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    Building Loyalty—One High Profit Customer Segment at a Time

    Innovative companies are deploying strategies build on customer segmentation to strengthen the bonds with high-profit potential customers.

    Mike Mancini

    NEW YORK -- 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 companywide 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 flush out these portraits, Best Buy realigned 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. Nielsen is the parent company to Convenience Store News.

    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.

    For more examples of success stories utilizing customer segmentation to develop a competitive edge, go to Nielsen Consumer Insights.

    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 enterprisewide 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 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.

    To learn more, download the full report, Using Segmentation to Strengthen Customer Loyalty.

    Mike Mancini is vice president of data product management for Nielsen Claritas

    -- Nielsen Business Media

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