understanding customer differences

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CHAPTER 2CHAPTER 2

UNDERSTANDING UNDERSTANDING CUSTOMER DIFFERENCESCUSTOMER DIFFERENCES

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Market SegmentationMarket Segmentationmarket segmentationmarket segmentation— dividing a heterogeneous — dividing a heterogeneous market into a number of smaller, more market into a number of smaller, more homogeneous subgroupshomogeneous subgroupsbusiness to consumer marketbusiness to consumer market (B2C)— the (B2C)— the buyer buyer is an individual consumer who will use the is an individual consumer who will use the product to satisfy personal or household needsproduct to satisfy personal or household needsbusiness-to-business marketbusiness-to-business market (B2B)— the (B2B)— the buyer is buyer is a firm or organization that will use a product to a firm or organization that will use a product to help operate its business, or a component part for help operate its business, or a component part for the product the firm produces, or when a firm will the product the firm produces, or when a firm will buy and resell a product to another customerbuy and resell a product to another customertarget markettarget market— the specific group toward which — the specific group toward which the firm aims its marketing planthe firm aims its marketing planExhibit 2.2: An Example of Potential Segments Exhibit 2.2: An Example of Potential Segments within the Computer Marketwithin the Computer Market

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EXHIBIT 2.2 AN EXAMPLE OF POTENTIAL SEGMENTS WITHIN THE COMPUTER MARKET

Global computer market

Domestic Foreign

Business Consumer

Dislikes computers

Uses for e-mail only

Sophisticated user

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Views Of CustomersViews Of CustomersRFM scoresRFM scores— refers to recency of purchase, fre— refers to recency of purchase, frequency of purchase, and a customer’s averagquency of purchase, and a customer’s average purchase size (monetary)e purchase size (monetary)80/20 principle80/20 principle— typically, 20 percent of the c— typically, 20 percent of the customers buy 80 percent of the product sold ustomers buy 80 percent of the product sold majority fallacymajority fallacy— the blind pursuit of the large— the blind pursuit of the largest, most easily identified, or most accessible mst, most easily identified, or most accessible market segment arket segment

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Strategic Options For Strategic Options For Approaching CustomersApproaching Customers

unsegmentedunsegmented, , mass marketingmass marketing— targeting the aggreg— targeting the aggregate market, where the product is standardized, one mate market, where the product is standardized, one model for the entire marketodel for the entire marketmarket segmentationmarket segmentation— organizations provide produc— organizations provide product options that meet the needs of defined groups t options that meet the needs of defined groups custom or one-to-one marketingcustom or one-to-one marketing— each individual cu— each individual customer receives personalized treatmentstomer receives personalized treatmentExhibit 2.1: Strategies for Dealing with CustomersExhibit 2.1: Strategies for Dealing with Customersright level of aggregation—to categorize customers in right level of aggregation—to categorize customers in groups that are neither too big nor too small groups that are neither too big nor too small

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EXHIBIT 2.1 STRAGEGIES FOR DEALING WITH CUSTOMERS

Unsegmented, mass marketing

Custom marketing

Market segmentation

AggregatedStandardized offeringLow cost / customer

One-to-oneTailored offering

High cost / customer

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Identifying Customer DifferencesIdentifying Customer DifferencesExhibit 2.3: Typical Ways to Segment MarketsExhibit 2.3: Typical Ways to Segment Marketsgeographic variablesgeographic variables— location (domestic/foreign; — location (domestic/foreign; regions, zip codes), or characteristics (climate, regions, zip codes), or characteristics (climate, density, terrain); where geographic information density, terrain); where geographic information systems (GIS) tie demographics to locations, such systems (GIS) tie demographics to locations, such as ZIP codes or census tractsas ZIP codes or census tractsdemographic variablesdemographic variables— gender, income, age, — gender, income, age, education, marital status, family life cycle, or education, marital status, family life cycle, or ethnicityethnicityExhibit 2.4: Examples of Stages of the Exhibit 2.4: Examples of Stages of the Family Life Family Life CycleCycle

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EXHIBIT 2.3 TYPICAL WAYS TO SEGMENT MARKETS

Segmenting variables Examples of typical options or levels

Geographic variablesDomestic/foreign/global, regions, zip codes, climate, population density, terrain

Demographic variables

Gender female, male

Income<$25,000; $25,000- $64,999; >$65,000

Age infant, child, preteen, teen, young adult, adult, elderly

Education high school, vocational school, college, grad school

Marital status married, single, divorced, widowed

Family life cycle single no children, married with children, empty nest

Ethnicity national identity, sub-cultural identity

Lifestyles/PsychographicsActivities (golf, fishing), interests (shopping), opinions values (patriotism, religion)

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EXHIBIT 2.3 TYPICAL WAYS TO SEGMENT MARKETS (Cont.)

Segmenting variables Examples of typical options or levels

Behavioral patterns

RFM recency, frequency, monetary value of purchases

Channel catalog, mail, television, internet, store, specialty shop

Benefits sought lowest price, best technology, greatest value

Service required telephone support, in-person, e-mail

Loyalty none, some, emotionally bonded, committed ask to send e-mails, mail, or further phone calls

Permission granted ask to send e-mails, mail, or further phone calls

Analytically derived Data mining deal seekers, stockpilers, regularly priced,

premium

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EXHIBIT 2.4 EXAMPLES OF STAGES OF THE FAMILY LIFE CYCLE

FLC Stage Typical items/ Expenditures

Young single Entertainment, housing, cars

Young married Furniture, nesting

DINKS-Dual income, No kids

Married with kids

Children under 6 Child care, car seats, diapers

Children over 6 Schools, lessons, bicycles

Younger and older singles / divorced

With children Child care, health care

Without children Travel, entertainment

Empty nest Redefine life together, travel, cruises, college courses

Widow / Widower Activities, meals-on-wheels

Nontraditional families Non-related blends, roommates, same gender

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Identifying Customer DifferencesIdentifying Customer Differencespsychological variablespsychological variables— lifestyles, — lifestyles, activities, interests, opinions, or values; activities, interests, opinions, or values; Quantitative measures of lifestyles are Quantitative measures of lifestyles are known as psychographics. known as psychographics. behavioral patternsbehavioral patterns— RFM, benefits — RFM, benefits sought, channels used (Web, catalogs, sought, channels used (Web, catalogs, stores, etc.), service required, or loyaltystores, etc.), service required, or loyaltyanalytically derivedanalytically derived— On-line analytical — On-line analytical processing (OLAP), data mining, and processing (OLAP), data mining, and advanced statistical techniques are used advanced statistical techniques are used to analyze data and to describe customer to analyze data and to describe customer segments segments

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Identifying Customer DifferencesIdentifying Customer Differencescustomer lifetime valuecustomer lifetime value— the net present — the net present value (NPV) of the future profits (margin value (NPV) of the future profits (margin contribution) to be received from a contribution) to be received from a givengiven number of newly acquired or existing number of newly acquired or existing customers during a specified period of customers during a specified period of yearsyearsExhibit 2.5: Envisioning Calculations for a Exhibit 2.5: Envisioning Calculations for a Customer’s Lifetime ValueCustomer’s Lifetime Valuelifetime cost of a relationshiplifetime cost of a relationship— the— the direct direct costs of providing the product or service costs of providing the product or service as well as the indirect costs, or overhead as well as the indirect costs, or overhead that may be allocated that may be allocated

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EXHIBIT 2.5 ENVISIONING CALCULATIONS FOR A

CUSTOMER’S LIFETIME VALUE

Per unit expectationsPrice $100Cost of goods 20Contribution margin $80Direct expenses 10Allocated costs 20

Per unit net profit, expected $50Times the number of units purchased per time frame *6Times the number of times frames expected *100Unadjusted lifetime profit expectations $30,000

Time1 Time2 Time3Profit expectations $10,000 $10,000 $10,000Divided by the discount rate 1 1.08 1.17Net present value of lifetime $10,000+$9,259.26+$8,547.01=$27,806.26

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Personalize B2c Messages At Personalize B2c Messages At The Right Level Of AggregationThe Right Level Of Aggregation

The marketers of computersThe marketers of computers

Mass personalizationMass personalization— the ability to — the ability to tailor a message to large numbers of tailor a message to large numbers of peoplepeople

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Using CRM Systems In B2b Using CRM Systems In B2b MarketingMarketing

undesirablesundesirables— segments with a poor purchase histor— segments with a poor purchase history and low expectations of any purchases in the futurey and low expectations of any purchases in the futureprospectsprospects— may— may have little or no past purchase historhave little or no past purchase history with the firm but exhibit a high potential for value in y with the firm but exhibit a high potential for value in the futurethe futureuneconomicalsuneconomicals— express— express a low likelihood of purchasia low likelihood of purchasing from the firm in the futureng from the firm in the futurevalue-added partnerships, VAPs— a set of independenvalue-added partnerships, VAPs— a set of independent companies that work together to manage the flow ot companies that work together to manage the flow of goods and services along the supply chain f goods and services along the supply chain Exhibit 2.6: Customer Types by Expected ValueExhibit 2.6: Customer Types by Expected Value

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EXHIBIT 2.6 CUSTOMER TYPES BY EXPECTED VALUE

UndesirableProspect

UneconomicalPremium

Expected Future Value to the Firm

High

High

Low

Low

Historical Value to the Firm

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Describe two different ways that each of the following Describe two different ways that each of the following companies might segment the market.companies might segment the market.

A gambling casinoA gambling casino

An automobile rental companyAn automobile rental company

A bankA bank

d. An airlined. An airline

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A gambling casinoA gambling casino– OLAP should suggest OLAP should suggest RFM informationRFM information, ,

prior free gifts/rooms/meals received; prior free gifts/rooms/meals received; Value considerationsValue considerations could suggest could suggest segments based on those who gamble segments based on those who gamble versus those who attend the shows or versus those who attend the shows or patronize the restaurants; and patronize the restaurants; and loyaltyloyalty may differentiate profitable repeat may differentiate profitable repeat customers…customers…

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An automobile rental companyAn automobile rental company– The The purpose/benefitpurpose/benefit of the rental— of the rental—

business, family leisure time, business, family leisure time, convenient transportation, temporary convenient transportation, temporary replacement for a repair; replacement for a repair; Stage of the Stage of the family life cyclefamily life cycle as it impacts sizes of as it impacts sizes of rentals; rentals; Geographic originGeographic origin could be the could be the home town or near an airport; home town or near an airport; PsychographicsPsychographics may yield insights as may yield insights as to activities—outdoors, formal events, to activities—outdoors, formal events, group socials… group socials…

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A bankA bank– IncomeIncome; behaviorally by number of ; behaviorally by number of

different services (i.e. mortgage, different services (i.e. mortgage, savings, estate planning, etc); OLAP savings, estate planning, etc); OLAP should suggest should suggest RFMRFM and cross selling and cross selling opportunities; opportunities; Benefits soughtBenefits sought could could include lower interest rates, free include lower interest rates, free checking, convenient location, free checking, convenient location, free ATM usage, full service available ATM usage, full service available through the breadth of services through the breadth of services provided…provided…

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d. An airlined. An airline– The OLAP should suggest The OLAP should suggest RFMRFM; ;

purposepurpose varies by business or family varies by business or family travel (yet both segments seem to be travel (yet both segments seem to be placing a much greater value on price); placing a much greater value on price); geographicallygeographically by routes, domestic or by routes, domestic or international; Benefits associated with international; Benefits associated with travel provide cross selling and travel provide cross selling and bundling opportunities (i.e. hotels, car bundling opportunities (i.e. hotels, car rentals, entertainment attractions)…rentals, entertainment attractions)…

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Discussion/ReportDiscussion/Report

3C:

Cosmetic

Computer

Casino

Discussion/ReportDiscussion/ReportPhase:

Group Discussion Report Q&A

Product

Situation

Segment

What/Why/How/

≤1 min/P

1.Opinion

2/3/4/5.Support

6.Conclude

≥1 /G

5-8 Min 5-8 Min5-10min5 min

1/2/3/4/5/6

Introduce

Leader

Divide work

Grade

Creative

Interesting

Logical & Reasonable

Polite

Co-operative

A+-

B+-

C+-

D/F/O

Standard:

5 min

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Discussion/ReportDiscussion/Report

Student No. NameGrade

Group1

Group2

Group3

Group4

Group5

Group6

A+ 　　　　　　A 　　　　　　A- 　　　　　　B+

B 　　　　　　B-

C+ 　　　　　　C 　　　　　　C- 　　　　　　D

F 　　　　　　O

02098-B011-1 Shi Yd

…… ……

04566-C012-3 Zhan…… ………… ………… ………… ……

understanding customer differences

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