Segmentation AndCustomer Loyalty - Nielsen
Segmentation and Customer LoyaltyUsing Segmentation to Strengthen Customer LoyaltyMay 2009
Segmentation and Customer LoyaltyUsing Segmentation to Strengthen Customer LoyaltyBy Mike Mancini, Vice President of Data Product ManagementNielsen ClaritasExecutive SummaryLoyal customers are important to businessesbecause they offer a steady revenue stream,higher profit margins and enthusiasticreferrals. But in a down economy, pricesensitivity can trump loyalty. To strengthenthe bonds with these high-profit potentialcustomers, innovative companies aredeploying enterprise-wide strategies builton consumer segmentation. These strategiesgo beyond the classic marketing applicationsof segmentation to drive customer-facingaspects of a business. Among the strategies: Real estate departments select sitesbased on surrounding population profiles Stores are remodeled to meet the needsof specific target groups Customer service departments differentiatetheir response scripts according to howlong a caller has been a patron Merchandise is fine-tuned to meet thelifestyle preferences of the most loyalcustomers and those with highestprofit potentialstrengthen customer loyalty and positiona company for even better performancewhen a healthier economy returns.IntroductionCustomer loyalty comes in many forms:consumers who wouldn’t think of buying acar from another dealer, shoppers who areon a first-name basis with a boutique storeclerk, coffee shop regulars who don’t evenneed to place an order to get their half-caf,no-whip soy latte. Loyal customers, builtone positive experience at a time, providebusinesses with a steady revenue stream,higher profit margins and confirmed evangelists who virtually—and sometimes virally—do much of their marketing for them.At Nielsen, analysts have developed aframework for achieving customer loyalty: Identify the best consumer segments Create the top target groups and developdetailed lifestyle and behavior profiles Deploy enterprise-wide strategies thattake into account these profiles Measure effectiveness and adjust strategyto maximize ROIBut with the U.S. economy undergoing awrenching recession, maintaining customerloyalty is more critical—and challenging—than ever. Industries ranging from bankingto telecommunications are scrambling toremain profitable amid dampened consumerspending, high unemployment and financialuncertainty. At the same time, companiesare cutting back their marketing budgetsand preferred customer rewards programsas cost-saving measures. Twenty-five yearsafter Neiman Marcus introduced the firstcustomer loyalty program, nationwide surveyshave reported a decline in corporate allegianceas consumers shift their concerns frompatronage to price.Because this framework crosses functionalboundaries, managers may face resistanceto their deployment. But a well-executedenterprise-wide segmentation effort canAn example of this is when the NielsenConvergence Audit surveyed 38,000Americans about their technology purchases,24 percent said they had switched their cellPage 2phone, cable TV and Internet serviceproviders in the last six months of 2008.But one upside to the economic downturn isthat companies are becoming more customercentric to build long-term value. To makesure they hold on to their most valuablecustomers, many companies are taking asecond look at a classic marketing tool—consumer segmentation—and applying itsconcepts in new and innovative ways. Withconsumer segmentation, businesses classifytheir customers according to shared demographic, lifestyle and behavioral traits. Thenthey focus their marketing and merchandising efforts on the segments that offer thehighest profit potential. The results—increased brand loyalty, higher directmarketing response rates and improvedcustomer acquisition and retention—helpexplain why consumer segmentation in theU.S. market research industry is a multimillion dollar business.The strategy has also become more valuablein the current recession as companies facegreater competition in a down market,according to Morris Holbrook, Ph.D., a professor of marketing at Columbia University.“Consumer segmentation doesn’t justprovide companies with more data to betterserve more customers,” says Holbrook. 2009 The Nielsen Company. All rights reserved
Segmentation and Customer Loyaltyor broad-based mailing. Using consumersegments based on investable assets andlifestage, a financial services companyconverted 30 percent more prospects tocustomers than with prior mass mailings.And when Ace Hardware turned to lifestylesegmentation for a customer retentionprogram, revenues rose 5.4 percent aslapsed customers were enticed by discountsto return to their local Ace stores.“They don’t have to go after customers thatare more loyal to competitors. They canconcentrate on segments that are strongwhile shedding segments that are weak.”While segmentation was initially developedas a tool for market research, the latestapplications are taking root as a sophisticated,enterprise-wide strategy. Multiple departmentswithin a company now use segmentationinitiatives for customer acquisition, productdevelopment, cross-selling, up-selling,customer relationship management, mediaplanning, site location analysis and merchandising. But to reap such gains, the organizationhas to embrace a segmentation frameworkas a way to build customer loyalty andincrease revenue. Only by deepening therelationship with its best customers frommultiple touch-points will a company beable to compete more effectively duringthe recession and grow its loyal customerbase when a healthier economy returns.Realigning Operationsthrough SegmentationConsumer segmentation has been aroundfor nearly four decades, and it’s been proveneffective in solving a variety of marketingchallenges. According to Nielsen, whichoffers a number of segmentation systems,the response rate of a direct mail campaignthat employs lifestyle-based customer segments can be double that of a scattershotPage 3Segmentation has always sought to answerfour fundamental questions: Who are mycustomers? What are they like? Where canI find more of them? What channels andmessages should I use to connect withthem? Segmentation solutions traditionallyanswer those questions by analyzing acompany’s current customer database orsyndicated research to identify groups ofcustomers with similar traits and behaviors,such as single women living in urbanapartments or married men with collegedegrees living in exurbia. Companies thentarget the best-performing customersegments with special product offerings,personalized service, sales incentives andmerchandising designed with their lifestylepreferences in mind.But for companies seeking to become trulycustomer centric, a segmentation initiativecan go well beyond focused marketingpitches to shape virtually every functionthat touches the customer. Best Buylaunched a customer-centric programbased on segmentation that now is at theheart of its company-wide growth strategy.According to published reports, the consumerelectronics giant, which has more than1,000 stores nationwide, classified its bestcustomers into five consumer segments,conferring names on them like Buzz (theyoung tech enthusiast), Jill (the suburbansoccer mom) and Barry (the wealthyprofessional guy). Using a variety ofdemographic, lifestyle and marketplacedata to flesh out these portraits, Best Buyre-aligned its stores according to thesegments. Store clerks received training onhow to serve the Barrys or Buzzes in theirtrade areas, and stores were remodeled toreflect the dominant target groups. As a resultof this program, the company invested morethan 50 million to renovate 110 stores.A store with a strong Jill clientele, forinstance, received brightly colored signage,play areas for children, lots of educationaltoys and personal shopping assistantstrained in ways to ease technology angst.The store’s design, merchandise and staffingall combined to enhance a Jill’s shoppingexperience—and, of course, maximizecompany profits. In the year after themakeover, the Best Buy stores that hadbeen converted to the customer-centricmodel reported same-store sales growth inexcess of nine percent—more than doublethat of outlets that had not been overhauledusing the segmentation model.Typically, segmentation initiatives like theone used by Best Buy augment a company’stransactional data with syndicated surveyresearch to create detailed profiles of thecustomers who account for the most profit.Segmentation systems enhance customerdata by linking consumers to a variety ofthird-party databases that can reliably predicttheir lifestyles and media preferences throughtheir demographics. Nielsen PRIZM, introduced in 1976, currently classifies all 114million U.S. households into one of 66consumer types—with names like UpperCrust, New Empty Nests and Shotguns &Pickups. Drawing on U.S. Census data andmarket research conducted by companieslike Simmons and Mediamark Research &Intelligence, the system puts a human faceon every segment’s likes and dislikes.Households classified Money & Brains, asegment of white-collar professionals livingin high-priced urban enclaves, share a 2009 The Nielsen Company. All rights reserved
Segmentation and Customer Loyaltywas able to cut printing and postage costs,reducing its acquisition cost per subscriberby 23 percent.fondness for the arts, international travel,luxury imports, wireless technology andbusiness magazines—whether they live inPrinceton, New Jersey or Palo Alto, California.By appending a PRIZM code to an addressfile, any company can begin buildingstronger relationships with customersthrough tailored contacts that go beyondmass mailing a discount coupon or buyinga 30-second spot on the evening news.Stores in different cities—or even differentneighborhoods in the same city—can featureproduct mixes geared specifically to thelifestyles and preferences of the segmentsin that area. And once a company finds aspecific segment with a high profit potential,the segmentation system can identify areaswhere more of those kinds of consumersare likely to live and provide insights onwhat messages will appeal to them.“Segmentation has really cut down on ourmailing pieces and costs,” says Greg Bright,Director of IT Data Management, whonotes the paper now sends out 40 percentfewer direct mail pieces. “We’ve learned whowe’re most likely to attract as subscribersand concentrated our efforts with them.Anyone still doing a mass mailing withouttarget group selection is wasting their timeand money.” Loyalty Has Its PrivilegesAt the Arizona Republic, a Gannett newspaperwith the largest circulation in Arizona—486,686 Sunday subscribers—consumersegmentation drives its interdisciplinaryapproach to maintaining customer loyalty.Reporters attend seminars about the mostcommon PRIZM segments among theirreaders to better craft their stories with theiraudience in mind. Circulation managersdifferentiate customer service policiesbased on whether a subscriber is a long-timereader or a new customer. And marketerstarget subscription drives to prospectswho, according to segmentation data, aremost likely to become loyal readers.To execute this customer-centric approach,the company analyzes its subscriber list toidentify longtime readers and then classifiesthose loyal readers by PRIZM segmentsbased on their addresses. The resulting listof dominant segments is then sorted intofive target groups with nicknames like Gold(older, affluent readers from PRIZM segmentsPage 4like Upper Crust and Blue Blood Estates)and Silver (younger, upscale residents ofsegments such as Young Influentials andThe Cosmopolitans). Using a software toolthat evaluates customers and markets,analysts identify Arizona neighborhoodswith high concentrations of the targetgroups and the retail areas they are likelyto frequent. Knowing where to find peoplewho share the same demographics andlifestyles as its most loyal readers allowsthe Arizona Republic to target its introductorydirect mail subscription offers and differentiateits pitch based on the prospects’ specificinterests. And by setting up kiosks outsidethe grocery and department stores favoredby the various target groups, the papermakes sure it’s seen by the people mostlikely to subscribe.This approach to finding “look-alike” customerswho matched the characteristics of its mostloyal segments yields measurable results.Before 2005, when the Arizona Republicsought new customers with mass mailingsof generic direct mail pieces, 23 percent ofrespondents canceled their subscriptionsafter the introductory offer. But in 2007,after the paper segmented and targetedGold subscriber look-alikes, the drop-outrate fell to just 14 percent—a 39 percentimprovement. Just as important, by targetingonly selected households, the newspaperOnce the Arizona Republic has landed newsubscribers, the focus of its segmentationefforts shifts to retaining them. The papersent longtime Gold readers a thank younote for their loyalty, along with a 20 giftcard to Nordstrom, one of the Gold group’sfavorite retailers. Silver readers received 20 gift cards to Target. The segmentationstrategy has even guided circulation stafferswith a counterintuitive approach to managingcustomer service problems. If a paper isdelivered late to a Gold subscriber, forinstance, a simple apology and servicecredit may be sufficient to assuage a loyalreader. The less loyal readers in the Bronzegroup, however, receive a longer chat andservice credit. “Just by looking at a PRIZMcode, we know if someone is going to staya subscriber no matter what happens,” saysBright. “That lets us divert some of ourretention dollars to subscribers on the fringes.”But he’s quick to add that the paper doesn’ttake its most loyal customers for granted.Increasing Customer StickinessBuilding customer loyalty through segmentation is not limited to finding new customerlook-alikes. It can also help companieskeep existing customers from defectingto competitors. When First Tennessee, aMemphis-based regional bank with about200 branches, decided in 2008 to place a 2009 The Nielsen Company. All rights reserved
Segmentation and Customer Loyaltygreater strategic emphasis on becomingcustomer centric, it employed an innovativeapproach to address the lifecycle needs oftop prospects. The bank drew on both itscustomer records and data from NielsenP YCLE, a segmentation system thatclassifies households into 58 types basedon demographics and financial behavior.Focusing on a customer’s investable assetsand lifestage, First Tennessee identifiedsegments of affluent and mass affluentcustomers, and divided them further intoyounger professionals, near retirees andretirees, for a total of six target groups.After developing lifestyle portraits of thetarget group members, First Tennesseeidentified key marketing themes based onthe intersection of customer needs and thebank’s competitive advantages. With amulti-channel advertising campaign builtaround the tagline “Powering Your Dreams,”the bank tailored individual marketingmessages to resonate with its top targetgroups. For instance, to satisfy the busyprofessionals who place a high value onconvenience, the bank highlighted itsextended hours—open until 6 p.m. onweekdays and until 1 p.m. every Saturday—that were 30 percent longer than thecompetition. Meanwhile, promotions to thenear-retirement target group trumpeted itsretirement planning services, including thesafety of its FDIC-insured savings and CDproducts. In a commercial designed topromote how First Tennessee offerings helpyounger professionals save for a bright future,an African-American couple is shownproudly sending their son off to elementaryschool. For the near retirees, another spotfeatures a middle-aged couple helping theirdaughter prepare for her wedding.“We want our bank to resonate with thelifestyle and financial needs of our targetaudience,” says Dan Marks, Chief MarketingOfficer at First Tennessee, “so we emphasizethe competitive advantages that we knowresonate with our customers and use ourproducts as the call to action.”Marks notes that P YCLE is especially usefulin understanding the lifestyle context andfull wallet opportunity of a customer inorder to anticipate their financial needs.For example, when a customer opens a 5,000 checking account, most banksdon’t know whether the balance representsmost or only a small portion of the individual’swealth. But by linking its customers to aP YCLE segment, a bank can determinewhether the individual is a member ofWorking-Class USA (with investable assetslikely less than 25,000) or Domestic Bliss(with assets typically above 100,000). Forbanks like First Tennessee, such insights areinvaluable when representatives talk tocustomers. “Segmentation lets us knowmore about customers and their potentialeven before we talk to them,” says Marks.“Based on the customer code, we’ll send anupscale customer’s name to our privatebanking service and a more consultativechannel. Once you move customers over toa private banking channel, the attrition rategets cut in half.”Adopting such strategies across multipledepartments has allowed First Tennesseeto unlock the true power of consumersegmentation. And to increase awareness,Page 5First Tennessee has deployed a successfuladvertising strategy linked to the mediapatterns of targeted P YCLE segments.While the bank used to run TV commercialson network news and sports programs,P YCLE showed that its targeted customersactually preferred cable channels like CNBC,the Weather Channel and the Food Network.The bank’s media buy changed accordingly,and the number of new deposit accountsand loan applications rose in response.“We’re still surprised by the Food Network,”Marks chuckles. “But it’s worked very well.”Pitfalls and Principles forCreating Loyal CustomersDespite these success stories, applyingconsumer segmentation across an enterpriseis not always an easy sell. Some salesmanagers resist focusing on the mostvaluable customers over the long-term,preferring to acquire as many customersin as short a time as possible—especially iftheir compensation is structured to rewardthat objective. Others may consider customerloyalty a qualitative attribute that is lessimportant than such quantitative metricsas product sales. And some ad agenciesdiscredit lifestyle-based segmentation datain favor of their own creative team’s intuition,traditional demographics or psychographicsto classify customers. At one telecommunications company, agency media buyerspersisted in selecting TV shows based onage and gender even after a segmentationanalysis revealed that the lifestyles andpurchase behavior of the company’s mostvaluable segments were inconsistent withthose programs. Only after the targetgroups were profiled with detailed portraitsof their lifestyles and leisure activities—including media preferences—did the adagency modify its messages, images andmedia buy for each target group. 2009 The Nielsen Company. All rights reserved
Segmentation and Customer LoyaltyFor those companies ready to undertakean enterprise-wide segmentation initiativeto increase customer loyalty, there area handful of guiding principles that areimportant to achieving success:1. Identify key customer segments.Using a consumer segmentation systemlike PRIZM, P YCLE or the technologyfocused Nielsen ConneXions, append asegment code to each customer address, oruse syndicated data if you lack an addressfile. Identify your best segments by comparingthe customers or sales in each segment tothe average in your market or nationwideusing syndicated data. But keep in mindthat determining who your best customersare requires analyzing not just transactionlevel profitability, but the cost of maintainingthem. Do they use a lot of discount coupons,rain checks or rebates? Do they return a lotof items? These factors play an importantrole in developing the optimal model.2. Create target groups of similarsegments. After merging similar segmentsof your best customers into
lifestyle preferences of the most loyal customers and those with highest profit potential At Nielsen, analysts have developed a frameworkfor achieving customer loyalty: Identify the best consumer segments Create the top target groups and develop detailed lifestyle and behavior profiles
The expansion of loyalty programs has led to changes in the loyalty of customers: according to Yi and Jeon (2003) there are now two different kind of loyalty: program loyalty and brand loyalty. Similarly, others researchers such as Evanschitzky et al. (2011) differentiate loyalty to the program itself and the loyalty to the company.
Siebel Loyalty Administration Guide Version 8.1/8.2 7 Creating Goals and Assumptions for Loyalty Promotions 336 Adding Expenses and Line Items to Loyalty Promotions 337 Adding Purchase Requests to Loyalty Promotions 338 Adding Market Development Fund Requests to Loyalty Promotions 339 Associating Loyalty Members with Marketing Campaigns 339
Internal Segmentation Firewall Segmentation is not new, but effective segmentation has not been practical. In the past, performance, price, and effort were all gating factors for implementing a good segmentation strategy. But this has not changed the desire for deeper and more prolific segmentation in the enterprise.
Internal Segmentation Firewall Segmentation is not new, but effective segmentation has not been practical. In the past, performance, price, and effort were all gating factors for implementing a good segmentation strategy. But this has not changed the desire for deeper and more prolific segmentation in the enterprise.
segmentation research. 2. Method The method of segmentation refers to when the segments are defined. There are two methods of segmentation. They are a priori and post hoc. Segmentation requires that respondents be grouped based on some set of variables that are identified before data collection. In a priori segmentation, not only are the
Fig. 1.Overview. First stage: Coarse segmentation with multi-organ segmentation withweighted-FCN, where we obtain the segmentation results and probability map for eachorgan. Second stage: Fine-scaled binary segmentation per organ. The input consists of cropped volume and a probability map from coarse segmentation.
want to bring into the store or onto the website more, and design a loyalty program for them.” The Nielsen Global Retail Loyalty-Sentiment Survey polled more than 30,000 online respondents in 63 countries to understand what drives cons
AS and A level specifications in business must encourage students to: develop an enthusiasm for studying business gain an holistic understanding of business in a range of contexts develop a critical understanding of organisations and their ability to meet society’s needs and wants understand that business behaviour can be studied from a range of perspectives generate enterprising and .
