Unit-4

Customer Lifetime Value: Concept, Basic

Customer Value
Customer Lifetime Value or CLTV is the present value of the future cash flows or the value of
business attributed to the customer during his or her entire relationship with the company.

Description: CLTV is the value a customer contributes to your business over the entire lifetime at your
company. It is a very important metric and is used while making important decisions about sales,
marketing, product development, and customer support.

By applying Customer Lifetime Value marketing managers can easily arrive at the rupee value
associated with the long-term relationship with any customer. It is difficult to predict how long each
relationship will last, but marketing managers can make a good estimate and state CLTV as a periodic
value.

It is useful metric used by marketing managers especially at a time of acquiring a customer. Ideally,
lifetime value should be greater than the cost of acquiring a customer. Some also call it a break-even
point.

The basic formula for calculating CLTV is the following:

(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)

For example, let’s say you run a Health Club where customers pay Rs 1000 per month and the average
time that a person remains a customer in your club is 3 years. Then the lifetime value of each customer
is (according to the formula above):

Rs 1,000 per month x 12 months x 3 years = Rs 36,000. This means each customer is worth a lifetime
value of Rs 36,000.

Once we calculate CLTV we know how much the company can spend on paid advertising such as
Facebook ads, YouTube ads, Google Ad words etc. in order to acquire a new customer.

Basic Customer Value

In marketing, customer lifetime value (CLV) is a metric that represents the total net profit a company
makes from any given customer. CLV is a projection to estimate a customer’s monetary worth to a
business after factoring in the value of the relationship with a customer over time. CLV is an important
metric for determining how much money a company wants to spend on acquiring new customers and
how much repeat business a company can expect from certain consumers.

CLV is different from customer profitability (CP), which measures the customer’s worth over a specific
period of time, in that the metric predicts the future whereas CP measures the past.
CLV is calculated by subtracting the cost of acquiring and serving a customer from the revenue gained
from the customer and takes into account statistics such as customer expenditures per visit, the total
number of visits and then can be broken down to figure out the average customer value by week, year,
etc.

But the process is more nuanced than that. By concentrating on what a customer has previously spent,
companies neglect how their marketing or advertising practices have changed over time, resulting in
new customers who behave differently than old ones. CLV should never be determined by dividing the
total revenue by the number of total customers, since this is too simple a calculation and does not factor
into how long some customers have had a relationship with the company. Changes to any of these
strategies, as well as any shifts in a company’s customer base as a whole, in the future will prevent
companies from depending on past CLVs to predict upcoming ones.

Customer life time Value Calculations

The goal of the CLV is to take into account your customers’ loyalty and retention to calculate the
turnover (or profit) that a customer will generate during his or her “life” on your site.

The customer lifetime value is essential since it allows us to predict our turnover over the long term and
to adjust our marketing or acquisition budget in consequence.

If you thought that the cost of acquisition was calculated based on a single hypothetical purchase, here
is some data that will surely make you change your mind.

How do you calculate your customer lifetime value?

There are several formulas for calculating the LTV. However, many of them are complicated and time
consuming to put in place.

There is a simpler way to calculate your LTV.

For this, you will need some bits of data from your business:

1. The average cart

2. Purchase frequency
3. The customer value
4. The average customer lifespan

To make your calculations easier, use the above indicators over the same period of time: 1 year,
preferably.

(1) Average cart

The average cart is just turnover divided by the number of orders. It’s the average value of a purchase
on your site.

Average cart = Turnover / Number of orders

(2) Purchase frequency

Purchase frequency is a piece of data that allows you to understand how many purchases are made by
the same customer during a given period. This is essential since it tells you how many purchases your
unique customers make over a given period of time and whether your customers tend to make new
purchases on your e-commerce site.

Use the following formula:

Purchase frequency = Number of orders / Unique customers

(3) Customer value

Customer value is the average value of your shopping cart multiplied by the average purchase
frequency of your customers over a given period. It’s the multiplication of the two pieces of data that
we have just explained:

Average cart X Purchase frequency

(4) Customer average lifespan

The customer average lifespan is the last piece of the puzzle. However, it is also the most complicated
to understand because it depends on the type of activities you occupy.

Generally speaking, the customer average lifespan is considered to be between 1 and 3 years. However,
this piece of data will change depending on your business model: do you offer a subscription service or
a one-time purchase?

If your business is a very occasional niche, consider a lifetime of between 1 and 2 years. If you are
working on a clothing or decoration brand and your designs are renewed regularly, you can take 3 years
as a basis for your calculations.

Calculating the Customer Lifetime Value

Now that we have prepared all the data we need, it’s time to finally discover how much our customers
are bringing in during their lives on our site! Here is the formula:

Customer Lifetime Value = Client Value X Average Lifetime

By multiplying the value of a customer over a year (average cart x number of purchases) by the average
lifetime of your customers (1-3 years), you obtain the turnover that a customer brings in during his or
her period of activity (1-3 years) on your e-commerce site.

Some calculation variants

Before going on to the 5 concrete methods to increase your Customer Lifetime Value, here are some
variants of calculating the CLV for those who would like to push the analysis a little further:
(I) CLV expressed in profits: on the same basis as the calculation that we have just made, you can
reason in terms of profits rather than in terms of turnover. For this, simply replace the monetary data
(previously expressed in turnover) by the profit generated by purchase.

(II) CLV expressed in segments: to further analyze your customers’ behavior, you can analyze the
CLV for each segment. For example, you can calculate the LTV for each of your acquisition channels,
each demographic or geographic profile, etc. The possibilities are endless, and we can only advise you
to push the analysis further.

5 practical methods to increase customer lifetime value

You now have a reliable method to calculate your CLV.

The goal is to increase this customer lifetime value to make each customer more profitable.

While a customer can be expensive to acquire, there are several ways to increase the “customer value”
and thus increase the profits from each customer.

Focusing too much on acquiring new customers and we forget that, according to Business Insider,
regular visitors are twice as likely to put an item in their cart as new visitors.

Similarly, it is important to know that regular visitors have a lower bounce rate and a better conversion
rate compared to new visitors.

Improving your LTV means working on the purchase experience, customer service, and brand loyalty.

In short, working on the entire customer lifecycle to maintain a connection with your brand for as long
as possible.

Using Customer Value to Value a Business

Customer lifetime value (CLV) is a term in English that translates the value of a customer’s life. It is
an indicator that represents the profits made by a company through its relationship with certain
customers. It is used to know the value of a customer, that is to say, how much this customer can
generate, but also identify other strategies to attract new customers. It is also by calculating the CLV
that the marketer can predict the lifetime of a customer.

The mechanism of the “Customer lifetime value”

The principle of the value of a customer’s life is essential when it comes to customer value and sound if
customers are rather satisfied with the services offered. It validates the relevance and profitability of
marketing campaigns, in particular by comparing the lifetime value and the cost of customer
acquisition. The CLV involves all the monetary transactions a customer generates and all that he could
bring back in the future.

Customer lifetime value is mostly used to determine the intersection between marketing and customer
relationship management. When measures are calculated to improve the customer relationship, we get
the value of each transaction or marketing action.
The value of a customer’s life is based on the average life of a customer and the price of consumption.
It will also make it possible to calculate the acquisition cost of a customer, to value a company from the
client portfolio.

As the concept of customer loyalty is essential for most B2B companies, it is essential to use modeling
to begin its calculation.

Indeed, it is not uncommon for companies wishing to calculate the value of their client’s life face
difficulties related to uncertainties caused by the lack of information and the instability of market
conditions. Especially since some companies tend to overestimate the value of their customers by
developing overly optimistic assumptions about consumption.

Several models also make it possible to obtain the CLV during the customer journey, in particular
during the specific requests made by the customers. It is then necessary to take the duration of the
customers into consideration according to the stages of the purchase. (First contact, relationship
building, cross-selling, etc.)

It can, therefore, be said that the value of a customer is significant for a customer in terms of
investment, and constitutes a calculation element of the CLV.

The main vocations of the “Customer lifetime experience”

In practice, the CLV focuses on three kinds of variables, namely:

 The cost of acquiring a target that can be authorized, given the profitability of the latter over a
given time.
 The retention by a segment that will be obtained from a survey of the customer base
 Customer capital valued at the time of an assignment within the company

Companies are interested in customer segmentation to develop clear and precise plans of action. They
will observe their promotional campaigns from the attitude and behavior of customers. Thus, marketers
and salespeople can characterize segments as advantageous or not for the company and determine the
quality of their customers.

Calculation of “Customer lifetime value”

To calculate the value of a customer’s life, we apply the following formula:

Life Value = Total Customer Revenues – Total Costs for Customers

Let’s take an example where your customer has an income of 2,000$ in lifetime value or contribution.
Knowingly, you would obviously not spend 2000$ for the acquisition of a new customer. However, you
should expect about 10%, that is, 200$ for the cost of acquiring a new customer.

There are other ways to calculate the CLV from other variables such as termination rate, discount rate,
profit margins, loyalty costs. The formula must be adapted to the various offers. But we also remember
this formula:

Life value = (Average order value) x (Number of sales) x (Average duration of the relationship)
Also, remember that not all customers have the same economic situation. It is to this belief that the shoe
pinches. It is possible that passive customers are more profitable, and that those who are active do not
consume much and do not improve the products.

You will also meet customers who will give you more opportunities because they really appreciate
what you do and what you offer them. For all these reasons, the segments all have different values.
Hence the interest in having different strategies for each of them.

The important thing is to say that by improving the value of a customer’s life, you also improve his
career.

Segmentation Concept, Basis of Segmentation

Segmentation means to divide the marketplace into parts, or segments, which are definable, accessible,
actionable, and profitable and have a growth potential. In other words, a company would find it
impossible to target the entire market, because of time, cost and effort restrictions. It needs to have a
‘definable’ segment – a mass of people who can be identified and targeted with reasonable effort, cost
and time.

Once such a mass is identified, it has to be checked that this mass can actually be targeted with the
resources at hand, or the segment should be accessible to the company. Beyond this, will the segment
respond to marketing actions by the company (ads, prices, schemes, promos) or, is it actionable by the
company? After this check, even though the product and the target are clear, is it profitable to sell to
them? Is the number and value of the segment going to grow, such that the product also grows in sales
and profits?

Description: Segmentation takes on great significance in today’s cluttered marketplace, with thousands
of products, media proliferation, ad-fatigue and general economic problems around the world markets.
Rightly segmenting the market place can make the difference between successes and shut down for a
company.

Segmentation allows a seller to closely tailor his product to the needs, desires, uses and paying ability
of customers. It allows sellers to concentrate on their resources, money, time and effort on a profitable
market, which will grow in numbers, usage and value.

Basis of Segmentation
Segmenting is dividing a group into subgroups according to some set ‘basis’. These bases range from
age, gender, etc. to psychographic factors like attitude, interest, values, etc.

Gender

Gender is one of the most simple yet important bases of market segmentation. The interests, needs and
wants of males and females differ at many levels. Thus, marketers focus on different marketing and
communication strategies for both. This type of segmentation is usually seen in the case of cosmetics,
clothing, and jewellery industry, etc.

Age group
Segmenting market according to the age group of the audience is a great strategy for personalized
marketing. Most of the products in the market are not universal to be used by all the age groups. Hence,
by segmenting the market according to the target age group, marketers create better marketing and
communication strategies and get better conversion rates.

Income

Income decides the purchasing power of the target audience. It is also one of the key factors to decide
whether to market the product as a need, want or a luxury. Marketers usually segment the market into
three different groups considering their income. These are

 High Income Group

 Mid Income Group
 Low Income Group

Place

The place where the target audience lives and affect the buying decision the most. A person living in
the mountains will have less or no demand for ice cream than the person living in a desert.

Occupation

Occupation, just like income, influences the purchase decision of the audience. A need for an
entrepreneur might be a luxury for a government sector employee. There are even many products which
cater to an audience engaged in a specific occupation.

Usage

Product usage also acts as a segmenting basis. A user can be labeled as heavy, medium or light user of
a product. The audience can also be segmented on the basis of their awareness of the product.

Lifestyle

Other than physical factors, marketers also segment the market on the basis of lifestyle. Lifestyle
includes subsets like marital status, interests, hobbies, religion, values, and other psychographic factors
which affect the decision making of an individual.

Market Segmentation: Concept and Importance

Market Segmentation: Concept
Market segmentation is a process of dividing the entire market population into multiple meaningful
segments based on marketing variables like demographics (age, gender etc), geographic,
psychographics (lifestyle, behavior) etc. Market segmentation in marketing is identifying a set of
homogenous segments having similar needs, properties & demands which can be used by a company to
sell their product/service more effectively.
Once an entire population is divided into market segments, companies can target them more accurately
and design their positioning accordingly. This entire process is also known as STP (Segmentation,
Targeting and Positioning).

Market segmentation is one of the oldest marketing trick in the books. With the customer population
and preferences becoming more wider, and the competitive options becoming more available, market
segmentation has become critical in any business or marketing plan. In fact, people launch products
keeping the market segmentation in mind.

There are three ways to classify what the customer wants. It is known as needs, wants and demands.
However, to decide the needs, wants and demands, you need to carry out segmentation first. And in
segmentation, the first step is to determine which type of customer will prefer your products.
Accordingly, that customer will be from your targeted segment. Who would want your product and
whether it falls in the needs segment, the wants segment or the demands segment. Once you decide the
product you are going to make, then you decide on the market segmentation.

IMPORTANCE

1. More Precise Definition of the Market

Segmentation improves company’s understanding of why consumers do or do not buy certain products.
Marketer can have very clear understanding of his consumers. He knows adequately about the market.
He can formulate and implement marketing plan more successfully.

2. Maximum Customer Satisfaction

Marketer can cater needs of customers more effectively. Market segmentation is relevant to the modern
marketing practices. It ensures both maximum satisfaction to consumers and maximum sales to the
company. Maximum consumer satisfaction is the master key to solve any problem. Marketer can cater
needs of customers more effectively. Customers can have products as per their needs; they can get
better products or services at lower costs.

3. Effective Marketing Strategy

Market segmentation provides an opportunity to understand needs and wants of different segments of
the market. This can help in formulating marketing mix/programme more meaningfully. Company can
gain a maximum market response.

4. Essence of Modern Marketing

Market segmentation strategy fits with modern marketing philosophy. If the marketer wants to satisfy
his valued consumers, market segmentation is the only option. It is an essential condition for the
successful modern marketing practice.

5. Improved Profitability

On the basis of the study on needs of specific group of buyers, the products are manufactured.
Company can attract distinct groups of buyers and can increase sales. An increased sale has positive
impact on its profitability.
 6. Optimum Use of Productive Resources

Market segmentation leads to effective use of the valuable resources. Resources are allocated and used
exactly as per market needs, avoiding mismatching between what marketer offers and what the market
needs. So, valuable resources like man, money, material, space, technology, time, etc., can be utilized
more effectively.

7. Benefit of Specialization

It is easy to direct marketing efforts more clearly and specifically. Company designs its marketing
programme for different products and for various groups of buyers. Specialization in production and
marketing can offer a lot of benefits to the company.

8. High Competitiveness

As a result of market segmentation, a company can treat its consumers more effectively than
competitors. It improves competitive strength of the company. Company can respond strongly to the
competitor; can prevent the entry of competitors; or can defeat competitors. Company can create and
maintain the loyal consumers for long period of time.

9. Collection of Valuable Information

Market segmentation process elicits a lot of valuable information for the company. Such information is
instrumental for marketing research, product development, and evaluation of marketing activities. It is
also useful for measuring effectiveness of sales and distribution facilities.

10. Identifying Market opportunity

Market segmentation helps establish close relations with specific groups of buyers. Close relations
facilitate a continuous interaction between consumers and company. Consumers inform the company
regarding changes in their needs, wants, and habits on a continuous basis or whenever asked. Thus, it is
easy for a marketer to project the future trends. He can identify opportunities to be available currently
or in the near future, and can plan accordingly.

11. Benefits to Society and Nation

Market segmentation, if taken objectively, can contribute to social welfare and national development.
Basically, it is a consumer-oriented philosophy, and it results into a win-win-win approach, that is,
company, society, and nation, all three, are benefited.

This can improve overall economic system by manufacturing the right products of the right quantity
and quality for the right groups of consumers, made available continuously at the right price and place
by the right distribution channel.

12. Benefits to Small Scale Industrial Units

We know that small-scale industrial units can function on a limited scale of operation. They can have
only the limited manufacturing and marketing capacity. Industries working on a small- scale basis can
take advantages of market segmentation. By concentrating on special demand of specific group of a
limited number of consumers, they can afford products and get profitable market easily. They can
compete with the large industrial units, too.

Segmentation Targeting Positioning (STP)

Framework
Segmentation Targeting and Positioning (STP) is a strategic approach to modern marketing
techniques and demonstrates a link between the overall market and how any business plans its
marketing activities to compete in that market. Many times STP is referred to as a process where
segmentation is developed initially, one or more target market is selected and then the positioning of
the final product or services takes place. The overall purpose of STP is to guide the business to the
planning and implementing a marketing mix program which is appropriate for both the company and
the targeted group of people.

The STP model is very useful in the development of marketing communications plan as it allows the
marketers to prioritize their propositions and then aim in delivering relevant and personalized messages
so as to get intact with a different type of audiences.

How to Apply Segmentation Targeting Positioning “STP” to a Business?

There are basic steps in the STP model which are very useful in analyzing the products or services
being offered along with the way in which the value and benefits of the offering are conveyed to target
groups. In this marketing tutorial, we will learn how to apply segmentation, targeting and positioning
model in any business organization include the following steps to follow:

Step 1: Segment the Market

Whatever a business is offering, it cannot be everything for everyone. This is the main concept behind
market segmentation which involves dividing various customers into different groups that have
common needs and characteristics. In this way, organizations can tailor-make their marketing
approaches so as to meet the requirements of every group cost-effectively along with providing an edge
over your competitors.

Segmenting customers can be based on different aspects like demographic, behavioral, psychographic
and geographic factors. For example, a travel agency online arranges adventure vacations worldwide.
Its customers are divided into three groups as it is very costly to make diverse packages for additional
groups.

The first segment includes people who are young and married couples and who are interested in eco-
friendly and affordable vacations at exotic places. The second segment includes middle-income
families who are willing for a family-friendly and safe vacation plan and which also makes their trip
fun and easy with children. The third segment includes wealthy retirees who want to go for a luxurious
and stylish vacation in the well-known cities.

Step 2: Target your Customers

At this step, companies need to determine which segment they have to target. Here, companies to
analyze different factors such as the profitability and effectiveness of every segment, analyzing the
potential growth and size of every segment and understand how well the company can serve to the
needs of particular segments. This step can be explained from the previous example where the online
adventure company examines the market size, revenues and profits of every segment.

The first segment reported profits of $9,520,000, the Segment B generates profits of $5,460,000,
whereas, Segment C profits are expected to $4,360,000. Analyzing this, the company decides to give
attention more to the first segment because of the size of this segment.

Step 3: Position the Offering

The final step is positioning strategy that requires companies to determine how they want to place their
offerings to the targeted and most important customer group. After this, the most appropriate marketing
mix can be selected. Business should initially determine why the customers will avail the offering
rather than from its competitors. This can be done by identifying the unique selling proposition (USP)
and then depict a positioning plan for understanding how the different segments will perceive the
products or services. In this way, companies can find the best marketing model to position its offerings.

In addition to this, companies should also understand the needs and wants of every segment or
understand the problem which the offering will solve. This can be done by creating value proposition
which explains how the product or service will meet the expectations of the group better than other
products.

For example, the travelling company presents itself as the ‘finest service for eco-vacation trips for
newly young married couples’. The company tends to hold a contest on social media platforms for
reaching its audience as this medium is preferred by this segment. The competition asks participants to
send pictures of previous eco-vacations; the best picture will win a trip. This marketing campaign was a
big hit and helped the company create its mailing list for the e-newsletter on monthly basis including
profiles of different destinations.

A very important concept of segmentation targeting and positioning model is that all the three steps
should be in alignment with one another so as to develop a fluid plan. Segmentation allows reaching the
right target market which paves way for an appropriate positioning strategy. If any step within the STP
model changes, it is important that the whole work from segmentation should be done and the strategy
needs to be re-worked or else the market strategy will be destined to fail.

Managing the Segmentation Process

1. Determine the need of the segment

What are the needs of the customers and how can you group customers based on their needs? You have
to think of this in terms of consumption by customers or what would each of your customer like to
have.

For example – In a region, there are many normal restaurants but there is no Italian restaurant or there
is no fast food chain. So, you came to know the NEED of consumers in that specific region.

2. Identifying the segment

Once you know the need of the customers, you need to identify that “who” will be the customers to
choose your product over other offerings. Quite simply, you have to decide which type of segmentation
you are going to use in this case. Is it going to be geographic, demographic, psychographic or what?
The 1st step gives you a mass of crowd, and in the 2nd step, you have to differentiate the people from
within that crowd.

Taking the same above example of Italian restaurant – The target will be children, youngsters and
middle aged people. Italian food is generally not preferred by old age people who prefer food which
can be easily chewed (that’s what I feel at least. Lets see if I have teeth by the time I am 60). So you
know the segment now.

3. Which segment is most attractive?

Now, we approach the targeting phase in the steps of market segmentation. Out of the various segments
you have identified via demography, geography or psychography, you have to choose which is the most
attractive segment for you. This is a tough question to answer because one of them will be left out.

If you are using psychographic segmentation, then you need to target the psychology of consumers
which takes time. So you will not be able to expand faster. But if your product is basic, then you can
use demographic segmentation as the base, and expand much faster in surrounding regions. So this step
involves deciding on ALL the different types of segmentation that you can use.

Attractiveness of the firm also depends on the competition available in the segment. If the competition
is too much in a given segment, then it does not make sense to take that segment into consideration. In
fact, that segment is not attractive at all.

Taking the above example of an Italian restaurant, the restaurant owner realizes that he has more
middle aged people and youngsters in his vicinity. So it is better to market his store on weekends and
malls where this target group is likely to go. The middle aged people can bring children and elders as
per their convenience. So the 1st target is the middle aged group, and the 2nd target is youngsters. He is
using a combination of demographic and geographic segmentation to target middle aged people in his
region.

4. Is the segment giving profit

So, now you have different types of segmentation being analysed for their attractiveness. Which
segment do you think will give you the maximum crowd has been decided in the 3rd step. But which of
those segments is most profitable is a decision to be taken in the 4th step. This is also one more
targeting step in the process of segmentation.

Example – The Italian restaurant owner above decides that he is getting fantastic profitability from the
middle aged group, but he is getting poor profitability from youngsters. Youngsters like fast food and
they like socializing. So they order very less, and spend a lot of time at the table, thereby reducing the
profitability. So what does the owner do? How does he change this mindset when one of the segments
he has identified is less profitable? Lets find out in the 5th step.

5. Positioning for the segment

Once you have identified the most profitable segments via the steps of market segmentation, then you
need to position your product in the mind of the consumers. I would not dive deep into positioning here
as you can read this quick guide to positioning. The basic concept is that the firm needs to place a value
on its products.

If the firm wants a customer to buy their product, what is the value being provided to the customer, and
in his mindset, where does the customer place the brand after purchasing the product? What was the
value of the product to the customer and how valuable does he think the brand is – that is the work of
positioning. And to complete the process of segmentation, you need to position your product in the
mind of your segments.

Example – In the above case we saw that the Italian restaurant owner was finding youngsters
unprofitable. So what does he do? How does he target that segment as well? Simple. He starts a fast
food chain right next to the Italian restaurant. What happens is, although the area has other fast food
restaurants, his restaurant is the only one which offers good Italian cuisine and a good fast food
restaurant next door itself. So both, the middle aged target group and the youngsters can enjoy. He has
converted the profit earned from the middle aged group, into more profit, and has achieved top of the
mind positioning for all people in his region.

6. Expanding the segment

All segments need to be scalable. So, if you have found a segment, that segment should be such that the
business is able to expand with the type of segmentation chosen. If the segment is very niche, then the
business will run out of its course in due time. Hence the expansion of the segment is the second last
step of market segmentation.

In the above example, the Italian restaurant owner has the best process in his hand – an Italian
restaurant combined with a fast food chain. He was using both Demographic and geographic
segmentation. Now he starts looking at other geographic segments in other regions where he can
establish the same concept and expand his business. Naturally, with more expansion he will earn more
profits.

7. Incorporating the segmentation into your marketing strategy

Once you have found a segment which is profitable and expandable, you need to incorporate that
segment in your marketing strategy. How do you think McDonalds or KFC became such big chains of
fast food? They had a very clear process of segmentation because of which it became easier to find
regions to target.

With the steps of market segmentation, your segments become clear and then you can adapt other
variables of marketing strategy as per the segment being targeted. You can modify the products, keep
the optimum price, enhance the distribution and the place and finally promote clearly and crisply to
your target audience. Business becomes simpler due to the process of market segmentation.

Deriving Market Segments and Describing the

Segments
A market segment is a group of people who share one or more common characteristics, lumped
together for marketing purposes. Each market segment is unique, and marketers use various criteria to
create a target market for their product or service. Marketing professionals approach each segment
differently, after fully understanding the needs, lifestyles, demographics, and personality of the target
consumer.

A market segment is a category of customers who have similar likes and dislikes in an otherwise
homogeneous market. These customers can be individuals, families, businesses, organizations, or a
blend of multiple types. Market segments are known to respond somewhat predictably to a marketing
strategy, plan, or promotion. This is why marketers use segmentation when deciding a target market.
As its name suggests, market segmentation is the process of separating a market into sub-groups, in
which its members share common characteristics.

To meet the most basic criteria of a market segment, three characteristics must be present. First, there
must be homogeneity among the common needs of the segment. Second, there needs to be a distinction
that makes the segment unique from other groups. Lastly, the presence of a common reaction, or a
similar and somewhat predictable response to marketing, is required. For example, common
characteristics of a market segment include interests, lifestyle, age, gender, etc. Common examples of
market segmentation include geographic, demographic, psychographic, and behavioral.

Examples of Market Segments and Market Segmentation

A good example of market segments and how a company markets to those groups is in the banking
industry. All commercial banks service a wide range of people, many of whom have relatable life
situations and monetary goals. If, for example, a bank wants to market to Baby Boomers, it conducts
research and finds that retirement planning is the most important aspect of their financial needs. The
bank, therefore, markets tax-deferred accounts to this consumer segment.

Taking it a step further, if the same bank wants to effectively market products and services to young
unmarried, most of young unmarried are planning to have a family. The bank uses that data to market
college-friendly savings and investment accounts to this consumer segment.

Conversely, sometimes a company already has a product but does not yet know its target consumer
segment. In this scenario, it is up to the business to define its market and cater its offering to its target
group. Restaurants are a good example. If a restaurant is near a college, it can market its food in such a
way to entice college students to enjoy happy hours rather than trying to attract high-value business
customers.

Points to Remember

A market segment is a group of people in a homogeneous market who share common marketable
characteristics.

The criteria for a market segment are that there is homogeneity among the segment’s main needs, the
segment must be unique, and the segment’s members must produce a common reaction to marketing
tactics.

Common market segment traits include interests, lifestyle, age, and gender.

Cluster Analysis Market Segmentation

Cluster analysis is the use of a mathematical model to discover groups of similar customers based on
finding the smallest variations among customers within each group. These homogeneous groups are
known as “customer archetypes” or “personas”.

The goal of cluster analysis in marketing is to accurately segment customers in order to achieve more
effective customer marketing via personalization. A common cluster analysis method is a mathematical
algorithm known as k-means cluster analysis, sometimes referred to as scientific segmentation. The
clusters that result assist in better customer modeling and predictive analytics, and are also are used to
target customers with offers and incentives personalized to their wants, needs and preferences.

The process is not based on any predetermined thresholds or rules. Rather, the data itself reveals the
customer prototypes that inherently exist within the population of customers.

The Advantages of Cluster Analysis

As compared with threshold/rule-based segmentation, the three main advantages of the analytical
segmentation approach represented by cluster analysis are:

(i) Practicality

It would be practically impossible to use predetermined rules to accurately segment customers over
many dimensions

(ii) Homogeneity

Variances within each resulting group are very small in cluster analysis, whereas rule-based
segmentation typically groups customers who are actually very different from one another.

(iii) Dynamic clustering

The clusters definitions change every time the clustering algorithm runs, ensuring that the groups
always accurately reflect the current state of the data.

Closing the Cluster Analysis Marketing Loop

Because customer behavior changes frequently, performing cluster-based segmentation only once in a
while is not sufficient. Ideally, it should be performed daily, taking advantage of all the latest customer
behavioral and transactional data. For most online businesses, this means identifying dozens or
hundreds of different personas that can be independently targeted by marketers. This, of course, is not
something that can be easily done manually; rather, an automated system should be employed to ensure
that the entire customer base is accurately segmented into relevant personas every day.

The next ingredient is connecting the discovered customer personas with the most relevant marketing
interactions for each one. These interactions should cater to the specific wants, needs and preferences of
each small, homogeneous group of customers represented by each persona. Marketing creativity must
be mated with an automated multi-channel marketing execution system that will allow marketers to
address any number of different personas with any number of different marketing campaigns, every
single day.
Finally, there needs to be a measurement and optimization cycle in place. By scientifically measuring
the results of each campaign in terms of monetary uplift, marketers can know which campaigns are
working well and which ones need improvement. The end result will be highly relevant marketing
communications – leaving no customer behind – that generate long-term customer loyalty, improved
brand perception and maximum customer value.

Discriminant Analysis
Discriminant Analysis is a statistical tool with an objective to assess the adequacy of a classification,
given the group memberships; or to assign objects to one group among a number of groups. For any
kind of Discriminant Analysis, some group assignments should be known beforehand.

Discriminant Analysis is quite close to being a graphical version of MANOVA and often used to
complement the findings of Cluster Analysis and Principal Components Analysis.

When Discriminant Analysis is used to separate two groups, it is called Discriminant Function Analysis
(DFA); while when there are more than two groups – the Canonical Varieties Analysis (CVA) method
is used.

In the 1930’s, 3 different people – R.A. Fisher in UK, Hoteling in US and Mahalanob is in India were
trying to solve the same problem via three different approaches. Later their methods of Fisher linear
discriminant function, Hoteling’s T2 test and Mahalanobis D2 distance were combined to devise what
is today called Discriminant Analysis.

Benefits and Practical Applications of Discriminant Analysis

Discriminant Analysis has various benefits as a statistical tool and is quite similar to regression
analysis. It can be used to determine which predictor variables are related to the dependant variable and
to predict the value of the dependant variable given certain values of the predictor variables.
Discriminant Analysis is also widely used to create Perceptual Mapping by marketers and has some
benefits over other methods that use perceived distances; like the option of using tests of significance to
check for dissimilarities among products and that the distances between two products would not be
impacted by other products included in the study.

Discriminant Analysis has various other practical applications and is often used in combination with
cluster analysis. Say, the loans department of a bank wants to find out the creditworthiness of
applicants before disbursing loans. It may use Discriminant Analysis to find out whether an applicant is
a good credit risk or not. This would serve as method of screening applicants and preventing later bad
debts. In another scenario, say a retail chain wants to conduct market segmentation. It might use a
survey to get respondents to rate various desirable service attributes and then use a combination of
cluster analysis and Discriminant Analysis to segment its market and assign customers to different
segments. This will help the retailer get an idea of customer’s preferences in each segment and also
target them better in their marketing campaigns.

Targeting Concepts, Types and Importance

Target marketing involves breaking a market into segments and then concentrating your marketing
efforts on one or a few key segments consisting of the customers whose needs and desires most closely
match your product or service offerings. It can be the key to attracting new business, increasing sales,
and making your business a success.

Targeting in marketing is a strategy that breaks a large market into smaller segments to concentrate on a
specific group of customers within that audience. It defines a segment of customers based on their
unique characteristics and focuses solely on serving them.

Instead of trying to reach an entire market, a brand uses target marketing to put their energy into
connecting with a specific, defined group within that market.

Five Different Types of Targeting

1. Behavioral Targeting (aka audience targeting)

Behavioral targeting is the practice of segmenting customers based on web browsing behavior,
including things like pages visited, searches performed, links clicked, and products purchased. If you
add mobile and physical store data into the mix, that can also include things like location, and in-store
purchases. Visitors with similar behaviors are then grouped into defined audience segments, allowing
advertisers to target them with specific, relevant ads and content based on their browsing and purchase
history. An oft cited example of behavioral targeting is retargeting ads.

2. Contextual Targeting

Contextual targeting involves displaying ads based on a website’s content. Think: placing an ad for
dishware on a recipe site, or an ad for running shoes on a running forum. It’s kind of like the digital
version of placing a print ad in a niche magazine. It works based on the assumption that someone
reading a page about running is likely to also be interested in your ad for sneakers.

3. Search Retargeting

Search retargeting is when you serve display ads to users as they browse the web based on their
keyword search behavior. Campaigns are set up with keywords that you choose and that are relevant to
your business or products. For example, if you are a furniture retailer, you might want to serve display
ads to users who have searched for “leather couch”, or “leather sectional”. This kind of advertising is
successful because it uses intent to connect with shoppers. The shopper may or may not know about
you, but they are showing interest in a product or solution that you offer. Think of this as an upper
funnel, prospecting strategy.

4. Site Retargeting

Site retargeting, also known as just “retargeting”, involves showing display ads to users who visited
your site and then left without completing a purchase to browse elsewhere. It differs from search
retargeting in two important ways: it is not keyword based, and it is targeting people who are already
familiar with your brand, or who at least have visited your site once and showed interest in your
offerings. Because of this brand recognition, the ROI of site retargeting is often extremely high. Think
of this as a lower funnel, conversion focused strategy.

5. Predictive Targeting
Predictive targeting uses all of the web browsing data from behavioral targeting, layers in 3rd party
data (if available), and applies powerful AI and machine learning to analyze the data and predict future
buying patterns based on past behaviors. The AI that powers predictive targeting can make connections
between behaviors, identify similar and related products for upselling and cross-selling, and zero in on
the shoppers most likely to convert at any given time—all in an instant. And the more data it analyzes,
the more it learns and the better its models become.

Importance of Targeting

Targeting in marketing is important because it’s a part of a holistic marketing strategy. It impacts
advertising, as well as customer experience, branding, and business operations. When your company
focuses on target market segmentation, you can do the following:

1. Speak directly to a defined audience

Marketing messages resonate more deeply with audiences when readers can relate directly to the
information. Brands that have a large, varied market of customers often struggle with creating
marketing campaigns that speak directly to their audience. Because their viewers are very different, few
slogans or stories can resonate with each person on a personal level. Through target marketing, you can
alleviate this problem and focus on crafting messages for one specific audience.

2. Attract and convert high-quality leads

When you speak directly to the people you want to target, you are more likely to attract the right
people. Your marketing will more effectively reach the people most likely to want to do business with
you. When you connect with the right people, you are then more likely to get high-quality, qualified
leads that will turn into paying customers.

3. Differentiate your brand from competitors

When you stop trying to speak to every customer in your market and start focusing on a smaller
segment of that audience, you also start to stand out from competitors in your industry. When
customers can clearly identify with your brand and your unique selling propositions, they will choose
you over a competitor that isn’t specifically speaking to or targeting them. You can use your
positioning in marketing to make your brand more well-known and unique.

4. Build deeper customer loyalty

The ability to stand out from competitors by reaching your customers on a more personal, human level
also creates longer-lasting relationships. When customers identify with your brand and feel like you are
an advocate for their specific perspectives and needs, they will likely be more loyal to your brand and
continue to do business with you over a longer period of time.

5. Improve products and services

Knowing your customers more intimately also helps you look at your products and services in a new
way. When you have a deep understanding of your target audience, you can put yourself in their shoes
and see how you can improve your offerings. You can see what features you can add to better serve
your customers.
 6. Stay focused

Finally, the benefit of using targeting in marketing is that it also serves to help your brand and team.
Target marketing allows you to get more specific about your marketing strategies, initiatives, and
direction of your brand. It helps you clarify your vision and get everyone in the organization on the
same page. You have more direction when it comes to shaping upcoming plans for both marketing and
the business as a whole. A focused approach helps you fully optimize your resources, time, and budget.

The Concept of Product Positioning

Product positioning is the process of identifying the needs of different groups of customers and the
extent to which competing products are perceived to meet customers’ needs. In other words, relating a
product to the market is termed as ‘product positioning’.

It also includes activities like determining the market segments towards which major marketing effort
will be directed on behalf of a product and suggesting methods to differentiate products from
competing ones. Thus, the whole process is meant to bring together the market segments and products.
The process can be used to retain existing products and services as well as to introduce new ones.

Thus, product positioning refers to targeting the product at specific class of customers or for specific
needs. It determines the image of the product in relation to the rival products. The strategies used for
this purpose are product differentiation and segmentation.

These strategies are often employed by the firms who want to engage in non-price competition in
markets characterised by imperfect or monopolistic competition. Both the strategies involve financial
investment in promotional programmes.

Product differentiation means making the product different in some manner from the competitive
products. It is an important product strategy in a competitive market. A marketer cannot control the
price of his product which is identical in all respects to the products of competitors.

Product differentiation can offer the following advantages:

(i) It helps in facing competition.

(ii) It facilitates some control over the price of the product.

(iii) It enables the marketer to create brand loyalty.

(iv) Awareness of differences in the product helps to boost the firm’s goodwill.

(v) It provides ideas for advertising.

However, product differentiation tends to increase the problem and costs of advertising and sales
promotion. Firms with limited product line find product differentiation particularly useful.

Perceptual Positioning & Perceptual Mapping

When we define Perceptual mapping we say that it is basically a technique to represent what people
think about products or services, people or ideas. Technically they are all objects. It is a spatial
representation of the perceptions about the brands on the parts of different individuals. If you perceive
the brands to be similar then you are getting them closer in the perceptual space, and if you perceive
them to be dissimilar then you are putting them apart. In short, I can say that it represents both brands
and people.

As everyone knows that the environment is turbulent so it changes fast and calls for frequent changes in
positioning. At times a company can lose its position due to change in technology, consumer attitudes,
competitive activity both in the economy and amongst creative executives. That is the reason why a
company should be in touch with the market place, and reposition itself before it suffers in terms of
products, image and revenue.

Key Points

 Perceptual maps help marketers understand where the consumer ranks their company in terms
of characteristics and in comparison to competing companies.
 Perceptual maps can display consumers’ ideal points that reflect their ideal combinations of
product characteristics.
 When creating a new product, a company should look for a space that is currently unoccupied
by competitors and that has a high concentration of consumer desire (ideal points).
 A perceptual map is usually based more on a marketer’s knowledge of an industry than market
research.

Key Term

 Demand Void: Areas without any significant consumer desires; typically found in ideal point
maps of perceptual mapping.
 Price elasticity: The measurement of how changing one economic variable affects others. For
example:”If I lower the price of my product, how much more will I sell? “”If I raise the price,
how much less will I sell? “”If we learn that a resource is becoming scarce, will people
scramble to acquire it? “