February 7, 2006
How Marketers Make an
by Barbara Bix and Melissa Josephson
Every company aims to maximize profit.
Yet, in the frenzy of everyday work,
it is not uncommon for "urgent" issues
to supplant "important" ones,
thereby shifting the focus of marketing
The most important contribution that
marketers make to the company's success
is consciously choosing a strategy for
optimizing sales and marketing resources—and
then sticking to it.
Selecting the 'Right' Target Market
Picking the right target market by selecting
the most profitable group of customers
is the critical first step in developing
an effective marketing strategy. Doing
so enables marketers to concentrate their
firepower and limited resources on those
prospects that will yield the greatest
When identifying the most profitable
market segment, look for the group of
the most value from your products and services
and will therefore pay top
dollar for them
large enough to generate the desired revenue
the least expensive to serve
A good example of targeting profitable
customers is Jayne, a speech pathologist,
who used to work with hospital patients
and university students who needed
Through conversations with contacts
in the business world, Jayne found
more lucrative market niche: foreign
business executives who needed help
with accent reduction to improve their
and presentation skills. These executives
were willing to pay top dollar for
her services because outstanding communications
skills were key to their success.
The foreign business executives were
also more cost-effective to serve.
Jayne created a standard—and effective—program
for accent reduction, which she easily
adapted for each new client.
The irony was that once Jayne identified
this more profitable market, it became
much easier to generate new business.
The foreign business executives had
natural and tightly knit networks through
expatriate communities and often referred
Jayne to their friends and colleagues.
Word of Jayne's services spread quickly,
generating more business from high
paying clients—and, therefore, higher
profits for Jayne.
Dissecting the Profitability Equation
As demonstrated by Jayne's example,
the best market segments are those
optimize the "profitability equation":
Profits = (Price x Quantity) – Expenses.
Marketers must examine and weigh the
best combination of these three variables.
It helps to start by analyzing the makeup
of each variable and how the variables
affect one another:
Price: As illustrated in Jayne's example,
different customers derive different
value from the same product and will
pay different prices for it. Therefore,
maximizing price requires knowing who
derives the greatest value from your
products or services. To determine the
most desirable market segments, ask:
What alternatives do prospective clients
have? What is the availability and quality
of substitute products? What are the
prices of these competing products and
services? How do your products and services
better meet the needs of your customers?
If you can articulate a stronger value
proposition, you can charge higher prices.
Quantity: There is a direct relationship
between price and quantity. If you can
charge higher prices, you don't need
to sell as much volume to achieve the
same profit. Jayne was able to charge
higher prices to a much more concentrated
group of clients.
Expense: One way to look at expenses
is in terms of actual dollars spent to
acquire and serve customers. Another
important factor is the actual amount
of time spent on each customer. Customers
require different levels of attention,
and some are much more expensive to serve
than others. If you can determine which
market segments are easiest to acquire
and serve, you have the flexibility to
discount prices or sell less and still
achieve your profitability goals. When
determining which market segments to
target, don't neglect to ask: Do certain
customers require ancillary services
for which the company may not be able
to charge? What are your selling expenses?
Are certain market segments harder to
reach? Do particular customers require
custom product development?
Applying the Profitability Equation
to Select Your Target Market
Much of the information you need
to evaluate these three variables
current customer database. By
starting with the current customer
as a guide, marketers can look
Find groupings and identify segments. Some
pop up, such as customers
by geography, industry, specific
Ultimately, look for customers
in a segment that
share similar characteristics.
the relative benefits of serving each segment. How
segment? What are their
alternatives? What will they pay? What
will it cost to reach them? How
to make a buying decision?
How much effort will
it take to turn
potential threats, such as competing solutions,
volume or require additional
expenses to thwart.
the "profit maximizing" formula
and do the math. Review
price points, calculate the volume of customers
each price point, and incorporate
associated expense information into each segment.
When you are armed with
this information, creating
strategy is much easier.
Once you apply the
profit maximizing formula,
it's easy to select
the right target market,
focus your marketing
make the most
of your resources.