This article by Eddie Yoon of the Cambridge Group is worth the quick read:

http://blogs.harvardbusiness.org/cs/2009/11/surprising_insights_from_super.html

From a financial perspective, we closely analyze customer behavior to increase sales and margins. This “super consumer” analysis digs even more deeply, and to good effect.

For example:

Invariably, acting on the insights from those consumers who spend disproportionate time and energy in the category uncovers insights and innovations that encourage trade-up behaviors across other segments as well.

Consider this: A stapler company we consulted for found itself heading for a price war with competitors. What to do? Market research with its community of stapler groupies — users who stapled ten times as much as the average person — found that they valued anti-jamming above all other features, and would happily pay a premium for high-performance, jam-free staplers. Running with this insight, the company redesigned its point of sale to emphasize electric staplers and refocused its marketing message across all products on benefits (like reliability) rather than features (like color). The strategy boosted sales by 20% and improved margins overall. Not only did electric stapler sales increase (fueled by super-consumers), but the merchandizing strategy emphasizing the benefits of trading up increased sales of heavy-duty manual staplers across other segments.

Again, here’s the link.

The problem with digital goods is it is easy to get confused by its economics, the marginal cost is $0, selling a unit to customer does not make it unavailable to another and there are challenges in restricting use. This has led to supposedly new branch of economics, “economics of free and abundance”, led by Mr. Chris Anderson and has built a large following.

I have written several articles on the need to sell the value and not focus on the marginal cost. In the digital world matching price to value is more difficult than it is in physical world.  Economist Brad DeLong from UC Berkeley (my alma mater) writes in his 1999 paper titled, Speculative Microeconomics for Tomorrow’s economy,

In many information-based sectors of the next economy, the purchase of a good will no longer be transparent. The invisible hand theory assumes that purchasers know what they want and what they are buying so that they can effectively take advantage of competition and comparison-shop. If purchasers need first to figure out what they want and what they are buying, there is no good reason to assume that their willingness to pay corresponds to its true value to them.

When customers do not exactly know what they want and the value they get, the marketer will find it hard to make a value proposition and charge a price that captures that value. Difficult does not make it a good reason to give up on charging for digital goods and give it away for free.

In a Nov 1998 article in Harvard Business Review, economists Hal Varian  (also from Berkeley now at Google) and Carl Shapiro wrote (Harvard Business Review, 00178012, Nov/Dec98, Vol. 76, Issue 6)

But there is a practical way to set different prices for basically the same information without incurring high costs or offending customers. You do it by offering the information in different versions designed to appeal to different types of customers. With this strategy, which we call versioning, customers in effect segment themselves. The version they choose reveals the value they place on the information and the price they’re willing to pay for it.

It takes us back to what Ted Levitt said about customers buying holes and later what Clayton Christensen said about, “what job is your customer hiring your product for?”. The difficulty in value calculation comes from focusing on the “drill” and not on the “hole”. If marketers focus on what the customers really want and what job they are hiring the digital information for it becomes easier to tease out the value to customers and how it differs across segments. Then the marketer can target the segments with specific versions and position it appropriately to capture a share of the the value through effective pricing.

Fads like freemium, freeconomics and economics of abundance can help to sell books or speaking engagements but as Hal Varian (who was described by Mr. Chris Anderson as someone who taught him more about economics than any of his professors) said in 1998 (full ten years before the fads):

Success in selling digital goods does not require a whole new way of thinking about business. Rather, it requires the same kind of smart managing and smart marketing that have always set apart the best companies. The real power of versioning is that it enables you to apply tried-and-true product-management techniques-segmentation, differentiation, positioning-in a way that takes into account both the unusual economics of information production and the endless malleability of digital data.

Probably Mr. Anderson missed this class.

The road to profitability in any market goes through STP! That’s Segmentation – Targeting – Positioning. The rule does not change whether you are selling physical or digital goods.

Join the ‘Chatter’ in the ‘Marketing Cloud’:  http://www.mktgcloud.com

Join the ‘Marketing Cloud’ marketers on Linkedin: http://www.linkedin.com/groups?about=&gid=2540384&trk=anet_ug_grppro

As we turn into the last month of the year, marketeers are busy finishing lose ends on current projects and beginning 2010 initiatives.  No doubt next year’s goals and objectives include a key word – “GROWTH.”  But, strategically speaking, there’s a “good” way to grow and then there’s a “bad” way to grow.  For the Marketeer, this usually leads to the everlasting balance between growth & discipline.

A “good” way to grow

Growth that is built on the strategic product positioning will lead to long-term growth.  But that is the KEY; it must be built on the positioning.  The trick then is to layer strategies and tactics that build on this positioning. This is really the idea behind value chains. 

A good way to grow can also be found in separate branding.  A brand stands for something or someone… if you want to grow beyond that, build another brand with a different positioning.  But be very, very clear in your messaging, this is a completely separate product. 

Yet another path to grow is through stronger communication of your differentiation.  Another way to think about this is focus.  Watch Growth through Focus by Al Ries (part 1 & part 2) – worth 15 minutes of your time. 

A “bad” way to grow

Unfortunately we see many more examples of companies attempting to grow the “wrong” or “bad way,” which highly correlates to the failure rates of businesses.  There are many failures to point to, but in my experience I’ve noticed a few mishaps reoccur:

• The brand position is overstretched to the point that it becomes meaningless or confusing – can you say line extensions?
• Core competencies are confused with strategy, particularly in companies led by operationally focused leaders.
• Miscalculations of brand equity lead to brand dilution.
• Pricing, rebates, bundling – same offense. 

The examples are endless.  Yet for marketeers, these maybe the “dirty little secrets.”  Because in our efforts to grow our businesses, we turn to these short-term activities to make our number – but in the process we DIRTY our brands.  Interestingly enough, once you head down this path, it’s addicting, furthering the potential to corrupt your brand.   

7 Considerations for Marketeers

So what is a Marketeer to do when challenged to grow.  I’d say that the first word that should come to your head should be DISCIPLINE. 

Translate the growth challenge into a rallying cry for DISCIPLINED GROWTH by:

1.      Building longer & deeper value chains based on your current positioning. 

2.      Fiercely guarding the strategic positioning of your brand, fending off short-term thinkers in your organization.

3.      Develop separate or related branding schemes that capitalize on your brand but do not dilute it.

4.      Reinforce your product’s differentiation in a deeper, stronger way. 

5.      Fine tune segmentation, less is more in this case. 

6.      Acquire products or build partnerships that have equity in the space you’re attempting to penetrate.

7.      Have the courage to say “no” to strategies and tactics that will yield a short-term win, but a long-term disaster. 

Yes, I know, this is easier said than done, that is why I call it D I S C I P L I N E, because it requires sacrifice and trade-offs.  After 17 years of experience, I also know we all have done it at one point or another, hence, it is “the dirty little secret.”

Good marketing!

Ramiro Roman

Producing an accurate demand forecast has always been a challenge.

Most forecasting methods to date have largely been based on extrapolation techniques – ARIMA models being the most prevalent. These models rely on breaking down the time-series data into its main components: trend, seasonality and “noise” and then re-combining them back up at a future point in time. This technique is known as classical decomposition and is fine when a time-series can be broken down this way. And it can produce pretty accurate forecasts if the forecast user knows what they’re doing.

But what about a large grocery retailer who might have a series of complex promotional campaigns spread across the year? These campaigns might involve price reductions, multi-buys, loyalty points and percentage discounts amongst others and might also involve advertising on various promotional media (flyers, mailers, newspaper and TV ads to name but a few).

The standard statistical modeling processes cannot deal effectively with such a complex environment, resulting in companies having to employ large teams of expert forecasters just to get an idea of the expected demand of products over the next few weeks and months.

Even the large ERP vendors,  such as SAP and Oracle, and statistical software vendors, such as SAS, require experienced staff to operate their applications. These applications tend to rely on the traditional statistical techniques to produce their forecasts – requiring complex parameters to be defined as part of the modeling process.

Well, it seems there is a solution: Neural Networks.

NNs are parameter-less and self-configuring – all they need is the historic sales data. They’re primary use up until now has been as part of face recognition software, but there are seemingly endless uses for this technology. It also appears to be quite easy to implement – and no complex maths involved!

The beauty of neural networks is their ability to pick out patterns in data and identify relationships between different causal factors. This is perfect for modeling the complex behaviour of demand in relation to several simultaneous causal effects.

By further breaking down the problem say, using segmentation algorithms, and then creating a neural net for each segment it is possible to model ever more complex scenarios. Add to that a massively parallel, scalable architecture that allows forecasts to be generated in real-time and you’ve got the building blocks of a highly accurate forecasting system.

In a ‘plain vanilla’ world full of austerity, marketing would have had no importance. Fortunately, not many of us follow a hermit’s way of life. We have desires and the ability to find ways of satiating them. These desires or needs form the core of marketing.

Going by the conventional definition, “Marketing is a process of satisfying the needs of consumers”. Sounds pretty simple right…? But guaranteeing that ’satisfaction’ is not easy.

The entire process of  “knowing what consumers want, why they want it, how they want it, creating what they want, communicating that we are going to give them what they want, delivering it and then asking whether they have got what they wanted or not” is what marketing is. People very often relate advertising/ media activities to marketing… which actually comprise only the tip of the iceberg.

Importance of marketing stems from the fact that consumers have a lot of needs and many of them are unmet. Some of them are known and many are unknown. Those unknown ones are very often called latent needs. A latent need is something which the consumer himself is not really aware of. He is not sure of what he wants but he knows that there is something which is missing. E.g. Before online travel sites came into being; people always felt the need to have a one stop shop for buying tickets and planning their holidays. Some entrepreneurs realized that need and created the likes of Yatra.com, Makemytrip.com etc.

Sometimes marketers also have to create needs, which are altogether unknown. Consumers probably never thought they would require a particular thing until some one comes up with the idea. E.g. A sensor, put inside a Nike built-in pocket, specifically designed for it under the insole is an example of ‘need getting created’. The sensor is connected to the iPod device which tracks the jogger and sends data onto it. It can tell about the calories burnt, distance covered, pace etc.

The duty of a shrewd marketer is to understand the needs (including the subtle ones) and cater to the same. He can gauge those needs by observation, experience, consumer surveys or by using some scientific market research techniques.

If some one knows about the unmet needs of consumers, he can create product (s) which would fit those needs. It can be a website portal or an electronic gadget or a service. Kaya Clinics launched by Marico would be a good example of services.

Once he is sure of the product, he has to make it affordable to the consumers. So depending on the size of the market and the existing demand, he has to price it. Usually, a mass product is priced less whereas premium products are priced on the higher side. This, though, is not an absolute rule… Depending on other factors like demand/supply and bargaining power of the manufacturer, a product can be suitably priced. E.g. Nokia has products which are priced very minimally starting from a few thousand bucks to more than a lac. The low cost Nokia phones are aimed at the mass market which cannot afford very costly products. Whereas, a high end Nokia smart phone which has every new technology incorporated in it, is usually priced higher and targets a smaller segment of the market.

When he has a product and its price, the marketer needs to let the world know about it. This is where he needs to do promotion for his product. It may include media campaigns, TV commercials, radio jingles, online viral campaigns etc. on one side and trade margins and push at the retailer level on the other side. This act of promotion will help the consumers & customers know about the product and will help them in taking a conscious decision regarding whether to go for it or not.

Once promotion does enough ground work towards creation of demand in the market, customers will come seeking your product. This is where the significance of place comes into picture. The product has to be placed at the right place at the right time. It should not happen that a customer comes to buy your product and he does not find it in the shop. That will affect the brand image of the company and the product negatively. In simple words, the marketer has to decide where to sell his products from: whether he wants only supermarkets to sell it or should the unorganized sector go for it or is there a need for an exclusive retail chain dedicated to the product – this decision lies with the marketer and his judgments. Also, he has to ensure that the product reaches the desired outlet at the correct time. All the processes involved starting from sourcing to delivery fall under ‘place’.

Product, Price, Promotion and Place, highlighted in the paragraphs above together comprise what is called the 4Ps of marketing or the marketing mix.

Before I go ahead, there is one point that I need to clarify here: the difference between a consumer and a customer. A customer is some one who takes the decision of buying something. He has the monetary ability or the authority to buy a product. This definition is subjective and relative. For a manufacturer, the wholesaler can be a customer. For a wholesaler, the retailer can be the customer. For a retailer, the person who decides to buy the product is a customer. On the other hand, a consumer is some one who actually uses your product.

A very simple example would be: A mother decides to buy Johnson’s baby powder for her one year old baby. She is the customer and the baby is the consumer, the one who uses it. Sometimes, the customer can also be a consumer. E.g. For a retailer, the same person who takes the decision of buying a toothpaste (customer) also uses it (consumer).There can be other permutations & combination of this difference but the basic difference is the same.

Finally, just to touch upon another important aspect of the marketing, I would like to introduce STP a.k.a Segmentation, Targeting & Positioning. In very simple lay man terms, segmentation is the division of total universe of consumers into homogeneous groups, based on different criteria like: sex, age, region, race, education level etc. This division can be on the basis of one or a group of these factors. Once the segmentation is done, one or multiple groups are chosen and targeted based on the features of the product. Then, using media campaigns or other promotional techniques, an image is created in the minds of the targeted consumers about the product, which is called positioning.

Let us take an example: Many of us would have heard about the brand Saffola. For some one to buy it, the customer has to have a desired income level, he should be wary of (or is suffering from) lifestyle related stress & diseases and should also belong to a particular age group. So Saffola, in this case, segmented the market on the basis of income levels, age, lifestyle, jobs, education etc. and decided to target one particular set of consumers. Once the target group was selected, all that was left was to position the brand. All communications (including TV commercials, print ads etc.) showed a wife who is wary of her husband’s lifestyle related problems and so she takes a conscious decision of buying Saffola which would help her in keeping her husband healthy. These communications have been successful in creating a caring, healthy and safe image of the brand Saffola. This is positioning. It is the image of the brand or the product, created in the minds of consumers, thanks to promotional efforts. Positioning is what the brand/product stands for.

So, this brings us to the end of the first post on marketing… I only tried to define what it is, in very simple terms. I will try to come up with my thoughts or views on a lot of other topics pertaining to marketing.  All criticims and discussions are welcome. Happy reading .

I have recently discussed four generations and a few of their defining characteristics as described by Professor Linda Morton of the University of Oklahoma, but I think it is just as important to look at the age old battle of Men vs. Women.  In Morton’s Strategic Publications: Designing for Target Publics 2^nd Edition text book, I have found characteristics by gender.

 This is extremely useful because you will definitely be working with and targeting both of these genders quite frequently.  Your message will need to comply with the characteristics, lifestyles, attitudes, and values of either the male or female.  I chose to post a few of Morton’s suggestions because I believe practitioners often overlook such male and female characteristics when producing a piece of work, I am just as guilty!

 According to Morton, and ladies you will like this….Women make up almost half of the workforce with 7.7 million working in professional jobs and another 3.2 million owning their own businesses.  Okay guys, women are a force to be reckoned with!  Morton states that women are more likely to seek advice and turn to males and females for help, tailor your message to this characteristic.  Women of all ages consider money more in their decisions than men do and fare better financially compared to men, we have some work to do fellahs!

 Men have a few tricks of their own and are the best (Don’t tell my girlfriend I said that!).  Men fall into a few different categories but with a wide range of earned salaries.  Practitioners beware, not all men are the same. 

 Men and women are dynamic characters that undergo change through time and experience.  Morton has listed some female and male characteristics but I just don’t believe they do justice.  It all comes down to the practitioner.  Identify the sex you will be targeting and find some of their characteristics based on demographics.  It’s okay, do some research.  I believe it is necessary for each practitioner to bear in mind that one female is not the same as another just as one man is not the same as another.  Catering your message to your intended gender is difficult but must not be overlooked.  I believe the practitioner can start with their client to better understand their audiences’ characteristics stemming from gender and beyond.  Also, I think it just as important to put aside any biases or pre-conceived notions about a gender before beginning any piece or campaign.  

 Check out Author Linda P. Morton’s book for more characteristics and market segmentation tips.  

Check out this blog post at PROpenMic.  I found some cool statitics regarding gender in the PR realm http://www.propenmic.org/profiles/blogs/men-are-from-mars

The question of, “Why all movie tickets are priced the same?” have been studied at length*.  Economists express surprise at how primitive movie pricing is and how sub-optimal it is to charge the same price for all the movies. Marketers are surprised by the absence of basic tenet of marketing – segmentation and targeting, positioning the product and capturing value. Movie ticket pricing are indeed a greenfield for practicing price discrimination offering large un-captured consumer surpluses and value from price sensitive moviegoers.

Most pricing recommendations for movie theaters ask for

1. Higher pricing for weekends
2. Higher pricing based on mega budget films with stars
3. Higher pricing in the opening weeks and then reduced pricing (like Hardcover, softcover books pricing)

These methods were usually pushed aside because of the logistics of implementing them ( Movie Mystery. By: Hessel, Evan, Forbes, 00156914, 1/29/2007, Vol. 179, Issue 2) or complexity in estimating weekend box office sales. Others offered conventions as the reason for not adopting variable pricing at movies.

To be fair, movie theaters do practice  price discrimination. They sell the morning shows at a discount bringing price sensitive customers who are willing to make the trade-off (Second degree). They give discount to students (Third degree). They sell discount tickets through supermarkets that can be used after the first two weeks (Second degree).

But the basic question remains, when everything else is held constant except for the movie itself, why are the tickets for two different movies priced the same? For example, at an AMC multiplex  the 4PM screening of two new animated movies, Planet 51 and Fantastic Mr. Fox, are priced exactly the same $10.75.   Fantastic Mr. Fox is based on a book by renowned children author Roald Dahl (a very good book if you have not read alrady) and Planet 51 is a slapstick comedy of reverse ET.  Why can’t these be priced differently? Why cannot movie theaters practice price discrimination across movie titles?

The answer, I believe, lies in utility customer gets from different movies. Movie theaters can charge different prices for different movies only if the customer utility and hence their willingness to pay varies across different movies.  Stripped to the barebones, all movies are perceived as the same by customers – these are all entertainment. In other words different movies are simple horizontal product line extensions.

Based on the marketing study that found horizontal product lines are perceived identical by customers and hence have no difference in customer willingness to pay I hypothesize that customers will not accept pricing that varies across movies.

While pricing different movies differently is not possible, movie theaters can and do charge different prices when the movie varies in format or experience like 3D and IMAX 3D. For example, AMC charges $11.75 and $12.75 for 3D and IMAX 3D shows of Disney’s Christmas Carol. This is possible because the 3D shows are vertically differentiated and the perceived value to the customers vary from the baseline version.

The net is movie theaters cannot increase profits by pricing different movies differently but can do so by offering vertical differentiation in the form of 3D movies (of course this is not under the control of theaters but the studios), better seating (practiced in most other entertainment venues) or better experience (specific auditoriums with better speakers).

Footnote: Other movie ticket pricing references

1. Movie Mystery. By: Hessel, Evan, Forbes, 00156914, 1/29/2007, Vol. 179, Issue 2
2. Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles by Richard B. McKenzie (p157-163) (My review of this book here)
3. Why are all movies the same price? – Marginal revolution
4. Antitrust and Pricing in the Motion Picture Industry. Yale Journal on Regulation Summer2004, Vol. 21 Issue 2, p317-367, 51p
5. The Wisdom of Crowds by James Surowiecki (p98-102)

Brand extension occurs when a company intentionally takes a well known brand and applies it to another product category. Companies extend their brands quite regularly.The objective is to take advantage of the awareness of the brand, reach new audiences, and ultimately make more money.

For example, Arm and Hammer moved from Baking Soda into Dental Hygiene products.  They utilized their association with cleanliness and fighting germs and odor and found a space in a new market (though their competitors are aggressively fighting back).

And the Virgin brand has been successfully extended from records to airlines to mobile phones and even to space travel (Virgin Galactic).

Of course, brand extension doesn’t always work. McDonald’s had a significant failure with their McPizza offering. And does anyone remember LifeSavers soda? Coors Spring Water? Or Colgate Kitchen Entrees? (I kid you not!)

Another form of Brand Extension is when two well known brands, are brought together. One very successful example of this is the Lego Star Wars toys and games.

I believe the reason for this success is that there is overlap in the market segments of people who like Lego and those who like Star Wars.  i.e. mostly male, but with an age range skewed much higher than the typical target audience for Lego.

Those of us who grew up playing with Lego and saw the original Star Wars movies in the theaters can now spend some more money on the combination of those two passions, or introduce our children to them.

But this kind of combination doesn’t always work. Lego recently announced a new game for the Wii, entitled Lego Rock Band.

There is whole family of Rock Band games including:

• Rock Band (2007)
• Rock Band 2 (2008)
• Rock Band Unplugged (2009)
• The Beatles: Rock Band (2009)
• Lego Rock Band (2009)

Who is the target audience for Lego Rock Band? And will this game appeal to them?

The songs provided with the game are a curious mix of hits from various decades, with music from:

• Jimi Hendrix, The Jackson 5
• The Police, David Bowie
• Carl Douglas (gotta love “Kung Fu Fighting”)
• Foo Fighters, Bon Jovi
• Spinal Tap (set the volume to 11)
• Queen, Pink
• Iggy Pop (yeah, this guy ===>)
• Elton John, Korn
• Counting Crows
• and KT Tunstall (Who???)

to name just a few.

Forget about the video game for a second. Who would be the target for  that group of musicians????

Now combine the Rock Band portion, and maybe you’ll get some eclectic rocker/video game enthusiasts.

Now combine in the Lego theme, and who’s left? Young videogame playing, Lego fanboys who like 1970s punk rock?

Perhaps I’m not the target audience for this? I do own a Wii, and I actually do like some of the musicians listed above, and I did like Lego as a kid. But combining them all into a Rock Band game? I don’t think so.

Am I wrong here? Let me know.

Saeed

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Dans son rapport SMB Excellence Awards 2009, IDC met en avant 16 sociétés technologiques pour la qualité de leurs  innovations en termes de produits, de support technique, d’activités marketing et de programmes de promotions à l’attention des PME.

Cisco y figure en bonne place, grâce notamment à la segmentation de notre offre pour adresser ce marché. La création de 3 catégories de produits (Cisco Small Business, Cisco Small Business Pro, Cisco Classique) pour adresser les 3 typologies de PME que nous avons identifiées en fonction de leur profil d’utilisation de nos technologies  (Transactionnel, Ouvert aux conseils, Elite) est perçue comme particulièrement pertinente par les analystes d’IDC. Une preuve supplémentaire que Cisco est le bon choix pour les PME et les revendeurs informatiques qui adressent ce marché !

Below are the video and slides of the “Marketing for microISVS – embracing the ‘dark side’?” talk I gave at ESWC 2009 in Berlin. This is a high-speed ramble through a vast subject. In the 45 minutes available I do my best to dispel some of the myths software developers have about marketing and discuss some marketing concepts, including: branding; positioning; pricing; and segmentation. Taking in Harley Davidsons, tinned tomatoes, Coca Cola and food blenders on the way. The first couple of minutes, where I dispel the myth that good software sells itself without marketing, are missing from the video due to a dead camera battery. But you knew that anyway, so I don’t think this detracts much overall.

Video:

Slides (which might not make much sense without the video):

NB/ When I said 47Signals, I meant 37Signals (brand inflation?). Thanks to Tarek for the correction.

Links to some of the things mentioned in the talk:

• Brief reviews of all the books mentioned (plus a few others)
• Bob Walsh’s ‘microISV sites that sell!’ e-book
• Neil Davidson’s ‘Don’t Just Roll The Dice – A Usefully Short Guide to Software Pricing’ e-book (PDF)
• Brandz ‘Top 100 brand ranking 2008′ (PDF)
• Will it blend?
• Headset hotties
• Alwin Hoogerdijk’s blog
• Eric Sink’s blog

A big thank you to Alwin and Sytske of collectorz.com for hot-footing it from Alwin’s talk to do the video (you can see Alwin’s excellent talk on web app pros and cons here). And also to David and Panagiota for all the hard work that goes on behind the scenes organizing ESWC.

If you found this talk useful you might also like 10 mistakes microISVS make.

Direct marketing blends the art of the message and brand in a communication written expressly for you, delivered to (or viewed by) one person at a time.  So why is data so important to direct marketers?

Direct marketing relies on the 3 R’s:

• communicating the Right message
• to the Right person
• at the Right time

This is an iterative process and direct marketers test, test, and retest so that we know that are delivering the right message to the right person at the right time.  We have the data to back that up.

Once you understand who your best customers are (what channels they shop, what they buy, when they buy them, what messages they respond to, where they live, etc, etc), then you can go after more of them by marketing to highly similar people where are throughout the day. 

Proper segmentation of your customers enables better targeting and higher ROIs.  Conversely, it also allows you to avoid or suppress your lowest performing customers.  With better targeting, each message that is written expressly for them and delivered at the right time has a much higher likelihood of being received and an action taken.  And with data, you can track all of this, every step of the way.

In marketing circles we often talk about the importance of segmenting the market or to steal a textbook definition, “the process of partitioning a market into groups of potential customers who are similar in designated ways and are likely to exhibit similar purchasing behaviour”.

Segmentation acknowledges that buyers do not belong to one homogeneous group but rather each have individual needs, wants, and preferences. By dividing these consumers into segments according to particular characteristics or behaviours, marketers are better able to identify profitable target markets and develop effective marketing strategies for reaching those markets.

In theory, proper segmentation makes for a more efficient use of resources and avoids the issue of having to compete head on with all companies for the entire market.

The new A-League soccer franchise, who have adopted the working title Melbourne Heart, are in the unenviable position of having to develop a supporter base in a city whose allegiances are already tied to Melbourne Victory. For them, segmentation is crucial.

Founded in 2004, Melbourne Victory is unrivalled in its success, having won 4 major domestic titles already and boasting the largest average crowd attendances in the league.

So how will the new “Melbourne” team compete with a club as successful and well-established as the Victory in a state which it has solely represented till now? In short, where will the supporters come from?

For mine, there are a few things they can do to differentiate themselves from their cross-town rivals:

1. The Home-Base: According to Heart’s Wiki, management is currently in talks “with the Casey and Essendon Councils about where to establish the club’s home base”. I feel it is crucial they settle in an area where soccer fans will embrace them and adopt them as their own. They need to carve out a sizable suburban niche for themselves.
2. Latent Soccer Fans: They must find a way of attracting those members of society who take only a casual interest in the sport but have no true allegiance to any particular team or player. Targeting this segment will not be easy. Perhaps a well known marquee signing – such as a Mark Viduca – could help entice support.
3. Disgruntled Victory Fans: They exist. Heart must identify them and cater to their needs in a way which Victory wasn’t able/prepared to.
4. Family-Friendly Proposition: By positioning themselves as a family-friendly club, Heart might be able to attract new members. They would be wise to offer cheaper family and kids memberships and push to have their games scheduled at times which are more convenient for families to attend e.g. Sundays.

These are only a few of the suggestions which they should atleast entertain. In any case, entering an already saturated market will not be easy.

I experienced a very proud moment at this year’s DMA Conference in San Diego. This moment was watching my extremely talented analytics team at Euro RSCG Discovery receive an award at the 2009 DMA Analytics Challenge.

We took home second place in this year’s DMA Challenge competition. This was a particularly complex problem where each firm was asked to analyze an attitudinal segmentation, create a predictive classification model, and then infer that segmentation onto a customer database – much more difficult than in years past. But our team tackled the problem with the same technique and rigor that they use every day with our clients.

We approached the challenge as if it were an actual client project, so the excellent results both benchmark and showcase the strength of our analytics capabilities.

Congratulations to the Discovery team who participated in the Challenge!

Smartphones challenge Mobile PCs – the users speak

A TUPdate from MetaFacts by Dan Ness, Principal Analyst

You can’t go out for coffee these days without sharing space with legions of dedicated smartphone users doing everything from texting their friends to checking the latest NFL or soccer scores. With smartphone functionality and the number of available apps increasing at hyper speed, could this trend foreshadow the decline of the mobile computer and relegate all those laptops, netbooks and tablets to the land of the Atari? Will Apple iPhones, Blackberries, Winphones or the Android-powered grab the fingers of the most-mobile among us?  Our new MetaFacts Technology User Profile, 2009 Global Insights Edition polled over 22,000+ online PC adults in 10 developed countries and found some surprising answers.

Why is this important?

Makers of mobile computers, smartphone manufacturers, wireless carriers and application developers should all be watching these trends closely both from an R&D standpoint and a marketing perspective. OEMs of desktop computers should also take heed if more and more users opt for portables even if they don’t use them in more than one location.

First let’s look at who’s using mobile PCs these days and where they are using them. Not surprisingly, this is a younger group overall. The average age of online adult mobile PC users is nearly seven years younger than the average desktop user. Nearly a third of the mobile computer users are in the college age to early career category of 18-34 year olds.

Just where are mobile PCs being used? The age of the user is also a factor here. The younger users are, the more likely they were to report using their mobile computers in four or more locations, a finding that is likely reflective of the more mobile lifestyle of this segment.

But desktop and mobile PC manufacturers take notice: Nearly half of mobile PCs are used in only one location. This begs the question of why these homebody mobiles are stuck in their desk job. If this trend continues, will the pendulum swing away from netbooks and ever-lighter notebook PCs back to full-featured desktop replacements?

And the mobile PCs seem to be working harder than desktops. The portables are logging more hours than their desktop cousins with nearly 25% being used for 40 or more hours per week versus 18% of desktops being used that much.

So what are these mobile computer users doing with their portables? While their activities are generally the same as those performed on their desktops, the survey showed that mobile PCs which are used in multiple locations appeared to be much more integrated into the user’s life. These younger multiple-location PC users reported performing nearly double the number of activities on their mobile PCs than the group reporting that their mobile PCs remained tethered to one location.

The more years people use computers, the more activities they add to their list of things to do with their machines. PC Veterans, people who have used computers over a quarter of their lives, use their mobile PCs for more activities than PC Newbies, regardless of their age. Not surprisingly, users in the 18-24 age category use their mobile PCs more often for entertainment and communication than older mobile computer users.

Now let’s turn to the role that cell phones play in the mobile PC world. With the ever-increasing functionality of phones, is the choice of mobile connectivity an either/or when it comes using mobile computers and smartphones? Our survey showed quite the opposite. Even the savviest of smartphone users are not likely to give up their mobile computers. Interestingly, the adults who reported using the most functionality on their phones also reported using their mobile PCs in more locations, nearly twice the number of those who used their mobile phones only as basic phones. Bottom line: When it comes to the question of whether to take the smartphone or the mobile PC to the cybercafé, the current answer is often “both.”

If today’s mobile PCs could talk, they might paraphrase Mark Twain’s famous quote, “The reports of my death have been greatly exaggerated.”

Further Resources

MetaFacts Technology User Profile – 2009 Global Insights Edition – a syndicated survey of 30,889 representative respondents in 16 countries

MetaFacts Technology User Profile – 2009 Global Insights Edition – Developed Economies – a syndicated survey of 22,072 representative respondents in 10 countries

MetaFacts Mobile PC Brand Profile Report – analysis of the mobile market based on results in MetaFacts Technology User Profile 2008 Annual Edition – a syndicated survey of over 10,000 representative respondents in the U.S.

About this TUPdate

MetaFacts releases ongoing research on the market shifts and profiles for Windows Vista, Mobile PCs, Workplace PCs, Home PCs, Moms and Dads, Web Creators, Broadband, and many other technology industry topics. These TUPdates are short analytical articles in a series of specific topics utilizing the Technology User Profile Annual Edition study, which reveals the changing patterns of technology adoption around the world. Interested technology professionals can sign up at www.metafacts.com for complimentary TUPdates – periodic snapshots of technology markets.

About MetaFacts

MetaFacts, Inc. is a national market research firm focusing exclusively on the technology industries. MetaFacts’ Technology User Profile survey is the longest-running, large-scale comprehensive study of its kind, conducted continuously since 1983, the year before Apple released the Apple Macintosh. The detailed results are widely recognized as a primary market sizing and segmentation resource for leading companies providing consumer-oriented technology products and services, such as PCs, printers, software applications, peripherals, consumer electronics, mobile computing, and related services and products. For more information about the syndicated research service, publications and datasets, contact MetaFacts at 1-760-635-4300.

In a seminal work titled “How the questions shape the answers” published in American Psychologist (1999), Norbert Schwarz describes how responses are influenced by question wordings, format and context. Schwarz writes,

“Self reports a fallible source of data and minor changes in question wording, question format or question context can result in major changes in the obtained results”

This is especially a more pronounced problem when it comes to survey questions that ask customers for their willingness to pay (WTP) for a product. When you directly ask a customer questions like:

1. will you buy this product at  10?
2. how much will you pay for product?  a) $4   b) $8   c) $10   d) $10    e)  $12
3. will you buy this product if this were not offered free any more?

The researcher run the risk of getting answers that are not in any way  a true representation of what the customers will actually do. These kinds of questions assume that customers know how much they value the service and  customers are willing to disclose it. Another flaw in WTP studies is treating customer WTP as a fixed number in the minds of customers while it has been shown to be malleable (Thomas and Menon, Journal of Martket Research, 2006).

I saw a report from Forrester research on US customer WTP for online newpapers.  I admit I have not read the report but only their promotional blog post about it. The report claims 80% are not willing to pay for content From what I read I am not satisfied with study or its methods. The survey question was:

If the Web sites for the newspapers and magazines you read were no longer free, how would to prefer to pay for that content?

1. Wouldn’t access them if I have to pay
2. Subscription access to access all online content
3. Subscription that combined print, web, and mobile device access
4. Individual payment for each article read

The biggest flaw I find is anchoring – the question clearly reminds that the content has been free. The question  was too generic, asking  about newspapers and magazines you read and not about a specific newspaper or magazine. The respondents could be thinking of all newspapers, even those they read occasionally while answering this question.  There were no questions reminding respondents of value they get or to rank the online news sources by importance.   If the question had been,

If your most favorite newspaper cannot financially support the free online access, would you be willing to pay in one of the following ways?

1. Subscription access to access all online content
2. Subscription that combined print, web, and mobile device access
3. Individual payment for each article read
4. Wouldn’t access them if I have to pay

… the results would have completely different.

Based on their survey, Forrester  recommends:

Publishers should continue to offer free, ad-supported products to the 80% of consumers who won’t pay for content online; and

Publishers should offer consumers a choice of multichannel subscriptions, single-channel subscriptions, and micropayments for premium product access.

I do not agree. Even if we assume the 80% number is correct, does providing free provide higher profit than charging?  Do newspapers rally want higher reach (because of the Ad revenue)?

If a newspaper publisher really wants to find customer willingness to pay for content they need to do more targeted study of their readers,  use methods like Conjoint analysis to tease out the segments, how much customers in each value the product and focus on methods that help improve customer reference price before charging for content.

The net is the results are unreliable and Forrester’s recommendations are plain wrong.

The issue of customer loyalty and the role of loyalty marketing continues to be a big issue being discussed in almost every company right now. With smaller budgets, smaller marketing departments and a focus on customer retention, it is no surprise that marketers are trying to figure this out.

A large number of them have been reacting in a knee-jerk manner – creating and launching loyalty programs.

But, are loyalty programs really necessary? Is loyalty really an achievable goal for most brands in most categories?

I have a very clear point-of-view. Most brands don’t really need a loyalty program. What they actually need is a frequency marketing program – a program that will bring their customers back more frequently than they currently are. That’s what most marketers want. And, that’s actually what they need (to drive transactions). But, there is enough confusion in the definitions that very few marketers are distinguishing between the two.

In an attempt to simplify the discussion, I have provided some thoughts on distinctions between frequency and loyalty.

Frequency is about getting more transactions than you currently get from your existing customers.  If someone comes once-a-month (12X a year), can you get them to come one more time? Loyalty is about deepening the relationship that they currently have with you.

Frequency is behavioral while loyalty is attitudinal.  Behaviors drive transactions and make the cash register ring.  Attitudes make for nice charts in tracking studies.

Frequency is easier to effect with more relevant communications and offers – timed right.  Loyalty is harder to gain.  Changing attitudes to the deeper level takes significant level of time and resources.  It is also a goal that is unachievable in most categories.

Increasing frequency has the potential to create loyalty – you have to use the simple equation (2RL+2RC+RW=CL) – but execute consistently over time.  It also assumes that your category has the level of emotional cachet to allow those bonds to be made.

Frequency marketing programs are easier to execute.  They do not create liabilities on your balance sheet and can be evolved and refined at the company’s discretion.  Loyalty marketing programs, on the other hand, require a long-term commitment that becomes a big factor for the company and the balance sheet.  It becomes extremely hard to refine and evolve the program without the agreement of your customers.

Frequency can be executed by marketing with some support of other departments.  Loyalty programs require alignment across the entire organization.

None of my arguments above should constrain your aspirations to generating loyalty. I posit that if you can begin to improve frequency levels among your core customers, with the appropriate attitudinal beliefs, you will create loyalty.  It will be the outcome of a strategic frequency marketing program and will be cheaper and faster to execute.

Given that reality of time being our worst enemy, it’s the way to have a quick and immediate impact on the business.

DFA Analytics is the new reporting and visualisation tool for viewing advertising performance data. It shares similar technology with Google Analytics; if you’ve used Google Analytics before, you can quickly come up to speed with the easy-to-use graphical reporting tools that are now part of DFA.

With DFA Analytics, you can:

• Get frequent updates–about every three hours–of your campaign performance data.
• See account performance at a glance, in easy-to-understand charts and graphs.
• Drill down through reports at the advertiser, campaign, site, ad, and creative levels.

You can also review performance by:

• Country, designated market area (DMA), state, city, area code, or zip code.
• Hour, day, week, month, and one or more date ranges.
• Browser, operating system, and connection speed.

I cringe whenever I hear the word “campaign” associated with inbound marketing. Even the word “marketing” is somewhat unsettling. Inbound is the one area where you can take your marketing hat off and just be a human. Not just any human, mind you. You want to be the human who has the exact problem you’re trying to solve.

In reality, you will need to put yourself in the shoes of many people for your inbound marketing efforts to be successful. But the better you can segment your prospects into small, tight groups with similar pains, needs and behaviors, the better this whole thing will go. Be sure you can envision each of these people interacting as they try to solve their business problem. Envision your content flowing from one person to another inside your target company.  Imagine the analyst level person who found you on Google reusing your ideas in his PowerPoint presentation to the executive team. Once your content has made it to this stage, you can be confident that lead will convert to a Sales Opportunity.

Ask yourself what are the burning pain points your target prospects are experiencing. What are the key questions they are asking themselves each stage of the sales cycle. How much time will they devote to consuming the information you provide? What words do they use to describe their problem? What does it take for them to be successful in their jobs? Get into their heads, get the key people in your marketing group on board and off you go.

This part of inbound marketing is more art than science, but that will change over time as you put your segments through the analytic wringer. You’ll be watching closely to see how well each segment responds to your content, keywords and calls to action at each stage of the sales cycle. Likely, many of your assumptions will change too. At this point science will move to the forefront.

Economic Times (25/05/09) has a very interesting and enlightening article on Indian youth. Written by Mr Rajesh Shukla, the article throws light into some important data regarding the Indian youth market.

Read the article here : Harnessing Indian Youth Power

Some of the important statistics are reproduced below :

The total youth population (13-34) is 390 million which is 38% of the total population and is expected to rise to 440 million by 2020.

70% of the youth reside in over 600,000 villages.
72% of youth are literate.
41% of these literate youth fall in the age group (13-19 years) , 23% fall in 20-24 and 36% are in 25-34 years.

59% of literate youth are male. 7% are graduates and 12% have passed higher secondary.

The article also presents a clear view about the definition of youth. According to Rajesh Shukla , youth refers to a category rather than a group. The difference between category and group is that category has diverse or heterogeneous elements unlike groups which are similar in its composition. Youth relates to an age group that is transiting between childhood and adulthod and may comprise of a conglomeration of sub-groups with differing social roles, expectations and aspirations.

UN defines youth as those in the age group of 15-24 years. UNICEF defines youth in the age bracket of 15-30 years. Indian National Youth Policy considers all individuals in the agegroup of 13-35 years as youth population. NYP divides the youth population into two groups – 13-19 years as adolescent and 20-35 as Youth.

As far as marketers are concerned, the sheer size of this market is a huge opportunity. But no one so far has been able to rightly understand the Indian Youth’s psyche.

As the article points out, the youth market cannot be considered as a group because it is not homogeneous. So does it mean that marketers cannot segment this market on the bases of age alone ? . Segmentation is based on the assumption that the members display homogeneity . So if the members of a specific age group display heterogeneous characteristics, it no longer becomes a segment.
The implication is that marketers should find out variables other than age to segment the Indian youth market.So when age becomes irrelevant, does it mean that the so called Youth Market is a myth just like the much hyped Indian MiddleClass ?
Most of the marketers tend to use Lifestyle as a variable to define segments with in the Youth market. How ever lifestyle segmentation is tricky and highly subjective in nature.

This probably explain the reason why Indian marketers are still finding it difficult to find a formula to tap this huge lucrative market.

What do you think ?

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A fundamental task of marketing is to perform segmentation analysis. When properly applied, segmentation guides companies in tailoring their product and service offerings to the groups most likely to purchase them at a price that generates sufficient profits.  Unfortunately, many companies incorrectly segment their markets around factors that are not strongly linked to consumer outcomes, profitability or strategic fit.  As a result, these firms do not maximize share and profitability and are vulnerable to competitive advances.

Most companies segment around a single dimension such as product performance & image, price point, usage or psychographics.  While these are relatively easy to comprehend and measure, they often miss the mark in terms of effectiveness and efficiency.    For example, segmenting by feature or functionality often leads to product improvements that are irrelevant to a consumer’s fundamental need and desired outcome.  This type of segmentation also tends to inflate the cost structure due to wasteful R&D and marketing expenses.  Segmenting by customer type also creates problems of its own.   When marketers design a product to address the needs of a typical customer in a demographically defined segment, they cannot know whether any specific individual will buy the product.  Marketers can only express a likelihood of purchase in probabilistic terms.

Psychographic segmentation is even more nebulous as a tool.  Psychographics may capture some truth about real people’s lifestyles, attitudes, self-image, and aspirations, but it is very weak at predicting what if any of these people is likely to purchase in any given product category.

A better approach to segmentation considers different and multiple factors in aggregating like customers and prospects.  Some of these dimensions include: 

The job to do – Focusing on what outcomes customers actually want will help define what the segment, product and usage boundaries should be.  To quote the famous Harvard Business School Professor, Theodore Levitt, “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” Arm and Hammer baking soda is an excellent example of job-focused brand that has been extended much farther than traditional baking soda to new usages and markets (think laundry detergent, toothpaste and deodorant).

Link to corporate strategy – Segmentation decisions must be dynamic, reflecting major new strategic moves instead of focusing only on targeting customers in traditional markets. The segmentation analysis should examine the need/outcome states of adjacent markets as well as under serviced or dissatisfied users in traditional markets.  A good example of successfully linking multiple segments to strategy has been the evolution of Apple from a PC-only business to a wireless and consumer electronics powerhouse.

Adjacent revenue pools – To grow revenues, a company should understand what makes its best customers as profitable as they are and then seek new customer segments who share at least a couple of those characteristics. Many banks such as Wells Fargo and ING do an excellent job of ‘following the money’ into new and lucrative product segments.

Although segmentation can illuminate market potential, it lacks the predictive power of actual purchase behavior including usage, brand switching, and retail-format selection. To uncover this information, researchers can utilize laboratory-like simulations like conjoint analysis to measure how purchase behavior would change when you change product features, pricing or channel options.

To sustain profitable growth, marketers must use smarter segmentation strategies to link their products to how customers actually live their lives and how their company competes today and tomorrow.

For more information on our work and services please visit us at www.quantaconsulting.com

Michael E. Porter defines a Strategic Group as ‘the group of firms in an industry following the same or a similar strategy along the strategic dimensions.’  This essentially means that a Strategic Group, within an industry, is a group of firms that operate in a similar fashion in terms of their respective Specialization and Vertical Integration. If we take the example of the Passenger Car Industry, a group of firms are characterized by broad product lines, heavy advertising, medium integration, extensive distribution, mass-market appeal and widely-available service, lets call this Group A, while another group of companies would be characterized as extremely narrow product lines, minimal, often no advertising, high integration, selective distribution and service and superior performance, lets call this Group B. The firms that fall in Group A, internationally, are to the likes of Hyundai, Ford, Chevrolet, Volkswagen, Fiat, Toyota, Renault etc., while firms like Ferrari, Bugatti, Bentley, Rolls Royce, Lamborghini, Maybach etc, belong to the latter group. Then there exists a group in between wherein performance meets mass-market appeal. This, Group C, would consist of firms like BMW, Audi, Daimler-Benz (Mercedes), Porsche, Alfa-Romeo, Nissan etc., which are a match between performance and luxury, and wide-appeal through narrow product lines. Another group of manufacturers, say Group D, such as Proton, Tata Motors, Maruti-Suzuki, Daihatsu, Mahindra & Mahindra, etc. exists which has most characteristics of the first group, barring an international appeal, meaning that manufacturers like these are broadly limited to their home countries and a few other countries, with product lines which are neither narrow nor broad, but have extensive distribution channels, at least in their home countries.  Firms in Group B are highly vertically integrated primarily because of the focus on quality in their products, which is essentially why most products from these firms are hand-built with in-house manufacturing of components unlike other groups where most, and in some cases, all components are purchased, ranging from the Chassis to the Design, and Automobiles are just assembled in the plants.

Interestingly, the Strategic Groups, as mentioned, also have a lot in common with market shares of these firms. While Group A firms tend to enjoy a high market share with their products with mass-market appeal internationally, Group B, on the other end of the spectrum, has firms with products of very limited appeal, primarily because of the exorbitant price tags. Group C firms have much smaller market shares than that of Group A, and have a middle-of-the-road appeal in terms of luxury and performance and price. Group D, on the other hand, consists of firms with large market shares in only a few markets, most commonly in the country they originate from. It is also interesting to understand the ownership patterns of firms across various Strategic Groups. Broadly, the largest Global players enjoy a presence, through one or more of their brands, in at least three of the four strategic groups. For example, Volkswagen Group has a presence in Group A with its Volkswagen brand, in Group B with Bugatti & Bentley, in Group C with Audi & Porsche, and in Group D with Skoda & SEAT. Similarly, Fiat Group has a presence in the three groups with Fiat in Group A, Ferrari in Group B and Alfa-Romeo in Group C. The benefits are primarily in the form of platform sharing and in effect, cost saving because of reduced Research & Development costs, Market Power and the sharing of critical components.

Industry Rivalry

Rivalry within a Strategic Group is likely to be more in industries where there is a great difference between product lines of firms, especially in terms of pricing. In the Automobile Industry, the rivalry among the firms within a Group is far greater than the inter-group rivalry, as opposed to an industry where the substitutes are very close and are available in plenty. The inter-group rivalry is at a far lower level internationally because of the scale and appeal of products of firms from different groups. On the customers’ part, there can be a shift from one group to another, especially when upgrading to a more expensive automobile, the firms effectively compete for customers in different market segments on their parts. For example, Ford does not compete with Ferrari, but it does, in some segments, with BMW, Audi & Mercedes. This is because Ford’s more expensive and less mass-market range of cars are in similar segments with BMW’s lesser expensive, more mass-market cars. So a Ford Focus would compete with a BMW 1-Series and not a BMW 7-Series as the target customers for both are poles apart. Similarly, firms from Group D can often compete with firms from Group A on a regional level, which is why we see Maruti-Suzuki competing with Ford, Fiat & Chevrolet because their target customers in the Indian market are broadly similar, but differ in the global context.

Bargaining Power of Suppliers

Different strategic groups enjoy different degreed of bargaining power of suppliers. In Strategic Groups where firms are primarily assemblers, the bargaining power of suppliers tends to be low primarily because of the scale of production of these firms. Often firms that operate in the mass-market enjoy market power because of their market share. This allows them to leverage their position to bargain with suppliers and have components customized for their use than that of other players. For example, Denso is a key supplier of Toyota to such an extent that Denso follows Toyota to whichever market Toyota enters. The bargaining power of Toyota over Denso is fairly high because of standardization of components and faster product development times across the industry because of which Toyota has the advantage of purchasing similar components from Bosch or Delphi. But because Denso is so dependent on Toyota for its revenues, it has to operate in a manner which suits Toyota, hence effectively lowering possibilities of serving another client. The existence of multiple-suppliers allows firms to pick and choose from a bouquet of firms and attain the lowest possible costs, keeping in mind the specification of the components in concern. In other strategic groups such as Group B, the bargaining power of suppliers is fairly high because of the focus on quality of the product. Most firms in Group B product most components of their cars and outsource only a few. The few components that they outsource come from specialist suppliers. The switching costs may not be very high, but the costs of customization of products to suit the manufacturer is very high because of the nature of the product.

Bargaining Power of Buyers

Bargaining power of buyers varies from group to group. Groups where mass-market players exist with minimal product differentiation have to deal with high bargaining power of buyers while groups with highly differentiated products enjoy low bargaining power of buyers. Strategic Group A, where firms are mass-market players with low product differentiation in most cases, have to deal with very high bargaining power of customers, primarily because of the availability of a plethora of options both from the same firm as well as from constituents of the Strategic Group. The bargaining power of buyers is slightly lower for Group C firms than that of Group A, because each Group C firm has a brand identity which is peculiar to that firm alone while others are close to achieving similar results, but are not widely known for the same. For example, BMWs are identified with their handling and performance, while Mercedes cars are identified as the more luxurious of the two. While customers pick between one of the brands, they have an agenda in mind while purchasing cars from this particular group. A customer who would like more performance than luxury is likely to go for one brand over the other, but at the same time, the customer also enjoys the presence of multiple players and can shift from one brand to another because the products are so close to each other in terms of specifications, features, luxury and performance. Firms in Group B enjoy low bargaining power of buyers, primarily because they have highly differentiated products with varied features and specifications. The products are normally either extremely high on luxury, or on performance. While all products in this strategic group are far more luxurious and better in performance than those in the other groups, they tend to have an inclination towards one side of the spectrum. While Rolls Royce cars are the epitome of luxury on wheels, Ferrari’s are the best performers of the lot, which is not to say Rolls Royce is archaic in terms of performance and Ferrari in luxury. The customers here have a clear-cut demand which can only normally be filled by one of the brands, which essentially goes to say that the bargaining power of buyers is low for Strategic Group B firms.

Threat of Substitutes

Substitutes to passenger cars are broadly based on the price points of the vehicles. While at the lower-end of the spectrum, substitutes are public transport and 2-wheelers, the higher-end of the spectrum only has air-travel as a substitute, which is only applicable for inter-city travel. Group A and Group D face the threat of substitutes such as 2-wheelers and public transport because of their price points. For example, the Tata Nano faces threat of substitutes by Motorbikes in India, especially for unmarried individuals, married without children and empty-nesters. The other threat to lower-end cars is Public Transport, primarily because of the limited spending capacity of the target customers of these products. Firms in Strategic Group B only face threat from substitutes such as Helicopters and Airplanes, the latter primarily for inter-city travel and the former for intra-city travel. The threat is low because of the scarcity of helipads in most parts of the world.

Threat of New Entrants

Threat of new entrants is low across the industry at a global level primarily because of the capital requirements for setting up of production facilities and distribution channels. The threat is low on a global level, but at a local level, threat in parts of the world is high. For example, in India, the threat of new entrants is at a medium level because of the absence of multiple global players. When these players decide to enter India, they can, and are willing to, spend Millions of dollars in setting up infrastructure to support their products. This is aided by a huge potential market for products of these firms, which are primarily members of Group A. Establishing of brands is also a very difficult task, especially for firms looking to enter Group B or Group C. Most firms in these groups have been present in the market for decades and have established their brands over years and years of existence and can hence charge a huge price tag for their offerings.

Reference:
Competitive Strategy, Michael E. Porter