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 Foreign

Business Consumer

Dislikes Uses for e-mail Sophisticated

computers only 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

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 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
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EXHIBIT 2.1 STRAGEGIES FOR DEALING WITH
CUSTOMERS
Unsegmented, Market Custom
mass marketing segmentation marketing

Aggregated One-to-one
Standardized offering Tailored offering
Low cost / customer High cost / customer
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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

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EXHIBIT 2.3 TYPICAL WAYS TO SEGMENT MARKETS

Segmenting variables Examples of typical options or levels

Geographic variables Domestic/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/Psychographics Activities (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 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
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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
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EXHIBIT 2.5 ENVISIONING CALCULATIONS FOR A

CUSTOMER’S LIFETIME VALUE

Per unit expectations

Price $100
Cost of goods 20
Contribution margin $80
Direct expenses 10
Allocated costs 20
Per unit net profit, expected $50
Times the number of units purchased per time frame *6
Times the number of times frames expected *100
Unadjusted lifetime profit expectations $30,000

Time1 Time2 Time3

Profit expectations $10,000 $10,000 $10,000
Divided by the discount rate 1 1.08 1.17
Net present value of lifetime $10,000+$9,259.26+$8,547.01=$27,806.26
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 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
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EXHIBIT 2.6 CUSTOMER TYPES BY EXPECTED VALUE

Expected Future Value to the Firm

High Low
Historical
High Premium Uneconomical
Value to
the Firm 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…

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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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 Discussion/Report
Phase:

Group Discussion Report Q&A Grade

1/2/3/4/5/6 Product ≤1 min/P ≥1 /G

Introduce Situation
1.Opinion
Leader Segment
2/3/4/5.Support
Divide work What/Why/
How/ 6.Conclude

5 min 5-10min 5-8 Min 5-8 Min 5 min

Standard: Creative Polite A+-

Interesting Co-operative B+-
Logical & C+-
Reasonable
D/F/O
 Discussion/Report

Student No. Name Grade Group Group Group Group Group Group
1 2 3 4 5 6

02098-B011-1 Shi Yd A+ 　 　 　 　 　 　
…… …… A 　 　 　 　 　 　

04566-C012-3 Zhan A- 　 　 　 　 　 　
…… …… B+
…… …… B 　 　 　 　 　 　
…… ……
B-
…… ……
C+ 　 　 　 　 　 　
C 　 　 　 　 　 　
C- 　 　 　 　 　 　
D
F 　 　 　 　 　 　
O
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