1.7 Target Market + Marketing Mix = Marketing Strategy

Here is some important marketing math: when we add the target market to the marketing mix, we get to the core of marketing strategy—creating value for customers. The marketing mix comes together when we focus on the target market. We can focus on marketing through the eyes of brand champions and bringing “swing group” customers into the brand champion camp. Or, we can look for underserved customer targets and design a marketing mix to fill the gap in the marketplace.

Marketing Plan

One step beyond the marketing strategy is the marketing plan. A marketing plan is generated by adding an itemized budget and a time schedule to a marketing strategy. For example, Little Caesars targets economy-minded single adults and families looking for a quick, satisfying meal they don’t need to prepare or clean up. Note that a target is composed of a specific type of person in a particular usage situation. With its target consumer in mind, Little Caesars offers $5 pizzas (with minimal toppings and cheese) that customers can pick up from a low-rent storefront with little or no seating. Little Caesars’ product, price, promotion, and place work together to deliver exactly what their economy-minded brand champions are looking for.

Profitability Drivers

Driving profitability for the firm requires marketing managers to know how they will acquire new customers, retain existing customers, increase sales per customer, and calculate the margin earned per sale.

Customer Acquisition

Marketing’s role within the firm is to acquire and keep customers. Indeed, acquiring and keeping customers is the lifeblood of any business. Marketing managers consider a number of questions when thinking about acquiring customers. Which customers should we target—higher-value customers or customers with fewer up-front sales and marketing investment? How can we acquire customers profitably? What is our unique selling proposition? How much will it cost to acquire a customer? How can we eliminate unprofitable customer acquisition activities where the cost of acquiring a customer exceeds the value of that customer?

Customer Retention

Repeat purchases for many brands are only about one in three. Converting a person from trying the product to becoming a loyal product user is no easy task. Some product categories have high customer loyalty, such as smartphones. Other product categories have low customer loyalty, such as automobile insurance. What is the approach to keeping customers and encouraging customers to recommend a product to others? Can we develop loyalty initiatives tailored to keep top customers? How can we identify and eliminate the root causes of customer defections and actively recover customers who have just left or are about to leave?

Keeping customers drives profitability for the firm. Customer lifetime value (CLV) attempts to determine the economic value a customer brings over the lifetime with the business.1 Specifically, according to the AMA, CLV is the present value of the future cash flows attributed to the customer relationship.2 The primary use of CLV is to inform customer acquisition and retention decisions. Indeed, if you do not know what a customer is worth, you do not know what you should spend to get one or what you should spend to keep one. Starbucks, for example, estimates the lifetime value of a customer at $14,099,3 and the average lifetime value of a Lexus customer is $600,000!4 Understanding customer lifetime value changes the way firms view customers as they consider customers over the life of the business relationship versus a single transaction.

Sales per Customer

If customer acquisition costs are high, then sales per customer must be high to compensate. Customers will need to purchase frequently and remain loyal customers for a long time. The sales per customer are affected by whether the product is consumable or durable. Consumable products are frequently purchased and are often habitual, meaning that once the decision to use the product is made (let’s say for laundry soap) in the absence of technological change, a customer may use that same brand for generations. On the other hand, durable products (like a dishwasher) are often expensive and designed to last a long time. Durable products are purchased infrequently and trigger a series of complicated decisions each time one is purchased.

Marketers can boost sales per customer and ultimately drive profitability by

• (1) persuading customers to buy more of their products (rather than buying competitor or substitute products),

• (2) generating add-on sales (complementary products and services),

• and (3) partnering with other firms to create add-on sales opportunities.

For example, Hershey’s (chocolate bars) partners with Kraft (graham crackers and marshmallows) to promote the making and consumption of s’mores—a chocolate, marshmallow, and graham cracker treat.

Margin

The margin is the difference between price and cost. It sounds simple, but it is a bit complicated. The retail price is not the same price a manufacturer gets paid for a product. Depending on the retail margin, the manufacturer’s price to the retailer can be significantly less than the price paid by consumers. Furthermore, costs include variable costs to manufacture and distribute the product, costs for the machinery to build the product and overhead costs to pay for managers or to rent machinery, building space, and the like. The margin is a critical element in a successful revenue model.

Marketers can increase margin and, ultimately, profitability by

• (1) increasing price,

• (2) shifting the mix of purchases toward higher-margin products,

• (3) changing customer behavior so customers are less expensive to serve,

• and (4) discouraging unprofitable customer behavior.

Of course, before marketers raise the price, they should know something about consumer price sensitivity (discussed in the topic on pricing strategy). Shifting the purchase mix to higher-margin products or changing customer behavior so customers are less expensive to serve both require knowledge of customer perceived value (discussed in the topic on consumer behavior). Discouraging unprofitable customer behavior requires knowledge of customer acquisition costs and retention costs.

For example, Walter Frederick Morrison and Lucille Nay, the inventors of the Frisbee, knew there was potential for good business when they learned they could buy a cake pan for a nickel and sell it as a “flying” cake pan for a quarter. Successful direct-sales marketers know they must sell a product for five times what they pay for it, or for a margin of 500 percent, to maintain a profitable business.