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setting your price, deciding on service and quality levels and choosing where and how much to advertise.
Obviously the amount of time and money to be spent depends on the capital outlay required. If you need £1,000 to get into business, spending more than that on gathering information looks like overkill.
Understanding customers
Without customers no business can get off the ground, let alone survive. Some people believe that customers arrive after a business ‘opens its doors’. This is a serious and often fatal misconception. You need a clear idea in advance of who your customers will be, as they are a vital ingredient in a successful business strategy, not simply the passive recipients of a new product or service.
Knowing something about your customers, what they need, how much they can ‘consume’ and whom they buy from now, seems such elementary information it is hard to believe so many people could start without those insights – and yet they do.
There is an old business maxim that says that the customer is always right. But that does not mean that the customer is necessarily right for you. So as well as knowing whom to sell to you also need to know the sorts of people that trying to interest will be a waste of scarce resources on your part.
Recognizing needs
The founder of a successful cosmetics firm, when asked what he did, replied: ‘In the factories we make perfume. In the shops we sell dreams.’
Those of us in business usually start out defining our business in physical terms. Customers on the other hand see businesses having as their primary value the ability to satisfy their needs.
Even firms that adopt customer satisfaction, or even delight, as their stated maxim often find it a more complex goal than it at first appears. Take Blooming Marvellous, the case study given in the Introduction, by way of an example. They made clothes for the mother-to-be, sure enough: but the primary customer need they were aiming to satisfy was not either to preserve their modesty or to keep them warm. The need they were aiming for was much higher: they were ensuring their customers would feel fashionably dressed, which is about the way people interact with each other and how they feel about themselves. Just splashing on say a tog rating showing the thermal properties of the fabric, as you would with say a duvet, would cut no ice with Blooming Marvellous’s potential market.
Until you have clearly defined the needs of your market you cannot begin to assemble a product or service to satisfy it.
Fortunately, help is at hand. The US psychologist Abraham Maslow demonstrated in his research that ‘all customers are goal seekers who gratify their needs by purchase and consumption’. He then went a bit further and classified consumer needs into a five-stage pyramid he called the hierarchy of needs:
1. Self-actualization. This is the summit of Maslow’s hierarchy, in which people are looking for truth, wisdom, justice and purpose. It’s a need that is never fully satisfied and,
according to Maslow, only a very small percentage of people ever reach the point where they are prepared to pay much money to satisfy such needs. It is left to the like of Bill Gates and Sir Tom Hunter to give away billions to form
foundations to dispose of their wealth on worthy causes. The rest of us scrabble around further down the hierarchy.
2. Esteem. Here people are concerned with such matters as self-respect, achievement, attention, recognition and
reputation. The benefits customers are looking for include the feeling that others will think better of them if they have a particular product. Much of brand marketing is aimed at making consumers believe that, by conspicuously wearing the maker’s label or logo so that it can be seen by others, it will earn them ‘respect’. Understanding how this part of Maslow’s hierarchy works was vital to the founders of Responsibletravel.com (www.responsibletravel.com).
Founded six years ago with backing from Anita Roddick (of Body Shop) by Justin Francis and Harold Goodwin in
Francis’s front room in Brighton, the company set out to be the world’s first to offer environmentally responsible travel and holidays. They were one of the first companies to offer carbon offset schemes for travellers, and they boast that they turn away more tour companies trying to list on their site than they accept. They appeal to consumers who want to be recognized in their communities as being socially responsible.
3. Social needs. The need for friends, belonging to associations, clubs or other groups and the need to give and get love are all social needs. After ‘lower’ needs have been met these needs that relate to interacting with other people come to the fore. Hotel Chocolat (www.hotelchocolat.co.uk), founded by Angus Thirlwell and Peter Harris in their
kitchen, is a good example of a business based on meeting social needs. They market home-delivered luxury chocolates but generate sales by having tasting clubs to check out
products each month. The concept of the club is that you
invite friends round and use the firm’s scoring system to rate and give feedback on the chocolates.
4. Safety. The second most basic need of consumers is to feel safe and secure. People who feel they are in harm’s way either through their general environment or because of the product or service on offer will not be over-interested in having their higher needs met. When Charles Rigby set up World Challenge (www.world-challenge.co.uk) to market challenging expeditions to exotic locations around the world with the aim of taking young people up to around 19 out of their comfort zones and teaching them how to overcome adversity, he knew he had a challenge of his own on his hands: how to make an activity simultaneously exciting and apparently dangerous to teenagers, whilst being safe
enough for the parents writing the cheques to feel
comfortable. Six full sections on their website are devoted to explaining the safety measures the company takes to ensure that unacceptable risks are eliminated as far as is humanly possible.
5. Physiological needs. Air, water, sleep and food are all
absolutely essential to sustain life. Until these basic needs are satisfied, higher needs such as self-esteem will not be considered.
You can read more about Maslow’s hierarchy of needs and how to take it into account in understanding customers on the Net MBA website (www.netmba.com > Management > Maslow’s Hierarchy of Needs).
Features, benefits and proofs
Whilst understanding customer needs is vital, it is not sufficient on its own to help put together a saleable proposition. Before
you can do that you have to understand the benefits customers will get when they purchase. Features are what a product or service has or is, and benefits are what the product does for the customer. When Nigel Apperley founded his business Internet
Cameras Direct, now Internet Direct
(www.internetcamerasdirect.co.uk), whilst a student at business school he knew there was no point in telling customers about SLRs or shutter speeds. These are not the end product that customers want; they are looking for the convenience and economy of buying direct and good pictures.
He planned to follow the Dell direct sales model. Within three years Apperley had annual turnover in excess of £20 million and had moved a long way from his home-based beginnings.
Table 3.1 shows examples of product features and benefits, and has been extended to include proofs showing how the benefits will be delivered. The essential element to remember here is that the customer only wants to pay for benefits, whilst the seller has to pick up the tab for all the features whether the customer sees them as valuable or not. Benefits will provide the
‘copy’ for a business’s advertising and promotional activities.
TABLE 3.1 Example showing product features, benefits and proofs Features Benefits Proofs
Our maternity clothes are designed by fashion experts.
You get to look and feel great.
See the press comments in fashion magazines.
Our bookkeeping system is
approved by HM Revenue &
Customs.
You can sleep at night.
Our system is rated No. 1 by the Evaluation Centre
(www.evaluationcentre.com, Accounting software).
Who will buy first?
Customers do not sit and wait for a new business to open its doors. Word spreads slowly as the message is diffused throughout the various customer groups. Even then it is noticeable that generally it is the more adventurous types who first buy from a new business. Only after these people have given their seal of approval do the ‘followers’ come along.
Research shows that this adoption process, the product/service adoption cycle as it is known, moves through five distinct customer characteristics, from innovators to laggards, with the overall population being different for each group:
Innovators 2.5 per cent of the overall market Early adopters 13.5 per cent of the overall market Early majority 34.0 per cent of the overall market
Late majority 34.0 per cent of the overall market Laggards 16.0 per cent of the overall market Total market 100 per cent
Let’s suppose you have identified the market for your internet gift service. Initially your market has been confined to affluent professionals within five miles of your home to keep delivery costs low. So if market research shows that there are 100,000 people who meet the profile of your ideal customer and they have regular access to the internet, the market open for exploitation at the outset may be as low as 2,500, which is the 2.5 per cent of innovators.
This adoption process, from the 2.5 per cent of innovators who make up a new business’s first customers, through to the laggards who won’t buy from anyone until they have been in business for 20 years, is most noticeable with truly innovative and relatively costly goods and services, but the general trend is true for all businesses. Until you have sold to the innovators, significant sales cannot be achieved. So, an important first task is to identify these customers. The moral is: the more you know about your potential customers at the outset, the better your chances of success.
One further issue to keep in mind when shaping your marketing strategy is that innovators, early adopters and all the other sub-segments don’t necessarily use the same media, websites, magazines and newspapers or respond to the same images and messages. So they need to be marketed to in very different ways.
Segmenting markets
Having established that customers have different needs, we need to organize our marketing effort so as to address those individually. However, trying to satisfy everyone may mean that we end up satisfying no one fully. The marketing process that helps us deal with this seemingly impossible task is market segmentation. This is the name given to the process whereby customers and potential customers are organized into clusters or groups of ‘similar’ types.
For example, a carpet/upholstery cleaning business has private individuals and business clients running restaurants and guest houses. These two segments are fundamentally different, with one segment being more focused on cost and the other more concerned that the work is carried out with the least disruption to their business. Also, each of these customer groups is motivated to buy for different reasons, and your selling message has to be modified accordingly.
Worthwhile criteria
Useful rules to help decide if a market segment is worth trying to sell into include:
Measurability. Can you estimate how many customers are in the segment? Are there enough to make it worth offering something ‘different’?
Accessibility. Can you communicate with these customers, preferably in a way that reaches them on an individual basis? For example, you could reach the over-50s by advertising in a specialist ‘older people’s’ magazine with reasonable confidence that young people will not read it. So if you were trying to promote Scrabble with tiles 50 per cent larger, you might prefer that young people did not hear
about it. If they did, it might give the product an old- fashioned image.
Open to profitable development. The customers must have money to spend on the benefits that you propose to offer.
Size. A segment has to be large enough for it to be worth your while exploiting it, but perhaps not so large as to attract
larger competitors.
Endurance. Does the segment look like having a reasonably long life?
One example of a market segment that has not been open to development for hundreds of years is the sale of goods and services to retired people. Several factors made this a particularly unappealing segment. First, retired people were perceived as ‘old’ and less adventurous; second, they had a short life expectancy; and finally, the knockout blow was that they had no money. In the last decade or so that has all changed: people retire early and live longer and many have relatively large pensions. The result is that travel firms, housebuilders, magazine publishers and insurance companies have rushed out a stream of products and services aimed particularly at this market segment.
Segmentation is an important marketing process, as it helps to bring customers more sharply into focus, classifies them into manageable groups and allows you to focus on one or more niches. It has wide-ranging implications for other marketing decisions. For example, the same product can be priced differently according to the intensity of customers’ needs. The first- and second-class post is one example, and off-peak rail travel another.
It is also a continuous process that needs to be carried out periodically, for example when strategies are being reviewed.
Analysing competitors
Researching the competition is often a time-consuming and frustrating job, but there are important lessons to be learnt from it. Some of the information that would be of most value to you will not be available. Particularly hard to find is information relating to the size and profitability of your competitors. Businesses, and particularly smaller businesses, are very secretive about their finances. Because of this, you may have to make estimates of the size and profitability of various firms.
The presence of competitors is not all bad news; in the first place it gives you the comfort of knowing that there is a base of customers out there who want what you plan to offer. If there are already dozens of businesses selling your product or service then you will have to have a better or different offering to woo them away from their existing supplier. The difference doesn’t always have to be big, but it does have to be important to the customer. For example, a one-person gardening service stole a march on competitors by taking away all garden refuse rather than leaving it for the customer to remove. This meant having a slightly larger van than competitors, but it was sufficiently compelling as an advantage to win enough business to allow more staff to be recruited.
The task for research is to understand who your competitors, both direct and indirect, are, as well as their strengths and weaknesses. Direct competitors are those already actively operating in a market. So for the gardening business, other similar firms are its direct competitors. Indirect competitors would be businesses hiring out lawnmowers, hedge cutters and the like, to allow homeowners to do their own gardening.
Naming names
If your market is very confined then a Google search of the area concerned with a basic business description may have all the information you need to list out your competitors. If you have to look further to cover a wider geography, including overseas, there are numerous directories that list businesses by trade, area and size.
Aside from the names and basic contact details you will need to find out some facts about your competitors: what they do, how they are organized, what their turnover, profit and financial structure are and whether or not they are privately owned or part of a larger group of businesses. You need this information to see both how to compete and whether or not the business area looks profitable.
The sources that will provide much of the background data on the businesses that operate in your market and other relevant market data are included in Appendix 3.
Understanding strengths and weaknesses
The easiest way to find out what your competitors are doing right or wrong is to try them out. Even if you don’t actually buy or even need what they sell there is nothing in the rules that says you can’t enquire. Suppose, for example, you intend to set up a bookkeeping service. First search out local small businesses, using if necessary one of the sources described above. Then ‘enquire’ about their services with a list of questions, some of which you may find answers to in their leaflet or on their website.
The probing questions either to ask or to find out by research should include the following:
What exactly is the range of services they offer? For example, do they just prepare the accounts? Do they help with tax
returns? Do they offer advice on what the figures reveal about their client’s business? Do they handle tax enquiries?
Do they advise on sources of finance?
What are their prices and when do they require to be paid?
How long have they been in business?
How many clients do they have? You may find some
background information on their website, where businesses often list satisfied clients. Also, you can make an estimate by finding their turnover from their own accounts (see
Appendix 3) and dividing that by the price they charge. So, if their last year’s turnover was £400,000 and they charge
£4,000 a year to do the books for one business, they have around 100 clients.
How profitable are they? This once again is information that can be obtained from organizations listed in Appendix 3.
How many people do they employ? You can estimate this by visiting their offices.
Do they have other branches?
Where do they advertise? This might give you some pointers when planning your own promotion strategy.
Deciding on advantage
The outcome of your research into customers and competitors is a clear idea of the market niche you are going to sell into first and what will be different or better about your product or service. For a business planning to offer a local gardening