Tuesday, April 27, 2010

Allowing customers to self-segment can provide lasting value for companies

By Ashley Graves

DraftFCB CMO Michael Fassnact said in his Ad Age editorial, "The Death of Consumer Segmentation," earlier this month that the traditional way of segmenting customers is most likely dying, or at least becoming less useful.

Segmentation is still important to the analysis of huge customer databases, but it is what to do with the segmentation schemes that should be looked at differently. As Fassnact argues, marketers can’t simply segment customers and then leave them in those segments for life. A company’s segmentation scheme should allow for customers to migrate between segments in order to maximize their lifetime value to the business. Self-selection into segments is even better.

Many companies are doing a fantastic job at self-segmentation-ahem, Amazon.com, anyone? This idea of having customers initially segment themselves allows for more targeted messages, and also allows customers to move to a different segment based on a variety of events.

Let’s take swimsuit shopping as an example. For many women, including me, shopping for a swimsuit is a dreaded yearly event. You generally are far from being tan and forget that certain swimsuit cuts look awful until you put them on. Wouldn't it be great to skip the trial-and-error step?

Many retailers are doing a fairly good job of letting customers self-segment online when shopping for swimsuits. Both Macy’s and Nordstrom have “Swimsuit finder” sections in their websites that allow for customers to sort and view swimsuits that are flattering to their self-selected body type. If I’m pear-shaped, I’m directed towards different styles than if I were hourglass-shaped.

This concept of dressing to your body type is fairly common within fashion, but there is a big opportunity for retailers to better apply this idea to segmenting their customers. Macys.com also allows you to shop for dresses by body type, but it is difficult to find. You have to choose your shape again instead of having the site carry over your selection from swimsuit shopping.

Why can’t retailers like Macy’s save your self-segmented preferences in order to provide an entirely new level of personalized shopping? If customers could provide information in their profiles about things like body type, retailers like Macy’s could provide clothing recommendations in any department.

Self-segmentation strategies could provide consumers with more relevant, targeted and effective communications, thus increasing their value to the company over a longer period of time.

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Ashley Graves is the Editorial Director at Vitamin IMC and a student in the Masters in Integrated Marketing Communications program at Northwestern University’s Medill School. Swimsuit shopping stresses her out. She can be reached at ashleygraves2010@u.northwestern.edu.

Friday, April 16, 2010

MillerCoors experimenting with technology to promote beer

By Susan Monahan

It’s the perfect Saturday afternoon, and you’ve stopped to pick up some beer on your way to a barbecue. There in the store, you decide you’ll show up with something different, fresh and cool.

But what to choose?

MillerCoors hopes you’ll grab Colorado Native, a new craft-style beer that it’s trying to break through the clutter with. Which you might, if: you’d tried it previously; taken a picture of the SnapTag on the bottle with your camera phone; answered a few questions over a text message survey; then received local, brew-related tips and messages from Colorado Native.

“The SnapTag technology allows us to have thousands of individual, one-on-one conversations with our consumers and provide them with information that’s relevant to them and share that information with other natives,” said Glenn Knippenberg, president of Colorado Native’s brewing company, AC Golden. “Ultimately, they’ll define the brand for us.”

MillerCoors is testing the new beer only in Colorado, for now. It could capitalize on the attraction to trying new products. As Americans’ palates have developed, microbrews’ sales have increased. Even the macrobreweries like MillerCoors have grass-roots hits, such as Blue Moon. After a slow launch in 1995, Blue Moon sales recently picked up, rising 14% in 2009. Attribute that to the power of word-of-mouth for the self-proclaimed “artfully crafted” beer.

But, can MillerCoors quicken the catching-on of Colorado Native with SnapTags?

Traditionally, marketing efforts for craft brews have taken off at events like beer tasting festivals or in print media recommendations, such as Maxim’s Top Beers list.

Social marketing begs a time investment from consumers. However, consumers benefit from messages on topics they like, if they’re willing to join in conversation with the brand. MillerCoors is hoping to stimulate “discovery” of Colorado Native instead of using the heavy-handed, commercial approach.

Would you take a picture of Colorado Native’s SnapTag before your first sip?

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Susan Monahan is a graduate student in Integrated Marketing Communications at Northwestern and a VitaminIMC blogger. Though Colorado is great, she still thinks Portland, Oregon, is the #1 brewing town. Contact her at susanmonahan2010@u.northwestern.edu.

Monday, April 12, 2010

Computing Customer Lifetime Value

By Pooja Ranganathan

A few days ago, Avinash Kaushik and David Hughes published a post on Customer Lifetime Value. David was kind enough to provide a downloadable Excel template to get readers started on their own LTV analysis. The post and the worksheet provided a perfect opportunity for us at Medill IMC to vet our techniques against those used by industry practitioners. Last quarter, Professor Ed Malthouse taught several models and approaches to computing customer lifetime value at Medill.

The basic premise in both techniques is the same:

  1. Segment your customers. On this note, David’s idea of segmenting by acquisition channel for optimal allocation of your marketing budget is excellent. He also suggests segmenting by purchase behavior, using differences in average order value, frequency of purchases, retention periods, etc.
  2. For each segment, compute retention rates. What percentage of the original segment do you retain year-on-year?
  3. Estimate the net profit of customers retained each year. This is a function of frequency of purchase, average order amount, and costs.
  4. Discount each year’s net profit to get its net present value, less acquisition costs. The sum of all NPVs less acquisition costs is the customer lifetime value.

I won’t cover this process in more detail as it has been wonderfully explained in the original post. It’s almost exactly the same as the technique taught at Medill, with a few differences:

  • David’s technique accounts for different average order amounts, as he uses it as a basis for segmentation (“best” vs. “average” customers).
  • The technique taught at Medill accounts for “recency,” which is the period in which the customer last made a purchase. Your “active” customers in the current period would therefore include the customers that you retained from the immediately preceding period, as well as those you lost earlier that renewed their relationship with you in this period (after an absence of a few periods). The retention rate for the latter would vary based on recency as the longer a customer is inactive, the lower his probability of renewing the relationship in a later period.
  • By accounting for different recencies, we can vary our marketing expenditure accordingly, and spend less on customers that have been “inactive” for a longer time.

A happy union of David’s technique and the approaches taught at Medill is a small step away. One way of doing it is to segment customers based on revenue or average order amount (deciles are a common way of doing so), and replicate the spreadsheet for each of the top deciles.

How would you go about estimating LTV? Are there any further tweaks you would recommend?

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Pooja Ranganathan is a blogger at Vitamin IMC and a student in the Masters in Integrated Marketing Communications program at Northwestern University’s Medill School. She can be reached at PoojaRanganathan2010@u.northwestern.edu

Thursday, April 1, 2010

Walmart & the stickiness of customer loyalty

By Anne Mahoney

Walmart’s pricing strategy of everyday low, low, sometimes unbelievably low prices has earned it high points in customer loyalty, according to a new survey. But does this loyalty translate into true affection, or will the retailer lose its golden product retrievers to a new master once pricing is no longer the dominant differentiator?

The very public price war between Walmart and Amazon.com at the end of 2009 was a prime demonstration of the heavyweight’s affect on other retailers. It also demonstrated the tenacity of the “little guys” to match pricing that would barely achieve above-margin revenue. Target entered the ring after Amazon, each squaring off against Walmart by dramatically dropping prices.

What’s the potentially larger problem for all retailers involved? Setting a standard for customer expectations. Walmart’s customers may not be actually loyal to Walmart, the brand. They are loyal to the prices on Walmart’s tags. And now with online shopping price comparison sites and savvier retailer incentive programs, Walmart may need to be more than just the cheapest lemonade stand on the block.

Several strategies for retailers preparing to exit the recession era and compete outside of pricing were offered by DIRECT Magazine. It recommend competing on the best landscape suited to the brand, targeted promotions, strategic use of information and selective pricing.

To add to those recommendations are a few more, compliments of the Medill IMC classroom:

  • Personalized Communications & Incentives: The success of grocery retailer Tesco by marketing agent dunnhumby is a much-discussed case at Medill. Retailers who know how to leverage customer data and provide personal attention in the form of promotional offers have the upper hand in achieving real loyalty.

  • Experiential Shopping: Quick – what do you think of when you read “Target”? How about “Best Buy”? Now think “Walmart.” It is likely you thought of specific experiences, imagery, products or customer service for the first two. Did you think about cheap prices for Walmart? That’s where brand equity comes in.

  • Exclusivity: The economic situation has turned retail into a flea market. Everyone is shopping around for the best price. If retailers can’t compete on price, they can compete with superior product selection and avoidance of substitutability.

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Anne Mahoney is Social Media Director at Vitamin IMC and a student in the Masters in Integrated Marketing Communications program at Northwestern University's Medill School. She is smitten by Target’s advertising, to give full disclosure to this article. She can be reached at annemahoney2010@u.northwestern.edu.