Understanding Customer Differences

CHAPTER 2 UNDERSTANDING CUSTOMER DIFFERENCES

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Market Segmentation market segmentation— dividing a heterogeneous market into a number of smaller, more homogeneous subgroups business to consumer market (B2C)— the buyer is an individual consumer who will use the product to satisfy personal or household needs business-to-business market (B2B)— the buyer is a firm or organization that will use a product to help operate its business, or a component part for the product the firm produces, or when a firm will buy and resell a product to another customer target market— the specific group toward which the firm aims its marketing plan Exhibit 2.2: An Example of Potential Segments within the Computer Market 2

EXHIBIT 2.2 AN EXAMPLE OF POTENTIAL SEGMENTS WITHIN THE COMPUTER MARKET Global computer market Domestic

Business

Dislikes computers

Foreign

Consumer

Uses for e-mail only

Sophisticated user

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Views Of Customers RFM scores— refers to recency of purchase, frequency of purchase, and a customer’s average purchase size (monetary) 80/20 principle— typically, 20 percent of the customers buy 80 percent of the product sold majority fallacy— the blind pursuit of the largest, most easily identified, or most accessible market segment 4

Strategic Options For Approaching Customers unsegmented, mass marketing— targeting the aggregate market, where the product is standardized, one model for the entire market market segmentation— organizations provide product options that meet the needs of defined groups custom or one-to-one marketing— each individual customer receives personalized treatment Exhibit 2.1: Strategies for Dealing with Customers right level of aggregation—to categorize customers in groups that are neither too big nor too small 5

EXHIBIT 2.1 STRAGEGIES FOR DEALING WITH CUSTOMERS Unsegmented, mass marketing

Market segmentation

Aggregated Standardized offering Low cost / customer

Custom marketing

One-to-one Tailored offering High cost / customer 6

Identifying Customer Differences Exhibit 2.3: Typical Ways to Segment Markets geographic variables— location (domestic/foreign; regions, zip codes), or characteristics (climate, density, terrain); where geographic information systems (GIS) tie demographics to locations, such as ZIP codes or census tracts demographic variables— gender, income, age, education, marital status, family life cycle, or ethnicity Exhibit 2.4: Examples of Stages of the Family Life Cycle 7

EXHIBIT 2.3 TYPICAL WAYS TO SEGMENT MARKETS Segmenting variables Geographic variables Demographic variables

Lifestyles/Psychographics

Examples of typical options or levels Domestic/foreign/global, regions, zip codes, climate, population density, terrain 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

Activities (golf, fishing), interests (shopping), opinions values (patriotism, religion) 8

EXHIBIT 2.3 TYPICAL WAYS TO SEGMENT MARKETS (Cont.) Segmenting variables Behavioral patterns

Analytically derived

Examples of typical options or levels 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

Data mining

deal seekers, stockpilers, regularly priced, premium 9

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 gender10

Identifying Customer Differences psychological variables— lifestyles, activities, interests, opinions, or values; Quantitative measures of lifestyles are known as psychographics. behavioral patterns— RFM, benefits sought, channels used (Web, catalogs, stores, etc.), service required, or loyalty analytically derived— On-line analytical processing (OLAP), data mining, and advanced statistical techniques are used to analyze data and to describe customer segments 11

Identifying Customer Differences customer lifetime value— the net present value (NPV) of the future profits (margin contribution) to be received from a given number of newly acquired or existing customers during a specified period of years Exhibit 2.5: Envisioning Calculations for a Customer’s Lifetime Value lifetime cost of a relationship— the direct costs of providing the product or service as well as the indirect costs, or overhead that may be allocated 12

EXHIBIT 2.5 ENVISIONING CALCULATIONS FOR A CUSTOMER’S LIFETIME VALUE Per unit expectations Price Cost of goods Contribution margin Direct expenses Allocated costs Per unit net profit, expected Times the number of units purchased per time frame Times the number of times frames expected Unadjusted lifetime profit expectations

Profit expectations Divided by the discount rate Net present value of lifetime

$100 20 $80 10 20 $50 *6 *100 $30,000

Time1 Time2 Time3 $10,000 $10,000 $10,000 1 1.08 1.17 $10,000+$9,259.26+$8,547.01=$27,806.26 13

Personalize B2c Messages At The Right Level Of Aggregation The marketers of computers Mass personalization— the ability to tailor a message to large numbers of people

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Using CRM Systems In B2b Marketing undesirables— segments with a poor purchase history and low expectations of any purchases in the future prospects— may have little or no past purchase history with the firm but exhibit a high potential for value in the future uneconomicals— express a low likelihood of purchasing from the firm in the future value-added partnerships, VAPs— a set of independent companies that work together to manage the flow of goods and services along the supply chain Exhibit 2.6: Customer Types by Expected Value 15

EXHIBIT 2.6 CUSTOMER TYPES BY EXPECTED VALUE

Expected Future Value to the Firm Historical Value to the Firm

High

Low

High

Premium

Uneconomical

Low

Prospect

Undesirable

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

A gambling casino An automobile rental company A bank d. An airline

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

A gambling casino – OLAP should suggest RFM information, prior free gifts/rooms/meals received; Value considerations could suggest segments based on those who gamble versus those who attend the shows or patronize the restaurants; and loyalty may differentiate profitable repeat customers… 18

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

An automobile rental company – The purpose/benefit of the rental— business, family leisure time, convenient transportation, temporary replacement for a repair; Stage of the family life cycle as it impacts sizes of rentals; Geographic origin could be the home town or near an airport; Psychographics may yield insights as to activities—outdoors, formal events, group socials…

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

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

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

d. An airline – The OLAP should suggest RFM; purpose varies by business or family travel (yet both segments seem to be placing a much greater value on price); geographically by routes, domestic or international; Benefits associated with travel provide cross selling and bundling opportunities (i.e. hotels, car rentals, entertainment attractions)…

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Discussion/Report 3C: Cosmetic Computer Casino

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Phase: Group

Discussion/Report Discussion

1/2/3/4/5/6

Product

Introduce

Situation

Leader

Segment

Divide work

What/Why/ How/

5 min Standard:

5-10min

Report

Q&A

≤1 min/P

Grade

≥1 /G

1.Opinion 2/3/4/5.Support 6.Conclude 5-8 Min

5-8 Min

5 min

Creative

Polite

A+-

Interesting

Co-operative

B+-

Logical & Reasonable

C+D/F/O

Discussion/Report Student No. 02098-B011-1

Name Shi Yd

Grade

Group Group Group Group Group Group 1 2 3 4 5 6

A+

　

　

　

　

　

　

……

……

A

　

　

　

　

　

　

04566-C012-3 …… …… …… ……

Zhan …… …… …… ……

A-

　

　

　

　

　

　

　

　

　

　

　

　

C+

　

　

　

　

　

　

C

　

　

　

　

　

　

C-

　

　

　

　

　

　

　

　

　

　

　

　

B+ B B-

D F O 24