Selecting and Designing for
Target Markets and
Target Customers

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Companies’ objectives; definition of product success
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Financial measures; income statement analysis and opportunities/challenges
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How companies bring products to market
(roles/process/compensation)
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Creating “winning” business plans; key success factors; differentiation

Second Course Module the next four weeks
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Market/customer analysis
(DLJdirect case – online brokerage)
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Competitive analysis
(Airborne Express case – package delivery)
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Making product decisions
(THINK case – electric cars)
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Midterm exam on making product decisions
(Mathsoft case – engineering analysis software)

(before the midterm exam)
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 analyze a company’s financial performance and assess its opportunities and challenges for future growth assess the barriers to success in a particular market and select the appropriate target customers identify a company’s competitive advantages by performing a comprehensive analysis of its direct and indirect competition define the “whole product” and decide on appropriate product differentiators

(after the midterm exam)
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 select appropriate sales/distribution channels and promotional messages and methods identify best practices in new product development and the challenges in integrating the marketing, operations and product development functions understand how technical people interact with marketing, sales and operations personnel, and how they contribute to resolution of business issues understand how business issues impact technical work

…because you’ll understand and apply these Concepts (13)
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Definition of product success
Whole product
Product plan: key success factors
Differentiation
Market attractiveness
Target customers
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Competitive advantage
Marketing mix (C+4P)
Product positioning
Sales functions
Channel options
Channel value-added
Operations balance

… and you’ll be able to use these Methods/Tools (13)
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Income statement analysis
Financial benchmarks
Target customer description
Target customer selection
5 Forces analysis
Competitive analysis
(10 dimensions)
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Decision criteria
Identifying competitive options
Product decisions
Product competitive positioning
Channel economics
Process dimensions
Product development best practices

Business/Product Plan Learnings
(last week)
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Content/scope of a business/product plan
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Critical aspects of a “winning” plan
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Differentiation : importance, definition, identification
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Start-ups : success factors, funding requirements, success profiles
Interesting entrepreneurship info/course: http://professionalpractice.asme.org/Entrepreneurial/Startups/
Introduction.cfm

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Whole product differentiation is the answer to:
Why do customers choose your product instead of somebody else’s ?
(or buying nothing at all?)
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Product differentiators are the things that are unique or best about the whole product, compared to the customers’ other alternatives
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Potential areas for differentiation = dimensions of the whole product (product features, price, sales, marketing, customer service/support, brand, etc)

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(last week) Differentiation of the “whole product” from competitors is the key driver of success……
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(this week) …..
which differentiators to choose depends on what the target customers value…..
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(next week) ….and what competitors offer to those customers

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Market attractiveness: the five forces model
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The concept of target customers , and how to describe them
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Target customer selection method /process

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What is your target market ?
Who are your target customers within that market?
How can you create/present a better
“ value minus price” than competitors? proposition
…..requires understanding/quantifying
“value” in the target customers’ eyes
…..requires understanding what competitors’ offerings will/may be

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Market : an “ecosystem” including a product, its providers (competitors), its intermediaries
(channel partners), its input factors (suppliers) and its potential or existing buyers (users, customers)
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Customers : the entities (business, consumer, or government) who (potentially) buy and use the product; includes the end-customers

(the alternative, of course, is to try to attract all of the customers)

C + 4P
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C ustomers (target)
P roduct
P rice
P romotion
P lace (sales/distribution)
The 4Ps depend on the C

Select target market
(customer need, product category, industry)
Product concept
Select target customers (C)
Value assessment, versus competition
Define product & select price (2 P’s)

Selecting the Target Market :
Inter-Industry Differences
Operating Income/Assets (%)
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High (15-30%) : Pharmaceuticals, Packaged software, Semiconductors
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Medium (8-15%) : Restaurant chains,
Petroleum/natural gas, Engineering services
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Low (2-7%) : CATV service, Motor vehicles,
Airlines

1Q08 Industry Profitability measured by Net Return-on-Sales
(Net Income/Revenues)
Pharmaceuticals 25.9%
Chemicals 15.7%
Electrical equipment 12.1%
Oil companies 7.4%

“high” is bad for competitors in the market
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Threat from substitute products
Ease of market entry (and exit)
Bargaining power of buyers
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(customers, channels and influencers)
Bargaining power of suppliers
Degree of competitive rivalry suppliers  competitors  buyers (incl. customers)

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What is your target market ?
Who are your target customers within that market?
How can you create/present a better
“ value minus price” than competitors? proposition
…..requires understanding/quantifying
“value” in the target customers’ eyes
…..requires understanding what competitors’ offerings will/may be

All possible customers
Target
Customers

Selecting Target Customers: some considerations
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Segment size and revenue opportunity
Customer benefits
Customer interest (incl. current relationships)
Customer ability-to-pay and leverage
Competition/market coverage
Sales issues: sale time/complexity, cost, channel and associated profit margin
Cost to serve/support
Customer loyalty/lock-in
Strategic value

Method: Four Ways of
Describing Target Customers
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Name : customer (individual or group names), industry or occupation, affiliations,…
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Demographics : revenues/income, size of firm/size of family, location, …
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Psychographics : cost-conscious, prestige oriented, early adopter, risk adverse, …
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Needs …… throughout the buying/using experience (remember the whole product!)

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Walmart
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Southwest Airlines
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National Broadcasting Corp (NBC)

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Who are the targeted customers ?
What are their unmet needs ?
What value would they place on a particular
“satisfaction” of those needs? (i.e., what is their willingness to pay for a particular product)
Preferably, quantify that value….or at least be confident that (value - price) is greater than competitors can/will deliver

The
Product

The “Whole” Product:
What Customers Really Care About
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The product itself
Auxiliary or related products
Price and cost-in-service
Awareness and information
Where it is sold
Ease of choice, purchase, ordering
Delivery
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Installation
Payment method
Storage/movement
Aesthetics/style
Advice on use
Help in use (e.g., hotline)
Returns/exchanges
Service/repair
Disposal

Differentiation is usually achieved by choosing to meet some target customer needs
…..
while meeting most needs (requirements) at an acceptable level, and not meeting other needs at all
(“minor” needs, or needs of non-targeted segments)

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Primary customer research : doing endcustomer surveys, interviews, focus groups
Secondary customer research : reading or commissioning market studies by analysts
Benefit studies : cost savings, value-in-use, revenue-generation impacts
Revealed preference : what customers pay for (partial) equivalents
Extrapolation from technical possibilities

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Customer Needs (and relative importance)
Engineering characteristics impacting needs
Competitive position (in customers’ eyes, technical terms) and
Difficulty/importance/cost of features
Leads to…..engineering targets
There are many methodologies to implement the above, e.g. House of Quality

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DLJdirect has a successful online brokerage business targeting “aggressively affluent” customers
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Other segments are growing faster
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DLJdirect has to decide whether to address additional customer segments and whether to significantly increase its advertising capture customers in those segments to

Customer
(trader)
Marketmaker
Online
Broker customer’s account Clearinghouse
Stock
Exchange

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From End-customers
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Trading commissions
Account management fees
Interest on margin purchases
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From partners
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Order flow rebates
Mutual fund and money market fees iNautix revenues

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Are DLJdirect’s current
What is their trend?
financial results “good” ?
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Does DLJdirect have the financial capability to address new segments, e.g. to modify it’s whole product, or to do more advertising to attract new kinds of customers? How much money might be available in 2000?
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Identify the ways DLJdirect’s service is competitors’ offerings differentiated from
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What are the key n eed s of each of the four customer segments? Which are well-matched to DLJdirect’s differentiators and other capabilities?
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Use your judgment to rank the customer segments according to the profit potential in serving them (hint: consider both size of the segment and the average profit/customer in that segment)

DLJdirect’s Financial Situation
(partial income statement)
$M
Revenues
-commissions
-fees
-interest
Total cost & exp
-advertising
Income before tax
1-3Q98 %rev %growth 1-3Q99 %rev
82.5
54.3
18.4
9.8
83.1
19.9
-0.5
65.8
22.3
11.9
100.7
24.1
-0.6
96.1
161.8
81.2
108.2
155.1
72.1
88.4
NA
98.4
38.3
25
143
37.5
18.7
60.8
23.7
15.5
88.4
23.2
11.6

Profit potential of segment
=
# of customers in segment x probability of attracting and retaining them x profit potential per customer

AA
GRF
PCC
RBB
(estimated from Exhibits 5 & 10)
# in
1999 %total %growth
1.43
1.38
26
25
10
-43
# in
2002
1.56
0.78
%total
12
6
0.88
1.82
16
33
461 4.94
214 5.72
38
44
Total # 5.5M
13.0M

Assuming that DLJdirect continues to target the aggressively affluent segment:
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Should DLJdirect also target the trader) segment? Why?
Get Rich Fast (day
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In your opinion, is there an other
DLJdirect should target? Why?
customer segment that

Selecting Target Customers: some considerations
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Segment size and revenue opportunity
Customer benefits
Customer interest (incl. current relationships)
Customer ability-to-pay and leverage
Competition/market coverage
Sales issues: sale time/complexity, cost, channel and associated profit margin
Cost to serve/support
Customer loyalty/lock-in
Strategic value

Hint: identify the positives-and-negatives of each of other three segments (use the
AA pos-neg provided as a guide)

Positives-and-negatives of focusing on the AA segment
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Positives
- large segment; currently 26% of the market
- wealthy; high ability to pay
- likely to buy all 3 products (trades, acct mgmt, margin)
- attracted by DLJd brand image and differentiators
- most profitable?
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Negatives
- slow growing segment; declines to 12% of market
- desirable: competitive rivalry
- “aggressive”  modest customer loyalty?

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Market attractiveness: the five forces model
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The concept of target customers , and how to describe them
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Target customer selection method /process

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Airborne Express
(a case focused on competitive analysis and subsequent market/product decisions)

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(last week) Differentiation of the “whole product” from competitors is the key driver of success……

(this week) …..
which differentiators to choose depends on what the target customers value…..

(next week) ….and what competitors offer to those customers

Airborne Express: Case Summary
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The timeframe is 1997
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The market is the $16-17B U.S. express mail delivery
(letter, package) market
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Airborne is the smallest of the three major competitors with 16% market share (FedEx 45%; UPS 25%)
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It is recently the fastest growing, but historically the least profitable, of the Big 3
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The US Postal Service is threatening to enter the market

In 2003, Airborne Express was acquired by DHL for $1.2B

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Perform a Five Forces analysis of the US express delivery industry
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Perform a competitive analysis of FedEx, UPS and
Airborne in the 10 dimensions shown on the next slide
(display as a 3 x 10 matrix)
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Based on the competitive analysis, what are Airborne’s competitive strengths and weaknesses vis-à-vis FedEx and UPS?
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How is Airborne’s (whole) product differentiated ?
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What does Airborne need to do to assure that it survives and thrives in the future? (hint: start by identifying its opportunities and challenges)

Competitive Analysis
Dimensions (10)
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Products offered 
Operations: pickup & delivery
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Target customers
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Operations: air & hub operations
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Competitive positioning
(incl. price & cost) 
Marketing & sales
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Customer service
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Financial performance
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Information technology
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Culture & human resource management