2.1 Marketing to Customers

Why and how marketers collect customer data, segment markets, and build customer relationships.

Part 1 of 5 What Marketing Is

Marketing is every activity a business uses to find out what customers need, want and struggle with. Marketing then covers promoting, selling and delivering a product that answers those needs, wants and struggles. Advertising is one of those activities.

A business has three marketing decisions to make: which customers to serve, which products to make, and how to reach those customers profitably. A business cannot reliably guess the answers, so marketing depends on customer data. Data turns each decision from an opinion into a defensible choice. A business that uses customer data can be very small. The running example in this unit is a teenager who rebuilds neglected bikes and sells them at a Saturday market with a signed inspection tag. His garage notebook lists his first seven buyers. Six of those seven buyers were parents buying a safe commuter bike for a middle schooler. So the notebook already shows his target customer.

Part 2 of 5 Two Kinds of Customer Data

Demographic and psychographic data compared

	Demographic	Psychographic
What it is	Measurable qualities of a population	Cognitive and behavioral traits
Examples	Age, sex, race, ethnicity, income, location	Interests, activities, values, lifestyles
The sorting test	A census form could record it	It describes what someone values or how that person spends time
His buyers	Parents aged 35 to 45, about $100 to spend, near the Saturday market	Rank safety above price; respond to a 30-day tune-up promise more than to a discount

Where the data comes from

Source	Examples
Digital tools	Subscriber lists, online accounts, click-tracking software, tracking apps, social media monitoring
Traditional research	Surveys and interviews
Purchase	Buying customer data from other businesses

Part 3 of 5 From a Market to One Person

Each step narrows the group of customers the business aims at. The profile is one invented person who stands for the target customers.

Market segmentation groups potential customers into segments that share demographic and psychographic traits, so a business can see what each group needs. From the segments, the business picks its target customers: the buyers most likely to purchase a specific product because of their wants, needs and preferences. Then the business writes a customer profile, an invented description of one sample buyer built from real data.

Renee is forty-one, has a hundred dollars and a Saturday deadline, and needs a safe first commuter bike. Renee is a composite, built line by line from real buyers.

Aiming at one group of target customers is usually more effective and cheaper than appealing to everyone. Aiming at one group works better because the product, the branding, the price and the ads can all answer the concerns of one customer profile, such as Renee. The ads can also answer those concerns in the order Renee ranks them: safety first, then price.

Part 4 of 5 Relationships, Acquisition Cost and Lifetime Value

Businesses build customer relationships with personalized service, rewards for frequent buyers, and feedback opportunities such as satisfaction surveys. Social media and the internet make all three easier to use.

Two numbers that justify the effort

	Customer acquisition cost	Customer lifetime value
What it is	Total marketing, advertising and sales spending divided by the number of customers won	The money one customer is expected to spend with the business over the whole relationship
How a strong relationship moves it	It can fall: a satisfied buyer may send a referral, so fewer dollars go into finding the next customer	It can rise: loyal customers make repeat purchases
At the stall	$20 of flyers and a boosted post bring four new buyers: $5 each	One $95 bike, two $12 tune-ups and a likely sibling bike: about $185 of spending

Part 5 of 5 What Collecting Data Costs

Storing customers' searches, purchases, card numbers, posts and locations can violate their privacy. The violation is worst when customers do not know the business stores the data or how the business will use the data. Data that is not properly secured raises the risk of a data breach, fraud and identity theft.

A business weighs the benefit of collecting customer data against three possible losses: customer trust, its own stated values, and its reputation. Nineteen phone numbers kept in a notes app with no stated purpose is the same privacy failure as a corporate database with no rule for how long data is kept. The only difference is size. To fix the problem, lock the device, delete any data that has no stated purpose, and tell customers what data you keep.

Worked Examples

Customer acquisition cost for one month at the market

Compute customer acquisition cost from total marketing spending and customers won.

In his first month selling at the flea market, Theo spends twenty dollars in total: part stall fees and part photocopied flyers. Four buyers arrive because of that spending. Find his customer acquisition cost, then state what would happen to it if one of those four buyers later refers a fifth customer.

Stall fees and flyers, first month: $20
Customers acquired through that spending: 4
Additional marketing spent on a referred customer: $0

1. Identify every marketing, advertising, and sales cost
Customer acquisition cost uses total spending aimed at winning customers. Stall fees and flyers are both marketing costs, and together they are twenty dollars. Nothing else was spent on acquisition this month.
2. Count the customers that spending actually acquired
Four buyers came in through the stall and the flyers. Buyers who arrived by another route would not belong in this denominator.
3. Divide total cost by customers acquired
Twenty dollars divided by four customers gives five dollars per customer.
$CAC = \frac{$ 20}{4} = $ 5$
4. Test what a referral does to the figure
A referred customer costs nothing extra to acquire, so the numerator stays at twenty dollars while the denominator rises to five. Twenty divided by five is four dollars, which is why relationships that produce referrals push acquisition cost down.
$\frac{$ 20}{5} = $ 4$

Check answer

Answer
$5 per customer. Theo's customer acquisition cost is five dollars per customer. One referral would pull it down to four dollars without any new spending.

Why it matters
Acquisition cost is a ratio, so it moves for two different reasons: spending less, or acquiring more customers with the same spend. Relationship tactics work on the second, which is why the exam links customer relationships to lower acquisition cost rather than to lower advertising bills.

Lifetime value in margin for one customer

Build a customer lifetime value from repeat purchases and an expected future sale, then compare it to acquisition cost.

Renee buys one ninety five dollar commuter bike, which leaves Theo thirty eight dollars of margin. He expects the family to return for two paid tune ups over the years they own it, at twelve dollars of margin each. There is roughly a forty percent chance the family later buys a bike for a younger sibling, which would leave sixty five dollars of margin. Find Renee's lifetime value measured in margin, and compare it to the five dollar acquisition cost.

Margin on the first bike: $38
Margin per paid tune up: $12
Expected number of paid tune ups: 2
Margin on a later sibling bike: $65
Probability of the sibling bike: 40%
Customer acquisition cost: $5

1. Take the margin already earned
The first bike is a completed sale, so its thirty eight dollars enters the total at full value with no adjustment.
2. Add the repeat purchases
Two tune ups at twelve dollars of margin each add twenty four dollars. These are separate future purchases by the same customer, which is exactly what lifetime value is built to capture.
$2 \times $ 12 = $ 24$
3. Weight the uncertain purchase by its probability
The sibling bike is not certain, so it enters at its expected value rather than its full margin. Forty percent of sixty five dollars is twenty six dollars.
$0.40 \times $ 65 = $ 26$
4. Add the three components
Adding thirty eight, twenty four, and twenty six gives eighty eight dollars of lifetime value in margin terms.
$$ 38 + $ 24 + $ 26 = $ 88$
5. Compare value to the cost of acquiring it
Eighty eight dollars of value against five dollars of acquisition cost is a ratio of about seventeen to one, which is the arithmetic that justifies spending on free tune ups and sibling discounts.
$\frac{$ 88}{$ 5} \approx 17.6$

Check answer

Answer
$88 in margin. Renee's lifetime value in margin is eighty eight dollars, against a five dollar cost to acquire her.

Why it matters
Keep value and cost in the same units. Lifetime value by the strict definition is everything the customer spends, which would be a larger number; measuring it in margin instead lets it sit beside acquisition cost, which is also a margin sized figure. State which version you used before you compare.

Key Terms

Practice Questions

6 questions. Nothing here is recorded or scored.

Question 12.1.A.3, 2.1.A.3.i, 2.1.A.3.ii
Riverbend Suds
Dana Whitfield owns Riverbend Suds, a small-batch soap business with a Saturday farmers market stall and a small online store. Stall shoppers who join her email list get a free sample bar. The store requires an account, and its software logs what each account browses and buys. A short checkout survey asks each customer's age range, zip code, and what matters most when choosing soap. Reading the results, Dana sees two clusters: shoppers over fifty who buy single unscented bars and rank sensitive-skin ingredients first, and shoppers in their late twenties and thirties who buy gift sets, follow the shop on social media, and rank plastic-free packaging first. Dana decides her next product line will serve the younger cluster, and she drafts a one-page description of an imaginary shopper: Marisol, thirty-one, a renter who hosts friends often, follows zero-waste creators, and buys gifts locally.
Which of the following best describes the customer data the checkout survey collects?
- A.Only demographic data, because Dana can tally each survey answer into a countable total.
- B.Both types, because age and zip code are demographic and the values ranking is psychographic.
- C.Only psychographic data, because the survey asks shoppers to rank what matters most to them.
- D.Neither type, because a checkout survey is a traditional research tool rather than a digital one.
Check answerHide answer
Answer: B
A.
The bait is countability. Dana can tally how many shoppers ranked plastic-free packaging first, and counting a response does not change what the response describes: a ranked value stays psychographic data, however tidy the total.
B.
Correct. Demographic characteristics are measurable qualities describing a population, like age, income, and location, so the age range and zip code questions gather demographic data. Psychographic characteristics cover the interests, activities, values, and lifestyles inside a population, so the question about what matters most gathers psychographic data. One survey can collect both at once.
C.
A survey records whatever its questions ask for. The age range and zip code questions collect measurable traits of the person, which is demographic data, so the ranking is only half of what this survey gathers.
D.
Confuses the tool with the data type. Businesses gather customer data through digital tools and through traditional tools such as surveys and interviews, and the type of data depends on the question asked rather than on the channel asking it.
Question 22.1.B.2, 2.1.B.4
Which of the following best explains the advantage Dana gains by designing the next product line for the younger cluster?
- A.She can aim branding, pricing, and advertising at the whole soap market instead of one slice.
- B.She can stop watching the other soap sellers, because one segment belongs to her alone.
- C.She can stop collecting checkout survey data from the shoppers outside her chosen segment.
- D.She can design and price for the buyers most likely to purchase, converting better at lower cost.
Check answerHide answer
Answer: D
A.
The opposite strategy. Aiming at the whole market is the expensive, unfocused path that identifying a target customer exists to replace.
B.
Segmentation changes who Dana designs for, not who competes with her. No segment belongs to one business, the other soap sellers keep their stalls either way, and a clearer target helps her win a share of that competition rather than end it.
C.
Choosing a target says nothing about ending data collection. The older cluster still buys unscented bars, and the survey data that revealed both clusters is exactly what Dana needs to keep collecting to serve them and to catch the next shift.
D.
Correct. A target customer is the buyer most likely to purchase a product because of their wants, needs, and preferences, and Dana found hers by segmenting her market into groups with shared demographic and psychographic traits. Designing the product, the price, and the advertising for one defined group is typically more effective and less costly than appealing to a wide audience.
Question 32.1.B.3
The one-page description of Marisol is best identified as which of the following?
- A.A customer profile, because it invents a sample shopper from demographic and psychographic data.
- B.A market segment, because it stands for the whole group of shoppers who share those traits.
- C.A sales record, because it describes Dana's most valuable real customer at the online store.
- D.A subscriber list entry, because the online store's software generated it from Marisol's account.
Check answerHide answer
Answer: A
A.
Correct. A customer profile personifies the target customer: the business invents one specific person and then designs and markets as if she were the audience. Marisol's age and renter status form the demographic layer; the hosting, the zero-waste creators, and the local gifting form the psychographic layer.
B.
One zoom level too far out. The segment is the group of shoppers who share traits, and the profile is one imaginary member drawn from it.
C.
Misses the word fictional. A profile is an invented composite written to stand in for a target group, and no single real shopper is its subject.
D.
A subscriber list entry is a record the store's software generates about a real account holder. Marisol has no account and no orders, because Dana invented her; the description is a marketing tool, not stored customer data.
Question 42.1.C.1, 2.1.C.3
Which of the following best explains how a rewards program for frequent buyers can increase a business's profits?
- A.It lowers the per-unit production cost of the goods that rewards members buy most often.
- B.It raises the price each member pays, since the cost of the rewards is added to their orders.
- C.It builds brand loyalty and repeat purchasing, which raises the lifetime value of each customer.
- D.It removes the business's need to spend anything on attracting new customers to replace the ones who leave.
Check answerHide answer
Answer: C
A.
Borrows from operations. A punch card changes buying behavior and leaves the cost of making each unit exactly where it was.
B.
Reverses the money. Rewards are a discount the business funds in order to keep a customer, so members pay less over time rather than more, and the profit comes from the extra visits rather than from a surcharge.
C.
Correct. Lifetime value is the estimated total a customer will spend on the business's products over time, and relationship tactics like rewards programs, personalized service, and feedback surveys exist to raise it, because loyal customers make repeat purchases. Satisfied customers also refer friends, which pushes customer acquisition cost down, so one program can move both numbers.
D.
Loyal customers slow the leak; they do not fill the bucket. A customer base still shrinks over time as people move, switch, or drift away, so even a business with a strong rewards program keeps spending to attract new customers.
Question 52.1.C.2, 2.1.C.3
Cinder Peak Cocoa
Cinder Peak Cocoa, an online seller of hot chocolate mix, ran one marketing campaign in spring and one in fall. The table shows the results.
Figure | Spring campaign | Fall campaign Advertising costs | $6,000 | $6,000 Other marketing and sales costs | $2,000 | $3,000 New customers acquired | 400 | 300 Average customer lifetime value | $60 | $90 Which conclusion is supported by the table?
- A.Spring's customer acquisition cost was 15 dollars, the advertising spending divided by new customers.
- B.Fall performed worse than spring, because its customer acquisition cost was 10 dollars higher.
- C.The two campaigns had equal acquisition costs, because their advertising costs were both 6,000 dollars.
- D.Fall produced more value per customer, beating its acquisition cost by 60 dollars against spring's 40.
Check answerHide answer
Answer: D
A.
Divides advertising alone, 6,000 over 400, and gets 15. The formula takes every acquisition dollar, marketing and advertising and sales together, which makes spring's true cost 20 dollars per customer.
B.
Stops at the cost line. A higher acquisition cost can still be the better buy when lifetime value grows faster, and fall paid 10 dollars more per customer to gain 30 dollars more in value.
C.
Equal advertising is only part of each campaign's spending. Acquisition cost divides total marketing, advertising, and sales costs by customers acquired, and both the totals, 8,000 against 9,000, and the customer counts, 400 against 300, differ, so the costs come out to 20 and 30 dollars.
D.
Correct. Customer acquisition cost divides the total marketing, advertising, and sales costs by the number of customers acquired. Spring: 6,000 plus 2,000 is 8,000, divided by 400 customers is 20 dollars each. Fall: 6,000 plus 3,000 is 9,000, divided by 300 is 30 dollars each. Set each cost against lifetime value: a spring customer is worth 60 and cost 20, leaving 40; a fall customer is worth 90 and cost 30, leaving 60. Fall wins per customer.
Question 62.1.D.2, 2.1.D.3
A neighborhood gym that advertises itself as a trusted community space stores members' payment card numbers and check-in histories in an unsecured spreadsheet. Which of the following best explains the risk this creates for the gym itself?
- A.Limited risk to the gym itself, because a data breach falls on the members whose card numbers leak.
- B.A breach could drive members away, contradict the gym's stated values, and damage its reputation.
- C.Legal exposure, because storing members' payment card numbers without written consent is unlawful.
- D.The risk ends the moment members accept the gym's terms of service during online sign-up.
Check answerHide answer
Answer: B
A.
Sends the harm in one direction. Members face the fraud and the identity theft, and the gym faces the cancellations, the values it can no longer claim, and the reputation damage.
B.
Correct. Unsecured data invites a breach, a breach exposes members to fraud and identity theft, and the consequences rebound on the business: customers who no longer feel safe leave, the gym's stated values now read as broken promises, and the story reaches people who never joined. Those are the three business-side risks: lost customers, violated values, damaged reputation.
C.
Invents a consent rule. Businesses store payment information routinely and lawfully, and what this topic tests is whether the data is secured and whether customers understand how it will be used.
D.
A terms-of-service page shifts none of this risk. Members who accepted the terms can still cancel after a breach, the broken trust still contradicts the gym's community message, and the reputation damage spreads regardless of what anyone clicked.

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8 Common Mistakes on 2.1

The wrong moves students actually make on these questions, why each one is wrong, and what to do instead. Part of the practice tier.

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CED Codes

2.1.A.1 · 2.1.A.2 · 2.1.A.3 · 2.1.A.3.i · 2.1.A.3.ii · 2.1.A.4 · 2.1.B.1 · 2.1.B.2 · 2.1.B.3 · 2.1.B.4 · 2.1.C.1 · 2.1.C.2 · 2.1.C.3 · 2.1.D.1 · 2.1.D.2 · 2.1.D.3