Marketing strategy - Customer segmentation - Pricing

1.    GeoPure Water Technologies Marketing strategy

After having been through the 6 steps (Kotler P. and Keller K.L. 2009) of a market research (including the 2006 research from Texas A&M university),  GeoPure launched on the market, based on Texas A&M university technology, a service for desalination of oilfield brine and so generate additional water resources for the Oil & Gas operations. Before going in the Marketing-Mix, let’s first identify the strategy GeoPure has put in place.

Considering the competitive forces model (threat of new entrants, bargaining power of suppliers, threat of substitute products or services and bargaining power of buyers), Michael Porter maintains that only three generic strategies are available to organisations: cost leadership, product differentiation and specialisation by focus.

GeoPure implemented a focused marketing strategy to get more intimacy with the targeted segment (Texas oil and gas industry and groundwater users in west Texas at first). The strategy is dynamic i.e. depending on the environment you have to adapt your strategy to meet the market and GeoPure moved into Differentiation strategy when they started to sell a treatment system to handle feed water where suspended solids have already been removed.

Kotler and Keller define as Categories of Service Mix (2009) the continuum from pure tangible goods to pure service with in the middle tangible goods with accompanying services, hybrid and major service with accompanying minor goods and services. Assuming that GeoPure keeps ownership of all the on-site deployed hardware, they then sell a service to their customers and not tangible goods.

This has an impact on the Marketing-Mix as we have 7 P’s to take into account, Price, Product, Promotion, Place, People, Process and Physical evidences.

The new Product development 8 steps (Kotler P. and Keller K.L. 2009) will help understanding how the 7 P’s interact with each other. Once they knew what would be the product (basic product as per Kotler and Keller 5 levels of products) and got the solution developed and tested they could work on the marketing strategy.

Place is a given as Texas is a major drilling place for the start before testing in other states and Canada. This also drove the distribution channels for this new service. Brassington and Pettitt (1997) define distribution channel as the structure linking a group of individuals or organisations through which a product (tangible) or service (intangible) is made available to the consumer or industrial user. In the GeoPure case, we have direct distribution covering the whole market as it is a new technology they are the only ones to offer.

Promotion has been key in getting the first commercial deals. The GeoPure presence in specific conferences dedicated to the targeted customer segments with marketing booths, published articles and companies specific presentation, opened doors and allowed them to get the first 30 customers.

Pricing is a critical point. We have a new technology so no competitors on this segment yet and customers needing a scarce resource (fresh water) but also a market to “earn”. It looks like a Maximum Market Skimming (Kotler P. and Keller K.L. 2009) approach would be the right one here as we have buyers interested in the service, there is no competition and the price is assumed to be lower than fighting for fresh water including delays caused by issues with local communities. Using this approach will allow GeoPure to make maximum profit before the competition develops similar technology and also come on the market. GeoPure must make sure they don’t overprice else the competitors may be aggressive on the price and ruin the whole strategy.

People are important in the extended Marketing-Mix, skilled workers, employees, management and consumers add value to the offered service. This includes the people in Texas A&M University, GeoPure but also the workforce at the customers’ side.

Process to get the service on the market is key to the strategy and in this case the way to get the demonstration unit built in a travel-friendly container to test and go through the various stages of the feasibility with the customers.

The Physical Evidences are the way to make a service tangible to the customer. The demonstration unit brings this to GeoPure as it will deliver fresh water to the customer as evidence of the efficiency of the service.

All these components of the marketing strategy have been communicated through mainly three out of the eight modes of the marketing communication-mix. Events and experiences, public relations and publicity and finally personal selling are the methods GeoPure used to position themselves on the market and get their first customers in the conferences they participated. These also enforced an integrated marketing communication to ensure all these communication efforts are co-ordinated.

There is no recipe for success but using these frameworks helped identifying what to achieve and having the right controls in place to maximise the success rate.

2.   Select two different approaches to customer segmentation, explain their advantages and disadvantages and give examples of how companies have used them in practice.

Generally speaking companies have stopped doing mass marketing, they would prefer now using a “rifle” approach instead of a “shotgun” approach (Kotler P., Wong V., Saunders J. and Armstrong G. 1996). This will allow the company to focus energy and budget on the right target.

There are different dimensions in terms of segmentation as it is not only end-consumers (B2C) that are targeted but also it could be other companies (B2B) and the ways of segmenting will be different as the needs will be different and so may be the geographical aspect.

Segmentation for end consumers has multiple levels from mass marketing (Coke) to individual marketing (local tailor). Between those two extremes, I’ll select the geographic and demographic segmentations as they are popular to define a target segment.

I will use as an example Shell Gas in Belgium and how we used both segmentations together to fine-tune our marketing strategy.

Let’s focus on the small bulk part of the business as the cylinders is less impacted by these two segmentations (depends on a retailers network) and the large bulk is a B2B business.

Firstly we used the geographic segmentation as bulk propane can’t be sold (safety reasons) in cities and secondly we won’t advertise were natural gas is available as we are less convenient and more expensive. The second level is to split into three regions to include language into the equation as in Belgium we have three official languages and cultures. Having isolated per region the rural areas helps to define the target regions. This is where the geographical segmentation will stop, this is good enough if we intend to use press advertising in specific regions or communicate at local communities or even neighbourhood level. In our example of small bulk, this is not enough as propane has the image (in Belgium) of old fashioned individual heaters and not central heating. That explains the reason why we also integrated in the geographic segmentation the demographic aspect.

Demography will give more granularity in our customers’ segmentation. It will include attributes as age, gender, family size, social class, income, etc… (Kotler P. and Keller K.L. 2009). We did first, of course, segment our current customers’ base so that we have a clear idea of what type of demographic profile has our customer. Merging both segmentations will allow us to locate where we can find our potential customers and craft specific direct communication to ensure we send the right message to our prospects. Ideally we should be granular enough to impact the prospect positively when communicating our values.

Bottom line, that information was shared with the sales forces that could adapt the sales arguments (after a segmented communication sent to all prospects) and get the contract.

 Based on this experience, these two segmentations are combining quiet well as demographic data can be seen as a “drill down” of the geographical data. This meaning that we can see the demography will be what is in the households. The downside of this combination is that even if it gives you a much better success rate when focusing on your prospects, it is still limited. Those two segmentations are telling you who the prospects are and where they live but not what are their needs and what they aspire to. As example for Shell Gas you may be well in our target profile but, no way, you will use Propane in your garden as you have a son working for Total fuel and so will only buy from that company or you will never buy from a Oil and Gas company because you believe that it is bad for the carbon footprint, etc…

These show that geography and demography are not giving you the motivations of the prospects and the importance of always knowing more about your target to be closer to the prospect and have the right message. So other segmentation types like behavioural or psychographic are complementary to these two in order to adapt the marketing strategy and programme to realise first then recognise the differences between prospects.

Other companies who used those 2 segmentations are e.g. Philips that did not realise that some of their appliances were not fitting in Japanese kitchens or Coca-Cola that sold in Spain bottles of two litres that did not fit in local fridges (Kotler P., Wong V., Saunders J. and Armstrong G. 1996). Mac Donald’s is another good example targeting messages based on both segmentations e.g. children in South of Belgium.

So we could demonstrate that segmentation can help to know customers better, give orientation to allocate resources (budgets) better and also better focus the organisation energy. On the other hand this may also lead to launching a multitude of products and so increase the overall marketing costs and reduce the brand impact on the market.

3.   There are a number of strategies that can be taken when pricing products and services. Choose any one pricing approach, then critically analyse its merits and potential difficulties and identify in what market, company and competitive conditions such an approach would be appropriate.

First of all, let’s agree on the definition of price: “The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.” (Kotler P., Wong V., Saunders J. and Armstrong G. 1996). Kotler and Keller (2009) relate the pricing of products and services to where the company wants to position itself on the market. Five main objectives are: survival, maximum current profit, maximum market share, maximum market skimming and product-quality leadership. There are also other objectives related to non-profit or public organisations.

In this exercise, we’ll focus on the maximum market share pricing objective. The aim of this positioning, introducing a product at a low price is, is to increase the market shares of the company in a specific market. To achieve capturing the mass market by high initial sales, a market-based approach to pricing in which the price will be lower than the competition to make the product more attractive to the target has to be put in place.

For this pricing strategy to be effective, the market must be receptive to pricing i.e. low price will increase sales, increasing the volume will decrease the unit costs and low price will discourage competitors to enter the market (Kotler P. and Keller K.L. 2009). So it shows attractiveness where economies of scale can bring unit costs reduction and so can generate room to further decrease prices. A good example of penetration pricing is Dell using direct marketing and selling at low prices due to their direct selling strategy and also reducing distribution costs as they did not use distribution networks like their competitors. They could therefore gain market shares against big competitors as Compaq, HP and IBM. It allowed then this company to be leader in computers’ direct sales and so permitted Dell to make substantial profits.

The flip-side of this story shows also the difficulties that are linked to this strategy. Once the competitors adapted themselves to the new market needs by adding this new business model, Dell started to have problems and results started to soar as the big companies regained market share using the same strategy (Kotler P., Wong V., Saunders J. and Armstrong G. 1996).

The main advantages of this strategy are keeping new entrants (Porter’s Competitive forces model) out of this specific market by taking them by surprise, it may also speed-up the adoption rate of the product by e.g. word of mouth and also motivate the distribution channels as the stock turnover will be high. If the penetration is high and sustained as e.g. Windows, the product may also become an industry standard and so being preferred to even better products due to the adoption level in the sector.

The first downside of this strategy is that you have to make sure you can sustain being a cost leader (Porter’s Competitive forces model) and keep the new entrants out else your profit will quickly soar (look at Dell) and your market shares will drop accordingly. There are two other main disadvantages with this strategy. It becomes really difficult afterwards to raise prices for the same product in the same market as the customers will not understand why this happens, it is then necessary to upgrade the product e.g. from the basic to the expected product or even to the augmented one to justify the price increase. The second main issue is a branding, reputation one i.e. selling low cost may also mean low quality and so impact your image on the market i.e. is detrimental to the brand value and the reputation of the company.

Pushed to the extreme, penetration pricing may become, if the price is not sustainable and only aim to “destroy” the competition, an attempt to build a monopoly and this is illegal in some countries.

In conclusion, maximum market share or penetration pricing objective is a valid strategy as long as we evolve in a market that is ready for this and also only if we are ready to be “all-in” i.e. we go for cost leadership overall marketing strategy. It is critical to ensure the competition is kept out of the market or, as a minimum, unable to compete with the pricing we set. If this is the case, then we can reach a dominated or even captive market as the one of operating systems where Microsoft Windows became a standard after having used such a strategy from the beginning.