Customer segmentation

Segmenting customers has long been a stock-in-trade for marketing people. But an idea that changed the entire dynamics came in 1995, when Tesco, the UK’s biggest retailer, launched the Clubcard, a customer loyalty scheme that gave it a mass of data to mine about how people shop.

Clubcard was developed by Terry Leahy, a marketing man by background who was to become Tesco chief executive in 1997. The scheme could not only analyse consumer habits but also spot gaps in Tesco’s offerings.

A similar approach has been adopted around the world; in the US by, for example, Kroger, the supermarket chain. Meanwhile, in the intensely competitive UK supermarket sector, Tesco’s rival J Sainsbury uses the Nectar loyalty programme.

In a market where shoppers are bombarded by vouchers and coupons, the loyalty schemes help retailers tailor offers to their customers.

Janet Smith, Tesco’s head of group loyalty, has described untargeted offers, such as coupons printed in newspapers, as “bland”. In contrast, offers using Clubcard data give “customers discounts on the things they want to buy”.

Justin King, Sainsbury chief executive, has said: “If you target [money-off vouchers], you will give customers coupons they value… It works very powerfully.” But a new frontier in segmentation is opening up: the information provided by online searches, or the products shoppers buy via the internet.

Online searches can be used to build a detailed profile of a customer. For example, if a shopper is of a particular age or gender, he or she may need to buy certain products. This data could then be used to send consumers specific offers or promotions.

The Office of Fair Trading, the UK consumer protection watchdog, is looking at whether online retailers are personalising prices to customers, based on factors such as their browsing history.

Personalised pricing takes customer segmentation a stage further. The theory is that retailers may not offer just discounts and promotions, but also adjust the prices they offer to a website visitor based on the visitor’s past online behaviour or location.

The OFT first looked at this issue in 2010 but found no evidence of this type of personalised pricing in the UK, although it recognised the area was still evolving. Consequently, it wants to understand the changes that have taken place since the 2010 study, to ensure regulatory controls keep pace with technology and business strategy.

Andrea Felsted