Update 4/1/2012: WSJ has another piece on lulu’s marketing. It attributes lulu’s success to creating “scarcity”. I urge you to look past this secret sauce to see the second order lessons.

It may sound duplicitous to write an article on lessons learned from a single instance,especially given my strong recommendation against such methods as they are rife with cognitive biases and methodological errors. I intend to make this article about second order lessons about marketing principles at work rather than the externally observable actions from the narrative.  The principles are not new but I believe there is value in looking at them in the context of a popular example that is profiled in WSJ today.

The  lululemon narrative goes like this:

“lululemon shunned traditional marketing methods  and  made personal trainers their evangelists. They gave away clothing for free to the trainers and they give free classes in their stores. In return they got big WoM and sold more clothes.”

It worked for lululemon, but should you take it and apply it in your business? What are the second order lessons that we can take and and apply in our businesses?

Segmentation: This isn’t a product for all customers.  Demographically the target segment is comprised predominantly of  urban, educated women who have high disposable income and willingness to spend. Narrowing down further, those who think they need a trainer, willing to spend on one and have willfully deferred their fitness regimen to one. A corollary is that these have higher willingness to pay for things associated with their fitness activities. In essence lululemon knew exactly who they are targeting.

Needs: The needs of the segment are more than comfortable fitness wear. They are  most likely filling a higher emotional (hedonistic) need – be it looking good, feeling good, fitting in. It could be argued that the very reason this segment seeks such classes is more than just utlitarian reasons. (See Rational and not so Irrational reasons we buy)

Product: Such segment is bound to be small compared to rest of the market. Matching the size of the segment, its characteristics and willingness to pay, lululemon designed a premium product at premium price. It is not priced for those casual fitness people whose reference price is set by cheap alternatives. (That said, they may reach other segments in their later round of marketing.)

Where do these segments seek information?:  This is not general self-help fitness conscious segment that does its own research. The customers sought help from an “expert” and most likely are willing to defer their fitness apparel choice to these experts.  At the very least they are impressionable people who mimic their trainer’s apparel choice or those of others around them in the class. (Ironically, they may shun apparel from general retail because they want to be different and yet they want to belong.) Considering other information channels, it made economic sense for lululemon to reach these people through the trainers.

Choosing trainers: I do not have data but it is more likely that not all trainers get $1000 worth of free fitness-wear for their marketing work. It is likely that lululemon only targeted those with wider reach to the segment identified above (especially those who charge premium price for their own service).

Making Free Work: We have seen observations about how giving free classes drives sales. Very likely, but do not stop at “free drove sales”. It is true only because everything before this step was done right. Besides, the free classes are conducted by trainers who received sponsorship. The trainers model the clothes in their own classes and at the store and conduct free classes.  Unlike Freemium businesses that give away for free to every user wand have  no way of tracking whether the free-users are paying back in the form of free advertising, lululemon treat their free as part of their marketing investment and seem to make sure their investment work for them.

Netting it out, it is easy to fall in love with the narrative of this romantic story and draw conclusions like, “first engage your customer, toss out traditional marketing and rely only on WoM,  and free drives sales”. But these are the first order symptomatic lessons that are not something you can apply in your business. Imagine a doctor writing you the same prescription as the previous patient because you have the same temperature as her.

The real lessons are in understanding why they did what they did and getting back to the basics of marketing – need based segmentation and aligning product, pricing and communication with the segment you are targeting.