Customer Segmentation

THE THING ABOUT Customer Segmentation is that all customers are not the same. They were acquired in different ways. They spend different amounts. They buy at different frequencies. They stay different lengths of time. They sometimes refer your business sometimes not. But, great customer or just good, you want more of them.

If your customers are individual consumers, then what can you do to create an effective customer segmentation based on your current set of customers?

What do you know about your customers?

Let’s say that your business has 1,000 consumer customers. Some are active customers, they are buying now and some have lapsed. Along with transactional information of their sales, you have information on where they live. Their name and address, including postcode. You keep this is your marketing database.

You may not know it, but this is customer segmentation gold-dust! It is your customer segmentation DNA. If you could find others with a similar DNA, then logic says you’d be in a good position to present your offer to them.

What two characteristics really define your customer segmentation?

There are TWO things that create a customer segmentation well. Both of them you may have a good idea about, but maybe no hard facts. They are simple and understandable. Those TWO things?

  • Life-stage
  • Affluence

All of your customers can be defined by their life-stage. Their stage of life.

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If your business attracts customers primarily from one of the life-stages, then presumably, you would want to understand how many more of that type of person, at that life-stage, would be interested in your business?
Everyone in the country has a life-stage. Without fail. So if you can match up people who mirror the types of people you are serving right now, then that will help you segment your customer list.

All of your customers can also be defined by their level of affluence.

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The world does not precisely divide into rich and poor. There are degrees of difference. Even with those described as rich or high net worth, there are differences. One person may have assets of £20 million, another may have assets of £1 million. In every group, there are differences of degree. But, it is simple and understandable to segment an audience by affluence.

If you run an upmarket golf club, or market investment opportunities, then obviously your customers would mostly congregate in the affluent group. The upmarket golf club’s most profitable customer segmentation activity will be to identify people who are first and foremost affluent!

What can Marketing Managers do with Life-stage and Affluence?

If you are a marketing manager, or have responsibility for marketing, then you will want to know more about these affluence and life-stage. Why? Because it is possible to identify your customers by life-stage and affluence and then compare them – accurately – to the rest of the population, to find matches most suitable to your business.

Affluence is highly predictive of response to your offers. The wealthy golf club looking for new members will not resonate with someone who is on a low fixed income. Therefore, why waste any budget communicating with an audience without the ability to become a new customer.

Introducing SONAR, a unique geo-demographic system

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SONAR is a system that classifies postcodes that look alike. It uses a wide variety of data sources to do that. You may have observed this yourself, but people who live in the same neighbourhood often have similar characteristics. Birds of a feather live together.

Areas are often quite stable in their characteristics too. An example of this is the Monopoly board. It was brought out in 1935. Park Lane and Mayfair were wealthy areas then and are wealthy areas now. It generally holds for the other end of the spectrum too, like the Old Kent Road!

Of course, new areas are always being developed. Such as the Docklands area of London and Salford Quays in Manchester for example.

SONAR uses advanced statistical techniques called CLUSTERING to put together areas that are alike according to a wide range of characteristics. SONAR is very clever in that accurately predicts and identifies areas by affluence and life-stage. SONAR is formed by using a lot of variables that are highly correlated with affluence.

What characteristics go into SONAR?

There is a wide range of characteristics associated with affluence, including:
• Occupation
• Social Class
• Detached Properties
• Properties that are Owned Outright
• Large Properties
• Educational Qualifications
• House Prices
• Council Tax Information

All these characteristics are associated with affluence, so when they are combined you get a better idea of what areas are affluent and what areas are struggling.

Equally, the other dimension that is important to the marketing manager, is life-stage. SONAR splits these life-stages into 6 groups ranging from the young to old. This is important to what you purchase and what you buy. Different generations buy different products and services.

To get the very best description of an area was the driving force behind how SONAR was built. A huge number of data manipulations were performed. Key variables were carefully examined to create the maximum discrimination in the clusters that are used to describe the population.

In the end SONAR settled on 80 SONAR Codes, which are organised into 6 life-stage groups and 4 affluence groups, split into quartiles.

How does SONAR work?

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Each of the 80 SONAR groups have a code. The first two characters identify the life-stage group and the wealth quartile (or 25%).
Example: SONAR Code A11 is Metropolitan Young Professionals
The A represents ‘Young Singles’ and the second digit is wealth quartile 1 the most affluent. The third digit is the wealth ranking of this cluster out of all other 80 clusters compared to the other clusters in the A1 grouping. So Metropolitan Young Professionals has a wealth ranking of 2, which makes it the top A1 ranking, therefore A11.

Here’s a quick description of A11 Metropolitan Young Professionals
These mainly city centre neighbourhoods are heavily concentrated in Inner London. They consist of young, hardworking, affluent, business oriented individuals whose career comes before family. The group contains a very high number of professionals working in banking and finance and it also contains significant numbers of self-employed. They are a highly educated, geographically mobile group who tend to live in city centre converted flats and apartments, they make the most of the city life and enjoy going to theatres, restaurants, art galleries and cinemas as well as to the health club.

Another example is F44, which is Elderly Struggling Council Tenants
F is the life-stage, the first 4 reflects these households are in the least affluent quartile. Their overall wealth ranking is 76 out of 80. Of the F4 grouping, this wealth rank is 4, hence F44. Many live in run down local authority owned small flats. These are many aged residents living along. Levels of health care need are very high.

A SONAR code exists for every postcode in the country. You may know that some postcodes are ‘retired’ by Royal Mail. So if you had an old address, with one of those postcodes, would SONAR still work for you? The answer is yes. Because, the codes are attached to EVERY POSTCODE THAT EVER EXISTED!
So however old the data you want to profile, you will be able to get a SONAR code to describe your existing customers.

How Can a Marketing Manager Use SONAR?

One obvious use is:
Step1: Overlay the SONAR codes onto your database
Step 2: Identify ‘lookalike’ audiences to target.

Actually, the list of marketing strategies that can be enhanced by using SONAR is long.

10 Ways to use SONAR for Customer Segmentation

– Profile and add depth to your understanding of your existing customers
– Customer segmenation by those who have purchased a particular product or service
– Finding high value customers, or high net worth or affluent customers
– Customer segmentation of lapsed customers
– Finding ideal new customers for marketing acquisition campaigns
– Analysing responders and non-responders to find areas with the highest response rates to reduce costs and maximise return on marketing activity
– Media analysis – to understand what kinds of customers are being acquired by channel
– Catchment area analysis, for retailers planning new sites
– Sales territory allocation based on presence of a customer segmentation with predominant characteristics
– Use SONAR to segment your customers to ensure they get RELEVANT messages and images in your communications.
The list is almost endless. If you can associate a postcode, past or present then you can successfully profile your customers against the rest of the population. Which means you can massively improve the results of your marketing campaigns going forward.

Just how powerful is SONAR?

Here’s some analysis we did with SONAR a few weeks ago. Using a property database consisting of houses sold for £600,000 or more in the last 10 years, SONAR was used to profile the occupants.
Remember that Metropolitan Young Professionals code A11? Compared to the national percentage that particular code had an index of 2774 for households sold over £600,000.
So, if you are looking for people residing in properties over £600,000, then using SONAR you can pinpoint exactly where they are.

Another way to show SONAR’s ability to identify households sold over £600,000 is through this Gains Chart, or as some call it a lift chart. The chart shows the uplift through using SONAR as compared to a random base. For example, nearly 80% of expensive properties are concentrated within 10% of the population in the SONAR Codes with the highest indices.

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How SONAR identifies expensive properties in the UK

As you can see, just 1% of the population accounts for near 23% of the properties over £600,000. So if you are seeking to identify high net worth individuals then SONAR could be a big part of your plans.

How much does SONAR cost?

SONAR is priced around half or one quarter that of other options. The annual licence for SONAR is typically £6,000 plus vat. For companies with small databases we can agree a lower fee. Please contact Graham Arrowsmith for more information.