Chapter Three

Customer Analysis
Chapter Three: Learning Outcomes
At the end of this chapter, students will be able to:
• Conduct customer analysis;
• Understand customers better through the 6W model of customer
analysis;
• Know what customer segmentation is;
• Evaluate the attractiveness of a market segment;
• Define the terms ‘relationship marketing’ and ‘customer relationship
management’;
• Understand the different guidelines for relationship marketing and
customer relationship management;
• Conduct a market research analysis on the customer base;
• Understand the customer value creation process;
• Describe customer loyalty;
• Understand how customer loyalty can be established through
customer management.
 Introduction

• You only need one thing to have a business – “A

Customer”
• The purpose of an enterprise is to create and keep a
customer.
• Segmentation strategies are developed from the insights
gained through the customer analysis.
 Why is the customer so important to the
organisation?

• The customer is central to securing the long term

success of the organisation
• A strategy that focuses on the market or customer implies
that the customer is offered value which can only be
done if the organisation has a clear understanding of the
needs of the customer base that it serves
• Ferrell’s 6W model can be used for customer analysis
 The 6W model can be used for customer
analysis:
• WHO – are current or potential customers?
• WHAT – is the purpose for which they purchase the products
(what do they use it for)?
• WHERE – do customers purchase the product?
• WHEN – do customers purchase the product?
• WHAT – is the reason the customer buys the product from one
organisation instead of another one? (price or image may play a
role)
• WHY – do customer decide not to buy a product?
The 6W model can be used for customer
analysis:
WHO – are current or potential customers?
• What are the demographic characteristics of the
customers?
• What are the geographic characteristics of the
customers?
• What are the psychological characteristics of the
customers?
• Who purchases our products?
• Are the customers influenced during the purchase
process?
• Do the customers bear the financial responsibility for
the purchases themselves?
The 6W model can be used for customer
analysis:
WHAT – is the purpose for which they purchase the
products (what do they use it for)?
• In which quantities are the products purchased?
• Do customers combine this product with another
product?
• Are there differences between minor and major
users, and if yes, how many?
• Do customers need complementary products for the
product?
• What happens to the products after consumption?
• Do customer recycle the product or parts of the
product?
The 6W model can be used for customer
analysis:

WHERE – do customers purchase the product?

• Through which suppliers is the product sold?
• Is e-commerce an important component of the sale’s
strategy?
• Are the customers national or international
customers?
• Do they have different needs and wishes?
• Is the product offered through non-official points of
sale?
The 6W model can be used for customer
analysis:

WHEN – do customers purchase the product?

• Are there changes in sales numbers in certain
seasons?
• Do promotions have an effect on the sales numbers?
• Does the consumption of the product change due to
physical and social changes in the customer’s
environment?
• Does the consumption of the product change due to
a changing time perception?
The 6W model can be used for customer
analysis:

WHEN – do customers purchase the product?

• Are there changes in sales numbers in certain
seasons?
• Do promotions have an effect on the sales numbers?
• Does the consumption of the product change due to
physical and social changes in the customer’s
environment?
• Does the consumption of the product change due to
a changing time perception?
The 6W model can be used for customer analysis:
WHAT – is the reason the customer buys the product from one
organisation instead of another one? (price or image may play a role)
• What are the basic properties of the own products?
• What are the basic properties of the products offered by the
competition?
• What are the customers’ needs?
• How are the customers’ need fulfilled by the own organisation?
• How well does the competition fulfil these needs?
• Will customers’ needs change in the future? How?
• Which payment possibilities do customers use when making their
purchase? Do they have sufficient budget?
• Does the company offer credit possibilities?
• Do the customers build a lasting relationship with the company? Or
are the purchases purely transactional?
• Which methods should be used to improve customer relationships
are available?
The 6W model can be used for customer
analysis:
WHY – do customer decide not to buy a product?
• Which needs and wishes of the customer aren’t met
yet?
• What are the properties of the competitors’ products
that the customers do buy?
• Are there problems with distribution?
• Are there problems with price?
• Are there problems with promotion?
• How can potential customers be turned into
customers?
 Customer segmentation refers to dividing groups of
individuals or businesses into groups based on specific
characteristics.

The 5 bases for customer segmentation include:

• Demographic segmentation
• Geographic segmentation
• Psychographic segmentation
• Behavioural segmentation
• Benefits sought segmentation
 Demographic Segmentation

• Demographic segmentation is defined as a segment

based on demographic variables such as age, gender or
income. Demographic segmentation is helpful in better
understanding consumer behaviour.
• This is an important part of Ferrell’s 6W model.
Demographic is derived from the Greek word demos,
which means ‘people’. Graphy means ‘the study of’,
making demographic ‘the study of people’.
 Demographic Variables
• Gender
Different products sought
Differences in communication preferences
• Age
Target specific age group
For some products children are an attractive group
Often combined with other demographic variables
• Income
Lower income earners - focus on necessities
Higher income earners - may pursue luxuries
• Ethnicity
Significant part of personal identity
Need to understand the differences between ethnic groups
 Geographic Segmentation

• Geographical segmentation occurs when an organisation

divides the market based on geographic aspects. There
are various ways to geographically subdivided the
market. For example, the market can be divided into
regions such as a village, city, province, state, region,
country or continent. The market can also be divided into
rural or urban market segments.
 Geographic Variables

•Global regions Market Size

•Countries
•Region of country
•Provinces
•Cities
•Neighbourhoods
 Psychographic Segmentation
• Psychographic market segmentation is a method to
divide the customers based on their shared personality
traits, beliefs, attitudes, interests, values and other
factors. These traits could be visible or hidden.
• Identifying these psychographic characteristics is a
powerful way to ascertain whether a similar product or
service can be sold to people from different demographic
segments.
• Each individual has a different psychographic
composition, and analysing these characteristics is the
foundation of psychographic segmentation. Psychology
plays a large role in this form of segmentation.
 Psychographic Variables
Groups are formed according to psychological traits that
influence consumption habits drawn from people’s lifestyle
and preferences such as:
• Beliefs
• Values
• Personality
• Lifestyle
• Social status
• AIO (activities , opinions, and interests).
• Difficult to use as access to these characteristics can be
expensive and time consuming
 Behavioural Segmentation
• Behavioural segmentation refers to the process of
dividing potential customers into smaller homogeneous
groups based on behaviour and buying behaviour of
customers.
• Behavioural segmentation can be used in combination
with the 6W Model of Customer Analysis, because Ferrell
discusses the customer’s motivations to buy something
for a seller in great detail.
• Behavioural segmentation is carried out by analysing
matters such as user frequency, loyalty, benefits. These
buying patterns are taken into account as they are very
telling about the customer’s needs and wishes.
 Behavioural Variables

• Divides buyers into segments base on their knowledge,

attitudes, uses, responses to a product
• Occasion-based purchases – group according to when
product is consumed or purchased (orange juice for
breakfast, holidays, anniversary)
• User status (non-user, ex-users, potential users, first-time
users, regular users)
• Usage rate (non-user, light user, medium users, heavy
users)
• Loyalty status – segment based on the degree of
customer loyalty (low loyalty, moderate loyalty, loyal)
 Benefits Sought Segmentation

• Consumers derive different benefits from the same

products.
• This influences the relationship that the consumer has
with the product or organisation.
• The benefit sought variable offers more utility than the
traditional methods because it explains the reasons why
consumers choose to buy or prefer particular products, or
patronise particular suppliers over others.
• The benefits consumers seek from products will help
marketers segment customers as heavy or light users,
brand loyal or brand switchers
 Benefit Sought Variables
• Needs
• Motivations
E.g. consumers shop for convenience, value, safety,
esteem etc.

These variables help marketers determine the benefits

consumers are seeking when making purchases.
E.g. Bicycles serve different purposes to different
consumers – (racing, fitness, touring, transportation, fun
riding etc.)
 There are 9 common
business questions that are asked when
designing a customer
segmentation strategy:

• How are existing customers distributed according to demographic

criteria?
• To what extent and how has the age distribution within the existing
customer base changed over the past decade?
• What percentage of the organisation’s income is contributed by a
specific segment of customers?
• How are customers distributed by lifetime value?
 Continued …

• What are the revenue, profit and margins contributed by a specific

segment of customers?
• Which customer segment of the organisation responded best to the
most recent campaign?
• Which customer segment shows the greatest profitability?
• Which advertising campaigns were most effective in different
segments?
• Are there trends in purchasing patterns by segments?
 Some important aspects to note regarding
segmentation:

• Hybrid or multivariate segmentation refers to using

multiple segmentation variables in constructing market
segments.
• An attractive market segment is one that offers potential
for current or long-term profit for the business.
• Two important elements when building relationships
within a selected segment are trust and commitment
 Following from the discussion of
how to select target segments is one
pertaining to building relationships with
customers.

• Relationship marketing refers to identifying and

creating value with customers and sharing the
benefits of this in the long term.
• Itshould be noted that customer satisfaction is a
necessary precursor to customer relationship
marketing.
• Customer satisfaction refers to the judgement the
customer makes on a product or service being
provided.
 The key aspects of relationship marketing
include:

• Create new value for customers and share the value

• Value is created ‘with’ customers
• Design and align entire business process to gear towards creating
value for the customer
• A continuous cooperative effort is ongoing between buyer and seller
• Recognise the lifetime value of the customer
• Seeks to build a chain of relationships not only with customers but
also with suppliers, distributers, intermediaries and all other
stakeholders
 How does a marketer plan for better
relationships with customers?

• The core objective of relationship marketing is to retain current

customers so that the cost of trying to attract more/replacement
customers is reduced.
• The core principles of relationship marketing include – trust,
honestly, commitment, open communication channels, a focus on
customers interests, a commitment to quality, the provision of added
value through products and the willingness to retain customers.
 What is Customer Relationship
Management (CRM) as opposed to
Relationship Marketing?

• CRM refers to methodologies, software and Internet

capabilities assisting an organisation in managing
relationships with customers. In other words
methods used to create and maintain relationships
with customers. The way in which CRM is
implemented will depict the nature of the
relationships between company and customers.
 There are essentially
10 steps in implementing a CRM program:

1) Pre-planning (justify the initiative)

2) Co-ordinate CRM initiative (treat it like a project)
3) Assess the customers
4) Develop the CRM strategies (group customers)
5) Assess competitors CRM strategies
6) Internal assessment to see if CRM is appropriate
7) Select CRM technologies
8) Train people
9) Implement CRM strategies
10)Measure CRM results
 CRM builds loyalty but also achieves the
following 3 objectives:

a) Behaviour prediction – CRM helps a business to get closer to its

customers to examine their behaviour which will assist in predicting future
behaviour
b) Customer profitability – CRM is used to assist to identify and focus on
the most profitable customers
c) Personalisation – CRM is used to differentiate between customers and
personalise products and services for customers
 Market information and knowledge
resources about customers

• Customer research can be used for different purposes

(exploratory, descriptive and causal)
• The decisions to be made will depict the type of information to
be gathered, decisions can be related to the following;
segmentation bases, positioning of the product, marketing mix
effectiveness and/or to identify competitors
• When performing primary research, three questions should be
asked; Who? What? How?
 Customer loyalty
is recognised as the answer to long term
profitability for businesses.

What does the concept of customer lifetime value (CLV)

refer to?
• CLV refers to the present value of future profits of a
customer over his/her life of the relationship with the
business/brand.
 Why are loyal customers more profitable?

• They increase the number of purchases for the

company
• They often trade up (buy more or more expensive
versions of the product)
• They are less price sensitive
• They provide word-of-mouth referrals
• There is a lower cost associated with servicing long
time customers
 There are 5 distinct loyalty marketing
strategies:

1. Pure loyalty strategies are aimed at existing customers of the business

2. Push strategies are aimed at getting a customer closer to a business in
terms of its location or the distribution outlets that it uses
3. Pull loyalty strategies are aimed at pulling the customer towards the
business
4. Through promotions when competitors’ products are very similar to those
on offer by the business
5. Purchase loyalty strategies aim at getting customers to buy more products
or spend more
6. Purge loyalty strategies involve offering low prices in order to keep
customers coming back and buying more
 There are two main approaches
to customer loyalty:

• Behavioural loyalty refers to customers buying the same product

again and again, and attitudinal loyalty refers to a customer having
a favourable attitude and level of commitment to a product.
• When measuring behavioural loyalty, one must determine if the
customer is still buying from the company and determine if the
customer has consistently bought from the company.
 Customers which fall under ‘behavioural
loyalty’ can be divided into three:

• Those that are forced to be loyal (they cannot buy products from
anywhere else)
• Those that are loyal due to inertia (customer is comfortable, has faith
in the supplier and does not check for alternatives)
• Those that are functionally loyal (there is an objective reason for
loyalty, normally based on quality or price, etc.)
 How do marketers measure attitudinal
loyalty?

• When measuring attitudinal loyalty – One must measure the

components of attitude which are feelings, beliefs and purchase
intentions.
This is more of an emotional construct versus an objective one.
Emotional or attitudinal loyalty is stronger and lasts longer than
behavioural loyalty as the relationship is often more important to the
customer and the customer will do everything they can to maintain it.
 There are three different ways in which
customers who are behaviourally loyal can be
segmented:

• According to the customers primary behaviour – recency,

frequency and no of purchases
• According to customers secondary behaviour – customer
referrals, endorsements and spreading the word
• According to customers intent to purchase – determining
if the customer going to purchase in the future
 Customer loyalty can be divided into 5
categories:

1. Emotionally loyal customers

2. Behaviourally loyal customers
3. Dubious customers (active customers who are
currently using a certain product but do not know if
they will buy that product again)
4. Disloyal reducers (customers who intend to cut
down purchasing that specific product in the future)
5. Leavers (customers who will not buy again)
 Chapter Summary
In this chapter, we have discussed how to conduct
customer analysis through the 6W model. The chapter
presented the nature customer segmentation and how
to evaluate the attractiveness of a market segment.
The definitions of ‘relationship marketing’ and ‘customer
relationship management’ (CRM) was presented as
well as the different guidelines and steps for
implementing CRM.
An overview of the market research analysis on
customer base was also provided. The chapter also
presented discussions on customer loyalty and how
customer loyalty can be established through customer
management.