NOTE TO CHEGG EXPERTS: This requires the use of R-code Bank Marketing Segmentati
ID: 3771387 • Letter: N
Question
NOTE TO CHEGG EXPERTS: This requires the use of R-code
Bank Marketing Segmentation Case Study Analysis goal: Who is the best target for a cross-sell/up-sell campaign? A consumer bank wants to segment its customers based on historic usage patterns to identify those who might benefit from new product offerings. Analysis plan: 1. Perform cluster analysis. 2. Select the number of segments to create. 3. Interpret the segments. 4. Deploy the segmentation rules with scoring code. A consumer bank sought to identify customers for a particular type of campaign. Some customers might prefer an offer of a low-interest loan whereas others might prefer more convenience in online banking opportunities. In order to identify customer usage patterns, the bank decides to segment its customers based on historic data about products that they hold. Segmentation was to be used for improving contact strategies in the Marketing Department. A sample of 100 active consumer customers was selected. An active consumer customer was defined as an individual or household with at least one checking account and at least one transaction on the account during a three-month study period. All transactions during the threemonth study period were recorded and classified into one of four activity categories: traditional banking methods (TBM) automatic teller machine (ATM) point of sale (POS) customer service (CSC) A three-month activity profile for each customer was developed by combining historic activity averages with observed activity during the study period. Historically, for one CSC transaction, an average customer would conduct two POS transactions, three ATM transactions, and ten TBM transactions. Each customer was assigned this initial profile at the beginning of the study period. The initial profile was updated by adding the total number of transactions in each activity category over the entire three-month study period. The BANK data set contains 100 three month activity profiles. This case study describes the creation of customer activity segments based on the BANK data set. Name Model Role Measurement Level Description ID ID Nominal Customer ID CNT_TBM Input Interval Traditional bank method transaction count CNT_ATM Input Interval ATM transaction count CNT_POS Input Interval Point-of-sale transaction count CNT_CSC Input Interval Customer service transaction count CNT_TOT Input Interval Total transaction count Produce summary statistics and histograms (R function hist()) for all these variables. Since all variables are counts, they are highly skewed. It is better to develop segments based on the relative proportions of transactions across the four categories. Transform the raw data using the logit transformation: category logit score= log(transaction count in category/ transaction count out of category) For example, transform ATM transaction count in R-Code: atm=log(CNT_ATM/(CNT_TOTCNT_ATM)). Produce summary statistics and histograms for these transformed variables to see if they are still skewed. Limit the number of clusters (or segments) to 4 or 5 and see if you can interpret them.
ID CNT_TBM CNT_ATM CNT_POS CNT_CSC CNT_TOT 41360 34 3 3 9 49 52094 44 17 5 18 84 57340 122 26 32 36 216 76885 42 3 6 1 52 89150 20 15 2 2 39 94512 83 20 49 3 155 96396 33 9 49 17 108 98062 22 5 9 1 37 122779 21 27 2 1 51 125838 127 3 2 3 135 137317 52 20 2 11 85 147896 101 40 8 1 150 150206 156 52 80 4 292 160501 31 32 42 12 117 176820 107 3 2 1 113 187784 54 14 7 24 99 189200 92 3 2 2 99 198327 44 27 17 3 91 200237 146 3 2 1 152 207980 39 5 2 4 50 227355 180 3 2 10 195 228317 46 14 2 1 63 228906 25 3 2 1 31 229984 15 3 2 1 21 241022 13 3 2 1 19 253260 65 3 2 1 71 257910 35 3 2 1 41 261717 11 5 2 1 19 266600 15 3 2 1 21 269176 107 78 22 7 214 273510 110 15 6 21 152 302929 13 3 2 1 19 311940 16 15 16 1 48 341023 55 21 2 1 79 347091 17 14 7 1 39 375426 32 3 2 3 40 388852 18 3 2 1 24 404194 73 11 37 6 127 414364 49 11 2 1 63 417191 122 25 19 7 173 417996 133 27 7 1 168 420459 25 3 2 1 31 427493 27 31 39 52 149 434975 19 3 2 1 25 441474 19 3 2 1 25 469447 11 9 2 1 23 484515 59 36 2 10 107 489111 118 3 2 2 125 494168 199 3 2 1 205 504965 38 12 2 1 53 529476 76 3 2 1 82 548357 15 8 3 1 27 559012 76 3 2 1 82 599726 51 10 50 9 120 600359 112 24 28 5 169 629637 11 4 2 1 18 638213 166 14 6 3 189 641370 49 3 2 5 59 667651 93 22 27 3 145 696561 42 3 2 1 48 716261 60 46 2 1 109 755205 33 29 4 1 67 765932 186 50 12 18 266 766047 96 8 10 5 119 767265 12 6 2 1 21 772700 23 4 2 1 30 776709 40 3 2 1 46 778879 16 37 9 1 63 780357 51 24 2 1 78 785401 20 11 2 2 35 794342 191 21 2 11 225 803963 27 7 2 1 37 816976 14 5 2 1 22 858113 10 4 2 1 17 872299 119 13 17 15 164 891864 117 12 2 1 132 893304 14 11 3 1 29 899736 38 25 14 2 79 904410 16 4 2 1 23 942859 14 5 2 1 22 948961 211 21 4 1 237 964154 94 17 56 12 179 987437 17 3 2 1 23 993476 11 6 2 1 20 995997 188 5 2 2 197 997417 97 17 8 24 146 999996 25 85 15 6 131 1042998 17 3 2 2 24 1064704 1024 3 2 33 1062 1064731 20 37 2 2 61 1067051 79 18 2 5 104 1079463 12 3 2 1 18 1081759 53 21 23 55 152 1085242 94 7 2 1 104 1090812 227 28 76 26 357 1104403 49 3 2 1 55 1110480 190 3 2 11 206 1121453 25 11 24 26 86 1126673 51 19 2 8 80Explanation / Answer
1.0 Purpose Public and academic libraries face a plethora of information age challenges. In a world of customized service, where Amazon knows what books you might like to read and Netflix suggests films you’d like to watch, libraries have an opportunity to reinvent their customer relationship and to strategize how to create meaningful relationships with potential customers. Libraries that become customer-centric – those that start from understanding their customers’ needs and develop products, services, and programs to meet those needs – will ultimately find success as a 21st century community leader. We believe that market segmentation is instrumental to understanding customer needs and reinventing the customer relationship. Within this context, the purpose of this white paper is to: 1. Provide a general introduction to the concept, methodology, and use of market segmentation 2. Inform public and academic librarians, including administrators and reference librarians, about the importance of market segmentation 3. Provide information about the Tapestry market segmentation system (Tapestry), one of the nation's leading off-the-shelf (OTS) market segmentation systems 2.0 Introduction According to www.bplans.com, a free resource to help entrepreneurs plan better businesses, market segmentation is “the categorization of potential buyers into groups based on common characteristics such as age, gender, income, and geography or other attributes relating to purchase or consumption behavior.” Medium and large companies have been using market segmentation for years. > See Appendix for Case Study: Customer Prospecting, DS Waters, Atlanta, Georgia Small businesses, non-profit organizations, entry-level entrepreneurs, and public and academic libraries, however, know virtually nothing about market segmentation. Until recently, the cost of segmentation systems and the level of expertise needed to employ them have been beyond the reach of these organizations. With the entry of the BusinessDecision database (www.businessdecision.info) into the public and academic library market, the Tapestry segmentation system brings professional level segmentation to all public and academic library patrons. This opportunity provides organizations, including libraries themselves, with a powerful new tool to obtain the same benefits as large companies using market segmentation. 2 CIVICTechnologies Organizations use market segmentation to 1) gain insight into their customers and use that knowledge to enhance their profitability, revenue growth, and growth in the number of customers; and 2) to become a customer-centric organization; that is, to make the customer an integral part of their organization's strategy and decision-making. Public and academic libraries can use market segmentation to achieve growth in the number of customers; realize a higher return on investment (ROI) in materials and services; and increase the utilization of their resources (e.g., books, DVDs, etc.) across a higher number of people (in business terms to amortize or leverage their “sunk” investment in assets). Public and academic libraries can specifically use market segmentation in two use cases: • Customer service use case: • To offer their small businesses, entry-level entrepreneurs, and non-profits a tool to find new customers, retain existing customers, improve profitability, find the best location for their business, and develop new products and services appropriate to their market. > See Appendix for Case Study: Start-Up Yoga Studio, Los Angeles, California • For use by students to support research and class projects and to prepare students to use market segmentation in their chosen profession. > See Appendix for Case Study: Student Advertising Campaign Project, Pellissippi State Community College, Knoxville, Tennessee • Strategic planning use case: • For use by the public library itself to improve services by better engaging library users and those who don't yet use the library. > See Appendix for Case Study: Strategic Plan: Topeka and Shawnee County Public Library (TSCPL), Kansas For public and academic libraries, market segmentation is applicable both as a customer service (to businesses, entrepreneurs, non-profits, students, and faculty) and as an indispensable tool for the library’s own strategic planning process. Recognizing these different use cases, this white paper will use business terminology and library terminology interchangeably. We encourage the reader to think broadly about the applications for market segmentation in his or her library environment. 3 CIVICTechnologies 3.0 Market Segmentation Basics Most segmentation systems are off the shelf (OTS). Very large companies sometimes develop their own internal segmentation systems by mining their proprietary customer data. The decision by a business or organization to use an OTS segmentation system or to develop their own segmentation system (or to use some combination of them) depends upon their business objectives, available data, and budget. OTS segmentation systems can be general in nature or specific to an industry, such as health care or financial services. The following are the three most widely used OTS segmentation systems: • Tapestry Segmentation by ESRI • Prizm by Claritas • Mosaic by Experian All segmentation systems share certain principles of utilizing data and analytical techniques such as the use of multiple variables, complex mathematical formulas, and the incorporation of spatial analysis utilizing geographic information systems (GIS). "Today, segmentation is no longer a simple, or static, marketing technique; it is core to the way successful companies run their business." - IBM Institute for Business Value Market segmentation is best known for its use in marketing: customer acquisition, retention, and migration to higher value; and choosing the right location for a given facility, be it a retail store, library, or other type of outlet. Over the last decade, however, the success of market segmentation has expanded its application across other business functions. Market segmentation can be applied to a range of business or organizational functions (see Figure 1: Business Applications of Market Segmentation) including: • Strategic and tactical functions ranging from strategy development to customer acquisition and retention • Core business practices and initiative-based activities including planning and forecasting and development of new products and services • Customer management at the portfolio level and in one-to-one sales and services, including media and distribution choices 4 CIVICTechnologies Figure 1: Business Applications of Market Segmentation (Source: IBM Institute for Business Value) Businesses are successfully using market segmentation to better reach profitable customers; libraries are successfully using market segmentation to better reach prospective underserved and underprivileged patrons. More importantly, all types of organizations are weaving market segmentation into their business model and the range of business activities in order to improve top line and bottom line performance. As a result of this, opportunities have been identified which virtually all organizations can apply and from which they have the potential to derive benefits. The following figure is from a survey of companies conducted by the IBM Institute for Business Value, ranking the importance of segmentation through various types of marketing activities, shown on the bottom of the figure. Figure 2: Importance of Customer Segmentation for Marketing Activities (Source: IBM Institute for Business Value) 5 CIVICTechnologies 4.0 Differentiation through a Customer-Centric Approach Markets are either product driven or customer driven. In the mature U.S. market, which includes extensive use of mass-customization manufacturing techniques, the supply of goods and services is moving more and more toward a customer driven approach. Customers themselves are always learning, changing, and adapting. Changing expectations, lifestyles, life stages, access to ever increasing information, and competition providing new products and services mean there is little constancy in customer behavior. Customer preferences and buying decisions change from month to month and year to year. “A robust segmentation system reveals the differences between how customers appear and how they act.” Smart enterprises use segmentation to continually monitor, quantify, and qualify the changing customer, in part to stay ahead of the competition. Segmentation data provides organizations with information to develop timely goods and services that profitably serve customers, thereby sustaining the organization's growth and ability to compete with the development of new products and services. Companies must be able to discern the difference between how customers appear and how they act; while some customers may look alike, they behave quite differently, as shown in the example below. Figure 3: Example of Customers Who Look Alike but Behave Differently (Source: IBM Institute for Business Value) Demographics Lifestage Needs Attitudes Woman, early 40's married, household income of $125,000 Two kids under 10, working mom Menu planning advice (low fat and value oriented), cooking club Value shopper, prefers low fat products, enjoys cooking Woman, early 40's married, household income of $125,000 Two kids under 10, working mom Ready-to-eat products, precooked entrees, home grocery delivery services Convenience shopper, prefers organic foods, does not like to cook 6 CIVICTechnologies A robust segmentation system like Tapestry reveals these key differences. The comprehensive customer picture provided by segmentation informs pivotal, organizational decisions. Segmentation is instrumental in enabling organizations to manage a diverse and growing portfolio of customers, leading them to discover, for example: • Highly profitable or high-use customers: What can we do to keep these customers and keep them spending or using the library? How can we attract more like them? • Profitable or moderate-use customers: How do we get more of these customers to adopt the habits (spending or use) of our highly profitable or high-use ones? • Unprofitable or low-use customers: From the perspective of a small business, how can we phase out these customers and, in the meantime, serve them economically? From the perspective of a library, how can we increase use? 5.0 Building Blocks of Tapestry Segmentation The dynamic interaction of three key variables makes full use of a segmentation system’s potential: segment characteristics, time, and profitability (see Figure 4: Segmentation Building Blocks). Figure 4: Segmentation Building Blocks (Source: IBM Institute for Business Value) 7 CIVICTechnologies Segment Characteristics The core strengths of a segmentation system are the robust methodologies and diverse data sets that create penetrating insights into the personalities, needs, capabilities, and limitations (e.g., financial, age, education) of each segment. In this respect, characteristics should be viewed multidimensionally utilizing diverse data sets and empirically validated methodologies. Segment characteristics should generally be able to answer such questions as: • Who are they? • What do they look like? • What do they need? • How do they act? • What do they buy? • When do they need it? • Why do they want it? Tapestry is a profiling model that classifies households (and persons) into 65 segments by geographic level (see Sample List of Tapestry Segments). Tapestry is developed by ESRI, the world's leading geographic information systems (GIS) software and data provider. ESRI's business information group has over 30 years of experience in the preparation, development, and support of business related data, software, and information systems. Tapestry is used by thousands of organizations (businesses, non-profits, public agencies, universities, etc.) across a range of industries and disciplines. Sample List of Tapestry Segments Tapestry analyzes and sorts over 60 data attributes for each neighborhood in the U.S. These attributes are organized into four primary categories: 1. Demographic characteristics 2. Socio-economic characteristics 3. Residential characteristics 4. Consumer buying preferences Green Acres Las Casas Salt of the Earth Social Security Set Young and Restless The Elders Heartland Communities Home Town International Marketplace Midlife Junction Exurbanites Urban Chic Urban Villages Pacific Heights Rural Resort Dwellers Metro Renters In Style Silver and Gold Top Rung Prairie Living Wealthy Seaboard Suburbs Suburban Splendor Rustbelt Retirees Trendsetters Connoisseurs Milk and Cookies City Dimensions 8 CIVICTechnologies Some of the data attributes used in Tapestry include the following: • Population by Age and Sex • Population by Race and Ethnic Origins • Household Composition, Marital and Living Arrangements • Patterns of Migration, Mobility, and Commutation • General Characteristics of Housing • Economic Characteristics of Housing • Educational Enrollment and Attainment • Employment, Occupations, and Industrial Classifications • Household, Family, and Personal Incomes Based on an in-depth statistical analysis, Tapestry’s 65 segments were determined to be the optimal number to describe the diversity, subtleties, and complexities of the U.S. market and to provide statistical stability. Data sources that comprise the segments include Census 2000 data, ESRI proprietary demographic updates, the InfoBase-X consumer database from Acxiom Corporation, and other sources. Data is available by neighborhood at census block group level and up, including census tract, ZIP Code, and ZIP Code + Four levels. A distinguishing factor of Tapestry is the way data is analyzed geographically, or geodemographically. By correlating diverse data sets at small geographic levels (e.g., census block groups), powerful, insightful, predictive, and robust results are achieved. Neighborhood level analysis is a chief component in Tapestry. “By correlating diverse data sets at small geographic levels (e.g., census block groups), powerful, insightful, predictive, and robust results are achieved.” Neighborhoods are natural formations of people drawn together by their common need for a “place”—for security and acceptance. Neighborhood tangibles are housing, land values, available labor, infrastructure, transportation, school system, and other factors that remain stable over decades. Intangibles are elements such as economic opportunities, race, lifestyles, and overall ambience that separate and characterize neighborhoods. The most compelling feature about neighborhoods is the ability to attract or repel residents and shape their living standards and tastes. People need to feel that they belong and will seek places where their lifestyles and behaviors fit. For users to derive value from a market segmentation system, access to segment characterizations is a key issue: how easy is it to access, understand, and apply segment characterizations. In 9 CIVICTechnologies Tapestry, access is made easy because each segment is described by a one page narrative with relevant facts based upon certain data categories (see Figure 5: Sample Tapestry Segment Descriptions). In addition, a chart provides easy cross-segment comparisons (see Figure 6: Chart of All 65 Tapestry Segments). Figure 5: Sample Tapestry Segment Descriptions (Source: ESRI) 10 CIVICTechnologies Figure 6: Chart of All 65 Tapestry Segments (Source: ESRI) 11 CIVICTechnologies Tapestry segments are combined into LifeMode Groups and Urbanization Groups. These groups allow the segments to be rolled up to a higher level to allow for time sequence analysis, generalizations, high level analysis, and for users wishing to work with fewer categories. There are 12 LifeMode Groups each of whose segments represent similar consumption and demographic patterns that reflect shared lifestyle and life stage characteristics. For instance, Group L1, High Society, consists of the seven most affluent segments whereas Group L5, Senior Styles, includes the nine segments with a high presence of seniors. • L1 High Society • L2 Upscale Avenues • L3 Metropolis • L4 Solo Acts • L5 Senior Styles • L6 Scholars and Patriots • L7 High Hopes • L8 Global Roots • L9 Family Portrait • L10 Traditional Living • L11 Factories and Farms • L12 American Quilt LifeMode Groups Each LifeMode Group has a description. The following sample is the description for Group L9 Family Portrait: “The Family Portrait LifeMode Group is a fast-growing population. The growth is driven primarily by the rapid increase in the Up and Coming Families segment. Youth, family life, and the presence of children are the common characteristics across the five markets in Family Portrait. The group is also ethnically diverse: nearly 30 percent of the residents are of Hispanic descent. The neighborhoods are predominantly composed of homeowners who live in single-family homes. The majority of households include married couples with children who contribute to the group’s large household size averaging more than 3.11 persons per household. Their lifestyle reflects their youth and family orientation—buying infant and children’s apparel and toys. Visits to theme parks and zoos are popular. Their vehicle of choice is typically a minivan or a full-size SUV.” There are 11 Urbanization Groups which represent shared settlement patterns and income levels. These 11 groups are based on geographic and physical features such as population density, size of city, location in or outside a metropolitan area, and whether or not it is part of the economic and social center of a metropolitan area. For example, U1, Principal Urban Centers I, includes eight segments that are mainly in densely settled cities within a major metropolitan area. The “I” or “II” appearing after each group name designates the relative affluence within the group, with I being more affluent than II. 12 CIVICTechnologies • U1 Principal Urban Centers I • U2 Principal Urban Centers II • U3 Metro Cities I • U4 Metro Cities II • U5 Urban Outskirts I • U6 Urban Outskirts II • U7 Suburban Periphery I • U8 Suburban Periphery II • U9 Small Towns • U10 Rural I • U11 Rural II Urbanization Groups Each Urbanization Group has a description. The following sample is the description for Group U4 Metro Cities II: “The Metro Cities II Urbanization Group segments are found in larger cities and in densely populated neighborhoods, ranking third in population density behind Principal Urban Centers I and II. The eight markets in Metro Cities II are neighborhoods in transition including young, starter households; retirees; single-person households; and families. Most householders rent in multiunit buildings. The young population remains mobile. Many are enrolled in college; most are still trying different jobs. The median household income of this group is $41,272. But household wealth varies from $10,235 (Dorms to Diplomas) to $170,490 (Retirement Communities), reflecting the wide range of age and lifestage in Metro Cities II. Consumers in this group share a neighborhood with an emphasis on economy and convenience. Their preferences include compact or subcompact cars, fast food, and convenience stores. With the high concentration of renters, tenant insurance is common while home improvement projects are not.” Time Time-based characteristics describe how customers and their consumption patterns change over time, and how this information can impact an organization's relationship with the customer. Timebased characteristics should answer questions such as: • How recently did a customer make a purchase? • How frequently do customers make purchases? • What is the customer lifestage? • What is the preferred channel for purchases? • What is the customer's motivation for purchasing? Time-based characteristics address the motivational aspects of why customers consume what they do during various periods of their lifetime (frequently referred to as "lifestage"); how frequently and how recently they consume; and what marketing and sales channels they purchase through. All of these elements -- motivation, lifestage, frequency, and channels -- are built into Tapestry either at the segment level or the LifeMode Group level (see Figure 7: Changing Consumer Patterns). 13 CIVICTechnologies Figure 7: Changing Consumer Patterns (Source: IBM Institute for Business Value) It is important to capture the point at which a customer's consumption patterns change (their "points of choice"), usually when there are lifestage changes such as age, income, family structure, interests, and so forth. This period of change represents an opportunity for the organization to gain traction with the customer or for a business to drop them. Gaining traction means to reconsider its offering of goods and services and marketing and sales tactics. Not paying attention to changing patterns could result in an organization wasting time and money targeting a customer who is no longer (or never was) interested or profitable. If an organization decides to continue selling the same goods and services and therefore no longer will cater to customers moving out of the organization's sphere of business, then the organization must plan a specific effort to attract new customers including the time needed to rebuild the customer base and establish loyalty, and the higher monetary costs to obtain new customers, frequently one of the highest costs a business has. Few organizations put in place strategies and plans to reach customers at their points of choice (when their purchase or use habits change), thereby missing a prime opportunity to win business (ahead of their competitors). 14 CIVICTechnologies Life Stages in Tapestry “The Solo Acts LifeMode Group includes five segments (Laptops and Lattes, Trendsetters, Metro Renters, Old and Newcomers, and Young and Restless). These are singles who prefer city life. Many are young, startup households located in America’s more densely populated neighborhoods; some are well established singles who have eschewed homeownership and childrearing responsibilities. Contrary to modern migration patterns that flow away from the largest cities, Solo Acts’ residents are moving into major cities. With considerable discretionary income and few commitments, their lifestyle is urban, including the best of city life—dining out, attending plays, and visiting museums—and, for a break from constant connectivity, extensive travel domestically and abroad.” “The Global Roots LifeMode Group includes eight segments (International Marketplace, Industrious Urban Fringe, Urban Melting Pot, Las Casas, Inner City Tenants, NeWest Residents, City Dimensions, and High Rise Renters). The common thread among the markets in Global Roots is ethnic diversity. Households are young with modest incomes and tend to rent in multiunit dwellings. The youth of this group reflects recent immigration trends; half of all households have immigrated to the United States within the past 10 years. The households range from married couples, typically with children, to single parents to individuals who live alone. Because households with children dominate this marketplace, it is not surprising that spending for baby goods, children’s apparel, and toys is higher here. Residents of Global Roots are less likely to have home PCs but just as likely to use cell phones. They maintain ties with friends and relatives in their countries of origin with foreign travel.” • Lifestage: this represents the period of a person's lifetime that dominates their basic lifestyle: young adult in college or just graduated high school, just married, just starting a family with children, middle age, senior citizen, etc. The concept of lifestage is captured by Tapestry LifeMode Groups which organize individual segments (see Life Stages in Tapestry). • Motivation: this represents the reason that people engage in purchasing. By understanding the purchasing motivation an organization will have a handle on consumers’ state of mind. Purchasing motivations are exemplified by new parents needing to buy items for the newborn; senior citizens traveling; wealthy couples purchasing a second home; and so forth. • Recency: this represents how recently a customer made a purchase. This aspect is not built into Tapestry because it is unique to the business or organization that makes the sale. Recency data should be kept as part of the organization's customer relationship management (CRM) system and integrated with Tapestry segmentation. For a library, this 15 CIVICTechnologies equates to the integrated library system (ILS) or cardholder database. By combining these data sets an organization can benchmark its customer reach and connection, and then measure effectiveness of its marketing and sales campaigns. • Frequency: this represents how often or frequently customers make purchases. This is a key element in a business being able to forecast revenue and its investment in marketing and sales including the use of segmentation. Increasing purchasing (or, in the case of the library, borrowing) frequency by understanding customer lifestage and motivation through segmentation is essential to building the customer relationship. By utilizing the latest consumer expenditure survey data, Tapestry is able to distinguish consumer spending patterns and related lifestyle choices. • Channels: these are the methods and media through which organizations market and/or sell goods and services to the segments. These channels include print, television, radio, and web-based methods, as well as direct and indirect marketing. Organizations must actively choose and consider the best channels to reach each segment for the type of marketing or sales campaign they are undertaking. Evaluating Success Effective segmentation must be both qualitative and quantitative. To make accurate, segmentationdriven decisions, companies need to evaluate success (including, for companies, measuring profitability) at multiple levels, including the individual, sub-segment, segment, and the total customer portfolio level. Companies must figure out measures of value – the success or profitability variables that work best for them. Research at IBM indicates that these measures vary by industry and by company, from recency, frequency, and monetary indices (RFM), to customer-value indices, and revenue per customer versus cost to serve. IBM notes one caution in selecting profitability measures: make sure the measure chosen provides an accurate, comprehensive view of performance. Relying on per-customer revenue numbers only, for example, could be misleading; customers at the same sales levels could be profitable in a low-rent retail location but unprofitable in a high rent retail location. Make sure measures are comprehensive. Pulling it Together: Interaction of the Three Segmentation Building Blocks The interaction of these three segmentation building blocks (segment characteristics, time, and profitability) is the continual tracking of customers. Tracking customers and prospective customers on an annual basis or even a quarterly basis will not work in a marketplace in which customers have the upper hand because so much potential information is available to inform their purchasing decisions. Organizations must move away from infrequent tracking to always tracking and in turn create an on-going relationship with the customer. In this sense the business networking relationship is parallel to the social networking relationship. The organization that intentionally tracks customers to understand current and future profitability and risk, likelihood of defection, channel preference, propensity to purchase additional products, and lifestage has the competitive edge. An 16 CIVICTechnologies organization can use segmentation data, industry data, and its own data to predict changes in the marketplace and interpret the direction its business and its industry are moving. 6.0 Tapestry Library Applications There are two library applications in which Tapestry is presented: BusinessDecision and LibraryDecision. BusinessDecision BusinessDecision and BusinessDecision Academic (both hereinafter referred to as “BusinessDecision”) are database services that enable end-users, through a library’s subscription, to access Tapestry segmentation data. (Two case studies shown in the Appendix were prepared using BusinessDecision – Case Study 2: Start-Up Yoga Studio, Los Angeles, California and Case Study 3: Student Advertising Campaign Project, Pellissippi State Community College, Knoxville, Tennessee). BusinessDecision integrates Tapestry market segmentation data with other data sets including demographic forecasts, consumer spending data, housing forecasts, and thematic maps to support the individual, customized queries of any authorized end-user. BusinessDecision is a consumer market database, reporting, and mapping service that targets small business, entrepreneur, and non-profit patrons at public libraries; and students, faculty, and staff at academic libraries. With BusinessDecision libraries can empower local businesses, nonprofits, and students with most of the same data, reports, and maps that are used by America's best and most successful companies. BusinessDecision is wizard-driven and easy to use; the interface is designed so that anyone can create Tapestry segmentation reports and maps without having to be trained to use native geographic information systems (GIS) software. Because BusinessDecision embeds Tapestry, the end-user has the ability to utilize powerful data and analytical tools to: • Create and analyze trade areas • Perform competitive analysis • Evaluate market penetration • Identify new site locations • Target media buys and direct mail campaigns • Find new customers • Reveal untapped markets • Select the right merchandise mix • Expand into appropriate new markets BusinessDecision includes the use of powerful thematic maps. Thematic maps represent and display data, including Tapestry data, consumer expenditure data, and demographic data. Maps are designed and customized by the end-user including the location of the site studied and the study 17 CIVICTechnologies area around each site. The study area can be overlapping rings, donut rings, drive times, or a handdrawn shape. Map data can be presented at a range of geographic levels including census block groups, census tracts, and ZIP Codes, among others. As a subscription service, BusinessDecision offers many user support features including an unlimited number of reports and maps; can be used by an unlimited number of simultaneous users; and any registered library user can access BusinessDecision through any desktop computer's web browser or through the library's website. LibraryDecision LibraryDecision is a comprehensive suite of planning, marketing, and development services that employs Tapestry market segmentation data to assist public libraries better connect with their community. LibraryDecision utilizes Tapestry data to characterize the local populous and merges the Tapestry data with selected patron, checkout, and program information from the library’s integrated library system (ILS) to understand library use patterns and plan strategic initiatives. LibraryDecision services are delivered and displayed using CommunityConnect, as described below. Case Study 4: Strategic Plan: Topeka and Shawnee County Public Library (TSCPL), Kansas (see Appendix) was prepared using LibraryDecision. LibraryDecision includes four services that employ Tapestry: SnapShot SnapShot is a brief eye-catching report that analyzes Tapestry market segments, demographic trends, socio-economic data, and consumer interests. SnapShot is a situational analysis of the market in which the library is located. SnapShot provides hard data about the library’s service area and is particularly useful as a top level analysis. Patron Patron is an in-depth analysis of patron use patterns put in the framework of the Tapestry market segmentation system. Selected ILS data is merged with Tapestry data to develop profiles of patrons and non-patrons. These profiles look at who uses the library and where they live; and more importantly, who doesn’t use the library and how to connect with them. Patron is particularly useful for strategic and facilities planning. Patron results can be used to develop marketing campaigns, collection development, and planning facility locations. Planner Planner helps library administrators plan branch service areas and locate new outlets. Planner utilizes Tapestry market segmentation and other tools such as population forecasts, library service indicators, and thematic maps to identify underserved populations and develop plans of service to meet local needs. 18 CIVICTechnologies Voter Voter helps library administrators to win library-related ballot elections. Voter compares historical library use patterns, voting patterns and market segments to assist libraries in winning funding support at the ballot box. Through the use of Tapestry segmentation, Voter helps libraries in two ways: 1) strategically by predicting which voters will help win library funding campaigns; and 2) tactically by developing the election campaign focused on key segments and messages. Consulting Services Consulting services utilize Tapestry segmentation for special projects and other assignments that do not fit the services described above. CommunityConnect CommunityConnect is an interactive website that enables public libraries to understand their community by integrating market segmentation data with library statistics including patron, checkout, and materials data from SnapShot, Patron, Planner, and Voter. With CommunityConnect libraries have a powerful tool to deliver more effective services to meet the specific needs of local communities and neighborhoods (see www.tscplcommunityconnect.com). CommunityConnect can be customized to reflect a library’s strategic planning initiatives and can include data updates from the library’s integrated library system (ILS) to measure results and manage services, campaigns, and unique programs. 7.0 Conclusion: Market Segmentation and the 21st Century Library While market segmentation is new to the public and academic library market, its widespread adoption by large businesses over a long period of time is testimony to its robust and reliable predictive capabilities. With the affordability and ease-of-use of services such as BusinessDecision and LibraryDecision, libraries are beginning to adopt market segmentation to meet a variety of needs, including their own strategic planning. Market segmentation can be used broadly or narrowly. In its broadest use, market segmentation is strategic in nature and can help change the way an organization (e.g., library or business) conceptualizes its business model to become customer-centric. Used narrowly, market segmentation can be applied in a more traditional manner to marketing campaigns and sales programs. Because market segmentation is now an affordable commodity, public and academic libraries can engage customers with a service that specifically meets their needs. Academic libraries are using market segmentation to support the research needs of students and faculty; public libraries are 19 CIVICTechnologies supporting the economic growth and development of their communities by providing market segmentation tools to small businesses, entrepreneurs, and non-profits as well as using the tools for strategic planning by the library itself. 8.0 References Driving an Operational Model that Integrates Customer Segmentation with Customer Management,
Using Market Segmentation to Increase Transit Ridership A Management Guide Overview Does your agency suffer from ... 1) A "fuzzy" business mission? 2) Unclear objectives? 3) Trying to be all things to all people and consequently not serving any customers particularly well? 4) Information that is not decision-oriented? 5) An operations-oriented focus – that is, routing and scheduling reflect operational or in some cases political desires and do not reflect customer needs? 6) An unfocused promotional strategy? 7) Scarce resources for the development of new products or services or the implementation of a marketing or public education campaign? If you answered "yes" to one or more of these questions, your are not alone. Understanding and adopting a market segmentation strategy can make it easier for you to answer "no" to all but the last of these questions, and will make the problem of scarce resources become an opportunity for the development of innovative and cost-effective programs and services. What is "market segmentation"? The basic proposition behind market segmentation is that most – probably all – markets are not monolithic but instead consist of submarkets that are relatively homogeneous in terms of certain essential characteristics. These submarkets are market segments. Market segments consist of groups of people or organizations that are similar in terms of how they respond to a particular marketing mix or in other ways that are meaningful for marketing planning purposes. Market segmentation is the process by which segments are identified. That is, you perform segmentation expecting to find some market segments responding more positively than others do to marketing variables. This process of market segmentation generally involves the use of consumer research. Analysis of consumer characteristics, attitudes, and behaviors form the basis for market segments. Market segmentation is the identification of groups of customers – or market segments – that have similarities in characteristics or similarities in needs who are likely to exhibit similar purchase behavior and/or responses to changes in the marketing mix. Using Market Segmentation to Increase Transit Ridership A Management Guide Page • ii Using a market segmentation strategy will help you improve your agency's competitive position and better serve the needs of your customers. An effective strategy will enable you to ... ! Increase ridership (both by increasing the frequency of riding and attracting new riders). ! Increase transit's share of mode choice in your market. ! Efficiently allocate resources to markets that represent the greatest potential for change in light of changes to the marketing mix. ! Enhance the image and reputation of public transportation to increase support for public funding. Market segmentation can serve as the cornerstone of an efficient overall strategy. Research has shown that if you identify relatively stable market segments that can be effectively reached, you will achieve increases in ridership by marketing to these segments, beyond ridership increases possible from treating the market as homogeneous. The marketing research and analysis that is an integral part of the market segmentation process will enable you to ... ! Design responsive products to meet the needs of the marketplace. ! Develop effective and cost efficient promotional strategies. Moreover, this research will ... ! Provide you with insight on present marketing strategies. ! Provide you with reliable data on which to base resource allocation decisions. ! Provide you with important data on which long-range planning – for market growth or product development – can be based. In summary, market segmentation provides the necessary research base on which all other marketing strategies can be successfully formulated. This includes all aspects of marketing – product and service development, route structure, pricing and fare programs, and communications. Following segmentation, the agency can select target markets – one or more groups that will respond favorably to certain product or service configurations and messages about these products or services. The agency can then position its products and services by developing unique marketing strategies to appeal to the selected target market(s). Segmentation research analyzes markets, finds niche opportunities, and capitalizes on a superior competitive position – enabling you to better serve the needs of your customers. Segmentation-driven strategy can help agencies design responsive products, develop effective promotional strategies, understand emerging trends in the marketplace, and fine-tune current market initiatives. In summary, it is a systematic approach for controlled market coverage and expansion. Is your agency using market segmentation, and if so, are you using market segmentation techniques as well as possible? This handbook covers ! The issues that you need to address when using market segmentation. ! The procedures and terminology that you may encounter in connection with segmentation. ! Problems that may arise in implementing segmentation studies. ! Strategies that may prove useful in encouraging the use of market segmentation at your agency. Using Market Segmentation to Increase Transit Ridership A Management Guide Page • iii Segmenting Transit Markets – Common Bases for Segmentation A market can be segmented in many ways. As a rule when selecting target markets, these markets should be compatible with your agency's goals and objectives. Moreover, it is important to match the market opportunity represented by the target market with the resources of the agency. The first step in the market segmentation process is to identify the basis on which the market will be segmented. Demographic, socioeconomic, and geographic segmentation bases and variables provide important information about individuals within specific markets. Segmenting markets by these physical dimensions is a logical starting point for several reasons: ! The data is relatively easy to obtain. ! It is generally less expensive than other forms of segmentation research. ! It provides a quick snapshot of a market (an understanding of market structure and potential customer segments). ! Populations can be sampled and accurately projected to represent characteristics of the entire market. ! The information gathered can be of great value for decision-making. ! The data corresponds to other available data and information for decision-making. Product usage segmentation is particularly applicable to transit. This is frequently the next step taken once agencies have exhausted the possibilities of segmenting by demographics and/or geodemographics. In the transit industry, segmenting based on product usage is synonymous with segmenting based on ridership – notably frequency of ridership. Segmenting markets based on product usage provides five major benefits: ! Like demographic segmentation, this is a relatively simple methodology to use. Risks and costs can be relatively low. ! It is a useful dimension for understanding transit markets based on past ridership behavior. ! It can be used to identify strategies to retain frequent riders who are generally transit-dependent and often stop riding when other modes become available. ! It can be used to identify strategies to increase consumption among light and medium users in highly competitive markets. ! By providing additional benefits or focusing on neglected market segments, it is possible to convert nonriders to riders. ! Unlike psychographic and benefit segmentation, segmenting based on product usage is generally easy to implement and requires less complex analysis. It is also less expensive depending on the incidence of riders in the general population. Customers and noncustomers' attitudes toward a specific product or service category is another frequently used type of basis variable. This is especially useful for developing advertising and promotion programs, because it enables advertising agencies to understand what people think and feel about their needs in a specific product or service category. Using Market Segmentation to Increase Transit Ridership A Management Guide Page • iv One of the more powerful segmentation approaches – psychographics – has come a long way since the term was first coined nearly twenty years ago. Psychographic research seeks to describe human characteristics of consumers that may have bearing on their response to products, packaging, advertising, and public relations efforts. Such variables may span a spectrum from self-concept and lifestyle to attitudes, interests, and opinions, as well as perceptions of product attributes. Segmentation based on psychographics has proven to be most useful in. . . ! Identifying target markets. ! Explaining consumer behavior. ! Improving an agency's strategic marketing efforts. ! Minimizing the risks for new products, services, or other ventures. Benefit Segmentation is based on the belief that the benefits that people seek in consuming a given product are the basic reasons for the existence of true market segments. Benefits are the sum of product advantages or satisfactions that meet an individual's needs or wants. They extend beyond product features and serve to satisfy physical, emotional, or psychological needs. Benefit segmentation is found to provide the marketer with a new perspective and added insight into market situations. When properly executed, this approach is widely acknowledged as one of the best ways to segment markets. Some advantages of benefit segmentation include: ! Benefit segments are based on the reasons consumers buy. ! Benefit segmentation is an appropriate segmentation base in many types of situations. ! Benefit segments are based on causal factors rather than descriptive factors. ! Benefit segmentation is a method with great flexibility. ! Benefit segmentation can be used in conjunction with other closely related segmentation bases and variables. Using Market Segmentation to Increase Transit Ridership A Management Guide Page • v A Practical Approach to Market Segmentation How do you introduce or improve segmentation procedures and activities at your agency? Effective and cost-efficient segmentation analysis requires the following inputs: ! Superior planning – A managerial framework emphasizing planning and research guidelines leads to effective segmentation studies. ! Solid research – Choosing the optimal blend of primary, secondary, syndicated, and data base sources. ! Selecting the "right" segmentation dimensions – These include geographics, demographics, usage and other behavioral measures, benefits, and psychographics. ! Strategy development – Target market selection, positioning, nichemanship, and formulating the proper marketing mix based on product, pricing, promotional, and distribution elements. ! Implementation and control – Working, evaluating, and revising the segmentation plan. A good segmentation plan requires ... 1) Insuring management involvement and buy-in by ... ! Involving them early in the process. ! Keeping them informed. ! Involving them in any decisions along the way. 2) Establishing budgetary constraints by ... ! Including both in-house and outside vendor costs in analysis. ! Recognizing cost / benefit trade-offs (anticipate expected value of research). 3) Obtaining outside assistance as required. Outside assistance is most likely to be required in the design of the research, data collection, and analysis. 4) Establishing research objectives that include clear statements regarding the ... ! Project background. ! Project purpose. ! Research objectives. 5) Specifying target population measurements that clearly describe your customers. 6) Stating relevant definitions regarding ... ! The market or service area to be included in the study. ! Key demographic and socioeconomic classifications to evaluate, criteria for determining benefits or lifestyles, and consumption measures that will be included. Using Market Segmentation to Increase Transit Ridership A Management Guide Page • vi 7) Establishing criteria for segmentation viability that insures ... ! The importance of the market segment can be rated relative to other marketing opportunities. ! The market is realistic in size. ! Members of the market can be easily reached. ! Customers will respond to marketing initiatives. 8) Developing market segments that ... ! Have similar characteristics. ! Are distinct from other segments. ! Represent a sizable population. ! Provide meaningful segment data that is actionable. 8) Selecting the appropriate bases for segmentation by ... ! Developing a segmentation model. ! Identifying physical bases – geographic, demographic, geodemographic. ! Identifying behavioral bases – psychographics, benefits, and product use. 9) Collecting the data by ... ! Considering the applicability of secondary, primary and syndicated data. ! Selecting the best method of data collection – telephone or personal interviews. 10) Employing appropriate sampling procedures. This generally means using probabilistic or random samples. 11) Analyzing and interpreting the data by following an analysis plan that ... ! Specifies coding and tabulation requirements. ! Defines the statistical analysis – including any multivariate procedures – that will be employed. ! Uses complex models and advanced techniques only as needed. Using Market Segmentation to Increase Transit Ridership A Management Guide Page • vii Translating Segmentation Findings Into Strategy The results of a market segmentation study can be informative, insightful, and even fun. Once the segmentation analysis is complete, however, the hard work begins. The real value of segmentation analysis lies in its ability to be translated into actionable strategies. A simple three-step process can be used for strategy formulation. 1) Identify the project or decision. Consider projects or decisions your agency is presently considering and determine whether segmentation analysis is appropriate for that project or decision. Some examples of projects for which segmentation analysis might be considered include: new services, special promotions, pass or other fare media programs, advertising, special events, passenger information services, direct mail campaigns, guaranteed ride home programs, etc. Once the project or decision is identified, then ... a) Determine the applicability of segmentation analysis to this project. b) Create a project team. 2) Conduct a situation analysis. If it is determined that segmentation analysis is applicable to this project, the project team should first conduct a situation analysis. This step involves taking a step back and examining why your agency is considering this project or undertaking this decision. The situation analysis represents an opportunity for your agency to break out of the box and to look at the project or decision in different ways. Dare to be different! As part of your situation analysis, you should ... a) Identify opportunities. b) Examine problems / threats. c) Establish goals. d) Evaluate current strategies. 3) Formulate strategies. If the situation analysis indicates that this project is worth pursuing, the next step is to formulate the strategies to employ. If this is an existing project, this may involve a revision or complete overhaul of existing strategies. For new projects, you are operating from a clean slate. As noted in the situation analysis, be creative. Try looking at the results of your segmentation analysis in different ways. Brainstorm – don't reject ideas simply because your agency has never done it that way before. The bold new approach may be critical to attract those customer segments that have been resistant but through segmentation analysis have indicated they can be reached – with just a little more effort. During the strategy formulation process you will ... a) Identify target market segments. b) Positionarketing mix. Using Market Segmentation to Inc
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