MKTG 1011 FUNDAMENTALS OF MARKETING ANALYTICS

MODULE 6: UNDERSTANDING CUSTOMERS THROUGH THE LENS OF ANALYTICS II

FUNDAMENTALS OF MARKETING ANALYTICS LEARNING MODULES

1 Introduction to marketing analytics 

8 Promotion analytics II

2 From data to information to insight 

3 Marketing analytics tools and techniques;

Data visualisation 
9 Product and service analytics

4 The role of analytics in marketing strategy

and environment analysis  10 Price analytics

5 Understanding customers through the lens of

analytics I 
11 Omni-channel analytics

6 Understanding customers through the lens

of analytics II

7 Promotion analytics I
12 Special issues: Ethics; the future and
maintaining currency
MODULE 6: CUSTOMER ANALYTICS II
MODULE LEARNING OUTCOMES

On completion of this module, students should be able to:

• Identify appropriate customer analytics metrics as they apply to phases of

purchase/post-purchase customer experience.

• Be able to explain key customer valuation metrics such as CAC, RFM and
CLV.

• Understand the significance of different metrics for marketing strategy and

decision-making 3
TOP LINE AND BOTTOM LINE PERFORMANCE FROM CUSTOMER ANALYTICS

Bokman, Fiedler, Perrey & Pickersgill (2014), “Five Facts: How Customer analytics boosts corporate performance”, McKinsey & Cº, https://www.mckinsey.com/business-functions/growth-
marketing-and-sales/our-insights/five-facts-how-customer-analytics-boosts-corporate-performance viewed 26/08/22 4
Bokman, Fiedler, Perrey & Pickersgill (2014), “Five Facts: How Customer analytics boosts corporate performance”, McKinsey & Cº, https://www.mckinsey.com/business-functions/growth-
marketing-and-sales/our-insights/five-facts-how-customer-analytics-boosts-corporate-performance viewed 26/08/22 5
THE NEW
MARKETING FUNNEL TOP OF THE
FUNNEL

MIDDLE OF THE
FUNNEL

BOTTOM OF THE
FUNNEL

POST-PURCHASE
CUSTOMER
EXPERIENCE

Source: https://www.skyword.com/contentstandard/how-the-marketing-funnel-works-from-top-to-bottom/ viewed 21/08/22

 TOP OF THE Web analytics (e.g. traffic, impressions, reach); brand
awareness metrics
FUNNEL
Marketing/campaign analysis (e.g. engagement
MIDDLE OF THE analytics, email, event, content marketing evaluation);
Leads generated
FUNNEL

BOTTOM OF THE
FUNNEL Customer acquisition cost (CAC)
Sales/revenue/conversion rates
Customer experience analytics
RFM analysis
POST-PURCHASE Satisfaction metrics
CUSTOMER Loyalty metrics (e.g. SOW)
EXPERIENCE Referral rate
Churn and retention rates
NPS; Sentiment analysis; Voice
of customer

Customer lifetime value (CLTV)

Source: https://www.skyword.com/contentstandard/how-the-marketing-funnel-works-from-top-to-bottom/ viewed 21/08/22
HOW THE METRICS MIGHT DIFFER

• B2B or B2C?
• Nature of business model / purchase type
What metrics?  Contractual? E.g., phone plan, gym membership
 Subscription based? E.g., Costco, online gaming
 Continuous purchase? Most retailers
 Infrequent or discrete purchase? E.g., concert tickets,
real estate purchase.
How metrics are deployed  By industry (E.g., different cost structures)
• Startup or established enterprise?
• Overarching: Goals/objectives, KPIs, targets

When metrics are deployed

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CUSTOMER VALUE VERSUS VALUING THE CUSTOMER
CAC (Customer Acquisition Cost)
RFM analysis (Reach, Frequency, Monetary value)
CLTV/CLV (Customer Lifetime Value)

…. BUT what about customer value? 9

CUSTOMER ACQUISITION COST (CAC)
Expenses linked to CA include costs of advertising, sales teams, marketing
technology, running promotions, events

• WHY?
𝑇𝑜𝑡𝑎𝑙𝑠𝑎𝑙𝑒𝑠𝑎𝑛𝑑𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
 To determine how much is required to attract new customers
𝐶𝐴𝐶=
𝑁𝑒𝑤𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠𝑎𝑐𝑞𝑢𝑖𝑟𝑒𝑑
 As an input into break-even analysis
 Assist in decision-making about marketing activities
 Directly tied to CLV
Customers acquired over a specified period (e.g. month, quarter)

• EXAMPLES
 A consumer goods company: A cosmetics store spends $6,000 on advertising and promotions for a month long campaign and gains 1000 customers
identified as new sign-ups to their loyalty program. CAC = = $60

 A Manufacturing company: A manufacturer of trade tools spends $15,000 on sales and marketing and acquires 200 new customers in a quarter. CAC =
= $75

 A property developer: A developer of a small new housing development spends $35, 000 on advertising and the cost of a sales person. CAC = = $500

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A COUPLE WALK INTO A PUB ….

$1900 $2000

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RFM ANALYSIS
RECENCY
• Last purchase/interaction
• Data: Number of days since last purchase
FREQUENCY
• How frequent are purchases/interactions
• Data: Total number of purchases
MONETARY VALUE
• How much do they spend/interact
• Data: Total value of all purchases
• Each customer is assigned a score on each RFM
attribute
• Selecting an appropriate timeframe is important
and will vary by industry/market and situation.
• The more recent the purchase, the more
frequently purchases occur and the higher the
value of spend over time results in a higher RFM
score.
• Method:
1. Calculate RFM values for individual customers
2. Assign a score, (e.g. 1-5; 0-9) to each RFM
value where 5 (or 9) is the best value and 1
(or 0) is the worst.
3. Can compute a final overall score.
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RFM ANALYSIS VARIATIONS

RFD (Recency, • Duration: Time spent (e.g. on website). Useful for assessing
Frequency, web traffic in cases where a business doesn’t make money
from a transaction, but from advertising related to traffic
Duration) (e.g. cooking blogs/recipe websites, TripAdvisor)

RFE (Recency, • Engagement: Behavioural interactions with websites or

Frequency, social media, e.g. likes, retweets, pages per visit, bounce
rate, shares, downloads).
Engagement)
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RFM ANALYIS BENEFITS AND LIMITATIONS
BENEFITS
• Can be applied to different types of organisation
and businesses – online, retail, subscription-
based, non-profit.
• Can be used to segment a customer base to:
• Identify best customers (and other customer types,
e.g. ‘At-Risk’, ‘Recent Customers’, ‘Can’t lose Them’)
• Targeted direct marketing campaigns with
customised messages
• Improved customer relationship management
• Reduced marketing costs, improved ROMI and CLV
with optimised targeting
• Combine with other variables and tools for further
insight.
LIMITATIONS
• Not appropriate for discrete one-of purchases (e.g.
real estate); or where a business only sells one type of
product (e.g. a single software application).
• Is based on descriptive analytics, therefore not useful
for identifying prospective customers.
• May focus attention on only the best customers,
ignoring potential opportunities from other segments
• Uses behavioural measures only and is therefore less
useful if not combined with other segmentation
variables (demographics, psychographics), which can
provide insight into variation.
• Can be complex to calculate without a software tool
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TOOLS FOR
RFM ANALYSIS

• Excel
• Google Data Studio
• Tableau/Power BI
• Many CRM apps
• Python and R
• Specialised software
(e.g. RetentionGrid)
Source: https://www.putler.com/rfm-analysis/#:~:text=Putler%20for%20free-,What%20is%20RFM%20Analysis%3F,how%20much%20did%20they%20buy. Viewed 28/08/22

Tableau example

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CUSTOMER RETENTION RATE AND CHURN RATE
RETENTION RATE CHURN RATE
Measures the ability of a business to maintain is customers beyond Measures the customers lost rate, (i.e. no longer an active customer).
their initial acquisition over a given period (e.g., monthly, quarterly,
yearly).

E.g., At the beginning of a 3-month period a business has 2000

E.g., At the beginning of a 3-month period a business has 2850 active customers. At the end of the period it has 1800.
active customers. At the end of the period it has 3000. During the
period it has acquired 500 new customers. = 10%

= 87%

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CUSTOMER LIFETIME VALUE (CLV)

• “Customer lifetime value (CLV) seeks to project the [net present] value of the
customer into the future and measure the profitability of customers during
the lifetime of the relationship, or other period of interest, as opposed to
profitability on one transaction. CLV needs to take account of the fact that
customers do not continue as customers forever, at some point they must
drop out …” Coleman et al., (2022), Applied Marketing Analytics, 8(1) pp16-25

• “Customer lifetime value (CLV, or CLTV) is a metric that indicates the total
revenue a business can reasonably expect from a single customer ….
throughout the business relationship.” Fontanella, 2021, Hubspot.com

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CLV CALCULATION: THE HISTORICAL METHOD

𝐶𝐿𝑉=𝑇𝑜𝑡𝑎𝑙𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑟𝑒𝑣𝑒𝑛𝑢𝑒($)∗𝐺𝑟𝑜𝑠𝑠𝑚𝑎𝑟𝑔𝑖𝑛(%)
• E.g., a customer purchases four times during the year and spends $100 on each occasion.
Our GM is 25% (i.e. the percent of profit from purchases), therefore:
(100 * 4) * 0.25 = $100
• Method is only useful where customer behaviour Is regular/predictable over a certain
period
• Does not take into account that active customers may become inactive (or visa versa)

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CLV CALCULATION: THE ‘PREDICTIVE’ METHOD

CLV =

• E.g., an online grocery retailer calculates average monthly spend at $140 with a gross margin
of 12% and a monthly churn rate of 3%, therefore
140 * 0.25 / 0.03 = $1,166.67
• Better than historical approach
• Churn rate is still based on historical data and will overstate CLV without the application of a
discount rate.

19
CLV CALCULATION: THE TRADITIONAL METHOD

CLV =

• If Netflix had a high retention of 95% with an annual margin per customer $100, and a discount rate of 5% then,
100 (0.95/1+0.05 -0.95) = $950
• This can be interpreted as the lifetime value of each customer on average.
• Can be applied without historical sales / revenue if gross margin is known (or assumed from industry).
• Rather than a precise prediction, the CLV is best used in comparison with competitors or market benchmarks.
• This very simplified presentation of the traditional method is still using historical retention rates, but in practice the discount and retention rate
would be applied over time (e.g. 5 years) in a proper predictive model.

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BENEFITS OF CLV

• A means to determine how

much to spend on CAC
• Provides a further basis for
segmentation based on
customer value and hence for
targeting
• Increasing CLV can increase
revenue over time and reduce
CAC. CLV/CAC – is a
profitability ratio!
• Determine how much to
spend on retention
Imaage source: https://www.wordstream.com/blog/ws/2019/01/10/cac-vs-clv

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LIMITATIONS OF CLV

Makes assumptions about Includes no new revenue Focuses on monetary

an uncertain future from customers value only

CONCLUSION: DO calculate
but don’t fixate. What’s
important is to look at the
Treats customers as Assumes fixed market factors that contribute to CLV,
average conditions especially those that lead to
retention/churn. – i.e.
delivering value to the
customer → CUSTOMER
SATISFACTION!

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PURCHASE
REVENUE METRICS

• Measuring not just revenue, but revenue growth is

fundamental and underlies several other key indicators,
including gross margin, profit and ROMI.

• Other key revenue metrics include:

• Average selling price (ASP) = Revenue / Nº products sold
• Average order value (AOV) = Revenue / Nº orders
PURCHASE
PURCHASE TRANSACTION ANALYSIS

• MARKET BASKET ANALYSIS

• Seeks to determine products bought at the same time by the same
purchaser, i.e. purchase patterns
• Descriptive and predictive analytics

• Applications and benefits:

• In-store or online product placement

• Inventory management
• Cross-selling and upselling Offers (e.g. bundling offers or ‘unrelated’
products together)
• Increase customer engagement and improve experience
• Increase insight into customer behaviour
• Improve sales (revenue) and ROMI
REPEAT
REPEAT PURCHASE METRICS

• Related to retention metrics (retention; churn)

• Repeat purchase rate (RPR) = Nº returning customers / Total customers

• Can be applied to renewal (e.g. subscription renewal)
• May be an indicator of satisfaction and/or loyalty
• Inventory management

• Time between purchases

= (Days between purchases / Nº purchases) / Nº repeat customers
• Increased time between purchase may have implications for
customer satisfaction

• Product return rate (PRR) = Nº units returns / Total number units sold
• Tangible products
• Potential source of significant cost
• May be a warning sign 25
LOYALTY
WHAT REALLY IS CUSTOMER LOYALTY? A FUNCTION OF BEHAVIOUR AND ATTITUDE

Repeat Patronage
High Low
Latent
High Loyalty
Loyalty
Relative Attitude
Spurious No
Low
Loyalty Loyalty

Sheth, Mittal & Newman, (1999), “Customer Behaviour: Consumer Behaviour and Beyond”,
USA, Dryden Press, p. 701

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LOYALTY
LOYALTY METRICS

• Customer Satisfaction Score (CSAT):

• How satisfied where you with your [experience, purchase, delivery]?
• Think about what and when to measure

• Net promoter score (NPS):

• How likely to recommend (0-10) → Promoter, passives, detractors

• Share of wallet (SOW): Brand purchases / Total brand category purchases)

• Repeat purchase rate (RPR)

• Loyalty programs
• Loyalty participation rate (LPR): Nº active LP customers / Total customers
• Redemption rate (RR): Rewards redeemed / Rewards issued

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REFERRAL
REFERRAL METRICS

• Net Promoter Score (NPS)

• Referral rate: Nº referred purchases / Total purchases

• Differ between industries/markets and are a further indicator of

satisfaction, retention and growth

• Is referral an important source of customer acquisition? How can

business encourage referral

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ADVOCACY
MEASURING ADVOCACY

• REFERRAL METRICS, including NPS

• VOICE OF CUSTOMER

• Feedback, reviews, ratings

• Social listening/social monitoring

• Monitoring own profiles on social media for brand mentions
• Many tools available

• Sentiment analysis
• Determines extent of positive, neutral and negative comments (but
not necessarily ‘why’)

• Market research (e.g. focus groups, interviews)

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NEXT MODULE ……

MKTG 1011 FUNDAMENTALS OF MARKETING ANALYTICS

MODULE 7: PROMOTION ANALYTICS