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CustomerSegmentationFundamentals:
SixStepstoCreatingCustomerProfilesand GainingMarketAdvantage

Knowledgeofyourcustomersneedsandwantsisthefoundationformarketing andsalessuccess.Awellcraftedcustomersegmentationanalysisofconsumers willprovidethisknowledgeandcanserveasablueprintforyourentire organization.Corporatestrategists,marketers,salespeopleandproduct developersallcanusethesamecustomersegmentationanalysistodrive decisionsleadingtogreaterrevenueandprofitability. Theresultsofcustomersegmentationanalysiscanbeusedto: ChooseBetterStoreLocations Customersegmentationisakeyanalysisforaccuratelyprojectingthesize ofyourtotalmarketopportunity,andprojectingrevenueandcustomersfor newlocations.Fewcompaniescanmakesuccessfulsiteselectiondecisions withoutfirstgainingindepthknowledgeoftheircustomersthrougha segmentationanalysis. UnderstandUntappedMarketPotential Anaccurateprofileofyourcustomersallowsyoutoanalyzemarketareas orneighborhoodstounderstandhowwellyouaredoinginthoseareas calledyourpenetrationaswellgaininsightintothemarketpotentialand appropriatemixforyourproductsandservices. ImproveTargetedMarketing Byidentifyingthecustomersegmentsthataremostimportanttoyour business,youcanfocusmarketing,mediachoicesorbusinessactivitieson thosecustomersandprospectsmostlikelytopurchaseyourproducts.You canimproveresponseratesandROIbypreciselymarketingtosegments withoffersthatwillappealspecificallytothem.

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The Customer Segmentation Process

Thefactis,notallcustomersarecreatedequal.Somearebetterthanothers:they buymore,andmoreoften;theycontributemoreprofittoyourbottomline. Profilingyourcustomerstocreatesegmentswillhelpyouidentifyyourbest customersandthoseprospectsyoushouldtarget. Creatingcustomersegments(orprofiles)andthenusingthosesegments effectivelyinyouroperationsisamultistepprocess:
To profile customers, you can use a custom neighborhood segmentation system or a commercially available one, such as STI: Landscape, Mosaic , Tapestry , or PRIZM .

1. 2. 3. 4. 5. 6.

Startwithyourcustomerlistandlocateyourcustomersbyaddress* Applyaneighborhoodclassificationsystemtoclassifyanddescribethe neighborhoodsyourcustomerslivein UsetheconceptsofBase,PenetrationRateandPenetrationIndexin youranalysis DevelopaStrategicOpportunityGridtoidentifyyourbestsegments AddsyndicatedsurveydatafromMediamarkResearch,Inc.(MRI)to betterunderstandandtargetcustomersegments Usetheresultsofcustomersegmentationanalysistoimprovesales, marketing,andproductdevelopment

*IfyoudonthaveacustomerlistyoucanuseMRIconsumersurveyquestionstoidentifythe productmostlikeyoursandthesegmentsmostinterestedinit,thenusethesesegmentsasyour customersegments.

Neighborhood Segmentation Systems

Neighborhood segmentation systems are also called lifestyle segmentation systems, cluster systems or neighborhood classification systems. By any name, they are at the heart of customer segmentation analysis.

Neighborhoodsegmentationsystemsarecreatedusingproprietary methodologiesappliedtoahostofdemographicandconsumerdatavariables. Theyclassifyanddescribeneighborhoodsattheblockgrouplevelacrossthe entireU.S. Thesesystemsarebasedontheconceptofbirdsofafeatherflocktogether.In general,peoplewholiveinthesameneighborhoodssharesimilarcharacteristics, includingdemographics,lifestylesandpurchasingpatterns.Allofyour customersbecausetheylivesomewherefallintoaspecificsegment.You

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canidentifyacustomerssegmentby matchingyourcustomeraddresslistto aneighborhoodsegmentationsystem. Theresultingsegmentscanbepowerful predictorsofconsumerbehavior. Thefigureontherightshowsa distributionprofileofacustomerlist. Itshowsthenumberofcustomersin eachsegment(orcluster)andthe percentofcustomersineachsegment. Thisneighborhoodsegmentationsystem usescreativedescriptivenames,suchas CharmedLifeandStillintheGame. Thecountofcustomersineachcluster isntinitselfenoughtoindicatewhich clustersareyourbest.Weexpecthigher numbersofcustomersinclusterswhich inherentlyhavemorepeopleinthem. Therefore,insteadofcomparingyour customerstotheentirecountry,you needtocomparethemtoamoredefined andrelevantgeographicbaseinorderto achieveaccuratesegmentationresults.

Cluster ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

NAME Empire Builders Grand Masters Marquis Class American Knights Urban Squires Regents Charmed Life Sitting Pretty Kindred Spirit Middle of the Road White Collar Status Blue Collar Starts Social Whirls Managing Business Nest Builders Gainfully employed Strapped Gray Eminence Fall Years Still in the Game Gurus Wizards Apprentices Hard Act to Follow SM seeks SF Solo Acts Down But Not Out Urban Moms Apron Strings Solemn Widows Educated Earners Suburban Singles Hard Hats/Hair Nets Bonds and Babies Great Generations Couples with Capital Kith and Kin Sublime Suburbia Stocks and Scholars

# of Customers % of total 2,034 7.8% 1,492 5.7% 1,950 7.5% 844 3.2% 1,098 4.2% 609 2.3% 241 0.9% 240 0.9% 111 0.4% 64 0.2% 62 0.2% 16 0.1% 91 0.4% 125 0.5% 51 0.2% 58 0.2% 20 0.1% 128 0.5% 31 0.1% 0.0% 1,825 7.0% 3,223 12.4% 2,002 7.7% 332 1.3% 727 2.8% 360 1.4% 228 0.9% 182 0.7% 62 0.2% 16 0.1% 473 1.8% 163 0.6% 66 0.3% 592 2.3% 664 2.6% 505 1.9% 195 0.8% 146 0.6% 1,264 4.9%

LandscapeSegmentationSystem,STI,Inc.

Base, Penetration and Index

For segmentation purposes, your base is a geographic area where the people living there could reasonably purchase your product.

Thebaseistheareafromwhichcustomerscouldreasonablypurchaseyour product;itistheareafromwhichyourcustomerscome.Yourbasemightbe yourstorestradearea,aregionofthecountry,ortheentirenation.Itcanbe definedasamarket,agroupofmarkets,radiiaroundstoresoraspecialized groupingofZIPCodes. Toperformaccuratesegmentationanalysis,youmustcompareyourcustomers totheappropriatebasepopulation,ratherthantoeveryone.Why?Becausethe

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The penetration rate is the percent of a segment that is already your customer.

The penetration index is the likelihood of a specific segment being in your customer group.

lifestyleclustersprevalent 1 Empire Builders 262,052 5.0% 2,181,138 2 Grand Masters 113,930 2.2% 2,899,856 inyourbasepopulationcan 3 Marquis Class 207,846 4.0% 3,811,888 beverydifferentthanthe 4 American Knights 231,439 4.5% 4,869,084 5 Urban Squires 99,825 1.9% 2,612,828 clustersprevalentinthe 6 Regents 101,056 1.9% 3,700,597 overallU.S.population. 7 Charmed Life 50,880 1.0% 4,014,845 8 Sitting Pretty 74,888 1.4% 4,215,105 9 Kindred Spirit 59,450 1.1% 4,001,249 Intheexampleonthispage, 10 Middle of the Road 31,751 0.6% 2,870,588 11 White Collar Status 66,747 1.3% 2,856,038 EmpireBuildersrepresent 12 Blue Collar Starts 14,620 0.3% 2,499,120 5%ofyourbasebutonly1% 13 Social Whirls 21,679 0.4% 1,264,310 14 Managing Business 31,586 0.6% 2,202,769 oftheU.S.population. 15 Nest Builders 18,051 0.3% 2,595,541 Conversely,FallYears 16 Gainfully employed 29,275 0.6% 4,053,159 17 Strapped 14,921 0.3% 2,722,461 represent1.9%oftheU.S. 18 Gray Eminence 28,460 0.5% 3,709,503 populationbutonly0.1%of 19 Fall Years 6,913 0.1% 3,917,169 20 Still in the Game 0.0% 1,094,269 yourbase. 21 Gurus 202,770 3.9% 2,434,264 Inthefigurebelow,thecolumnPenetrationrepresentsthepercentofthetotal clusterpopulationofyourbasethatisalreadyacustomer.Inotherwords,how muchyouvepenetratedthatcluster,expressedasarate.ThePenetration Indexshowsthelikelihoodofaspecificclusterbeinginyourcustomergroup. Forexample,yourpenetrationoftheGrandMastersclusteris1.31%andGrand Mastersare2.62timesmorelikelythantheaverageclustertobeyourcustomer.
Number of people in cluster in base area Percent of total base Percent of total cluster population already a customer

Cluster ID NAME

Base_Count

US_Count

% 1.0% 1.4% 1.8% 2.3% 1.2% 1.8% 1.9% 2.0% 1.9% 1.4% 1.4% 1.2% 0.6% 1.0% 1.2% 1.9% 1.3% 1.8% 1.9% 0.5% 1.2%

Indexed performance of cluster group against other clusters

Cluster ID NAME 1 Empire Builders 2 Grand Masters 3 Marquis Class 4 American Knights 5 Urban Squires 6 Regents 7 Charmed Life 14 Managing Business 15 Nest Builders 16 Gainfully employed 17 Strapped 18 Gray Eminence 19 Fall Years 20 Still in the Game 21 Gurus 22 Wizards 23 Apprentices

Base_Count 262,052 113,930 207,846 231,439 99,825 101,056 50,880 31,586 18,051 29,275 14,921 28,460 6,913 202,770 317,240 315,736

# of Penetration Index % Customers % of total Penetration 5.0% 2,034 7.8% 0.78% 155 2.2% 1,492 5.7% 1.31% 262 4.0% 1,950 7.5% 0.94% 188 4.5% 844 3.3% 0.36% 73 1.9% 1,098 4.2% 1.10% 220 1.9% 609 2.3% 0.60% 121 1.0% 241 0.9% 0.47% 95 0.6% 125 0.5% 0.40% 79 0.3% 51 0.2% 0.28% 57 0.6% 58 0.2% 0.20% 40 0.3% 20 0.1% 0.13% 27 0.5% 128 0.5% 0.45% 90 0.1% 31 0.1% 0.45% 90 0.0% 0.0% 3.9% 1,825 7.0% 0.90% 180 6.1% 3,223 12.4% 1.02% 203 6.1% 2,002 7.7% 0.63% 127

Number of customers in cluster

Percent of customers in cluster

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Insimplestterms,yourbestcustomersarethoseintheclusterswhereyour penetrationrateandindexarehigh.Inreality,youmayneedtoperform additionalanalysis.Forexample,youmayhavehighpenetrationandhighindex clustersbutthebaseofthatclusterisntlargeenoughtodrawvalidconclusions.

The Strategic Opportunity Grid

TheStrategicOpportunityGridhelpsyouidentifyyourtargetcustomer segments(orclusters).Thegridcontainsfourquadrants,forthefour combinationsofHighorLowPenetrationIndexforaclusterandHighorLow PercentofCustomersintheBaseforacluster(seefigurebelow).

CoreCustomerSegments(upperrightofgrid) Corecustomersegmentsmakeupahigherpercentageofyourcustomersthan theymakeupintheoverallmarketarea.Forinstance,asegmentmaymakeup 4%ofyourcustomersbutonly2%ofthemarketarea.Corecustomersegments

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alsohaveanaboveaverageindextobeyourcustomer(>100).Think:loyal customers,apropensitytolikeyou,goodopportunity.Youcantokeep,grow andfindmoreofthesecustomersthroughyourcurrentmarketingstrategy. PotentialCustomerSegments(lowerrightofgrid) Segmentsthatmakeupasignificantpercentofyourcustomersandofthemarket area,butdonotindexhigh,arepotentialcustomers.Youhavesomeofthemas customers,butonlybecausetherearealotofthemoutthere.Thinkofthemas wantingtobeyourcustomers,buyyouhaventeffectivelyreachedthemyet. Reachingthesehighpotentialsegmentsrequiresachangeinmarketingefforts. NicheCustomerSegments(upperleftofgrid) Segmentsthatindexhighbutdonotmakeupasignificantpercentofthe customersoryourbasearenichecustomers.Theyarelikelytobegood customers,butbecausetherearenotalotofthem,youmustconsiderthecostsof acquiringthemascustomersagainstthevaluetheyrepresent. Segmentsinthelowerleftofgridareneitherprevalentinyourbasenorhigh indexing.Thesearenotyourtargetsegments.

Adding MRI Profiles

MRI Profiles allow you to better understand your customers wants, needs and behaviors in order to deploy more effective marketing and sales strategies.

Onceyouhavesegmentedandidentifiedyourtargetcustomersusinga neighborhoodclassificationsystemandStrategicOpportunityGrid,youmust betterunderstandtheirwants,needsandbehaviorsinordertodeploymore effectivemarketingandsalesstrategies. MRIProfiles,highlyrespectedthroughouttheindustry,arebasedonsyndicated consumermarketsurveysconductedbyMediamarkResearch,Inc.MRIProfiles allowyoutocompareacustomersegmenttotheindexofthatcustomersegment foranyspecificproduct,serviceorlifestylecharacteristic. Inotherwords,foranyofyourcustomersegments,howmuchmorelikelyorless likelythantheaveragepersonaretheytopurchaseBrandXshampoo,readY

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magazine,listentoradiostationZ,attendasportingeventorgotothemovies. Ormakeoneofhundredsofotherspendingandlifestyledecisions. UsingMRIProfiles,youwillbeabletobetterunderstandyourcustomers purchasingpatterns,identifyusersofyourproductsorsimilarproducts,and planmoreeffectivemediaandtargetingstrategiesbecauseyouwillknowhowto marketandwhatmessagetodeliver.

Driving the Results of Segmentation Analysis

Themostbrilliantcustomersegmentationanalysiswillonlybeusefulifyoucan drivetheintelligenceyougainthroughoutyourorganization.ForresterResearch recentlyreportedthatmanysegmentationsarenotproperlyimplemented.This isprimarilybecausethemarketresearcherswhoperformthecustomer segmentationanalysisarenottypicallyinvolvedindrivingtheuseofthe analysisthroughtheorganization.1 Followthesestrategiestoputcustomersegmentationanalysistosuccessfuluse: Marketing,salesandproductdevelopmentpersonnelshouldprovideinput intothesegmentationprocessupfront.Ultimately,theywillplayakeyrolein drivingtheuseofanalyticresults. Holdsegmentationadoptionsessionsinyourorganizationinwhichallthe keyplayersareeducatedandtrainedonhowtousethesegmentations. Pursueonlythemostattractiveandreachablesegments,ratherthanwatering downmarketing,salesanddevelopmenteffortsbytryingtoappealtoall segments.Thatsthewholepointofcustomersegmentation:todiscover wheretofocusresourcestoachievethegreatestROI. Developcoremessagesforeachkeysegment(orgroupofsegments)anduse thematcustomertouchpoints. Usesegmentationinsightforwhatiswasintendedfor:toimprovesite analysis,tradeareaanalysis,directmarketing,mediatargetingandcross sellingwiththegoalofincreasinggrowth,revenueandprofitabilityfor yourorganization.
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Pursue only the most attractive and reachable segments, rather than watering down marketing, sales and development efforts by trying to appeal to all segments.

Market Research: Why Good Segmentations Fail, Brad Bortner, www.livemint.com, 2008.

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About Mapping Analytics

MappingAnalyticsoffersanalyticalconsulting,softwareanddatatohelp businessesprofilecustomers,accuratelyassessmarketopportunity,select successfulretailandfranchisesites,andplansalesandserviceterritories,helping contributetooverallgrowthandprofitabilityforourclients. Founded1989,MappingAnalyticsisledbyanexperiencedleadershipteamwith abackgroundinconsumermarketingandprovensuccessingeographic analytics,mapping,projectmanagementandapplicationdevelopment.Our focusisbusinessmanagement,includingsales,marketing,realestate,strategic planning,andGISconsulting.Ourclientsspanvirtuallyeverybusinesssegment, frommanufacturing/distribution,banking/finance,retailandrestaurantsto marketing/media/advertising,insurance,andhealthcare. TolearnmoreaboutMappingAnalytics,pleasevisit www.mappinganalytics.comorcalltollfree(877)8936490.

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