Database Marketing: Use a Spending Index to Target Shoppers With Money to Buy

The challenge for today’s catalogers is to more effectively identify and target those prospects who have the capacity to buy and the propensity to purchase specific products. What’s the most effective way to get and maintain your share of wallet in a highly competitive multichannel market?

Many of the measures catalogers use in their targeting efforts, such as household income, tangible assets (house, car), spending habits, and traditional recency, frequency and monetary (RFM) segmentation, have either been fully exploited or just aren’t reliable indicators of a person’s capacity to spend. Thus, they don’t allow you to truly distinguish your ideal customers.

Effectively identifying and targeting potential catalog shoppers starts with an understanding of spending capacity, a much more reliable indicator than household income or other demographics. Why? Because it’s focused on discretionary income, that is, the money consumers have available to spendafter taking care of essentials such as food, clothing and shelter. This is money they spend based on their interests and lifestyles and, as such, is the true target for most marketers.

Consider, for instance, two households that both have $150,000 in income and two children, and are in the same lifestage. But one family lives in a small, rural town, and the other lives in New York City. Clearly they have substantially different spending power. In fact, the New York family may barely be squeaking by, and the small town family may have significant discretionary assets. Even if they happened to live in the same ZIP code, one family may have a child in college, a cost that can take up the bulk of a family’s discretionary assets. Beyond this, people are different, and spending patterns depend on their tastes, attitudes, where they live and their financial asset base.

From a cataloger’s perspective, these are all factors that can determine what each consumer can or can’t afford to buy and how he or she chooses to spend money. Our research has shown that the best prospects are those with both the discretionary funds to afford a cataloger’s productsand the propensity to buy those products.

Today, demographics, while useful, aren’t enough. To effectively identify and target potential buyers, you must focus on prospects who have the financial ability to buy and have a high degree of affinity for a particular brand. You need a new kind of screening, one that can tell you whom among your customer and prospect databases has access to disposable money --regardless of their income. The key is your to ability to identify, segment, target and communicate with those households that are most likely to be able to buy products and services, and to differentiate those households with limited spending ability.

What to Do? Look for a Spending Index

Echelon DSI, for example, assigns scores based on several proprietary models. The first model is used to estimate income produced from assets based on wealth factors from a proprietary measured investable assets database. From this springboard, a discretionary spending potential model is created using demographics, cost-of-living factors, population density, home value and a household’s available home equity. The model is transformed via proprietary statistical methods. In this way, each household gets its own score. Ratings can be appended to any customer or prospect file to identify and target consumers by their capacity to spend.

Putting the theory into practice requires analyzing your customer data and creating a model that profiles what best customers look like (i.e., purchasing habits, transaction history, demographics). The process is much like traditional best marketing practices. But from there a spending index tool can be appended to enhance the profile, determining which of the best customers truly have the capacity to buy. This profile also can be applied to rented lists to identify prospects that share your best customers’ characteristics. In this way, purchase capacity plus affinity to spend on a particular brand equals propensity to buy.

Armed with more specific information, you can better target customers, locate more individuals with similar profiles and most importantly, understand their true ability to spend. With the advance knowledge of a consumer’s capacity to buy discretionary products, and by customizing offers and marketing messages to be the most relevant for each audience segment, you can more effectively utilize your marketing budget to reach truly worthwhile prospects. For example, you can better segment lists to determine who should be mailed and improve cross-sell strategies by identifying which current customers have the financial capacity to buy other products.

Jim Koppenhaver is group vice president for Echelon Targeting, which provides segmentation and targeting solutions. He can be reached at (847) 808-7652 or via e-mail at jkoppenhaver@echelontargeting.com.