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Module 4: Customer Differentiation

Unit 3: D1ffere .tat n Based on Value O eeds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Introduction

In this course, we are focusing on the IDIC model as a means of achieving a 1-to-1 marketing
approach. We’ve already covered the differentiation based on the value a customer has for a
business.

In this unit, we will focus our attention on differentiating customers based on their needs and
behaviors. Then we will combine value and need differentiation to create the intersection
points that will result in greater ROI.

©2021 Sarah Cherres 1

Based on Needs

• A function of why the customer buys, not what the customer buys

• Customer needs are internal conditions or motivations behind a
purchase or usage

• Complex and involve ma ny dimensions

• Benefits include:

• Increasing company credibility

• Increasing efficiency and maximizing effectiveness

• Real izing positive financial impact

Dimen sions
Beliefs
Mot ivations

Preferences
Life stages
Decision-making

style, etc.

The ability to turn insight into action is essential in implementing CRM.

CI SarahCherres Modu le 4 I Unit 2: Differentiat ion Based on Value & N~s

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Differentiation Based On Needs
In addition to understanding customer value, companies must also understand how the needs of their
customers vary. They can then utilize this information to deepen their knowledge of customers and
customize solutions to meet their needs. A company should view customer needs and value information
together to form customer portfolios. This helps the company allocate more time and resources to
customizing the solutions that meet the needs of those customers with the highest actual and potential value.

The goal of customer needs differentiation is to identify clusters of customers with similar needs around
which companies can then build those customized strategies and relevant treatments. The ultimate goal is 1 to 1
customer relationships with these customers. Customer needs refer to why the customer buys, not what the
customer buys. This is the essential element behind customer needs differentiation.

Customer needs are the internal conditions or motivating desires behind a customer’s purchase or usage of a
product or service. Customer needs are complex and they involve many different dimensions, including
beliefs, motivations, preferences, life stages, decision-making styles and more.

Now, why would a company want to try to differentiate based on needs and not just only value? First of all, it
can:

• Increase the company’s credibility with customers and customer loyalty by improving the customer
experience; it’s understanding customer’s needs and providing relevant offerings that exceed customer
expectations.

• It can also increase efficiency and maximize the effectiveness of the customer focused efforts by
allocating time and resources to those that are most relevant to the customer.

• Lastly, it can realize positive financial impact by maximizing short and long-term customer value and
improving cost efficiency through improved customer targeting.

The analysis of the customer database and the creation of customer portfolios around customers with
similar value and needs is useless unless the information is acted upon. So the ability to turn customer
information into insight and then turn insight into action is essential in implementing CRM. Customer
analytics is a specialized capability or function that’s necessary for a company to conduct the data analysis and
the customer modeling activities that are required to develop the customer needs and value
differentiation that we have been talking about. Customer analytics is a complex function that requires
mining all available customer data from multiple sources and then running statistical and financial
algorithms and models to better understand customers’ value behavior profiles, preferences, and
characteristics. The goal is to predict future customer behavior.

©2021 Sarah Cherres 2

What are needs?

• What are attributes?

• What are benefits?

• A market segment has similar attributes

• A portfolio is made up of similar
customers

• The intersection of customer value tier
and needs clusters creates the customer
portfolio

Source: Peppers & Rogers (2009)

40 5.arahCherres

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Portfolio I

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M odule 4 I Un it 2: Different iat io n Based on Val ue & Needs

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Differentiation Based On Needs

Before we continue our discussion on differentiation based on needs, it’s important that we expand on some
key terms. When we refer to customer needs, we’re using the term in a generic sense. What
customers needs from a company is what they want, what they prefer, and what they would like to
have. In a sense, we’re not distinguishing customer’s needs from their wants, and we don’t distinguish needs
from preferences or wishes or desires. All of these are considered to be needs. What a customer needs
from an enterprise is the driving force behind the customer’s behavior. Needs represent the “why”
behind a customer’s actions. How customers want to buy may be an important factor for them, as important
as why they want to buy. For some customers, a need may represent a distribution channel or it may
represent a communication style or even an invoicing method. It’s important to go beyond the product or
the service when we think of a customer’s expanded need set.

Needs and value are essentially both sides of the value proposition between a company and the
customer — what the customer can do for the company and what the company can do for the customer. Now
it’s easy to confuse the customer’s needs with product benefits. Companies create products and services
with benefits that are especially designed to satisfy customer needs, but the benefits themselves
are not equivalent to the needs. In traditional marketing discipline, product benefits are the advantages that
the customers get from using that product based on its features and attributes. Features, attributes, and
benefits are all based on the product rather than on customer needs. Needs, on the other hand, are based on
the customer and not the product. Different customers might use the same product based on the same
features and attributes to satisfy very different needs.

Customers may be placed in a different segment or clustered together with other customers that have
similar attributes. A portfolio is made up of similar customers. The key here is that the intersection of
customer value tiers and needs clusters create what we call the customer portfolio. For example, you see
on this slide, five different portfolios that have been created based on customers that share similar
attributes, and that are seeking similar benefits. The first portfolio of exercisers; the second portfolio are
adventurers; the third portfolio are transportation riders; the fourth portfolio are socializers; and a fifth
portfolio are environmentalists. All of these portfolios are linked back to a bicycle product. So it’s the same
product, a bicycle, but each of these portfolio groups is looking for different needs and they’re each looking
for a different value even though the product itself shares the same attributes in the same features.

©2021 Sarah Cherres 3

>l!rahCherres

Basic Buyer Needs

Situational

Functional

Social

Psychological

Knowledge

I need a copier now because I have a major
project I need to complete.

I need a copier that sorts and staples.

I need a state-of-the-art copier so I will be
recognized as a technology-savvy person .

I need an extended warranty with a copier.

I need comprehensive training on how to
use a copier.

Modu le 4 I Un it 2: Differe ntiation Sn~ on Va lue & N~ds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Basic Buyer Needs

The total number of buyer needs is infinite but most if not all can be categorized into one or more of
the following five basic types of buyer needs. Situational needs are needs that arise from or are
magnified by the specific conditions of a particular situation. For example, I need a copier now
because I have a major project to complete.

Functional needs are built around the need to accomplish a particular task or function. These needs
are usually met by the features of a particular product. For example, I need a copier that sorts and
staples.

Social needs are those that are based on the need for acceptance from an association or organization
with others; a desire to belong to some reference group. For example, I need a state-of-the-art copier
so I will be recognized as a technology savvy person or company. It can relate to building a
reputation.

Psychological needs are those that reflect the desire for feelings of insurance and risk reduction as
well as positive emotions and feelings, such as success, joy, excitement, and stimulation.
For example, I need an extended warranty with a copier. Individuals with these needs bring up
lots of “what-if” or negative situations that can arise in the purchase.

Knowledge needs are those that represent the desire for personal development, information and
knowledge. To increase thought and understanding as to how and why things happen. For example,
I need a comprehensive training program on how to use a copier.

©2021 Sarah Cherres 4

Customer needs can be situational in
nature

2. Customer needs are dynamic and can
change over time

3. Customers have different intensities of
needs and different need profiles

4. Customer needs correlate with
customer value

Cl ~ra,hCherres M odule 4 I Unit 2: Differentiation &lsed on Value & Nttds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Characteristics of Needs

The next two slides focus on some of the characteristics of needs as defined by Peppers and Rogers’
book called Managing Customer Relationships. Understanding different customers with different
needs is critical to any serious relationship building program. Some of the characteristics are as
follows:

Customer needs can be situational in nature. Not only will two different consumers often buy the
same product to satisfy different needs, the customer needs might change from event to event.
It’s important to recognize when this happens. An airline might think it has two customer
types: business travelers and leisure travelers but in reality this typology refers to events, not
customers. Even the most frequent business traveler will occasionally be traveling for leisure,
perhaps with their spouse or family instead of the usual solo travel. In that event, they will need
different services from the airline than when traveling on business.

Customer needs are dynamic and can change over time. People are changeable creatures. Our
lives evolve from one stage to the other. We move from one place to another. We change our minds.
The fact that certain types of customers are not predictable is a customer characteristic itself. Life
events such as a customer marriage, new babies, or retirement typically lead to profound changes in
the needs that most people have.

Customers have different intensities of needs and different need profiles. Even when customers
have similar needs, one customer will have that need intensely while the other may feel the need but
less intensely. One homemaker may be committed to running a very green kitchen while the other
just wants to take care of the environment; one may have the need to save time as much as possible
and may use paper plates so that she doesn’t have to spend so much money or time washing dishes.

Customer needs often correlate with customer value. Although it’s not always true, more often
than not a high-value customer is likely to have similar types of needs in common with other high-
value customers.

©2021 Sarah Cherres 5

a r.acte r.istics

5. The most fundamental human needs are
psychological.

6. Some needs are shared by other customers
while some needs are uniquely individual.

7. There is no single best way to differentiate by
needs,

8. Even in B2B settings, a company’s customers
are not really another “company” with a
clearly defined, homogenous set of needs.

Source: Peppers & Rogers (2011}

Cl ~ra,hCherres M odule 4 I Unit 2: Differentiation &lsed on Value & Nttds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Characteristics of Needs

Let’s look at four other characteristics.

The most fundamental human needs are psychological. When dealing with human beings as
customers as opposed to companies or organizations, understanding the psychological differences
among people can provide useful guidance and insight for treating different customers differently.

Some needs are shared by other customers. While some needs are uniquely individual. When
an online bookstore makes an automated book recommendation to an individual customer, this
recommendation is based on the fact that other customers who have bought similar books in the
past may also buy the same books that are being recommended. Now there are hundreds of
thousands of books that a person could buy from an online bookstore because they share similar
needs. Needs types can be:
• Common: needs are shared by an entire customer base
• Overlapping: needs are shared by more than 1 group
• Group: needs are shared by a portfolio of customers
• Individual: only seen as a need by an individual customer

There is no single way to best differentiate customers by their needs. As difficult as it is to
predict and quantify a customer’s value to a company, at least the final result will be measured in
economic value ranking. It is done in one dimension, the financial dimension, than when a company
sets out to differentiate its customers by their needs. There are as many ways to differentiate
customers by their needs as there are creative ways to understand the deepest human motivations.
The value of any particular type of need-based differentiation can be found in its usefulness for
affecting the different behaviors of different customers.

Even in business-to-business setting up companies, customers are not really another company
with a clearly defined set of homogeneous needs. Instead, customers are a combination of
purchasing agents who need low prices and users who need benefits and attributes and managers of
the end users who need those end-users to be productive and so on.

©2021 Sarah Cherres 6

Needs Differentiation Example

interlocking toy blocks for children

PRODUCT ATTRIBUTE

Toys in fa ntasy configurations

Colorful, unusual shapes t hat easily interlock

Preplanned, logica lly deta iled instru ctions

PRODUCT BENEFIT

Recognizable make-believe situations

Large va riety of interesting com binations

Com plex directions that are easy to follow

Customer needs ca n be categorized into th ree groups:
Actors: Role playing, pretending, fantasizing

Artists : Creating, making stuff up, doing t hings differently

Engineers: Solving problems, com pleting pu zzles

Modul~ 4 I Unit 2: Oiff~r~nti!ltion Bas~d on V!IIU~ & Nttds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Let’s look at an example. Consider a company that manufactures interlocking toy blocks for children.
Suppose that this company goes to market with a set of blocks that are suitable for constructing
spaceships. Three 7-year-old children playing with a set of blocks might all have different needs for
it. One child might use the blocks to play a make-believe role, perhaps assembling a spaceship and
then pretending to be an astronaut. Another child might enjoy simply following the directions,
assembling the same spaceship in the exact detail, according to the instructions. Once the ship is built,
however the child is less interested in it. The third child might use the blocks set to construct a
spaceship or to build something entirely different, drawn from his own vivid imagination. This child
simply wouldn’t enjoy putting together a toy according to somebody else’s diagram.

Each of these three children may enjoy playing with the same set of blocks but each one is doing so to
satisfy a different set of needs. Each child, if known by the marketer, provides the key to increasing
the child value as a customer. The more the marketer knows each child, the more the marketer will be
able to increase value. If the toy manufacturer actually knew each child’s individual needs and had the
capacity to deal with each one individually by treating each one differently, the company could easily
increase its share of each child’s toy and entertainment consumption.

For example, you may be able to categorize the children based on the roles and create three different
portfolios.

• One portfolio may be actors where the company might consider offering costumes or other props
along with storybooks or videos or DVDs.

• To the children with more imagination, you could provide other types of tools such as blueprints for
additional toys to be assembled or maybe more complex diagrams. These might be categorized as
the engineers.

• For the more creative types, or the artists group, the company might provide pieces of unusual
colors or shapes or perhaps supplemental sets of parts that maybe were not planned with any
diagrams at all.

©2021 Sarah Cherres 7

for Nokia

• Basic low-income consumers: want a no frill s and very inexpen sive phone.

• Expression consumers: young con sumers who want to cu stomize their phone .

• Active consumers: want a rugged , tough phone with outdoor features.

• Classic consumers : want a tradit ional phone with some feature s.

• Fashion consumers: want ever thinner, ever small, ever more

stylish phones.

• Premium consumers: want all the latest features and services.

Modu lt4 I Un it2cDifftrenti11t ion811sl!don Value&Nttds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Differentiation for Nokia

Let’s look at how Nokia has clustered or segmented its customers historically. The first generation of
their mobile phones were launched 29 years ago and it was estimated that by 2010, three billion
phones would be in use around the world. Nokia sold about three out of every 10 phones to six basic
benefit segments that it had identified from consumer usage and lifestyle studies, as shown on this
slide.

Nokia’s future success depends on delivering great experiences to customers by creating products and
solutions that work seamlessly and are appealing. Their strategy contains the core elements required to
accomplish this, and is optimized for tapping into the mobile industry’s global growth potential as it
unfolds. But Nokia went further. It created a special product line of phones that are mostly for playing
games and provide special communicator lines for business users who want to use the phone for
Internet access, streaming video etc. In short, it had two emerging new segments associated with
particular usage situations and benefits sought. The first, or business segment, could merge with and
dominate the Premium Segment. The second, or game segment, is probably a sub-segment of the
young consumer segment but more for the introvert rather than the extravert who seeks a phone to
help them define their identity. Now consider adding the customer value to each group of customers.

In a grocery retail store, data can be collected on how much each registered customer spent and what
they spent money on. With the information gained on the total expenditures, it is possible to work out
their value to the company. Based on needs, the company can also categorize the purchases into
categories such as “vegetarian”, “meat & potatoes”, and “social class”. These socio-economic
categories are independent of one another, so customers can be members of different combinations
allowing a high degree of differentiation. This is extended further when combined with the customer’s
value to the company.

©2021 Sarah Cherres 8

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M odule 4 I Unit 2: Dlfferenti11tioo Sased on Value & Nttds

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Dif ferent iatio n – B ringing To geth er

So how do you organize the different portfolios based on both value and needs? How do you
distinguish between profitable versus unprofitable customers with different needs? The soundest way of
segmenting these customers is to use cluster analysis, which is to group the profitable customers into
segments that have similar profiles of products, models or features purchased, benefits sought, feature
preferences, and feature valuation, as shown in this slide. Once the clustering is done on relevant
criteria, then you can study the big differences between the clusters on measures such as LTV, loyalty,
demographics, needs, life stage, lifestyle, interests, etc. These differences will give you clues, not only on
the different routes to customer profitability, but also on how you should tailor different new
products and services to the different clusters of profitable customers.

While each portfolio or cluster will surely vary on many variables that may explain their preferences,
each will probably become known by a short title. This naming is often associated with the particular
features or services customers seek or the way they shop. Let’s look at another example. The Toyota
Prius is an electric hybrid vehicle that has sparked considerable interest and demand from consumers in the
U.S. This car, which is supposed to deliver upwards of 60 miles per gallon in fuel mileage and which
costs around $20,000, potentially making it a very economical family sedan. The car seems to appeal to
at least two different segments of customers, named environmentalists and trend setters. A single
branded automobile may be desired by two rather different customer clusters or portfolios because it
can fulfill multiple sets or clusters of customer needs & characteristics. Within these, you can also find
varying levels of loyalty and value (actual and potential).

The environmentalists appear motivated to purchase this car as a method of reliable transportation, that
will be very economical to drive and maintain over the long-term, and which also fulfills the
customer’s need to feel less guilt about driving a car in today’s high-consumption and air polluted
society.

Another customer portfolio named trend setters could consist of Hollywood stars (and their fans who
want to emulate them), for whom this car has also become quite popular. Obviously this cluster does not
need to worry about the economical aspects of their mode of transportation. However, this type of
customer may have an additional need of generating head-turning admiration, respect, or possibly envy on
the part of onlookers, who may admire their forward-thinking purchase decision as well as their
environmental concerns. These customers may also have an acute need to feel less guilt for their
consumption habits that are made possible by their status in society.

©2021 Sarah Cherres 9

ust omer Value
Profitability

Life time Va lue
l oyalty

Needs
Motiva tion
Expe rie nce

Convenienc e
Influences

Cust omer Data
De mographic
Be ha vioral
Attitudina l

Ext ernal
Competit ive Informa tion

Industry a n alysi s
l e ga l & regulatory

Technology

The dynamic
nature of

differentiat ion.

Mcx!ut~ 4 I Unit 2c Diffu~nli a lion 8as..d on Val u~ & Ntt<Js

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3

Differentiation – Bringing Togeth er

This slide illustrates the dynamic nature of differentiation. Companies can no longer consider one type
of variable or category, whether it be value, demographic, behavioral or attitudinal, because they overlap!
Today’s environment requires a multi-dimensional differentiation approach based on customer value,
profitability and needs. Analytical software identifies the intersections. Let’s look at an example of this
dynamic environment and what CRM tools can do to help manage this complex process.

Pizza Hut is one of the world’s largest pizza chains, with more than 16,000 restaurants in 100
countries. To remain relevant to its vast customer base, the company had to improve its approach to
capturing, structuring, and leveraging its customer data. The company implemented a CRM cloud
software solutions to help the company engage with customers through mobile, social, and in-store
channels.

The restaurant and food delivery industry is saturated with organized retail brands, as well as single and
independent outlets. High discount margins are prevalent, consumers are prone to impulse buys, and
repeat business is difficult to predict. The CRM Customer Intelligence solution enabled Pizza Hut to break
down its customer base into clusters and micro clusters based on expressed characteristics, purchase
tendencies, and other behavioral indicators gathered across several channels, including in-store interactions
and online and telephone orders. The resulting insights were then fed into a marketing intelligence
solution, where engagement programs were designed and deployed across thousands of targeted consumer
engagement work flows through campaign automation.

Pizza Hut now runs targeted campaigns built with intelligence around customers’ valuation, preferred
product categories, typical purchase times, and channels of choice. Analytics-driven offers lead to more
effective responses among loyal and new users, and have generated higher sales returns. The company has
created more than 67,000 customer behavioral groups, helping the brand predict future purchases
and execute campaigns at the most opportune times through customers’ preferred engagement channels. Since
implementing the solution, Pizza Hut has noticed successive increases in campaign performance, sales,
and overall customer experience with the brand. In comparison to Pizza Hut’s former bulk
promotions, automated life cycle marketing with personalization has yielded a 200 person jump in
average campaign hit rates across customer segments, a 38% improvement in customer retention, and a
9% increase in customer visits and purchase frequency. “We can now identify our customers’
responsiveness to different product segments and their repeat purchase tendencies, enabling us to
better design our customer engagement and product-launch campaigns, driving incremental sales and
better marketing ROI.

©2021 Sarah Cherres 10

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