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Professor Joel Huber Marketing 360 Marketing Management Fuqua School of Business. Customer Analysis. Agenda. LVOC: Lifetime Value of a Customer The Consumer Decision Process Consumer Markets Business markets Segmentation Analysis. But first. Is the customer always right?.
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Professor Joel Huber Marketing 360 Marketing Management Fuqua School of Business Customer Analysis
Agenda • LVOC: Lifetime Value of a Customer • The Consumer Decision Process • Consumer Markets • Business markets • Segmentation Analysis
But first ... • Is the customer always right?
Customers as Assets (Gupta and Lehmann) • Key idea - customer as sum of cash flows • let m=margin, r=retention rate, i=cost of capital • lvoc = • As retention increases, profits increase Margin Multiple
LVOC Applications - Acquiring Customers • Etrade, i=12%, r=80%, and m=$255 (total margin / # customers) . • lvoc = (r/(1+i – r) m = $637.50 • acquisition = marketing expense/new customer = $315 • looks like a profitable strategy • source: annual reports and 10K • Customer selection becomes a critical part of their strategy
LVOC Applications • Choosing the right customer - credit interest v. defaults, those that are credit worthy may not be profitable • Firing the customer • Early 90’s only 30% of bank’s customers profitable • Lower service levels • The customer is not always right
LVOC Applications - Valuations 1. Estimate LVOC 2. Estimate growth rates in # of customers • 9/5 Market Cap - Amz $3.13 BB ET $2.03 BB
Lifetime Value of a Customer • Note huge relationship between r and value • How to increase r? • Understand you consumer
Key Questions • Why should customers buy from me? • If you have trouble answering this question, your business is in jeopardy • Unless you are low cost (and can remain so), price is not a good reason • What are the impediments to their purchase? • Remove these barriers • Understand your customer’s problems
A Model of Consumer Behavior SOCIAL AND GROUP FORCES CultureSubcultureSocial classReference groupsFamily and households PSYCHOLOGICAL FORCES MotivationPerceptionLearningPersonalityAttitude SITUATIONAL FACTORS Whenconsumers buy Whereconsumers buy Whyconsumers buy Conditions under which consumers buy INFORMATION Commercialsources Social sources BUYING-DECISION PROCESS Need recognition Choice of involvement level Identification of alternatives Evaluation of alternatives Purchase and related decisions Postpurchase behavior
Flu shot decision for consumers? • Who values it most? • How could these people be reached, motivated? • Overcoming barriers
How are business customers different? • More persons, formal buying procedures, profit motive • Participants include: users, influencers (e.g., consultants), deciders, approvers and buyers
How are business customers different? • The Mix • Price (Negotiations, auctions) • Place (More Direct Channel) • Promotion (Sales and Trade Journals) • Product (Customizable, Long Purchase Cycle, Different Styles)
Analyzing Business Markets • Problem Recognition • Need Description • Product Specification • Supplier Search • Proposal Generation • Supplier Selection
Aggregating Consumers to Segments • Many analyses assume a ‘representative customer’ • Consumers may differ in any step in the consumer decision process (heterogeneity) • Preferences of different customer types may conflict • Making one group happy antagonizes another • Compromise offerings are dangerous as no group is really satisfied; competitors can come • Too expensive to design a different product for all • Segmentation is the answer
Market Segmentation • Market segmentation is the subdivision of a market into distinct subsets of customers • Or an aggregation of consumers into similar groups
Segmentation process • Identify bases for segmenting the market • How the good or service is used • Purchase volume • Price sensitivity • Geographic location • Demographics • Size of company
Segmentation process (cont.) • Develop profiles of resulting segments • Size and growth • Fit with company capabilities and objectives • Assess the attractiveness of each segment • Select the target segment(s) - 3C’s • Develop a 4P’s strategy for each segment
How would you sell the flu vaccine? • To Duke University • To Morgan-Stanley
Segmentation - Perceptual Maps Sportiness Porsche Miata BMW 4 Acura NSX 1 Jaguar Supra Prelude Celica 2 6 VW Golf Economic Value Volvo V70 5 3 Kia Rio Corolla Civic 1~6: Clusters of Ideal Points Radius proportional to # of consumers
Key Take Aways • LVOC • The customer is not always right • Retention is key to valuation • Can we increase retention • The Consumer Decision Process • Consumer decisions • Business decisions • Segmentation Analysis