Face the Music and Maximize long-term Marketing impact for online customer segments

By Alissa Chen and Koen Pauwels

Music is a key industry disrupted by E-commerce, which changes consumer behavior as we showed last week. Digital revenue grew from a meager 1.5% in 2004 to the vast majority of music’s overall dollars, which stopped their decade-long decline in 2014 and has been increasing for the last 5 years (https://www.statista.com/statistics/272305/global-revenue-of-the-music-industry/)

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With this shift to online, do you need to adjust your marketing? Yes: our research “How Online Consumer Segments Differ in Long-term Marketing Effectiveness” shows online segments and their marketing responsiveness differs from traditional insights gained offline by consumer packaged goods (CPG) companies. As resources are limited, it is imperative that companies competing in the digital music space can identify the efforts that will stimulate the most demand among different consumer segments.

Common wisdom for CPG consumers is that their behavioral segments are well captured by the distinction between heavy users and light users. Heavy users are typically more price sensitive, because they spend a much larger portion of their money on music than their counterparts. Moreover, they are typically less responsive to integrated marketing communication, because they ‘know what’s best for them’. However, our research concludes that heavy users for online music are less price sensitive than light users and more responsive to integrated marketing communication.

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Starting from over five hundred thousands of online music customers, our latent class analysis found the best way to segment them based on their behavior: (1) deal-prone customers, (2) new users, (3) steady users, and (4) heavy users. The size of each segment is 63%, 20.2%, 14.4%, and 2.4%, respectively. Note that ‘heavy users’ are a tiny portion of the overall customers base, but they spend seven times more per customer than the majority segment 1. The online music company used a marketing mix of coupons, TV, radio, print and online advertising. Next, we quantified the long-term effectiveness of each marketing action for each segment with a vector-autoregressive model that allows for lagged effects and synergies. Several results were surprising:

Long-term Elasticities of Customer Spending in Response to Marketing

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First, coupon usage decreases as customer weekly revenue increases. This emphasizes that marketing efforts are not equally effective for customers. With this knowledge, companies can push coupons to deal-prone customers and prevent over-reliance on those coupons for less price-sensitive customers. Moreover, companies can allocate those extra resources towards marketing efforts that are more likely to receive a response from heavy users. Coupons are most effective for deal-prone users (segment 1), online ads for new users (segment 2), TV for steady users (segment 3), and integrated marketing communication for heavy users (segment 4). Printed press, in particular, is only effective in combination with online marketing for heavy users, and in combination with TV for each segment.

The most important insight for all marketers is to recognize customers differ in their responsiveness to your marketing actions, and they differ even more so online than offline. Fortunately, online marketing also gives you the tools to customize your offer to specific customer profiles, based on their online behavior. Leveraging these insights helps your maximize long-term effectiveness.

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