Applying Segmentation to Direct Marketing

Episode 13

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Market Segmentation: Episode 13 Transcript

Hi, my name is Jerry Thomas and I’m President and CEO of Decision Analyst, and today’s discussion is about the application of segmentation techniques to direct marketing.

So, direct marketing stands in contrast to mass marketing and by direct marketing we typically mean, in some way, communicating directly with the end user.

Direct Market Definition

So you know an offer in the mail to a consumer is an example of direct marketing. Much direct marketing today is done via various online channels, websites. So there are many different ways that we can do direct marketing, but the distinguishing characteristic is that we’re going directly to the end-user rather than selling through intermediaries, like wholesalers or distributors.

And often we contrast direct marketing with mass marketing, (and by mass marketing, we mean marketing typically that’s going through indirect channels of distribution where we’re advertising on television, on radio, on broad reach magazines, outdoor billboards, media that tends to reach a broad market).

So in direct marketing, it’s much more targeted, much more pinpointed than mass marketing. And we’ve already talked a lot in this series about segmentation and what it means, and grouping people who have commonalities, or affinities, or similarities. So that’s exactly the same concept. And we’ve been talking primarily up to this point about segmentation as it applies to mass markets and mass distributed products.

Defining Segments

So, how do we apply segmentation concepts to direct marketing? So, again in segmentation, it’s the same general approach, we’re trying to find groups of people who have similar behaviors, similar attitudes, similar values, similar needs. We can use segmentation to improve messaging, improve targeting, and improve new product development.

Qualitative Research

So to do segmentation, we always recommend starting with qualitative research. We can do focus groups, we can do depth interviews, and there many online qualitative techniques that can be employed but always start with qualitative research so that you really understand the attitudes and the values and the needs of your end audience.

Just take a simple example, let’s assume that we’re trying to sell credit cards. We have different credit cards that go to different markets, and credit cards are often sold via direct marketing means. So, we’ve done our qualitative research—typically we would use depth interviews or focus groups, I personally prefer the depth interview—we’ve explored usage of credit cards and attitudes and features and benefits.

So, now we know enough to go out and design a large nationwide survey where we will interview two or three thousand households, or individuals, and again, ask about attitudes, and usage, and behaviors, and features, and benefits—all related to credit cards. We’ll also include questions about media usage and media consumption including mail and whether or not they respond to direct mail offers, and online behavior, and attitudes, and so forth.

So, now we have this large, huge database of information about two or three thousand people and we will also append additional data to those records from the demographic data services, such as credit scores. And because we’re talking about loaning money, and there are actually hundreds of variables that we can append to enrich our database. Then, we would conduct segmentation—there are a number of techniques we’ve talked about to do that. We’ve identified then all of these segments who have similarities or commonalities.

Let’s suppose, for an example, that we want to target the international travel segment, and that’s a segment that fell out of our segmentation analysis. Our analysis indicated that high-income people, well-educated people clustered in six states in the US are the heavy international travelers. Then, we have a starting point, and we might start and say we’re going to use Direct Mail as our direct marketing vehicle; we would take a sample of households, say twenty thousand; we would do a test mailing for our international travel card to that group; we would look at the response rate, the approval rate of those individuals; and then we would start building a mathematical model, so that we can improve that response rate.

Targeting Segments

And, in fact, we can incorporate artificial intelligence and machine learning as another way to help improve the predictive model. So, we now have done an experiment with our 20,000 households, we built a model, and now we start iterating. We bump the size up to 50,000 mailing, and then to a hundred, then to a half-million, and then to a million, and each step we’re improving the predictive model.

After we’ve explored and marketed our international travel card, then we would pick another segment, and another card, and would repeat this whole process.

One final thought to leave with you: in direct marketing, we have to have some way, whether it’s a narrow reach magazine, or an online channel, or a Direct Mail option, we have to have some way to reach that market for direct marketing to work, so keep that in mind always. Our next session is going to be on the application of segmentation to the future.


Jerry W. Thomas

Jerry W. Thomas

Chief Executive Officer

Jerry founded Decision Analyst in September 1978. The firm has grown over the years and is now one of the largest privately held, employee-owned research agencies in North America. The firm prides itself on mastery of advanced analytics, predictive modeling to maximize learning from research studies, and the development of leading-edge analytic software.

Jerry is deeply involved in the firm’s development of new research methods and techniques and in the design of new software systems. He plays a key role in the development of Decision Analyst’s proprietary research services and related mathematical models.

Jerry describes himself as a student of marketing strategy, new product development, mathematical modeling, business survival, and economic growth. In his spare time, he likes to work on his farm in East Texas where he grows grapes, apples, pears, pecans, plums, and peaches; a forest of native trees, grasses, and insects; and wild plants of many types.

He graduated from the University of Texas at Arlington, earned his MBA at the University of Texas at Austin, and studied graduate economics at SMU.