AT&T and DirectTV merger case study

Chapter 05 Minilecture - Customers, Segmentation, and Target Marketing

I'd like to look at Market Segmentation, Targeting, and Positioning this week in the context of Consumer and Internet Marketing, and then present to you some ideas from a typically excellent piece on this topic from the pages of Harvard Business Review . We'll save that discussion for last. Before that, I want to give some coverage to a couple of very important topics having to do with consumer decision making, and characteristics of products and services that lend themselves to "adoption" by consumers.

Market segmentation, as we all know, is the fine art of dividing consumers into meaningful groups that will respond differently to different combinations of marketing variables. For example, for some time, Inbev / Anheuser Busch (IAB) has understood that by using the idea of social class, they can produce different products aimed at different social classes, and sell more beer to each group, using the appropriate combination of product formulation, brand name, price, distribution channel, and advertising.

IAB’s marketers, for example, will tell you that an upper class individual is more likely to prefer a high-quality beverage, which carries a higher price, isn’t necessarily available in all stores, but the discerning buyer of this product will go a bit further and pay a bit more cash to possess IAB’s Michelob beer. At the same time, this “high-end” product proclaims to the world (rightly or wrongly) a unique benefit: its user’s good taste and elevated status. At the other extreme, IAB’s Busch and Natural Light brands are positioned to appeal to Joe six-pack types, who definitely want to pay less, are unconcerned about image, and tend to shop in convenience stores, or at Wal-Mart and other mass-retailers, and are likely to be reached – for purposes of promotion – at distinctly different venues than their “higher class” brethren: Gun-and-Knife Shows at the Show-Me Center, etc.

So basically, IAB is using a combination of demographics (e.g., social class) and benefits sought, much in the way discussed in text Chapter 05, to create actionable and meaningful market segments, and to sell more products than they would if they simply had one brand for all customers. This little tactic is one of marketing’s most significant contributions to the modern way of life: it lets everyone have access to the products that best match their individual “needs.”

The Consumer Decision Making Process

We begin this week's mini lecture with a look at the consumer decision making process, and some recommendations for alert marketers based on our understanding of consumer decision making. The model described in your text depicts our decisions as a sequence of need recognition, information search, evaluation of alternatives, purchase decisions, and post purchase evaluation. Depending on the product category, and depending on the consumer, individuals follow this sequence carefully and methodically, they might fly through it in a nanosecond, or be somewhere in between. Our approach to selecting and purchasing products has much to do with our involvement in the product category, and numerous other factors.

Involvement is an under-appreciated concept in marketing. Involvement is basically when the choice of a product or service is personally relevant to the consumer. Typically, a consumer will be involved if the purchase involves a large cash expenditure or has other types of psychological and emotional significance. The upshot of this is that it's mission critical for every good marketer to get the buyer involved in the marketing exchange. Whether you're selling mutual funds or post-a-notes, you need to convince the buyer that the purchase is significant. Involved customers are more willing to listen to our advertisements and to consider the value proposition. You probably know that you can't pound a customer into buying your product by bombarding her or him with advertising and high-power selling. But if you can get his attention and consider a careful presentation of the advantages of your product or service, he or she just might "sell himself." I'll say it here, and probably will say it again later: The best persuasion is self-persuasion . And none of that good stuff will happen unless we can get the buyer to take our post-a-notes seriously.  Here’s a humorous example of Direct TV trying to get consumers to choose the satellite provider very carefully…

Just above, I used the word "involvement."  Marketing academics like the word, but marketing practitioners prefer to use instead "engagement."  I believe I have already discussed marketers' obsession with engagement.  And I'm sure the subject will come up again.  But now let's look at the first step of the Consumer Buying Process: need recognition.

Need Recognition

Stimulating need recognition (or problem recognition as it's sometimes called) is job one for marketers. This subject, like all the topics discussed this week, has been extensively researched by marketing researchers, and it's not possible here to review all the findings of that work. I would like to present a possibly simplistic, but useful overview of some of the most basic findings.

One problem for marketers is what we call "inactive problems." Often, marketers have to more or less shake consumers to alert them, for example, to the fact that their possessions are being destroyed (with micro-photographs of frayed fabrics, termite damage, gingivitis, heartworm, et cetera). In the 1940's the Talon zipper was promoted as a cure for "gaposis" ― which occurs when puckers appear around the buttons on a woman's skirt. Geritol gave us "tired blood." Perhaps mercifully, you don't recall the invention of "visible panty line," (thank you, lingerie industry), but it was used to sell a lot of L'eggs in the 1970's. Financial planners have to fight this battle ― alerting consumers to unrecognized needs ― every day.

The diagram immediately below presents the basic driver of need recognition: the GAP. All of us have a sense of where we stand with respect to the important things in our lives ― how well our mutual funds portfolio or our Camry is performing, our overall state of physical and mental well-being, etc. Researchers call this our "actual condition," shown by the red line in panels 01, 02, and 03 below. Of course we all aspire to better things in life − that's why you're getting an MBA, and that's why Nordick Track and the fitness industry can sell us all those workout devices we store in our basements and never use. Anyway, that aspiration is represented in Panels 01, 02, and 03 below as our "ideal condition," the thin blue line. What's important here is that, for all of us, there are gaps between our actual and ideal conditions, gaps which we are all motivated as rational and emotional beings to minimize or eliminate, some of us more than others. These gaps then are basic driving, motivating forces, and this is where marketers become very interested in need recognition.

Panel 01 isn't very interesting: it simply tells us what we already know, things like the tread on those tires is getting thin, our LED TV monitor seems small compared to the Jones’s, etc. Most of us live with small gaps like this in about every area of our lives, but still manage to tough it out.

Panel 02 is where marketers can make things more interesting, however, because they know that simply by increasing the perceived "ideal condition" for consumers (raising the blue line), they increase the gap, motivate buyers to consider their products, and set them off in hot pursuit of the remaining steps of the decision making process. Without some motivating force, without the gap, nothing happens in marketing. So raising the bar ― showing how much better life could be if you stay at The Ramada Inn or take your next vacation in the Virgin Islands is an effective way to motivate consumers to take that next step in the process: to search for more information, call an 800 number, visit a website.

Panel 03 presents another interesting technique to stimulate problem recognition: by lowering consumers' perceived actual condition, marketers achieve the same effect ― a yawning gap between where we are and where we want to be. I'll state flatly that I think this sometimes bumps up against a number of ethical concerns. Critics of marketing always point out that we are creating "needs" where none exist, and in some cases, this is probably pretty much what is going on.  However, the fact remains that it's a good way to motivate consumers to seek remedies, by pointing out that they're not quite as well off as they may think they are. Here’s an excellent example of how the (presumably ethical) American Cancer Society has done exactly this. A more mundane example of this would be those ubiquitous ads we've all seen that show dollar bills flying through the walls and windows of our homes, informing us just how much of our energy bill goes out the window. And advertising informs small business that even though that desktop PC your secretary is using only cost $3000, when you total up all the costs, it can cost up to $15,000 over its lifetime for training, downtime, maintenance, software, upgrades. Here's an ad I saw in January that stimulates need recognition by showing you how you're probably worse off than you realized if you have a printer. Now there's a gap that needs closing!  Not long ago, I saw a "loan consolidation" promotion for a company called debt.com which basically reminds us how bad we have it paying off our credit cards, and the advertiser's service will let us close that gap. You could find advertisers using gaps almost literally everywhere. Because they want to motivate us to go to the next stage:

Information Search

Let's get this out there for the record... Consumers get their information from many sources: Word of mouth, personal experience, third-party sources (e.g., Consumer Reports and other sources of PR), opinion leaders, and advertising. And, from most to least, here is the amount of credibility these sources have: Personal experience, opinion leaders, word of mouth, third-party sources, advertising. That's right: advertising is dead last in credibility, and it's no surprise to anyone.

Now this is very relevant to our discussion of information search, because, like problem recognition, not much will happen for us if consumers don't actively seek out information or passively allow it to slip past their perceptual defenses. Again, this is a more appropriate topic for Chapter 06, but I'll just plant a small idea here: Public Relations is beginning to replace advertising as the way that smart marketers build brands, and this paradigm shift has everything to do with the big "C" ― Credibility.

The Evoked Set

...is an interesting topic that has been extensively researched by consumer behavior gurus. Basically, an evoked set is that small group of products that you will actively consider information about and evaluate. Like the Final Four, it's the select group of brands that each has a very good shot of going all the way: into your shopping basket, assuming you need it. Because all of us are somewhat limited in our short-term memory, our ability to compare more than five to seven objects reliably, it's thought that our evoked sets therefore are limited to just a few brands ― whether the product category is power tools or batteries.

I'll share with you some of the evoked sets of brands that are my finalists in several product categories that I use to shrink the Really Important Gaps in my life:

So: We should agree by now that job one for marketers is to stimulate problem recognition. But job two is to get into (or stay in) consumers' evoked sets. How to do this? That depends on whether your brand is currently in or out of their sets.

If you're IN consumers' evoked sets: Maintain product quality. Reminder advertising. Avoid stockouts and distribution problems. Defend market share against "challengers." Load up consumers to "take them out of play" (e.g., liter bottles of Coke, two-for-the-price-of-one packs). Loyalty Programs. Frequent Flyer Programs. Service and Maintenance Contracts, etc. The Citgo station better be open, and they better have Yuban and Cinnamon Cheerios.  For most consumer products, these kind of activities are what we call “sales promotion.”  They’re intended to get consumers excited about the deal – not so much about the product – and to buy our brand.  Some feel that this activity hurts the image of the brand, but that’s the nature of the evoked set:  If they buy one more of mine, they buy one less of my competitor’s product (plus one, minus one).  For that reason we often call consumer markets a “zero-sum” game – especially when they’re mature and not growing at any appreciable rate.

If you're OUT of their evoked sets: Comparison advertising.  New Products. Publicity. Sampling. Aggressive Retail Promotions, etc.

How can your company get into or stay in consumers' evoked sets? How can this be applied to your cases this semester? (rhetorical question only)

Evaluation of Alternatives

Marketers face some fundamental research issues, here. Basically, they have to figure out what the evaluative criteria for their products and services are: the attributes or characteristics that deliver the benefits consumers seek. Measuring consumer judgments and determining the relative importance of criteria will let their customers close the gap between where they are and where they want to be. Done well, this becomes the basis of effective market segmentation (Chapter 05): Southwest Airlines, Ryan Air, and Singapore Airlines all succeed in the marketplace despite the fact that they provide the same basic service, because they target different consumer needs and different segments of the market, based on their understanding of flyers' evaluative criteria.

Here I’d like to quote from an excellent article from consultants McKinsey and Company:

“In today’s decision journey (when consumers are evaluating alternatives), consumer-driven marketing is increasingly important as customers seize control of the process and actively “pull” information helpful to them. (McKinsey) found that two-thirds of the touch points during active evaluation involve consumer-driven marketing activities, such as Internet reviews and word-of-mouth recommendations from friends and family, as well as in-store interactions and recollections of past experiences.  A third of the touch points involve company-driven marketing. Traditional marketing remains important but the change in the way consumers make decisions means that marketers must move aggressively beyond purely push-style communications and learn to influence consumer-driven touch points.”  McKinsey Quarterly, June 2009.

One more reason why social media is the great disruptive technology that it is. More on that later.

Purchase Decision

Having stimulated need recognition, after earning a spot in consumers' evoked sets, and having presented their market offering to buyers in line with the benefits they seek, it's still important to consider some aspects of consumers' purchase decision to close the deal. There's not a lot to add to what you've already read in your text: marketers need to offer some combination of "ease of purchase" (e.g., Amazon.com's one-click payment system that converts shoppers to buyers), financing (Carrier air conditioning actually makes more money from their finance, leasing, and credit operations than from making and selling ACs), to name but a few. In the new world of e-commerce, cross-channel marketing offers marketers the optimal combination of e-tailing and good old fashioned brick-and-mortar: now you can order a cashmere sweater at Lands End.com and pick it up (or return it) at Sears.

Don't forget that some very basic economic concepts come hugely into play here: we consumers want a certain satisfaction in our purchases: anything we can have right here and right now is always going to provide more utility .

Whatever it takes to remove the obstacles to ultimately making the sale.

I’ll quote again from the excellent McKinsey article cited above:

“Our research found that one consequence of the new world of marketing complexity is that more consumers hold off their final purchase decision until they’re in a store. Merchandising and packaging have therefore become very important selling factors, a point that’s not widely understood. Consumers want to look at a product in action and are highly influenced by the visual dimension: up to 40 percent of them change their minds because of something they see, learn, or do at this point—say, packaging, placement, or interactions with salespeople.

In skin care, for example, some brands that are fairly unlikely to be in a consumer’s initial-consideration set nonetheless win at the point of purchase with attractive packages and on-shelf messaging. Such elements have now become essential selling tools because consumers of these products are still in play when they enter a store. That’s also true in some consumer electronics segments, which explains those impressive rows of high-definition TVs in stores.

Sometimes it takes a combination of approaches—great packaging, a favorable shelf position, forceful fixtures, informative signage—to attract consumers who enter a store with a strong attachment to their initial-consideration set. Our research shows that in-store touch points provide a significant opportunity for other brands.”

The above points just reinforce a couple of truisms about closing the sale:

1. In the retail setting, two-thirds of purchases are “generally unplanned.”  I may have “cereal” on my list, but chances are that an attractive package, a coupon, or other promotion will determine which one goes into my basket. It’s not quite the same as an impulse purchase, where you pick up an item that you weren’t shopping for.

2. The package is also known as the “silent salesman” because it has such a large role in this.  Next time you get annoyed (as I do) at clamshell packaging, remember that marketers only use it because it displays the product better than every other alternative, and it protects the product during shipment (if you don’t break it try to get the shell open).

Postpurchase Evaluation

...can be summed up in two words: "cognitive dissonance." This is what happens when there's a disconnect between our behaviors and our attitudes, when we've just committed to a purchase that we're not entirely sure is right for us. We can all tolerate some level of this. If you and your mate like different music, or he likes sports and she likes movies, well, you deal with it.

But a few interesting things happen when people experience dissonance. When it becomes unbearable we're likely to:

1. Downgrade the importance of the decision. This is the last thing you want as a marketer; to have your customers conclude that the maintenance contract on their BMW they purchased from you is not so important after all. Basically, they've undone all your good work in the problem recognition area. These are future ex-customers.

2. Consider the unchosen alternative more favorably (the "wow, I could have had a V-8" syndrome) ― again, you're about to lose these buyers.

3. Look for information to support their choice. This is what you want. This is where customers who might be wavering are kept. Be sure to send your customers a letter to thank them for their purchase, to reinforce all the reasons they made the right choice and bought your product. My realtor and my broker always send me a card on my birthday ― just to make sure I'm not experiencing any post-purchase anxiety. And they're pretty good marketers. One of my favorite marketers is Dish Network. I literally telephoned them for tech support 4 or 5 times last year, and each time, I never had to wait more than 2 or 3 minutes to speak to a real human. But during the wait, their software reads me this message: "Oh, I see you're one of our premium subscribers. Thanks!" It took me a couple of calls before I realized I didn't have to say "you're welcome."

Here’s some more information about Innovations and Adopters of Innovations.  Information which explains a lot about disruptive, technologically advanced products and services, and the people who do or don’t buy them.  You don’t have to read this unless you just want to.  But it will supply you with a lot of talking points for cases, exams, et cetera.

Versioning and Segmentation

What follows here is a discussion with more immediate relevance to Internet Marketing, and is basically a synthesis of some ideas presented by Carl Shapiro and Hal Varian, in a recent edition of Harvard Business Review. The article I refer to is called “Versioning: The Smart Way to Sell Information.” After reading your Chapter 05, you're all familiar with segmentation and positioning... This article is totally about market segmentation.

It touches on three fundamental concepts important to Internet marketing: 1) the economics of selling information-based products (digital products that you buy and are delivered via the web, such as a subscription to The Wall Street Journal online edition), 2) Effective ways to segment markets based on the benefits users seek , and 3) some practical recommendations for implementing a versioning strategy. Please read carefully, and send me a message if you would like clarification of some of the ideas, or take a look at the original on your own…

First: The economics of selling information-based products…

Information goods, unlike tires, shoes, and beer, have a distinctive cost structure: producing the first copy is often very expensive, but producing subsequent copies is very cheap. Paying a writer to create content for an online newsletter may be expensive, but once this is done, the content can be distributed via the Internet to one, a hundred, or a million users at a consistent and minimal cost to the company. In the language of economics, the fixed costs are large and the variable costs are small. This is one of the most dangerous aspects of Internet Marketing – competition can force a company to reduce its prices to near its marginal production costs (that is, rock-bottom).

Example: Microsoft, with substantial sunk costs in producing its products, to now has been able to charge a premium price, but with the advent of competition (the FREE operating system Linux, for example) and free software available on the Internet, it will be hard for Microsoft to continue with their premium-price business model. Essentially, low variable costs to distribute software products are putting and will continue to put downward pressure on prices and profits in the software industry.

So just how do competitors create products to compete with Microsoft? How do they avoid the enormous R&D costs Microsoft has incurred? There are many answers, but basically, you can develop software in places like India, China, and elsewhere (where a well-trained work force commands wages that are a fraction of what they are in Silicon Valley), and there are entrepreneurs who can attract financing to create software products (Netscape is an example) and are willing to distribute it for free, betting they can make pay off their sunk costs and make money by signing advertising deals, and up-selling value-added services to an ever-expanding base of users who adopt their free products. (In an ironic turn-about, talented software engineers who have emigrated to Silicon Valley from Bangalore and Mumbai are seeing their own jobs being shipped overseas -- to India).

So, you can’t set prices based on variable costs – a surefire road to ruin – and for competitive reasons you may not succeed with some kind of cost-based pricing. According to Varian and Shapiro, the only viable strategy is to set prices according to the value a customer places on the information . And this leads us back to about nine ways to segment markets based on benefits sought . For digital information products, we call these “versions’’ of a product, which, like Michelob and Natural Light, basically let customers segment themselves, based again on the benefits they seek .

Versions and the Bases for Versioning…

Convenience	Comprehensiveness	Manipulation
Community	Annoyance	Speed
Data Processing	Image Resolution	Support

One caveat about versioning should be established here: don't confuse versioning and sampling . While offering consumers the opportunity to hear thirty seconds of Mumford & Son's latest song may tempt some to shell out, say, a dollar-twenty-nine cents for the whole thing, this is NOT an example of versioning. Remember, versioning requires that the simple, plain vanilla version of a product be suitable as is to a certain segment of the market. Think of the email program Eudora light: although the simple, free version had the annoyance of pop-up ads, it still worked just fine, and some segments of the market didn't mind that much. With a sample however, nobody (that I know of) is satisfied to have a collection of 30-second song samples. So PLEASE NOTE that offering teasers and samples is not the same as offering a plain-vanilla stand-alone version of a product that will be acceptable to some segments of the market. In other words, it's NOT an example of versioning.

Finally: Practical Recommendations…

Researchers and practitioners all know that the average customer has an aversion to extremes. That’s why McDonalds, Wendys, and other marketing magicians always offer a medium-size drink and fries. They know that for many customers, the small size is well, too small, and many of us hesitate to order the king size. The mid-size version just “feels-right.”

Another interesting observation is that if you have a $200 camera and customers tend to feel it’s on the expensive side, just put another (similar but slightly different) camera priced at $349.99 right next to it …. Studies show that you’ll sell more of the original camera: the $200 price now seems like a better value; less extreme. You may even sell a few of the deluxe models.

The point here is to consider consumers’ judgments about value carefully and allow them to choose among a limited number of options. Intuit, for example, offers a basic tax preparation software – Quicken – as well as the deluxe version: Quicken Deluxe. Maybe they would do well to add one more version, and give us three to choose among. Research suggests it’s quite likely that many of their customers for the economy version would upgrade to the next level.

The KEY to all of this is having a valued and trusted brand, like Lexis-Nexis news service, that customers are willing to pay for. This is one approach to setting yourself apart from the herd: call it differentiation . Competition based on such added-value features as reputation, service, and not based on cost. This is the goal of strategy – an established brand and a base of loyal users that will protect Quicken from low-cost, plentiful, copycat versions of their product. We also call it – you guessed it –competitive advantage.

One last word of caution about putting limits and restrictions on your own software products:

Some time ago, it was reported in the national media that Turbo Tax had backed away from a small software change they built into one of the annually-updated versions of their income tax preparation software package. Apparently, large numbers of their customers were unhappy that they couldn't prepare their taxes on one computer (at home) and print them out at another computer (at work). The company explained that this limitation on the "transferability" of the program was intended to prevent people from sharing their software with a friend. A few of their competitors, however, seized the opportunity to lure Turbo's customers away with a more user-friendly product. A spokesperson for Turbo Tax later announced that future versions of the tax prep program will eliminate this problem, because (as you know), the whole point of a business is to create and keep a customer. Maybe the iTunes store could once get away with restricting the use of the software products they sold us (with about 70% market share of the downloadable market) but apparently this method of dividing the market couldn't stand.

Having just scraped the tip of the iceberg of consumer behavior, we'll take a break from the subject. Our upcoming discussions of product, pricing, and promotions will be well and truly marinated in consumer psychology.

Last updated: Saturday, January 12, 2019