Understanding Customer Differences

Transcription

1 CHAPTER 2 Understanding Customer Differences E-Customer Relationship Management

2 Objectives Describes a basic view of market segmentation Identifying Customer Differences

3 Views of Customer Organizations with sophisticated CRM systems often have databases that record a customer s RFM (recency, frequency, and monetary) scores Recency of purchase Frequency of purchase Customer s average purchase size (monetary)

4 Views of Customer Recency is a measure of how long it has been since a customer last placed an order with the company, one data requirement will be the time/date of purchase of all transactions Frequency is a measure of how often a customer orders from the company in a certain defined period, also requires the history of all transactions by the customer with the firm Monetary value is the amount that a customer spends on an average transaction

5 Views of Customer RFM technique helps organizations significantly, not only in clearly targeting valuable customers who have a very high chance of purchasing, but also in avoiding costly communications and campaigns to customers who have a lesser chance of purchasing

6 RFM - Regression Method Regression techniques to compute the relative weights of the R, F, and M metrics Relative weights are used to compute the cumulative points of each customer The pre-computed weights for R, F and M, based on a test sample are used to assign RFM scores to each customer The higher the computed score, the more profitable the customer is likely to be in the future This method is flexible and can be tailored to each business situation

7 Recency Score 20 if within past 2 months; 10 if within past 4 months; 05 if within past 6 months; 03 if within past 9 months; 01 if within past 12 months; Relative weight = 5 Customer Purchases (Number) Recency (Months) Assigned Points Weighted Points JOHN SMITH MAGS

8 Frequency Score Points for Frequency: 3 points for each purchase within 12 months; Maximum = 15 points; Relative weight = 2 Customer Purchases (#) Frequency Assigned Points Weighted Points JOHN SMITH MAGS

9 Monetary Value Score Monetary Value: 10 percent of the $ Volume of Purchase with 12 months; Maximum = 25 points; Relative weight = 3 Customer Purchases (Number) Monetary Assigned Points Weighted Points 1 $ JOHN 2 $ $ SMITH 1 $ $ MAGS 2 $ $ $

10 RFM Cumulative Score Customer Purchases (Number) Total Weighted Points Cumulative Points JOHN SMITH MAGS

11 RFM Cumulative Score Cumulative scores: 249 for John, 112 for Smith and 308 for Mags; indicate a potential preference for Mags John seems to be a good prospect, but mailing to Smith might be a misdirected marketing effort

12 Views of Customer Concentrating on the heavy user market segment is an attractive strategy the best customers 80/20 principle typically, 20 percent of the customers buy 80 percent of the product sold This 20 percent are heavy users or major customers For example many airlines use product (service) usage and brand loyalty as the basis for their frequent flyer programs

13 Views of Customer When Southwest Airlines identified Rich Marcott as its top frequent flier out of Chicago a few years ago, the company did more than just give him elite status It got to know him personally First, Southwest gave him tickets to Chicago sporting events Then it arranged for him to throw out a pitch at a Cubs game Finally, learning that he was a big fan of Southwest s former CEO Herb Kelleher, Southwest set up a meeting between the two while Kelleher was in Chicago

14 Strategic Options for Approaching Customers Unsegmented, mass marketing targeting the aggregate market, where the product is standardized, one model for the entire market For example, an organization selling paper clips may engage in unsegmented, mass marketing because there is little diversity among customer needs or because it is more cost effective to target the aggregate market

15 Strategic Options for Approaching Customers Market segmentation organizations provide product options that meet the needs of defined groups For example, most automobile manufacturers provide models for budget-conscious customers, families, and those who desire luxury options Each car or truck is designed to meet the needs of a specific group

16 Strategic Options for Approaching Customers Custom or one-to-one marketing each individual customer receives personalized treatment Most services, such as those provided by architects, tailors, doctors, or lawyers, require that each customer be treated in a unique way While the effectiveness of reaching the hearts of customers with this strategy is assumed to be high, marketing costs must be considered as well

17 Strategies for Dealing with Customers Unsegmented, Marketing Custom Mass marketing segmentation marketing Aggregated Standardized offering Low cost/customer One-to-one Tailored offering High cost/customer

18 Identifying Customer Differences Geographic Variables Demographic Segmentation Variables Lifestyles Behavioral Patterns Analytically Derived Segments

19 Identifying Customer Differences Geographic Variables Geographic market segmentation often begin with the broad distinction between domestic and foreign markets International marketers recognize that people in different nations may have different tastes, needs, and behaviors In Argentina, for example, most Coca- Cola is consumed with food, but in many Asian countries it is rarely served with meals

20 Identifying Customer Differences Direct marketers, especially those that sell through catalogs sent by mail, often use zip codes as a basis for market segmentation People in the same zip code area are often demographically similar

21 Identifying Customer Differences Demographic Segmentation Variables Gender, income, age, marital status, family life cycle, race, and ethnicity Demographic characteristics are among the most commonly used segmentation variables

22 Identifying Customer Differences Income is a factor that may influence willingness and ability to purchase The annual income for the owner of a Porsche or Rolls-Royce automobile may be expected to differ from the annual income of the owner of a Hyundai, but the incomes of subscribers to the local cable service may not serve to differentiate segments as well

23 Identifying Customer Differences Variations in preferences for clothing, scents, or jewelry may occur simply because of gender differences More men than women may be expected to buy the Gillette MACH3 razor, but more women than men may buy the Gillette Venus

24 Identifying Customer Differences Infants, young children, teenagers, adults and senior citizens are typical age-based segments A useful distinction when people of different ages have different purchasing behaviors For example, the heaviest consumption of soft drinks, occurs among teenagers

25 Identifying Customer Differences Family life cycle defines segments whose purchasing patterns differ with marital status, age, and presence/absence of children Young single entertainment, housing, Young married Married with kids Children under 6 Children over 6 Divorced With children Without children cars furniture, nesting child care, car seats schools, lessons, bicycles child care, health care travel, entertainment

26 Identifying Customer Differences Lifestyles A lifestyle is a pattern in an individual s pursuit of life goals in how the person spends his or her time and money An individual s activities, interests, opinions, and values represent the aspects of life that seem tied to purchasing behaviors

27 Identifying Customer Differences You probably know someone who has an outdoor lifestyle for example, who owns canoes, tent, and backpacks

28 Identifying Customer Differences Behavioral Patterns Individual consumers exhibit different shopping behavioral patterns that may be worthy of attention For example, some individuals purchase apparel only at specialty shops for premium prices, while others will drive for miles on the rumor of a sale, and still others will search the Web for the very best price and delivery options

29 Identifying Customer Differences To define benefit segments, organizations must collect information about the features most desired by customers In any given group of people, some customer will always buy the lowest priced option while others want the highest prestige In car buying, some segments focus on fuel efficiency while others want the benefit of a sporty look

30 Identifying Customer Differences Many customers do not want to be called on the telephone or be sent unsolicited e- mail messages Because organizations do not want to offend these customers, it is a common CRM strategy to ask customers for permission to send with product updates or other messages

31 Identifying Customer Differences Permission segments suggest that records indicate which customers have agreed to learn more about a company and its products Customers can also be segmented based on their preferences for the method and frequency of contacts from different firms

32 Identifying Customer Differences Analytically Derived Segments Information technology can be used to analyze data and create segments that are unique to an enterprise s specific business needs A comprehensive CRM system may identify a firm s most profitable customers and the behaviors and characteristics held in common by the group

33 Identifying Customer Differences On-line analytical processing (OLAP), data mining, and advanced statistical techniques are used to analyze data and to describe customer segments 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

34 Identifying Customer Differences Calculation of a customer segment s lifetime value requires information about four factors: 1. Profit margin, the annual revenue that customers generate minus the costs a company incurs in serving them 2. Retention rate, the percentage of total customers expected to repeat purchase 3. Discount rate, the current cost of capital 4. Time, the expected duration of the relationships

35 Envision Calculations for a Customer s Lifetime Value Per unit expectations price $100 cost of goods contribution margin 20 $ 80 direct expenses 10 allocated costs 20 per unit net profit, expected $ 50 times the number of units purchased/time frame x 6 times the number of time frame expected x 100 unadjusted lifetime profit expectations $30,000 Time1 Time2 Time3 Profit expectations 10,000 10,000 10,000 Divided by the discount rate Net present value of lifetime 10, , ,547 $27,806

36 Typical Ways to Segment Markets Segmenting variables Geographic variables Examples of typical options or levels Domestic/foreign, regions, zip codes, climate, population density, terrain Demographic variables Lifestyles/ Psychographics Gender Income Age Education Marital status Family life cycle Ethnicity Activities Interests Opinions values Male, female <$25,000; $25,000-60,000 Infant, child, teen, adult, elderly High school, college, university Married, single, divorced No children, married with children National identity Golf, fishing Shopping religion

37 Typical Ways to Segment Markets Segmentin g variables Examples of typical options or levels Behavioral patterns Analytically derived RFM Channel Benefit sought Service required Loyalty Permission granted Data mining Recency, frequency, monetary value of purchases Catalog, mail, television, Internet, store Lowest price, best technology, greatest value Telephone support, in-person, e- mail None, some, committed Ask to send s, mail, or further phone calls Deal seekers, regularly priced, premium

38 Summary A fundamental principle of CRM is that all customers are not the same Marketing strategy becomes effective and efficient when managers realize that CRM is based on the idea of treating different customers differently There are three strategies for dealing with customers: Unsegmented/Mass marketing Market segmentation Custom marketing

39 Summary Unsegmented, mass marketing treats all customers the same With custom marketing, each individual customer receives personalized treatment Effectiveness of marketing one-to-one is high, but so are marketing costs

40 Summary Some typical ways to segment consumer markets are by geographical variables, demographic variables, gender, income, age, education, marital status, family life cycle, ethnicity, lifestyle and psychographic variables, behavior patterns and expectations, ownership, recency of purchase, purchase frequency, consumption habits, customer service requirements, customer loyalty, etc.

41 Summary All customers are not of equal value to a company An effective CRM strategy determines the lifetime value of each of its customers It assigns its customers into segments with labels that may be as elementary as high lifetime value, medium lifetime value, and low lifetime value