Starbucks Coffee Segmentation and Target Market
Starbucks Corporation was started at Seattle by Gordon Bowker, Jerry Baldwin and Zev Siegl in 1971 (Burks 2009). They were initially selling whole beans coffee in one of the Seattle store. By 1982, the business had tremendously grown and opened up five stores that were selling a roasting facility, coffee beans and a wholesale business to local restaurants. It started its business with only a small coffee shop. The Starbucks owners’ mission was to educate their customers about the fine coffee and feel the dark roasted coffee’s smell.
Howard Schultz who was appointed as the retail and marketing manager brought new ideas to the owners on how to improve their operations though he was turned down. He in turn opened his own I1Giornale coffee bar based on Italian coffee cafes in 1986, which was selling brewed Starbucks coffee. He expanded his business to three coffee bars by 1987 and acquired Starbucks for $4 million from the owners and changed the name from I1 Giornale to Starbucks. His intention was to ensure the company grows slowly with a solid foundation. The company experienced losses within the first two years as a result of increased operating and overhead expenses due to its expansion. By 1991, Starbucks increased its sales by 84% and the company had no outstanding debts.
Starbucks is the leading roaster and retailer for the specialty of coffee brand in the world. It has opened up over 7,500 stores all over the world. As it continues to expand, it encounters different types of new product markets, with new customers demanding appealing and unique products. It has already begun by introducing a Frappuccino line extension targeted to the non-coffee drinker. Starbucks faces challenges and difficulties when entering this new market as it has to compete in order to retain its primary products brand recognition, and still increase its new product line awareness.
Marketing strategy of Starbucks
Marketing strategy refers to the process of carrying out segmentation, positioning and targeting (Kerins 2009). It involves having a detailed knowledge of the marketplace into strategic decisions and the appropriate targeting of customer groups. It should emphasize on any differential advantages and have a suitable positioning within the target segments (Simkin and Dibb 1996). Starbucks has adopted a differential strategy which is seeking to provide a service or product that is different from competitors, and offer benefits that are that are widely valued by customers. When Starbucks was launched in 1971, there were many coffee bars in the US, but Starbucks wanted to have a unique stand from others. Marketing can powerfully contribute to the highly important aspects of the organizational competitiveness such as competitive analysis (Varadarajan 1992) and innovation (Kerrin 1992). Starbucks is mainly focusing on the strategy of new products, stronger customers’ connection as third place and expanding their store locations in US and abroad. It has followed the Segmentation, Targeting and Positioning process (STP).
It is a process of subdividing a market into buyers’ distinct groups with different characteristics, needs, or behavior that might require marketing programs or separate products (Amstrong and Kotler 2006). In the beginning, Starbucks was based on socio-Economic segmentation in consumer markets due to its concentration on social class of people working at the office and wanted to have a cup of coffee with good facilities and atmosphere. Starbucks has also segmented its markets by demographically and geographically selecting the store location with educated and coffee lovers (Dibb and Simkin 1996).
Since 1960’s, consumption of coffee in the U.S. has been trending down. Starbucks has been extremely cautious on its target markets. According to Pinsen (2008), a target market consists of a set of buyers with common characteristics or needs that the company decides to serve. The decision of selecting the target segments can be assessed by considering competitive factors, market factors, social, political and environmental factors (Jobber 1995). Price, customers’ bargaining power, suppliers and barriers to entry that comes under market factors, and in the case of Starbucks, they had expensive coffee and were trying to implement a new coffee culture in America. However, they have low entry barriers. In their effort to maintain suppliers’ long-standing relationship, they were extremely careful in each coffee making step (Stanley 2002), and they did not have any real competition threats.
Starbucks targeted middle to high income office workers with a desire to purchase premium products. Schultz wanted to make Starbucks ‘Third Place’, the place in between home and work where people could relax, gather and interact with one another. This made them be vigilant about their quality control and meet the high expectations. They also paid a great deal of attention to the store details from layout to furniture and the music. Moreover, Starbucks were in the ‘introduction’ stage of their product lifecycle.
There are three different ways of doing target marketing; differentiated, concentrated and undifferentiated. A concentrated/niche marketing concentrates its efforts towards a single market segment, maintains and creates an exclusive strategy for each segment (Dibb 1994). Another approach is the differentiated/segmented marketing. It takes the mass market approach through designing a separate marketing and products programs for the different segments (Walker Boyd 1990). Concerning the undifferentiated /mass marketing, the company ignores the differences in the market segment and uses one strategy to target the whole market (Amstrong and Kotler 2004). When it was launched, they applied undifferentiated marketing strategy, created and maintained the marketing mix as they considered the market as a single segment. A major challenge in using this target market strategy is developing the brand that satisfies all customers. They used their services without quality compromise for attaining this targeting strategy. Moreover, their aggressiveness in the market was displayed by opening 15 new stores in 1988, 20 stores in 1990, 31 stores in 1991, and 53 stores in 1992.
After deciding which market segments the company should enter into, it must decide the position that it wants to occupy in their target market. Market positioning is the way products are arranged in order to occupy desirable, clear and distinctive place that is relative to the competing products in the targeted customers’ mind (Williams 2010). Starbucks developed a unique market position for their products. This was meant to make their products different from others so as to attract customers. According to Kotler and Amstrong (2006), Starbucks positioned itself in the market as a highly reputed brand. In this case, the company has planned its positioning in a way that brings a distinction between their products’ brand from those of competitors, and enjoy the greatest strategic advantage in their target markets. Their positioning strategy was based on the customer so as to provide the best service beyond customers’ expectations. They gained a competitive advantage over employee and customer satisfaction. This was enhanced by its positioning development strategy that was customer based which provided the utmost facility in terms furniture, layout and music. Concerning employee satisfaction, they make them as partners and provide them with personal security, freedom to participate in every decision of the business and make it successful (Miller 1985).
Developing marketing mix
One of the major modern marketing concepts is when a business has planned its overall marketing strategy than planning the marketing mix details. Marketing mix refers to a set of tactical, controllable marketing tools which include; price, product, promotion and place that is blended by a firm to produce the target market’s desired response (Frey 2010). The company has come up with good decisions on marketing mix tools.
Starbucks tried to position themselves in the coffee industry as a premium product through creating a high standard, providing an excellent service and introducing innovative products. Schultz knew that his coffee was perishable making them so fanatical about quality control, and thus they monitored each and every coffee production step very carefully. They purchased dark-roast, whole bean coffee from Kenya, Sumatra, Ethiopia, Costa Rica and Ethiopia. They roasted coffee in their own plants and later sold it through company-owned stores. They applied Total Quality Management (TQM) that all company’s people are constantly involved in improving the products’ quality (Kanji 1996). Use of introduction of Frappuccino and nonfat milk made a significance presence in the Starbucks’ balance sheet. Moreover, they gave seasonal offerings, such as cream Frappuccino and strawberry in the summer and gingerbread latte was introduced during Christmas. Gradually, food items such as pastries, cookies, salads and sandwiches made their way into the stores. They later developed new products with other companies, which show how cautious they were in maintaining their premium quality image and keep their standards high.
According to Dalrymple (1986), price refers to the money paid to the seller the buyer for a given quantity of the product. Quality and price determine the value of the product. When Starbucks was launched, it was positioned in accordance with its expensive products. They purchased the quality beans, gave efficient and effective training to staffs, created an atmosphere to enjoy coffee, interact with fellow people and have a break from the busy life. They all justify their pricing and indicate how pricing supported their positioning.
Distribution and Service
Distribution channels link the products or services of the organization to its customers. In a producer-consumer channel, it is significant to maintain personnel relationship with the customers as it is the case of Starbucks (Brassington 2000). However, Starbucks got an advantage from a distribution point of view through sticking on its winning store location formula for its new stores. They opened stores like clusters and selected highly visible locations. Due to the increased demand, they were enabled to manage the increased traffic and maintained their competitive position. The company invested heavily on staffs’ training and did innovative tactics in the management of their human capital. They differentiated themselves from other competitors in the market through constant provision of higher quality services.
Shimp (1997) defined promotion as all marketing activities that stimulate buyer action or product sales. Starbucks used to have big community events before opening its stores. Each city’s personality was boosted by the designed artworks, and it was used on T-shirts and commuter mugs. They did not use funds in advertising but instead they used them in acquiring key locations. Starbucks always tried to establish a national dominance to take the first priority before other specialty coffee bars comes into the picture.
Relationship between consumer behavior and target markets and branding
Consumer behavior is commonly accepted to refer to the process of decision-making employed by consumers when choosing, purchasing and using services and products (Noel 2009). An understanding of consumer behavior brings important clues that help in identifying market segments. They are most likely to respond to the service offering or product and marketing communication programs.
Quantitative Market Segmentation
There are four types of qualitative and quantitative market segmentation tools used to determine the factors affecting buying decisions when identifying target markets: demographic, psychographic, geographic and behavioral influences. Demographic and geographic factors such as age, location, family income, occupation, education attainment and ethnicity help to identify market segments. Observable influences help in making inferences about social, lifestyle and cultural influences that drive consumer behavior.
Qualitative Market Segmentation
Behavioral and psychographic influences are qualitative, emotional factors explaining why target markets behaves as it does. Psychographic influences include attitudes, beliefs, personality, opinions, values, self-image and interests. Behavioral influences relate to the customer’s relationship with brands in terms of experience, knowledge, perceptions and usage. These include perceived brand benefits, brand attributes, usage rates, brand loyalty and usage occasions. They are essential in terms of assessing cognitive levels versus intuitive involvement in buying deliberations.
Alignment between Company Strategy and Marketing Decision
Alignment refers to an arrangement of activities in a straight line, or inappropriate or correct relative positions. On the other hand, strategy alignment refers to the complete organizational component integration to the strategic vision, mission, day-to-day decision making, planning processes and human performance systems. It facilitates continuous monitoring, updating the strategy, review, which is crucial in today’s constant environmental change. The laid down company strategies influences the marketing decision made by a business.
Starbucks claimed their leadership through focusing on a new products’ strategy, a stronger customers’ connection as the Third Place and expanding the company’s store locations both in United States and abroad. They had no compromise on their service standards and quality and maintained customer relationship with utmost care. This paper analyzed the positioning strategy and target markets of Starbucks while it was launched. It also shows how different marketing mix variables supported their positioning. Starbucks has spread in all cities in America and other 48 countries all over the world. The level of success obtained by Starbucks has important lessons, and much aspiration is needed in the business world.
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