Segmentation & Targeting

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1 Segmentation and Customer Loyalty Using Segmentation to Strengthen Customer Loyalty May 2009

2 Segmentation and Customer Loyalty Using Segmentation to Strengthen Customer Loyalty By Mike Mancini, Vice President of Data Product Management Nielsen Claritas Executive Summary strengthen customer loyalty and position Loyal customers are important to businesses a company for even better performance because they offer a steady revenue stream, when a healthier economy returns. higher profit margins and enthusiastic referrals. But in a down economy, price Introduction sensitivity can trump loyalty. To strengthen Customer loyalty comes in many forms: the bonds with these high-profit potential consumers who wouldnt think of buying a customers, innovative companies are car from another dealer, shoppers who are deploying enterprise-wide strategies built on a first-name basis with a boutique store phone, cable TV and Internet service on consumer segmentation. These strategies clerk, coffee shop regulars who dont even providers in the last six months of 2008. go beyond the classic marketing applications need to place an order to get their half-caf, But one upside to the economic downturn is of segmentation to drive customer-facing no-whip soy latte. Loyal customers, built that companies are becoming more customer aspects of a business. Among the strategies: one positive experience at a time, provide centric to build long-term value. To make Real estate departments select sites businesses with a steady revenue stream, sure they hold on to their most valuable based on surrounding population profiles higher profit margins and confirmed evan- customers, many companies are taking a Stores are remodeled to meet the needs gelists who virtuallyand sometimes virally second look at a classic marketing tool of specific target groups do much of their marketing for them. consumer segmentationand applying its Customer service departments differentiate concepts in new and innovative ways. With their response scripts according to how But with the U.S. economy undergoing a consumer segmentation, businesses classify long a caller has been a patron wrenching recession, maintaining customer their customers according to shared demo- Merchandise is fine-tuned to meet the loyalty is more criticaland challenging graphic, lifestyle and behavioral traits. Then lifestyle preferences of the most loyal than ever. Industries ranging from banking they focus their marketing and merchandis- customers and those with highest to telecommunications are scrambling to ing efforts on the segments that offer the profit potential remain profitable amid dampened consumer highest profit potential. The results spending, high unemployment and financial increased brand loyalty, higher direct At Nielsen, analysts have developed a uncertainty. At the same time, companies marketing response rates and improved framework for achieving customer loyalty: are cutting back their marketing budgets customer acquisition and retentionhelp Identify the best consumer segments and preferred customer rewards programs explain why consumer segmentation in the Create the top target groups and develop as cost-saving measures. Twenty-five years U.S. market research industry is a multi- detailed lifestyle and behavior profiles after Neiman Marcus introduced the first million dollar business. Deploy enterprise-wide strategies that customer loyalty program, nationwide surveys take into account these profiles have reported a decline in corporate allegiance The strategy has also become more valuable Measure effectiveness and adjust strategy as consumers shift their concerns from in the current recession as companies face to maximize ROI patronage to price. greater competition in a down market, according to Morris Holbrook, Ph.D., a pro- Because this framework crosses functional An example of this is when the Nielsen fessor of marketing at Columbia University. boundaries, managers may face resistance Convergence Audit surveyed 38,000 Consumer segmentation doesnt just to their deployment. But a well-executed Americans about their technology purchases, provide companies with more data to better enterprise-wide segmentation effort can 24 percent said they had switched their cell serve more customers, says Holbrook. Page 2 2009 The Nielsen Company. All rights reserved

3 Segmentation and Customer Loyalty or broad-based mailing. Using consumer data to flesh out these portraits, Best Buy segments based on investable assets and re-aligned its stores according to the lifestage, a financial services company segments. Store clerks received training on converted 30 percent more prospects to how to serve the Barrys or Buzzes in their customers than with prior mass mailings. trade areas, and stores were remodeled to And when Ace Hardware turned to lifestyle reflect the dominant target groups. As a result segmentation for a customer retention of this program, the company invested more program, revenues rose 5.4 percent as than $50 million to renovate 110 stores. lapsed customers were enticed by discounts to return to their local Ace stores. A store with a strong Jill clientele, for instance, received brightly colored signage, Segmentation has always sought to answer play areas for children, lots of educational four fundamental questions: Who are my toys and personal shopping assistants They dont have to go after customers that customers? What are they like? Where can trained in ways to ease technology angst. are more loyal to competitors. They can I find more of them? What channels and The stores design, merchandise and staffing concentrate on segments that are strong messages should I use to connect with all combined to enhance a Jills shopping while shedding segments that are weak. them? Segmentation solutions traditionally experienceand, of course, maximize answer those questions by analyzing a company profits. In the year after the While segmentation was initially developed companys current customer database or makeover, the Best Buy stores that had as a tool for market research, the latest syndicated research to identify groups of been converted to the customer-centric applications are taking root as a sophisticated, customers with similar traits and behaviors, model reported same-store sales growth in enterprise-wide strategy. Multiple departments such as single women living in urban excess of nine percentmore than double within a company now use segmentation apartments or married men with college that of outlets that had not been overhauled initiatives for customer acquisition, product degrees living in exurbia. Companies then using the segmentation model. development, cross-selling, up-selling, target the best-performing customer customer relationship management, media segments with special product offerings, Typically, segmentation initiatives like the planning, site location analysis and merchan- personalized service, sales incentives and one used by Best Buy augment a companys dising. But to reap such gains, the organization merchandising designed with their lifestyle transactional data with syndicated survey has to embrace a segmentation framework preferences in mind. research to create detailed profiles of the as a way to build customer loyalty and customers who account for the most profit. increase revenue. Only by deepening the But for companies seeking to become truly Segmentation systems enhance customer relationship with its best customers from customer centric, a segmentation initiative data by linking consumers to a variety of multiple touch-points will a company be can go well beyond focused marketing third-party databases that can reliably predict able to compete more effectively during pitches to shape virtually every function their lifestyles and media preferences through the recession and grow its loyal customer that touches the customer. Best Buy their demographics. Nielsen PRIZM, intro- base when a healthier economy returns. launched a customer-centric program duced in 1976, currently classifies all 114 based on segmentation that now is at the million U.S. households into one of 66 Realigning Operations heart of its company-wide growth strategy. consumer typeswith names like Upper through Segmentation According to published reports, the consumer Crust, New Empty Nests and Shotguns & Consumer segmentation has been around electronics giant, which has more than Pickups. Drawing on U.S. Census data and for nearly four decades, and its been proven 1,000 stores nationwide, classified its best market research conducted by companies effective in solving a variety of marketing customers into five consumer segments, like Simmons and Mediamark Research & challenges. According to Nielsen, which conferring names on them like Buzz (the Intelligence, the system puts a human face offers a number of segmentation systems, young tech enthusiast), Jill (the suburban on every segments likes and dislikes. the response rate of a direct mail campaign soccer mom) and Barry (the wealthy Households classified Money & Brains, a that employs lifestyle-based customer seg- professional guy). Using a variety of segment of white-collar professionals living ments can be double that of a scattershot demographic, lifestyle and marketplace in high-priced urban enclaves, share a Page 3 2009 The Nielsen Company. All rights reserved

4 Segmentation and Customer Loyalty fondness for the arts, international travel, was able to cut printing and postage costs, luxury imports, wireless technology and reducing its acquisition cost per subscriber business magazineswhether they live in by 23 percent. Princeton, New Jersey or Palo Alto, California. Segmentation has really cut down on our By appending a PRIZM code to an address mailing pieces and costs, says Greg Bright, file, any company can begin building Director of IT Data Management, who stronger relationships with customers notes the paper now sends out 40 percent through tailored contacts that go beyond fewer direct mail pieces. Weve learned who mass mailing a discount coupon or buying were most likely to attract as subscribers a 30-second spot on the evening news. and concentrated our efforts with them. Stores in different citiesor even different Anyone still doing a mass mailing without neighborhoods in the same citycan feature target group selection is wasting their time product mixes geared specifically to the and money. lifestyles and preferences of the segments like Upper Crust and Blue Blood Estates) in that area. And once a company finds a and Silver (younger, upscale residents of Once the Arizona Republic has landed new specific segment with a high profit potential, segments such as Young Influentials and subscribers, the focus of its segmentation the segmentation system can identify areas The Cosmopolitans). Using a software tool efforts shifts to retaining them. The paper where more of those kinds of consumers that evaluates customers and markets, sent longtime Gold readers a thank you are likely to live and provide insights on analysts identify Arizona neighborhoods note for their loyalty, along with a $20 gift what messages will appeal to them. with high concentrations of the target card to Nordstrom, one of the Gold groups groups and the retail areas they are likely favorite retailers. Silver readers received Loyalty Has Its Privileges to frequent. Knowing where to find people $20 gift cards to Target. The segmentation At the Arizona Republic, a Gannett newspaper who share the same demographics and strategy has even guided circulation staffers with the largest circulation in Arizona lifestyles as its most loyal readers allows with a counterintuitive approach to managing 486,686 Sunday subscribersconsumer the Arizona Republic to target its introductory customer service problems. If a paper is segmentation drives its interdisciplinary direct mail subscription offers and differentiate delivered late to a Gold subscriber, for approach to maintaining customer loyalty. its pitch based on the prospects specific instance, a simple apology and service Reporters attend seminars about the most interests. And by setting up kiosks outside credit may be sufficient to assuage a loyal common PRIZM segments among their the grocery and department stores favored reader. The less loyal readers in the Bronze readers to better craft their stories with their by the various target groups, the paper group, however, receive a longer chat and audience in mind. Circulation managers makes sure its seen by the people most service credit. Just by looking at a PRIZM differentiate customer service policies likely to subscribe. code, we know if someone is going to stay based on whether a subscriber is a long-time a subscriber no matter what happens, says reader or a new customer. And marketers This approach to finding look-alike customers Bright. That lets us divert some of our target subscription drives to prospects who matched the characteristics of its most retention dollars to subscribers on the fringes. who, according to segmentation data, are loyal segments yields measurable results. But hes quick to add that the paper doesnt most likely to become loyal readers. Before 2005, when the Arizona Republic take its most loyal customers for granted. sought new customers with mass mailings To execute this customer-centric approach, of generic direct mail pieces, 23 percent of Increasing Customer Stickiness the company analyzes its subscriber list to respondents canceled their subscriptions Building customer loyalty through segmen- identify longtime readers and then classifies after the introductory offer. But in 2007, tation is not limited to finding new customer those loyal readers by PRIZM segments after the paper segmented and targeted look-alikes. It can also help companies based on their addresses. The resulting list Gold subscriber look-alikes, the drop-out keep existing customers from defecting of dominant segments is then sorted into rate fell to just 14 percenta 39 percent to competitors. When First Tennessee, a five target groups with nicknames like Gold improvement. Just as important, by targeting Memphis-based regional bank with about (older, affluent readers from PRIZM segments only selected households, the newspaper 200 branches, decided in 2008 to place a Page 4 2009 The Nielsen Company. All rights reserved

5 Segmentation and Customer Loyalty greater strategic emphasis on becoming products. In a commercial designed to First Tennessee has deployed a successful customer centric, it employed an innovative promote how First Tennessee offerings help advertising strategy linked to the media approach to address the lifecycle needs of younger professionals save for a bright future, patterns of targeted P$YCLE segments. top prospects. The bank drew on both its an African-American couple is shown While the bank used to run TV commercials customer records and data from Nielsen proudly sending their son off to elementary on network news and sports programs, P$YCLE, a segmentation system that school. For the near retirees, another spot P$YCLE showed that its targeted customers classifies households into 58 types based features a middle-aged couple helping their actually preferred cable channels like CNBC, on demographics and financial behavior. daughter prepare for her wedding. the Weather Channel and the Food Network. Focusing on a customers investable assets The banks media buy changed accordingly, and lifestage, First Tennessee identified We want our bank to resonate with the and the number of new deposit accounts segments of affluent and mass affluent lifestyle and financial needs of our target and loan applications rose in response. customers, and divided them further into audience, says Dan Marks, Chief Marketing Were still surprised by the Food Network, younger professionals, near retirees and Officer at First Tennessee, so we emphasize Marks chuckles. But its worked very well. retirees, for a total of six target groups. the competitive advantages that we know resonate with our customers and use our Pitfalls and Principles for After developing lifestyle portraits of the products as the call to action. Creating Loyal Customers target group members, First Tennessee Despite these success stories, applying identified key marketing themes based on Marks notes that P$YCLE is especially useful consumer segmentation across an enterprise the intersection of customer needs and the in understanding the lifestyle context and is not always an easy sell. Some sales banks competitive advantages. With a full wallet opportunity of a customer in managers resist focusing on the most multi-channel advertising campaign built order to anticipate their financial needs. valuable customers over the long-term, around the tagline Powering Your Dreams, For example, when a customer opens a preferring to acquire as many customers the bank tailored individual marketing $5,000 checking account, most banks in as short a time as possibleespecially if messages to resonate with its top target dont know whether the balance represents their compensation is structured to reward groups. For instance, to satisfy the busy most or only a small portion of the individuals that objective. Others may consider customer professionals who place a high value on wealth. But by linking its customers to a loyalty a qualitative attribute that is less convenience, the bank highlighted its P$YCLE segment, a bank can determine important than such quantitative metrics extended hoursopen until 6 p.m. on whether the individual is a member of as product sales. And some ad agencies weekdays and until 1 p.m. every Saturday Working-Class USA (with investable assets discredit lifestyle-based segmentation data that were 30 percent longer than the likely less than $25,000) or Domestic Bliss in favor of their own creative teams intuition, competition. Meanwhile, promotions to the (with assets typically above $100,000). For traditional demographics or psychographics near-retirement target group trumpeted its banks like First Tennessee, such insights are to classify customers. At one telecommuni- retirement planning services, including the invaluable when representatives talk to cations company, agency media buyers safety of its FDIC-insured savings and CD customers. Segmentation lets us know persisted in selecting TV shows based on more about customers and their potential age and gender even after a segmentation even before we talk to them, says Marks. analysis revealed that the lifestyles and Based on the customer code, well send an purchase behavior of the companys most upscale customers name to our private valuable segments were inconsistent with banking service and a more consultative those programs. Only after the target channel. Once you move customers over to groups were profiled with detailed portraits a private banking channel, the attrition rate of their lifestyles and leisure activities gets cut in half. including media preferencesdid the ad agency modify its messages, images and Adopting such strategies across multiple media buy for each target group. departments has allowed First Tennessee to unlock the true power of consumer segmentation. And to increase awareness, Page 5 2009 The Nielsen Company. All rights reserved

6 Segmentation and Customer Loyalty For those companies ready to undertake online job sites and social networks a bet- 7. Measure the effectiveness and adjust an enterprise-wide segmentation initiative ter choice? One bank based in the South your strategy. Use ROI analytics to ensure to increase customer loyalty, there are that sponsored NASCAR events was sur- your strategy is gaining traction and a handful of guiding principles that are prised to learn that 70 percent of its core delivering on goals. By measuring how important to achieving success: target preferred the opera; it promptly your customers respond to your efforts, changed its sponsorships. you can better predict their future behavior 1. Identify key customer segments. and refine your segmentation strategies Using a consumer segmentation system 4. Deliver differentiated messages and accordingly. like PRIZM, P$YCLE or the technology- experiences. Develop different product focused Nielsen ConneXions, append a positioning or messages for your top target Using consumer segmentation to build segment code to each customer address, or groups to keep current customers from customer loyalty can help companies use syndicated data if you lack an address defecting. Also, customize merchandising prosper even in a difficult economy with file. Identify your best segments by comparing strategies to the target groups to win comprehensive data and a willingness to the customers or sales in each segment to greater share of wallet. Each approach modify practices throughout the enterprise. the average in your market or nationwide should reflect their backgrounds, lifestyles By shifting resources away from mass using syndicated data. But keep in mind and preferences. And your sales staff marketing channels to a focused campaign that determining who your best customers should be thoroughly briefed on your top that puts their best customers front and are requires analyzing not just transaction- customer groups. center, businesses can improve sales and level profitability, but the cost of maintaining decrease costs, while building a loyal them. Do they use a lot of discount coupons, 5. Keep it simple. One automaker spent clientele that allows them to weather this rain checks or rebates? Do they return a lot hundreds of thousands of dollars developing challenging market. And when the economy of items? These factors play an important its own consumer segmentation system does turn around, a loyal customer base role in developing the optimal model. based on a survey of new car buyers and provides the best platform for future growth. created a model with more than 100 buyer 2. Create target groups of similar segments. While the system worked well in segments. After merging similar segments focus groups, it proved unwieldy in the of your best customers into four to eight marketplace, and the manufacturer eventually target groups, analyze each group by who pulled the plug. Off-the-shelf segmentation they are (demographics), what theyre like systems that provide comprehensive data (lifestyle activities and product preferences), and actionable strategies let you easily where they live (geographic concentration) connect with customers on the ground. and how to reach them (media consumption). Theyre also usually less expensive than If possible, identify their psychographics to more sophisticated, custom models. help determine whether theyre early adopters, price sensitive or green consumers. 6. Get everyone involved in the consumer segmentation approach. 3. Prospect for look-alikes in target Advanced segmentation initiatives require markets and your own customer multiple departments to adopt the strategies. database. Perform a market analysis that That means that the real estate department projects the concentration of your target no longer selects new store sites based on groups to potential trade areas, and then the lowest lease offered by a mall developer rank promising areas by profitability and but on the customer segment composition long-term value. After determining each of the area. And it means that a companys target groups preferences, develop a media merchandising department presents products and marketing strategy for each market. that appeal to the target audience. Would TV sports programs and country radio make the right connection or are Page 6 2009 The Nielsen Company. All rights reserved

7 Segmentation and Customer Loyalty Figure 1: A Framework for Segmentation 1 260 240 Purchasers by PRIZM Segment Identify the Best 220 Consumer Segments 200 Segment 33 180 Segment 50 Segment 66 160 140 120 100 Segment 25 Segment 01 80 60 Index 40 Index of 100 = U.S. average (11.6%) 20 2 Elite Suburbs Elite Suburbs SecondCity Second CitySociety Society Town & Town & Country Country Urban Upscale Urban Upscale The Affluentials The Affluentials Create the Top 01 Upper Crust 10 Second City Elite 05 Country Squires 04 Young Digerati 08 Executive Suites Target Groups 02 Blue Blood Estates 12 Brite Lites, Lil City 09 Big Fish, Small Pond 07 Money & Brains 15 Pools & Patios 03 Movers & Shakers 13 Upward Bound 11 Gods Country 16 Bohemian Mix 17 Beltway Boomers Lifestyle Types 06 Winners Circle 20 Fast-Track Families 24 Up-and-Comers 18 Kids & Cul-de-Sacs Who They Are 23 Greenbelt Sports 29 American Dreams 19 Home Sweet Home 25 Country Casuals Size = 13% of purchasers Size = 8% of purchasers Size = 20% of purchasers Size = 12% of purchasers Size = 11% of purchasers Index = 256 Index = 196 Index: 188 Index: 166 Index: 143 Consumer Insights Wealthiest suburbanites Affluent couples with children Prosperous boomers Upscale citydwellers Comfortable suburbanites What Theyre Like Post-graduate degrees College degrees College degrees Ethnically diverse Mostly couples Executive jobs Management jobs Telecommuting pros Early tech adopters College degrees Large homes Digital technology Exercise equipment Enjoy the arts White-collar jobs Expensive clothes Casual dining restaurants SUVs and boats Shop exclusive retailers Computer equipment Arts fans Upscale malls Consumer electronics Drive luxury imports Health foods Business media Conservative media Family media Travel abroad Big-box retailers Marketing Strategy Publisher websites Museum websites Stock trading websites Product placement in films Travel websites How to Reach Them NPR Turner Classic movies Search engine sites MTV Movie advertisements PBS Architectural Digest Meet the Press Vanity Fair Smithsonian Theater playbills Dow Jones Radio New Age radio stations Foreign language radio Computer store tie-ins Subway tie-ins Cruise ship tie-ins Consumer elec. tie-ins Wireless phone tie-ins Flyers at health clubs 3 Deploy Enterprise- Targeted marketing Call center scripting Messaging, tone and positioning Wide Strategies Customer insights Product development Customer relationship management Customer service offers Site location analysis Media strategy and buying 4 amp aigns Measure Effectiveness st c te p and Adjust Strategy D e v el o Me asure resu ROI y eg lt t s A s t stra dju In this case study, researchers analyzed Amazon.coms top customers using PRIZM lifestyle-based segments. Analysts grouped high-indexing segments into five target groups, profiled them using media and marketplace surveys and developed differentiated marketing strategies to reach them. The gray bars in the top chart represent low-indexing segments that arent among Amazon.coms best target groups. The results can be used for strategic and tactical applications across the company. Sources: Nielsen PRIZM, Mediamark Research & Intelligence. Page 7 2009 The Nielsen Company. All rights reserved

8 Segmentation and Customer Loyalty Figure 2: Segmenting Customers by Channel Yields Different Areas of Opportunity Shop at Wal-Mart Versus Order from, by PRIZM Segment Index of 100 = U.S. average (65.1% for Wal-Mart 2.7% for PRIZM Segments Shop at Wal-Mart, 3 mo Order from, 1 yr Shop at Wal-Mart Order from Consumer segmentation shows that the best customers for a retailer's brick-and-mortar stores may be very different from its best online shoppers. According to the bar chart displaying Nielsen PRIZM segments, Wal-Mart's most loyal fans are found in midscale and working-class exurban segments like New Homesteaders (32) and Big Sky Families (33), and the company should prospect for new customers in the dark blue areas in the map on the left. To expand the customer base for, however, the company should focus on younger, metro segments like Young Digerati (04) and Fast-Track Families (20) in the dark orange markets in the right map. And to increase the most loyal customerswho shop at both Wal-Mart and walmart.comthe company should design cross-channel marketing and merchandising initiatives to segments like Mayberry-ville (37) and Shotguns & Pickups (51). Sources: Nielsen PRIZM, Mediamark Research & Intelligence. For more information call (800) 234-5973 or visit us at Nielsen Claritas 2009 The Nielsen Company. All rights reserved.

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