AP Business with Personal Finance · Lesson 1

Choosing customers and understanding why they buy

Know Know it

Marketing is everything a business does to find out what customers want, create products that meet those wants, and get them to customers at a profit. The marketing concept says to start with customer needs, not with what the business happens to make. The marketing mix, or 4 Ps, is the set of choices a business controls: product, price, place and promotion.

No product suits everyone, so businesses segment the market into groups with shared traits. Demographic variables are facts such as age, income, gender and family size. Geographic variables are where people live, from region to climate. Psychographic variables are lifestyle, values, interests and personality. Behavioral variables are how people act toward the product: how often they buy, the benefit they want, their loyalty. The business then chooses a target market. Undifferentiated (mass) marketing offers one product to everyone; differentiated marketing offers a different version to each of several segments; concentrated (niche) marketing serves one segment very well.

Positioning is the image a business wants its product to hold in customers’ minds compared with rivals. A perceptual map plots brands on two features buyers care about, such as price and quality, to show where gaps are. A value proposition says why the target customer should choose this product. Selling to other businesses (B2B) usually means fewer, larger buyers and longer decisions than selling to consumers (B2C). Customer relationship management uses records of past purchases to keep customers coming back, because a loyal customer’s lifetime value is often far more than one sale.

Buyers usually move through a decision process: need recognition, information search, evaluation of alternatives, the purchase, and post-purchase evaluation. After a costly purchase, buyers may feel cognitive dissonance, doubt about their choice; reassurance, easy returns and follow-up help. Cheap, familiar items are bought by routine response; expensive, rarely bought items involve extensive decision-making. Influences include psychological factors (motives, perception, attitudes; Maslow’s hierarchy runs from physiological and safety needs up to love and belonging, esteem and self-actualization), social factors (family, reference groups, culture), personal factors (age, life stage, income) and the situation at the moment of buying.

Trap Who people are is not how they live

Age, income and family size are demographic, even when they hint at a lifestyle. Values, interests and personality are psychographic. How often someone buys, or which benefit they seek, is behavioral. Sort a variable by what it actually measures.

Worked example Easy

A fictional climbing gym aims its ads at people who describe themselves as thrill-seekers and like to try new challenges, whatever their age or income. Which segmentation variable is it using?

  1. Demographic
  2. PsychographicAnswer
  3. Geographic
  4. Behavioral

How to solve it

  1. Ask what the variable measures: “thrill-seeker who likes new challenges.”
  2. That is a trait of personality and lifestyle, not age, place or buying habit.
  3. Personality and lifestyle variables are psychographic.

Why each choice is right or wrong

  • A. Incorrect. Demographic variables are facts such as age and income, and the gym says it ignores those.
  • B. Correct. Seeing oneself as a thrill-seeker who likes new challenges is a personality and lifestyle trait, a psychographic variable.
  • C. Incorrect. Geographic variables are about where people live, and the ads say nothing about place.
  • D. Incorrect. Behavioral variables are about how people act toward a product, such as how often they buy, not their personality.

Explain Explain it

Task verbs: identify, explain

To identify a stage of the decision process, find what the buyer is doing right now: noticing a need, gathering information, comparing options, paying, or judging the purchase afterward.

To explain a targeting choice, first name the strategy from what the business actually does. Then weigh it against a simpler choice: give one gain and one drawback, and tie each to a detail of the case.

Worked example Medium

Lena saved for months and then paid 1,400 dollars for a fictional Arclight camera. Two days later she keeps rereading reviews of the camera she did not buy, wondering whether she made a mistake. The store sends her an email with tips for her first photo walk and a reminder of its 30-day return policy.

Which stage of the decision process is Lena in, and what is the store’s email trying to reduce?

  1. Information search; the time she spends reading reviews
  2. Post-purchase evaluation; her doubts about her choiceAnswer
  3. Evaluation of alternatives; the number of cameras she compares
  4. Need recognition; her wish to own a better camera

How to solve it

  1. She has already paid, so the stage must come after the purchase.
  2. Worry about whether a costly purchase was right is cognitive dissonance.
  3. The email reassures her during post-purchase evaluation, so she keeps the camera and stays happy with the store.

Why each choice is right or wrong

  • A. Incorrect. Information search comes before buying, but Lena has already paid for her camera.
  • B. Correct. She has bought the camera and now doubts her choice, which is cognitive dissonance in post-purchase evaluation; the tips and return reminder reassure her.
  • C. Incorrect. Evaluating alternatives comes before the purchase; Lena is judging a choice she already made.
  • D. Incorrect. Need recognition is the first stage, but Lena has already recognized her need and bought the camera.

Explain Your turn

A fictional tea company, Tallow & Leaf, sells the same green tea in two versions: a plain box sold in supermarkets to shoppers on a budget, and a decorated gift tin sold in department stores to people buying presents. Name the targeting strategy Tallow & Leaf is using. Then explain one benefit and one cost of this strategy compared with selling one version of the tea to everyone.

Write it, then compare. Nothing you type here is saved or graded.

Compare with a model answer

A full answer does this

  • Names the strategy as differentiated marketing
  • Explains a benefit of offering two versions instead of one
  • Explains a cost or drawback of running two versions instead of one

Model answer

Tallow & Leaf is using differentiated marketing: it offers a different version of the tea to each of two segments. One benefit is that each version fits what its buyers want, a low price for budget shoppers and an attractive tin for gift buyers, so the company can sell to both groups and earn more than one version would. One cost is that running two versions is more expensive: the company pays for two kinds of packaging, sells through two kinds of stores and needs separate promotion for each.

Apply Apply it

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