Unit 2 · Topic 2.1 · about 30 minutes
Marketing to Customers
Use customer data to choose target customers and write a customer profile, then explain how customer relationships and data privacy affect a business's profits.
Predict first
A new smoothie shop opens between a college campus and a gym. It has $2,000 to spend on ads this month. Which plan will probably bring in more customers for the money?
What marketing is
Marketing is all of the activities businesses undertake to identify customers' problems, needs and wants, and to promote, sell and deliver products. Ads are only one piece of it. Deciding who to sell to and what to make is marketing too.
Those decisions run on customer data. It helps marketers work out which customers the business should serve, which products to produce, and how to market those products effectively and profitably.
Two kinds of customer data
Marketers collect a wide variety of data about customers, and two kinds come up again and again.
- Demographic characteristics are measurable qualities used to describe a population, such as age, sex, race, ethnicity, income and location.
- Psychographic characteristics are cognitive and behavioral factors within a population, including people's interests, activities, values and lifestyles.
You need both. Two 16-year-olds in the same Ohio suburb, from families that earn about the same, match on age, location and income. If one spends Saturdays at the skate park and the other spends them at robotics competitions, a shoe company would market to them in completely different ways.
Sort it
Tap a fact about a customer, then tap the kind of data it is.
Demographic
Psychographic
Where the data comes from
Businesses collect customer data with digital tools: subscriber lists (the email list you joined for 10% off), online accounts, click-tracking software that records what you click, tracking apps that record things like where you go, and social media monitoring of what people post about a brand. They also use traditional research tools such as surveys and interviews.
And they buy customer data from other businesses. That is how a store you have never shopped at can already know your age and zip code.
Segments, target customers and profiles
Market segmentation gathers potential customers into groups, called market segments, based on shared demographic and psychographic characteristics. It shows a business what different groups within a market need and want, and how its products might meet those needs and wants.
Segmentation is how a business finds its target customers: the buyers most likely to purchase a specific product because of their wants, needs and preferences. A $140 trail-running shoe has little to offer someone who only walks from the parking lot to the office.
To personify its target customers, a business may write a customer profile, a fictional description of one specific sample customer. It combines demographic and psychographic data with that person's wants, needs and preferences.
The payoff is focus. Designing products and marketing elements such as branding, pricing and advertising for the target customers is typically more effective and less costly than appealing to a wide audience.
Worked exampleWriting a customer profile
Ridgeline Running sells a $140 trail-running shoe online. Most of its buyers are adults 25 to 44 who live within an hour of mountain trails, earn over $60,000 a year, run trails on weekends and care more about how long a shoe lasts than how it looks. Their reviews keep mentioning grip on wet rock, and many ask whether worn-out shoes can be recycled. Turn that segment into a customer profile, then put the profile to work.
Sort the data. Demographic: ages 25 to 44, income over $60,000, living near mountain trails. Psychographic: runs trails on weekends (an activity) and cares whether worn-out shoes get recycled (a value).
Make it one person. Maya is 31, a physical therapist in Boise, Idaho, earning $78,000. She runs trails every Saturday and enters two races a year. She needs a shoe that grips wet rock, wants it to last a full season, and prefers brands that recycle worn-out pairs.
Use it. Grip and durability matter more to Maya than bright colors, so that is where the design money goes. Ads on trail-race websites and running podcasts reach her, while a national TV ad mostly reaches people who will never run a trail.
Maya is fictional, but every detail fits what Ridgeline knows about its buyers, so the whole team designs and markets for the same person.
Keeping the customers you win
A business spends money to win every new customer, so it pays to keep the ones it has. Tactics that build strong customer relationships include personalized service (the barista who starts your usual order as you walk in), rewards programs for frequent buyers (every tenth sandwich free) and customer feedback opportunities such as satisfaction surveys. Social media and the internet make all of these easier: an app remembers your order, and a business can answer a complaint the same afternoon.
A plan to build customer relationships picks tactics that fit one business's customers and says what each is meant to achieve. A plant shop might give frequent buyers a rewards card, to bring them back more often, and text every new customer a month after a sale to ask how the plant is doing. That check-in is a feedback opportunity, and a customer who gets help saving a drooping plant is likely to tell friends.
| Measure | What it is | How strong relationships help |
|---|---|---|
| Customer acquisition cost | The total marketing, advertising and sales costs associated with acquiring customers, divided by the total number of customers acquired | Satisfied customers may refer new customers, so each new one costs less to win |
| Lifetime value of a customer | The estimated amount of money a customer will spend on the business's products over time | Satisfied customers have more brand loyalty and make repeat purchases, so each one spends more over time |
Worked exampleAcquisition cost and lifetime value at a plant shop
Fern & Fig, a plant shop, kept these records for its first two years. In the second year, happy customers sent so many friends that new customers jumped.
- Rent: $30,000 a year
- Marketing, advertising and sales in the first year: $14,400, which acquired 480 customers
- Marketing, advertising and sales in the second year: $15,000, which acquired 750 new customers
- A typical customer: $35 a visit, 6 visits a year, for about 4 years
Find each year's customer acquisition cost, then estimate a customer's lifetime value.
First year: customer acquisition cost = 14,400 divided by 480 = $30 per customer. Rent is a cost of running the shop, not of winning customers, so it stays out.
Second year: 15,000 divided by 750 = $20 per customer. Spending barely changed, but referrals brought in far more customers, so each one cost less to win.
Lifetime value: 6 visits a year for 4 years is 24 visits, and 24 times 35 = $840. That is the estimated amount a typical customer spends at the shop over time.
Why loyalty matters: if better service kept customers coming for 5 years instead of 4, that would be 30 visits, and lifetime value would rise to 30 times 35 = $1,050.
Referrals cut customer acquisition cost from $30 to $20, and each customer is worth about $840 in spending, more if they stay longer.
When customer data becomes a risk
Collecting, compiling and storing customer data such as online searches, purchases of goods and services, credit card numbers, social media posts and geographic location may violate consumers' privacy. The risk is greatest when people are unaware their data is being collected, or uninformed about how it may be used. A flashlight app that quietly records everywhere you go is a privacy problem even if nothing bad ever happens with the data.
Data that is not properly secured can also be stolen in a data breach, leaving customers, and the business itself, vulnerable to fraud and identity theft.
So a business has to balance the benefits of using customer data against the risks to the business: losing customers, violating its own core values, and harming its reputation. You sit on the other side of that balance every time you create an account or tap Allow on an app's request for your location.
Check your understanding
A sporting goods chain studies one group of its customers. Which of these findings is a psychographic characteristic?
A tutoring business opened last year. In its first year it spent $9,600 on marketing, advertising and sales and acquired 120 customers. Its rent for the year was $18,000. What was its customer acquisition cost, in dollars per customer?
A juice company's marketing team writes this: "Jordan is 34, lives in Austin, Texas, and earns $72,000 as a nurse. Jordan works 12-hour shifts, takes a spin class twice a week and wants a quick breakfast that is not loaded with sugar." What has the team written?
A gym wants to raise the lifetime value of each of its members. Which change would do that most directly?
A free weather app records each user's exact location all day, even while the app is closed. Users were never told. Which statement best describes this practice?
Course alignment, for teachers
AP Business with Personal Finance topic 2.1, Unit 2: Marketing.