Monday, October 4, 2010

Starbucks' magic recipe: divide, focus, customise and rule!

When the British ruled India for more than 300 years from the 1600s to 1947, one of their successes came from their use of the divide and rule policy. This was because they could not rule all of the Indian subcontinent as one as it was very diverse, complex and large in size. So they identified different regions and parts of the subcontinent, broke it up into geographical as well as political fragments and ruled each region separately by applying a different strategy for each region.

The same can be said to be true of new marketing stragies too. Successful companies have learnt to divide the markets into segments with unique needs, based on demographics, geographic, customer preferences, profiles and so on, in order to conquer them! The intention being higher profits, greater coverage, better customer service and so on.

Anyone who is interested in the stock market and follows the history of stocks will tell you with a gleam in his eye (if he missed out on riding the SBUX stock wave) or a naughty smile on his face (if he did benefit from it) about how the stock of Starbucks Corporation rocketed from a penny stock worth around 70 cents in 1992 to around $37 in 2006 while at its peak! If someone had invested just $1000 in 1992, he would have had atleast $52857.14 in 2006 from the appreciation of stock value alone, excluding the dividends reaped!! How did this magic happen? How did starbucks become so loved and profitable? The brief answer in simple terms is "divide and rule". In marketing, the term used is market segmentation!

The application of Starbucks Corporation's strategy of segmentation of markets into different groups, then targeting each group individually with focus and finally positioning is legendary in the marketing world! To start with, Starbucks decided to sell not just coffee, but an experience - a premium experience, a notch above.. classy coffee for classy people in a classy environment, no less! But that coffee came with a classy (read high!) price tag as well, which people were willing to pay. Every office or college going yuppie wanted to be seen with a starbucks cup in his hands. No wonder people jokingly call Starbucks as "five bucks!".

Initially, Starbucks' target was the 9 AM to 5 PM office going crowd in the urban areas who were in a hurry for their morning fix of caffeine as well as 18 to 24 year olds who wanted a place to "hang out". Once Starbucks had identified this segment, it began to target this segment and position itself accordingly as "a place where you can sit back and be yourself". The decor, lighting, furniture were all customised to attract this segment of the population. They even started selling music albums in their stores, which the youth love. In this decade, free wi fi access was added. The baristas were given training about how to be customer friendly, especially with the young and hip crowd.

Once they had good market share over this segment of 18 to 24 year olds, they wondered, why not apply the same formula to all the segments of the population as well? And why not target every segment separately and develop specific products positioned for each segment? Then they developed new menu items for other segments like middle and older age, "skinny drinks" for those who preferred low calorie drinks, tea and other beverages for non coffee drinkers. They even decided to target the segment of breakfast menu for office goers and started selling hot breakfast sandwitches and added drive through windows. Gradually, starbucks had an answer and an offer for each segment of the population and each place - they found their way into supermarkets, book shops, highways, you name it. This is how they were able to grow phenomenally, among other reasons like good product, placing, presentation and promotion.

After this blog, I feel like I need to relax and unwind a bit. I think I am going to head to the nearest Starbucks and order a Venti Moccha Frappachino - light ice, double blended, no cream - which my favourite barista in the store, Chan, has imprinted in his memory!

Attachment: Part of a powerpoint slide show related to the SBUX strategy.

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