Unit-4

Customer Analytics

Customer Lifetime Value (CLV):-

Customer lifetime value (CLV) is one of the key stats to track as part of a customer
experience program. CLV is a measurement of how valuable a customer is to your
company, not just on a purchase-by-purchase basis but across the whole
relationship.

How do you measure customer lifetime value?

If you’ve bought a £40 Christmas tree from the same grower for the last 10 years,
your CLV has been $400 – pretty straightforward. But as you can imagine, in
bigger companies with more complex products and business models, CLV gets
more complicated to calculate.

Some companies don’t attempt to measure CLV, citing the challenges of

segregated teams, inadequate systems, and untargeted marketing.

When data from all areas of an organisation is integrated, however, it becomes

easier to calculate CLV.

CLV can be measured in the following way:

1. Identify the touchpoints where the customer creates the value

2. Integrate records to create the customer journey

3. Measure revenue at each touchpoint

4. Add together over the lifetime of that customer

Calculating CLV: Formula

CLV = customer value X average customer lifespan

Here’s a worked example of the customer lifetime value calculation using the
simple formula below:

Customer revenue per year * Duration of the relationship in years – Total costs of
acquiring and serving the customer = CLV
Here’s the example in practice:

 Customer A’s revenue per year = £500

 Customer relationship duration = 10 years

 Cost of acquisition = £50

 Cost to serve = £50 per year (£500 over 10 years)

The subsequent math:

£500 x 10 = £5,000£5,000 – £550 = £4,450

CLV for Customer A = £4,450

Key Takeaways

 Customer lifetime value (CLV) is a measure of the average customer’s

revenue generated over their entire relationship with a company.

 Comparing CLV to customer acquisition cost is a quick method of

estimating a customer’s profitability and the business’s potential for long-
term growth.

 Businesses have several marketing tools to help them improve CLV over
time.

 Looking at CLV by customer segment may offer expanded insights into

what’s working well and what isn’t working as well for your organization.

Customer Lifetime Value (CLV) Explained

Customer lifetime value boils down to a single number, but there may be
significant nuances. By understanding the different parts of your CLV, you can test
different strategies to find out what works best with your customers. Thanks to its
simplicity, CLV can be an important financial metric for small businesses.

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. But why does that number
matter? We’ll dig into the details in the next section.

Importance of Customer Lifetime Value to Businesses:-

In the example above, we figured out the average lifetime value of a customer for a
grocery store. But why do businesses care about CLV? Here are a few key reasons
to track and use CLV:

 You Can’t Improve What You Don’t Measure: Once you start measuring
customer lifetime value and breaking down the various components, you can
employ specific strategies around pricing, sales, advertising and customer
retention with a goal of continuously reducing costs and increasing profit.

 Make Better Decisions on Customer Acquisition Costs: When you know

what you will earn from a typical customer, you can increase or decrease
spending to ensure you maximize profitability and continue to attract the
right types of customers.

 Improved Forecasting: CLV forecasts help you make forward-looking

decisions around inventory, staffing, production capacity and other costs.
Without a forecast, you could unknowingly overspend and waste money or
underspend and put yourself in a bind where you struggle to keep up with
demand.

14 Ways to Improve CLV

There are many different strategies companies can adopt to boost their CLV. Here
are 14 ideas to consider if you’re trying to earn more revenue from the typical
customer:

1. Customer Loyalty or Rewards Programs

Customer loyalty programs keep customers engaged and reward frequent
purchases. Airline frequent flyer programs and restaurant punch cards are
popular examples. Incentivizing customers to return can increase purchase
frequency and the amount of time a customer buys from a brand.

2. Customer Experience
 Your website, storefront, call centre and other touchpoints are all part of
the customer experience. If customers enjoy a smooth, low-stress shopping
experience every time, they are more likely to return for repeat business.

3. Improve Customer Onboarding

Some customers buy a product or service from a business and don't know
what to do next. Successful businesses chart a path for their customer
relationships over time. Turning a one-time customer into a source of
recurring revenue is essential for growth in many industries.

4. Customer Engagement
Businesses that actively monitor all interactions between the company and
their customers can identify ways to improve the customer experience and
customer loyalty. This should span channels like advertising, customer
support and sales.

5. Improved Customer Service

Bad customer service is a quick way to see your CLV quickly fall, as
customers leave for competitors. Focusing on making every customer
service interaction a positive one will further enhance customer loyalty.
CRM systems and dedicated customer service platforms bring these
interactions to one central location for streamlined management.

6. Customer Relationship Management

Businesses need to understand their relationships and communication history
with customers across sales, customer service and marketing. ERP and CRM
systems help track and enhance these relationships over time by creating a
seamless flow of information across the entire customer lifecycle — from
lead all the way through opportunity, sales order, fulfilment, renewal, upsell
and support.

7. Customer Feedback Loop

If a customer does have a bad experience, it shouldn't go unresolved. In
addition to relying on customer service to fix the issue, businesses should
continuously solicit customer feedback to enhance the customer experience.
Regular product or service iterations and fixes can resolve problem areas,
helping to improve customer satisfaction.
8. Invest in Technology & Software
Technology can automate processes and track and centralize much of your
business data. Some companies rely on basic tools like email, spreadsheets
and contact databases to manage all this information, but it’s much easier to
use proven, packaged software suites to handle these functions. Your
customers will notice the difference.

9. Upsell and Cross-Sell

It's often easier to reengage or upsell an existing customer than bring in a
new one. Upselling and cross-selling are strategies designed to encourage
customers to buy more expensive or multiple products or services at once
instead of a lower-cost option.

10.Increase Pricing
When done correctly, a price increase can directly increase CLV. Just take
care to avoid scaring off customers with dramatic price increases. Also,
consider competitor pricing when determining your own. By focusing on
value and giving customers something, they can’t get elsewhere, you may be
able to increase pricing without losing customers.

11.Social Media
One of the best places to get your customers' attention is to reach them in
places where they already spend time. Social media platforms like
Facebook, Instagram, Twitter and Tik-Tok are meaningful channels to both
advertise and interact with customers.

12.Simple Purchasing Experiences

Cart abandonment rate is a metric used by online businesses to track how
many customers start shopping but leave before completing the checkout
process. This can also extend to in-person buying experiences where
excessive options and packaging can turn customers off. Building a simple
purchase experience will help you capture every possible sale. Forward-
looking businesses use strategies like A/B testing to find out what works
best.

13.Make Returns Easy

 When a customer isn’t happy with their product or service, making returns
and exchanges difficult may cost you a customer for good. A painless
returns process makes it more likely a customer will come back and give
your product or service another tries.

14.Targeted Content
Content marketing is a strategy used to educate or entertain your target
customers, usually designed to build up brand trust and loyalty. Blog posts,
e-books videos, podcasts and other media are popular forms of targeted
content that can speak to particular segments of your audience.

Market Segmentation:-

Market segmentation consists of sectioning the target market into smaller groups
that share similar characteristics, such as age, income, personality traits, behaviour,
interests, needs or location.

These segments can be used to optimize products, marketing, advertising and sales
efforts.

Segmentation allows brands to create strategies for different types of consumers,

depending on how they perceive the overall value of certain products and
services. In this way they can introduce a more personalized message with the
certainty that it will be received successfully.

Now that you know what market segmentation is, let’s talk about the different
types that exist.

Types Of Market Segmentation

There are 4 types of market segmentation. Below, we describe each of them:

Geographic segmentation

Geographic segmentation consists of creating different groups of customers based

on geographic boundaries.

The needs and interests of potential customers vary according to their geographic
location, climate and region, and understanding this allows you to determine where
to sell and advertise a brand, as well as where to expand a business.

Demographic segmentation
Demographic segmentation consists of dividing the market through different
variables such as age, gender, nationality, education level, family size, occupation,
income, etc.

This is one of the most widely used forms of market segmentation, since it is based
on knowing how customers use your products and services and how much they are
willing to pay for them.

Psychographic segmentation

Psychographic segmentation consists of grouping the target audience based on

their behaviour, lifestyle, attitudes and interests.

To understand the target audience, market research methods such as focus groups,
surveys, interviews and case studies can be successful in compiling this type of
conclusion.

Behavioural segmentation

Behavioural segmentation focuses on specific reactions, i.e. the consumer

behaviours, patterns and the way customers go through their decision-making and
purchasing processes.

The attitudes the public has towards your brand, the way they use it and their
awareness are examples of behavioural segmentation. Collecting this type of data
is similar to the way you would find psychographic data. This allows marketers to
develop a more targeted approach.

Market segmentation objectives:-

There are different market segmentation objectives. Here we tell you what each of
them are:

 Product: Creating successful products is one of the main objectives of

organizations and one of the reasons why they conduct market research. This
allows you to add the right features to your product and will also help you
reduce costs to meet the needs of your target audience.
  Price: Another objective of market segmentation is to establish the right
price for your products. Identifying which is the public that will be willing to
pay for it.
 Promotion: It helps you to target the members of each segment and select
them in different categories so that you can direct your strategies
appropriately.
 Place: The ultimate goal of segmentation is to decide how you offer a
product to each group of consumers and make it pleasant to them.

5 steps to implement a market segmentation strategy

In order to implement a strategy, you must not only know what market
segmentation is. It is very important to know how to apply this method. That is
why we have for you a guide that will help you:

 Define your market: At this point of the segmentation you should focus on
discovering how big the market is, where your brand fits and if your
products have the capacity to solve what it promises.
 Segment your market: This step consists of choosing which of the types best
suits your brand.
 Understand your market: Ask your customers the right questions, depending
on the type you chose. You must know your target audience in detail. You
can use online surveys to get their answers.
 Build your customer segment: After collecting responses, you need to
perform data analysis to create dynamic segments unique to your brand.
 Test your strategy: Make sure you have correctly interpreted your survey
data by testing it with your target audience. This will help you to revisit your
market segmentation strategies and make the necessary changes.

Advantages of market segmentation

Knowing what market segmentation is and the benefits it has for your organization
will help you implement it correctly. Here are some of its advantages:

 Create stronger marketing messages: When you know who you are
targeting, you can create strong, personalized messages that respond to the
needs and wants of your target audience.
  Find the ideal marketing strategies: You may not know which is the right
strategy to attract the ideal audience. Market segmentation allows you to
know the audience, create a plan that will work successfully and determine
better solutions and methods to reach them.
 Design targeted advertising: Market segmentation allows you to target your
advertising to the audience in a successful and effective way, knowing their
age, location, buying habits, interests, etc.
 Attract potential customers: By sending direct and clear marketing
messages, you attract the right audience and are more likely to convert them
into buyers.
 Differentiate your brand from the competition: By creating messages
specific to your value proposition, you can stand out from the competition.
Segmentation allows you to differentiate your brand by focusing on specific
customer needs and characteristics.
 Identify your niche market: Market segmentation helps you discover your
niche market. Identify the niche with the broadest audience and whether it
has needs that your brand can effectively address.
 Focus your efforts: Allows you to identify new marketing opportunities and
avoid distractions that take you away from your target market.
 Create a customer connection: When you know what your customers want
and need, you can create effective strategies. This allows you to create
strong bonds between your brand and the customer to create brand
loyalty and customer satisfaction.

Cluster Analysis:-

 Cluster analysis is a statistical classification technique in which a set of

objects or points with similar characteristics are grouped together in clusters.
It encompasses a number of different algorithms and methods that are all
used for grouping objects of similar kinds into respective categories.
 The aim of cluster analysis is to organize observed data into meaningful
structures in order to gain further insight from them.
 Cluster analysis is a multivariate data mining technique whose goal is to
groups objects (eg., products, respondents, or other entities) based on a set of
user selected characteristics or attributes.
 It is the basic and most important step of data mining and a common
technique for statistical data analysis and it is used in many fields such as
 data compression, machine learning, pattern recognition, information
retrieval etc.

Clusters should exhibit high internal homogeneity and high external heterogeneity.

Types of Cluster Analysis

The clustering algorithm needs to be chosen experimentally unless there is a

mathematical reason to choose one cluster method over another. It should be noted
that an algorithm that works on a particular set of data will not work on another set
of data. There are a number of different methods to perform cluster analysis. Some
of them are,

1. Hierarchical Cluster Analysis

a. In this method, first, a cluster is made and then added to another

cluster (the most similar and closest one) to form one single cluster.

b. This process is repeated until all subjects are in one cluster. This
particular method is known as Agglomerative method. Agglomerative
clustering starts with single objects and starts grouping them into
clusters.
 c. The divisive method is another kind of Hierarchical method in which
clustering starts with the complete data set and then starts dividing
into partitions.

2. Centred-based Clustering

a. In this type of clustering, clusters are represented by a central entity,

which may or may not be a part of the given data set. K-Means
method of clustering is used in this method, where k is the cluster
centres and objects are assigned to the nearest cluster centres.

3. Distribution-based Clustering
a. It is a type of clustering model closely related to statistics based on the
modals of distribution.
b. Objects that belong to the same distribution are put into a single
cluster. This type of clustering can capture some complex properties
of objects like correlation and dependence between attributes.
 4. Density-based Clustering
a. In this type of clustering, clusters are defined by the areas of density
that are higher than the remaining of the data set.
b. Objects in sparse areas are usually required to separate clusters. The
objects in these sparse points are usually noise and border points in
the graph. The most popular method in this type of clustering is
DBSCAN.

It is the principal job of exploratory data mining, and a common method for
statistical data analysis. It is used in many fields, such as machine learning, image
analysis, pattern recognition, information retrieval, data compression,
bioinformatics and computer graphics.

It can be used to examine patterns of antibiotic resistance, to incorporate

antimicrobial compounds according to their mechanism of activity, to analyse
antibiotics according to their antibacterial action.
Cluster analysis can be a compelling data-mining means for any organization that
wants to recognise discrete groups of customers, sales transactions, or other kinds
of behaviours and things. For example, insurance providing companies use cluster
analysis to identify fraudulent claims and banks apply it for credit scoring.