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    Building Loyalty -- One High-Profit Customer Segment at a Time

    In a down economy, price sensitivity can trump loyalty. Without loyal customers, however, businesses can lose a substantial revenue stream, higher profit margins and enthusiastic referrals.

    In a down economy, price sensitivity can trump loyalty. Without loyal customers, however, businesses can lose a substantial revenue stream, higher profit margins and enthusiastic referrals. Innovative companies are staying ahead of the trend by deploying strategies built on consumer segmentation to strengthen the bonds with these high-profit potential customers. These strategies go beyond the classic marketing applications of segmentation to drive customer-facing aspects of a business.

    For most businesses, loyal customers are the ultimate quest: consumers who wouldn’t think of buying a car from another dealer, shoppers who are on a first-name basis with a boutique store clerk, coffee shop regulars who don’t even need to place an order to get their half-caf, no-whip soy latte. Loyal customers provide businesses with a steady revenue stream, higher profit margins and confirmed evangelists who virtually -- and sometimes virally -- do much of their marketing for them.

    Twenty-five years after Neiman Marcus introduced the first customer loyalty program, nationwide surveys have reported a decline in corporate allegiance as consumers shift their concerns from patronage to price. To strengthen the bonds with their best customers and retain wallet share, a number of innovative companies are taking a second look at a classic marketing tool -- consumer segmentation -- and applying its concepts in new and innovative ways.

    Customer-centricity as a Growth Strategy

    Electronics giant 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, Best Buy, which has more than 1,000 stores nationwide, classified its best customers into five consumer segments, with names 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 according to the segments. Store clerks received training on how to serve the Barrys or Buzzes in their trade areas, and stores were remodeled to reflect the dominant target groups. 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 9 percent -- more than double that of outlets that had not been overhauled using the segmentation model.

    The Human Connection

    Typically, segmentation initiatives like the one used by Best Buy augment a company’s transactional data with syndicated survey research to create detailed profiles of the best customers. Segmentation systems -- such as Nielsen’s PRIZM®, which was introduced in 1976 -- enhance customer data by linking consumers to a variety of third-party databases that can reliably predict their lifestyles and media preferences through their demographics.

    PRIZM draws on U.S. Census data and market research conducted by companies like Simmons and Mediamark Research & Intelligence, and currently classifies all 114 million U.S. households into one of 66 consumer types, putting a human face on every segment’s likes and dislikes.

    By appending a segmentation system such as PRIZM to an address file, any company can begin building stronger relationships with customers through tailored contacts that go beyond mass mailing a discount coupon or buying a 30-second spot on the evening news. Stores in different cities -- or even different neighborhoods in the same city -- can feature product mixes geared specifically to the lifestyles and preferences of the segments in that area. Once a company finds a specific segment with a high-profit potential, the segmentation system can identify areas where more of those kinds of consumers are likely to live and provide insights on what messages will appeal to them.

    Loyalty Has its Privileges

    At the Arizona Republic, a Gannett newspaper with the largest circulation in Arizona -- 486,686 Sunday subscribers -- consumer segmentation drives its interdisciplinary approach to maintaining customer loyalty. 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 longtime reader or a new customer. And marketers target subscription drives to prospects who, according to segmentation data, are most likely to become loyal readers.

    The Arizona Republic classifies loyal readers by PRIZM segments based on their addresses. The resulting list of dominant segments is then sorted into five target groups with nicknames like Gold (older, affluent readers from PRIZM segments like Upper Crust and Blue Blood Estates) and Silver (younger, upscale residents of segments such as Young Influentials and The Cosmopolitans). Analysts then identify Arizona neighborhoods with high concentrations of the target groups and the retail areas they are likely to frequent. Knowing where to find people who share the same demographics and lifestyles as its most loyal readers allows the Arizona Republic to target its introductory direct-mail subscription offers and differentiate its pitch based on the prospects’ specific interests.

    This approach to finding “look-alike” customers who matched the characteristics of its most loyal segments yields measurable results. For example, after the paper segmented and targeted subscriber look-alikes, the dropout rate fell to just 14 percent -- a 39 percent improvement. Just as important, by targeting only selected households, the newspaper was able to cut printing and postage costs, reducing its acquisition cost per subscriber by 23 percent and decreasing the number of direct-mail pieces sent by 40 percent.

    Developing a Competitive Edge

    Segmentation can also help companies keep existing customers from defecting to competitors. When First Tennessee, a Memphis-based regional bank with about 200 branches, decided 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. Focusing on a customer’s investable assets and lifestage, First Tennessee identified segments of affluent and mass affluent customers, and divided them further into younger professionals, near-retirees and retirees, for a total of six target groups.

    After developing lifestyle portraits of the target group members, First Tennessee identified key marketing themes based on the intersection of customer needs and the bank’s competitive advantages. With a multi-channel advertising campaign built around the tagline “Powering Your Dreams,” the bank tailored individual marketing messages to resonate with its top target groups. “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.

    Adopting such strategies across multiple departments has allowed First Tennessee to incorporate consumer segmentation into its overall business plan. For example, to increase customer awareness, First Tennessee deployed an advertising strategy linked to the media patterns of targeted P$YCLE segments. While the bank used to run TV commercials on network news and sports programs, P$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

    Despite these success stories, applying consumer segmentation across an enterprise is not always an easy sell. Some sales managers resist focusing on the most valuable customers over the long term, preferring to acquire as many customers in as short a time as possible -- especially if their compensation is structured to reward that objective. Others may consider customer loyalty a qualitative attribute that is less important than such quantitative metrics as product sales. 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
    --Implement the approach throughout the departments within your organization
    --Measure the effectiveness and adjust your strategy

    Using consumer segmentation to build customer loyalty can help companies prosper even in a difficult economy. 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.

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