DLJ Case Writup
A firm can adopt either a multi-segment or a niche approach to market targeting. The multi-segment approach entails diversifying the firm's target clientele with the intention of reducing resulting vulnerability. It enables firms to effectively respond to demographic and trends dynamics in the market. On the other hand, the niche approach involves focusing on a particular segment in a market. It is generally considered risky since it does not offer adequate flexibility necessary in effective adjustment to market changes. With this in mind, determining whether DLJdirect should expand its online target segment portfolio, and the appropriate marketing budget requires an in-depth analysis of the prevailing circumstances. Currently, the company employs a niche targeting approach, which potentially poses numerous challenges, including market instability and missed profitability opportunities. This paper therefore entails a study of the viability of DLJdirect's segment approach and its marketing budget.
Segmentation Approach Decisions
It is important to examine the various factors that make a target segment viable. This will help arrive at the most appropriate decision regarding DLJdirect's decision towards online share trading market segmentation. These factors include the opportunity to increase revenues, enhancement of market stability, advantages of economies of scale, and market dominance.
DLJdirect has to consider the opportunity that comes along with venturing into other target segments. Currently, the company focuses exclusively on “Aggressively Affluent” segment. This segment encompasses a small fraction of online investors. Per se, the segment has accounts for a total of about 243 000 accounts for the company. The few number of accounts has limited DLJdirect's revenue generation capabilities.
As illustrated in the above table, DLJdirect had net revenues of $38.8 million for the 1999 financial year. This ranked the company at position three among the top five highest net revenue generating firms. Shwab had the highest revenues, of about $73.34 million, generated from a more diversified target segmentation approach. Its portfolio encompasses a healthy combination of customers in “Portfolio Cruise Control” and “Retirement by the Book” segments. It is evident that Schwab's ability to diversify its target segments gives it an edge over DLJdirect in revenue generation. This can be associated with the resulting high volumes customers from the two target segments.
Stability is another factor that DLJdirect has to consider when deciding on whether to increase its target segmentation portfolio. It should be in the interest of a company to ensure that besides profit making approaches, it is protected from direct risk exposure. By focusing only on the “Aggressively Affluent” segment, DLJ operates a relatively stable accounts. This is as shown below.
Based on the nature of investors under the “Aggressive Affluent” segment, DLJdirect is assured a high level of stability. These investors are ready to pay a premium for services offered. Nonetheless, the one segment approach exposes the company to risks associated with market changes. This is because the high-net investors are likely to be affected the most by hard economic times. If this happens, the company lacks the diversity necessary in risk exposure mitigation. Notably, while the “Retirement by the Book” segment has moderate risk levels, the “Get Rich Quick” segment has similarly better risk tolerance levels as the “Aggressive Affluent” segment. It is evident that incorporating the “Get Rich Quick” segment in the portfolio would not increase any level of risk. Differently it would enhance diversification and consequently enhance stability.
Economies of Scale Advantages
The decision on market segmentation approach has to contemplate the arising economies of scale. Generally, economies of scale have a major impact on the operations and profitability of a company. DLJdirect has to consider the economies associated with sole operations of “Aggressive Affluent” accounts on one hand and a multiplicity of accounts from different segments on the other hand. As such, the number of average daily trades and average marketing cost per new account has to be considered. These trades are as shown below.
From the above table, it is evident that DLJdirect has the lowest number of average daily online transactions. This is likely to have a negative impact on cost of production. Besides the inability to generate income from a large pool of investors when compared to its competitors, the company will not be able to effectively spread the cost of operating the accounts. This is evident in the average marketing costs per new account for the top five companies. Rightly, DLJdirect ranks second, only after E*Trade. This is in consideration of the fact that the company has lower revenues per marketing budgetary allocations compared to those of Ameritrade and E*Trade.
Growth is an important factor to consider in the evaluation of the viability of the DlJdirect's niche segmentation approach. This entails examining the potential the target segment in guaranteeing future expansion of the business. Understanding this phenomenon requires an analysis of the demographic covered by a company's segment of choice. It can also be studied through scrutiny of previous growth efforts.
As manifested in the table above, DLJdirect has the lowest volumes in the number of new accounts. This indicates a slow growth in the number of its customers. Visibly, customer growth rate is almost three time lower than that of Ameritrade, the company with the second lowest growth in customers.
The nature of customers targeted by the “Aggressive Affluent” segment as well provides important information on DLJdirect's growth potential. This category encompasses customers with an average income of $77 000. As illustrated in the table below, this target income is more than double that of customers in the “Get Rich Quick” segment. Notably, very few investors are within this income bracket, which limits the company's ability to grow. This is especially magnified with DLJdirect's decision to globalize its operations.
The impact of DLJdirect's niche segmentation approach is visible in the company's market dominance. This dominance is certainly important in enhancing the company's image and augmenting its revenue generation capacity. Market command is equally essential in the long-term survival of a company since it positions it rightly when it comes to valuation, brand image, and acquisition wars. Markedly, as shown below, DLJdirect's market share is only 4% of the total online share trading market.
From the table, it is manifest that DLJdirect is struggling to assert itself in the market. This does not contribute positively to its global image. It is ranked seventh in terms of market reach. This is despite having the second best assets to account ratios, only after Schwab. Concerning assets to account ratio, DLJdirect has amounts of $46 091, while Schwab has $86 400.
Marketing Budget Decisions
Numerous factors will be considered when arriving on the decision whether to increase the marketing budget for DLJdirect. These factors include company's internal objectives, strategic alignment, company's age, and competitors' budgets. The impact of these factors on DLJdirect's marketing budget allocation actions is deliberated hereunder.
In the case of DLJdirect, the marketing efforts aim at enhancing its dominance. The company has in the past suffered declining investor numbers. There has been need to invest in marketing to counter the extremely aggressive marketing wars launched by the company's competitors. For this reason, the company has to allocate adequate marketing funds to ensure that it lures in more investors.
Consideration of this factor will involve ensuring that the marketing allocations are aligned with the company's profit making goals. For instance, the marketing budget has to be in tandem with the company's revenues. They should not be too low or way above the generated income. Prominently, the marketing allocations by DLJdirect are currently at 12% of its total revenues. It usually argued that marketing budget allocations should not exceed 10% of generated revenue.
A company's age is usually an important factor to consider when determining the size of a marketing budget. When the company or product is new in the market, it is expected that more resources will be required to adequately fund brand name campaigns. This is different for a company like DLJdirect, which has been in the market for long.
Importantly, a company has to evaluate the actions of competitors when allocating marketing funds. It is necessary that DLJdirect prepares a comparative budget to ensure that it competes fairly with its competitors. With this is in mind, it has been observed that ten online share trading companies had allocated a total of $1.5 billion to marketing for the following financial year. Specifically, E*Trade, Ameritrade, and Schwab had marketing budgets of $300 million, $200 million, and $300 million respectively.
Conclusion and Recommendations
Based on the above analysis, it lucid that DLJdirect if facing serious market challenges. The competition is stiff and companies need to seal all loopholes and utilize all available opportunities to ensure survival. For this reason, DLJdirect loses opportunities by focusing on only the “Aggressive Affluent” segment. This approach denies the company advantages such as increased revenue, enhanced stability, economies of scale benefits, assured growth, and market dominance. It is therefore evident that DLJdirect should explore the idea of incorporating at least one other segment in its target portfolio. On the other hand, the company does not necessarily need to increase its marketing budget. This will be in consideration of the need to ensure that its budget is in tandem with the generated revenue and the high marketing budgets set by its competitors. Considering that DLJdirect had revenues of $3.952 billion for the 1998 financial year, 10% of this revenue would be adequate enough for marketing. This would amount to about $395.2 million.
...(download the rest of the essay above)