(KMBN MK02) Unit 4: Customer Analytics

Customer Lifetime Value

Customer Lifetime Value (CLV) is like figuring out how much money a customer is likely to spend on your business over their entire relationship with you. Think of it as the total value a customer brings to your business during the time they stay connected with you.

Example: Imagine you own a coffee shop, and one regular customer spends ₹200 every week at your shop. If this customer keeps coming back for 5 years, their lifetime value is ₹200 x 52 weeks x 5 years = ₹52,000.

Why is CLV important?

• It helps you understand which customers are most valuable to your business.
• It guides you to spend wisely on marketing to keep your best customers coming back.
• It helps you plan better to grow your business by focusing on customer loyalty.
• Helps Plan Better: Businesses can figure out how much they should spend on advertising or giving discounts to attract customers.
• Focus on Loyal Customers: It shows that keeping loyal customers can be more profitable than constantly finding new ones.
• Improve Services: Businesses can improve products or services to keep customers happy for a longer time.

In short, CLV shows the big picture of how much a customer is worth to your business!

Basic Customer Value

Basic customer value refers to the fundamental benefit or solution a product or service provides to satisfy a customer's need or solve their problem.

Think of it this way: when you buy something, you're not just paying for the item itself but for what it does for you. For example:

• A cup of coffee gives you the energy boost you need.
• A mobile phone helps you stay connected with others.
• A pair of shoes protects your feet and makes walking comfortable.

At its core, basic customer value is about why a customer chooses a product — the essential reason it is useful or desirable to them.

Measuring Customer Lifetime value

Measuring Customer Lifetime Value (CLV) is like figuring out how much money a customer is likely to spend on your business during their entire relationship with you.

Imagine you have a favorite coffee shop. You buy a cup of coffee for ₹100 every week for a year. Over 5 years, that’s ₹100 x 52 weeks x 5 years = ₹26,000. That ₹26,000 is your lifetime value to the coffee shop.

Businesses measure CLV to

• Understand Customer Worth: They find out which customers are most valuable so they can focus on keeping them happy.
• Plan Investments: If a customer is likely to spend a lot in the future, it might make sense to spend more on marketing or better services for them.
• Boost Profits: By understanding CLV, businesses can create strategies to encourage repeat purchases and make customers stay longer.

In short, CLV tells businesses how important you are to them in the long run and helps them decide how much effort to put into keeping you as a customer.

Estimating Chance that customer is still active

Estimating the chance that a customer is still active is like guessing if someone is still interested in staying connected with you. Imagine you have a list of friends, and you want to figure out who might still want to hang out or chat with you.

Here’s how it works

• Check the Past Activity: You look at how often each friend has reached out to you or spent time with you recently. For customers, this means checking when they last made a purchase or interacted with the business.
• Look for Patterns: You notice patterns in how often they used to call or visit. If a friend called every week but hasn’t called in months, you might think they’re less interested now. Similarly, for customers, businesses track how frequently they used to buy or visit.
• Use a Formula or Method: To make a better guess, businesses use special methods or tools (like looking at averages or probabilities) to figure out the likelihood that the customer is still around.
• Take Action: Once you have an idea of who might still be interested, you can send reminders, offers, or messages to encourage them to stay connected.

By combining these clues (last visit, buying frequency, spending habits), you can estimate whether a customer is still engaged or if you need to do something, like send them a reminder or offer, to bring them back.

It’s all about understanding behavior and using that information to keep the relationship strong!

Using Customer Value to value a business

Customer value refers to the benefit a customer gets from using a product or service compared to what they spend on it (money, time, or effort). Businesses that consistently provide high customer value are often more successful and valuable. 

Here's how customer value helps to determine the worth of a business

1. Satisfied Customers = More Sales: If customers feel they are getting good value for their money, they are more likely to buy again and recommend the business to others. This leads to higher sales and revenue.

2. Loyal Customers = Steady Income: Businesses with loyal customers have a consistent income because these customers stick around for a long time. This makes the business more stable and attractive to investors.

3. Reputation = Higher Worth: A business that delivers great value builds a strong reputation in the market. A good reputation can make a business more valuable, as it attracts more customers and investors.

4. Customer Lifetime Value (CLV): This measures how much money a customer is likely to spend on a business over time. A business with high CLV is more valuable because it shows the ability to retain customers and earn from them consistently.

5. Competitive Edge: A business offering more value than competitors (better quality, lower prices, or better service) is more attractive in the market. This gives it a competitive edge, which adds to its overall value.

6. Predictable Growth: When a business focuses on improving customer value, it ensures long-term growth. Happy customers bring in more business and help the company expand.

Example: Imagine two coffee shops

• Shop A sells coffee for ₹50, but the taste, quality, and service are average.
• Shop B also sells coffee for ₹50, but it’s delicious, served quickly, and offers a cozy ambiance.

Customers prefer Shop B because it offers more value. Over time, Shop B will have more loyal customers, higher sales, and a better reputation, making it worth more than Shop A.

In short, focusing on customer value helps a business grow, maintain loyal customers, and stay competitive, which increases its overall worth. 

Market Segmentation

Market segmentation is the process of dividing a broad group of potential customers into smaller, more specific groups based on shared characteristics. This helps businesses tailor their products, services, and marketing efforts to meet the unique needs of each group.

For example, think about a company that sells sports shoes. Instead of marketing to everyone, they might break down the market into different groups, such as:

• Age: Young adults, teenagers, seniors. Shoes for children, teenagers, adults, and seniors. 
• Activity Level: Athletes, casual walkers, people who just want comfortable shoes. Athletic shoes for sports lovers, casual shoes for daily wear, and formal shoes for work
• Location: People living in hot climates versus cold climates. Shoes for hot climates, cold climates, or rainy areas.
• Income: Budget-friendly shoes for price-conscious customers or premium shoes for high-income buyers.
• Gender: Shoes designed for men, women, and unisex.

By focusing on specific groups, businesses can offer products and messages that are more relevant, leading to better customer satisfaction and increased sales.

The segmentation-targeting-positioning (STP) framework

The Segmentation-Targeting-Positioning (STP) framework is a marketing approach that helps businesses effectively reach their customers.

• Segmentation: This is the first step, where a company divides the market into smaller groups based on common characteristics like age, location, income, interests, or behavior. For example, a clothing brand might segment the market into groups like teenagers, working professionals, or retirees.
• Targeting: After dividing the market, the business chooses which group(s) they want to focus on. They select the most profitable or accessible segment to target. For example, if the clothing brand wants to focus on teenagers, they might develop trendy, affordable fashion for this group.
• Positioning: This is how the business wants its product or brand to be seen by the target group. It involves creating a unique image or identity for the product in the minds of the target customers. For example, the brand might position itself as a "fashionable and affordable choice for teenagers."

In short, STP helps companies figure out who to sell to, how to reach them, and how to make their product stand out to that group.

Segmentation

Segmentation is the process of dividing a large group or market into smaller, more manageable parts based on shared characteristics. Think of it like slicing a big cake into smaller pieces. Each piece is tailored to different preferences or needs. In marketing, businesses use segmentation to better understand their customers and target them with specific products or services.

For example, a clothing store might divide its customers into segments like men, women, kids, or even by age groups. This helps the store offer the right kind of clothes to the right people, making their marketing more effective.

The Concept of Market Segmentation

Market segmentation is the process of dividing a large group of customers into smaller, more specific groups based on certain characteristics. These characteristics can be things like age, location, interests, income, or buying behavior. The idea is that by understanding these different groups, businesses can offer products or services that better meet the needs of each group, instead of trying to please everyone with one approach.

For example, imagine a clothing brand. They might divide their market into segments like young adults, working professionals, and elderly customers. Each group has different tastes and needs, so the brand can create special clothing lines for each segment. This makes their marketing more effective and their products more appealing to the right people. 

Managing the Segmentation Process

Managing the segmentation process involves dividing a larger market into smaller, more manageable groups of consumers who have similar needs, preferences, or behaviors. This helps businesses target specific groups more effectively. Here’s how it works in simple terms:

• Identify the market: First, the business looks at the entire market to understand who their potential customers are.
• Divide into segments: The next step is to break this large market into smaller segments based on certain characteristics like age, income, location, or lifestyle. For example, a company selling running shoes might have one segment for professional athletes and another for casual joggers.
• Understand each segment: Once the segments are defined, businesses research each one to understand their needs and how they behave. This helps in creating tailored messages or offers.
• Target specific segments: After understanding the different groups, businesses choose which segments they want to focus on. This ensures they are not wasting resources on customers who are unlikely to buy their product.
• Monitor and adjust: Finally, businesses keep an eye on the effectiveness of their segmentation strategy. If customer needs change, they might adjust the segments or their approach.

In essence, managing segmentation is about understanding who your customers are, grouping them into similar categories, and then focusing on the most promising ones to make your marketing more effective.

In simple words, segmentation is about grouping similar people together to sell them exactly what they want, making the business more efficient and effective.  

Deriving Market Segments

Market segmentation is the process of dividing a large, diverse market into smaller groups of people or businesses that share similar needs, characteristics, or behaviors. By doing this, businesses can focus their marketing efforts on specific groups that are more likely to buy their product or service.

For example, a company selling sports shoes might divide the market into different segments like:

• Young athletes looking for performance shoes.
• Casual walkers wanting comfortable shoes for daily use.
• Fashion-conscious buyers looking for trendy designs.

Describing Segments Using Cluster Analysis:

Cluster analysis is a technique used to group similar items (in this case, people) into clusters based on shared characteristics. The goal is to find natural groupings within a dataset, which can help businesses understand the different market segments more clearly.

Imagine you have a large set of customer data with information like age, income, shopping habits, and preferences.

Cluster analysis will automatically sort the customers into different groups based on the similarities between them. For example, if you're studying customers of a store, you might use cluster analysis to group them based on their buying behaviors. Some customers might buy expensive items regularly, while others may prefer cheaper products. By using cluster analysis, you can divide customers into groups, such as

• High-spending customers: Those who buy expensive items often.
• Bargain shoppers: Customers who always look for discounts or cheaper options.
• Occasional buyers: Those who don’t buy much but spend a lot when they do.

This helps businesses understand their customers better and tailor marketing or offers to each group.

In simple terms, it's like organizing a crowd into groups based on who has similar interests or behaviors, making it easier to manage and understand.

In short Market segmentation divides a market into smaller groups of similar people, and cluster analysis helps identify these groups by grouping customers based on shared traits.

Unit 3: Sales Forecasting