Retail TouchPoints: Subtle Shifts in Customer Segmentation Strategies May Provide Shelter from the Economic Storm
By John Gaffney, Senior Analyst
Through a special arrangement, what follows is an excerpt of a current article from the Retail TouchPoints website, presented here for discussion.
As the economy continues to show lower growth rates, a strong argument could be made that some customer segments are changing. Are the most frequent customers maintaining an income level that allows them to be frequent? Are the “luxury” shoppers still in first class? Knowing the answers is essential.
Customer strategy experts suggest the following rules for re-evaluating and acting on customer segments.
- Clearly define the rules of engagement: Each customer segment should have
a protocol for frequency and relevancy of communication. Just because that
retailer needs to make up some ground in the fourth quarter doesn’t mean
that it should drop prices more frequently and then bombard the discount
segment with emails. “You must decide before the fourth quarter gets very busy exactly how far you’re willing to go to change pricing, marketing messaging, and tactics,” said Nick Godfrey partner at Customer Portfolios. “To
go beyond those agreed rules of engagement compromises your brand and customer
relationships.” - Protect the Brand: Customer value is best increased by acting with the
knowledge of sound segment valuation and analysis. Although the economy may
have taken some segment metrics down (such as purchase frequency) they have
not taken them out. “The brand does not evaporate on December 24th,” Mr. Godfrey said. “The
brand is made up of customers. Their motivations may change but they are
still in a lifecycle with your company that should be followed.” - Understand segment changes: It is quite possible, and even probable, that
the monetary value of key customer segments have changed. The “convenience oriented housewife” may
still spend 90 percent of her grocery budget at your store. But what she
can actually purchase for the same amount of revenue has dropped.”
Ron Shevlin, senior analyst at the Aite Group, maintains that retailers do not execute against their segment work effectively. Therefore, when segment value changes they tend to overreact. They tend to reinvent campaigns based on segment value changes, and even reinvent their entire segment profile. In most cases it is not necessary.
“The smart market researcher knows that customer research needs to be analyzed,” he said. “Do changes mean that actual spending plans are changing? Are they simple reflections of changing attitudes or are they hard and fast economic changes?”
Retailers that understand the importance of customer analysis will most likely plan for better real-time customer data, and update their segment strategy accordingly.
“The last place I want to panic is where I can be seen by my most valuable customers,” said Mr. Godfrey. “The evidence of a downturn is still debatable. You can make it as bad as you want to. Don’t risk panic on your valuable customer segments.”
Discussion Questions: How (if at all) should retailers adjust their customer segmentation strategies during tougher times? In particular, how should segmentation change for a store’s most frequent customers versus other customers? Do you agree that overreactions during more difficult times are all too common?
Of course segmentation strategies must change with the shifting economic times. In fact, it’s naive to suggest that consumer segments are fixed and unchanging. The market is malleable and dynamic and so are consumer behaviors. We must expect people to change their shopping and consumption behaviors when their level of prosperity changes. Or when new choices become available. Or when they pass from one lifestage to another.
This does not mean we throw valuable, enduring shopper insights out the window just because gasoline recently got more expensive. But it does mean that our quest for understanding must be an ongoing one, and that even bedrock truths must be periodically questioned and refined if the data tells us so.
Knee-jerk reactions are seldom good strategy for marketers. But planning to be flexible and responsive to market shifts is a fundamental competency. In a game where success is measured in pennies on the dollar, even a one-cent adjustment to economic realities can be the difference between mediocrity and success.
I agree that retailers often have a knee-jerk reaction to changing conditions (witness what my partner Paula Rosenblum calls “holiday markdown chicken”), I find that most of those reactions exist in a vacuum–they’re not responding to specific changes in customer behavior, they’re responding to “sky is falling” media reports and doing “what we’ve always done in tough times.”
From the moment that it looked like 2007’s holiday sales were going to be flat all the way up until this very moment, I have been saying that the retailers who are going to come out of this slump ahead of the game are the ones who have their customer analytics tuned enough that they can sense and respond to the subtle (all right, and the not-so-subtle) shifts in consumer behavior that they see in their channels. The retailers who are the farthest down customer-centric strategies have the biggest opportunity–but it’s still no guarantee. If you thought merchandising assortment planning was as much art as science, you haven’t seen anything compared to the art of segmentation….
Mr. Godfrey’s most important point is his second–you have to protect the brand. In a VERY general sense, the customer comes to the retailer–the retailer does not go to the customer. What I mean is that a retailer must establish a positioning and reinforce it religiously throughout all aspects of the business to build an enduring brand. (Reference our discussion last month about Target and whether they should shift emphasis to “value.”)
In today’s economic news environment, each retailer may need to go an extra step to be sure they communicate their kind of value to their kind of customer. AJ’s (great store!) may add more wine sampling days and grapes to the cheese. Basha’s may double up on Coke 2 liter BOGOs. But AJ’s does NOT want to advertise Coke 2 liter BOGOs. No matter how hot it gets in Scottsdale in August.
Customer segments aren’t changing. They are who they are. However, their habits will likely ebb and flow with the times relative to price sensitivity, frequency of shop and product selection.
Too often, a knee-jerk reaction is to scale back marketing efforts and focus only on the best of the best customers at a time when most retailers’ biggest challenge is acquiring new customers.
Retailers should have enough data to evaluate how each segment behaves and what they respond to. Bottom line, provide relevant offers to the right customers at the right time.
The problem I see is retailers think market segments act across the board when the economic environment changes. There generally are shifts, more on the down than up, in economic change. Where most retailers miss this change is that it is not across all the categories or departments. For example, a moderate organic buyer may reduce organic purchases for themselves, but will not give up organic baby food for the children. Understanding the target market segments requires looking past dollars spent and trips made.
I do agree that there is a tendency for over-reaction when economic times change. That stated, while analysis is important and understanding shopper behavioral changes is critical to keeping them satisfied, trying to change to be all things to all segments is very, very difficult and confusing. You have to have some stability and consistency in what you stand for with shoppers or their confusion will drive them to look to other retailers to fill their needs.
If you cater to the high-end market as your core shopper base (AJ’s in Phoenix comes to mind) then your focus must remain driven by that segment’s expectations. You can’t become all things to all people; especially when the ups and downs of the economy, seasonal timing, and many other variables will impact a particular shopping trip and season.
Gasoline price alone has caused a change in what most consumers have to spend on other items. However, the worst idea that I presume will come to being, is that retailers will try to find cost savings by squeezing the suppliers, and of course, the smaller suppliers will either go out of business, or have to make sacrifices in quality and service. The better approach is for retailers and suppliers to work together to make adjustments and changes to match up with changing economic realities.
Solid segmentation strategies will continue to provide direction for retailers, but as the panel has discussed, refinement to the plan has to be continuous. For example, strategies targeted for core segments can be enhanced by looking into the trip mission, or why the shopper came into the store that day. More than two-thirds of middle class purchases are discretionary, according to Shopper insight information presented at a recent conference. As the number of shopping trips drops in response to fuel costs, knowing your best customers and why their preferences are changing is a must.
Take Nick Godfrey’s comment to heart. The most important strategy is to first protect the brand. A retailer’s brand is every bit as important as the brand on a packaged good or consumer service. Each retailer has a place in the consumer’s mind. That place dictates why the shopper does or does not shop regularly there. That place might be represented by “lowest price products” (i.e. Walmart); or “better products at low prices” (i.e. Target). If Target were to react to the current economic conditions and down-scale their position, they would confuse the shopper’s mind set and find their position very difficult to recover as the economy turns.
The most loyal and therefore most valuable customers are the ones that are in lock-step with the retailer’s branded positioning. If the retailer changes position, the valuable customer becomes un-locked.
I agree that in difficult economic times that maintaining brand equity is essential, but I also believe there’s an important corollary, and that’s that maintaining price/value integrity is essential as well. Far too often, regardless of the segment, the first response to a soft environment is to cut prices. this alone fundamentally impacts brand equity, for it alters the price/value equation, and customers immediately pick up on it.
Retailers need to respond instead by sharpening and reinforcing their core competencies, whether it be in-store experience, lifestyle identification, customer service or specialized assortments. They must refocus on their execution throughout the organization.
The nature of analytics necessitates constant refinement regardless of the economic environment.
Regarding the affluent, they’ve been fragmenting for years. Rather than writing a tome, I recommend you visit:
• Richard Baker’s Premium Knowledge Group is likely the best resource for a better understanding of how to craft a message that resonates.
• Lewis Schiff’s new book “The Middle Class Millionaire” provides great insights into the affluent with net worth between $1M and $10M.
• Ron Kurtz’s American Affluence Research Center tracks the affluent twice a year, and it’s quite affordable and very informative.
• The Luxury Marketing Council: 1500+ world’s finest brands and companies working together in over 20 chapters around the world, and considered the global thought-leader in terms of marketing to the affluent. (Full disclosure–I’m involved with this organization.)
Brand equity doesn’t always mean price appeals are wrong. Pepsi built its business on offering more in a bottle than Coke, for the same nickle. VW’s maximum American market share was achieved via the super-low price of the Beetle, not just clever magazine ads. Taco Bell brought itself back from the land of the eternal decline with its 99 cent (now as low as 79 cents) value menu. Sometimes it’s a lot of fun to be the price leader!