1. New Segmentation Methods and CLV Gerald E. Smith MK719

2. DEFINITIONS MARKET SEGMENTATION: Customer oriented -- identifies customer subgroups of the market as they currently exist. PRODUCT DIFFERENTIATION: Product oriented -- identifies subgroups of competing products.

3. RULE OF MARKET SEGMENTATION Maximize homogeneity within market segments Maximize heterogeneity between market segments

4. BASES FOR SEGMENTING MARKETS CONSUMER: Geographic Demographic (age, income, marital, occupation, ethnicity, etc. Psychographic (AIO, lifestyles) Behavioral (occasions, user status, usage rate, loyalty status, hierarchy of needs) Benefits BUSINESS TO BUSINESS: Demographic (industry, size, location) Customer Variables (technology, user/nonuser, loyalty status) Purchasing(centralized/de centralized, functional orientation, contracts vs. bids vs. lease) Situational (urgency, order size, product application)

5. PSYCHOGRAPHIC SEGMENTATION Actualizers (taste, finer things) Fulfilleds (functionability, value, durability) Believers (established products/brands) Achievers (visibility to peers) Strivers (emulation) Experiencers (experiential consumption) Makers (basic practical possessions) Strugglers (urgent basic needs)

6. BENEFIT SEGMENTATION Toothpaste Category

7. Segmentation Using Means End Laddering Source: Perry, Strategic Marketing Management (2001).

8. Segmenting Using Means End Laddering

9. Segmentation Framing Source: Barron and Hollingshead, “Making Segmentation Work,” Marketing Management (2002).

10. Document Security Service e.g., Federal Express Point-to-Point Shipping Service e.g., UPS $10-$12 per small parcel $14-$16 per small parcel Segmenting by Frames of Reference and Contrasting Reference Value Profiles Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002).

11. Segmenting by Value Delivery Model and Composite Channel Customer Value Models Commercial Volume Driven Segment Brand Awareness $41,000 Brand Likelihood of Purchase $41,000 Brand Tie-In Purchase $36,000 Product Failure- Reinstall $21,000 Experienced Installers $19,000 Reference Value $400,000 Positive Incremental Value $158,000 Negative Incremental Value $114,000 Net Economic Value $444,000 Info Accuracy-Lost Sales $20,000 Delivery Errors-Lost Cust $16,000 Delivery Errors-Opp Cost $16,000 Delivery Errors-Rep Bus $10,000 Out of Stock-Lost Bus $11,500 Out of Stock-Rep Bus $12,000 Management Time Lost $10,000 Carpet Products Probs $7,000 Out of Stock-Opp Cost $11,500 Residential High Service Segment Brand Awareness $45,000 Brand Likelihood of Purchase $42,000 Brand Tie-In Purchase $31,000 Product Failure- Reinstall $18,000 Product Failure Opp Cost $21,000 Reference Value $500,000 Positive Incremental Value $234,000 Negative Incremental Value $70,000 Net Economic Value $664,000 Experienced Installers $22,000 Experienced Installers Opp Cost $19,000 Extra Installers $36,000 Info Accuracy-Lost Sales $25,000 Delivery Errors-Lost Cust $20,000 Delivery Errors-Rep Bus $12,500 Management Time Lost $12,500 Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002).

12. Location Awareness $275 Consumer Confidence Second Tier Brands $305 $2,000 Trained Flooring Installers $185 Flooring Installer Availability $325 Brand Awareness $335 Consumer Confidence Top Tier Brands $425 Availability of Complementary Products $280 Custom Flooring Installers $340 $2,000 Differentiation Value Reference Value Differentiation Value Reference Value Best Brand RetailersVolume Driven Retailers Contrasting Differentiation Value Profiles Source: Smith, “Segmenting B2B Marketing Using Economic Value Analysis,” Marketing Management (2002).

13. Evaluating Segments Using Economic Value Pools $30 Reference Value Courts and Law Enforcement Agencies Academic Research Labs Pharmaceutical Drug Discovery Clinical Services (paternity, inheritance, infidelity) Immigration $1,655 $2,500 $400 Millions of kits of market potential Economic Value per Kit $900 $1,300 Source: Nagle and Hogan, The Strategy and Tactics of Pricing (2006).

14. Evaluating Segments Using Profit Pools Source: Gadiesh and Gilbert, Harvard Business Review (1998).

15. Evaluating Segments Using Profit Pools Source: Gadiesh and Gilbert, Harvard Business Review (1998).

16. Evaluating Segments Using Profit Pools Source: Gadiesh and Gilbert, Harvard Business Review (1998).

17. CALCULATING CUSTOMER LIFETIME VALUE 1.Customer Acquisition Costs 2.Customer Break-even Analysis 3.Lifetime Value Analysis

18. CUSTOMER ACQUISITION COSTS AC = _____________________ Prospecting Costs: Production, Mailing, Advertising, Lists Response Rate

19. RETENTION AND SURVIVAL Survival (t) = Retention Rate (t-1)

20. CUSTOMER LIFETIME VALUE

21. CUSTOMER LIFETIME VALUE Infinite Life

22. BREAK-EVEN ANALYSIS Frequent Buyers

23. BREAK-EVEN ANALYSIS Occasional Buyers

24. LIFETIME VALUE ANALYSIS Frequent Buyers

25. LIFETIME VALUE ANALYSIS Occasional Buyers

26. Segmenting Using CLV Likely value of each customer Buying patterns of each customer Optimal marketing strategies –For different customer segments –For each customer over time or situation