Analyzing Markets With Perceptual Maps

Product differentiation is the foundation for product positioning. Product positioning refers to the way in which a product is perceived by a consumer. Positioning takes place in the mind of the consumer, but marketers take great pains to help formulate that perception. Before making any marketing mix decisions but after much research about various market segments, marketers create positioning statements that are intended to tap into the desired value of each targeted segment. A positioning statement is an internal directional document indicating, in a compelling manner, what marketers want the target market to think and feel when they purchase and use the brand or product. The view that marketers desire to create, however, must tap into the utilitarian and hedonic value that the target segment desires.

Example of a Perceptual Map

Perceptual mapping is a graphics technique that marketers use to display the perceptions of current or potential customers. Displayed may be products, product lines, brands, or the company relative to competitors. Although perceptual maps can have any number of dimensions, the most common is two dimensions, due to the simplicity of drawing and interpreting the map. Shown below is a perceptual map for Coca-Cola soft drinks developed on two dimensions: flavors (flavored vs. regular) and calorie content (high vs. low in calories).

Figure 1.7. Perceptual Map Example 

Perceptual Map of Competing Products

Coke products that are positioned close to each other are perceived by consumers as similar based on the dimensions indicated on the map. For example, on this map consumers identify Coca-Cola C2 and Diet Coke as similar with very little differentiation in regard to flavor or calories.

How do marketers use the information in a perceptual map? Some examples include the following:

• A company considering the introduction of a product will look for an area on the map free from similar products.
• Perceptual maps may be drawn with different sized circles to represent product sales volume or market share.
• Perceptual maps are also useful when a company wants to reposition the product.

In Lesson 2, we will explore the factors that contribute to consumers’ perceptions and how perception affects consumer purchasing and marketing decisions.

Value Today and Tomorrow—Customer Lifetime Value

Although marketers go to great lengths to gather just enough of the right data to target valuable (profitable) customers, the truth is that not all customers are equally valuable to a brand. Therefore, more and more brands want to know where to invest their money to retain and attract customers. One way they do this is to look at the long-term projected value of a customer or customer segment. Ideally, brands identify, attract, and retain their most profitable segment(s) and create a marketing mix that optimizes profit potential.

Customer lifetime value (CLV) is a projection tool that approximates the worth of a customer or segment to a brand in financial terms. Essentially it estimates the overall profitability of an individual consumer or segment. According to Babin and Harris, there is no generally accepted formula for CLV, however the basic premise is simple and can be represented as follows:

Figure 1.8. Customer Lifetime Value Formula

CLV = npv(sales - costs) + npv(equity)

where npv = net present value. Consider a customer who shops twice a week at JCPenney. On average, this customer spends $100 per week, or $5,200 per year, at the retailer. If we assume a 5% operating margin, this customer yields a net of $260 per year to JCPenney.

As seen from the formula above, the CLV calculation process consists of four steps:

1. Calculate the predicted remaining customer (or customer segment) lifetime.
2. Calculate projected future revenues year-by-year. Base your predictions on the expectation of future product purchases and the corresponding prices to be paid.
3. Estimate costs for delivering those products each year.
4. Calculate the net present value of these future amounts and determine the net difference (profit or loss).

Check out How to Compute Your Customer Lifetime Value from the Database Marketing Institute, which illustrates all the calculations involved in the CLV formula.

The Customer Lifetime Value Calculator at Harvard Business School Publishing is another tool used to calculate CLV. Change one variable at a time (using the "Tool" tab) and notice the difference in CLV for each of your entries.

Once marketers calculate the necessary CLV projections, what do they do with them? According to RJMetrics, some decisions that can be made based on CLV projections are the following:

• Promotion: How much should I spend to acquire a customer?
• Product: How can I offer products and services tailored for my best customers?
• Customer support: How much should I spend to service and retain a customer?
• Sales: What types of customers should sales reps spend the most time on trying to acquire? (RJ Metrics, n.d.)