Starbucks’ Market Segmentation

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Table of Contents

Abstract
The Segmentation Variables used by Starbucks
Specialty Coffee Business
Differentiation Strategy
Competitive Positioning Strategy
References

Abstract

It is essential to take the market segmentation of Starbucks into account when analyzing the company’s business model. Marketers use various segmentation variables to categorize the consumers into specific groups based on particular distinctive attributes. In this way, they are able to design different marketing strategies for each segment. Starbucks Corporation uses geographic, demographic, and psychotropic variables to structure its market.

This paper describes Starbucks’ market segmentation and marketing strategy. It provides the variables the writer will use to compete with the retailer in his specialty coffee business. It also details the product differentiation and positioning strategies that will enable the coffee shop to compete effectively in the market.

Starbucks’ Segmentation Variables

Marketers use market segmentation to divide a target market into groups bearing similar attributes or needs. They use geographic, behavioral, lifestyle/psychotropic, and demographic variables to organize markets into segments (Kotler & Armstrong, 2014). The geographic segment includes consumer groupings defined by administrative units (geographical regions) and physical factors, such as climate. Marketers also use demographic variables such as age, gender, and income level, among others, to organize a given market. Additionally, firms that offer multiple brands use psychotropic variables, such as lifestyle, to organize a market into different segments.

In the writer’s opinion, Starbucks Corporation organizes its market based on three variables, namely, demographic, psychotropic, and geographic. The company then uses product differentiation to satisfy the different customer groups. With regard to geographic segmentation, Starbucks has retail outlets distributed in different locations. Each of these outlets reflects the tastes and preferences of the local consumers.

Although the outlets are similar in design, they differ in terms of product category (coffee and baked food) and size. Additionally, Starbucks uses geographic variables to segment its international markets. According to Kotler and Armstrong (2014), firms planning to enter new markets categorize countries or regions based on geographic variables such as “income levels, religions, languages, customs, and political stability” (p. 112). In the writer’s view, Starbucks uses the same segmentation criteria to enter and thrive in foreign markets.

The company also provides a broad range of teas and baked goods with variable dietary content to cater for different tastes and preferences. Its menu contains nutritional information that clients can read before placing an order. Additionally, the firm has an online community dubbed ‘Coffeehouse’ that enables patrons with similar tastes to interact (Our Heritage, 2010). In this view, Starbucks divides its market into psychotropic segments based on lifestyle factors and customer traits. With regard to demographic segmentation, Starbucks’ various outlets have facilities that appeal to the all generations and income groups. Each outlet has comfortable seats and lounges as well as free internet (Wi-Fi).

Specialty Coffee Business

A specialty coffee startup can face stiff competition from big retailers like Starbucks. To compete effectively, the writer will use segmentation variables to organize the target market. First, the writer will define the customer types that the coffee shop will serve. Their characteristics will help design the types of coffees that the shop will offer and develop a marketing strategy to compete effectively. To achieve this, the writer will use demographic, psychotropic, and behavioral variables.

The demographic factors that will be useful in segmenting the market include age, level of income, and occupation. The reason for using these demographics is to design products/services that appeal to clients of all age groups, incomes, and occupations. For instance, the occupation of the customers will determine if the shop will have a meeting area or offer packaged takeaways that patrons can consume in their offices. Their income level will inform the pricing strategy for our products. Age will determine the type of in-house entertainment, music, and internet facilities that the business will offer. Counter and table services will be available to patrons of all ages. The shop will also offer free birthday drinks to appeal to clients of all age groups.

The writer will use psychotropic variables, such as customer styles and tastes, to segment the market. The patrons’ music and food tastes will indicate the type of entertainment and products to offer. Different coffees of variable dietary content to suit diverse customer tastes and characteristics will be available to our clients. Additionally, the shop’s interior design and decor will be made in a manner that reflects the different local styles. The reason for using these psychotropic variables is to provide products that meet diverse client needs.

The behavioral variables that marketers use to segment markets include “consumer loyalty, occasion, benefits, user status, and usage rates” (Porter & Claycomb, 1997, p. 65). The writer will use these variables because they reflect the consumption behavior of customers and therefore, useful in market targeting. The writer will use loyalty cards to reward loyal customers based on the number of times they visit the shop. In contrast, usage rates will indicate the level of coffee consumption among the different groups.

Differentiation Strategy

A firm gains competitive advantage by differentiating its products in a way that offers greater customer value. According to Kotler and Keller (2011), firms use a value proposition to help consumers distinguish their merchandise from those of rivals. In this view, they make customers to believe that a firm’s product gives extra benefits compared to those offered by rival companies.

Kotler and Keller (2011) further state that product differentiation involves two stages, namely, defining the value differences and promoting those differences in the market. A firm must first determine a value difference that can enhance competitiveness before promoting it. In this regard, differences that are “profitable, affordable, superior, and distinctive” are worth pursuing (Kotler & Keller, 2011, p. 75).

The shop will differentiate its products in terms of design, quality, and performance features. It will promote the identified product differences in these attributes between Starbucks’ beverages and its coffee using different strategies. One differentiation strategy the shop will use is the value proposition approach.

It will use a compelling value proposition to inform customers that it offers the finest espresso coffee in the market. Starbucks prides itself in providing multiple coffee brewing methods and a host of other products, including teas, juices, and pastries. The shop will only focus on espresso coffee. In this way, it will create a unique niche reputation and avoid confusing consumers. This approach will also portray the shop’s espresso coffee offerings as being of superior quality. It will also cut down capital costs and contribute to better management.

The shop will also use a pricing strategy to differentiate its product offerings. On average, Starbucks sells its beverages at a price that is $2 higher than the cost of similar products sold by other competitors. The shop will charge lower prices for its products, but offer extra benefits to its customers. In this way, customers will feel that they get value for their money. The shop will also adopt the Italian coffee culture. Starbucks usually uses syrups and other sweeteners to improve the taste of their coffee (Our Heritage, 2010). Fine Italian coffee does not need such ingredients to taste good. In this regard, the shop will brew its espresso coffee the Italian way to provide distinctive and superior quality products.

Starbucks often uses automated machines in the preparation of its products. It uses machines to cut down labor costs and enhance the uniformity of its coffee. However, the automated machines cannot adjust the variables and flavors that define quality in espresso coffee. In this regard, the shop will only use manual machines to adjust the variables that enhance the quality of the coffee. This will also help provide coffee of variable taste and nutritional content for different customer groups.

Competitive Positioning Strategy

The position of a brand in the market depends on how consumers perceive its benefits, quality, and other attributes (Jain, 2009). Since Starbucks is an established beverage retailer, new entrants that offer products at comparable prices will not compete effectively. Thus, the “more for more positioning strategy” will only result in losses, as customers will continue to frequent Starbucks (Jain, 2009, p. 51). In this view, the shop will use the ‘more for less’ strategy to position itself in the market. This strategy entails selling a product of a higher quality at a slightly lower price than that of competitors.

As aforementioned, the shop will focus on espresso coffee drinks to cut a unique market niche for itself. It will offer these drinks at slightly lower prices than that of Starbucks, which are usually $1-$3 higher than the industry average. Since the shop will specialize on espresso coffee drinks, marketing costs will not be high. The shop will depend on repeat customers and ‘referring’ business to increase its profit margins. Additionally, the specialization will cut down labor and operational costs. Thus, the shop will be able to sell top quality coffee at a lower price without incurring losses. The approach will also create the perception that customers get value for their money when they visit the shop.

References

Jain, S. (2009). Marketing: Planning and Strategy. New York: Cengage Learning.

Kotler, P., & Armstrong, G. (2014). Principles of Marketing. Upper Saddle River, NJ: Pearson Education.

Kotler, P., & Keller, K. (2011). Marketing Management. New York: Prentice Hall.

Our Heritage: Starbucks. (2010). Web.

Porter, S., & Claycomb, C. (1997). The influence of brand recognition on retail store image. Journal of Product and Brand Management, 6(6) 197-207.

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