Market Segmentation and

Customer Relationship MarketingChapter FiveChapter Five

MMarket-Basedarket-Based Management, 4Management, 4thth editionedition

5-2

Market Segmentation and Market Segmentation and Customer Relationship Customer Relationship

MarketingMarketing

Chapter Five

-Market Segments; Defined and Explained

-Needs-Based Market Segmentation

-Segment Strategies

- Customer Relationship Marketing

- Customer Relationship Management

5-3

Customer Needs and Customer Needs and Market SegmentationMarket Segmentation

• What is a Market Segment?• Why is Market Segmentation Important?• How are Markets Segmented?

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Business Needs and Market Business Needs and Market SegmentationSegmentation

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Needs-Based Market Needs-Based Market SegmentationSegmentation

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Needs-Based Segmentation Needs-Based Segmentation and Segment Identificationand Segment Identification

Why Should Segments be Identified?

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Segment AttractivenessSegment Attractiveness

What Makes a Segment Attractive?

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[ ( )] Segment Segment Rev Variable Cost Marketing

Demand Share per Cust per Cust Expenses X X - -

Segment ProfitabilitySegment Profitability

NMC =

Marketing ROS = NMC/Segment Sales Revenues

Marketing ROI = NMC/Segment M&S Expenses

NMC: Net Marketing Contribution

M&S : Marketing and Sales

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Segment PositioningSegment Positioning

• How does positioning simplify promotional efforts?

• How does a firm determine if its segmentation strategy is meaningful?

• What is meant by Segment Strategy Acid Test?

• What is the importance of the marketing mix in the segmentation strategy?

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Segmentation StrategiesSegmentation Strategies

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Customer Relationship Customer Relationship MarketingMarketing

5-12

Customer Relationship Customer Relationship ManagementManagement

• How does a firm justify the use of CRM?

• CRM vs. Needs-Based Market Segmentation

• 4 Critical Steps in Developing CRM Programs

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TakeawaysTakeaways//ReviewReview

• Market Segmentation and Identification

• Key Steps in the Market Segmentation Process

• Segmentation Strategies

• Sub-segment Strategies

• Customer Relationship Marketing

• Customer Relationship Management

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Marketing Performance ToolsMarketing Performance Tools

Profit Impact of Segment Strategy

Marketing Strategy Mass Market Segment Strategy Segment

Strategy Quality Segment Price Segment Strategy

Market Demand 3,000,000 1,000,000 2,000,000 3,000,000

Market Share 5.0% 5.0% 5.0% 5.0%

Unit Volume 150000 50000 100000 150,000

Average Price $1,350.00 $2,500.00 $1,250.00 $1,666.67

Sales Revenues $202,500,000 $125,000,000 $125,000,000 $250,000,000

Percent Margin 25.9% 40.0% 20.0% 30.0%

Gross Profit $52,447,500 $50,000,000 $25,000,000 $75,000,000

Marketing & Sales (% sales) 10.0% 15.0% 5.0% 10.0%

Marketing & Sales Expenses $20,250,000 $18,750,000 $6,250,000 $25,000,000

Net Marketing Contribution $32,197,500 $31,250,000 $18,750,000 $50,000,000

Marketing ROS 15.9% 25.0% 15.0% 20.0%

Marketing ROI 159% 167% 300% 200%

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Marketing Performance ToolsMarketing Performance Tools

Profit Impact of Customer Relationship ManagementAnnual Segment Mass Mass Customer

Customer Performance Average Personalization Customization Relationship Mgmt

Revenue per Customer $1,000 $1,000 $1,200 $1,500

Percent Margin 40% 40% 50% 60%

Gross Profit per Customer $400 $400 $600 $900

Acquistion Cost $500 $500 $500 $500

Retention Cost $100 $150 $200 $250

Customer Profits $300 $250 $400 $650

Customer Retention 0.60 0.67 0.75 0.80

Customer Life (years) 2.5 3.0 4.0 5.0

Discount Rate 20% 20% 20% 20%

Customer Cash Flow

Year Cash Flow Cash Flow Cash Flow Cash Flow

0 -$500 -$500 -$500 -$500

1 $300 $250 $400 $650

2 $300 $250 $400 $650

3 $150 $250 $400 $650

4 $400 $650

5 $650

6

7

8

9

10

Lifetime Value $45.14 $26.62 $535.49 $1,443.90