NOTES-UNIT-1

Unit -1: Introduction to marketing Analytics (4 hrs.)

Analytics in Marketing

Marketing, in general, is referred to as the management process responsible for

identifying, anticipating, and satisfying customer requirements profitably.

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.  Data-backed customer insights can be used to enhance
marketing efforts at every stage of the process, and one of the most effective tactics is
using analytics along with other business inputs and relative techniques.

Characteristics of Marketing analytics

1. Ensure high quality data

2. Get real time insights

3. Perfect your dashboard

4. Choose the right analytics visualization

5. Use a featuring machine learning and AI to predict and prescribe

Ensure high-quality data – Your analytics rest on your data. That means you need a tool
that mines both structured and unstructured customer data from all possible sources,
including various interactions and touch points.

Get real-time insights – Your marketing analytics solution also needs to deliver real-time
insights to you. You can’t be effective if your information is out-of-date; tracking the
right metrics at the right time is key.
Perfect your dashboard – While it may be tempting to track as many metrics as possible,
your analytics will not be as useful if you do. Rather, define your goals and measure
results for the use cases most important to you.

Choose the right analytics visualization – Marketing teams and stakeholders must be
able to make something of the data if you are to gain meaningful insights from it. The
key is to choose the most appropriate data visualizations so you can find patterns and
interpret the data. Thus, you must choose a marketing analytics solution that allows you
to choose or customize your visualizations instead of using default charts for displaying
data.

Use a tool featuring machine learning and AI to predict and prescribe – Marketing must
be real-time and predictive to be effective today. You must be able to make accurate
predictions, analyze the data, and make data-driven decisions to enhance each step of
the customer journey. 

Advantages and disadvantages of marketing analytics

https://theintactone.com/2020/01/19/advantages-and-disadvantages-of-marketing-
analytics/

1. Granular segmentation

2. Tailored Messaging

3. Muti-Channel Customer View

4. Marketing analytics with digital marketing tools

Disadvantages

1. Misidentifying needs

2. Evaluating market growth without market share

3. Market Segmentation vs Target Markets

4. Improper interpretation of data

5 Must-Have Data Sources to Improve Your Marketing Team’s Efficiencies

To fuel your sales pipeline, your marketing team needs to bring in quality inbound leads,
and quality data sources are the way to ensure that happens.

Your sales team may rely on accurate prospecting tools for their outbound sales efforts,
but they likely rely on leads supplied from a marketing team for inbound efforts. While
creativity is a significant component of a marketer’s profession, the skill of utilizing data
is just as important. Data gives you insight into your audience. In turn, it allows you to
use creativity in your approach to adequately reach your target group. According to the
below stats, having access to the right data is pivotal to success: 

42% of B2B marketing professionals state that a lack of quality data is their most
significant barrier to lead generation.

24% of marketers don’t know whether their efforts resulted in closed-won deals.

Only 16.3% of marketers use marketing analytics to inform multi-channel marketing.

To be successful in developing marketing strategies that strike a chord with your target
audience and drive inbound leads, you have to introduce your team to data sources that
will help them make well-informed and strategic decisions. Read on for five must-have
data sources that can increase the efficiency of your marketing team. 

Web Analytics 

One of the best ways to determine how customers are interacting with your brand is by
monitoring their engagements with the company webpage. Web analytics allow you to
understand the content that is resonating with customers, mediums that are bringing
them to the site, and the exact pages they are visiting while they are there. Web
analytics can inform any digital marketing strategy, especially when it comes to creating
content. 

Census Data 

Creating personas based on demographic and location information is essential to any

marketing strategy. Having access to U.S. Census Data enables marketing teams to
analyze who their target market is, and the external factors that could contribute to who
these people are. Teams can use sample data to define who their ideal customer should
be, and can also combine location data with demographic information to zero in on
where they should put their efforts. 

Go even further by combining this data with that from your customer relationship
management (CRM) solution to understand how your current customer set compares
with the nation. To do this well, make sure your CRM can import census data or that you
can export customer data sets to a BI tool to manipulate. 

Keyword Trends

Mastering SEO is crucial to getting your company’s web material in front of your target
audience. To do this correctly, it makes sense to take a look at keyword trend data to
find out which keywords your website can rank for. Programs like Google Trends and
Moz can provide vital insights into related keywords that are popular among your target
audience. It keeps marketers from flying blind when they create a new blog post or
website copy. 

Social Media Analytics 

Are you posting information at the right times? When is your target audience the most
active on a particular platform? How often should you post? Taking a look at social
media analytics can help your team create an effective and well-informed social media
marketing strategy. To gain even more detailed insights, it makes sense to connect this
data with web analytics to see which social media platforms are attracting the most
attention to your web content. 

Business Statistics

While micro-level stats are vital, it does not hurt to take a macro approach to market
research. You might be rolling out a new product, but economic and employment
conditions could make you narrow your target or alter your research. Data from the
Small Business Administration website provides valuable insight into the current state of
the economy, population trends, and small business conditions. 

Pro Tip: Market Share pages from Datanyze is another great source for market research.
There you’ll find accurate and up-to-date information & insights into industry trends,
rising technologies, and key competitors. 

https://www.tradeready.ca/2017/topics/researchdevelopment/types-data-need-collect-
market-research/

What types of data do you need for your market research?

Once you have the objectives for your market research established and the parameters
specified, researchers can select which methods you will use to collect data, and there
are a wide range of research options available. The choice of research design will depend
on the following factors: Whether the information needed already exists in some form
(secondary data) or whether it will have to be collected for the research project (primary
data) Whether the market research objectives involve the collection of facts and figures
(quantitative data), opinions and feelings (qualitative data) or both types of data
Whether the research is to gain insights and reactions (exploratory research), describe
what is known (descriptive research) or identify a cause and effect relationship (causal
research) Whether the research involves discovering a trend (continuous) or the status
of the situation at a single point in time (ad hoc) When researchers answer these
questions, it will help them identify the potential data sources for the research
information and the methodologies needed to obtain the information. The sources and
methodologies can then be compared to the budget and timelines to decide if they are
suitable and achievable. Secondary and primary research When considering the market
research objectives, researchers might realize that a lot of the information they need
can be obtained by using existing reports, documents and published statistics. This is
secondary data. The process of gathering secondary data is called secondary research or
desk research. Secondary research can be gathered from numerous sources, such as: a
company’s own records and publications government publications competitors’ websites
and publications newspapers, journals and magazine articles Other information might
need to be gathered specifically to answer the research objectives. This is primary data,
and the process of gathering it is called primary research. Primary data sources include
questionnaires and surveys. Secondary research is usually faster, easier and less
expensive than primary research. For example, secondary research might be as simple as
browsing the Internet using carefully selected search terms, whereas primary research
usually involves designing a data-collection tool such as a survey and investing
considerable time in contacting customers and obtaining replies.

Most small- and medium-sized companies focus on desk research and then move on to
primary research if they can afford it. Larger companies will invest more in primary
research because their risk exposure will be higher.

Quantitative and qualitative research Researchers must also identify what type of
information the market research should obtain. This depends on whether the research
objectives require information that can be measured, categorized or analyzed
numerically, or information that indicates customer opinions and motivations.
Quantitative research gathers information that can be analyzed numerically. It can be
obtained through secondary research; for example, by obtaining the census records for a
population. It can also be obtained through primary research, such as by conducting a
survey and asking questions that have answers that can be measured. For example, a
researcher can ask consumers how satisfied they are with their current toothpaste on a
scale of 1 to 5. The resulting information can be represented statistically. Qualitative
data is descriptive information and is often transferred verbally or in writing. Among
other things, qualitative research enables companies to discover what actions
consumers take and why. Researchers can gather information about consumer
preferences and purchasing habits and about why consumers have the preferences that
they do. Qualitative data can be used in three main ways: To enable researchers to
decide what questions to ask in quantitative research To answer a specific question To
help explain the data received in quantitative research Qualitative data are usually
gathered through primary research methods, including interviews, focus groups and
observational analysis. Focus groups are informal, guided discussions in which a small
group of potential customers are encouraged to share their views and opinions of a
company, brand, product or service. Observational analysis involves gathering
information about customer actions and preferences through direct or indirect
observation, such as CCTV cameras or online tracking.

Exploratory, descriptive and causal research

The design of a market research program is also dictated by how much information is
already known and the actions the decision makers will take after obtaining the results
of the research. Exploratory research involves collecting information informally to gain
insights into some aspect of marketing or trade. It is helpful in breaking very broad
research problem statements into smaller and more manageable statements. For
example, researchers might visit a potential international market to investigate
consumer attitudes. Exploratory research projects often provide a basis for further
research and usually involve gathering qualitative information. Descriptive research is
more structured than exploratory research and involves gathering information about a
market to explain the current market condition, current demographics or a current
business problem. It is often used to measure the frequency with which something
happens or to compare market variables and is useful in establishing what is real, rather
than what is assumed. For example, a company considering exporting to Japan might
have heard about new regulations regarding wood packaging material. Descriptive
research could identify the regulations and any necessary certifications required. Causal
research involves attempting to determine whether one market variable has an impact
on another market variable. The aim is to detect cause and effect relationships. For
example, a company attempting to break into a new international market and not having
much success might wish to carry out causal research to determine whether a lower
price will have a significant impact on sales. Continuous or ad hoc research Researchers
must also consider whether information must be collected over a period of time or on
one occasion only. Ad hoc research involves investigating a single problem or
opportunity at one point in time. Often, ad hoc research involves gathering information
from a range of sources in one specific time frame and is called cross-sectional research.
Cross-sectional research is useful for research objectives that involve knowing the right
time to make a business move or whether it is wise to launch a new product. Continuous
research, also known as longitudinal research, involves long term research to monitor
trends in customer attitudes and market attitudes. This involves obtaining information
from the same sources or the same consumer groups on several occasions over a
defined time period. Continuous market research is very useful for investigating causal
responses, such as purchasing habits in response to changing interest rates, or for
following trials of a new product or service.

Primary Data vs. Secondary Data: Market Research Methods

There are more data sources than ever. Just googling a search term may not be
sufficient, as the googled data may be inaccurate and/or biased. You want to avoid
making important business decisions based on unreliable data. So which data sources
should you use?

At the highest level, market research data can be categorized into secondary and
primary types.

What Is Secondary Data?

Secondary data is public information that has been collected by others. It is typically free
or inexpensive to obtain and can act as a strong foundation to any research project —
provided you know where to find it and how to judge its worth and relevance.

Secondary Data Examples

Sources of secondary data include (but are not limited to):

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. However, data is often not presented
explicitly for the subject you are interested in, so it can take some manipulation and
cross-checking of the data to get it as narrowly focused as you’d like.
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.

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 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.

Published market research reports are another possible resource, as anyone who’s ever

googled the name of the industry they’re interested in and “market research” can tell
you. For a fee, they can provide a great overview of an industry, including quantitative
data you might not find elsewhere related to market size, growth rates and industry
participant market share. The downside is that you might not be interested in an
overview — you might be interested in a niche, and that niche is only discussed on three
of the report’s 300 pages. 

What Is Primary Data?

Now it’s time for primary data, new information collected specifically for your purposes,
directly from people in the know. 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 Examples

In-depth interviews present the opportunity to gather detailed insights from leading

industry participants about their business, competitors and the greater industry. When
you approach a company contact from a position of knowledge — thanks to all that
secondary data you’ve already collected — you can have a free-flowing conversation
about the topics of interest. You can guide the conversation toward your research
objectives, but also allow yourself to be led down unexpected paths by interviewees —
some of the most valuable insights are the ones you didn’t know you should be looking
for.
If you’re seeking data you can quantify, 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, what they like and if they’re happy.
You 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 of the right people in the right way,
so care should be taken both to develop survey questions respondents will find relevant
and interesting, and to determine which method of conducting the survey (online,
telephone or in-person) is most appropriate.

Looking to get consumers’ thoughts on a new product or service offering idea when
you’re in the early stages of the development process? A focus group can get a small
group of people that fit your target demographic in a room to discuss what they like,
dislike, are confused by, would do differently — whatever. The group’s leader
encourages honest, open discussion among participants, collecting opinions that can
further direct your development efforts.

Prefer to eavesdrop rather than ask questions outright? Social media monitoring can

help you keeps tabs on candid conversations about your industry, your company and
your competitors. How much are people talking about your brand compared to
competitive brands? Is what they’re saying positive or negative? Is the public clamoring
for something the industry currently doesn’t provide? How are your competitors
portraying themselves via social media, and what does that say about their strategy?
Social media monitoring shows that you don’t always need to participate in the
conversation to learn from it.

Market Sizing

Estimating Product Potential

Imagine that you've just spent three years building a fantastic business – your product is
great, your website is cutting edge, your people are well-trained and enthusiastic, and
your customers love what you do.

The problem is, you're running at a loss – there simply aren't enough customers in the
market to support the business.

This is a heartbreaking, and very common, position to be in. It's why many professional
entrepreneurs and investors conduct "market sizing" exercises before they invest in a
new business, as part of the business planning  that they do.

What Is Market Sizing?

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.
It's important to calculate and understand market size for several reasons.

First, 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.

If you choose to move forward, this analysis will also help you to develop a marketing
strategy  that addresses the unique needs and potential of your core 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, rather than "feeling your way" as you
test your new market. If you know this from the start, you can optimize your approach
to recruitment, so that you have the right people in place when you need them.

Market Sizing Methods

There are two methods that are commonly used for market sizing: top-down and
bottom-up.

Although the top-down method is simple, it's often unreliable and overly optimistic. It
looks at the "relevant" market size for your product or service, and then calculates how
much your organization might earn from it.

For example, imagine that your organization markets learning resources to schools. Your
research shows that there are 6,000 relevant schools in your country. You know that the
average sale per school is around US$50,000, which means that your market size is
US$300 million.

Of course, this is an incredibly optimistic and unrealistic figure. Not every school needs
your products, and they're unlikely to purchase $50,000 worth of goods each, so it could
be a real challenge to capture even a small percentage of this market. 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.

This article focuses on how you can use a bottom-up approach to market sizing.

How to Calculate Market Size

Follow the steps below to use this approach.

1. Define Your Target Market

To predict the size of your market, you need to know the type of person that your
product or service is best suited to. Your offering has to fulfill a need – or solve a
problem – uniquely well for a group of people, and you need to define who these people
are.

Also, think about how you can access these customers – there's no point considering
them if you can't reach them cost-effectively.

You can use market segmentation  to divide your market into specific groups. This gives
you a greater understanding of each group that your product or service will appeal to,
and it helps you to tailor your offering to the specific needs of that group. Once you've
identified the different possible segments in your market, choose the ones that you want
to focus on to build your business.

Now you need to determine how large this market is. To start, contact business
organizations, data providers, civic organizations, city and state development offices, or
regulatory agencies that handle business and commerce; and do what you can to source
a list of potential clients in your chosen segments. 

Example

Your organization wants to develop point-of-sale software for mid-sized grocery stores.
But, before you invest the time and money to develop the software, you need to make
sure that the market is large enough, and that people are interested enough in your
product to buy it.

After researching online and contacting your region's business and commerce
department, you determine that there are roughly 10,000 mid-sized grocery stores in
your country, and you source a list of these stores.

2. Use Market Research to Assess Interest in Your Product

Obviously, not everyone in your target market will want to buy your type of product. So
your next step is to estimate realistic interest.

One way to do this is to focus on competitors who target the same group of buyers.
What is their market share? And what are their annual sales for similar products or
services?

If your competitors are exclusively focused on this market, this can give you a good
estimate of potential market size. However, it can be almost impossible to source this
information if they focus on other markets as well, or if they are part of larger business
groups.

Another way to assess interest is through individual interviews, focus groups, and
surveys. Question a sufficiently large sample of people or businesses that fall within your
target market, and explain what you have to offer. The larger your sample, the better
your analysis will be. Does this product interest them? What would they feel
comfortable paying for it? And how likely are they to purchase your product or a similar
product within the next two years?

It's important to draw conservative conclusions based on the feedback you get from
these focus groups or surveys. Often, people will say one thing and do another. In
particular, people often "think twice" before actually making a purchase; and this is
especially true as budgets, interests, and market conditions change.

Example

Over the course of three months, you talk to 100 randomly selected mid-sized grocery
stores, which represent one percent of your target market. You explain the idea behind
the new software, and the benefits it will provide to the store owners.

After the presentations are finished, 35 stores express a strong interest in the software,
and a willingness to buy once it's available. To be conservative, you reduce this number
to 18. So, 18 percent of stores in your market will be interested in this product. Out of
10,000 possible grocery stores, this means that 1,800 could buy.

Step 3: Calculate Potential Sales

You now have a more realistic figure that represents how popular your product or
service could be to your target market. Use this data to decide whether your product is
worth the investment and risk.

To do this, develop a financial model of your business using the data you have gathered
(see our articles on Cash Flow Forecasting  and use of NPVs and IRRs  for more on this.)
Then, identify key assumptions within your model, and test these using techniques such
as Scenario Analysis  and Monte Carlo Analysis .

Example

You've determined that 1,800 grocery stores might invest in your software, which costs
US$30,000. If 100 percent of these stores purchase the software, this is a return of
US$54 million.

Your organization has already estimated that it will have to invest at least US$7 million
to develop, test, and market the new software. This investment is only 13 percent of
potential annual revenues, so the risk is low, even if the response isn't as positive as
predicted. Your organization therefore decides to move forward with the development
of new software.

What is PESTLE 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 a mnemonic 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. On the basis of the organization, it can be reduced to PEST or
additional areas can be added (such as Ethical).

PESTLE analysis forms a much more comprehensive version of the SWOT analysis. This
form of analysis is then compared with the company’s internal strengths and
weaknesses via a SWOT analysis. This aids in determining the future scope of action and
in developing measures for strategic management.

Why is PESTLE analysis used?  

Businessmen and entrepreneurs often turn towards business analysis tools for aiding
them in making suitable decisions for their firm. Before any business venture, the
business owners often remain doubtful regarding its outcome and how it would be
received.  Pestle analysis is adopted for determining an answer to these questions.   This
analysis involves asking questions that give the analyst an idea about the things to keep
in mind. These questions are: 

 What is the political situation of a country and what is its effect on the markets?

 What are the prevalent economic factors? 

 How is culture affecting the markets and what are its determinants?

 What are the technological inventions that are trending and what are other fu-
ture possibilities in this field?

 What are the current legislations that regulate the industry and if they need to be
changed?

 What are the environmental concerns for the industry? 

Analysts find answers to these questions and try to cover all the aspects through this
analysis. The PESTLE analysis is more than just understanding the market. This
framework represents one of the backbones of strategic management by not only
defining what a company should do but also accounting for an organization’s goals and
the strategies strung to them.

Factors of PESTLE Analysis

 
Each of the factors mentioned above, from Political, Economic, Social, Technological,
Legal to Environmental, have an impact on an organization. Yet the significance of each
of these factors may differ based on the different kinds of industries.

1. Political factors in PESTLE Analysis

Political factors include tax policy, environmental regulations, trade restrictions and

reform, tariffs, and also political stability. These factors determine the extent to which
a government may influence an industry or a company. For example, the government
may bring new tax reforms that might change the whole revenue-generating system of a
company.

Some tariff trade barriers that can prove to be a hindrance in the way we run our
business operations include customs policy and export subsidies. Non-tariff trade
barriers meanwhile include determining minimum import prices as well as bans and
restrictions on exports.

2. Economic factors in PESTLE Analysis 

Economic factors include economic growth/decline, interest, exchange, inflation and

wage rates, minimum wage, working hours, unemployment (local and national), credit
availability, and cost of living. These factors are determinants to an economy’s
performance that directly impacts a company and also have resonating long term
effects.

For example, a rise in the inflation rate of any economy would affect the way companies
price their products and services. Besides, it would also affect the purchasing power of a
consumer and may result in a change in demand/supply models for that economy.

3. Social factors in PESTLE Analysis 

Social factors include cultural norms and expectations, health consciousness,

population growth rates, age distribution, career attitudes, health, and safety. These
factors are helpful for companies to better plan their marketing analytics and strategy.
For example, the Indian market generally witnesses a surge in demands for vehicles
during the last months of the year, due to marriage and the festive season.  

These factors are particularly significant for marketers as they target certain customers.
Additionally, they also highlight the local workforce and its zeal to operate under certain
circumstances.

The factors of PESTLE Analysis

4. Technological factors in PESTLE Analysis 

Technological factors mean the innovations and developments in technologies. These

factors impact an organization’s operations. Several new developments like Artificial
Intelligence, IoT, Machine Learning, Deep Learning, are being made in the technology
field and if a company fails to match up the trend it may lose its position in the market.   

A few of the technological factors which are included in the PESTLE analysis include the
rate of technological change, the evolution of infrastructure, and any government or
institutional research.  

5. Legal factors in PESTLE Analysis 

Legal factors include changes to legislation impacting employment, access to materials,

quotas, resources, imports/exports, and taxation. These factors have both external and
internal sides. Certain laws have an impact on the business environment in a country. 

Apart from these laws/rules, companies maintain their own set of rules and regulations
by which an employee is expected to abide by. So, the legal analysis takes accounts of
both these angles and forms strategies keeping them in mind.

6. Environmental factors in PESTLE Analysis 

These factors are mainly concerned with the effect of the surrounding environment and
the influence of ecological aspects. These include waste disposal laws, environmental
protection laws, energy consumption regulation.

This aspect of the PESTLE is crucial for certain industries particularly example tourism,
farming, agriculture, etc. However, Global warming and the increased need to switch to
sustainable resources; ethical sourcing (both locally and nationally, including supply
chain intelligence) have compelled every organization to consider the environmental
factors. Corporate Social Responsibility (CSR) has been made compulsory for
organizations.  

How to do a PESTLE Analysis?  

Conducting a PESTLE Analysis involves some steps which we have mentioned below:

 Identify the scope of the research. It should cover the present and the future
scenarios. It should apply to the areas of the business world where the particular
organization operates. 

 Form a good team and assign responsibilities accordingly. Involving diverse peo-

ple helps in collecting content-rich data. 

 Identify appropriate sources of information. These may include people seeking

professional help regarding an issue or a change/update in current policy. 

 Gather and assemble the information. Better create a template as the basis for
recording the information. 

 Analyzing the collected information is a significant step. 

 Create an order of the issues to be addressed. Try to resolve the issue, that can
create a big impact, at the earliest.

 Identify the business-specific options to address the issues.

 Create a well-informing document for all the stakeholders

 Disseminate and discuss the findings with stakeholders and decision-makers

 Decide on the actions to be taken and trends that need to be monitored on an

ongoing basis
To be effective, organizations must perform PESTLE analysis on an ongoing or regular
basis. Organizations that do so enjoy a competitive advantage as they spot trends before
others. 

What is a PESTLE Analysis used for?

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

establish the external factors that could impact decisions made inside the organization.
By understanding the impact these external factors can have on an organization, it
becomes handy for organizations to plan better. They can form strategies to minimize
the threats and maximize opportunities for themselves. 

Uses of PESTLE Analysis

A PESTLE analysis is an appropriate framework that fulfills these purposes. Apart from
that, it also helps organizations in a range of business planning situations. These include:

1. Strategic business planning

A PESTLE analysis report is a useful document to have by your side when starting a
business planning process. It provides the senior management team with loads of
contextual information about the company like the direction in which the business is
heading, brand positioning, growth targets, and the areas of concern that may lead to a
decline in growth and productivity.

2. Workforce Planning

Workforce planning is a business process that aligns business and people strategies. A
PESTLE analysis helps businesses to identify disruptive changes to business models that
may have a profound impact on the future employment landscape. Organizations are
facing huge changes in their workforce from increased skills gaps, the creation of job
roles that did not exist 10 years ago like the IT department, and job reductions or
displacement. 

3. Marketing Planning

As PESTLE analysis brings a lot of information on external factors, it also brings crucial
market insights. So, it can help prioritize business activities to accomplish specific
marketing objectives within a set timeframe. 

4. Product development

As mentioned above, a PESTLE analysis also has crucial market insights that tell about
the response from customers about a product or service. This helps businesses to decide
on whether to enter or leave a route, modify an existing product, and when and what to
launch as a new product.  

5. Organizational Change 

A PESTLE analysis is a powerful tool for understanding the context for change, and
focusing on the areas to make that change successful. In this situation, PESTLE analysis
works best with a SWOT analysis. This helps an organization to identify the potential
opportunities and threats around labor changes, for example, skill shortage and
workforce capabilities. 

Advantages and Disadvantages of a PESTLE Analysis

Everything has both aspects and so does a PESTLE Analysis. Let us look at the advantages
as well as the disadvantages of it.  

Advantages

 It is a simple framework- easy to understand and conduct

 It facilitates a better and broader understanding of the business environment.

 It encourages organizations to develop external and strategic thinking

The most talked advantage- it enables an organization to anticipate future business
threats and allows it to minimize or nullify the impact

It also allows organizations to spot an opportunity and to capitalize on them

Disadvantages

Some PESTLE analysis users oversimplify the amount of data used for decisions – it’s
easy to use insufficient data.

It’s easy to get lost in the enormous amount of data. So, there always remains a risk of
capturing too much data and undertaking too much data analytics that may lead to
‘paralysis by analysis’

As a PESTLE analysis works on assumptions, there remains a risk of being wrong

Once in a while an attitude doesn’t work with PESTLE analysis. So, it must be a regular
practice.

The pace of change makes it difficult to anticipate the developments and this may affect
the organization in future

Conclusion

It can be stated that PESTLE analysis is a great tool for businesses that can be leveraged
for several purposes. It brings information about the possible impact of the six external
factors on an organization. This makes it easier for organizations to prepare for any sort
of problems caused by these PESTLE factors.

Porter’s Five Forces of Competitive Position Analysis

Framework/theory

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E
Porter of Harvard Business School as a simple framework for assessing and evaluating the
competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the
competitive intensity and attractiveness of a market. Porter’s five forces help to identify
where power lies in a business situation. This is useful both in understanding the strength of
an organisation’s current competitive position, and the strength of a position that an
organisation may look to move into.
Strategic analysts often use Porter’s five forces to understand whether new products or
services are potentially profitable. By understanding where power lies, the theory can also
be used to identify areas of strength, to improve weaknesses and to avoid mistakes.

Porter’s five forces of competitive position analysis:

Porter’s Five Forces

Porter’s Five Forces is a process for doing a competitive analysis on any particular
marketplace invented by Professor Michael E. Porter of Harvard University. It is a resource-
focused methodology as it factors industry costs and how businesses deal with them. The
primary purpose of Porter’s method is to determine the competitive intensity of your
particular industry. High competitive intensity (where a marketplace is flooded with a wide
mix of products and services) creates what is called a red ocean. The sea is red because you
have lots of sharks fighting over a finite supply of consumers. The redder the sea, the less
likely your company will be able to make a profit.

It’s important to understand how intensely red the ocean that you’re competing in is
colored. If a marketplace is stuck in a red ocean, then see if there is a nearby blue ocean you
can compete in with fewer competitors. A blue ocean gives you more flexibility to make
more profit. If a company can slightly shift their product or services to cater to this less
competitive space, they can reap proportionally more reward for the same amount of effort.

Porter’s#1 Force – Competitive Intensity

Competitive intensity forms the first of Porter’s Five Forces. Competitive intensity is made
up of all the factors that conspire to create a red ocean type of industry. These factors can
affect profits down as competitors try to jostle for position. To figure out how competitive
your industry is, start with the following eight factors to assess the competitive intensity of
your industry.

The eight factors of Porter’s competitive intensity.

According to Porter, eight factors go into determining the relative competitiveness of a

marketplace.

1. Are there lots of competitors?  If

there are a lot of people opening the same type of business, then
the competition in your space may be too intense for your business to be viable.

2. Is there real industry growth?  If

you are in a quickly growing industry such as many online
businesses are these days, this may bode well for you even if the sector is filled with
competitors. Growth rates change over time, so be sure to make regular forecasts to adjust
your future expectations.

3. Are there high fixed costs? Fixed

costs such as storage costs create an incentive where
competitors that are in the industry battle to stay in it.

4. Is there a lack of differentiation?  When

every digital agency spends money on marketing and
branding, it can be hard to differentiate between various online businesses. A good example
is a marketing agency that promises companies more leads. Think about what can
distinguish your business from the hundreds in your state alone that promise the same
benefit?

5. Is capacity added to significant increments?  Imagine

a scenario where a stadium is trying to forecast
its ideal capacity. To add more seats, it needs to create a multi-million dollar extension to its
existing infrastructure. It’s not like it can create 100 new seats just by going to the chair
factory. Take the example when a hotel needs to add volume for the holidays. The hotel
industry has to add a lot of capacity all at once. These high marginal costs can act as a
deterrent for other competitors to enter the space.

6.Do businesses use their diverse, competitive strategies in a particular market?  If
you’re competing against
companies that use a range of competitive strategy, it can difficult to come up with a
different plan that helps you stand out.

7. Are you in a high stakes industry?  Imagine

an industry like solar power or cancer research.
Businesses in these industries have significant things at stake for our humanity as a whole.
It’s imperative that you be the best for society to be rewarded as quickly as possible. High
stakes industries are therefore extremely competitive.

8. Is there a high exit barrier?  Once

you are in industry, is it difficult for businesses to get out? Firms
that are difficult to liquidate tend to stick around longer whether they’re doing well or not.
An example of competitive intensity in online business is online storage. While some online
storage companies like Dropbox have been able to differentiate themselves, there are so
many competitors that they mostly have to compete on price.

Porter’s #2 Force – Ease of Entry

The second of Porter’s Five Forces is how easy is it for a company to get into your industry.
You have to ask whether it is expensive for an average person to jump into your industry?
Larger, well-established companies may have large economies of scale. There could also be
barriers to entry in the market such as licensure requirements and expensive permits that
keep the less-committed out. There could be a significant capital barrier to entry into a
niche. Some businesses require specialized capital equipment that you would need before
you could compete in that particular industry.

An example in the online business of ease of entry is the web hosting business. It’s relatively
easy for anyone to setup as a host and starts accepting payments. This creates a “red sea”
situation where there is a large pool of competitors.

Porter’s #3 Force – Buyer’s Bargaining Power

The third of the Five Forces is the bargaining power of buyers, which in this case means
customers. Just like in real estate, you could either be in a buyer’s market or a seller’s
market. If there is lots of supply with relatively slack demand, a buyer can negotiate the
price down until they get a great deal. On the other hand, there might be so much demand
that the seller has more bargaining power to get a price more conducive to making a profit.
You obviously want to stay away from industries where the buyers have all the pricing
power. These industries have a marketplace imbalance such that the businesses have to
work harder to service their customers.

An example of buyer’s bargaining power in online business is the online ad serving industry.
The rates that advertisers pay for display advertising continues to drop, an indication that
the buyers have the leverage in this marketplace.

Porter’s #4 Force – Threat of Substitutes

The fourth of the Five Forces is the threat of substitutes. This tenet gauges how easy it is for
a consumer to get what they need from another industry. Let’s say you run a concrete
business. People needing to repave their driveways will need to come to you. Now they
could substitute an inferior product like asphalt or a more expensive product like natural
stone, but those products are not exact substitutions. On the other side of the spectrum,
let’s look at food. If you’re hungry, you can eat anywhere to satiate your hunger. Food has a
high threat of substitution, and anyone getting into the restaurant business knows that they
will have to fight hard to get people coming back.

The threat of substitutes is something that digital businesses have to be especially wary of.
You may be thinking about a great digital service or app idea, but what will anchor people to
stay with your app? You’ll have to map out a set of features that your competitors are
missing from their service. You’ll always have inertia and brand loyalty on your side if you’re
one of the first to market in your digital niche, but you’ll need more to make your digital
service “sticky” to consumers as they will have plenty of choices.

Porter’s #5 Force – Supplier’s Bargaining Power

The fifth and final of the Five Forces is the bargaining power of vendors. When your
suppliers have lots of bargaining power, you are competing more heavily because for
resources. If the supply of supplies that your company needs can be increased without you
threatening to look elsewhere, then your costs will be higher. The biggest supply cost for
most businesses will be their labor supply. If you need to hire skilled computer technicians
that are in short supply, then you will need to escalate wages to attract suitable candidates.
In the online business world, there’s an unusually high demand for computer programmers
and developers. This causes their wages to rise in proportion to their scarcity.

Another aspect of the bargaining power of suppliers includes the share of their business that
you have for them. If you are one of their most valuable customers, then you’ll have
tremendous bargaining power. However, if you are a small customer for that supplier, you
lose any bargaining power that you have. An example of this is when Apple needed faster
PowerPC chips from Sony for their PowerMac line of computers. As Apple applied pressure
to Sony to increase the clock speeds of their G5 PowerPC processors, Sony was able to brush
Apple off as the Playstation dwarfed Apple’s demand in their supply chain. Apple had no
choice but to switch to Intel chips for both their desktop and laptop computer lines.

There’s one final thing to look at when it comes to your supplier’s effect on competitive
intensity. What if the company that is supplying you with your raw materials or services can
themselves create a comparable offering? That means by hiring a product team; they could
enter the industry to compete with you. The supplier that had been driving up the
competitive intensity of your supply chain costs now has jumped into your ocean. Their
existence now increases their bargaining power with you, since they can just keep their
inputs for themselves instead of selling them on a wholesale basis to you.

https://opentextbc.ca/principlesofeconomics/chapter/5-1-price-elasticity-of-demand-and-
price-elasticity-of-supply/

https://theintactone.com/2020/01/19/estimating-demand-curves-estimating-linear-and-
power-demand-curves/

NOTES-UNIT-2

UNIT 2 – PRICING ANALYTICS

Definition: Pricing is the method of determining the value a producer will get in the
exchange of goods and services. Simply, pricing method is used to set the price of producer’s
offerings relevant to both the producer and the customer.

Every business operates with the primary objective of earning profits, and the same can be
realized through the Pricing methods adopted by the firms.

While setting the price of a product or service the following points have to be kept in mind:

 Nature of the product/service.

 The price of similar product/service in the market.
 Target audience i.e. for whom the product is manufactured (high, medium or lower
class)
 The cost of production viz. Labor cost, raw material cost, machinery cost, inventory
cost, transit cost, etc.
 External factors such as Economy, Government policies, Legal issues, etc.
Pricing Objectives

The objective once set gives the path to the business i.e. in which direction to go. The
following are the pricing objectives that clears the purpose for which the business exists:

1. Survival: The foremost Pricing Objective of any firm is to set the price that is opti-
mum and help the product or service to survive in the market. Each firm faces the
 danger of getting ruled out from the market because of the intense competition, a ma-
ture market or change in customer’s tastes and preferences, etc.Thus, a firm must set
the price covering the fixed and variable cost incurred without adding any profit
margin to it. The survival should be the short term objective once the firm gets a hold
in the market it must strive for the additional profits.The New Firms entering into the
market adopts this type of pricing objective.
2. Maximizing the current profits: Many firms try to maximize their current profits by
estimating the Demand and Supply of goods and services in the market. Pricing is
done in line with the product’s demand in the customers and the substitutes available
to fulfill that demand. Higher the demand higher will be the price charged. Seasonal
supply and demand of goods and services are the best examples that can be quoted
here.
3. Capturing huge market share: Many firms charge low prices for their offerings to
capture greater market share. The reason for keeping the price low is to have an in-
creased sales resulting from the Economies of Scale. Higher sales volume lead to
lower production cost and increased profits in the long run.This strategy of keeping
the price low is also known as Market Penetration Pricing. This pricing method is
generally used when competition is intense and customers are price sensitive. FMCG
industry is the best example to supplement this.
4. Market Skimming: Market skimming means charging a high price for the product
and services offered by the firms which are innovative, and uses modern technology.
The prices are comparatively kept high due to the high cost of production incurred be-
cause of modern technology. Mobile phones, Electronic Gadgets are the best exam-
ples of skimming pricing that are launched at a very high cost and gets cheaper with
the span of time.
5. Product –Quality Leadership: Many firms keep the price of their goods and services
in accordance with the Quality Perceived by the customers. Generally, the luxury
goods create their high quality, taste, and status image in the minds of customers for
which they are willing to pay high prices. Luxury cars such as BMW, Mercedes,
Jaguar, etc. create the high quality with high-status image among the customers.
Thus, every firm operates with the ultimate objective of earning profits and, therefore, the
price of a product must be set keeping in mind the cost incurred in its production along with
the benefits it offers for which people are ready to pay extra.

What is Pricing Method?

Pricing method is a technique that a company apply to evaluate the cost of their products.
This process is the most challenging challenge encountered by a company, as the price
should match the current market structure and also compliment the expenses of a company
and gain profits. Also, it has to take the competitor’s product pricing into consideration so,
choosing the correct pricing method is essential.

Types of Pricing Method:

The pricing method is divided into two parts:
  Cost Oriented Pricing Method– It is the base for evaluating the price of the finished
goods, and most of the company apply this method to calculate the cost of the prod-
uct. This method is divided further into the following ways.
o Cost-Plus Pricing- In this pricing, the manufacturer calculates the cost of pro-
duction sustained and includes a fixed percentage (also known as mark up) to
obtain the selling price. The mark up of profit is evaluated on the total cost
(fixed and variable cost).
o Markup Pricing- Here, the fixed number or a percentage of the total cost of a
product is added to the product’s end price to get the selling price of a product.
o Target-Returning Pricing- The company or a firm fix the cost of the product to
achieve the Rate of Return on Investment.
 Market-Oriented Pricing Method- Under this category, the is determined on the base
of market research
o Perceived-Value Pricing- In this method, the producer establishes the cost tak-
ing into consideration the customer’s approach towards the goods and ser-
vices, including other elements such as product quality, advertisement, promo-
tion, distribution, etc. that impacts the customer’s point of view.
o Value pricing- Here, the company produces a product that is high in quality
but low in price.
o Going-Rate Pricing- In this method, the company reviews the competitor’s
rate as a foundation in deciding the rate of their product. Usually, the cost of
the product will be more or less the same as the competitors.
o Auction Type Pricing- With more usage of internet, this contemporary pricing
method is blooming day by day. Many online platforms like OLX, Quickr,
eBay, etc. use online sites to buy and sell the product to the customer.
o Differential Pricing- This method is applied when the pricing has to be differ-
ent for different groups or customers. Here, the pricing might differ according
to the region, area, product, time etc.
What is price optimization?

o 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 max-
imize sales or profitability. The optimal price point is the price where compa-
nies can best meet their objectives, whether that means increased profit mar-
gins, customer growth, or a blend.

Information used in price optimization includes things like:

o Customer survey data

o Demographic and psychographic data
o Historic sales data
o Operating costs
o Inventories
o Machine learning outputs
o Subscription lifetime value and churn data (for subscription business models)
 o Pricing optimization is a similar process to dynamic pricing strategies used in
hospitality, travel, ecommerce, and other industries, although dynamic pricing
tends to change much more rapidly as companies tweak pricing to match real-
time demand.

What you need to optimize for?

The goal of pricing optimization is to find that perfect balance of profit, value, and desire.
Since you can’t control which products and features customers want, and adding valuable
product features takes time and effort, most companies start finding that balance by setting
two things: the starting price of their product or services, and any discounts or promotions
they might offer. 

o Starting prices
o Your starting price, or base price, is important since it lets customers know
whether your product or service is worth their time and investment. Starting
prices should be optimized to match the baseline demand for your product be-
fore any discounts or promotions are applied. Optimizing the starting price
works well for companies with products and services that remain fairly stable
over time, like groceries, office supplies, or even SaaS products.
o Discounted prices
o If you’re in sales, you need to know what works best to pull in new customers.
Offering your product at a discount—or, in some cases, even offering
a freemium version—is a great way to bring in new customers (customers ac-
quired through freemium offerings cost nearly half as much to acquire as those
who sign up for paid offerings directly).
o Promotional prices
o What promotional offers would serve you and your customers best? Will
markdowns create any additional profit, or are you better off charging the
starting price? How big of a discount should you offer below your starting
prices? How long will something take to sell at a specific price point? Opti-
mizing your promotional prices can help boost sales for newly introduced prod-
ucts and promotional bundles—for example, a SaaS company launching a new
product, or bundling multiple products.

Why many companies fail at pricing optimization?

o To make a long story short, most companies aren’t willing to put in the effort
to optimize their pricing decisions. All the customer research needed to figure
out the right valuations takes time and effort. Surprisingly, the average com-
pany only spends less than ten hours per year on their pricing strategy, which is
not enough.
o Instead, companies turn to strategies like guessing, relying on discounts, and
not pricing based on value.

Guessing

o Many companies simply guess what an optimal price point would be instead
of using analytics and metrics that their customers have given them. It’s an in-
sidious cycle. With the right positioning and promotion, even guessing at your
prices will work to some extent—it’s easy to take that as a sign that your pric-
ing is “good enough.” Ultimately, though, you are leaving money on the table.

Misunderstanding tiers

o Many companies don’t know how many different pricing tiers or levels they
should incorporate into their pricing structure. It’s a common misconception
that more tiers equals more conversions. Data shows that too many or too few
options pushes away potential customers, with a clear decrease in conversion
rates as the number of tiers gets higher.

 
  

Relying heavily on discounts

o The problem with discounting is that many companies wield discounting like a
sledgehammer instead of a scalpel. Yes, it juices your acquisition metrics in
the short term, but over time discounting can reduce your SaaS lifetime value
by over 30%. Discounted customers have just over double the churn rate of
those who pay full price—they’ve either been trained to devalue the product,
or they just weren’t the right customers in the first place.
Not pricing for value

o Value-based pricing is the best price optimization model  since it includes both you
and your customer’s optimal prices. The goal with value-based pricing is to
figure out how much each customer is willing to pay for your product, so you
can maximize revenue by charging each customer exactly what they’re willing
to pay. Figuring out what that price should be, though, isn’t easy.

That’s why so many companies lose out on revenue by setting their prices based on those of
their competitors or on their costs—they don’t want to put in the effort.

How to optimize your pricing

Deciding on the right product pricing strategy —a price that maximizes value for
customers and profit for you—starts with gaining a deep understanding of your
customers. You need to understand who your best customers are, what features
they like, and what features they need. You also need to understand your market:
retailers will have different considerations than B2B companies. Once you
understand that, you can align your pricing with what they value, tracking the
results of the price changes you make and improving over time. 

1. Get to know your customers

Optimizing your pricing is all about the data—both qualitative and quantitative.
Hard data is the only way to find out how much customers are willing to pay for
your product, and it’s the key to breaking free from the guessing cycle.

Quantitative data, like transactional data, customer reviews, supply and demand
data, churn rate, MRR, and more show you how you’re doing and what needs to
be changed. Software like Price Intelligently can help you make sense of those
metrics and turn them into pricing insights by slicing and dicing your data based
on demographic, psychographic, and customer preferences.

Just as helpful, qualitative data comes from talking to customers. Surveys are
great, but they’re no match for picking up the phone and actually talking to
customers, asking them about topics such as their price sensitivity and what
features or benefits they value most in your product.
 

2. Quantify value

Once you’ve collected all your customer data, it’s time to work out what “value”
actually means to your customers. That means working out your value metric.
Your value metric is essentially what and how you’re charging for your product—
identifying and pricing along your proper value metric is the difference between
surviving and thriving. 

3. Analyze the data

You’ve collected some customer data and worked out what your customers value
—now it’s time to look for patterns in the features, benefits, price points, and
value metrics that drive or detract from value. You’ll also find out how willing
different segments and personas are to pay different prices for your products.

Use your findings to create tiers and proper packages for your product or services.
Each tier should be priced along your value metric, and should align with your
different buyer personas so that you're offering the right amount of product or
service to each customer segment. 

4. Adjust pricing and monitor

Even once you’ve set your prices, you’re still not done—the value you provide
versus your competitors’ is constantly changing, so you need to be constantly
monitoring and adjusting your pricing.

Pricing is an ongoing process. You should use your pricing strategy to eliminate as
much doubt as possible. Think back to our dartboard example from earlier—
adjusting your pricing helps eliminate sections of the dartboard, focusing in on the
right region for your dart to land as you learn more about what works.

You need to continually collect data and analyze the value customers are getting
from your product to make sure that what you’re offering still meets your
customers’ needs and pricing desires. Make sure you keep a very close eye on
your pricing, and see how customers respond. If need be, re-evaluate and change
things up—but don’t be too quick to switch, since you might alienate potential or
existing customers. 

What is Complementary Product Pricing?

Complementary Product pricing is a method in which one of the products is priced

to maximize the sales volume and which in turn stimulates the demand of other
product.

One product is priced low, just to cover the costs with little or no profit margin
while the other product is priced high with a very high profit margin. Both the
products are complementary products i.e use of one product is complemented by
the other. This strategy is basically followed to overcome the loss due to product’s
sale by the profit provided by the sales of the other complementary product.

For example Printer & cartridge. This strategy is successful because once you
have bought a printer; you are required to buy the complementary cartridge unless
you are willing to buy in a new printer itself. Also, Companies avoid competitors
selling ink for their printers by having unique cartridges.

Price Optimization

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.

“More Profit + Same Customers”

Scientific Up / Down Adjustments

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.

Simple Example

Imagine you are selling 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.

Price Bundling & Nonlinear Pricing

Bundling

is a marketing practice that involves offering several different products for sale as
one combined product. Examples 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, etc). 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

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. 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. 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. Because pure bundling also limits the
choices available to the consumer it can come under scrutiny and even be subject
to litigation.

Mixed Bundling

... 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.

Pure bundling and mixed bundling are both examples of product bundling. The
big difference between pure and mixed bundling is that mixed bundling allows the
consumer to purchase the items separately while pure bundling does not.

Bundling offers a very powerful way to increase sales and also customer
satisfaction. Although unbundling has become very popular, especially in things
like flower delivery where perceived cost can be reduced with separate service
fees and delivery charges, there are many customers that prefer the convenience
that comes with bundled pricing.

Watch the customers at a movie theater, where the bundled packages offer little if
any savings (almost always less than 5%). Customers love the bundles because
there is less thinking (they don't need to add up the prices in their heads) and
greater perceived value (they assume savings even when they aren't there).

More specifically mixed bundling is good, pure bundling more problematic.

Mixed bundling allows your customers more options, when they want them,
something they appreciate. Pure bundling can effectively force them to spend
more money, but does anyone really like dealing with the cable company? Unless
there are very few alternatives for your customers pure bundling is generally a
dangerous game.

But mixed bundling offers the best of both worlds. Customers are not trapped,
they have the ability to choose each individual item and you are not limiting their
options. At the same time you are offering them the convenience of a bundle of
products at a single price.
For optimal price bundling, Kindly follow the link:

https://theintactone.com/2020/01/19/determine-optimal-bundling-pricing/

Nonlinear pricing

1. Introduction
A nonlinear pricing schedule refers to any pricing structure where the total charges
payable by customers are not proportional to the quantity of their consumed ser-
vices. The most common form is quantity discount for the purchase of large vol-
umes. Several other forms of such pricing schemes exist across different industries.
The following examples show the ubiquitous nature of this pricing strategy.

1. Telecommunications Most long-distance providers charge customers

based on a combination of fixed fees (for access to the service) and per-
minute price for each minute of a long-distance call. Wireless companies
also charge customers in a similar manner for consumption of minutes
but typically include some free minutes of consumption, along with a ser-
vice plan.
2. Consumer packaged goods Quantity discounts are common in the con-
sumer pack- aged goods industry. Typically, the per-unit price declines
with package size. For instance, a recent search on Netgrocer.com
showed that an 8 oz can of original B & M baked beans cost $1.39,
which translates to $0.17/oz. A 16 oz can of the same baked beans cost
$2.19, which is $0.14/oz. Some past research such as Nason and Della
Bitta (1983) shows that consumers expect such quantity discounts.
3. Electricity and water supply Utility companies also offer quantity dis -
counts. For instance, higher levels of consumption cost less for each
kilowatt of consumption. In addition, energy rates for business users are
different from those for residential users. Business users also incur vary-
ing rates based on peak versus off-peak electricity consumption.
4. Business-to-business transactions Many businesses offer quantity discounts to
their customers. For instance in the electricity industry, customers purchasing large
quan tities of power have a high utilization as well. A quantity discount acknowledges
the lower cost of idle capacity for such customers. Similar instances occur in the news-
paper advertising industry, where businesses that advertise with a high frequency get
charged at a lower rate per advertisement. See Dolan (1987) for a detailed discussion
of various aspects of quantity discounts.

5. Magazine subscriptions Most magazines offer a lower rate for a two- or three-year
subscription compared to the one-year subscription rate.

Reasons for nonlinear pricing

There are several reasons for firms to adopt a nonlinear pricing scheme. Here we
discuss a few of the salient ones.
Price discrimination Heterogeneity among customers is the primary reason to
implement a nonlinear pricing scheme. This pricing structure can be thought of as a
menu of quantities and corresponding charges. Each customer is expected to self- select
the quantity–charge combination that is most appealing to him.

1. Cost considerations Decreasing block pricing schemes such as quantity

discounts offer incentives for customers to stockpile and transfer the in -
ventory of units from the firm to the customer. If the inventory cost for a
firm is high, then such discounts offer a way of reducing its costs. Wilson
(1993, pp. 15–16) gives an example from the electric utilities industry. In
that industry, customers purchasing large quantities of power have a
high utilization as well. A quantity discount acknowledges the lower cost
of idle capacity for such customers.
The pricing scheme within the package delivery industry provides another il-
lustration of where the pricing scheme reflects cost considerations. Federal Ex-
press charges different rates depending on the weight of package and speed of
delivery.
2. Competitive pressures Competitive pressures lead firms to use innovative
nonlinear pricing schemes to entice customers. For instance, frequent
flier miles began with each airline trying to acquire and retain business
customers. Similarly, in the package delivery industry, many competitors
of Federal Express such as UPS offer competitive nonlinear pricing
schemes to draw customers.
The principles of price discrimination were introduced by Pigou (1920)
who distinguished between three basic forms of price discrimination:
●
First degree (Direct) discrimination where prices are based on the
purchasers’ willingness-to-pay.
●
Second degree (Indirect) discrimination where prices are based
on some observable characteristics of the purchase (e.g. volume),
which is correlated with the customer’s preferences.
●
Third degree (Semi-direct) discrimination where prices are based
on some observable characteristics of the buyer (e.g. geographic
location or age).

Five generic nonlinear pricing schemes

●
Bundling
●
Quantity discounts
●
Ramsey pricing
●
Quality differentiation
●
Priority pricing and efficient rationing
B UNDLING
Bundling is the most basic form of nonlinear pricing and indirect price discrimina-
tion which segments the market by offering commodities either separately or in a bun-
dle which is offered at a price below the sum prices of the components. There is a fine
line between bundling and “tying” which is illegal in the USA. Under tying, cus-
tomers are forced to buy one thing as a condition for being able to buy another pop-
ular or essential product or service. Companies often use tying as a mechanism to
monitor usage of the essential product, which will enable them to discriminate based
on usage. For instance IBM used to force their customers who bought IBM comput-
ers to buy only IBM punch cards. By controlling the price of the punch cards they
were effectively able to charge their computers different prices based on use. Similarly
Xerox was forcing their customer to use only Xerox toner in their copiers and more re-
cently HP was trying to force their customers to buy HP maintenance services for
their HP computers. These practices are now considered illegal.

QUANTITY DISCOUNTS
In order to analyze quantity discount strategies, we have to extend our concept of a de-
mand function to capture the divergence among customer types with regard to pur-
chasing of multiple units of a product. If we assume that all units are sold at the same
price, as in basic economic theory, we do not care if ten units are purchased by ten
different customers or by one customer.

R AMSEY PRICING
As mentioned in the introduction, Ramsey pricing is a form of semi-direct price dis-
crimination. Its purpose is to enforce a total profit constraint while incurring the least
social cost. It is presented here because, in spite of the different motivation and appar -
ent philosophical differences, the methodology used to derive Ramsey pricing and the
end results bear remarkable similarity to those presented in the previous section in de-
riving optimal volume discount schedules.
Here instead of differentiating among the demands for the first, second, and third . . .
unit of consumption the regulated monopoly seller (with the blessing of the regulator)
differentiates among the demand of different customer classes; say, commercial and
residential. This type of price discrimination was common in the old days when
AT&T had a monopoly over long distance phone service.
QUALITY DIFFERENTIATION

Pricing exogenous quality attributes

Quality differentiation in the context of nonlinear pricing is done through unbundling
quality attributes of products or services for which customers have heterogeneous
preferences, for the purpose of market segmentation and indirect price discrimination.
Typical unbundled attributes include product features, packaging, distribution chan-
nels, or delivery conditions such as time of use, class of service in airlines, speed of
delivery in mail service, bulk versus retail.
Price induced endogenous qualities
Differential quality of service can sometimes be created by inducing customers to
sort themselves through differential pricing in situations where quality is affected
by the demand, for example through congestion.

Rationing-based quality differentiation

When the supply of a product is limited by scarcity or limited capacity, it is possible to
use supply uncertainty as a mechanism for quality differentiation. Such an approach is
particularly useful when the demand function is such that using a single price will re-
sult in monopoly prices that underutilize available supply. This may occur when the
profit function as a function of supply quantity is non-monotone so that the monopoly
supplier may be induced to withhold available capacity.
Priority service pricing and efficient rationing
This pricing mechanism is a quality differentiation and enables an efficient ra-
tioning in situations where supply is both scarce and uncertain. It enables customers
to pay different prices based on the order in which they are served or probability of
getting the product. In the case of electricity supply, for instance, customers can
sign up for an option of being curtailed when supply is scarce in exchange for a dis-
count on their electricity bills. Another example of priority pricing is the practice of
the discount clothing store Filene’s Basement, which posts on each item a series of
increasing percentage discounts on the item and the date on which each discount
level will go into effect. Customers must trade off the option of a larger discount
against the probability that someone else will purchase the item they want.

What Is Price Skimming?

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.

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.

This approach contrasts with the penetration pricing model, which focuses on releasing a lower-
priced product to grab as much market share as possible. Generally, this technique is better-suited
for lower-cost items, such as basic household supplies, where price may be a driving factor in most
customers' production selections.

Firms often use skimming to recover the cost of development. 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.

When a new product enters the market, such as a new form of home technology, the price can
affect buyer perception. Often, items priced towards the higher end suggest quality and exclusivity.
This may help attract early adopters who are willing to spend more for a product and can also
provide useful word-of-mouth marketing campaigns.

Price Skimming Limits

Generally, the price skimming model is best used for a short period of time, allowing the early
adopter market to become saturated, but not alienating price-conscious buyers over the long term.
Additionally, buyers may turn to cheaper competitors if a price reduction comes about too late,
leading to lost sales and most likely lost revenue.

Price skimming may also not be as effective for any competitor follow-up products. Since the initial
market of early adopters has been tapped, other buyers may not purchase a competing product at
a higher price without significant product improvements over the original.

What is a Markdown?
In business, a markdown refers to the practice of lowering a product’s price for the purpose
of accumulating sales. Markdowns shall not be confused with other related pricing
strategies like promotions and discounts since the price in markdown has been reduced
permanently. Calculating markdowns usually involves subtracting the actual selling price
from the original selling price.
 
For instance, you purchased a set of shirts with a price of $5 each and offered it in your
retail store for about $15. The problem is that the sales of these shirts turned out to be
lackluster, so to avoid loss of revenue, you decided to mark down their price to only $10.

Advantages of Markdowns
Markdowns are considered to be essential tools, especially for the retailing industry. It can
be used in a variety of ways that can save a company from constant problems regarding
product selling. If a company is on the verge of collapsing due to issues such as slow-moving
inventory and inability to provide informed customer decisions, price markdowns are
perhaps the best option that they can apply.

However, this doesn’t mean that markdowns must be taken as a last resort. In fact,
regardless of the current condition of a retail business, marking down the prices of specific
products can aid in clearing stocks so that they can be replaced with more popular items.
Moreover, cutting down the costs of your items can make them much more attractive for
buyers that are looking for some good bargains.
Markdowns can be implemented in a couple of ways: early markdown and late markdown.

Early Markdown
If a store is in urgent need of maintaining the flow of all products in the store for as fast as
possible, early markdowns can make short work of it. To understand how early markdown
works, here’s an example:
Supposed that you have a store that implemented a policy that all products that are
receiving low sales for quite some time must be marked down by 25 percent after three
weeks of staying on the shelf. Once that time threshold has been reached, the products are
then marked down by 50 percent if it remained unsold for seven weeks, and 75 percent
after eleven weeks.
This early markdown strategy tends to bring more positive results if your store regularly
receives high customer traffic because people will likely notice the gradual decrease in your
products. As a result, your store will be filled with more customers and, ultimately, more
purchases that lead to increased sales.
 

Buy-one-get-one-free (BOGO)

According to research from AMG, 66% of shoppers believe that BOGO is the most preferable
sales promotion type, with over 93% of them enjoys finding a BOGO deal in the past. BOGO
is widely popular amongst retailers nowadays due to its perceived value. Shoppers tend to
be more engaged in BOGO deals because of its concept that buying a single product gives
them the entitlement to own a product without any extra cost. 
The word “free” is an extremely vague concept in business that can attract customers like a
magnet. But before marking down your products by BOGO deals, make sure that the
strategy you have will still be guided by your store’s overall pricing strategy.

Late Markdown
While early markdown takes advantage by overusing the markdown strategy itself, late
markdowns are for those who wanted to avoid lowering down the price of their products as
long as it’s necessary to do so.
Owners who use late markdowns tend to give their products a chance to attract customers
for a bit of time before marking down their products at a steep rate. Organizing clearance
sales is one good example of a late markdown. Late markdowns typically start with at least a
37 percent decrease in the original price. The main attraction of this type of markdown is
that it prompts the shoppers to plan their lists for the event and buy a bulk of your items at
once, potentially sweeping the stocks of your less popular products in a single sale.
How Markdowns Affect Customer Buying Decisions?
Many stores are practicing different markdown strategies in order to manipulate the buying
decisions of their customers to a certain extent. If a store announces to the public that
they’re going to mark down the price of some specific products, imagine how the customers
will respond.
Some might want to wait until the store gave the lowest price possible, while others prefer
buying the products in the first markdown because they’re afraid that it might be sold out
pretty soon. Another common trick for retailers who are more experienced in markdown
prices is that they deliberately price some items higher than their competitors. This way,
even if they often hold markdown sales, it gives the customers the impression that they’re
getting bargains on an expensive product.

NOTES-UNIT-3

Unit-3: Sales Forecasting (8 hrs.)

Introduction, Simple Linear Regression & Multiple Regression model

to forecast sales, Forecasting in Presence of Special Events, Modeling
trend and seasonality; Ratio to moving average forecasting method,
Using S curves to Forecast Sales of a New Product

What is sales forecasting?

Sales forecasting is the process of estimating future revenue by predicting the amount of
product or services a sales unit (which can be an individual salesperson, a sales team, or a
company) will sell in the next week, month, quarter, or year.

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

Why is sales forecasting important?

Forecasts are about the future. It’s hard to overstate how important it is for a company to
produce an accurate sales forecast. Privately-held companies gain confidence in their
business when leaders are able to trust forecasts. For publicly-traded companies, accurate
forecasts confer credibility in the market.

Sales forecasting adds value across an organization. Finance, for example, relies on forecasts
to develop budgets for capacity plans and hiring. Production uses sales forecasts to plan
their cycles. Forecasts help sales ops with territory and quota planning, supply chain with
material purchases and production capacity, and sales strategy with channel and partner
strategies.

These are only a few examples. Unfortunately, at many companies, these methodologies
stay disconnected, which can produce adverse business outcomes. If information from a
sales forecast isn’t shared, for example, product marketing may create demand plans that
don’t align with sales quotas or sales attainment levels. This leaves a company with too
much inventory, or too little inventory, or inaccurate sales targets—all mistakes that hurt
the bottom line. Committing to regular, quality sales forecasting can help avoid such
expensive mistakes.

What are some benefits of having an accurate sales forecast?

An accurate sales forecast process confers many benefits. These include:

 Improved decision-making about the future

 Reduction of sales pipeline and forecast risks

 Alignment of sales quotas and revenue expectations

 Reduction of time spent planning territory coverage and setting quota assignments

 Benchmarks that can be used to assess trends in the future

 Ability to focus a sales team on high-revenue, high-profit sales pipeline opportunit-

ies, resulting in improved win rates

How to accurately forecast sales

To create an accurate sales forecast, follow these five steps:

1. Assess historical trends

Examine sales from the previous year. Break the numbers down by price, product,
 rep, 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.

2. 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 ex-
ample:

o Pricing. Are you changing the prices of any products? Are there competitors
who may force you to modify your pricing schemes?

o Customers. How many new customers do you anticipate landing this year?

How many did you land the previous year? Have you hired new reps, gained
quantifiable brand exposure, or increased the likelihood of gaining new cus-
tomers?

o Promotions. Will you be running any new promotions this year? What is the
ROI on previous promotions, and how do you expect the new ones to com-
pare?

o Channels. Are you opening up any new channels? New locations? New territ-
ories?

o Product changes. Are you introducing new products? Changing your product

suite? How long did it take for previous products to gain traction in the mar-
ket? Do you expect new products to act similarly?

3. 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?

4. 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.

5. 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 beehives you to be able to zoom in or out as far as needed.

Should you do a bottom-up sales forecast or a top-down sales forecast?

In general, there are two types of sales forecasting methodologies: bottom-up forecasts and
top-down forecasts. Bottom-up forecasts start by projecting the amounts of units a
company will sell, then multiplying that number by the average cost per unit. You can also
build in the number of locations, number of sales reps, number of on-line interactions, and
other metrics.

The idea behind a bottom-up sales forecast is to begin with the smallest components of the
forecast, and build up from there.

The advantage to a bottom-up forecast is that if any variables change (like cost per item, or
number of reps), the forecast is easy to modify. It also provides fairly granular information.

A top-down sales forecast starts with the total size of the market (the TAM—total
addressable market), then estimates what percentage of the market the business can
capture. If the size of a market is $500 million, for example, a company may estimate that
they can win 10 percent of that market, making their sales forecast $50 million for the year.

When making a sales forecast, it’s important to use both of these methods. Start with a top-
down method, then use the bottom-up approach to see if your first estimate is feasible. Or
do the two separately and see how well they accord. To produce the most accurate
forecast, companies should perform both types of forecasts, then tweak both until they
produce the same number.

Keys to success in sales forecasting

Improving the accuracy of your sales forecasts and the efficiency of the forecast
methodology depends on multiple factors, including strong organizational coordination,
automation, reliable data, and an analytics-based process. Ideally, sales forecasts should be:

 Collaborative. Leaders should synthesize input from a variety of sales roles, business

units, and regions. Frontline sales teams can be of great value here, providing a pulse
on the market you hadn’t considered before.

 Data-driven. Predictive analytics can reduce the impact of subjectivity, which is often

more backward-looking than forward-looking. Using common data definitions and
baselines will foster alignment and save time.
  Produced in real time. Investing in real-time capability to course-correct or refore-
cast allows sales leaders to quickly gain insight so they can make more informed de-
cisions. This enables them to quickly and accurately update the forecast based on
demand or market changes.

 Single-sourced, with multiple views. Generating the forecast as a single source of

data gives you great visibility into rep, region, and company performance, and helps
align different business functions across the organization.

 Improved over time. Use the insights provided by an improved sales forecasting pro-
cess to create more refined future forecasts where accuracy improves over time
against a set of accuracy goals.

Companies with better forecasting processes and tools perform better than their peers
because they better understand their business drivers and have the ability to shape the
outcome of a sales period before that period is closed.

What are some key sales forecasting challenges?

It can be difficult to produce a consistently accurate sales forecast. Some of the keys to
success in sales forecasting:

 Accuracy and Mistrust.

When companies use spreadsheets for sales forecasting, they can run into issues
with accuracy, which in turn creates a less trustworthy forecast. These issues with
accuracy can be exacerbated by:

o Poor adoption of CRM across the company, and employees not entering data
in a timely manner

o Inconsistent data across teams or salespeople not inputting complete data

o Stakeholders across the company using different methodologies to produce

their forecasts

o Insufficient collaboration across product, sales, and finance teams. This lack
of collaboration can be heightened when companies produce sales forecasts
manually or using spreadsheets.

 Subjectivity.
Although producing a quality sales forecast does rely to a small degree on the fore-
caster making good decisions about how to use the data, in general, companies rely
more on judgement and less on credible predictive analytics than they should. Com-
panies forecasting with simple arithmetic pipeline weightings, for example, may miss
 the nuances of the real drivers of accuracy, which may be headcount, pricing de-
cisions, or route-to-market points of emphasis.

 Usability.
When a sales forecast isn’t generated in a way that makes it useful for stakeholders
across the company, it becomes far less effective than it should be. A good forecast
should produce data that’s relevant to multiple teams, and understandable by them.

 Inefficiency.
Sales forecasts can be especially difficult to produce when inefficiencies are built into
the forecasting process. For example, when a forecast has multiple owners, or the
forecast process is not clearly spelled out with a standard set of rules, there can be
disputes about how the forecast will be produced. Similarly, if inputs into the fore-
cast are not reconciled before the forecast is produced, the forecast itself may be
subject to many revisions, which can reduce trust in the forecast if versions are
rolled out and then revised.

How can a company forecast across the enterprise?

To forecast across the enterprise, a company needs different elements from each business
function. Here’s what different functions can contribute to the sales forecast:

Sales:
Provides the bottom-up view, using data from the CRM and PRM, building in judgment from
sales leaders. Sales can manage this process through the Sales Operations function, using
the right tools, and reporting.

Finance:
Provides macro-economic guidance and works with the product teams. Finance can help
integrate the forecast with their financial planning software.

Marketing:
Provides macro market guidance, especially in industries like telecom, retail, and CPG.
Marketing can also provide finance teams with market data.

Supply Chain:

Provides inputs on supplies and production.

IT:

Assists sales forecasting by providing platforms, data, integration, and technical support.
The future of sales forecasting: Predictive analytics

Predictive analytics is already transforming many areas of business and sales forecasting is
no exception. Even so, terms like “predictive analytics” and “machine learning” can still be
intimidating. In a webinar, Abe Awasthi, Senior Manager at Deloitte, presented a short
example that explains how predictive analytics can improve forecasting.

A tech company asked Deloitte to produce a predictive model to improve sales forecast
accuracy. To create their model, Deloitte leveraged the company’s pipeline data from the
previous few years with customer and employee names removed. Deloitte then used
machine learning to extrapolate from historical trends and fill in the gaps in the data.

Deloitte then used this data to build two predictive forecasting models: one calculated the
probability that any given deal would close, and the other predicted the time frame in which
that close would happen. When combined, these models provided highly actionable, very
specific recommendations to the company’s sales team: “push opportunity number five to
qualified within the next 10 days or you’re going to lose it!”

Importantly, Deloitte was able to build these predictive forecasts in 8¬12 weeks—a timeline
that could be feasible for many companies.

Sales forecasting is important because it can help you identify what is going right, as well as
what areas of your current strategy need to be adapted and changed to ensure future success.

For example, if your team is consistently below quotas, sales forecasting can help determine
where and why these issues are happening. Forecasting can also help you decide on future
business endeavors, like when you’d have the revenue to invest in new products or expand
your business.

Some forecasting methods involve doing basic math, like adding up month to month sales,
and others are more in-depth. Regression analysis is one of these methods, and it requires in-
depth statistical analysis.

What is regression analysis?

In statistics, 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.
There are multiple different types of regression analysis, but the most basic and common
form is simple linear regression that uses the following equation: Y = bX + a

In simple terms, 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.

Example Of Regression Analysis Forecasting

Your business wants to forecast your sales for the upcoming summer program in order to
plan for your budget and figure out if you need to conduct a second round of hiring for
temporary sales reps. In this scenario, the sales team is the dependent variable and your goal
is to understand what influences it.

So, you compare the sales to an independent variable, like the number of sales calls. Then
you collect data for both the total seasonal sales and the total seasonal sales calls for the last
five years.

The goal here, again, is to compare what influences the number of calls had on the number of
sales.

Once you set everything up and have the data, you can get even more granular with that
information and review the number of sales calls as it impacts the number of sales each year,
and then again for each month during the sales season so that you can determine not only
how many new sales reps to hire the following year, but for precisely what months you need
to ramp up seasonal sales reps. Then, you filter them out as the sales calls and subsequently
the sales themselves, start to thin out.

The regression model equation might be as simple as Y = a + bX in which case the Y is

your Sales, the ‘a’ is the intercept and the ‘b’ is the slope. You would need regression
software to run an effective analysis. You are trying to find the best fit in order to uncover the
relationship between these variables.

Multiple Linear Regression (MLR)

What Is Multiple Linear Regression (MLR)?

Multiple linear regression (MLR), also known simply as multiple regression, is a statistical
technique that uses several explanatory variables to predict the outcome of a response vari-
able. The goal of multiple linear regression is to model the linear relationship between the
explanatory (independent) variables and response (dependent) variables. In essence, multiple
regression is the extension of ordinary least-squares (OLS) regression because it involves
more than one explanatory variable.
Sales Forecasting Methods

Not all sales forecasting methods are created equal. Here are a few of the most common
ways to forecast sales. We've also included some examples to further illustrate each sales
forecasting method.

1. Opportunity Stage Forecasting

The opportunity stage sales forecasting method accounts for the various stages of the sales
process each deal is in. The further along in the pipeline, the likelier a deal is to close.

Once you've picked a reporting period — usually month, quarter, or year, depending on the
length of your sales cycle and your sales team's quota — you simply multiply each deal's po -
tential value by the probability it will close. 

After you've done this for each deal in the pipeline, add up the total to get your overall fore-
cast.

Although it's relatively easy to create a sales forecast this way, the results are often inaccur -
ate. This method doesn't account for the age of an opportunity.

In other words, a deal that's been languishing in your rep's pipeline for three months will be
treated the same as one that's a week old — as long as their close dates are the same. You
have to trust your salespeople to regularly clean up their pipelines, which isn't always feas -
ible.

An opportunity stage sales forecast also may rely too heavily on historical data. If you're
changing your messaging, products, sales process, or any other variable, your deals will
close at different percentages by stage than they have in the past.

PROS CONS
Inaccurate data can lead to inaccurate
It's relatively easy to establish a sales forecasts.
forecast.
Its calculations don't consider the size
Its calculations are objective. or age of each opportunity.

Opportunity Stage Forecasting Example

Let's say you've established the following likely-to-close percentages based on your pipeline:

 Initial Call: 5%

 Qualified:10%

 Product Demo: 35%

 Product Trial: 60%

  Final Call: 80%

 Deal Closed: 100%

According to this forecasting model, a $1,000 deal at the Product Demo stage is 35% likely to
close. The forecasted amount for this deal would be $350. 

2. Length of Sales Cycle Forecasting

The length of the sales cycle forecasting method uses the age of individual opportunities to
predict when they're likely to close.

Because this technique relies solely on objective data rather than the rep's feedback, you're
less likely to get a prediction that's too generous.

Suppose a salesperson books a demo with a prospect before they're ready. They might tell
you the prospect is close to buying — but this method will calculate they're unlikely to buy
because they only started talking to the salesperson a few weeks ago.

Furthermore, this technique can encompass different sales cycles. A normal lead might take
roughly six months to buy, but referrals could typically need only one month, and leads
coming from trade shows may require approximately eight months. You can bucket each deal
type by average sales cycle length.

To get accurate results, you'll need to carefully track how and when prospects enter your
salespeople's pipelines. If your CRM doesn't integrate with your marketing software as well
as automatically log interactions, your reps will be spending a lot of time manually entering
data.
PROS CONS

Its calculations are objective. Its calculations don't always consider the size or
type of each opportunity.
You can easily integrate lead sources to better
forecast those opportunities. It only works with carefully tracked data.

Length of Sales Cycle Forecasting Example

Let's say your average sales cycle lasts six months. If your salesperson has been working an
account for three months, your forecast might suggest they're 50% likely to win the deal.

3. Intuitive Forecasting
Some sales managers simply ask their reps to estimate the likelihood of closing. The
salesperson might say, "I'm confident they'll buy within 14 days, and the deal will be worth
X." This is intuitive sales forecasting.
On the one hand, this method factors in the opinions of the ones closest to prospects: Your
salespeople. On the other, reps are naturally optimistic and often offer overly generous
estimates.

There's also no scalable way to verify their assessment. To see whether a prospect is as likely
to close as the salesperson says, her sales manager would need to listen to her calls, shadow
her meetings, and/or read her conversations.

This method is most valuable in the very early stages of a company or product when there's
close to zero historical data.

PROS CONS

Calculations are subjective and each sales rep

can forecast differently.
It relies on the opinions of your sales team, who
works closest to your prospects. You can't scale or replicate this method.

You don't need historical data.  

Intuitive Forecasting Example

Let's say you want to forecast sales for your brand new business. You've only been operating
for three months and have no historical data. You have two salespeople on your team, so you
ask them to forecast sales for the next six months based on their intuition.

Each salesperson examines the deals in their sales pipeline as well as any prospecting
opportunities they have planned for the following months. Based on their analysis, they
forecast $50,000 in sales for the following six months.

4. Historical Forecasting

A quick and dirty way to predict how much you'll sell in a month, quarter, or year is to look
at the matching time period and assume your results will be equal to or greater than those
results. This is historical sales forecasting.

There are a few issues with this method. First, it doesn't take into account seasonality.
Second, it assumes that buyer demand is constant. But if anything outside of the ordinary
happens, your model won't hold up.

Ultimately, historical demand should be used as a benchmark rather than the foundation of
your sales forecast.

PROS CONS
It relies on proven historical data, which can be
helpful for steady markets. It doesn't consider seasonality or market changes.

It's quick and easy. It doesn't take into account buyer demand.

Historical Forecasting Example

Let's say your team collectively sold $80,000 in monthly recurring revenue (MRR) in
October. Based on this method, you'd assume they'd sell $80,000 or more in November.

You can make this prediction more sophisticated by adding your historical growth. If you
consistently increase sales by 6-8% each month, a conservative estimate for November would
be $84,800.

5. Multivariable Analysis Forecasting

The most sophisticated sales forecasting method — multivariable analysis forecasting — uses
predictive analytics and incorporates several of the factors mentioned, such as average sales
cycle length, probability of closing based on opportunity type, and individual rep
performance.

This forecast tends to be the most accurate. However, it requires an advanced analytics
solution, meaning it's not always feasible if you have a small budget.

You'll also need clean data — if your reps aren't dedicated to tracking their deal progress and
activities, your results will be inaccurate no matter how great your software is.

PROS CONS

Because it's so data-driven, it requires an

analytics solution and/or forecasting tool, which
can be expensive.

It's very reliant on data and therefore the most Sales reps need to consistently track and clean
accurate. data.

Multivariable Analysis Forecasting Example

Imagine you have two reps, each of which is working a single account. Your first rep has a
meeting with Procurement scheduled for Friday, while your second rep just gave her first
presentation to the buying committee.

Based on your first rep's win rate for this stage of the sales process, combined with the
relatively large predicted deal size and the number of days left in the quarter, he's 40% likely
to close in this period. That gives you a forecast of $9,600.

Your second rep is earlier in the sales process, but the deal is smaller and she has a high close
rate. She's also 40% likely to close, giving you a forecast of $6,800.

Combine those, and you'd get a quarterly sales forecast of $16,400.

6. Pipeline Forecasting

The pipeline sales forecasting method can take some time — maybe too much time — if you
don't have a program in place to handle your calculations. It reviews each opportunity
currently sitting in your pipeline and calculates its chances of closing based on unique
company variables including the rep's win rate and opportunity value.

This forecasting method relies on your ability to provide high-quality data. If you mess up the
numbers or use imperfect data, you'll end up with forecasting that provides zero value.

Make sure your reps regularly enter accurate, timely data into their CRM to glean the most
insight from this method.

PROS CONS

It's very data-reliant, which makes it one of the

most accurate.
It's very data-reliant and can be easily skewed.
It takes into account unique factors of each
opportunity. It often requires a sales forecasting tool.

Pipeline Forecasting Example

If your sales team typically closes deals worth between $5,000 and $8,000 within 60 days, all
current deals in your team's pipeline would be given a high likelihood of closing.

You can then use this data to figure your monthly or quarterly forecast.

Steps for sales forecasting

These steps will ensure an accurate sales forecast for your business.
1. Establish a sales process for your team.

If your sales team isn't consistently using the same stages and steps, you won't be able to
predict the likelihood of an opportunity closing. Reference our guide to building a sales
process to learn how to create a documented, structured sales process to use when converting
any prospect from a lead to a customer.
Your sales process will also set standard opportunity, lead, prospect, and close definitions.
Everyone needs to agree about when and how to count leads entering and exiting the funnel.
2. Set individual and team quotas.

To gauge performance, you need an objective definition of "success". Work with your sales
reps and leaders to set sales quotas. These will serve as financial baseline goals to compare
alongside your sales forecasting.
3. Invest in a customer relationship management (CRM) tool.

CRMs, like the HubSpot CRM, give your sales reps a database for tracking opportunities to
give you accurate close predictions. Accurate data will allow for accurate forecasting.
Even if your business is brand new, establishing a CRM and getting your reps in the habit of
using one will benefit your future forecasting.
4. Choose a sales forecasting method.

Once you have your sales process, sales quota, and CRM in place, you can choose a sales
forecasting method. 

The method you choose will depend on a few factors, including the age of your business, the
size of your sales team and pipelines, and the quality of your sales data and data tracking
habits.

If your business is new or doesn't have much historical sales data, the best method for you
would be intuitive forecasting.
If you're just getting started with sales forecasting and have busy sales pipelines, opportunity
stage forecasting, length of sales cycle forecasting. These methods both present objective
forecasting calculations, however, so if you're looking for more detailed pipeline-specific
forecasting, multivariable analysis forecasting and pipeline forecasting may be feasible
options.
These two works best if your team has impeccable sales data and is in the habit of keeping up
with their pipeline data. Lastly, for the most consistent markets and industries, historical
forecasting can be a good forecasting model.

Take a close look at your business model, sales team, data tracking, and broader industry
before moving forward with a sales forecasting model.

5. Include data from other organizations such as Marketing, Product, and Finance. 

While understanding past sales data is critical for creating a viable sales forecast, other
organizations within your company can also provide valuable insight. Make sure you include
the following organizations in your forecasting process:

 Marketing – Your marketing organization has a direct correlation to the quality of

your pipeline. Sit down with your marketing team to understand their plans and
strategies for the time period you're forecasting.
 Product – Is your product team working on anything new for the coming year? How
do product launches factor into your overall forecast? Including this data in your
analysis can help you create a more well-rounded strategy.
 Finance – The finance team at your company should be running analysis to better
understand the financial health of your company as a whole. Work with financial an-
alysts to understand how your sales forecast aligns with the financial goals of the
company.
 HR – Will your future sales goals require additional headcount or employee re-
sources? If so, connect with a business partner from your HR department to map out
what that process will look like, and how it impacts your forecast.
6. Review prior sales forecasts.

How did your team perform this year? Compare the actual data you have available to the
prior year's forecast and take note of any variances or discrepencies. 

Are there any clear areas your sales organization underdelivered on? Were the goals set the
prior year unrealistic? Did you factor in major events and seasonality? Highlight any major
takeaways or lessons learned that your company's leadership should be aware of as you
navigate the forecasting process.

7. Keep your sales team informed and accountable.

Regardless of which sales forecasting method you choose, keep your sales reps informed and
communicate changes and decisions often. This is another good reason to invest in a CRM —
it keeps your reps informed about every interaction with leads and with each other.

Gather regular feedback from your team about what's working and what's not. Hold your reps
accountable for their performance against your sales quotas and sales forecasts. After all, they
are the closest to and most familiar with your prospects and overall sales performance as a
company.

What is Seasonality
Seasonality is a time series feature in which data experiences predictable variations that
repeat every calendar year. Seasonal patterns are defined as predictable fluctuations that recur
over a period of one year.

When used correctly a seasonality forecast can decrease business costs and increase
bottom-line profitability. Predicted seasonal variation can inform business decisions ranging
from inventory levels to staff hiring initiatives.

Seasonality forecasting methods can assist business professionals with stock and economic
trend analysis. For example, retail sales are generally affected by seasonality. If the monthly
data of a retail operation is evaluated without the context of seasonal variations, a business
can easily assume they are more profitable than they actually are.

Seasonal forecasting provides businesses with critical data to assist with preparing for
upcoming business operations. There are several important forecasting terms that business
professionals should be familiar with, including

 Seasonal indices- Seasonal indices are the plural form of a seasonal index and are
measurements of a particular season cycle in comparison with the average seasonal
cycle.
 Moving averages- A moving average evaluates subsets of data to find a consistently
updated average.
 Exponential smoothing- Weighted averages of past historical data, with older data
decreasing in weight. Without a clear data pattern available, exponential smoothing
can be used to forecast sales.
 Time series- Time series data is collected over different points of time. A time series
with a clear seasonal pattern can use moving averages and historical data for fore-
casting.
 Holt Winters method- The Holt Winters method, also known as triple exponential
smoothing, is a time series behavior model. The Holt Winters method may be used
to forecast time series data with trend and seasonality variations.

Ratio to moving averages method:

https://edurev.in/studytube/Ratio-to-moving-average-method--Business-Mathemati/
2bae8656-0c56-412b-8e35-e9f1dd895c63_t
S Curves and Market Adoption of a New Product

Marketing Concept | S Curve

S curve is one of the most important concept when it comes to the Product Life Cycle (PLC)
or the Product Evolutionary Cycle (PEC). It is a widely used concept in marketing. It is called
the S curve because it looks like the letter S.

S curve is applicable to any business or startup where things move very slowly at first, then it
gains momentum and continues to grow and finally a stage where productivity or sales
declines and the market becomes saturated. S Curve equation enables one to know how large
the sales will become and whether the sales have touched the inflection point.

Let’s have an overview of the S curve concept with an example. Once a company wanted to
develop a product. It also wanted to forecast the sales and revenue generated by the product
over the next few years. It took the help of a nonlinear graph called S curve to plot sales
against the time period. Once assured that the product will be profitable for the company, it
invested huge money on its research & development and finally launched the product in the
market.

Let’s have an overview of the S curve concept with an example. Once a company wanted to
develop a product. It also wanted to forecast the sales and revenue generated by the product
over the next few years. It took the help of a nonlinear graph called S curve to plot sales
against the time period. Once assured that the product will be profitable for the company, it
invested huge money on its research & development and finally launched the product in the
market.

The S curve can be divided into 3 parts:

 In the initial stage, the sales generated are less due to many factors like low de-
mand, high competition in the market, poor promotion, and high costs associated
with marketing.

 Then the sales start to increase with an increasing rate up to a point( known as in-
flection point). This is due to greater public awareness and reduced costs due to
economies of scale.

  After the point of inflection, the growth rate of sales slows down. It means that
only existing customers continue to buy and the product has reached its saturation
point.

Once any product reaches its saturation point in its product life cycle, it can either die at this
phase or if infused with new innovation and greater efficiency, it might create a newer S
curve from this phase.
 NOTES-UNIT-4

S curves are used to plan, control, analyze, and forecast the progress and performance of a
product/project over a period of time. They are also used for cash flow forecasts, quantity
output comparison, etc

Unit-4: Customer Analytics (8 hrs.)

Customer Lifetime Value: Concept, Basic Customer Value, Measuring Customer

Lifetime value, Estimating Chance that customer is still active, Using Customer
Value to value a business

Market Segmentation : The segmentation-targeting-positioning (STP)

framework, Segmentation, The concept of market segmentation, managing the
segmentation process, Deriving market segments and describing the segments
using Cluster analysis,

What Is Customer Lifetime Value (CLV)

Customer lifetime value (CLV) is a business metric that measures how much a business can
plan to earn from the average customer over the course of the relationship. Differences in
products, costs, purchase frequencies and purchase volumes can make customer lifetime
value calculations complex. However, with the right tools, you can find customer lifetime
value in just a few clicks.

With an understanding of CLV, you can make better-informed marketing and sales decisions,
among other benefits. This guide provides insights about customer lifetime value, how to
calculate this metric and more useful information about CLV that business owners and
managers should know.

What Is Customer Lifetime Value (CLV)?

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.
When measuring CLV, it’s best to look at the total average revenue generated by a customer
and the total average profit. Each provides important insights into how customers interact
with your business and if your overall marketing plan is working as expected.

For a more in-depth look, you may want to break down your company’s CLV by quartile or
some other segmentation of customers. This can give greater insight into what’s working well
with high-value customers, so you can work to replicate that success across your entire
customer base.

Note: There are multiple definitions of CLV: Basic calculations that only look at revenue and
more complex equations that factor in gross margin and operational expenses like COGS,
shipping, and fulfillment. Marketing expenses can be included but are sometimes left out if
they are too variable. For the sake of simplicity, we’re using revenue throughout this article.

Key Takeaways

 Customer lifetime value (CLV) is a measure of the average customer’s revenue gen-
erated over their entire relationship with a company.
 Comparing CLV to customer acquisition cost is a quick method of estimating a cus-
tomer’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 work-
ing 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.
Why Is Customer Lifetime Value Important to Businesses? Why Does It Matter?

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.
Advantages of Customer Lifetime Value

 Improve Customer Retention: One of the biggest factors in addressing CLV is im-

proving customer retention and avoiding customer attrition. Tracking these details
with accurate segmentation can help you identify your best customers and deter-
mine 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, calcu-
lating CLV can be difficult. An enterprise resource planning (ERP) or customer rela-
tionship 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.
How to Measure Customer Lifetime Value
Businesses with ERP systems don’t have to worry about the math behind CLV. The system
does all of the calculations for you. If you’re looking to measure customer lifetime value
manually, however, you can follow the steps and formula below.

4 Steps to Measure 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 ev-
ery 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

Each of these inputs acts as a lever you can pull to grow your CLV. However, every move
your business makes may have unintended consequences that impact CLV. For example, a
price increase may improve your average transaction size, but it could push customers to
shop less often or look for lower-cost alternatives.

Experienced marketers familiar with the four Ps of marketing — product, place, price and
promotion — have a strong understanding of how marketing efforts directly influence
customer lifetime value.

Customer Lifetime Value Examples

The best way to understand CLV is through examples. Here are examples from three very
different industries to better demonstrate how customer lifetime value may impact your
company:

Coffee shop

A coffee shop is a perfect starting example for CLV, as it is easy to understand even if you
don’t have an extensive business background. 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 .2 (annual purchases) x 15 (years) = $90,000

Software as a Service (SaaS) subscription

For the last example, let’s assume an online video streaming service has multiple price plans,
but the average customer spends $17 per month. Customers typically subscribe for three and
a half years and use automatic monthly payments.

CLV = $17 (average sale) x 12 (annual purchases) x 3.5 (years) = $714

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 center 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, fulfillment, 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 TikTok 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 try.

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.

How to use Segmentation, Targeting, and Positioning (STP) to develop marketing

strategies

Today, the STP marketing model (Segmentation, Targeting, Positioning) is a familiar strategic
approach in modern marketing. It is one of the most commonly applied marketing models in
practice, with marketing leaders crediting it for efficient, streamlined communications
practice.
STP marketing focuses on commercial effectiveness, selecting the most valuable segments
for a business and then developing a marketing mix and product positioning strategy for
each segment. As Martech continues to develop, so do opportunities for segmentation,
targeting, and positioning. So whether you're brand new to STP or a seasoned veteran, it
can be useful to take stock and double-check you're utilizing every chance you get to reach,
interact with, convert and engage customers.

The STP model is useful when creating marketing communications plans since it helps
marketers to prioritize propositions and then develop and deliver personalized and relevant
messages to engage with different audiences. The three-step funnel consists of market
segmentation, market targeting, and product positioning.

Within your research-based market segmentation phase, you are aiming to identify a basis
for the segmentation of your target customers, and determine important characteristics to
differentiate each market segment.

When creating your targeting and positioning strategy, you must evaluate the potential and
commercial attractiveness of each segment, and then develop detailed product positioning
for each selected segment, including a tailored marketing mix based on your knowledge of
that segment.
In our poll asking about the most popular marketing model STP marketing won second
place, only beaten by the venerable SWOT / TOWs matrix. The popularity of this market-
focused model is a departure from previous marketing approaches that were based more
around products rather than customers. In the 1950s, for example, the main marketing
strategy was 'product differentiation'.

Moreover, segmentation, targeting, and positioning is an audience-focused rather than

product-focused approach to marketing communications which helps deliver more relevant
messages to commercially appealing audiences.

 
 

Applying Segmentation, Targeting and Positioning to digital communications

STP marketing is relevant to digital marketing too at a more tactical communications level.
For example, applying marketing personas can help develop more relevant digital
communications as shown by these alternative tactical email customer segmentation
approaches.

It reminds us how digital channels offer new options for targeting audiences that weren't
available previously, but we need to reserve sufficient budget for. For example:

 Search intent as searchers type keywords when comparing products they are inter-
ested in buying
  Interest-based targeting in Facebook, e.g. Prospecting for those interested in
Gardening, Gym membership, or Golf

 Targeting through email personalization and on-site personalization based on profile,

behavior (e.g. content consumed)

How to use STP marketing?

Through segmentation, you can identify niches with specific needs, mature markets to find
new customers, deliver more focused and effective marketing messages.

The needs of each segment are the same, so marketing messages should be designed for each
segment to emphasise relevant benefits and features required rather than one size fits all for
all customer types. This approach is more efficient, delivering the right mix to the same
group of people, rather than a scattergun approach.

You can segment your existing markets based on nearly any variable, as long as it’s effective
as the examples below show:

Well-known ways to segment your audience include:

1. Demographics

Breakdown by any combination: age, gender, income, education, ethnicity, marital status,
education, household (or business), size, length of residence, type of residence, or even
profession/occupation.

An example is Firefox who sells 'coolest things', aimed at a younger male audience. Though,
Moshi Monsters, however, is targeted to parents with fun, safe and educational space for
younger audiences.

2. Psychographics

This refers to 'personality and emotions' based on behavior, linked to purchase choices,
including attitudes, lifestyle, hobbies, risk aversion, personality, and leadership traits.
magazines read and TV. While demographics explain 'who' your buyer is, psychographics
inform you 'why' your customer buys.

There are a few different ways you can gather data to help form psychographic profiles for
your typical customers.

1. Interviews: Talk to a few people that are broadly representative of your target
audience. In-depth interviews let you gather useful qualitative data to really un-
derstand what makes your customers tick. The problem is they can be expensive
 and difficult to conduct, and the small sample size means they may not always be
representative of the people you are trying to target.

2. Surveys: Surveys let you reach more people than interviews, but it can be harder
to get as insightful answers.

3. Customer data: You may have data on what your customers tend to purchase
from you, such as data coming from loyalty cards if an FMCG brand or from online
purchase history if you are an e-commerce business. You can use this data to gen-
erate insights into what kind of products your customers are interested in and
what is likely to make them purchase. For example, does discounting vastly in-
crease their propensity to purchase? In which case they might be quite sponta-
neous.

An example is Virgin Holidays who use segmentation, positioning and targeting to promote
their holidays to 6 different audiences.

3. Lifestyle

This refers to Hobbies, recreational pursuits, entertainment, vacations, and other non-work
time pursuits.
Companies such as on and off-line magazine will target those with specific hobbies i.e.
FourFourTwo for football fans.

Some hobbies are large and well established, and thus relatively easy to target, such as the
football fan example. However, some businesses have found great success targeting very
small niches very effectively. A great example is the explosion in 'prepping' related
businesses, which has gone from a little heard of fringe activity to a billion-dollar industry in
recent years. Apparently now 3.7 million American's think of themselves as preppers or
survivalists. A great way to start researching and targeting these kind of niches is Reddit,
where people create subReddits to share information about a given interest or hobby.

4. Belief and values

Refers to Religious, political, nationalistic, and cultural beliefs and values.

The Islamic Bank of Britain offers Sharia-compliant banking which meets specific religious
requirements.

A strange but interesting example of religious demographics influencing marketing that you
might not have guessed is that Mormons are really into 'multi-level marketing'. They're far
more likely to be engaged in the practice than any other US group. Going the extra mile with
demographic research can lead to discovering new marketing opportunities and thinking
outside the box. For example, did you know the average age of a Cadillac driver is 47.1 years
old? But you don't tend to see them in the car ads. An opportunity waiting to be seized!

5. Life stages

Life stages are the Chronological benchmarking of people’s lives at different stages.

An example is Saga holidays which are only available for people aged 50+. They claim a
large enough segment to focus on this life stage.

6. Geography

Drill down by Country, region, area, metropolitan or rural location, population density or
even climate.

An example is Neiman Marcus, the upmarket department store chain in the USA now
delivers to the UK.

7. Behaviour

Refers to the nature of the purchase, brand loyalty, usage level, benefits sought, distribution
channels used, reaction to marketing factors.
In a B2B environment, the benefits sought are often about ‘how soon can it be delivered?’
which includes the ‘last-minute’ segment -  the planning in advance segment.

An example is Parcelmonkey.co.uk who offers same-day, next day and international parcel
deliveries.

8. Benefit

Benefit is the use and satisfaction gained by the consumer.

Smythson Stationery offer similar products to other stationery companies, but their clients
want the benefit of their signature packaging: tissue-lined Nile Blue boxes and tied with navy
ribbon!

Market targeting

The list below refers to what’s needed to evaluate the potential and commercial attractiveness
of each segment.

 Criteria size: The market must be large enough to justify segmenting. If the market is
small, it may make it smaller.

 Difference: Measurable differences must exist between segments.

 Money: Anticipated profits must exceed the costs of additional marketing plans and
other changes.

 Accessible: Each segment must be accessible to your team and the segment must be
able to receive your marketing messages

 Focus on different benefits: Different segments must need different benefits.

Product positioning

Positioning maps are the last element of the STP process. For this to work, you need two
variables to illustrate the market overview.

In the example here, I’ve taken some cars available in the UK. This isn’t a detailed product
position map, more of an illustration. If there were no cars in one segment it could indicate a
market opportunity.
Expanding on the extremely basic example above, you can unpack the market by mapping
your competitors onto a matrix based on key factors that determine purchase.
This chart is not meant to be any kind of accurate representation of the car market, but rather
just illustrate how you could use a product positioning map to analyze your own business's
current position in the market, and identify opportunities. For example, as you can see in the
gap below, we've identified a possible opportunity in the market for low-priced family cars.
We're not saying this gap actually exists, I'm sure you could think of cars that fit this
category, as the car market is an extremely developed and competitive market. However, it
does show how you can use the tool to identify gaps in your own market.

An example of a company using STP marketing?

Any time you suspect there are significant, measurable differences in your market, you
should consider STP. Especially if you have to create a range of different messages for
different groups.

A good example of segmentation is BT Plc, the UK’s largest telecoms company. BT has
adopted STP marketing for its varied customer groups; ranging from individual consumers to
B2B services for its competitors:
What to watch for in segmentation, positioning, and targeting marketing strategy

 Make sure the market is large enough to matter and customers can be easily con-
tacted.

 Apply market research to ensure your approach will add value to the existing cus-
tomer experience, above and beyond competitors.

 As Martech continues to become more sophisticated, to support digital marketers'

wants and needs, consider the developments in relation to your product/service.
NOTES-UNIT-5

Unit-5: Retailing & Advertising Analysis (8 hrs.)

Market Basket analysis: Computing two way and three-way lift, RFM Analysis,
Allocating Retail Space and Sales Resources: Identifying the sales to marketing
effort relationship & its modeling, optimizing sales effort

Advertising Analysis: Measuring the Effectiveness of Advertising, Pay per Click

(PPC) Online Advertising

Market Basket Analysis

When you go to the supermarket, usually the first thing you do is grab a shopping cart. As
you move up and down the aisles, you will pick up certain items and place them in your
shopping cart. Most of these items may correspond to a shopping list that was prepared
ahead of time, but other items may have been selected spontaneously. Let’s presume that
when you check out at the cashier, the contents of your (and every other shopper’s) cart are
logged, because the supermarket wants to see if there are any patterns in selection that
occur from one shopper to another. This is called market basket analysis.

Market basket analysis is a process that looks for relationships of objects that “go together”
within the business context. In reality, market basket analysis goes beyond the supermarket
scenario from which its name is derived. Market basket analysis is the analysis of any
collection of items to identify affinities that can be exploited in some manner. Some
examples of the use of market basket analysis include:
▪
 Product placement. Identifying products that may often be purchased together and
arranging the placement of those items (such as in a catalog or on a web site) close
by to encourage the purchaser to buy both items.

Physical shelf arrangement. An alternate use for physical product placement in a

store is to separate items that are often purchased at the same time to
encourage individuals to wander through the store to find what they are looking for
to potentially increase the probability of additional impulse purchases.

Up-sell, cross-sell, and bundling opportunities. Companies may use the affinity
grouping of multiple products as an indication that customers may be predisposed to
buying the grouped products at the same time. This enables the presentation of
items for cross-selling, or may suggest that customers may be willing to buy more
items when certain products are bundled together.

Customer retention. When customers contact a business to sever a relationship, a

company representative may use market basket analysis to determine the right
incentives to offer in order to retain the customer’s business.

How Market Basket Analysis Works

In order to make it easier to understand, think of Market Basket Analysis in terms of

shopping at a supermarket. Market Basket Analysis takes data at transaction level, which
lists all items bought by a customer in a single purchase. The technique determines
relationships of what products were purchased with which other product(s). These
relationships are then used to build profiles containing If-Then rules of the items purchased.

The rules could be written as:

If {A} Then {B}

The If part of the rule (the {A} above) is known as the antecedent and the THEN part of the
rule is known as the consequent (the {B} above). The antecedent is the condition and the
consequent is the result. The association rule has three measures that express the degree of
confidence in the rule, Support, Confidence, and Lift.

For example, you are in a supermarket to buy milk. Based on the analysis, are you more
likely to buy apples or cheese in the same transaction than somebody who did not buy milk?
In the following table (table 1), there are nine baskets containing varying combinations of
milk, cheese, apples, and bananas.

The next step is to determine the relationships and the rules. For explanation purposes, the
following table shows some of the relationships. In total there are 22 rules for the nine
baskets. The complete set of rules are shown in the explanation of the RStat output.

The first measure called the support is the number of transactions that include items in the
{A} and {B} parts of the rule as a percentage of the total number of transactions. It is a
measure of how frequently the collection of items occur together as a percentage of all
transactions.

The support formula written out would look something like:

Interpreted as: Fraction of transactions that contain both A and B.

The second measure called the confidence of the rule is the ratio of the number of
transactions that include all items in {B} as well as the number of transactions that include
all items in {A} to the number of transactions that include all items in {A}.

The confidence formula written out would like something like:

Interpreted as: How often items in B appear in transactions that contain A only.

The third measure called the lift or lift ratio is the ratio of confidence to expected
confidence. Expected confidence is the confidence divided by the frequency of B. The Lift
tells us how much better a rule is at predicting the result than just assuming the result in the
first place. Greater lift values indicate stronger associations.

The lift formula written out would look something like:

Interpreted as: How much our confidence has increased that B will be purchased given that
A was purchased.

Practical Applications of Market Basket Analysis

When one hears Market Basket Analysis, one thinks of shopping carts and supermarket
shoppers. It is important to realize that there are many other areas in which Market Basket
Analysis can be applied. An example of Market Basket Analysis for a majority of Internet
users is a list of potentially interesting products for Amazon. Amazon informs the customer
that people who bought the item being purchased by them, also reviewed or bought
another list of items. A list of applications of Market Basket Analysis in various industries is
listed below:

 Retail. In Retail, Market Basket Analysis can help determine what items are pur-
chased together, purchased sequentially, and purchased by season. This can assist
retailers to determine product placement and promotion optimization (for instance,
combining product incentives). Does it make sense to sell soda and chips or soda and
crackers?

 Telecommunications. In Telecommunications, where high churn rates continue to be

a growing concern, Market Basket Analysis can be used to determine what services
are being utilized and what packages customers are purchasing. They can use that
knowledge to direct marketing efforts at customers who are more likely to follow the
same path.

For instance, Telecommunications these days is also offering TV and Internet.

Creating bundles for purchases can be determined from an analysis of what
customers purchase, thereby giving the company an idea of how to price the
bundles. This analysis might also lead to determining the capacity requirements.

 Banks. In Financial (banking for instance), Market Basket Analysis can be used to
analyze credit card purchases of customers to build profiles for fraud detection pur-
poses and cross-selling opportunities.

 Insurance. In Insurance, Market Basket Analysis can be used to build profiles to de-
tect medical insurance claim fraud. By building profiles of claims, you are able to
then use the profiles to determine if more than 1 claim belongs to a particular
claimee within a specified period of time.

 Medical. In Healthcare or Medical, Market Basket Analysis can be used for comorbid
conditions and symptom analysis, with which a profile of illness can be better identi-
fied. It can also be used to reveal biologically relevant associations between different
genes or between environmental effects and gene expression.
What is RFM Segmentation?
RFM segmentation allows marketers to target specific clusters of customers with
communications that are much more relevant for their particular behavior – and thus generate
much higher rates of response, plus increased loyalty and customer lifetime value. Like other
segmentation methods, RFM segmentation is a powerful way to identify groups of customers
for special treatment. RFM stands for recency, frequency and monetary – more about each of
these shortly.
Marketers typically have extensive data on their existing customers – such as purchase
history, browsing history, prior campaign response patterns and demographics – that can be
used to identify specific groups of customers that can be addressed with offers very relevant
to each.
While there are countless ways to perform segmentation, RFM analysis is popular for three
reasons:

 It utilizes objective, numerical scales that yield a concise and informative high-level
depiction of customers.
 It is simple – marketers can use it effectively without the need for data scientists or
sophisticated software.

 It is intuitive – the output of this segmentation method is easy to understand and in-
terpret.

What are Recency, Frequency and Monetary?

Underlying the RFM segmentation technique is the idea that marketers can gain an extensive
understanding of their customers by analyzing three quantifiable factors. These are:

 Recency: How much time has elapsed since a customer’s last activity or transaction
with the brand? Activity is usually a purchase, although variations are sometimes
used, e.g., the last visit to a website or use of a mobile app. In most cases, the more
recently a customer has interacted or transacted with a brand, the more likely that
customer will be responsive to communications from the brand.
 Frequency: How often has a customer transacted or interacted with the brand dur-
ing a particular period of time? Clearly, customers with frequent activities are more
engaged, and probably more loyal, than customers who rarely do so. And one-time-
only customers are in a class of their own.

 Monetary: Also referred to as “monetary value,” this factor reflects how much a cus-
tomer has spent with the brand during a particular period of time. Big spenders
should usually be treated differently than customers who spend little. Looking at
monetary divided by frequency indicates the average purchase amount – an impor-
tant secondary factor to consider when segmenting customers.

Performing RFM Segmentation and RFM Analysis, Step by Step

The following is a step-by-step, do-it-yourself approach to RFM segmentation.
Note that with the aid of software, RFM segmentation – as well as other, more sophisticated
types of segmentation – can be done automatically, with more accurate results.
Step 1
The first step in building an RFM model is to assign Recency, Frequency and Monetary
values to each customer. The raw data for doing this, which should be readily available in the
company’s CRM or transactional databases, can be compiled in an Excel spreadsheet or
database:

 Recency is simply the amount of time since the customer’s most recent transaction
(most businesses use days, though for others it might make sense to use months,
weeks or even hours instead).
 Frequency is the total number of transactions made by the customer (during a de-
fined period).

 Monetary is the total amount that the customer has spent across all transactions
(during a defined period).

Step 2
The second step is to divide the customer list into tiered groups for each of the three
dimensions (R, F and M), using Excel or another tool. Unless using specialized software, it’s
recommended to divide the customers into four tiers for each dimension, such that each
customer will be assigned to one tier in each dimension:
Recency Frequency Monetary

R-Tier-1 (most recent) F-Tier-1 (most frequent) M-Tier-1 (highest spend)

R-Tier-2 F-Tier-2 M-Tier-2

R-Tier-3 F-Tier-3 M-Tier-3

R-Tier-4 (least recent) F-Tier-4 (only one transaction) M-Tier-4 (lowest spend)

This results in 64 distinct customer segments (4x4x4), into which customers will be
segmented. Three tiers can also be used (resulting in 27 segments); using more than four,
however, is not recommended (because the difficulty in use outweighs the small benefit gain
from the extra granularity).
As mentioned above, more sophisticated and less manual approaches – such as k-means
cluster analysis – can be performed by software, resulting in groups of customers with more
homogeneous characteristics.

Step 3
The third step is to select groups of customers to whom specific types of communications
will be sent, based on the RFM segments in which they appear.
It is helpful to assign names to segments of interest. Here are just a few examples to illustrate:

 Best Customers – This group consists of those customers who are found in R-Tier-1,
F-Tier-1 and M-Tier-1, meaning that they transacted recently, do so often and spend
more than other customers. A shortened notation for this segment is 1-1-1; we’ll use
this notation going forward.
  High-spending New Customers – This group consists of those customers in 1-4-1 and
1-4-2. These are customers who transacted only once, but very recently and they
spent a lot.

 Lowest-Spending Active Loyal Customers – This group consists of those customers

in segments 1-1-3 and 1-1-4 (they transacted recently and do so often, but spend the
least).

 Churned Best Customers – This segment consists of those customers in groups 4-1-
1, 4-1-2, 4-2-1 and 4-2-2 (they transacted frequently and spent a lot, but it’s been a
long time since they’ve transacted).

Marketers should assemble groups of customers most relevant for their particular business
objectives and retention goals.

Step 4
The fourth step actually goes beyond the RFM segmentation itself: crafting specific
messaging that is tailored for each customer group. By focusing on the behavioral patterns of
particular groups, RFM marketing allows marketers to communicate with customers in a
much more effective manner.
Again, here are just some examples for illustration, using the groups we named above:

 Best Customers – Communications with this group should make them feel valued
and appreciated. These customers likely generate a disproportionately high percent-
age of overall revenues and thus focusing on keeping them happy should be a top
priority. Further analyzing their individual preferences and affinities will provide ad-
ditional opportunities for even more personalized messaging.
 High-spending New Customers – It is always a good idea to carefully “incubate” all
new customers, but because these new customers spent a lot on their first purchase,
it’s even more important. Like with the Best Customers group, it’s important to make
them feel valued and appreciated – and to give them terrific incentives to continue
interacting with the brand.

 Lowest-Spending Active Loyal Customers – These repeat customers are active and
loyal, but they are low spenders. Marketers should create campaigns for this group
that make them feel valued, and incentivize them to increase their spend levels. As
loyal customers, it often also pays to reward them with special offers if they spread
the word about the brand to their friends, e.g., via social networks.

 Churned Best Customers – These are valuable customers who stopped transacting a
long time ago. While it’s often challenging to re-engage churned customers, the high
value of these customers makes it worthwhile trying. Like with the Best Customers
group, it’s important to communicate with them on the basis of their specific prefer-
ences, as known from earlier transaction data.

Of course, deciding which groups of customers to target and how to best communicate with
them is where the art of marketing comes in!
Caveats of RFM Segmentation and RFM Model
RFM segmentation is a straightforward and powerful method for customer segmentation.
However, the fact that the RFM model only looks at three specific factors (albeit important
ones) means that the method may be excluding other variables that are equally, or more,
important (e.g., products purchased, prior campaign responses, demographic details).
Also, RFM marketing is, by its nature, an historical method: it looks at past customer
behavior that may or may not accurately indicate future activities, preferences and responses.
More advanced customer segmentation techniques are based on predictive analytics
technologies that tend to be far more accurate at predicting future customer behavior.

Retail Management - Space

Space management is one of the crucial challenges faced by today’s retail managers. A well-
organized shopping place increases productivity of inventory, enhances customers’ shopping
experience, reduces operating costs, and increases financial performance of the retail store.
It also elevates the chances of customer loyalty.
Let us see, how space management is important and how retailers manage it.

What is Space Management?

It is the process of managing the floor space adequately to facilitate the customers and to
increase the sale. Since store space is a limited resource, it needs to be used wisely.
Space management is very crucial in retail as the sales volume and gross profitability
depends on the amount of space used to generate those sales.

Optimum Space Use

While allocating the space to various products, the managers need to consider the following
points −
 Product Category −
o Profit builders − High profit margins-low sales products. Allocate quality
space rather than quantity.
o Star performers − Products exceeding sales and profit margins. Allocate
large amount of quality space.
o Space wasters − Low sales-low profit margins products. Put them at the top
or bottom of shelves.
o Traffic builders − High sales-low profit margins products. These products
need to be displayed close to impulse products.
 Size, shape, and weight of the product.
 Product adjacencies − It means which products can coexist on display?
 Product life on the shelf.
Retail Floor Space
Here are the steps to take into consideration for using floor space effectively −
 Measure the total area of space available.
 Divide this area into selling and non-selling areas such as aisle, storage, promotional
displays, customer support cell, (trial rooms in case of clothing retail) and billing
counters.
 Create a Planogram, a pictorial diagram that depicts how and where to place specific
retail products on shelves or displays in order to increase customer purchases.
 Allocate the selling space to each product category. Determine the amount of space
for a particular category by considering historical and forecasted sales data. Deter-
mine the space for billing counter by referring historical customer volume data. In
case of clothing retail, allocate a separate space for trial rooms that is near the prod-
uct display but away from the billing area.
 Determine the location of the product categories within the space. This helps the cus-
tomers to locate the required product easily.
 Decide product adjacencies logically. This facilitates multiple product purchase. For
example, pasta sauces and spices are kept near raw pasta packets.
 Make use of irregular shaped corner space wisely. Some products such as domestic
cleaning devices or garden furniture can stand in a corner.
 Allocate space for promotional displays and schemes facing towards road to notify
and attract the customers. Use glass walls or doors wisely for promotion.
Store Layout and Design
Customer buying behavior is an important point of consideration while designing store
layout. The objectives of store layout and design are −

 It should attract customers.

 It should help the customers to locate the products effortlessly.
 It should help the customers spend longer time in the store.
 It should motivate customers to make unplanned, impulsive purchases.
 It should influence the customers’ buying behavior.
Store Layout Formats

The retail store layouts are designed in way to use the space efficiently. There are broadly
three popular layouts for retail stores −
Grid Layout − Mainly used in grocery stores.
Loop Layout − Used in malls and departmental stores.

Free Layout − Followed mainly in luxury retail or fashion stores.

Store Design
Both internal and external factors matter when it comes to store design.
Interior Design

The store interior is the area where customers actually look for products and make
purchases. It directly contributes to influence customer decision making. In includes the
following −
 Clear and adequate walking space, separate from product display area.
 Free standing displays: Fixtures, rotary displays, or mannequins installed to attract
customers’ attention and bring them to the store.
 End caps: These displays at the end of the aisles can be used to display promotional
offers.
 Windows and doors can provide visual messages about merchandise on sale.
 Proper lighting at the product display. For example, jewelry retail needs more acute
lighting.
 Relevant signage with readable typefaces and limited text for product categories, for
promotional schemes, and at Point of Sale (POS) that guides customers’ decision-
making process. It can also include hanging signage for enhancing visibility.
 Sitting area for a few differently abled people or senior citizens.
Exterior Design
This area outside the store is as much important as the interior of the store. It communicates
with the customer on who the retailer is and what it stands for. The exterior includes −
 Name of the store, which tells the world that it exists. It can be a plain painted board
or as fancy as an aesthetically designed digital board of the outlet.
 The store entrance: Standard or automatic, glass, wood, or metal? Width of the en-
trance.
 The cleanliness of the area around the store.
 The aesthetics used to draw the customers inside the store.

Advertising Analysis 

Advertising analysis, a specialized form of market research, has become increasingly

common as the costs of promotion have escalated. Because any mistake can be costly,
analysis is done at every stage of the advertising process: while the message is developed,
when the copy is being prepared, and after the advertisement runs.

The Halo Group suggests that consumers respond better to factual ads about products they
need, while gravitating toward emotional ads promoting products they desire. The analyst
uses a range of techniques to test the effectiveness of advertising approaches.

Ad Development Research
Analysis of potential advertising messages is known as developmental research. Its goal is
to understand the kinds of promises and solutions sought by the brand's target audience.
One ad analysis example called concept testing involves asking consumers for feedback on
the advertiser's suggested message or new product ideas, as described by QPC.

Alternatively, a focus group may be convened. This is an unstructured but professionally

moderated discussion designed to elicit the participants' perceptions of the brand and
suggestions for an advertising message.

Evaluative Research
Evaluative research is used to judge the effectiveness of proposed copy and visuals. One
method of analysis is a communication test, where members of the brand's target audience
view the ad and then give their opinions or respond to a questionnaire about it.

Recall and recognition tests are ad analysis examples critical to predicting advertising
success, according to Medium.com. Usually used for television commercials, recall tests
involve asking participants to watch a certain program; the next day, they tell researchers
how much they remember of particular ads during the show. Print recognition tests ask
readers whether they recognize an ad in a magazine they previously read.
Field Research
After an ad is launched, the goal of analysis is to evaluate how well it is working. A
common approach, known as a tracking study, surveys members of the target audience over
time. This allows researchers to follow, or track, ongoing changes in their attitudes,
purchase intent and knowledge of the brand.

Companies assess the effectiveness of Internet advertising based on number of direct

responses, like the number of inquiries or sales generated by a particular ad. For example,
analysis of advertisements for Coca Cola led to association of the soft drink with fun and
joy, a message that resonnates around the world, as depicted by Business Insider .

Ad Analysis Challenges
While no form of marketing research is easy, advertising analysis faces unique challenges.
First is the problem of audience distraction. If people watch television while engaging in
other activities such as eating or talking to friends, a poor recall score for a commercial
may say little about its effectiveness.

Similarly, someone who casually flips through a magazine may be unable to give
meaningful feedback about a particular print ad. Another challenge is posed by Internet
advertising, which is believed to influence people in different ways than traditional media
vehicles.

How to Measure Advertising Effectiveness

Advertising is one of the main ways companies generate business. An effective advertising
campaign can attract new customers, improve brand perception and increase sales. Measuring
advertising effectiveness helps you understand the impact and reach of your campaign,
allowing you to find the optimal amount of exposure and determine what is and isn’t working
about your advertising strategies.
There are several ways to measure the effectiveness of an advertising campaign:
1. Set a Specific Goal
Setting a clear goal for your advertising campaign is key to measuring its success. For
example, setting a goal of increasing your Instagram followers by 20% is much easier to
quantify than just increasing your number of social media followers.
2. Analyze Site Traffic
A successful advertising campaign will usually increase site traffic. Consumers typically
research companies when they’re interested in doing business with them, and that research
often starts with exploring the company website.
Compare site traffic before and after your advertising campaign to determine if more people
are visiting your site. You can use different analytic tools to get daily, weekly and monthly
reports on site traffic.
3. Review Lead Quality
Lead quality refers to how likely leads are to turn into customers. The higher the lead quality,
the greater your chance of gaining a new customer. You can determine the quality of a lead in
a few ways:
 Assess the types of pages they visit: For example, how many product pages they
view as opposed to blog posts.
 How much time they spend on each page: Are they spending seconds or minutes
looking at your website?
 How did they find the page: Did they come across your page on social media or via a
search engine?
When you focus on lead quality, you can increase your chances of converting a lead into a
sale.
4. Analyze Key Metrics Before and After
It’s essential to have context to determine the effectiveness of your advertising campaigns.
That’s why you must analyze how you were doing before the campaign started to understand
your post-campaign performance. When you have clear pre-campaign metrics to use as a
benchmark, you can determine what worked in your campaign and what didn’t.
5. Survey Testing
Gathering survey data provides crucial insights into advertising campaign effectiveness.
When you survey your audience about your advertising campaign, you can ask precise
questions that help you:
 Identify how many people saw your ad.
 Find out what viewers thought of the ad.
 Determine whether these potential leads remember your brand.

Measuring Advertising Effectiveness (3 Methods)

Accordingly, there can be three sets of methods to meet his needs namely, pre-testing,

concurrent testing and post-testing methods.

I. Pre-testing methods:
1. Check-list test:

A check-list is a list of good qualities to be possessed by an effective advertisement. A typical

check- list provides rating scale or basis for ranking the ads in terms of the characteristics.
These characteristics may be honesty, attention getting, readability, reliability, convincing

ability, selling ability and the like. The ad that gets highest score is considered as the best.

2. Opinion test:

Opinion test or consumer jury test is one that obtains the preference of a sample group of

typical prospective consumers of the product or the service for an ad or part of it. The

members of the jury rate the ads as to their head-lines, themes, illustrations, slogans, by direct

comparison.

Getting preference from a juror is better than getting it from a member of general public or

an ad expert.

Jury’s preference is arrived at by seeking answers to the questions as to which ad was seen

first?

Which was most convincing?

Which was most interesting? And so on.

Accordingly, the top ranking ad gets selected.

3. Dummy magazine and port-folio test:

Dummy magazines are used to pre-test the ads under conditions of approximation resembling

normal exposure. A dummy magazine contains standard editorial material, control ads that

have been already tested and the ads to be tested. The sample households receive these

magazines and the interviews are conducted to determine recall scores.

Port-folio test is like that of dummy magazine test except that the test ads are placed in a

folder that contains control ads. The respondents are given these folders for their reading and

reactions. The test scores are determined in the interview. The ad with highest score is taken

as the best.
4. Inquiry test:

It involves running two or more ads on a limited scale to determine which is most effective in

terms of maximum inquiries for the offers made. These inquiry tests are used exclusively to

test copy appeals, copies, illustrations, and other components.

Any of these elements may be checked. The point that is to be checked is changed and all

other components are unaltered, to get the score.

5. Mechanical tests:

These mechanical tests are objective in nature unlike the one already explained. These help in

provide good measures as to how respondent are eyes and emotions reaching a given

advertisement.

The most widely used mechanical devices are:

1. Eye Movement Camera

2. Perceptoscope

3. Psycho-galvanometer and

4. Tachistoscope.

II. Concurrent Testing Methods:

1. Co-incidental surveys:

This is called as coincidental telephone method also whereby a sample of households is

selected, calls are made during the time programme broadcast, the respondents are asked

whether their radio or television is on, and if so, to what station or programme it is tuned?

The results of the survey are used to determine the share of response for the advertisement or

the programme.

2. Consumer diaries:
This method involves giving the families selected in advance of diary or individual diaries to

the members of the family. The selected families and individual respondents are asked to

record the details about the programme they listen or view. The diaries are collected

periodically to determine the scores.

3. Mechanical devices:

The mechanical devices used to measure the ad differences concurrently are more common to

broadcast media.

These are:

1. Audio meters

2. Psychogalvanometer

3. Tachistoscope and

4. Truck Electronic Unit.

4. Traffic counts:

Traffic counts are of special applicability to outdoor advertising. One can get good deal of

information through traffic counts. This counting is done by independent organisations may

be private or public. This work is also undertaken by advertising agencies. For instance, how

many automobiles and other vehicles were exposed to a bulletin board or a poster or a wall

painting and how many times? Can be determined.

III. Post-testing methods:

1. Inquiry tests:

It is controlled experiment conducted in the field. In inquiry test, the number of consumer

inquiries produced by an advertising copy or the medium is considered as to the measure of

its communication effectiveness.

Therefore, the number of inquiries is the test of effectiveness which can be produced only

when the ad copy or the medium succeeds in attracting and retaining reader or viewer

attention. To encourage inquiries, the advertiser offers to send something complimentary to

the reader or the viewer, if he replies.

2. Split-run test:

A split-run test is a technique that makes possible testing of two or more ads in the same

position, publication, issued with a guarantee of each ad reaching a comparable group of

readers. It is an improvement over the inquiry test in that the ad copy is split into elements

like appeal layout headline and so on. Here also, the readers are encouraged to reply the

inquiries to the keyed or the given address.

3. Recognition tests:

Recognition is a matter of identifying something as having seen or heard before. It is based

on the memory of the respondent. It attempts to measure the ad effectiveness by determining

the number of respondents who have read or seen the ads before. To arrive at the results,

readership or listenership surveys are conducted.

4. Recall tests:

Recalling is more demanding than recognizing as a test of memory. It involves respondents to

answer as to what they have read, seen or heard without allowing them to look at or listen to

the ad while they are answering.

There are several variations of this test. One such test is Triple Association Test which is

designed to test copy themes or the slogans and reveals the extent to which they have

remembered.

5. Sales tests:

Sales tests represent controlled experiment under which actual field conditions than the

simulated are faced. It attempts to establish a direct relationship between one or more
variables and sales of a product or service. It facilitates testing of one ad against another and

one medium against another.

To sum-up, ad effectiveness testing is a must to avoid costly mistakes, to select the best

alternative from the apparently equal alternatives, to resolve the differences of opinion and to

add to the store of knowledge having deep bearing on advertising effectiveness and

efficiency. Ad effectiveness testing can be at three levels namely, prior to, during and after

the release of an ad.

There are many methods to choose. The final results depend on the validity, reliability and

the relevance of each method employed. Testing, if done in good faith, can payout its costs

and rich dividends too.

Pay-Per-Click Advertising: What Is PPC & How Does It Work?

What Is Pay-Per-Click Advertising?
PPC is an online advertising model in which advertisers pay each time a user clicks on one of
their online ads.

There are different types of PPC ads, but one of the most common types is the paid search ad.
These ads appear when people search for things online using a search engine like Google –
especially when they are performing commercial searches, meaning that they're looking for
something to buy. This could be anything from a mobile search (someone looking for "pizza
near me" on their phone) to a local service search (someone looking for a dentist or a plumber
in their area) to someone shopping for a gift ("Mother's Day flowers") or a high-end item like
enterprise software. All of these searches trigger pay-per-click ads.

In pay-per-click advertising, businesses running ads are only charged when a user actually
clicks on their ad, hence the name “pay-per-click.”

Other forms of PPC advertising include display advertising (typically, serving banner

ads) and remarketing.

How Does Pay-Per-Click Advertising Work?

In order for ads to appear alongside the results on a search engine (commonly referred to as a
Search Engine Results Page, or SERP), advertisers cannot simply pay more to ensure that
their ads appear more prominently than their competitor’s ads. Instead, ads are subject to
what is known as the Ad Auction, an entirely automated process that Google and other major
search engines use to determine the relevance and validity of advertisements that appear on
their SERPs.
Pay-Per-Click Models

Commonly, pay-per-click advertising rates are determined using the flat-rate model or the
bid-based model.

1. Flat-rate model

In the flat rate pay-per-click model, an advertiser pays a publisher a fixed fee for each click.
Publishers generally keep a list of different PPC rates that apply to different areas of their
website. Note that publishers are generally open to negotiations regarding the price. A
publisher is very likely to lower the fixed price if an advertiser offers a long-term or a high-
value contract.

2. Bid-based model

In the bid-based model, each advertiser makes a bid with a maximum amount of money they
are willing to pay for an advertising spot. Then, a publisher undertakes an auction using
automated tools. An auction is run whenever a visitor triggers the ad spot.

Note that the winner of an auction is generally determined by the rank, not the total amount,
of money offered. The rank considers both the amount of money offered and the quality of
the content offered by an advertiser. Thus, the relevance of the content is as important as the
bid.

Question Bank

 How similar is the impact of casual factors like weather across different store
locations?

 Do you model different SKU groups differently?

 Are private labels becoming more widespread or has a new equilibrium been reached?