Principles of Marketing – MKTG 301

Principles of Marketing – MKTG 301

Principles of Marketing – MKTG 3010
Spring 2017
Homework 2: Market Segmentation
Due: by the start of class on Monday, March 20. Late assignments will lose 10 points, and 3 additional points for
every day late past the deadline.
Overview: For this assignment, assume that you have been hired to do market research for Harley-Davidson, Inc.
The company is a publically traded manufacturer of motorcycles that also licenses various branded accessories.
Your job is to analyze some customer segments in the US market, and then to make recommendations to HarleyDavidson
management about which segments are the most desirable.
This assignment has two separate parts, each corresponding to a different technique for analyzing segments. Part
1 has a quantitative focus and uses a standard way to calculate Customer Lifetime Value, or CLV. Part 2 uses a
more qualitative technique called a Customer Persona. For each part of the assignment, you will be provided with
initial information about customer segments, then use the specified technique to supplement or summarize that
information, and finally make recommendations based on what you discover.
Instructions for “deliverables” and point values
(If you’re unfamiliar with the brand Harley-Davidson, you may want to watch the videos for Part 2 first).
Part 1. 2-3 written pages and the completed spreadsheet. Written pages should be submitted to canvas
in pdf format. The written answers for Parts 1 & 2 should be combined into one document.
(6 points) Calculate the CLV for each segment using the CLV spreadsheet, and save the results.
(6 points) Describe the pros and cons of each of the 3 segments for Harley-Davidson Inc., referring to your
CLV results and any other information you think is important to consider.
(2 points) Which segment would you recommend to H-D management as the most attractive, and why?
Part 2. 2-4 written pages in addition to the completed Customer Persona descriptions, submitted to
canvas in pdf format. The written answers for Parts 1 & 2 should be combined into one document.
Watch the videos posted to Canvas in their numbered order.
(9 points) Based on the videos, complete the Customer Persona descriptions.
(5 points) Which segment would you recommend to H-D management as the least attractive, and why?
Which segment is the most attractive, and why?
Segmentation overview.
As we saw earlier in the semester, one of the most important decisions in marketing is segmenting the market in
order to choose a group of target customers. The process of segmentation is important not only to understand
customers, but also to make the best use of limited marketing resources and to gain advantage by adapting
offerings to customer differences. The size of a segment can vary with a company’s resources and goals. But
even companies that appeal to broad global mass markets will change their offerings to appeal to various smaller
market segments. Take Coca-Cola as an example: at first glance, Coke might seem to have the broadest possible
market; there’s an old marketing joke that Coke’s target market is “anyone with a mouth.” After all, in most
countries in the world consumers drink Coke, everyone sees the same brand messaging, and everyone can find
Coke in the same places.
However, Coca-Cola’s approach to the market is more complex. Many of its offerings are fine-tuned to appeal to
particular sub-segments of consumers, and these offerings change over time to follow changes in consumer
preferences. In the US market, customers can buy “regular” Coke, as well as Diet Coke, Caffeine-free Diet Coke,
Coke Zero, and Cherry Coke in a variety of sizes and packages. This broad assortment of offerings allows Coke to
appeal to a variety of segments more effectively than if they offered a single standardized product. Coke Zero, for
instance, has a target segment of men aged 18-34, who tend to view drinks with the word “Diet” in the name as
effeminate.
As we discussed in class, organizations segment their markets in many ways, and make use of a wide assortment
of factors to create segmentation schemes. Organizations then assess these segments in order to select a target
segment. It is the chosen target segment that will be the focus of subsequent marketing efforts, including product
design, distribution, pricing, and promotions. For this homework assignment, you will get some experience using
two common tools for summarizing and assessing segments: calculations of Customer Lifetime Value and
Customer Persona descriptions.
PART 1: Customer Lifetime Value
CLV overview: general idea, this approach, the spreadsheet
In Week 1 you saw a brief definition of marketing: “managing profitable customer relationships.” The word
“relationships” in that definition is meant to emphasize how marketers seek to develop long-term value by
serving customers over the long term, rather than engaging in single discrete transactions. A properly managed
long-term relationship with a customer is usually more profitable than short-term transactions.
Organizations often measure the value of their consumers by looking at current sales revenues, so that sales force
and other marketing efforts are directed at customers with the highest revenues. However, there a several
shortcomings of this approach. First, it doesn’t take into account the cost of serving the customer. The customer
who generates the highest revenue may not be the customer who generates the highest profit. Second, current
sales revenue is tenuously related to future sales revenue; one customer may keep generating revenue far into
the future, while a second customer may leave at the end of the year. Third, related to the second, even for loyal
customers the organization won’t count revenue in the future as equivalent to revenue today.
Discounting for the Future.
This third point captures the notion of discounting for the future, and is commonly referred to as “the time value
of money.” You may remember this concept from a finance or accounting class, and if you’re comfortable with its
meaning you can safely skip this explanation and go to the next section. Applied to this homework, the notion of
discounting is that today’s value of a unit of money is greater than the value of same unit at some point in the
future, which in turn is greater than the unit’s value even further in the future.
To see why, suppose someone offers you the following choice: a gift certificate, valid starting today, for $25 at
your favorite pizza place, or a different gift certificate, valid starting in 1 year, for $50 at the same pizza place. You
can probably see that the decision is not as simple as comparing the dollar amounts, and that the second gift
certificate doesn’t necessarily translate to 2 times the pizza. For one thing, you would want to take into account
inflation: a year from now, $50 won’t have the same purchasing power that it does today. In addition, you might
want to consider some risk involved in planning for the future. Will you still be living at your current address a
year from now? In a year will it be difficult or prohibitively expensive to get back to this restaurant? Will the
restaurant still have your favorite item on the menu? Will it still be in business? All of these considerations may
make you hesitate about choosing the $50 gift certificate. The standard way of capturing this hesitation is by
devaluing or “discounting” the $50 amount. Instead of a comparison between $25 and $50 gift certificates, it
becomes a comparison between a $25 gift certificate and one worth some amount less than $50. How much less
depends on your predictions for the rate of inflation in the intervening year, your chances of moving away or the
restaurant closing, etc.
For financial decisions, the amount of discounting is usually quantified (that’s not to say it’s accurate, just that it’s
quantified for purposes of calculation). A discount rate represents the amount of devaluation applied to values in
future time periods, permitting a more consistent comparison with values in current time periods. As an example
of the application of a discount rate, imagine that you are planning for retirement and you could invest $10,000
today at an annual interest rate of 10%. After a year, your initial $10,000 investment would grow by 10%, leaving
you with $11,000. This growth is given by the formula
$x after one time period = $x * (1 + d)
Where x is the amount you initially invest and d is the interest rate (I’ve called the interest rate d in keeping with a
formula that you’ll see In a few minutes). The time period is almost always a year; the important thing to
remember is that all time periods have to be the same – you can’t use revenue per month and interest rate per
year in the same equation, for example.
Sometimes you’re interested in a different perspective. Rather than knowing how much today’s investment will
be worth in the future, sometimes you want to know how much an amount that you obtain in the future will be
worth in terms of today’s dollars. This is analogous to assessing the value of the $50 pizza coupon from the
previous example. Calculating this involves taking the equation above and dividing both sides by (1 + d). Here’s a
comparison of both forms of the basic equation:
Today
(time 0)
A year from today
(time 1)
$10,000 = $10,000 * (1 + d)
$10,000
(1 + d)
= $10,000
Assuming d = 10%, $10,000 acquired a year from today would equal $9,090.91 in terms of today’s dollars.
Applying a discount rate has allowed us to compare units of money we have today with units that we will acquire
a year from today. The $9,090.91 figure is referred to as the “present value” of next year’s $10,000. Using this
formula with the pizza gift certificates example, our $50 a year from now, assuming a discount rate of 10%, would
be worth $50 / (1 + .10), or $45.45 today. Increasing the discount rate to 20% would yield a value today of
$41.67. In either case, the discounted value of the $50 coupon is still greater than $25, so you might favor the
$50 coupon. However, if you had a reason to apply a very high discount rate – if you were almost certain to move
away within the year, for example – than the value of the $50 coupon in today’s terms might fall below $25, and
then you would presumably choose the $25 coupon instead.
Customer Lifetime Value – A Basic Model
The same concept of discounting in order to calculate a present value can be applied to revenues from an
organization’s customers, through a concept called Customer Lifetime Value (CLV). CLV is often used to estimate
how much an organization can spend to acquire new customers. When you see companies offer low initial prices
in order to attract new customers, there is usually a calculation of CLV behind the enticing initial price. A
cellphone company that offers new customers a free phone, or free unlimited data, has calculated that they will
make up the amount of the initial expenditure with (discounted) future revenue from the new customers. That is,
any losses or compromised profits from an initial transaction will be outweighed by the discounted value of future
transactions.
In order to calculate basic CLV, you need 3 pieces of information, all of which are provided in the spreadsheet
named “Homework Basic CLV.” The first is a measure of profitability. We’re using the per-period margin. The
second bit of information is a discount rate, also given in the spreadsheet. In this context, you can think of the
discount rate as the return on today’s money available to the organization through other means of investment. In
other words, suppose a company is trying to decide whether to spend $100,000 today on a marketing effort to
acquire new customers. The company wants to check whether the eventual return on this $100,000 exceeds
what’s available through other means of investment. If not, then it might not make sense to spend $100,000 on
the marketing program.
The third piece of information you need is a measure of how long customers will stay with the company,
measured in the same time periods as the discount rate and margin (e.g., per year). The propensity of current
customers to remain with the company is known as the per-period “retention rate,” expressed as the percentage
of customers who will remain customers into the next time period. If 75% of customers will still be with a
company next year, then the retention rate is .75. The higher the retention rate, the longer the time customers
will remain, and consequently the company can count on more periods of future profit (this is of course assuming
that serving the customers is in fact profitable).
The basic formula that we’ll use is:
CLV = m
(1 – r + d)
where m is the per-period margin, r is the retention rate, and d is the discount rate.
As a simple example, suppose that a cellphone company wants to attract new customers by giving away the latest
iPhone. The company believes will make an annual margin from each customer of $90, 80% of customers will stay
with the company’s service each year, and the company chose a discount rate of 10% per year. CLV would be
given by $90 / (1 – .80 + .1), or $90 / .3, or $300. This represents the discounted future revenue expected from a
single customer, or the net present value of a customer. In this example, spending more than $300 to acquire a
customer would result in a loss for the company. By the same token, an immediate loss of $250 to acquire a
customer will still result in a $50 profit over the long term.
CLV for Homework
For this part of the Homework, you will use the spreadsheet called “Homework Basic CLV” to calculate CLV for
several segments of Harley-Davidson consumers. You will be calculating CLV based on sales of merchandise and
accessories to these segments. This analysis will not consider purchases of motorcycles because of complications
from the length of the buying cycle and the market for used motorcycles.
Overview of Segments
The first segment are consumers who are fans of in the brand, but don’t express extreme involvement. They may
or may not own a motorcycle, and if they do, they don’t use it as a primary means of transport. Instead, they may
take a “cruising” vacation for a week or less with a spouse or close friends. Those who don’t own motorcycles
mostly purchase licensed H-D clothing such as shirts, hats, and leather jackets. Those who do own a motorcycle
also buy riding-specific clothing and helmets, as well as occasional parts and services at H-D dealerships. You
estimate that the addressable size of this segment (that is, the number of customers in this segment H-D could
capture in the immediate future) is about 200,000. These customers are 65% male, tend to be between 45 and 70
years old, and have income in the upper two quintiles of the population. Annual margins for this group are
estimated at $40.00 per year, and retention rate at 65%.
The second segment are consumers who aren’t interested in motorcycles outside of a current fashion trend
involving US motorcycle brands (i.e., H-D and Indian). These customers are interested in buying H-D clothing,
jewelry, and other accessories. Most of them will not visit a dealership or ride a motorcycle, even as a passenger.
This group is 85% female, generally in the age range of 25-45, and has income in the top 2/3 of the population.
Addressable market size is approximately 400,000. These customers are unlikely to convert to motorcycle riders.
Annual margins are thought to be $80.00, with a retention rate of 20%.
Consumers in the final segment might be described as “hard core” aficionados of H-D. If they buy a motorcycle, it
is unlikely to be a foreign brand, and they are likely to use the motorcycle as much as weather permits, including
to commute. Addressable market size is around 100,000. These customers are middle-aged in general, 80% male,
and have income that spans a wide range. Their purchases are likely to come from dealerships, and focus on
clothing and parts that enhance their ability to ride and enjoy riding. Yearly margins are $25, with a retention rate
of 95%.
CLV Spreadsheet
In the spreadsheet named “Homework Basic CLV,” you’ll see an incomplete area corresponding to each of the
three segments. Begin by filling in the blue cells on the left with information about margins, retention rates, and
discount rates for each segment. Use 10% as the discount rate in all cases, and remember that retention and
discount rates are converted to decimal equivalents. On the left, some cells will automatically complete based on
the information you entered.
Next, for the first segment, autofill1 each row in the table by doing the following:
– Select the cell with the Year 1 margin for the first segment, cell B3. Autofill the row to complete
entries for all 10 years in the table (that is, through cell Q3).
– Select cell I4, with Year 2 Cumulative Retention Rate, and autofill to Year 10.
– Select cell I5, with Year 2 Cumulative Discount Rate, and autofill to complete the row.
– Select cell H6, with Year 1 Present Value, and autofill the row.
– Finally, select Year 2 Cumulative NPV, cell I7, and autofill.
Repeat these steps for the rows corresponding to the remaining two segments.
You may notice that the Year 10 Cumulative NPV doesn’t always exactly match the CLV given by the formula built
into the cells at the far right of the sheet (e.g., cell S7 for the first segment). The reason is that the basic formula
outlined above assumes that the customer’s lifetime is an infinite number of periods. For some segments, profits
will continue to accrue beyond the 10th year. For the analyses in this homework, the differences should be small
enough to ignore.
Save your completed spreadsheet, submit it to Canvas, and answer the questions for this part of the homework.
PART 2: Customer Personas
For this part of the Homework, pretend that you have been hired by Harley-Davidson, Inc. to do some qualitative
research on potentially attractive market segments. Begin by watching the videos, in numeric order, found on

1 Autofill is sort of a speedy version of copying and pasting in Excel. To use this function, select a cell (this will work for a
group of cells as well, but you won’t want to do it for this homework assignment) and rest the cursor on the lower right
corner of the selected cell. The cursor will change from a fat white + symbol to a slim black one. While the cursor is a black +
symbol, left click and hold your mouse, and drag the cell across the area you want to fill by autocompletion. Let go of the
mouse button when you’ve reached the end of your target range. In this case, you will separately use autocomplete for each
row of the table for each segment, so you will have numbers in each cell from Year 1 to Year 10.
Canvas. (If you’re having trouble viewing the videos, try downloading the free VLC Media Player, which is also
installed on most university computers.) Assume that the videos are representative of lengthy depth interviews
conducted over the course of 2 weeks. Your task is to generate Consumer Persona descriptions based on these
interviews (we looked at examples of Customer Persona descriptions in class).
The H-D riders you will encounter in the videos are taking part in a 2-week group ride that has been organized by
Harley. The event starts in Galveston Texas and rides north to the Canadian border. The hundreds of riders can
pursue their own route, but generally they ride with others in groups, and meet in the same towns along the
route each evening. There are also some organized stops along the way, such as at Harley Davidson dealerships,
various historical museums, and so on.
Customer Persona overview
A Customer Persona is a way of summarizing consumer segments to make them easier to assess and consider for
decision making. It’s certainly possible to describe a segment of consumers with a list of distinctive quantitative
attributes (e.g., demographic information such as age, income, geography, as well as information such as CLV),
but such summaries don’t lend themselves to focused consideration of the goals and desires of a segment of
consumers. A Persona is meant to summarize and add to segment descriptions by inventing an individual
person’s identity as an overview of the entire segment. We looked at some examples of Persona descriptions in a
previous webinar.
A Customer Persona is an invented person, usually with a pretend name and picture, based on the actual data you
have collected about the segment. The intent of a Persona is to make the summary description of a segment
seem less abstract and more like a real person whose needs can be addressed through marketing efforts.
Although a Persona is fictitious, it should seem as realistic as possible in matching the information you have.
Format for this assignment
For this section of the Homework, assume that you have spent 2 weeks observing and interviewing the H-D riders
you saw in the videos, along with more riders not shown. Below are partial Personas for 3 consumer segments.
Each persona has a picture taken from the videos and some initial information; assume that this information
summarizes a group of consumers you encountered during your interviews. Fill in the missing information with
your own conclusions and impressions based on the videos. In contrast to the CLV calculations in Part 1, here you
have to give some room to imaginative insight into the customers and their lives.
Each of the following 3 Customer Persona descriptions already has a picture and information about average
demographics and lifestyles for the segment. Your job is to add the following information to each Persona:
? a name to represent each segment. Choose a name that you think is a good representation of the
segment, and don’t use the real name from the videos of the pictured riders.
? a summary quote, 2-3 sentences long. The quote may be made up by you, but should encapsulate what’s
important and distinctive about their lives. All aspects of the quote need not include reference to H-D,
but it should be possible to connect the quote to the segment’s relationship with the brand.
? a description of the Main Benefits Sought by the segment, 3-4 sentences. This description summarizes
information such as what the segment hopes to accomplish by association with H-D products and the
brand, their goals for H-D product use, their priorities and methods in shopping for H-D products, and
shortcomings (if any) of the brand for them.
Customer Persona #1
Name:
Summary Quote:
Main Benefits Sought through H-D:
Lifestyles & Preferences:
? shop at discount chains such as Burlington Coat Factory and Ross;
? frequently stop at convenience stores;
? follow pro boxing;
? heavy use of tv and radio.
Demographics:
? household income of $28,000 – $35,000;
? hold blue-collar and service jobs;
? live in small, older apartments or houses;
? 60% Caucasian;
? ages between 35 and 64.
Customer Segment #2
Name:
Summary Quote:
Main Benefit Sought through H-D:
Demographics:
? household income of $50,000 – $150,000;
? few income-producing assets;
? 90% Caucasian;
? ages between 35 and 64;
? usually college educated mix of families, couples, and singles with white-collar jobs;
? tend to marry later than average;
? live in comfortable suburban subdivisions.
Lifestyles & Preferences:
? shop for health foods, consumer electronics;
? shop at the full range of big-box retailers;
? eat at Chick-fil-A;
? favor stays at Spring Hill Suites;
? above average household technology use.
Customer Segment #3:
Name:
Summary Quote:
Main Benefit Sought through H-D:
Demographics:
? household income of $50,000 – $80,000;
? 75% Caucasian;
? live in ethnically diverse neighborhoods near city centers;
? ages between 28 and 54;
? some college education;
? mix of couples and singles mostly without kids;
? mix of homeowners and renters.
Lifestyles & Preferences:
? eat at Jack in the Box and Taco Bell;
? active lives outside the home, attending everything from hockey and baseball games to occasional
operas;
? own GMC vehicles;
? favor stays at La Quinta;
? spend above average time researching their upcoming purchases online.
Year #
Segment 1 1 2 3 4 5 6 7 8 9 10
Annual Margin Margin Earned $0
Retention Rate Cumulative Retention Rate 1 0.00
Discount Rate Cumulative Discount Rate 1.00 1.00
Present Value in Year $0.00 Check with CLV formula:
Cumulative NPV $0.00 $0.00 $0.00

Year #
Segment 2 1 2 3 4 5 6 7 8 9 10
Annual Margin Margin Earned $0
Retention Rate Cumulative Retention Rate 1 0.00
Discount Rate Cumulative Discount Rate 1.00 1.00
Present Value in Year $0.00 Check with CLV formula:
Cumulative NPV $0.00 $0.00 $0.00

Year #
Segment 3 1 2 3 4 5 6 7 8 9 10
Annual Margin Margin Earned $0
Retention Rate Cumulative Retention Rate 1 0.00
Discount Rate Cumulative Discount Rate 1.00 1.00
Present Value in Year $0.00 Check with CLV formula:
Cumulative NPV $0.00 $0.00 $0.00

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