Tuesday, September 1, 2009

Building Loyalty - One High Profit Customer Segment at a Time

CI SUMMARY: 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.

By: Mike Mancini, Vice President of Data Product Management, Nielsen Claritas.

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%—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 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.

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 drop-out rate fell to just 14%—a 39% 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% and decreasing the number of direct mail pieces sent by 40%.

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 their 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.

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

Source: http://en-us.nielsen.com/main/insights/consumer_insight/August2009/building_loyalty_one

Nielsen reminds us that the heart of loyalty programs is solid consumer segmentation. All too often, marketers use generic approach to translate retention or loyalty as keeping top percentage of consumers who contribute most sales away from competitors. Various delightful priviledges are then offered under common assumption that they are cheaper than the cost of attracting new consumers & hopefully they will generate better ROI in long-term.

The premise is: if we put enough effort to develop a robust segmentation & build a deep understanding of our consumers, it's going to be intuitively easy to develop the programs that strikingly hook the loyalists. Keeping the big picture in mind: loyalty program should support the growth strategy and being an integral part of overall marketing plan to achieve profit objective, not just an after-thought.

It seems like easier for marketers who collect consumers database as part of the sales cycle via subscription / transaction (banking, phone providers, retailers, etc) because there are many tools available to slice-and-dice the data. How to apply this on mass-products like CPG?

Budgeting for the Upturn - Does Share of Voice Matter?

CI SUMMARY: Advertisers seek to understand the relationship between share of voice (SOV) and share of market (SOM). Many factors besides SOV contribute to increased market share including: brand size; life cycle stage; “newness”; campaign quality.

By: Nikki Clarke, Marketing Mix Consultant, The Nielsen Company, United Kingdom.

In the ongoing battle for greater sales and more market share, marketers are left wondering which strategy will increase their brand’s strength. In today’s tough economic times, advertisers seek insights to guide them in spending their limited budgets as efficiently as possible.

Most companies are trimming ad budgets. Global advertising expenditure across television, newspapers, magazines and radio recorded a 7.2% drop for the first quarter of 2009 compared to the same time period in 2008. In addition, with the explosion of consumer-generated media, these traditional advertiser-led media outlets are less trusted by consumers. Recommendations by personal acquaintances and consumer opinions posted online are now the most trusted forms of advertising globally, according to the latest Nielsen Global Online Consumer Survey. However, advertisers will be encouraged to learn that brand websites—the most trusted form of advertiser-led advertising—are trusted by as many people as online consumer opinions.

The concept of equilibrium
All things being equal, a brand whose share of voice (SOV) is greater than its share of market (SOM) is more likely to gain market share.

A Brand That Punches

Excess share of voice (ESOV = SOV - SOM) is an important contributor to the level of growth. Brand size and life cycle stage also played a role in the analysis. To quantify just how much market share grows when advertisers increase their SOV, 123 brands were analyzed, across 30 different categories of ‘typical’ advertising (i.e., not award-winning campaigns).

On average, a 10 point difference between SOV and SOM leads to 0.5% of extra market share growth. Therefore, a brand with a market share of 20.5% with an ESOV of 10 points would grow to 21% market share over a year.

So, what is the implication for media planning? Excess share of voice can drive market share. The 10 to 0.5 ratio norm can be used for market share forecasting purposes when setting targets for fast moving consumer goods (FMCG) brands. In the study, there were large variances across particular categories and brands; therefore, a brand should measure its specific relationship between SOV and SOM to provide an accurate benchmark.

Drivers of growth
A number of factors explained the variation from the 10:0.5 normative return:

  • Brand size
  • Leaders vs. challengers
  • New brands and new news
  • Campaign quality

Brand size matters

There were wide disparities between the levels of growth achieved per point of ESOV by large brands compared to smaller ones. Smaller brands face an uphill battle to grow their market share through share of voice alone, and will almost certainly require ad campaigns with above-average effectiveness in order to succeed. Larger brands have distribution, range, and pricing to help to maintain and increase share. As a result, their ad campaigns do not have to be as effective.

Growth vs Excess Share

Brand leaders vs. challenger brands
On average, brand leaders achieved 1.4% of share growth per 10% of ESOV, compared to 0.4% for challenger brands. Therefore, a typical FMCG challenger needs to be at least 3.5 times as effective as the leader to level the playing field. In this context, it is easy to see why challenger brands have to take a different approach to deliver the same scale of efficiency as the brand leader.

To illustrate the struggle faced by challenger brands, these findings were applied to compare the growth that would be achieved by a market leader to that achieved by a challenger brand if both sustained 10% of ESOV.

Challenger Brands

New brands and new news
Introducing something new for the brand or category generally resulted in greater growth responsiveness to ESOV. Brand launches or re-launches typically achieved 15-25% greater growth per point of ESOV than the norm. Brands in younger categories with less competition also fared better than those in mature categories.

Campaign quality
Using the right copy is a significant driver of brand growth. Campaign quality is the most significant driver of consumer-generated media and is important for traditional and new media. Nielsen investigated drivers of word of mouth, or ‘buzzability’. An example includes two United Kingdom ad campaigns that utilized viral marketing to elevate their brands to a whole new level of awareness.

In an attempt to reverse a long-term decline in the U.K. tea market and ignite sales for its PG Tips brand of tea, Unilever re-introduced “Monkey” in 2007—a widely popular animated puppet in the form of a knitted sock monkey as ambassador to the brand. The PG Tips Monkey campaign broke the mold in terms of cutting through buzz. However, when the award-winning Cadbury Gorilla aired a few months later, online chatter increased dramatically, and YouTube received 500,000 page views in the first week after launch, exceeding the levels achieved by the PG Tips Monkey to set a new benchmark.

Right Copy

Application for media planning
Clients are faced with increasing, maintaining, or decreasing support for their brand. In the short-term, it is tempting to make cuts to media investments. However, what is the impact in the long term? Three scenarios were investigated to demonstrate the use of the ESOV-growth model as a planning tool.

Scenario one used an extreme example, which showed the effect of a typical brand leader cutting its media budget to zero for two years while others maintained 2% media budget growth. The result showed that when the advertiser cut all spending, market share fell from 33.3% to 28.5% in the third year.

In scenarios two and three, the effects of two brand strategies were compared. One brand chose a modest investment strategy versus a more realistic reduced investment strategy. The investor brand raised activity by 2% in the first year, then by 3.5% in the second year, and finally by 4.5%. The disinvestor brand cut its activity by 20% in year one followed by 10% and stayed flat in the last year.

The outcome was enlightening. While the investor brand increased market share 15% in year three and grew profit by 2%, the disinvestor brand declined 20% losing 3% of profits. The apparent result is that short-term reductions to investment damage a brand in the long term, whereas brands that continue to invest maintain a stronger position over time.

The long view
Short-term reductions to media investments will likely damage a brand in the long-term. Clients that take a long view of brand strategy will emerge out of the down economy in a stronger position than those who focus on short-term savings.

To grow market share, five guiding principles can help navigate the correct levels of SOV investment:

  1. SOV alone is not enough. Using the right copy is critical to drive returns
  2. SOV/SOM differential matters. Excess SOV delivers growth: typically, 0.5% for a 10-point differential
  3. Brand size matters. Market leaders drive greater returns from SOV than challengers.
  4. ‘Newness’ delivers higher gains. Launches/younger categories respond at a higher level.
  5. Short-Termism is dangerous. Correct level of SOV + quality campaign = stronger brands.
Source: http://en-us.nielsen.com/main/insights/consumer_insight/August2009/budgeting_for_the

Common belief says that we have to maintain SOV at least at the same level as market share to sustain base business. Then, we need to invest 'Excess SOV' on top if we desire to push the share a little bit higher. Nielsen came up with this wonderful article that scrutinizes key factors to consider when we decide to fuel to the media investment.
All being take into account, there are equally important go-to-market elements that brand managers need to watch to ensure the off-take really flies.