MarketingAnalytics

Sem III
Dr. Uzma Hasan
Unit I - Marketing Analytics – Meaning
 Marketing Analytics is the act of tracking, collecting and analyzing data to evaluate marketing
effectiveness and guiding future marketing decisions.
 Marketing analytics comprises the processes and technologies that enable marketers to evaluate the
success of their marketing initiatives. 
 Marketing analytics is the study of data garnered through marketing campaigns in order to discern
patterns between such things as how a campaign contributed to conversions, consumer behavior,
regional preferences, creative preferences and much more. The goal of marketing analytics as a practice
is to use these patterns and findings to optimize future campaigns based on what was successful.
 Marketing analytics gathers data from across all marketing channels and consolidates it into a common
marketing view. From this common view, you can extract analytical results that can provide invaluable
assistance in driving your marketing efforts forward.
 Marketing analytics benefits both marketers and consumers. This analysis allows marketers to achieve
higher ROI on marketing investments by understanding what is successful in driving either
conversions, brand awareness, or both.  Analytics also ensures that consumers see a greater number of
targeted, personalized ads that speak to their specific needs and interests, rather than mass
communications that tend to annoy.
Marketing Analytics - Characteristics
 Marketing Analytics is a broad range and is an essential tool or strategy that is used to
unlock the customer’s relevant insights, increase the ROI (Return on Investment),
profitability, and to make the brand perception popular among the audience or the end-
users.

 Another important aspect of marketing analytics is that you can convert the business to a
profitable means, by implementing the right analytics, by discovering new areas of
development, uncovering unknown markets, new end audiences, and areas of future
marketing, and much more.

 There are many aspects to a marketing campaign that you can measure: conversion rates,
leads captured and brand recognition, to name a few. Through marketing analytics, one can
understand the problem that the firm is trying to solve and focus on analyzing the data from
that point of view.
• Analytics also helps uncover areas of the buyer’s journey that could be simplified or
improved. Where are your clients struggling? Are there ways you can simplify your product
or make the check-out process easier?

• Marketing analytics is focused on people. Marketing analytics looks at the metrics that come
from all the different digital platforms. This is not only your website, but your lead
generation programs, your email marketing, your ads, your social media connections. It’s
going to be looking at these metrics coming from a number of different platforms, and what
we do is we focus more now on the lead level, or the person level for further planning.
Hence, web analytics is focused on page, marketing analytics is more focused on people.

• Marketing analytics helps in integrating different channels. It helps in integrating between

email, social, organic and paid leads and understanding how each one of those is working
and engaging the prospective customers. Marketing analytics allows you to see holistically
how these channels are performing, and which platform is closing the most customers.
Advantages of the Marketing Analytics

• UNDERSTAND YOUR AUDIENCE

• Marketing analytics assists you in better understanding of your buyers and other market
opportunities. Marketing analytics will help you learn how their preferences and values
influence their interaction with the brand. Analytics helps to understand about where they
are entering (or exiting) the conversion funnel.

• IDENTIFY TRENDS
•  When you can recognize important trends, such as how your customers interact with your
brand or how your marketing campaigns are doing, you can respond quickly to capitalize
on or reverse those trends. Marketing analytics offers insight to help you forecast (and
manage) potential market dynamics by allowing you to see the big picture.
• GAIN INSIGHTS INTO PAST EVENTS
• One of the significant benefits of marketing analytics is that it offers insights into past
events and reasons behind the changing purchasing patterns. This, further, helps marketing
teams to avoid making the same mistakes as in the past. With the help of descriptive
analysis and customer relationship management, marketing analytics solutions can
highlight not only what happened in the past but also provide answers to questions on
buying patterns and customer preferences.

• MEASURE PERFORMANCE
• Marketing analytics will help you understand how well the marketing campaigns are doing
in terms of meeting business objectives. By monitoring the performance indicators that are
most important to the company’s objectives, one will change the marketing strategies and
budgets to have a greater positive effect.
• OPTIMIZE CAMPAIGNS
• Marketing analytics assists in ensuring if the marketing budget is utilized efficiently and
effectively as possible. Also, it allows users to understand the effectiveness of marketing
campaign which, later helps in determining which campaigns were the most successful and
identify areas for improvement. S/he may also see which campaigns are underperforming
and pause or terminate them.

• PERSONALIZE YOUR MARKETING AND CUSTOMER ENGAGEMENTS

Marketing analytics enable organizations to explore how customers in defined segments
behave differently, and even predict customers’ likelihood to respond to different offers.
Doing that enables them to tailor the timing, content and delivery channel of offers to fit
the preferences of customers
Disadvantages of Marketing Analytics

• Misidentifying Market Needs

• One of the elements of your marketing analysis is identifying the needs of each market segment. It
also identifies other businesses and products that are attempting to satisfy the needs of this
segment. The glaring disadvantage could be that you may overestimate how well your competition is
meeting the customers' needs and quit before you even try to market. You also may misidentify the
need that is being met. overlook the uniqueness of your own offering.

• Data Misinterpretation
• Data misinterpretation from a market analysis can be detrimental to your marketing campaign. It can
lead to wrong marketing decisions or create unrealistic financial projections. Therefore, before
making decisions based on the information gathered from a market analysis, you should seek the
advice of a professional market analyst. The analyst can identify any pitfalls and help you avoid an
inept marketing strategy based on a flawed analysis.
• Huge Expenses
• Market analysis is financially taxing because it involves expenses such as data collection,
processing and hiring of market analysis experts or research agencies. Such costs can be
discouraging and unnecessary. A small business may not have adequate resources to hire
experts and conduct a comprehensive market survey. 

• Evaluating Market Growth without Market Share

• Your marketing analysis will include a look at how the overall market is growing, which can
give you some idea of your range of opportunities. If your analysis discourages you from
entering a new market due to its slow growth, it can be a disadvantage. You can successfully
compete in a limited market if you capture market share. An analysis of the market size
alone is not enough to indicate your opportunities. Improved market share can compensate
for a slow-growth market.
• Intrusion of Customer Privacy
• Data analysis may breach consumer secrecy because details such as online transactions,
sales or rentals can be accessed by parent companies, among the numerous risks of
information analytics. The companies are likely to share these systems for mutual
benefit.

• Data Misinterpretation
• Data misinterpretation from a market analysis can be detrimental to your marketing
campaign. It can lead to wrong marketing decisions or create unrealistic financial
projections. Therefore, before making decisions based on the information gathered from
a market analysis, you should seek the advice of a professional market analyst. The
analyst can identify any pitfalls and help you avoid an inept marketing strategy based on
a flawed analysis.
Market Data Sources – Primary and Secondary

• Market Data can be obtained through two sources – primary and secondary.

Primary Data

• Primary data is information collected through original or first-hand research. Methods of

primary data collection vary based upon the goals of the research, as well as the type and
depth of information being sought.

• Primary data is directly related with the problem on hand. Primary data comprises of
original information and is treated as the basic input for analyzing and solving any problem
related to marketing activities.
Primary Data Sources

• In-depth interviews 
• In-depth Interviews present the opportunity to gather detailed insights from leading industry
participants about their business, competitors and the greater industry.
• It is primarily a qualitative research method that helps in collecting data either in person (face-to-
face) or over the telephone.

• Surveys
• Surveys are an excellent way to collect a large amount of information from a given population.
Surveys can be used to describe a population in terms of who they are, what they do and what do
they like.
• One can then forecast the population’s future behavior in light of these identified characteristics,
behavior, preferences and satisfaction. Surveys yield the most meaningful data when they ask the
right questions in the right way, thereby, care should be taken while developing the survey questions.
• Focus Groups
• A focus group is a research technique used to collect data through group interaction. The
group comprises a small number of carefully selected people who discuss a given topic.
Focus groups are used to identify and explore how people think and behave, and they
throw light on why, what and how questions.

• Observation
• The observation method is described as a method to observe and describe the behavior of
a subject. As the name suggests, it is a way of collecting relevant information and data by
observing.
• Observation method is used in cases where you want to avoid an error that can be a result
of bias during evaluation and interpretation processes. It is a way to obtain objective data
by watching a participant and recording it for analysis at a later stage.
Secondary Data

• Secondary data is information which has been collected in the past by other researchers
and analysts.
• Secondary data comes in all sorts of shapes and sizes.  There are plenty of raw data sources
and internal company data like customer details, sales figures, employee timecards, etc. can
also be considered secondary data.
• Published articles, including peer-reviewed journals, newspapers, magazines, and even blog
postings like this count as secondary data sources.  Don’t forget legal documents like
patents and company annual filings.  
• Social media data is a new source of secondary data.  
• Secondary data is all around us and is more accessible than even.  It is increasingly possible
to obtain behavioral data from secondary sources, which can be more powerful and reliable
than self-reported data (via surveys and focus groups).
Secondary Data Sources
• Sources of secondary data include (but are not limited to):

• Government statistics 
• Government Statistics are widely available and easily accessed online, and can provide
insights related to product shipments, trade activity, business formation, patents, pricing
and economic trends, among other topics.

• Industry associations typically have websites full of useful information - an overview of the

industry and its history, a list of participating companies, press releases about product and
company news, technical resources, and reports about industry trends.
• Trade Publications
• Trade publications, such as periodicals and news articles, most of which make their content
available online, are an excellent source of in-depth product, industry and competitor data
related to specific industries. Oftentimes, news articles include insights obtained directly
from executives at leading companies about new technologies, industry trends and future
plans.

• Company Websites
• Company websites can be virtual goldmines of information. Public companies will have
investor relations sections full of annual reports, regulatory findings and investor
presentations that can provide insights into both the individual company’s performance and
that of the industry at large.
• Public and private companies’ websites will typically provide detail around product
offerings, industries served, geographic presence, organizational structure, sales methods
(distribution or direct), customer relationships and innovations.
• Market Research Reports
• Published market research reports are another possible resource of information.  They can
provide a great overview of an industry, including quantitative data you might not find
elsewhere related to the market size, growth rates and industry participant market share. 

• Industry Associations
• Industry associations typically have websites full of useful information - an overview of the
industry and its history, a list of participating companies, press releases about product and
company news, technical resources, and reports about industry trends. Some information
may be accessible to members only (such as member directories or market research), but
industry associations are a great place to look when starting to learn about a new industry
or when looking for information an industry insider would have.
Market Sizing

• Market sizing is traditionally defined as estimating the number of buyers of a particular

product, or users of a service.
• Market Sizing is the process of estimating the potential of a market. Understanding the
potential of a market is important for companies looking to launch a new product or service.
• The "market size" is made up of the total number of potential buyers of a product or service
within a given market, and the total revenue that these sales may generate.
• Entrepreneurs and organizations can use market sizing to estimate how much profit they
could potentially earn from a new business, product or service. This helps decision-makers
to decide whether they should invest in it.
• Market size solves the following strategic questions:
 Should we invest in this product/market?
 Should we increase our investment in this product/market?
• Total Addressable Market (TAM) is the entire potential market. This refers to the
combined revenue (or unit sales) of all the companies in a specific market.

• Serviceable Addressable Market (SAM) is the part of the total addressable market that
can be reached.  This is the segment of the TAM targeted by your products and services
which is within your geographical reach. This is usually the part of the market that a
business is targeting, for example people aged between 35 and 55 or a particular
geographic region.

• Serviceable Obtainable Market (SOM) represents market share. It is the portion of the
served available market that a business model can realistically serve.
• Let's say you are starting a fast food chain. Your TAM would be the worldwide fast food
restaurant market. Potentially, if you were present in every country and had no
competition you would generate TAM as revenues.
• Let's be more realistic. You are starting your restaurant chain in two cities where the
demand for fast food can be estimated based on: the population, their food habits, and
the revenues generated by fast food restaurants in other cities having similar
demographics.
• That is your Serviceable Available Market: the demand for your type of products within
your reach. In other words if you were the only fast food in town you would generate
revenues of SAM.
• Now you are probably not the only fast food in town...
• So realistically you can hope to capture only a fraction of your SAM. Most likely you will
attract fast food aficionados living or working close to your restaurants and a fraction of
the people located further away that are willing to give your chain a try for the sake of fast
food diversity. This is your SOM.
Market Sizing: Stakeholders

Marketing Department Channel partners

• Investigate new markets Intermediaries
• Calculate market share

Stakeholders for
Market Sizing

Operations Department
Financial Department
• Products manufacturing: how
many units to make • Allocation of capital for the
• Service Delivery: How many product
people to hire
Application of Market Sizing

• The main purpose of market sizing is used to inform business viability, specifically go/no-go
decisions, as well as key marketing decisions, such as pricing of the service or marketing
tactics to increase usage.
• It also provides a preliminary estimate of the level of operational and technological
capabilities required to service the expected market.
• Market sizing can also help you to estimate the number of people that you may need to hire
before you launch a new product or service
• Depending on the total potential market, for example, the firm may need to consider
upgrading call-center staff to respond to forecasted customer service inquiries.
• Market sizing becomes crucial when the investment is large within the total market and the
investor aims to achieve a significant share within it.
• It helps in splitting out sub cells of the market which could be attractive target market.
Market Sizing For Business Decisions

Market Sizing can play a crucial role in many business decisions, such as:

• Estimating the potential value of introducing a new product to the market

• Evaluating the impact of introducing a product to a new region or market segment
• Prioritizing markets to target for roll-out
• Determining products/services to invest internal resources
• Evaluating a partnership or acquisition opportunity
• Assessing staffing needs for a given segment
Approaches to Market Sizing (Top-down and Bottom-up)

Top-down Market Sizing Approach

• Top-down market sizing starts by looking at the current market as a whole, taking a macro
view of all the potential customers and revenue, and then narrowing it down to a section
you can realistically target. This gives you your serviceable obtainable market (SAM).
• Under top-down market sizing, we start with a big picture of the market, and then cut
away those pieces which are not relevant to our product or service. 
• This type of sizing is done generally by using Demographical data like Company size,
industry, location or Human Population, Age, Income etc. Base your hypothesis on a large
number and work your way down from there. You can segment the market the way it best
suits the business.
Example of Top-down Market Sizing

• If you’re providing a home cooked lunch delivery system in offices in Delhi/NCR, you’d start
by calculating the total number of offices in the Delhi/NCR. Then, reduce that to a smaller
segment - how many of those offices have enough employees to justify the presence of a
lunch delivery system? Finally, find out which ones you have already been availing the
services of the competitors , how many prefer home cooked food sold to, or which ones are
unlikely to buy from you, and so on, to find your serviceable obtainable market.

• If you are starting a new streaming service broadcasting only Korean dramas and series in
India. Then you would start by calculating the total population of the country, followed by
the number of people who have access to internet, and then you would calculate the
number of youngsters who are likely to watch the Korean Dramas.
• Then the number of current users on the different streaming apps would be calculated to
filter it down to the number of people who might be willing to pay for the service.
Pros of the Top-down market sizing

• It tends to be faster than a bottom-up approach. The process of gathering existing data to
estimate your market size isn’t enormously time-consuming, making it the best option to get
a quick estimate of the serviceable obtainable market, which you can supplement with
primary data at a later date to reach a more accurate forecast.
• It tends to work well for big, established markets, where there is a plenty of data and
analysis available.

Cons of the Top-down market sizing

• It doesn’t work as well for new, smaller markets and disruptive products. If there’s a good
chance your product could have a disruptive effect on its market, this could significantly
affect serviceable obtainable market and render your top-down analysis largely meaningless.
• The initial research relies on general information collected by others, so the data isn’t
specific to your business and situation. It’s a good general guide, but does need to be
supported by primary research that’s specific to your particular market for greater accuracy. 
Bottom - up Market Sizing Approach

• Although the top-down method is simple, it's often unreliable and overly optimistic. A top-
down approach gives you inflated data, and you often can't rely on it to make good
decisions.
• This is why it's much more effective to use the bottom-up approach. This approach is time-
consuming, because you do all of your own market research and you don't rely solely on
generalized forecasts and trends. However, you'll get a more realistic and accurate
assessment of your market's potential.
• Bottom-up market sizing is where you start with your own product and the basic units of
your business and work out how you can scale them. Where can your products be sold,
how much for, and how much of the current market could you command? You start small
and build up to the result.
• To do a bottom-up analysis you start with the basic units of your business (your product,
price, customers) and estimate how large you can scale those units.
Pros of the Bottom-up market sizing
• It’s tailored to your specific circumstances and uses your own data. 
• It’s especially useful for new markets and markets where your product is likely to make a big,
disruptive impact.
• It tends to result in better forecasting and more accurate data on a more granular level, helping you
better understand how your individual projects will make an impact.

Cons of the Bottom-up market sizing

• It can take longer and require more resources than a top-down approach, as a bottom-down
approach requires much more in-depth analysis of your own business.
• It has a tendency to assume there will be more customers than there actually will. This is important
to look out for.
• Any errors you make early on at the micro-level become compounded as you work up to the macro-
level. It’s important to ensure you’re doing everything the right way, or these mistakes and
misunderstandings will carry through your entire analysis.
Example of Bottom Up Market Sizing
• Tomatology (tomatoes delivered on-demand!), a Bottom-Up market sizing needs to start with the
price of tomatoes which are around $1 for a large tomato in my area. Our local customer survey tells
us that consumers buy 3 tomatoes when they go to the market once a week. That means the average
consumer would buy $150 of tomatoes per year.
• How many consumers can we reach? Based on the effectiveness of commercials, billboards and
other channels our head of marketing thinks we can reach about 35,000 households in our
hometown. That brings our estimate to $5.3M.
• Finally, we will assume that we can expand into the top 30 cities based on our operating plan and
available capital. That gives us an audience of 1.1M households or a total of $156M.

Price per tomato $1

… 150 per household $15
… 35,000 reachable $5.3M
households per city

… 30 cities $156M
PESTLE Market Analysis
• PESTLE analysis sometimes referred to as PEST analysis, is a concept in marketing principles.
This concept is used as a tool by organizations to keep a track of the external factors
impacting the organization. PESTLE is an acronym which in its expanded form denotes P for
Political, E for Economic, S for Social, T for Technological, L for Legal, and E for
Environmental. 
Political Factors:
• These factors are all about how and to what degree a government intervenes in the economy or a
certain industry. 
• Basically all the influences that a government has on your business could be classified here. This can
include government policy, political stability or instability, corruption, foreign trade policy, tax policy,
labour law, environmental law and trade restrictions.
• Furthermore, the government may have a profound impact on a nation’s education system,
infrastructure and health regulations. These are all factors that need to be taken into account when
assessing the attractiveness of a potential market.

Economic Factors:
• Economic factors are determinants of a certain economy’s performance. Factors include economic
growth, exchange rates, inflation rates, interest rates, disposable income of consumers and
unemployment rates. 
• These factors may have a direct or indirect long term impact on a company, since it affects the
purchasing power of consumers and could possibly change demand/supply models in the economy.
Consequently it also affects the way companies price their products and services.
Social Factors:
• This dimension of the general environment represents the demographic characteristics, norms,
customs and values of the population within which the organization operates.
• This includes population trends such as the population growth rate, age distribution, income
distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural
barriers. These factors are especially important for marketers when targeting certain customers. In
addition, it also says something about the local workforce and its willingness to work under certain
conditions.

Technological Factors:
• These factors pertain to innovations in technology that may affect the operations of the industry and
the market favorably or unfavorably. This refers to technology incentives, the level of innovation,
automation, research and development (R&D) activity, technological change and the amount of
technological awareness that a market possesses.
• These factors may influence decisions to enter or not enter certain industries, to launch or not launch
certain products or to outsource production activities abroad.
• By knowing what is going on technology-wise, you may be able to prevent your company from
spending a lot of money on developing a technology that would become obsolete very soon due to
disruptive technological changes elsewhere.
Environmental Factors:
• Environmental factors have come to the forefront only relatively recently. They have become
important due to the increasing scarcity of raw materials, pollution targets and carbon footprint
targets set by governments. 
• These factors include ecological and environmental aspects such as weather, climate, environmental
offsets and climate change which may especially affect industries such as tourism, farming,
agriculture and insurance.
• Furthermore, growing awareness of the potential impacts of climate change is affecting how
companies operate and the products they offer. This has led to many companies getting more and
more involved in practices such as corporate social responsibility (CSR) and sustainability.

Legal Factors:
• Although these factors may have some overlap with the political factors, they include more specific
laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws,
copyright and patent laws, and health and safety laws. It is clear that companies need to know what
is and what is not legal in order to trade successfully and ethically.
• If an organisation trades globally this becomes especially tricky since each country has its
own set of rules and regulations.
• In addition, you want to be aware of any potential changes in legislation and the impact it
may have on your business in the future.
• It is recommended to have a legal advisor or attorney to help the firm deal with such issues.
What is PESTLE Analysis used for

• A PESTLE analysis is often used as a broad fact-finding activity. It helps an organisation

establish the external factors that could impact decisions made inside the organisation.
• A PESTLE analysis is an appropriate framework and activity to use in a range of business
planning situations. These can encompass:

• Strategic business planning: A PESTLE analysis report is a useful document to have when
starting a business planning process. It provides the senior management team with
contextual information about the direction in which the business is going, brand positioning,
growth targets, and any risks (such as another pandemic) which might bring a decline in
productivity. It can also help determine the validity of existing products and services and
define new product development.
• Workforce planning: A PESTLE analysis can help to identify disruptive changes to business
models that may have a profound impact on the future employment landscape.
Organisations are facing huge changes in their workforce from increased skills gaps, the
creation of job roles that did not exist 10 years ago, and job reductions or displacement.
This pace of change will only increase.

• Marketing planning: As with business planning, a PESTLE analysis provides the essential
element of ‘climate’ in the situation analysis phase of the marketing planning process. It
can help prioritize business activities to accomplish specific marketing objectives within a
set timeframe. 

• Product development: By offering insights on what’s happening externally to an

organisation, a PESTLE analysis can help you decide whether to enter or leave a route to
market, determine whether your product or service still fulfils a need in the marketplace, or
when to launch a new product. 
• Organizational change: A PESTLE analysis can be a powerful activity for understanding
the context for change, and the potential areas of focus to make change successful. In
this situation, PESTLE is most effective when used in association with a SWOT
analysis to provide information about potential opportunities and threats around labour
changes; for example, skills shortages and current workforce capabilities. 

• People strategies, reports and projects: A PESTLE analysis can also be used as a
framework for looking outside the organisation to hypothesize what may or may not
happen in future. It can ensure that basic factors are not overlooked or ignored
when aligning people strategies to the broader organisation strategy. It can also help in
deciding what additional evidence-based research should be explored.
Advantages of PESTLE Analysis

• It’s a simple framework.

• It facilitates an understanding of the wider business environment. 
• It encourages the development of external and strategic thinking. 
• It can enable an organisation to anticipate future business threats and take action to avoid
or minimize their impact.
• It can enable an organisation to spot business opportunities and exploit them fully.
Disadvantages of PESTLE Analysis

• Some PESTLE analysis users oversimplify the amount of data used for decisions – it’s easy
to use insufficient data.
• The risk of capturing too much data may lead to ‘paralysis by analysis’. 
• The data used may be based on assumptions that later prove to be unfounded. 
• The pace of change makes it increasingly difficult to anticipate developments that may
affect an organisation in the future.
• To be effective, the process needs to be repeated on a regular basis.
Porter Five Forces Analysis
What Are Porter's Five Forces?

• Porter's Five Forces is a model that identifies and analyzes five competitive forces that
shape every industry and helps determine an industry's weaknesses and strengths.
• Porter's Five Forces is a framework for analyzing a company's competitive environment.
• Porter's model can be applied to any segment of the economy to understand the level of
competition within the industry and enhance a company's long-term profitability.
• The Five Forces model is named after Harvard Business School professor, Michael E. Porter.
• The number and power of a company's competitive rivals, potential new market entrants,
suppliers, customers, and substitute products influence a company's profitability.
• The five forces are frequently used to measure competition intensity, attractiveness, and
profitability of an industry or market.
• Five Forces analysis can be used to guide business strategy to increase competitive
advantage.
Competition in the Industry
• The first of the five forces refers to the number of competitors and their ability to undercut
a company.
• The larger the number of competitors, along with the number of equivalent products and
services they offer, the lesser the power of a company.
• Suppliers and buyers seek out a company's competition if they are able to offer a better
deal or lower prices. Conversely, when competitive rivalry is low, a company has greater
power to charge higher prices and set the terms of deals to achieve higher sales and profits.

Potential of New Entrants Into an Industry

• A company's power is also affected by the force of new entrants into its market.
• The less time and money it costs for a competitor to enter a company's market and be an
effective competitor, the more an established company's position could be significantly
weakened.
• An industry with strong barriers to entry is ideal for existing companies within that industry
since the company would be able to charge higher prices and negotiate better terms.
Power of Suppliers
• The next factor in the five forces model addresses how easily suppliers can drive up the
cost of inputs.
• It is affected by the number of suppliers of key inputs of a good or service, how unique
these inputs are, and how much it would cost a company to switch to another supplier.
• The fewer suppliers to an industry, the more a company would depend on a supplier. As a
result, the supplier has more power and can drive up input costs and push for other
advantages in trade.
• On the other hand, when there are many suppliers or low switching costs between rival
suppliers, a company can keep its input costs lower and enhance its profits.
Power of Customers
• The ability that customers have to drive prices lower or their level of power is one of the
five forces.
• It is affected by how many buyers or customers a company has, how significant each
customer is, and how much it would cost a company to find new customers or markets for
its output.
• A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals.
• A company that has many, smaller, independent customers will have an easier time
charging higher prices to increase profitability.
Threat of Substitutes
• The last of the five forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat.
• Companies that produce goods or services for which there are no close substitutes will
have more power to increase prices and lock in favorable terms.
• When close substitutes are available, customers will have the option to forgo buying a
company's product, and a company's power can be weakened.
UNIT II - Pricing Analytics

Pricing Policy

• A pricing policy is a company's approach to determining the price at which it offers a good
or service to the market.
• A policy frame-work should lead to pricing that is consistent with the company objectives,
costs, competition and demand for the product.
• Through systematic pricing policies and strategies, companies can reap greater profits and
increase or defend their market shares.
• A stable pricing policy can be used to establish the best price for a product or service. It
helps you choose prices which can maximize profits and shareholder value while
considering consumer and market demand.
Pricing Policy Objectives

• Profit: The most basic business objective of making profit is still an important one.
For some businesses, it might be critical to maximize profit in the immediate future.

• Firm survival: Sometimes the only available pricing policy is the one that enables
your firm to continue operations.

• Limiting competition: Your business may have structural advantages that enable it

to produce a good at a price point no competitor can match. Businesses typically
weigh the competitive consequences of any price point against profit potential.
• Gaining market share: Your pricing policy might aim at maximizing market share.
Earning a large portion of market share provides both strategic and financial
advantages.

• Accessibility: If your company values offering its product to as many people as

possible, your pricing policy might have to adapt.

• Consumer satisfaction: Consumers' expectations change depending on the price they

pay for something. Your business might consider what expectations you want to
meet and price accordingly.
Price Elasticity
• Price elasticity of demand is a measurement of the change in consumption of a product in
relation to a change in its price.
• It is an economic measurement of how quantity demanded of a good will be affected by
changes in its price.
• In other words, it’s a way to figure out the responsiveness of consumers to fluctuations in
price.
• If the quantity demanded of a product changes greatly in response to changes in its price,
it is termed "elastic." That is, the demand point for the product is stretched far from its
prior point.
• If the quantity purchased shows a small change after a change in its price, it is termed
"inelastic." The quantity didn't stretch much from its prior point. 
• Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
• Further, the equation for price elasticity of demand can be elaborated into
• Price Elasticity of Demand = [(Q1 – Q0) / (Q1 + Q0)] / [(P1 – P0)/(P1 + P0)]
• Where Q0 = Initial quantity, Q1 = Final quantity, P0 = Initial price and P1 = Final price
Types of Price Elasticity of Demand

• Perfectly Elastic Demand: When there is a sharp rise or fall due to a change in the price of
the commodity, it is said to be perfectly elastic demand. 

• Perfectly Inelastic Demand: A perfectly inelastic demand is the one in which there is no
change measured against a price change. 

• Relatively Elastic Demand: Relatively elastic demand refers to the demand when the
proportionate change in the demand is greater than the proportionate change in the price
of the good. In relatively elastic demand, if the price of a good increases by 25% then the
demand for the product will necessarily fall by more than 25%.
• Relatively Inelastic Demand: In a relatively inelastic demand, the proportionate change in
the quantity demanded for a product is always less than the proportionate change in the
price. For example, if the price of a good goes down by 10%, the proportionate change in
its demand will not go beyond 9.9%

• Unitary Elastic Demand: When the proportionate change in the quantity demanded for a
product is equal to the proportionate change in the price of the commodity, it is said to be
unitary elastic demand. 
Estimating Price through Linear and Power Demand Curve
• What is a Demand Curve

• The demand curve is a graphical representation of the relationship between the price of a
good or service and the quantity demanded for a given period of time. In a typical
representation, the price will appear on the left vertical axis, the quantity demanded on the
horizontal axis. 
• The demand curve will move downward from the left to the right, which expresses the law
of demand - as the price of a given commodity increases, the quantity demanded
decreases, all else being equal. This formulation implies that price is the independent
variable, and quantity the dependent variable.
• Quantity demanded for the product is dependent on its price, prices of other products,
consumers income, increase in population and preferences of the consumers.
• The demand curve is shallower (closer to horizontal) for products with more elastic
demand, and steeper (closer to vertical) for products with less elastic demand.
• Movement along the demand curve: On the demand curve, a movement denotes a
change in both price and quantity demanded from one point to another on the
curve. 
• A movement occurs when a change in the quantity demanded is caused only by a
change in price and vice versa.
• Shift in the demand curve:
• A shift in the demand curve is when a determinant of demand other than price changes. It
occurs when demand for goods and services changes even though the price didn’t.
• A shift in the demand curve occurs when the price remains the same but at least one of
the other five determinants change namely Income of the consumers, consumer taste and
preferences, expectations of future price, supply, needs etc., the price of the related goods
and the number of buyers.
Types of Demand Curve - Linear Demand Curve and Power Demand Curve

• Linear Demand Curve

• When the demand curve is linear, the price elasticity of the product is changing and is not
constant.
• If you sell a product and have changed your price at least once, you could conceivably use a
linear demand curve to figure out approximately how many units you could sell if you
changed the price to something else.

• The Linear Demand Function

Qd = a – b(P) where,
• P is the price
• Qd is the quantity demanded
• The Qd = a – b(P) function is useful for calculating the demand as you adjust price. If you
want to calculate your price to achieve a desired quantity demanded, you can use the
formula P = a - b(Qd), where "a" is the intercept when the price is 0, and "b" is the slope
of the demand curve.

• "a" is the quantity demanded when price is 0, also known as the y-intercept, and "b" is the
slope of the curve. You can find the slope by dividing the change in price by the change in
quantity, in this manner: "(p1-p2)/(q1-q2)."
Power Demand Curve

• While the linear demand curve can be a good approximation of the product’s true demand
curve particularly for prices near the current price, the problem with this method is the fact
that for a linear demand curve the price elasticity is different for each price point.
• However, if the marketing analyst believes that elasticity remains relatively constant as price
changes, then he can use a power demand curve (which has constant price elasticity) to
model demand for a product.
• Power Demand Curve is the arc that shows relationship between price and demand, when
the product’s price elasticity is not affected by the product’s price.
D = ap^b

D = Quantity demanded
P = price
a and b adjust curve to fit product’s price elasticity (if elasticity is 2, b would be -2)
Optimize Pricing

• Price optimization is the practice of using data from customers and the market to find the
most effective price point for your product or service that will maximize sales or
profitability. The optimal price point is the price where companies can best meet their
objectives, whether that means increased profit margins, customer growth, or a blend of
the two.
• Information used in price optimization includes things like:
1. Customer survey data
2. Demographic and psychographic data
3. Historic sales data
4. Operating costs
5. Inventories
• Here’s an example to help you better understand what price optimization is: Let us say you
sell baking supplies and your goal is to drive profits. Rather than following your intuition
and setting sky-high or too low prices, you will gather data, analyze the data, and then
determine the best price for your products.
• The optimized price is one that your customers are willing to pay and you also get a good
profit margin.
• An optimized price can mean a higher price than the initial price or it can mean a lower
price. It all depends on the factors at play and the data you gather about customers,
market, seasonality, competition, and so on.
• Price optimization is an ongoing process and for you to meet your goals you need to
constantly evaluate and update your prices. 
How to optimize your pricing

Do a Complete Business Analysis: It all starts with determining your business’s weaknesses
and strengths. You will need accurate comprehensive data across current economic
conditions, seasonal conditions, historical data, product availability, operational costs,
demand, and competitor prices. All these factors would affect you prices, demand, and
profitability. This will enable you to see the bigger picture of where you stand in the market.

Perform Customer Analysis: You need to know your customers and their perception of your
brand. You need to look at customer reviews, demand data, customer sentiment, market
trends, and supply data. This data steers you towards the important changes to be made to
both prices and product features. In addition to this, you can get additional details from
customers through surveys or interviews.
• Identify Value Metrics: It isn’t all about pricing at the end of the day. It is also about the
perceived value. A value metric is a way to measure how your customers value your
products and which features they value the most so that you can optimize prices
accordingly. It is important to align prices with customer needs.

• Execute Comprehensive Data Analysis: When all data has been collected and value metrics
have been determined, it is time to analyze the collected data. If you are using a machine
learning tool then it will reveal patterns to you according to customer segments. For
instance, it will reveal what price customer segments are willing to pay, what kind of
promotions work the most with your customers, which demographics find which offerings
the most valuable, and what prices work for what products. It will spot trends and provide
smart price recommendations that you can use to optimize prices accurately. 

• Define Pricing Strategy: To start setting or altering your prices, you need to finalize on a
pricing strategy that suits you. The goal is for it to align with your business objectives and
what you want to achieve with price optimization.
• Set and Monitor Prices: When all the previous steps are done, it’s time to set the price
for your products. A market change is inevitable which means you might need to alter
your prices on an ongoing basis. The frequency of price monitoring and price
adjustments depends on your industry, competition, and goals. You should pay close
attention to how your customers respond to the price change and analyze the results
before changing your product prices again.
Incorporating Complementary Products

• A Complementary good is a product or service that adds value to another. In other words,
they are two goods that the consumer uses together. For example, cereal and milk, or a DVD
and a DVD player.
• When the price of a good that complements a good decreases, then the quantity demanded
of one increases and the demand for the other increases.
• For example: Sugar is complementary to coffee. If you increase coffees sales there is a
chance that sugar sales will rise at a given price. But if you increase sugar price then people
might choose a substitute product to sugar
• Complementary Goods have a negative relationship with each other – which means that
when product X increases in price, demand for product Y falls. This is because fewer people
buy product X due to the higher price. As a result, fewer people are also buying product Y,
which only adds value to product X. In economic jargon, this is known as ’negative cross-
elasticity of demand’.
Complementary Goods Examples

1.Tennis Balls and Tennis Racket

2.Mobile Phones and Sim Cards
3.Petrol and Cars
4.Burger and Burger Buns
5.PlayStation and Games
6.Movies and Popcorn
7.Shoes and Insoles
8.Pencils and Notebooks
Why do brands use complementary products?

• They increase their sales volume and revenue this way.

• To boost sales, retail stores often decrease the price of the basic item and increase the price
of the complementary product. Such a bundle seems beneficial to consumers.
• Retailers analyze customers' demands and place these bundles close to each other. This is
the way stores sell razors and blades, flour and baking powder, laundry detergent, and
softener.
• However, complementary products have negative cross elasticity of demand. It means that if
the price for the main item increases, the consumers' demand for a complement decreases
since it often brings no value alone. Hence, the sales volume decreases significantly and
retailers have to drop the price for the main item to cover the costs.
Pricing Multiple Products

• Generally, organizations produce more than one product in their line of production. Even a
single product of an organization can differ in styles and sizes.
• For example, a refrigerator manufacturing organization produces refrigerators in different
colors, sizes, and features. Similarly, an automobile organization manufactures vehicles in
different colors, sizes, and mileage. The pricing in case of multiple products is called multiple
product pricing.

• Apart from stiff competition, internal cannibalization of a brand can severely impact the
sales volume of a product. It happens whenever you have a customer who was going to buy
your more expensive product, but switched to the cheaper product when they saw your
discount.
• Multi-Product Pricing is necessary whenever you give customers a choice.
• Maybe you offer customers a range of brands to select from. Or maybe you offer customers
a portfolio of Good / Better / Best products. That is, you offer a cheap “good” product, a
more expensive “better” product, and a premium “best” product.
• Multi-Product Pricing, also called “Portfolio Pricing” and “Category Pricing”, offers a way to
eliminate cannibalization and increase profitability without sacrificing market share. In other
words, you can get more profit from the same customers.
• Multi-Product Pricing works by making small, scientific, up/down price adjustments across
all the products in a portfolio.
• The average price of the portfolio should remain about the same – this will ensure
customers don’t see a change in the value-for-price offered by your brand or store.
Maintaining the average price should also appease paranoid competitors who worry that
you are disrupting the market.
• The new portfolio prices are calculated against the Willingness To Pay (WTP) of your
customers.
• The math works by ensuring the number of customers still buying the “up” increased-price
products outweigh the number of customers who switch to the “down” decreased-price
products.
• Cannibalization is reduced because “premium” customers who are willing to pay more
won’t be tempted by the cheaper products. At the same time, “value” customers who have
a low Willingness To Pay (WTP) are given additional options that encourage them to remain
as customers.

Example:
Imagine you are selling 1000 red shirts and blue shirts for $100 each. About 75% of your
customers are buying the red shirts and 25% of customers are buying the blue shirts. There
are also a lot of other sellers that make up the Total Market Size for shirts. If the shirts are
costing you $80 then you are making a profit of $20,000 per month.
• Multi-Product Pricing is then used to calculate the profit-maximizing prices for each product
across your portfolio.
• After calculating the Willingness To Pay (WTP) of your customers, Multi-Product Pricing
determines that a small up/down price change to both shirts would increase profitability.
• Increasing the price of the red shirt by $10 and decreasing the price of the blue shirt by $10
will keep the average price of your shirts at $100. So your customers won’t notice a change
in your overall value-for-price. Competitors will also be reassured that you are not slashing
prices to steal away customers.
• Despite the increase in price, 60% of your customers will continue buying your red shirt. A
few customers are not willing to pay the increase, but you retain most of them as customers
by offering a now cheaper and more enticing blue shirt. Those that you really do lose will be
replaced by new blue-shirt customers.
• After the price changes, you find that you still have 1,000 customers buying your shirts. But
now your profitability has climbed to $22,000 per month. You’re making an extra 10% in
profit without upsetting the rest of the market!
What is Price Bundling

• Bundling is when companies package several of their products or services together as a

single combined unit, often for a lower price than they would charge customers to buy each
item separately.
• Bundling is a marketing strategy that facilitates the convenient purchase of several products
and/or services from one company. These bundled products and services are usually
related, but they can also consist of dissimilar items which appeal to one group of
customers.
• Many companies produce and supply multiple products or services. They must decide
whether to sell these products or services separately at individual prices or in packages of
products, or bundles, at a "bundle price." 
• Price bundling plays an increasingly important role in many verticals, such as banking,
insurance, software, and automotive. In fact, some organizations devise entire marketing
strategies based on bundling. Typical examples of bundling include option packages on new
automobiles and value meals at restaurants.
• In a bundle pricing scheme, companies sell the bundle for a lower price than would be
charged for items individually.
• Offering discounts can stimulate demand, enabling companies to perhaps sell products or
services they otherwise had difficulty offloading and generate a greater volume in sales.
Over time, this approach might even help to cancel out sacrifices in per-item profit margins
- selling an item for less means squeezing less profit from it.
• Examples of bundling would include things like "combos" or value meals at fast food
restaurants (where a combination might include a burger, a drink and a beverage) or the
concession stand at a movie theater (where it might include popcorn, soda and candy).
• Bundles are also common from cable companies (their bundles include the basic service,
hardware like the cable box, access to specific features like packages of movies, sports and
other specialty programming).
• It is a popular practice that can increase revenue for the seller (by increasing sales) and
provide increased satisfaction for the customer (who enjoy any savings and the
convenience that comes with having to evaluate a single price).
Pure Bundling

• Pure Bundling is a type of bundling where the individual components that make up the
bundle are only available when purchased as a bundle – they are not available for purchase
separately. 
• Pure bundling does not give customers the option to buy items separately. An item that
consists of several products or services must be bought as one or not at all.
• One example would be the cable company – you can choose different bundles of services
and channels, but you can't select the individual channels that make up those bundles. Like
if you wish to watch star sports, you cant do that without paying for Star Plus too.
• Pure bundling is sometimes favored because it is seen as a way to increase sales – to get the
channel you really want you also have to pay for a lot of channels you really don't care
about.
• This is a great tactic when you have a highly popular product, but you also want to offload
some of your less attractive products, too. 
• Pure Bundling can be further divided into two types: Joint Bundling and Leader Bundling.

• Joint Bundling is the process of offering two or more products together for a single price
which is lower than the sum of the two individual products.

• Under Leader Bundling, the core product is sold at a discount while supplemented with a
complementary product. The ‘leader’ product – is more valuable, and is sold alongside a
‘non-leader’ product at a discounted price.
 Mixed Bundling

• Mixed Bundling is an approach to bundling where the individual components that make up
the bundle are also available for purchase individually. Movie theater snacks and fast food
combos are examples of mixed bundling – you can purchase each item individually, or
together as part of the combo for a single price.

• The Value Meal (sandwich, fries, and soda) at McDonald’s is a great example of mixed
bundling. You can purchase each food product individually as well as in a discounted bundle. 

• When you create a mixed bundle, you’re giving customers the option to purchase each
feature together, or individually for a higher price.
Advantages of Price Bundling

• Simplify the buying experience: When you offer a bundle of normally separated products or
features that, together, your customers need to accomplish their goals, you make the
purchase decision easier. Instead of expecting them to cobble together different products
or features, you’re offering a one-stop shop for them. That makes the experience of
interacting with your business and purchasing your product simple and efficient.

• Increase sales: Bundling is a great way to increase your sales and profit margins as well as
the value you provide to customers. With a bundle pricing strategy, you’re not just putting
together products that complement one another from a business perspective; you’re also
giving customers more value through the bundle than they would receive from each
individual purchase. That compounding value makes customers more loyal and can lead to
future purchases.
• Move lower-volume products: If you have a product or feature that’s underperforming, price
bundling helps you boost customer engagement by selling it alongside a more popular one.
Just make sure that both of the products you’re bundling together increase in value as a
result of the bundle. You don’t want to decrease the value of a more popular product or
feature by connecting it with one that your customers don’t actually need.
What is Consumer Surplus

• The consumer surplus is the difference between the price the consumer actually pays for
the product and the price he was willing to pay.

• If the product is being offered at a price which is less than what the consumer was willing to
pay then it would create consumer surplus.

• For example, a specific kind of laptop is required by the consumer for his office work. Due to
the urgency of his work, he was ready to buy it for 50,000 but if the laptop is being sold for
40,000, then 10,000 is consumer surplus.

• A consumer aims to maximize his consumer surplus.

Optimal Bundling Price
Single Price Strategy (No Bundling)
• Price of ESPN = $8*2 = $16 (both consumers buy)
• Price of Star Sports = $1.50*2 = $3 (both consumers buy)
• Revenue from ESPN = $8*2 = $16
• Revenue from Star Sports = $1.50*2 = $3 Total Revenue = $16+$3 = $19

Customer ESPN Star Sports Bundle (optimal price)

Jack $8 $2 $10

Mike $10 $1.50 $11.50

Bundling as a strategy
• Price of a bundle = $10
• Total revenue = $10*2 = $20

• Hence the firm makes a profit of $1

• Bundling will increase profit when the consumer’s demands are negatively correlated. In the
example too, Mike is willing to pay more for ESPN than Jack and Jack is willing to pay more
for Star Sports than Mike
Non Linear Pricing Strategies

• Non linear pricing constitutes of those pricing models in which the total amount a customer
pays for a set of products is not equal to the sum of the individual product prices.
• For example under Non linear pricing, an individual single unit of product sold separately
may cost $5, but two units of the same product may be put together to cost $8.
• An alternative to non linear pricing is linear pricing: charging the same price regardless of
how many items the customer buys.
• Non linear pricing is a generic characterization of any tariff structure where the purchase
price is not strictly proportional to some measure of purchase quantity.
• A key assumption of nonlinear pricing is the existence of identifiable differences among
customers that affect their choices in a systematic way. Furthermore, it is assumed that
these differences among customers are either directly observable or that customers can be
sorted by observing measurable characteristics of the customer or her purchases.
• Nonlinear pricing is motivated by several goals such as: efficient use of resources, cost
recovery by a regulated utility, exercise of monopoly power, obtaining competitive
advantage, rewarding customer loyalty as well as social goals such as subsidies to the poor
and discounts to service persons in uniform.
• Being able to sell identical or similar products or services at different prices to different
customers has powerful ramifications and can lead to win–win outcomes from the
customers’ and the sellers’ perspectives.
• Some of the most commonly used non linear pricing strategies are:
Price Bundling
Quantity Discounts
Two way/part Tariff
Quantity Discount

• A quantity discount is an incentive offered to a buyer that results in a decreased cost per

unit of goods or materials when purchased in greater numbers. A quantity discount is
often offered by sellers to entice customers to purchase in larger quantities. 
• Using this pricing strategy, the seller is able to move more goods or materials, and the
buyer receives a more favorable price for them.
• Under the method of quantity discount, when the customer buys the quantity which is less
than CUT units(cut off point at which the seller changes his price), then they pay high
price. But if they buy more than CUT units, then the seller offers them low price for
purchasing more quantity of goods.
• For example, if the seller has fixed CUT to be 1000 units. Then if the buyer purchases less
than 1000, then the seller would charge $10 for each unit. But if the buyer decides to
purchase more than 1000 units, then the seller charges him $8 for each unit sold after first
1000 units.
Two part tariff

• A two-part tariff is a pricing scheme where a producer charges a flat fee for the right to
purchase units of a good or service and then charges an additional per-unit price for the
good or service itself. For example: entry fees and per-ride fees at an amusement park.

• The two-part tariff system is considered to be a form of price discrimination that is often
employed by profit-seeking businesses trying to maximize their total revenue by the means
of fully capturing any consumer surplus that may be available.
Price Skimming and Sales

• Price skimming is a product pricing strategy by which a firm charges the highest initial price
that customers will pay and then lowers it over time.
• As the demand of the first customers is satisfied and competition enters the market, the firm
lowers the price to attract another, more price-sensitive segment of the population.
• The skimming strategy gets its name from "skimming" successive layers of cream, or
customer segments, as prices are lowered over time.
• The pricing strategy is usually used by a first mover who faces little to no competition. Price
skimming is not a viable long-term pricing strategy, as competitors eventually launch rival
products and put pricing pressure on the first company.
• The pricing strategy is largely effective with a breakthrough product, where the firm is the
first to enter the marketplace. In such a strategy, the goal is to generate the maximum profit
in the shortest time possible, rather than to generate maximum sales. 
How Price Skimming Works

• Price skimming is often used when a new type of product enters the market. The goal is to
gather as much revenue as possible while consumer demand is high and competition has
not entered the market.
• Once those goals are met, the original product creator can lower prices to attract more cost-
conscious buyers while remaining competitive toward any lower-cost copycat items
entering the market. This stage generally occurs when sales volume begins to decrease at
the highest price the seller is able to charge, forcing them to lower the price to meet market
demand.
• Skimming is a useful strategy in the following contexts:
There are enough prospective customers willing to buy the product at a high price.
The high price does not attract competitors.
Lowering the price would have only a minor effect on increasing sales volume and
reducing unit costs.
The high price is interpreted as a sign of high quality.
Advantages of Price Skimming

• Perceived quality: Price skimming helps build a high-quality image and perception of the
product.

• Cost recuperation: It helps a firm quickly recover its costs of development.

• High profitability: It generates a high profit margin for the company.

• Vertical supply chain benefits: It helps distributors earn a higher percentage. The markup
on a $500 product is far more substantial than on a $5 item.
Disadvantages of Price Skimming

• Deterrence: If the firm is unable to justify its high price, then consumers may not be willing
to purchase the product.
• Limitation of sales volume: A firm may not be able to utilize economies of scale if a skim
price generates too few sales.
• Inefficient long-term strategy: Price skimming is not a viable long-term pricing strategy, as
competitors will eventually enter the market with rival products and exert downward
pricing pressure.
• Consumer loyalty: If a product that costs $1,000 at launch has a follow-on price of $200 in a
couple of months, innovators and early adopters may feel ripped off. Therefore, if the firm
has a history of price skimming, consumers may wait a couple of months before purchasing
the product.
Revenue Management

• Revenue management refers to a business practice designed to optimize the revenue

potential of an asset through all market conditions.
• Revenue management exists to align the price of a commodity as closely as possible with
the maximum amount a customer is willing to pay for it at a given time. Or, to put it more
simply: revenue management is selling the right product to the right customer, through the
right distribution channels, using the right tools, at the right time, and for the right price —
all to optimize potential revenue. 
• The concept was originally designed for the airline industry so that the different companies
could find ways to anticipate their customers' needs and demands, and then create dynamic
pricing.
• The revenue management strategy is used by the airline industry when they provide hefty
discounts to the consumers who book the flight tickets in advance. Similarly, hotel rooms are
priced at high charges during the weekend in comparison to weekdays.
• Revenue Management, also referred to as yield management, is used to describe pricing
policies used by organisations that sells goods whose value is time sensitive and usually
perishable.

• Under revenue management, the firm must be able to make the consumers pay an
amount which could be as close to the actual valuation of the product by them.

• For example, business travellers would usually be willing to pay higher amount for the
same flight ticket in comparison to the leisure travellers.

• Ticket prices at the cinema halls for the same movie would be higher during the
weekends compared to the weekday rates.
 Markdown Pricing

• To cut down the actual price of the products to increase the sale is called markdown pricing.
• Retailers use this strategy because it is commonly seen that people tend to buy more (even
when they don’t need) when there is a drop in the price of the product. If the retailers are
selling products at a markdown, that doesn’t necessarily mean that they are selling at a loss.
• A markdown is a reduction in price because of a product’s inability to sell at its original price,
while a discount is a reduction in price for a specific purpose. While discounts are temporary,
markdowns are permanent price reductions.
• An example of a markdown would be if you bought a pair of sunglasses for $5 and set the
retail price at $15. It turns out sales of the sunglasses are slow after a few months, so you
mark down the price to $10. 
• Markdown Pricing can be used as competitive advantage when the store needs to move slow
selling merchandise off the shelves as rapidly as possible to reinvest in more popular items.
• Common reasons for markdowns include:

• Seasonal Sales : If you’re a month out from the end of the season, but you still have
seasonal items in-store, the store can make room for new, seasonally appropriate inventory
by marking down last season’s items.

• Poor Performance: While it’s easy to fall in love with a product, if you see it’s not moving off
the shelf, start marking it down so you can make room for something that is selling.

• Competition: If you’re competing with other businesses that offer identical items for a
lower price, first try and gain a competitive advantage by offering something exclusive like a
better location or excellent customer service. But if that’s not enough, you might have to
resort to markdowns to remain competitive and increase sales. 
Unit III - Sales Forecasting

• Sales forecasting is the process of estimating a company’s sales revenue for a specific time
period, commonly a month, quarter, or year. A sales forecast is prediction of how much a
company will sell in the future.

• At its simplest, a sales forecast is a projected measure of how a market will respond to a
company’s go-to-market efforts.

• Sales leaders can use it to plan spending and adjust the sales strategy to make up for
fluctuations in revenue, lead flow, and other factors.

• Accurate sales forecasts enable companies to make informed business decisions and predict
short-term and long-term performance. Companies can base their forecasts on past sales
data, industry-wide comparisons, and economic trends.
Types of Sales Forecasting

• There are two types of sales forecasting:

(i) Short term forecasting
(ii) Long term forecasting

Short Term Forecasting: It may be defined as forecasting done for a relatively shorter period.
The period may be one month to one year depending upon the nature of the product.
Generally this type of forecasting is done for a period of one year but if the market demand
fluctuates forecasting may be done only for a short period.

Purpose of Short Term Forecasting:

(a) Production Policy:
• By knowing the future demand the decision regarding production policy can be taken so that
there is no problem of over production and short supply of input materials.
(b) Material Requirement Planning: By knowing the future demand, the availability of right
quantity and quality of materials could be ensured.

(c) Purchase Procedure: The purchase program could be decided depending upon the
material requirements.

(d) Inventory Control: Proper control of inventory could be ensured, so that inventory

carrying cost is minimum or optimum.

(e) Equipment Requirement: The decision regarding procurement of new equipment in view
of the capacity and capability of the existing equipment can be taken.

(f) Man-Power Requirement: The decision regarding recruitment of extra labour on full time
or part time could be taken.
Long Term Forecasting: The forecasting that covers a considerable period of time, such as 5,
10, 20 years is called long term forecasting. The period no doubt depends upon the nature of
business or type of the product the firm is engaged in manufacturing.

Purposes of Long Term Forecasting:

(a) To plan for the new unit of production, or expansion of the existing unit or diversification
of lines of production or shut down of the existing units depending upon the level of demand.
(b) To plan the long term financial requirement for various needs.
(c) To make proper arrangement for training the personnel so that man-power requirement
of desired expertise can be met in future.
Advantages of Sales Forecasting

• Estimate future revenue: Sales forecasting allows you to know how much revenue your
team will generate each month, quarter, and year and when to expect money to come in.
For instance, if sales were slow during the past three Julys, there’s a good chance that you
can expect a summertime lull this year, too.
• Allocate resources: Sales forecasting also helps companies decide how to manage internal
resources, cash flow, and the sales force. Predicting future sales allows sales leaders to head
off problems by shifting focus in advance. Say leads are trending down. By tracking these
metrics, leaders can forecast when they’ll reach critical levels and re-focus sales teams to
bring more in at an appropriate time.
• Plan your growth strategy: When you have an idea of what lies ahead, you’ll be better
prepared to respond to roadblocks and opportunities as they emerge. Sales forecasting
allows business leaders to make healthy plans and investments for the organization as a
whole. That means spending, investing, and hiring at the right rates at the right time. Sloppy
forecasting or no forecasting means that leadership has no idea when they’re overspending
or skimping on important resources.
Sales Forecasting Methods

• Jury of Executive Opinion: This method of sales forecasting is the oldest. One or more of the
executives, who are experienced and have good knowledge of the market factors make out
the expected sales. The executives are responsible while forecasting sales figures through
estimates and experiences. All the factors, internal and external are taken into account. This
is a type of committee approach. This method is simple as experiences and judgement are
pooled together in taking a sales forecast figure. 

• Sales Force Opinion: Under this method, salesmen, or intermediaries are required to make
out an estimate sales in their respective territories for a given period. Salesmen are in close
touch with the consumers and possess good knowledge about the future demand trend.
Thus all the sales force estimates are processed, integrated, modified, and a sales volume
estimate formed for the whole market, for the given period.
• Test Marketing Result: Under the market test method, products are introduced in a limited
geographical area and the result is studied. Taking this result as a base, sales forecast is
made. This test is conducted as a sample on pre-test basis in order to understand the
market response.

• Consumers’ Buying Plan: Consumers, as a source of information, are approached to know

their likely purchases during the period under a given set of conditions. This method is
suitable when there are few customers. This type of forecasting is generally adopted for
industrial goods. It is suitable for industries, which produce costly goods to a limited
number of buyers- wholesalers, retailers, potential consumers etc. A survey is conducted
on face to face basis or survey method. It is because changes are constant while buyer
behaviour and buying decisions change frequently.
• Market Factor Analysis: A company’s sales may depend on the behaviour of certain
market factors. The principal factors which affect the sales may be determined. By
studying the behaviour of the factors, forecasting should be made. For instance, you
publish a text book on “Banking”, affiliated to different universities. The permitted intake
capacity of each and the medium through which the students are taught are known. Is it a
compulsory or an optional subject? By getting all these details and also by considering the
sales activities of promotional work, you may be able to declare the probable copies to be
printed.

• Past Sales (Historical method): Personal judgement of sales forecasting can be beneficially
supplemented by the use of statistical and quantitative methods. Past sales are a good
basis and on this basis future sales can be formulated and forecast.
• Simple Sales Percentage: Under this method, sales forecast is made by adding simply a flat
percentage of sales so as to forecast sales as given below:
Next year sales = Present year sales + This year sales/Last year sales
or = Present year sales + 10 or 5% of present sale

• Time Series Analysis: A time series analysis is a statistical method of studying historical
data. It involves the isolation of long time trend, cyclical changes, seasonal variations and
irregular fluctuations. Past sales figures are taken as a base, analyzed and adjusted to
future trends. The past records and reports enable us to interpret the information and
forecast future trends and trade cycle too.

• Statistical Methods: Statistical methods are considered to be superior techniques of sales

forecasting such as Trend Method, Graphical Method, Semi-average method, Moving
average method, Correlation method, Regression method etc.
 How to accurately forecast sales
To create an accurate sales forecast, follow the following steps:
• Assess historical trends: Examine sales from the previous year. Break the numbers down by
price, product, sales period, and other relevant variables. Build those into a “sales run rate,”
which is the amount of projected sales per sales period. This forms the basis of your sales
forecast.

• Incorporate changes: This is where the forecast gets interesting. After you have your basic
sales run rate, you want to modify it according to a number of changes that you see coming.
For example:
Pricing: Are you changing the prices of any products? Are there competitors who may force
you to modify your pricing schemes?
Customers: How many new customers do you anticipate landing this year? How many did
you land the previous year? Have you hired new representatives, gained quantifiable brand
exposure, or increased the likelihood of gaining new customers?
• Anticipate market trends: Now is the time to project all the market events you’ve been
tracking. Will you or your competitors be going public? Do you anticipate any acquisitions?
Will there be legislation that changes how your product is received?

• Monitor competitors: You’re likely doing this already, but take into account the products and
campaigns of competitors, especially the major players in the space. Also check around to
see if new competitors may be entering your market.

• Include business plans: Add in all of your business’ strategic plans. Are you in growth mode?
What are hiring projections for the year? New markets you’re targeting? New marketing
campaigns? How might all of these impact the forecast?
• Once you’ve quantified all of these things, build them into your forecast. You want
everything to be itemized, so that you can understand the forecast in as granular a level as
possible. Different stakeholders in the company will likely want to understand different
aspects of the forecast, so it behooves you to be able to zoom in or out as far as needed.
Using Regression to Forecast Sales

• Regression analysis is a mathematical method used to understand the relationship

between a dependent variable and an independent variable. Results of this analysis
demonstrate the strength of the relationship between the two variables and if the
dependent variable is significantly impacted by the independent variable.
• Sales regression analysis is used to understand how certain factors in your sales process
affect sales performance and predict how sales would change over time if you continued
the same strategy or pivoted to different methods.
• Independent and dependent variables are still at play here, but the dependent variable is
always the same: sales performance. Whether it’s total revenue or number of deals closed,
your dependent variable will always be sales performance.
• The independent variable is the factor you are examining that will change sales
performance, like the number of salespeople you have or how much money is spent on
advertising.
• Sales regression forecasting results help businesses understand how their sales teams are or
are not succeeding and what the future could look like based on past sales performance.
The results can also be used to predict future sales based on changes that haven’t yet been
made, like if hiring more salespeople would increase business revenue.
Regression Equation
• Now that we know how the relative relationship between the two variables is calculated,
we can develop a regression equation to forecast or predict the variable we desire. Below is
the formula for a simple linear regression.
• The "y" is the value we are trying to forecast, the "b" is the slope of the regression line, the
"x" is the value of our independent value, and the "a" represents the y-intercept.
• The regression equation simply describes the relationship between the dependent variable
(y) and the independent variable (x).
​y=bx+a​
• The intercept, or "a," is the value of y (dependent variable) if the value of x (independent
variable) is zero, and so is sometimes simply referred to as the 'constant.'
Sales Forecasting in presence of special events

• Sales promotions are common phenomena in contemporary retail operations. Evidence

suggests that promotions are the leading cause for judgmental adjustments to statistical
forecasts.
• When a promotion occurs, a price discount is offered to customers for a specified time-
period and a variety of additional actions are also taken to increase the prominence of a
given product or service.
• The additional actions taken are associated with the promotional mechanics, which may
include: type of promotion (e.g., single-buy, buy one get one free, multi-buy), display type
(e.g., front of store, end of aisle), advertisement type (e.g., in-store, online, catalogue), and
special features to coincide with holidays/events (e.g., Christmas oriented product labelling,
free event- oriented gift with purchase).
• There is normally an uplift in sales when promotions are offered. The uplift is often
associated with purchasing acceleration, increased consumption and/or brand switching.
• Moreover, consumers commonly stockpile products while they are on promotion (that is
more the case for less perishable items) which often leads to lower sales in the following
period(s). Different combinations of promotions result in different sales uplift, but the
magnitude of the impact is associated with a high degree of uncertainty given the dynamic
nature of consumer behavior. Inevitably, such promotional effects complicate the
forecasting process.
• The impact of sales promotions on demand has been previously explored yet quantifying
the impact of promotions still proves to be problematic for practicing forecasters and
academic researchers alike.
• There are several reasons why human judgment has been used in promotional sales
forecasting. First, statistical methods only consider historical data and therefore do not
account for the effects of future sales promotions in forecasts, unless promotions and
corresponding effects are very consistent over time. Although such methods are well suited
for semi-automatically generating forecasts for numerous products, subsequent judgmental
adjustment to account for contextual information is required. Second, judgment is
particularly useful when little or no historical data is available such as when a new product
or promotional campaign is offered.
The Sales Forecasting Problem

• A simple forecasting cycle looks like this

• According to forecasting principles forecasting is a hard problem for 2 reasons:

• Incorporating large volumes of historical data, which can lead to missing important
information about the past of the target data dynamics.
• Incorporating related yet independent data (holidays/events, locations, marketing
promotions)
Ratio to Moving Average Forecasting Method

• A moving average is a technique to get an overall idea of the trends in a data set; it is

an average of any subset of numbers. The moving average is extremely useful
for forecasting long-term trends. You can calculate it for any period of time.
• For example, if you have sales data for a twenty-year period, you can calculate a five-year
moving average, a four-year moving average, a three-year moving average and so on. Stock
market analysts will often use a 50 or 200 day moving average to help them see trends in
the stock market and (hopefully) forecast where the stocks are headed.
• An average represents the “middling” value of a set of numbers. The moving average is
exactly the same, but the average is calculated several times for several subsets of data. For
example, if you want a two-year moving average for a data set from 2000, 2001, 2002 and
2003 you would find averages for the subsets 2000/2001, 2001/2002 and 2002/2003.
• Moving averages are usually plotted and are best visualized.
• Calculate a five year moving average from the following data set:
Year Sales ($M)
2003 4
2004 6
2005 5
2006 8
2007 9
2008 5
2009 4
2010 3
2011 7
2012 8

• The mean (average) sales for the first five years (2003-2007) is calculated by finding the
mean from the first five years (i.e. adding the five sales totals and dividing by 5). This gives
you the moving average for 2005 (the center year) = 6.4M:
• (4M + 6M + 5M + 8M + 9M) / 5 = 6.4M

• The average sales for the second subset of five years (2004 – 2008), centered around 2006,
is 6.6M:
(6M + 5M + 8M + 9M + 5M) / 5 = 6.6M

• The average sales for the third subset of five years (2005 – 2009), centered around 2007,
is 6.6M:
(5M + 8M + 9M + 5M + 4M) / 5 = 6.2M

• Continue calculating each five-year average, until you reach the end of the set (2009-2013).
This gives you a series of points (averages) that you can use to plot a chart of moving
averages. The following Excel table shows you the moving averages calculated for 2003-2012
along with a scatter plot of the data:
Unit IV - Customer Value

• Customer Value is the incremental benefit which a customer derives from consuming a
product after paying in return. The term value signifies the benefit that a customer gets
from a product.
• Customer value can be defined as the balance between the benefits a customer derives
from a service or product and the customer’s effort, or the difficulties they face in using or
obtaining the product or service in question.
• Customer value measures a product or service's worth and compares it to its possible
alternatives. This determines whether the customer feels like they received enough value
for the price they paid for the product/service.
• If customers feel like the total cost of an item outweighs its benefits, they're going to regret
their purchase. Especially if there's a competitor who's making a better offer than yours for
a similar product or service.
• The value of a product increases with its quality and service, as the benefits increase.
Customer Value Parameters
Customer Value - Example

• Let us imagine a cake shop selling pineapple pastry with basic ingredients. The pastry has cake at
the bottom and some cream in the middle with a slice of pineapple at the top a 2$ per piece.
The customer who buy it don't return nor review the pastries well. This shows that at 2$ per
piece the customer may or may not be getting the actual value he or she perceived before
buying.

• Let us see the scenarios below :

• 1) The same seller started selling the pastry at 1$ per piece. Suddenly the sales rose and
customer started coming back. This may have happened because at 1$ the customer is happy
with the pastry he is getting even if it is just average pastry.
• 2) The same seller made the pastry different with small pieces of pineapple included in the
cream as well as added 2 pieces of pineapple on the top. Again sales of the pastry rose.

• The above two scenarios show how product can be changed either in attributes or price to alter
the value it can deliver.
Importance of Customer Value

• Retaining Customers: Customer loyalty is the result of excellence and attention to detail -
neither of which are small feats for a company to incorporate into its daily operations.
However, even small improvements in customer retention can have a major impact on
profitability.

• Customer Advocacy: Satisfying customers to the point that recommending your company
over others comes naturally to them can bring about lasting changes in your market
position. Customers who become advocates for your company do the work of your
marketing team free of charge. Their enthusiasm for your organization helps tremendously
in attracting additional leads, which contributes to your business’s growth over the long
term.
• Clarifying Customer Needs: The most obvious step in the process of enhancing customer
value in any given organization is identifying the needs of its customers. Customers tend
to look for a few simple things in products and services: low price, high quality, speed.
• Improving in any of the above areas can give your business an immediate edge in the
market. However, once you know what portion of the market your company serves, you
can adjust the base needs of speed, cost-effectiveness, and quality to best fit their
requirements and priorities.

• Streamlining Business Processes: Simplifying and enhancing the efficiency of everything

from product development to logistics and payment processing can make a positive
impression on customer perceptions and customer satisfaction and add to customer
value.
Using Customer Value to value a business

• The business can be enhanced by increasing the customer value in the following ways:

• Quick Service: The first way to increase value is simply to increase the speed you deliver
the kind of value people are willing to pay for.  People perceive a direct correlation between
speed and the value of your offering.  
• Offer Better Quality: The second key to creating customer value is by offering better quality
than your competitors at the same price. Total quality management can best be defined as:
“Finding out what your customer wants and giving it to him or her faster than your
competitors.”
• Increase Convenience: Another way of increasing value is by increasing the convenience of
purchasing and using your product or service.  Fast food stores by the thousands are a
simple example of how much more people are willing to pay for convenience than they are
if they have to drive across town to a major shopping center or a major grocery store.
• Improve Customer Service: Another way of creating value and increasing wealth is by
improving customer service. Many companies are using customer service as a primary
source of competitive advantage in a fast changing marketplace.

• Distinguish your Unique Selling Point: Every business must have a value proposition,
which is essentially something different each business has to offer. In order to generate
value for customers, it is important to first recognize what the value proposition of the
business is. Make sure to brand your business with a focus on your unique selling points
and value proposition, so customers can associate you with a quality and value offering
brand.

• Consistency: In order to build a strong relationship with customers and encourage repeat
sales, it is important to ensure that the quality of goods and service is consistent. If a
customer enjoyed his/her first purchase, the repeat purchase will be made with the
expectation that the quality will be maintained.
Customer Lifetime Value

• The lifetime value of a customer, or customer lifetime value (CLV), represents the total
amount of money a customer is expected to spend in your business, or on your products,
during their lifetime.
• Customer lifetime value (CLV) is a measure of the total income a business can expect to
bring in from a typical customer for as long as that person or account remains a client.
• It’s an important metric as it costs less to keep existing customers than it does to acquire
new ones, so increasing the value of your existing customers is a great way to drive growth.
• For example, let’s examine how a grocery chain may look at CLV. Based on data in the
company’s ERP system, it can see that the typical customer spends $50 per visit and comes
in an average of once every two weeks (26 times per year) over a seven-year relationship.
The grocer can find its CLV by multiplying those three numbers - 50 x 26 x 7 - for a value of
$9,100.
Advantages of Customer Lifetime Value

• Improve Customer Retention: One of the biggest factors in addressing CLV is

improving customer retention and avoiding customer attrition. Tracking these details with
accurate segmentation can help you identify your best customers and determine what’s
working well.

• Drive Repeat Sales: Some retailers, tech companies, restaurant chains and other businesses
have loyal customer bases that come back again and again. You can use CLV to track the
average number of visits per year or over the customer lifetime and use that data to
strategize ways to increase repeat business.

• Encourage Higher-Value Sales: Netflix is an example of a business that improved CLV

through higher pricing but learned years ago that increasing costs too quickly may scare off
long-time customers. The right balance is key to success here.
• Increase Profitability: Overall, a higher CLV should lead to bigger profits. By keeping
customers longer and building a business that encourages them to spend more, you
should see the benefit show up on your bottom line.
Challenges of Customer Lifetime Value

• It Can Be Hard to Measure: If you don’t have quality tracking systems in place, calculating
CLV can be difficult. An enterprise resource planning (ERP) or customer relationship
management (CRM) system can make this information easily available on an automated
dashboard that tracks KPIs.

• High-Level Results May Be Misleading: Looking at a business’s total CLV can be a helpful

data point, but it can also cover up problems in certain customer segments. Breaking
down the data by customer size, location and other segments may provide more useful
data.
Why is Customer Lifetime Value Important?

1. It directly affects your revenue: The CLV identifies the specific customers that contribute
the most revenue to your business. This allows you to serve these existing customers
with products/services they like and make them happier, resulting in them spending
more money at your company.

2. It boosts customer loyalty and retention: When a company optimizes its CLV and
consistently provides value in the form of excellent customer support, products, or a
loyalty program - it tends to increase customer loyalty and retention.

3. It helps you target your ideal customers: When you know the lifetime value of a
customer, you also know how much money they spend with your business over a period
of time — whether it's $50, $500, or $5000. Armed with that knowledge, you can
develop a customer acquisition strategy that targets customers who will spend the most
at your business.
Measuring Customer Lifetime Value
1.Determine Your Average Order Value: Start by finding the value of the average sale. If
you have not been tracking this data for long, consider looking at a one- or three-month
period as a proxy for the full year.
2.Calculate the Average Number of Transactions Per Period: Do customers come in several
times a week, which might be common with a coffee shop, or only once every few years,
which could be the case at a car dealership? The frequency of visits is a major driver of
CLV.
3.Measure Your Customer Retention: Finally, you’ll need to figure out how long the
average customer sticks with your brand. Some brands, like technology and car brands,
inspire lifelong loyalty. Others, like gas stations or retail chains, may have much less loyal
customers.
4.Calculate Customer Lifetime Value: Now you have the inputs. It's time to multiply the
three numbers together to calculate CLV per the formula below.
• Customer Lifetime Value Formula

• Here is the formula for customer lifetime value:

CLV = Average Transaction Size x Number of Transactions x Retention Period

Customer Lifetime Value Examples

Coffee shop
• A coffee shop is a perfect starting example for CLV. Let’s say a local coffee chain with three
locations has an average sale of $4. The typical customer is a local worker who visits two
times per week, 50 weeks per year, over an average of five years.
CLV = $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000

Car dealership
• A car dealership has a much higher average sale amount with a lower purchase volume. In
this example, we'll assume someone buys a new car every five years for $30,000.
Customers are loyal to this brand and tend to keep buying from it for 15 years.
CLV = $30,000 (average sale) x (3/15)0.2 (annual purchases) x 15 (years) = $90,000
Factors affecting Customer Lifetime Value - Churn Rate

Churn Rate
• The churn rate, also known as the rate of attrition or customer churn, is the rate at which
customers stop doing business with an entity.
• The firm’s annual churn rate would be the percentage at which the firm is losing users per
year. 
• Churn rate is one of the most critical business metrics for the companies. A high churn rate
or a churn rate constantly increasing over time can be detrimental to a company’s
profitability and limit its growth potential. Thus, the ability to predict the churn rate is
essential for the company’s success.
• Say you start January with 600 users, and at the end of the month, you have 400 users.
• Here’s how you would calculate your churn rate:
• (600-400)/600 = 33.33% churn rate.
Advantages of Churn Rate

• The advantage of calculating a company's churn rate is that it provides clarity on how well
the business is retaining customers, which is a reflection on the quality of the service the
business is providing, as well as its usefulness.
• If a company sees that its churn rate is increasing from period to period then it understands
that a fundamental component of how it is running its business is flawed. The company may
be providing a faulty product, it may have poor customer service, or its product may not be
attractive to individuals who decided the cost is not worth the utility.
• The churn rate will indicate to a company that it needs to understand why its clients are
leaving and where to fix its business. The cost of acquiring new customers is much higher
than it is to retain current customers, so as you ensure that the customers you worked hard
to attract remain as paying customers, it makes sense to understand the quality of your
business.
Disadvantages of Churn Rate

• One of the limitations of the churn rate is that it does not take into consideration the types of
customers that are leaving. Customer decay is primarily seen in the most recently acquired
customers.
• Perhaps your company had a recent promotion that attracted new customers. Once this promotion
was over or even if the benefit of the promotion never ended, customers that were trying out the
product may determine it's not for them, canceling their subscription.
• The impact of losing new customers versus long-term customers is critical. New customers are
transient whereas old customers are entrenched and have enjoyed your product and there must
be a more significant reason as to why they are leaving. A high churn rate in one period may be
indicative of a high growth rate from the previous period rather than a judgment on the quality of
the business.
• The churn rate also does not provide a true industry comparison of the types of companies within
an industry. Most new companies will have a high acquisition rate as new people try the business,
but they will also have a higher churn rate as these new clients leave.
Pros
• Provides clarity on the quality of the business
• Indicates whether customers are satisfied or dissatisfied with the product or service
• Allows for comparison with competitors to gauge an acceptable level of churn
• Easy to calculate

Cons
• Does not provide clarity on the types of customers leaving: new versus old
• Does not differentiate between types of companies in industry comparison: startups,
growing, and mature
Factors affecting Customer Lifetime Value - Customer Loyalty

• Customer loyalty is a measure of a customer’s likeliness to do repeat business with a

company or brand. It is the result of customer satisfaction, positive customer experiences,
and the overall value of the goods or services a customer receives from a business.

• If the customer has no sense of dedication to a particular brand, they are considered
brand agnostic.

• Brands with high number of loyal customers are likely to have higher than normal
customer lifetime value.

• All businesses should strive to improve customer loyalty to keep clients purchasing and
make them promote their brand to new audiences.
Why is customer loyalty important?

• Repeat customers spend more than first-time customers

• Loyal customers produce higher conversion rates
• It boosts profits
• Retaining an existing customer is cheaper than acquiring a new one
• Customer loyalty helps in effective planning
• Loyal customer shop regularly
• Repeat customers spend more during the holidays
How to improve Customer Lifetime Value (CLV)

• Invest in customer experience: Customer experience is made up of every instance of

connection between a customer and a brand, including store visits, contact centre queries,
purchases, product use and even their exposure to advertising and social media.
Improving the experience is a business-wide endeavour. This is a process of monitoring,
listening and making changes that add up to a lasting improvement in how customers feel
and their tendency to be loyal over the long-term.

• Recognize and reward your best customers: You can nurture your relationships with the
most loyal individuals or groups using targeted marketing and special offers that recognize
their loyalty. This could include free expedited shipping, top-tier benefits in your loyalty
program, or access to exclusive or pre-release products and services.
• Close the loop with unhappy customers: Closed-loop feedback is a powerful way to reduce
unwanted churn and turn dissatisfied customers into newly loyal ones. In this model,
businesses proactively reach out to detractors or complainants and intervene before issues
can escalate and lead to a breakdown of the customer relationship.

• Remember the power of social media: Social media is increasingly important not only for
customer communication, but for customers to gather information on your brand and
public image. If customers feel as though your social media responses to a query or issue
aren’t fast enough, thorough enough, or empathetic, this will affect the opinion the
customer has of your brand moving forward.
The Segmentation Targeting Positioning (STP) Framework

• STP marketing stands for segmentation, targeting, and positioning. It is a three-step process
that allows for the development of a specific and actionable marketing strategy.
• The main principle behind the process is to segment your audience, target each segmented
group according to their preferences and habits, and make positioning adjustments in your
branding and marketing strategies to accommodate their needs and expectations.
• STP marketing is one of the most popular strategic marketing modules used by businesses
today, and for good reason.
• The STP model is an excellent embodiment of the gradual change in focus from a product-
centric approach to a customer-centric approach, which enables companies to better
understand who they are trying to reach and how to position themselves for success.
• The reason why the segmentation-targeting-positioning process is so effective is that it
breaks down broader markets into smaller parts, making it easier to develop specific
approaches for reaching and engaging potential customers instead of having to use a
generic marketing strategy that would not be as appealing, or as effective.
Applying the STP Model
Step 1: Segment Your Market
• Any organisation, brand or product can’t be all things to all people. This is why a firm needs to use
market segmentation to divide their customers into groups of people with common characteristics
and needs.
• This allows the firm to tailor their approach to meet each group’s needs cost - effectively, and this
gives a huge advantage over other competitors who might be using a one size fits all approach.
• There are many different ways to segment your target markets. For example, you can use the
following approaches:
• Demographic – By personal attributes such as age, marital status, gender, ethnicity, sexuality,
education, or occupation.
• Geographic – By country, region, state, city, or neighborhood.
• Psychographic – By personality, attitude, values, or lifestyle.
• Behavioral – By how people use the product, how loyal they are, or the benefits that they are
looking for.
Step 2: Target Your Best Customers

• Next, the firm then decides which segments to target by finding the most attractive and
lucrative ones.
• First, the firm would calculate the profitability of each segment respectively. It entails
assessing that which customers contribute the most to the company’s sales.
• Then, the size and potential of each customer group is analyzed. Is it large enough to be
worth addressing? Is steady growth possible? And how does it compare with the other
segments? (Make sure that you won't be reducing revenue by shifting your focus to a niche
market that's too small.)
• Last, think carefully about how well your organisation can service the chosen market. For
example, are there any legal, technological or social barriers that could have an impact.
Step 3: Position Your Offering

• In the last step, the firm’s goal is to identify how they would want to position the product to
target the most valuable customer segments.
• Market Positioning refers to the ability to influence consumer perception regarding a brand
or product relative to competitors. The objective of market positioning is to establish the
image or identity of a brand or product so that consumers perceive it in a certain way.
• Some common types of positioning in marketing are based on quality, pricing, customer
service, convenience, user group etc.
• For example:
• A handbag maker may position itself as a luxury status symbol
• A TV maker may position its TV as the most innovative and cutting-edge
• A fast-food restaurant chain may position itself as the provider of cheap meals
Perceptual Mapping

• Perceptual maps are also referred to as product positioning maps. A perceptual map is a
chart used by market researchers and businesses to depict and understand how target
customers view and feel about a given brand or product. 
• Perceptual mapping is a visual representation of where a brand, product, or service stands
among competitors.
• A perceptual map is of the visual technique designed to show how the average target
market consumer understands the positioning of the competing products in the
marketplace. In other words, it is a tool that attempts to map the consumer’s perceptions
and understandings in a diagram.
• Perceptual mapping utilizes customer input to understand your brand, product, or service
from the customer’s perspective.
Uses of a Perceptual Map

• We get a true understanding of how our brand is perceived in the marketplace

• We can track how the perception of our brand is evolving over time, with new products and
campaigns
• We can track the perception of competitor products and measure the impact of their
marketing strategies
• We can identify positioning preferences (i.e ideal combination of product attributes) for
different market segments
• We can identify possible gaps and opportunities for new products
• We can identify possible opportunities for repositioning our brand
Market Segmentation
• Market segmentation is the practice of dividing your target market into approachable
groups. Market segmentation creates subsets of a market based on demographics, needs,
priorities, common interests, and other psychographic or behavioral criteria used to better
understand the target audience.
• Market segmentation can help you to define and better understand your target audiences
and ideal customers. If you’re a marketer, this allows you to identify the right market for
your products and then target your marketing more effectively.
• Market segmentation is an extension of market research that seeks to identify targeted
groups of consumers to tailor products and branding in a way that is attractive to the
group.
• The objective of market segmentation is to minimize risk by determining which products
have the best chances of gaining a share of a target market and determining the best way
to deliver the products to the market. This allows the company to increase its overall
efficiency by focusing limited resources on efforts that produce the best return on
investment (ROI).
Types of Market Segmentation

• Demographic Segmentation: Demographics are the breakdown of your customer personas

in the market for cursory traits like age or gender. These traits offer basic information on
your customers and are often considered one of the more broad segmentation types.
Examples of demographic segmentation include age, income, family size, education, or
gender.

• Psychographic Segmentation: Psychographics is a type of customer segmentation that

focuses on inner or qualitative traits. Psychographic attributes are the ones that aren’t
obvious just by looking at your customer, like demographic segmentation. Instead,
psychographics requires deeper analysis. Psychographic Segmentation Examples include
Habits, Hobbies, activities, or interests, Values or opinions, Personality, Attitude, Lifestyle,
Social status etc.
• Behavioural Segmentation: Behavioral segmentation digs deeper into customers' purchasing
habits than demographic segmentation. It’s also one of the most popular customer profile
types to be integrated into marketing campaigns. Behavioral segmentation comprises
behavior patterns, like customer loyalty or engagement level, specific to customer
interactions with a brand or company. Behavioral Segmentation examples include
purchasing habits, user status, benefits sought from the product, customer interactions
with the brand etc.

• Geographic Segmentation: Geographics are the study of your customer based on their
physical location, which can affect more physical interactions in the market. Consumers
grouped in similar areas may share similar preferences. That’s why this type of market
segmentation is excellent to pair alongside more abstract types, like behavioral. Geographic
Segmentation examples include City, State, Country, Population density, Zip Code, Regional
climate etc.
Advantages of Market Segmentation

1.Stronger marketing messages: You no longer have to be generic and vague – you can speak
directly to a specific group of people in ways they can relate to, because you understand
their characteristics, wants, and needs.
2.Targeted digital advertising: Market segmentation helps you understand and define your
audience’s characteristics, so you can direct your marketing efforts to specific ages,
locations, buying habits, interests etc.
3.Developing effective marketing strategies: Knowing your target audience gives you a head
start about what methods, tactics and solutions they will be most responsive to.
4.Attracting the right customers: Market segmentation helps you create targeted, clear and
direct messaging that attracts the people you want to buy from you.
5.Increasing brand loyalty: when customers feel understood, uniquely well served and
trusting, they are more likely to stick with your brand.
6. Differentiating your brand from the competition: More specific, personal messaging
makes your brand stand out.
7. Identifying niche markets: segmentation can uncover not only underserved markets,
but also new ways of serving existing markets – opportunities which can be used to grow
your brand.
Steps in the Segmentation Process

• Identify the target market: The first and foremost step is to identify the target market. The
marketers must be very clear about who all should be included in a common segment.
Make sure the individuals have something in common. Segmentation helps the
organizations decide on the marketing strategies and promotional schemes. Maruti Suzuki
has adopted a focused approach and wisely created segments within a large market to
promote their cars.
Lower Income Group - Maruti 800, Alto
Middle Income Group - Wagon R, Swift, Swift Dzire, Ritz
High Income Group - Maruti Suzuki Kizashi, Suzuki Grand Vitara
Suzuki Grand Vitara would obviously have no takers amongst the lower income group.
• Identify needs and expectations of Target Audience: Once the target market is decided,
it is essential to find out the needs of the target audience. The product must meet the
expectations of the individuals. The marketer must interact with the target audience to
know more about their interests and demands. Kellogg’s K special was launched
specifically for the individuals who wanted to cut down on their calorie intake.

• Create Subgroups: In order to ensure that their target market is well defined, the
organisations must create subgroups within groups for effective results. E.g. moisturizers
aimed at age group between 25-40 years may emphasize more on hydration of skin
whereas those meant for consumers above 45 years may focus on anti ageing properties.

• Review the needs of the target audience: The marketing team must review the needs
and preferences of the consumers from each section of society. It will also be easy to
come up with a generic marketing strategy if the requirements of the consumers are
studied and reviewed carefully.
• Select your Target Market(s): Once you’ve properly evaluated the different segments,
you can select the segment that you want to target. This is the most important step in
the whole process, as the segment you select will shape all your marketing strategies
and your product positioning going forth.
Deriving market segments using Cluster Analysis

• Cluster analysis can be a powerful data-mining tool for any organisation that needs to
identify discrete groups of customers, sales transactions, or other types of behaviors and
things. For example, insurance providers use cluster analysis to detect fraudulent claims,
and banks use it for credit scoring.
• A cluster is a group of relatively homogeneous customers. Customers who belong to the
same cluster are similar to each other. They are also dissimilar to customers outside the
cluster, particularly customers in other clusters.
• The objective of cluster analysis is to find similar groups of subjects, where “similarity”
between each pair of subjects means some global measure over the whole set of
characteristics. 
• The most common use of cluster analysis is classification. Subjects are separated into groups
so that each subject is more similar to other subjects in its group than to subjects outside
the group.
Using Cluster Analysis for Segmentation

• When a company wants to know which individuals to target, they can use cluster analysis to
segment consumers based on similarities and dissimilarities. Once the company determines
which type of consumer fits into each group, it can develop marketing strategies according
to the needs of its target groups.
• Cluster analysis also allows a company to segment its market based on the products it
carries. This can help a company understand who its competition is and identify any new
market opportunities.
• Consumers in the same group are similar with respect to a given set of characteristics.
Consumers belonging to different groups are dissimilar with respect to the same set of
characteristics.
• We say that each individual cluster is homogeneous, which means that its data is all alike.
However, when compared to one another, the clusters are heterogeneous, or dissimilar,
which means that each cluster is different from other clusters.
• Cluster Analysis help marketers discover distinct groups in their customer bases, and
then use this knowledge to develop targeted marketing programs.
• The underlying definition of cluster analysis procedures mimic the goals of market
segmentation which is to identify groups of respondents that minimizes differences
among members of the same group.
• Cluster Analysis finds out internally homogeneous groups while also identifying groups
with maximum differences which are largely heterogeneous in nature.
• Clustering of similar brands or products according to their characteristics also allows in
identifying competitors and other potential market opportunities. 
The Advantages of Cluster Analysis

• The three main advantages of the analytical segmentation approach represented by cluster
analysis are:

• Practicality – It would be practically impossible to use predetermined rules to accurately

segment customers over many dimensions

• 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.

• 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.
Cluster Analysis - Example

• The following chart shows the results of a three-dimension cluster analysis performed on
the customer base of an e-commerce site. This analysis resulted in the discovery of four
customer personas.
Another Example of Cluster Analysis to segment customers

• To get a quick understanding of how cluster analysis works for market segmentation
purposes, let’s use the two variables of “customer satisfaction” scores and a “loyalty” metric
to help segment the customers on a database. Let’s assume that we have customer
satisfaction (CSAT) scores of 1 to 9 (where 1 = very dissatisfied and 9 = very satisfied). And
we have similar scores for the customer’s level of loyalty (1 = high switcher-low loyalty and
9 = non-switcher-high loyalty).

• This graph shows this customer database information mapped onto a scatter-plot graph.
The red squares represent the scores of the individual customers and the large red circle is
the average score of all the customers for CSAT (average = 5.05) and loyalty (average = 5.85).
• But if we look closely at the plot points – for the purpose of identifying clusters (market
segments), there is a suggestion of three possible inherent market segments – this is
done using a rough visual basis as shown in the next chart – which the same as above,
except for the addition of a top-level segmentation approach (using the extra large
circles).
• You should be able to see that there are three clusters (segments) of consumers
suggested by the data as presented. The black circle (top-right) appears to be loyal
customers, with a high level of customer satisfaction. The blue circle (bottom-left)
appears to be less loyal customers, with a lower level of CSAT. This relationship is
probably obvious and to be expected – and our existing marketing programs (to existing
customers) are probably built around this CSAT-loyalty correlation.
• However – take a look at the red circle (top-right) – this segment consists of largely
unsatisfied, yet quite loyal customers. This is an interesting finding and perhaps
unexpected (somewhat of a marketing insight). This is one reason why looking at
different approaches to market segments is often worthwhile.