optimal sequence in which individual tasks should be performed to ensure effective and cost-efficient completion of the project. The implementation schedule can also identify the key personnel involved in managing individual tasks and delineate the time frame for beginning and completing these tasks.

Identifying Controls The uncertainty and dynamics associated with most business markets necessitate that companies continuously evaluate their performance and monitor changes in the environment.

Strategic Marketing Management

Accordingly, marketing controls serve two key functions: Performance can be evaluated on a variety of metrics, such as net income, market share, and unit sales. Performance evaluation can lead to one of two outcomes: In cases when performance evaluation reveals a gap, the existing action plan needs to be modified to put the company back on track toward achieving its goal.

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The basic principle in modifying the action plan is that the changes should directly address the identified opportunities and threats.

Writing a Marketing Plan The marketing plan can be formalized as a written document that effectively communicates the proposed course of action to relevant stakeholders: Writing a marketing plan is different from market planning.

Market planning is the process of identifying a goal and developing a course of action to achieve this goal. Most marketing plans follow a similar structure: The key components of the marketing plan are illustrated in Figure 3 and summarized below.

Figure 3. The typical executive summary is one or two pages long, outlining the key problem faced by the company e. The situation analysis section of the marketing plan aims to provide an overall evaluation of the company and the environment in which it operates, as well as identify the markets in which it will compete. Accordingly, the situation analysis involves two sections: The other elements of the marketing plan—the executive summary, situation analysis, and exhibits—aim to facilitate an understanding of the logic underlying the plan and provide specifics for the proposed course of action.

In addition to developing an overall marketing plan, companies often develop more specialized plans. Such plans include a product development plan, service management plan, brand management plan, sales plan, promotions plan, and communication plan. Some of these plans can, in turn, encompass even more specific plans.

The ultimate success of each of these individual plans depends on the degree to which they are aligned with the overall marketing plan. Updating the Marketing Plan Once developed, marketing plans need updating in order to remain relevant. There are two common reasons to consider updating the marketing plan: Performance gaps typically stem from three main sources: When developing the marketing plan, managers rarely have all the necessary information at their fingertips.

It is often the case that, despite the voluminous amount of available information, certain strategically important pieces of information are not readily available e. As a result, managers must fill in the information gaps by making certain assumptions. Because assumptions reflect uncertainty, updating the plan to reduce the uncertainty can increase its effectiveness. Logic flaws. Another common source of performance gaps is the presence of logic flaws in the design of the marketing plan. For example, the proposed strategy might be inconsistent with the set goal, whereby an otherwise viable strategy might not produce desired results.

Implementation errors. Performance gaps can also stem from implementation errors, which involve poor execution of an otherwise viable marketing plan. This type of error is due to the fact that managers do not adhere to the actions prescribed by the marketing plan e. Changes in the target market involve changes in one or more of the Five Cs: These five steps comprise the G-STIC framework, which is the backbone of developing successful action plans. The value proposition defines the value that an offering aims to create for the relevant participants in the market—target customers, the company, and its collaborators.

In addition to structuring the managerial decision process, the G-STIC framework also serves as the basis for writing a marketing plan.

The marketing plan identifies a specific goal and outlines a course of action to achieve this goal. The marketing plan typically comprises four key components: Chicago, IL: Cerebellum Press. Lehmann, Donald R. Winer , Analysis for Marketing Planning 7th ed. Boston, MA: Specifically, strategy identifies the market in which the company operates, defines the value exchanges among the key market entities, and outlines the ways in which the offering creates market value.

Accordingly, the key aspects of strategic analysis outlined in this book include 1 identifying target customers, 2 creating customer value, 3 creating company value, and 4 creating collaborator value. These four aspects of the value-creation process are briefly summarized below and discussed in greater detail in the following four chapters.

Identifying target customers is the stepping stone for the development of a marketing strategy. Identifying target customers involves grouping customers into segments, selecting which segments to target, and identifying actionable strategies to reach the selected target segments. The key aspects of identifying target customers are discussed in Chapter 4. The value proposition is augmented by a positioning that formulates the primary reason for customers to choose the offering.

The process of developing a value proposition and positioning is discussed in Chapter 5. Creating company value involves optimizing the value exchange in a way that enables the company to reach its goal and create value for its stakeholders.

The key approaches to creating company value are discussed in Chapter 6. Creating collaborator value involves identifying entities that will work with the company to create market value for target customers and optimizing the offering in a way that enables collaborators to reach their goals.

The key approaches to creating collaborator value are the focus of Chapter 7. These four aspects of the value-creation process stem from the key marketing principle: Accordingly, the following chapters take the perspective of each of the three market entities—target customers, the company, and its collaborators—to identify strategies for identifying a viable target market and developing an optimal value proposition for that market.

The cornerstone of developing a viable strategy is deciding which customers to target and how to reach those customers in an effective and cost-efficient manner. The process of identifying target customers is the focus of this chapter. The Concept of Targeting Targeting is the process of identifying customers for whom the company will optimize its offering. The logic of identifying target customers and the strategic and tactical aspects of this process are discussed in more detail below.

The Logic of Targeting Imagine a company operating in a market in which there are two customers with different needs. Which of these customers should the company serve? The intuitive answer is—both. Should the company choose to target both customers it has two options to develop an offering. One approach is to develop the same offering for both customers one-for-all strategy , and the other is to develop different offerings based on the needs of each one one-for-each strategy.

The one-for-all strategy of developing the same offering for both customers might not be effective for customers with different needs because the offering will end up not creating value for at least one and perhaps even both. Furthermore, developing a mid-priced, mid-quality offering will likely fail to fulfill the needs of both because the offering will still be too expensive for one of the customers and of insufficient quality for the other.

The one-for-each strategy of developing a separate offering for each customer might not be effective because the company might not have the resources to develop offerings that meet the needs of both customers. For example, the company might not have the scale of operations to develop a low-priced offering for the price- sensitive customer and the technological know-how to develop a high-performance offering for the quality-focused consumer.

Furthermore, even if the company has resources to develop separate offerings, both customers might not be able to create value for the company. As a general rule, developing a separate offering for each individual customer is beneficial when the incremental value created by customizing the offering outweighs the costs of developing the offering. To illustrate, when the cost of customization is relatively high as with durable goods, such as cars, household appliances, and electronic equipment , companies tend to develop offerings that serve relatively large groups of customers, whereas in industries where the cost of customization is relatively low as in the case of delivering online information , offerings can be tailored for smaller groups of customers.

Individual and Segment-Based Targeting The discussion so far has focused on a scenario in which a company operates in a market comprised of two customers. While such markets do exist, especially in a business-to-business context, they are the exception rather than the rule: Most markets comprise thousands and often millions of buyers. This scenario is different not only in the number of customers but also in that some customers are likely to have fairly similar needs that could be fulfilled by the same offering.

In such cases, rather than developing individual offerings for each customer, a company might consider developing offerings for groups of customers—commonly referred to as customer segments—that share similar characteristics.

The concept of segment-based targeting is illustrated in Figure 1. For example, dark circles might represent quality-focused customers Segment A , white circles might represent price-sensitive customers Segment B , and gray circles might represent customers who are looking for a compromise between price and quality Segment C. In this context, Figure 1 depicts a scenario in which a company targets quality-oriented customers by developing high-end offerings to fulfill the needs of these customers, while ignoring the other two customer segments.

Figure 1. Segment-Based Targeting Grouping customers into segments enables a company to improve the cost efficiency of its marketing activities by not having to customize the offering for individual customers, usually with minimal sacrifice to the effectiveness of the offering.

From a conceptual standpoint, the process of identifying target customers is virtually identical, be it individual customers or customer segments.

The key difference is that in addition to identifying the needs of the target customers, segment-based targeting involves grouping customers with similar needs into segments—a process commonly referred to as segmentation. Strategic and Tactical Targeting Customers vary in two main aspects: The existence of these two types of customer characteristics—value and profile —raises the question of which one to prioritize in targeting.

Focusing on the value is logical because value-creation is the essence of any business activity. Focusing on the customer profile, on the other hand, can be beneficial because it is observable, which enables the company to reach its customers, make them aware of the offering, and deliver the offering in an effective and cost-efficient manner.

The downside of focusing on profile is that it provides little or no insight into customer needs and preferences, thus making it difficult for the company to create value for its customers. Because neither of the two customer descriptors—value and profile—is sufficient on its own to create customer value in an effective and cost-efficient manner, targeting must incorporate both factors.

Based on their focus, two types of targeting can be distinguished: Strategic targeting focuses on the value defined by customer needs and the potential to create value for the company. In contrast, tactical targeting focuses on customer profile, including factors such as age, gender, income, social status, geographic location, and buying behavior, to identify effective and cost-efficient ways to reach these customers.

These two aspects of targeting—strategic and tactical —are discussed in more detail in the following sections. Strategic Targeting Strategic targeting involves identifying which customers to serve and which to ignore.

Because strategic targeting aims to optimize value for customers, on one hand, and for the company and its collaborators, on the other hand, when evaluating the viability of targeting a particular customer segment, a manager needs to answer two key questions: Can the company create superior value for these customers?

The answer to the second question is determined by the ability of target customers to create value for the company and its collaborators. These two key targeting criteria—target attractiveness and target compatibility—are illustrated in Figure 2 and discussed in more detail below.

The two general types of company value—monetary and strategic —are discussed in more detail below. Monetary value is a function of the revenues generated by a particular customer segment and the costs associated with serving this segment.

The cost of serving target customers can also include the expenses incurred in acquiring and retaining these customers e. There are four main types of strategic value: For example, a company might target low-margin or even unprofitable customers due to the economics of its business model, especially in the case of companies such as airlines, hotels, and cruise lines, which have large fixed costs and marginal variable costs.

The success of Apple, Microsoft, eBay, and Facebook networks illustrates the benefits from building large-scale user networks. Thus, a company might target customers not because of their own buying power and the profits they are likely to directly generate for the company but to take advantage of their social networks and their ability to influence other buyers. Information value reflects the worth of the information provided by customers.

A company might target customers because they furnish the company with data about their needs and profile that can help design, communicate, and deliver value for other customers with similar needs. Companies with different strategic goals are likely to vary in the way they evaluate the attractiveness of different segments, such that the same customers might be viewed as attractive by some companies and as unattractive by others. The second and equally important aspect of identifying target customers is the ability of the company to create superior value for these customers.

Business infrastructure involves several types of assets: Collaborator networks include two types of networks: For many organizations—such as those involved in research and development, education, and consulting—human capital is a key value-creating asset.

Intellectual property covers the legal entitlement attached to intangible assets. Intellectual property involves two types of assets: Strong brands create value by identifying the offering and generating meaningful associations that create value above and beyond the value created by the product and service aspects of the offering. Synergistic offerings are a strategic asset to the degree that they facilitate customer acceptance of related company offerings.

For example, the Windows operating system can be viewed as a strategic asset for Microsoft because it ensures product compatibility, thus facilitating customer adoption of related software offerings. Access to scarce resources provides the company with a distinct competitive advantage by restricting the strategic options of its competitors.

Access to capital provides the company with resources to carry out different aspects of its strategy and tactics, including sustaining a price war, developing new products, or implementing a communication campaign.

In fact, assets that are a source of customer value for one segment can become liabilities for a different segment. For example, a brand associated with a casual image is likely to be an asset when targeting customers seeking to convey a casual image and a liability for customers seeking to project a more upscale, exclusive image.

Therefore, when choosing a target market a company needs to evaluate its assets from the viewpoint of the particular target segment to ensure the compatibility of customer needs with its own resources. Strategic Targeting: This is the resource advantage principle: To create a superior offering, the company must have superior resources relative to the competition.

The uniqueness of customer needs determines the degree to which a company requires specialized resources to fulfill these needs, as well as the degree of the competition for this segment.

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The more unique the customer needs, the more the company requires specialized resources to serve those customers, and the fewer the viable competitors likely to exist in the market. The relationship among these three factors is illustrated in Figure 3. These are the optimal target customers because the company can create superior value for these customers and serve them in a way its competitors cannot the dark-shaded segment in Figure 3. The Resource Advantage Principle The development of marketing offerings should always be driven by customer needs.

Yet, obsession with the competition often leads companies astray, encouraging them to develop offerings that match those of competitors even in the absence of an underlying customer need.

These unutilized needs and resources can be used to provide the company with directions for future development. Thus, unmet customer needs offer the company with an opportunity to develop the necessary resources to create offerings that will fulfill these needs.

Strategic Marketing Management, 8th Edition

By the same logic, unutilized company resources call for identifying unmet customer needs and developing offerings to fulfill those needs.

Tactical Targeting Tactical targeting is similar to strategic targeting in that it also involves identifying target customers. However, unlike strategic targeting, which aims to determine which customers to target and which to ignore, tactical targeting aims to identify an effective and cost-efficient approach to communicate and deliver the offering to already selected target customers.

The key aspects of tactical targeting are discussed in more detail below. Yet, while knowing customer needs is crucial for deciding which customers to target and which to ignore, needs are not readily observable and therefore cannot be acted on to reach these customers.

Identifying ways to reach target customers who have been chosen based on the value they are seeking from and bringing to the company is the crux of the identification problem Figure 4. To reach the value-based customer segments, companies need to identify a set of readily observable characteristics—also referred to as a profile—that describe these segments and use these observable characteristics to communicate and deliver its offerings.

The process of linking value-based segments to corresponding observable and actionable profiles is the essence of tactical targeting. Defining a customer profile involves defining the observable characteristics of a value-based target segment, comprising two types of factors: Demographic factors outline the key descriptive characteristics of target customers.

Commonly used demographics include age, gender, income, level of education, ethnicity, social class, stage in the life cycle, employment status, household size, and geographic location. Common behavioral factors include purchase quantity, frequency of repurchase, price sensitivity, promotion sensitivity e. The relationship between strategic and tactical targeting is illustrated in Figure 5. This shortcoming is addressed by tactical targeting, which involves identifying the demographic and behavioral profile of the strategically selected target customers.

Thus, strategic and tactical targeting are two inseparable and complementary aspects of the process of identifying target customers.

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Strategic and Tactical Targeting: The problem faced by this company is that customer needs are unobservable, meaning that, a priori, it is difficult to know which consumers might enjoy the travel benefits offered by the card. To solve this problem, the company must link the value-based customer segment with certain observable characteristics describing this segment. Here, the credit score offers a link between the unobservable e. Furthermore, to identify customers for whom the company can create value e.

Thus, by focusing on customers whose profiles are aligned with the value-based target segment, a company can maximize the effectiveness and cost efficiency of its targeting activities. Targeting Effectiveness and Cost Efficiency Targeting reflects the company's intent to focus on certain customers, which might or might not be the actual outcome of its actions.

When identifying the profiles of its target customers, the company walks a fine line between defining the market too broadly and defining it too narrowly. Overly broad targeting is not cost efficient because it calls for the expenditure of significant resources to reach customers that the company has no intention of targeting. In contrast, overly narrow segmentation is ineffective because it will likely cause the company to overlook customers interested in the offering.

The goal, therefore, is to find the best link between the need-based target segments and the corresponding profile-based segments. The misalignment of value and profile can result in one of three common types of targeting errors. One possibility is that the profile of target customers is defined too broadly, such that it includes not only the target customers but also many noncustomers Figure 6B.

The problem with this approach—often referred to as shotgun targeting—is that it is not cost efficient because the company will end up promoting the offering to customers who are not aligned with its strategic goals. Alternatively, the company might define the profile of its target customers too narrowly, such that it includes only a subset of its target customers Figure 6C. The problem with this approach— often referred to as oversegmentation—is that it is not effective because the company will forgo promoting its offering to some of its strategically chosen customers.

Finally, the company might define the profile of its target customers in a way that only marginally overlaps or does not overlap at all with its desired target customers Figure 6D. The problem with this shot-in-the-dark approach is that it is neither effective nor cost efficient because it includes only a subset of its target customers while wasting resources by reaching customers who do not fit its strategic goals. Figure 6. Single-segment marketing, however, is the exception rather than the rule.

Most offerings exist as part of a product line, with different offerings targeting different customer segments. Indeed, even companies that start with a single offering achieve wider customer adoption over time.

As their customer base becomes more diverse, these companies transition from a single offering to a product line with offerings that fit the needs of the diverse customers it serves. Because the needs of each customer segment are distinct, the basic principle in targeting multiple segments is that the company must develop a strategy and tactics for each segment it aims to pursue Figure 7.

Accordingly, a product line is warranted only when each offering targets a unique customer segment with distinct needs and resources and develops a corresponding strategy and tactics to create a viable value exchange with each segment. The process of developing and managing product lines is discussed in more detail in Chapter Segmentation The discussion so far has focused on the logic, the key aspects, and the core principles of targeting, assuming that potential buyers have already been assigned to distinct segments.

In reality, however, this is not the case. In order to choose a particular target segment, the market must already be segmented, and each market segment should be defined as such.

Accordingly, the focus of this section is on the process and key principles of the process of dividing potential buyers into market segments. The Essence of Segmentation Segmentation is a categorization process that groups customers by focusing on those differences that are relevant for targeting and ignoring those differences that are irrelevant. Segmentation can involve two opposing processes—differentiation and agglomeration Figure 8.

The process of differentiation is illustrated in the left part of Figure 8, whereby a mass market in which customers viewed as being similar in their needs and resources is divided into three homogeneous segments such that customers in each segment are similar to one another and at the same time different from those in the other segments.

The process of agglomeration is illustrated in the right part of Figure 8, whereby an idiosyncratic market in which customers viewed as having unique needs and resources are grouped into three homogeneous segments, such that customers in each segment are similar to one another and at the same time different from those in the other segments.

Thus, even though differentiation and agglomeration are opposite processes, they aim to achieve the same goal—facilitate the process of identifying target customers—and yield the same outcome. Segmentation as a Process of Differentiation and Agglomeration Segmentation enables companies to streamline their activities by developing offerings for groups of customers with similar needs.

The key drawback of segmentation is that grouping customers into segments might not take into account potentially important differences that exist among customers within each segment. Thus, segmentation can increase the cost efficiency of targeting but also might decrease its effectiveness.

A common misperception is that the selection of target customers starts with dividing customers into segments and deciding which segments to target only after market segments have been identified.

Although for presentation purposes segmentation typically precedes targeting, from a conceptual standpoint, segmentation and targeting are an iterative process of identifying target customers. Thus, segmentation is targeting-specific, meaning that markets are segmented in a way that facilitates targeting, and targeting is segment-driven, meaning that a segment must already be defined in order to be selected as a target.

Because segmentation aims to facilitate targeting, two types of segmentation processes can be distinguished: These two types of segmentation and the corresponding targeting decisions are illustrated in Figure 9. Figure 9. Segmentation and Targeting: Building on the tactical segmentation, tactical targeting identifies the specific channels to be used to reach target customers in order to communicate and deliver the offering.

Key Segmentation Principles To be effective, the process of grouping customers into market segments must follow four key principles: The essence and the rationale underlying these four principles are outlined in more detail below.

There is virtually an infinite number of criteria that one could use to divide customers into segments. Segmentation aims to group customers so that those within each segment are quite similar to one another i.

In general, a larger number of segments leads to a greater similarity homogeneity among the customers within each segment, such that the resulting segments are more likely to comprise customers with uniform preferences. An important market segmentation principle is that segments should be comprehensive, meaning that they should include all potential customers in a given market, such that each customer is assigned to a segment.

Accordingly, segmentation should produce segments that are collectively exhaustive, whereby no potential customers are left unassigned to a segment. The four segmentation principles are illustrated in Figure Here, the first scenario Figure 10A illustrates a segmentation that conforms to all four principles: In contrast, the other four scenarios illustrate segmentations that violate each of the four principles.

Thus, the second scenario Figure 10B illustrates a segmentation that uses an irrelevant criterion, such that the resulting segmentation does not capture the differences in customer needs indicated by different shadings relevant for targeting.

Likewise, the third scenario Figure 10C illustrates a segmentation that violates the similarity principle, whereby customers in one of the segments have heterogeneous preferences. The fourth scenario Figure 10D further illustrates a segmentation that does not follow the exclusivity principle, whereby customers with similar preferences are spread across different segments.

Finally, the fifth scenario Figure 10E illustrates a non-exhaustive segmentation that fails to include some potential customers in one of its segments.

Figure Indeed, segmentation and targeting are two complementary aspects of the process of identifying target customers; errors in one of these aspects is likely to trickle down to the other, ultimately resulting in choosing suboptimal target customers and creating a flawed value exchange.

Targeting involves two decisions: Strategic targeting involves identifying which customers segments to serve and which to ignore. Because it aims to optimize value for customers, the company, and its collaborators, strategic targeting is typically derived from value-based segmentation rather than from profile-based segmentation.

The targeting decision is guided by two key criteria: Tactical targeting links the typically unobservable value-based segments to specific observable and actionable characteristics. Such observable characteristics, also referred to as a customer profile, involve demographic e.

To succeed, an offering should create superior value for its target customers and collaborators. To accomplish that, a company needs to identify customers whose needs it can fulfill better than the competition. Targeting effectiveness and cost efficiency is defined by the degree to which a company's tactical targeting is consistent with the strategically identified target customers. Because the needs of each customer segment are distinct, the basic principle in targeting multiple segments is that the company must develop a unique strategy for each segment it decides to pursue.

Segmentation is a categorization process that groups customers by focusing on those differences that are relevant for targeting and ignoring those differences that are irrelevant. Accordingly, segmentation focuses marketing analysis on the important aspects of customer needs, enabling managers to group customers into larger segments and develop offerings for the entire segment rather than for each individual customer.

Segmentation must follow four key principles: The monetary and strategic value customers are likely to create for the company during their tenure with this company.

Customer equity goes beyond the current profitability of a customer to include the entire stream of profits adjusted for the time value of money that a company is likely to receive from this customer. A customer can create value for the company in at least three different ways: A set of characteristics used to describe a given population. Demographics commonly used in marketing include factors such as population size and growth, age dispersion, geographic dispersion, ethnic background, income, mobility, education, employment, and household composition.

The key characteristics of an organization, typically used for segmentation purposes. Firmographics include factors such as location, size of company, organizational structure, industry, buying process, growth, revenues, and profitability. Heterogeneous Market: Market composed of customers who vary i. Homogeneous Market: Lifetime Customer Value: See customer equity.

MECE Rule: A popular segmentation heuristic stating that segmentation should yield segments that are both mutually exclusive and collectively exhaustive. This rule combines two of the four segmentation principles identified earlier in this chapter— exclusivity and comprehensiveness. Thus, the MECE rule indicates that segments should be sufficiently different from one another so that they do not overlap i.

Niche Strategy: Marketing strategy aimed at a distinct and relatively small customer segment. Occasion-Based Targeting: Targeting strategy that groups customers based on purchase and consumption occasions.

Occasion-based targeting is useful in cases in which customer needs vary across purchase occasions, and the same customer is likely to fall into different usage-based segments at different times.

By focusing on usage occasions rather than on the individual characteristics of the customer, occasion-based targeting accounts for the fact that the same customer is likely to display different needs depending on the occasion. Unlike user-based targeting, which assumes that customer needs do not vary across purchase occasions, occasion-based targeting does not make such an assumption, implying that an individual customer or segment can have different needs on different purchase occasions. Relatively stable individual characteristics such as personality, moral values, attitudes, interests, and lifestyle.

User-Based Targeting: Targeting strategy that groups customers based on their relatively stable individual characteristics, which are likely to determine their needs and behavior across different purchase and consumption occasions. User-based targeting focuses on individual customers, assuming that their preferences are constant across usage occasions, whereas occasion-based targeting focuses on usage occasions rather than on individual customers.

To illustrate, the preference for regular versus light diet soft drinks is fairly stable across individuals and calls for user-based targeting. User-based targeting can be viewed as a special case assuming that customer preferences are constant across usage occasions of the more general approach of need-based targeting.

Harvard Business School Press. Burlington, MA: Weinstein, Art , Handbook of Market Segmentation: Strategic Targeting for Business and Technology Firms 3rd ed. Haworth Press. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else. Because customers are the ultimate source of value for the company and its collaborators, customer value is the key to creating market value. The two key aspects of creating customer value—value proposition and positioning—are the focus of this chapter.

The Big Picture The development of a customer value proposition and positioning follows the identification of customers that the company will serve with its offering discussed in more detail in Chapter 4.

Building on the value proposition, the positioning identifies the primary benefit s of the offering that will serve as the main reason for customers to choose it. The processes of identifying target customers, developing a value proposition, and positioning are illustrated in Figure 1. Indeed, even though they are presented in Figure 1 as a progression, in reality these processes are iterative, whereby the development of a value proposition and positioning both determines and follows from the choice of target customers.

At the same time, the development of a value proposition follows from the selection of target customers because a meaningful value proposition necessitates knowing the needs and preferences of target customers. Recognizing the iterative nature of the processes of identifying target customers and developing a value proposition and positioning, this chapter focuses on the key aspects of developing a value proposition and positioning on the assumption that target customers have already been identified.

Developing a Value Proposition The customer value proposition defines the value that an offering aims to create for its target customers. The key aspects of the concept of customer value, the value function, and creating a competitive value advantage are outlined below.

Customer Value as a Marketing Concept The concept of customer value is central to defining the value exchange in any market. Accordingly, understanding the essence of customer value and identifying its key domains is essential for the development of a viable marketing strategy.

The better the offering's attributes fit the needs of its target customers, the greater the value created by this offering. Thus, an offering that is appealing to one customer might be of little or no value to another customer. For example, a lower priced, lower quality offering is likely to be attractive to price-conscious customers and unattractive to those customers seeking high performance and exclusivity.

The Domains of Customer Value Depending on the underlying customer needs, an offering can create value across three domains: These three domains of customer value are depicted in Figure 3 and briefly outlined below.

Attributes that create functional value include performance, reliability, durability, compatibility, ease of use, design, customization, form, style, and packaging.

For offerings that serve primarily utilitarian functions, such as office and industrial equipment, functionality is often the paramount consideration. Psychological value is defined by the psychological benefits and costs associated with the offering. Psychological value goes beyond the functional benefits of the offering to create psychological benefits for target customers.

For example, customers might value the emotional benefits provided by a car, such as the joy of driving a high-performance vehicle as well as the social status and lifestyle conveyed by the car. In categories such as luxury and fashion, where customers seek emotional and self-expressive benefits, the psychological value conveyed by the offering is often of primary importance.

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Monetary value is defined by the monetary benefits and costs associated with the offering. Even though monetary value is typically associated with costs, an offering can also carry monetary benefits, such as cash-back offers, monetary bonuses, cash prizes, financial rewards, and low-interest financing. In commoditized categories with undifferentiated offerings, the monetary aspect of the offerings is often the dominant criterion for choice.

Even though they represent different dimensions of customer value, these domains are not mutually exclusive.

An offering can create value in all three domains. Consider Starbucks, the Seattle-based global coffeehouse chain. Every week Starbucks serves millions of customers around the world, providing them with fresh-brewed coffee and in the process delivering value in these three domains.

From a functional perspective, Starbucks coffee provides its customers with energy, helping them to wake up, rejuvenate in the afternoon, and stay up late at night. Finally, from a monetary perspective, Starbucks creates disutility negative value associated with the price customers pay at the register, which in turn can be attenuated by the available price promotions and loyalty programs. The Value Function A company creates customer value by designing market offerings that can fulfill a particular customer need better than the competition.

Customer Value as a Function of Offering Attributes Customers do not evaluate market offerings based on their objective attribute characteristics but based on the expected subjective value utility of these attributes. The customer value function reflects the way in which attributes of the offering translate to subjective benefits and costs for target customers. For example, when choosing a mobile phone, a customer might consider several attributes, including battery life, operating system, brand reputation, form factor, camera resolution, and price.

Furthermore, different attributes might vary in importance for this customer, such that battery life, operating system, and brand reputation are of utmost importance, and price of least importance. Finally, this customer is likely to assess how well each of the available phones performs on the above attributes.

The index i ranges from 1 in the case of offerings defined by a single attribute to the total number of attributes describing a given offering n. The symbol f means that the value is a function of attribute importance wi and offering performance ai , without implying a specific relationship e.

To choose among multiple offerings, consumers typically compare their valuations of each of the available options e. Accordingly, the valuation of camera A can be calculated as: Following the same logic, the consumer can evaluate the other options e. Despite its popularity, the weighted-additive value function is subject to important limitations that stem from its four key assumptions.

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