Market Segmentation/Share of Wallet

Understanding the characteristics of High-Potential Customers

A Case Study by Harte-Hanks Research & Analytics

Harte-Hanks Research & Analytics San Diego, California 92037 (800) 854-8409

Client Objective Gain an understanding of the companys share of telecommunications dollars spent by customers. Tailor sales and marketing plans toward industry segments, showing maximum revenue growth potential.

Broader Audience for Case A share-of-wallet study can be fruitful for virtually any business, whether the client markets to consumers or other businesses, or even in a non-profit development context. It can be particularly relevant if customers frequently buy from multiple vendors, or if you have just grown through merger or acquisition and want to gain a quick handle on your acquired customer base. Its also valuable if your industry is going through rapid growth. If everybody in the sector is growing, youll want to get a handle on whether your own growth is hiding things: For instance, possibly the fact that customer penetration is shallow and that you are actually losing ground to key competitors. Whenever its undertaken, the end resulta marketing strategy focused on the best revenue opportunitiesis always desirable. The Harte-Hanks Solution In order to analyze the clients share of wallet in customer spending, Harte-Hanks first matched the clients customer list to Harte-Hanks Market Intelligences syndicated database (which contains statistics, by site, on long-distance voice expenditures and volumes of data communications product usage, each identified by service provider). For all matched sites, Harte-Hanks coupled average price points for data communications products with reported product usage in a formula that estimated data communications spending. Calculated data communications spending was added to the reported long-distance voice spending to arrive at total spending for each customer. The customers actual client billing data could then be compared with total estimated spending to arrive at the clients share-of-wallet versus the dollars each customer spent with other communications carriers. Once core calculations to determine total spending and share of wallet were completed, cuts of the customer base were made by industry and by three client-spending tiers. Harte-Hanks identified segments offering the most revenue potential in long distance, data communications, and combined overall revenue based upon estimated dollars spent with competitors on communications services. These segments were then analyzed on a time-series basis, viewing customer spending over a four-year history to spot the strongest growth trends.

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The analysis identified areas where significant future revenue growth, beyond just that captured in current spending data, might lie. Finally, a cluster analysis identified groupings of customers with internally homogeneous characteristics that distinguished them, in general, from other customers. Clustering, which uses combinations of factors (rather than just single attributes) to formulate distinctions, yields a multi-dimensional picture of the various constituencies within the customer base. Findings Initial analysis showed that the client held its highest share of spending in the lowest targeted customer tier. Share was slightly lower in the highest tier, while the middle spending tier offered the most potential with only a 23% share-of-wallet captured. When these results were further segmented by industry and specific spending categories, pockets of potential emerged in all three tiers of monthly spending. For example, despite the relatively high share of wallet in the lowest spending tier, the Education, Wholesale and Government customers in that category still offered high potential across all three revenue categories (longdistance, data communications and total revenue). Some industries showed potential in specific service lines. For example, Transportation customers in the highest spending tier offered strong long-distance spending potential, while Business Services customers in the lowest tier offered strong data communications potential. Conversely, though they were not highlighted for either specific service, Communications customers in the middle tier presented strong overall spending potential. With historical trend analysis that pinpointed areas of growth, more middle-tier industry segments (where the current customer base was less penetrated) appeared to be good future revenue possibilities. Finally, the cluster analysis showed a new perspective. Rather than being dominated by industry characteristics, clustering factors tended to be size of site or enterprise and use of specific services. Seven clusters were identified:
Franchise Locations Mom and Pop Average Joe

ISDN Heavies

Client Customers

Smaller Private Network

Voice and Data Heavies

Telemarketing

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1. 2. 3. 4. 5. 6. 7.

Franchise Locations (small sitelarge enterprise) Mom and Pop (small sitesmall enterprise) Average Joe (medium site with PBX) Smaller Private Network (medium site with data services) Telemarketing (medium-to-large site with high long-distance) Voice and Data Heavies (large site with voice, data and T1) ISDN Heavies (very large sites with very heavy ISDN)

The clients share of wallet was strongest in high-use clusters 6 and 7, and lowest in the small site clusters, 1 and 2. This illustrated that even though the client had a high share-of-wallet overall in the lowest of three spending tiers, there were still significant pockets of opportunity to be realized in targeting services to smaller sites. Results The client used this industry segment information and cluster analysis to design a new marketing strategy. Sales quotas, sales force structure and product pricing were all re-aligned to focus on areas of greatest opportunity based upon these discoveries about revenue potential. Ideas to Consider for Your Business Not every industry will have a syndicated database available for use in estimating customer spending, but that doesnt mean share-of-wallet analysis is impossible. Financial services firms, for example, may be able to estimate household credit usage or mortgage sizes by looking at demographics, psychographics or cluster codes. Other consumer or business-to-business marketers might survey a sampling of customers about stated frequency of purchases in the category, then compare the results to their actual purchase activity with your firm. From the limited sample surveyed, a model can be created based on purchase patterns and demographic or firmographic characteristics to project estimated total spending for non-surveyed customers. Aggregate spending statistics from government sources may also be available that can be used as a reality check on self-reported data, helping to normalize information by geographic areas. When looking at growth potential by customers and segments, incorporating a historical perspective is important, particularly in rapidly changing industries. While a segments current spending level may be modest, knowing that it has doubled in size over the past year suggests a trend to watch. Similarly, its important to consider combining that with a geographic perspective to look at how the territories where you market are changing. Trends of business and consumer populations by area, for instance, might be missed when looking only within your customer database. If a whole population is underrepresented in your customer base but is growing rapidly, reaching out to expand it presents a big opportunity.

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Cluster analysis to segment by multiple characteristics versus one-at-a-time can add distinct value, particularly with product packaging and promotion strategy. The descriptive pictures for each cluster offer a fertile basis for developing price offers, upgrade deals, or even advertising messages that might appeal to a specific group. Knowing each groups overall size, as well as its opportunity size, helps you know how to prioritize funds. If you elect to drive your marketing through a segmentation scheme, however, its wise to flag segment members at an initial point in time and then reevaluate periodically to track segment growth and inter-segment movement. Different customer life stages usually involve changes affecting the descriptive segment characteristics, and knowing the patterns of movement will give you important insights. Each company, industry and marketing situation offers unique characteristics, of course. These ideas are just suggestions, and we hope youll contact us at Harte-Hanks to discuss solutions for your specific business opportunity.

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