Matt O’Grady, President, Nielsen Claritas
In a down economy, price sensitivity can trump loyalty as customers are forced to reduce their spending. Nationwide surveys have reported a decline in corporate allegiance as consumers shift their concerns from patronage to price. When the Nielsen Convergence Audit surveyed 38,000 Americans about their technology purchases, 24 percent said they had switched their cell phone, cable TV and Internet service providers in the last six months of 2008. To strengthen the bonds with their best customers and retain wallet share, a number of innovative companies are applying consumer segmentation to enterprise-wide strategies designed to make their organizations more customer centric. At Nielsen, analysts have developed a framework for deploying these enterprise-wide segmentation initiatives that can yield significant results.
Realigning Operations through Segmentation
Best Buy launched a customer-centric program based on segmentation that now is at the heart of its company-wide growth strategy. According to published reports, the consumer electronics giant classified its best customers into five consumer segments, conferring names on them like Buzz (the young tech enthusiast), Jill (the suburban soccer mom) and Barry (the wealthy professional guy). Using a variety of demographic, lifestyle and marketplace data to flesh out these portraits, Best Buy re-aligned its stores, sales training and marketing according to the segments. As a result of this program, the company invested more than $50 million to renovate 110 stores. In the year after the makeover, the Best Buy stores that had been converted to the customer-centric model reported same-store sales growth in excess of nine percent-more than double that of outlets that had not been overhauled using the segmentation model.
Loyalty Has Its Privileges
At the Arizona Republic, a Gannett company, consumer segmentation drives their approach to maintaining customer loyalty. Using data from Nielsen’s PRIZM, a segmentation system that classifies households into 66 types based on demographics and lifestyles, reporters attend seminars about the most common PRIZM segments among their readers to better craft their stories with their audience in mind. Circulation managers differentiate customer service policies based on whether a subscriber is a long-time reader or a new customer. And marketers target subscription drives to prospects who, according to segmentation data, are most likely to become loyal readers. Before 2005, when the Arizona Republic sought new customers with mass mailings of generic direct-mail pieces, 23 percent of respondents canceled their subscriptions after the introductory offer. But in 2007, after the paper segmented and targeted Gold subscriber look-alikes, the drop-out rate fell to just 14 percent-a 39 percent improvement. Just as important, the newspaper was able to cut printing and postage costs, reducing its acquisition cost per subscriber by 23 percent. “Segmentation has really cut down on our mailing pieces and costs,” says Greg Bright, Director of IT Data Management, who notes the paper now sends out 40 percent fewer direct-mail pieces.
Increasing Customer Stickiness
Building customer loyalty can also help companies keep existing customers from defecting to competitors. When First Tennessee decided in 2008 to place a greater strategic emphasis on becoming customer centric, it employed an innovative approach to address the lifecycle needs of top prospects. The bank drew on both its customer records and data from Nielsen P$YCLE, a segmentation system that classifies households into 58 types based on demographics and financial behavior. “We want our bank to resonate with the lifestyle and financial needs of our target audience,” says Dan Marks, Chief Marketing Officer at First Tennessee, “so we emphasize the competitive advantages that we know resonate with our customers and use our products as the call to action.” While the bank used to run TV commercials on network news and sports programs, P$YCLE® showed that its targeted customers actually 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 accounts and loan applications rose in response. “We’re still surprised by the Food Network,” Marks chuckles. “But it’s worked very well.”
Principles for Creating Loyal Customers
For those companies ready to undertake an enterprise-wide segmentation initiative to increase customer loyalty, there are a handful of guiding principles that are important to achieving success:
- Identify key customer segments.
- Create target groups of similar segments.
- Prospect for look-alikes in target markets and your own customer database.
- Deliver differentiated messages and experiences.
- Keep it simple.
- Get everyone involved in the consumer segmentation approach.
- Measure the effectiveness and adjust your strategy.
Using consumer segmentation to build customer loyalty can help companies prosper even in a difficult economy with comprehensive data and a willingness to modify practices throughout the enterprise. By shifting resources away from mass marketing channels to a focused campaign that puts their best customers front and center, businesses can improve sales and decrease costs, while building a loyal clientele that allows them to weather this challenging market.