C3 Tommy Hilfiger r1f3o

Case study

How Tommy Hilfiger capitalizes on its most profitable customers

Authors

Tommy Hilfiger case

Angelo Gelsumino is a partner in the Advisory Practice, Ernst & Young LLP, Netherlands and is the EMEIA customer lead Bob van der Beek is a senior manager in the Advisory Practice, Ernst & Young LLP, Netherlands Kasia Blicharz is a manager in the Advisory Practice, Ernst & Young LLP, Netherlands

Executive summary

I

n today’s competitive global fashion market in which Tommy Hilfiger operates, companies struggle with building sustainable and profitable customer relationships. In this environment, segmentation becomes the key to effective customer profitability management. It helps to optimize investments in product development, channel management and marketing communications. A fact-based

segmentation establishes a method to select the most profitable customers and with their underlying profiles helps to build targeted marketing strategies around them. This segmentation method enabled Tommy Hilfiger to stimulate the change of its mindset from traditional productcentric thinking to a more customer-centric thinking. As a result, Tommy Hilfiger will optimize the allocation of the total marketing spend, launch tailored CRM activities and effectively increase its sales margins and revenue.

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Today’s global fashion market: redefining the balance between efficiency and effectiveness - building brand loyalty as the next competitive battleground The high-quality global fashion market in which Tommy Hilfiger operates is characterized by strong competition and a number of industry trends such as: • Retailer consolidation and growth of retailers’ private label brands • Apparel price deflation and flat growth • Capricious customers and reduced timeto-market cycles

Although customers shop more frequently and buy more clothes than before, they spend overall less of their income on clothing than in the past. Factory outlet sales and online sales are increasing rapidly, with shoppers looking for maximum value for money, chasing good deals on high-end brands. Consumers are also buying closer to the time they will wear the clothing, requiring a reduction in time-to-market cycles (from design board to store racks).

The ability to quickly respond to customers’ ever changing demands with effective, low-cost sourcing and supply chain management is key to both gaining and maintaining a competitive advantage. Traditionally companies need to eliminate inefficiencies to reduce cycle times and cut costs. At the same time, as profitability becomes more difficult to achieve, optimizing the effectiveness of their operation becomes critical. This pressure of becoming more effective requires a rigorous focus on building and retaining a strong and differentiated brand1 and managing the relationship

with the customer. Failure to identify consumer trends, meet customers’ needs and build a closer relationship with them has an increasing impact on business performance. Therefore, building brand loyalty2 is becoming the next competitive battleground. 1

The “soul of the brand” (image, associated lifestyle and types of styles and products offered) is one of the company’s main assets and should be managed carefully to build brand loyalty and successfully differentiate the brand from its competitors.

2

Loyalty in this context is defined as a

Building sustainable and profitable customer relationships Tommy Hilfiger is a recognized fashion brand, offering customers a range of high-quality product lines including men’s, women’s and children’s casual apparel, denim, accessories and a range of licensed products such as fragrances. Tommy Hilfiger uses a variety of direct and indirect distribution channels. Its business model is based on indirect selling through

combination of both attitudinal and behavioral loyalty. Attitudinal loyalty is measured by two components. The first is the extent to which customers feel a personal bond with the brand and a connection to what the brand stands for: “brand proximity.” The second component is “customer preference,” the extent to which customers indicate a particular brand as being one of their favorites. Behavioral loyalty is also measured by two components: the level of actual customer recommendation (positive word-of-mouth over the last 12 months) and repeat purchase over the years.

Tommy Hilfiger case

wholesale3 and direct selling through retail4 and e-commerce.5

management (CRM) strategy, including a loyalty program.

In order to achieve sustainable and profitable growth, Tommy Hilfiger is aiming to achieve:

The project team was initially requested to help validate this hypothesis and provide the guiding principles for launching a CRM strategy. When we started to develop a solution for Tommy Hilfiger, we took a broader view and embedded the requirements of the CRM strategy in a wider context, in which the fundamental question was, “How does a company build sustainable and profitable customer relationships?”

• An improved sales margin • Strengthened brand positioning to increase sales revenue Furthermore, Tommy Hilfiger’s marketing division’s hypothesis is that by focusing on brand loyalty and building a direct relationship with customers, Tommy Hilfiger can make a structural improvement

Managing customer profitability through strategic market segmentation The segmentation of consumers in Tommy Hilfiger’s target market6 is the cornerstone of customer profitability management. Effective segmentation establishes a common ground for a fact-based selection of customer groups (segments) and helps to optimize investments in product development, channel management and marketing communication.

to its margins and increase revenues. This hypothesis has led Tommy Hilfiger to outline a customer relationship

3

Indirect selling; clients include business-toconsumer clients such as leading department stores and chain stores, as well as business-tobusiness clients who act as resellers, e.g., selling to multibrand stores or online stores.

4

Direct selling to customers through single brand stores, both owned and operated as well as franchisees.

5

Direct selling to customers through online single brand stores, owned and operated.

Segmentation is a strategic process of subdividing the market (including customers) into relevant groups that share similar characteristics and are also significantly different from other groups. Strategic market segmentation demonstrates how one can capitalize on deep customer insight to re-align the organization around its most profitable customers. Identifying customers with the highest present and potential value and 6

The project team has helped Tommy Hilfiger to define its target market, based on specific criteria taking into customers’ “fashion literacy” and brand-buying behaviour.

building operating models around them is the key to driving growth and profitable revenues. Most organizations only have a limited and somewhat fragmented view of their customers using basic demographics and buying behavior. However, in order to build sustainable and profitable customer relationships, an in-depth understanding of the underlying motives and values that drive customer behavior is needed. Capturing these driving forces of customer profitability requires a multidimensional approach to the market and segments. We developed a four-dimensional market segmentation framework for Tommy Hilfiger that combines the following dimensions: • Buying behavior and customer economics • Customer needs and attitudes • Customer experience and brand relationship • Social demographics and lifestyle We built our market segmentation framework conducting quantitative primary market research across Tommy Hilfiger’s key markets in Europe.7 Statistical analysis of this research resulted in the identification of seven European market segments, each of them with a distinct profile in of the four main dimensions listed above. The emerged segments differed in size, both in number of consumers and their respective share of the market in of overall revenue. Tommy Hilfiger is present in each of these 7

The market research comprises nearly 6,000 consumers in Belgium, , Italy, Spain and the United Kingdom.

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market segments, its presence varying in of the number of consumers who buy the brand and the share of each segment in total Tommy Hilfiger sales revenue. Although the model was constructed on a European scale, it accommodated potential differences between countries. These differences appeared to be minimal, making the model both actionable on country level and scalable to additional countries and regions in a later phase. For each segment, we provided Tommy Hilfiger with an in-depth profile booklet, containing a quantitative description of the segments. Both through these booklets and workshops involving representatives from several departments and key decision-makers, the segments were brought to life. We highlighted their key drivers and personality traits, and analyzed in detail their buying behavior and customer economics, customer needs and attitudes, customer experience and brand relationship, and socio-demographics and lifestyle. The key benefits of this strategic market segmentation program delivered are twofold: 1. A common basis in facts for the selection of the most profitable customer segments 2. The ability to optimize product management, channel management and communication

A common factual basis for the selection of most profitable market segments

for the brand, ideally having the brand as the most frequently bought fashion brand on which they spend most of their clothing budget.

By identifying the unique characteristics of each segment, we helped Tommy Hilfiger to understand the segment differences and potential ways to address the segments’ respective needs. Building on this, we helped to quantify the business rationale for focusing on a few key segments and we helped to develop a targeted marketing strategy around these “primary segments.”

In order to quantify the brand position, we constructed a Tommy Hilfiger brand pyramid. This brand pyramid (see Figure 1) represents the five main stages customers go through:

The primary segments were based on three main criteria: A. Conversion ratio — from knowing the brand to recurring buying B. Average annual customer spending in relation to relative share in total sales revenue C. Brand fit A. Conversion ratio — from knowing the brand to recurring buying For a fashion brand like Tommy Hilfiger, the key challenge is to continually strive to improve the conversion rates in its target market from simply knowing the brand to actually buying the brand on a recurring basis. The aim is to create a loyal base of customers who have a strong preference

• Knowing the brand (brand awareness) • Feeling a personal bond with the brand and a connection to what the brand stands for (brand proximity) • Deliberately visiting a store to buy the brand (brand purchase intention) • Buying the brand for the first time (buyers) • Buying the brand year after year (recurring buyers) By building a brand pyramid for each market segment, we found significant differences in the conversion ratios. Our analysis also revealed segment differences with respect to the leakage8 that occurs when moving up in the brand pyramid from one stage to another. We looked at those segments with the highest conversion ratios to see which of them qualified as a primary segment.

8

Leakage refers to the loss of customers in each stage of the brand pyramid.

Tommy Hilfiger case

Figure 1. Brand pyramid for Tommy Hilfiger — conversion from brand awareness to recurring buyers Recurring buyers

The segmentation of consumers in Tommy Hilfiger’s target market is the cornerstone of customer profitability management

Buyers

Brand purchase intention

Brand proximity

Brand awareness

Conversion ratio =

Recurring buyers % __________________ Brand awareness %

Source: Authors’ research

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B. Average annual customer spend in relation to relative share of total sales revenue The average annual sales revenue per customer differed significantly between segments. Differences were also found in

the segments’ share in Tommy Hilfiger’s total sales revenue. The combination of these two elements and the differences in conversion ratios provided further direction for segment selection (see Figure 2). In order to indentify primary segment

we looked at those with the highest scores for all three elements. C. Brand fit By conducting both a quantitative and qualitative assessment of “brand fit,” we evaluated the extent to which the Tommy

Figure 2. Focusing on key segments is critical to achieving long-term growth Index of conversion ratio (brand pyramid) and average annual customer spend Size of bubble represents share of segment in total sales revenue of Tommy Hilfiger

150 Segment 3, 25%

Highest scoring segments 3, 4 and 7 for 53% of sales revenue (while representing 42% of total consumer base of Tommy Hilfiger)

Index of conversion ratio (from awareness to recurring buyers)

Segment 4, 12%

Segment 7, 16% Segment 1, 17% 100 Segment 5, 13%

Segment 6, 8%

Segment 2, 9% Index 100 based on total of all Tommy Hilfiger customers 50 50

100 Index of average annual customer spending on Tommy Hilfiger

Source: Authors’ research

150

Tommy Hilfiger case

Hilfiger brand personality and its relative position toward direct competitors’ brands9 fit with the unique characteristics and growth potential of a particular segment. Taking into considerations the findings from our four-dimensional segmentation framework, we carefully mapped the Tommy Hilfiger brand personality with the characteristics of each of the seven segments. In order to find the segments that qualified as primary segments, we looked at the segments that had the strongest fit with the Tommy Hilfiger brand. Our evaluation of the seven segments on these three main criteria has led Tommy Hilfiger’s global marketing management to select three primary segments (3, 4 and 7).

The ability to optimize product management, channel management and communication By focusing on these three primary segments, Tommy Hilfiger was able to use the insights gained on each segment’s distinct profile to optimize the following: • Product management — which product ranges to offer to the primary segments?

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Index of conversion ratios of Tommy Hilfiger versus competitor brands shows a relative strong position towards both Direct Competitors and High-end Competitors; conversion ratios of both sets of brands are far below those of Tommy Hilfiger for six out of seven segments.

• Channel management — which sales channels to use for targeting and servicing these segments • Marketing communication — which media and messages to use to reach these segments A. Product management: transforming from product-centric to consumercentric thinking The findings from the segmentation program have stimulated a change of mindset from traditional product-centric thinking to more customer-centric thinking. Tommy Hilfiger is now capable of supplementing market segmentation as the guiding principle for future product design. This involves differentiating product categories and deg collections attuned to specific segments. It also relates to optimizing the allocation of product categories and product lines across channels to optimize the reach of primary segments (offering access to the right mix of products through the right channels). One of the areas we started to explore together with Tommy Hilfiger was the business case for a more segmented diversification and expansion of the existing product range. In this respect we have carefully evaluated each “primary segment” in of its attitude towards fashion, its product categories bought, its reasons for buying and its sales channels usage.

By working with Tommy Hilfiger’s global marketing team, we helped to identify opportunities for attracting more customers from the primary segments in the target market; thereby aiming to increase the share of these segments in the customer base and the overall Tommy Hilfiger sales revenue. B. Channel strategy: steering toward higher margin sales channels Sales margin and revenue improvements can be achieved by steering the primary segments to the direct channel. The differences between the segments with respect to direct channel purchasing habits (Tommy Hilfiger owned and operated stores, both offline and online) are most significant when it comes to online shopping in Tommy Hilfiger’s web shop (see Figure 3). A closer examination of segment 3, for example, shows the future growth potential that would arise if customers in this segment were to migrate (part of) their spend on Tommy Hilfiger from indirect to direct (Tommy Hilfiger owned and operated) channels, in particular, the web shop. The potential margin optimization from moving these customers from relatively low margin indirect channels to higher margin direct channels is very large, since this segment s for 25% of total sales revenue, making it Tommy Hilfiger’s largest segment. In order to achieve this identified channel migration potential, Tommy Hilfiger needs to use its in-depth insights into the distinctive drivers and characteristics of the segment. The segmentation provides

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Figure 3. Improving margin through channel optimization for ‘primary segment’ 3 Index of buying at branded Tommy Hilfiger shops – online and offline Size of bubble represents share of segment in total sales revenue of Tommy Hilfiger

200%

Segment 7, 16%

Index of buying online via branded Tommy Hilfiger webshop

150% Segment 4, 12%

Segment 1, 17% Potential of margin optimization of moving these customers from relatively lower margin indirect channels to higher margin direct channels

100% Segment 3, 25%

Segment 5, 13% 50% Segment 6, 8%

Segment 2, 9%

Index 100 based on total of all Tommy Hilfiger customers

0% 50%

100% Index of buying offline via branded Tommy Hilfiger high street shop

Source: Authors’ research

Tommy Hilfiger with the necessary information on which to base a CRM strategy that effectively addresses the needs of the primary segments. For example, the recently rolled-out Tommy Hilfiger loyalty program is designed to send customers to the direct channel by means of targeted initiatives such as personal sales and service propositions.

C. Communication: increasing customer life-time value by shifting focus to segmention-based communication

On average, 35% of Tommy Hilfiger’s customers have been buying the brand already for more than five years and this is consistent across segments (variation The shift from a generic marketing approach between 28% and 41%).10 As Figure 4 to highly segmented and more personalized illustrates, there is a strong link between communication is expected to help optimize behavioral/attitudinal loyalty components marketing spend via increased conversion (actual consumer recommendation/brand ratios and sales revenue. proximity) and consumer spending. Over the years, Tommy Hilfiger has built a strong brand and a loyal customer base. 10 These figures are not presented graphically in this article.

Tommy Hilfiger case

Figure 4. Establishing a strong brand relationship is reflected in higher customer spend Index of customer recommendation, brand proximity and average annual customer spend Size of bubble represents index of average annual customer spending on Tommy Hilfiger

150

Index of actual customer recommendation

Segment 7, 136

Segment 4, 141

Segment 3, 114 100 Segment 1, 98

Segment 5, 91

Segment 6, 61 Segment 2, 71

Index 100 based on total of all Tommy Hilfiger customers 50 80

100

120

Index of brand proximity Source: Authors’ research

The deployment of segmentation across its commercial operation enables Tommy Hilfiger to optimize its allocation of total marketing spend and increase average revenue per customer

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From a segmentation perspective, one can argue that the primary segments in the target market may not be effectively reached by a “one size fits all” above-theline (ATL)11 marketing communication approach. In general, across industries, the communication approach to customers has shifted, with the emphasis being more toward below-the-line (BTL) initiatives to optimize the return on marketing budget spent. Companies are increasingly focusing their energy on winning smaller but more strategically significant BTL battles than ATL wars with well-funded competition.12 The same is true for Tommy Hilfiger, for which segmention-based BTL communication could potentially be more efficient and effective to boost the

11 ATL is a type of advertising through media such as television, cinema, radio, print, web banners and web search engines to promote brands. This type of communication is conventional in nature and is considered impersonal to customers. It differs from BTL advertising, which uses unconventional brand-building strategies, such as direct mail, email and printed media. It is much more effective when the target group is very large and difficult to define and it is efficient and cost-effective for targeting a specific group. While ATL promotions are designed for a mass audience, BTL promotions are targeted at individuals according to their needs or preferences. ATL promotions are usually targeted more at establishing brand identity, whereas BTL is usually aimed at generating sales. 12 Winterberry Group Report Quantifies Fundamental Marketing Shift as Spending Moves Below-theLine//PR Newswire, 23 January, 2006.

customer lifetime value. The fact that Tommy Hilfiger already has a stable and loyal customer base provides a strong basis for a CRM program with segmention-based BTL communication. Figure 5 shows that, for Tommy Hilfiger, investing in building customer relationships is profitable. The average annual sales revenue per customer increases significantly as the relationship with the brand evolves over time, with customers demonstrating behavioral loyalty (repeat purchase) toward the brand.13 Furthermore, the findings in Figure 6 indicate that the performance differences between segments increase even more significantly over time, indicating the added value of targeting the “primary segments.”

13 The percentage of customers who indicate that Tommy Hilfiger is the brand they have purchased most often differs by segment and varies from 9% to 25%. Among the primary focus segments 3, 4 and 7, these figures are 25%, 9% and 14% respectively.

For example, an analysis of the results for repeat purchases shows that segment 4 has the strongest uplift in consumer spending of all segments. However, currently, only 9% of this segment said that Tommy Hilfiger is the brand they purchase most often (compared with 25% for segment 3). This suggests that there is a significant revenue potential to increase this percentage from 9% to 25%.

Tommy Hilfiger case

Figure 5. Building a long-term relationship helps to create revenue growth Index of average annual sales revenue per customer over time across segments 400 Total (all 7 segments) Index of average annual sales revenue per customer

359 320 300 278

213

200

100

100 (Index 100 based on first-time buyers of Tommy Hilfiger)

0

First time buyers

...1-2 years

...3-4 years

... more than 5 years

Customers who have bought Tommy Hilifger for...

Source: Authors’ research

… as the brand they have purchased most often Customers indicating Tommy Hilfiger…

Figure 6. Building loyalty among primary focus segments generates added value Index of average annual sales revenue per customer over time across segments 800 Highest scoring segment Lowest scoring segment Total (all 7 segments)

Index of average annual sales revenue per customer

700

Highest scoring segment: 4

713

600 500 416

400

359 300 268 201

200

309 278

320

213 177

188 156

126

100

100 65 (Index 100 based on first-time buyers of Tommy Hilfiger)

0

First time buyers

Source: Authors’ research

...1-2 years

...3-4 years

Customers who have bought Tommy Hilifger for...

... more than 5 years

… as the brand they have purchased most often Customers indicating Tommy Hilfiger… 67

Furthermore, when looking at other indicators, the potential of increasing customer life-time value via targeted communication becomes clear. Although segment 4 buys the widest variety of goods from Tommy Hilfiger (see Figure 7), the customer preference for Tommy Hilfiger among this segment is weaker than in segment 3.

If Tommy Hilfiger were to introduce a CRM program with segmentation-based communication, this could strengthen its relationship with primary segments 4 and 7 while at the same time stimulating the cross-sell in segment 3. As part of the market segmentation, we conducted an indepth proposition test. The aim was to find out segments’ preferences for the range of

potential customer offerings that Tommy Hilfiger could introduce. The preferences that emerged differed by segment. This information provided Tommy Hilfiger with a direction for the development of its CRM program. Recently, Tommy Hilfiger launched its first loyalty program aimed at customers buying

Figure 7. Capitalizing on brand preference will help to boost cross-sell Index of customer preference and variety of product categories purchased Size of bubble represents share of segment in total sales revenue of Tommy Hilfiger

160

Index of consumer prefeence – Tommy Hilfiger as one of the most favorite brands

Segment 3, 25%

Potential of cross-selling among segment 3 130

Segment 4, 12%

Potential of increasing customer preference among segment 4 and 7

Segment 1, 17%

100 Segment 6, 8%

Segment 5, 13%

Segment 7, 16% Segment 2, 9% Index 100 based on total of all Tommy Hilfiger customers 70 70

100

130

Index of variety of Tommy Hilfiger product categories bought Source: Authors’ research

160

Tommy Hilfiger case

in the direct sales channel. They are now building up their customer database across Europe, with both offline and online direct sales data. As the number of customers that have signed up for hip of the loyalty program grows, Tommy Hilfiger will be able to implement large-scale segmented marketing campaigns. Using the segments’ profile and the analysis of individual customer’s buying patterns, Tommy Hilfiger plans to approach individual customers using personalized communication such as tailored sales and service offerings. In order to do so, Tommy Hilfiger’s marketing division needed to tag each customer in the database with a segment label. We provided Tommy Hilfiger with an allocation model to determine which segment a customer is likely to belong to. This algorithm has been built for each segment and country separately.14 The model is based on a subset of questions (segment identifier questions or SIQs) from the original market segmentation study. These SIQs can be used in interactions with customers, e.g., when customers purchase products online or sign up for a loyalty program. Moreover, the SIQs can be used in future market studies, e.g., in brand and communication tracking in order to closely monitor ATL brand and advertising performance at the segment level across countries.

Tommy Hilfiger is now in pole position for building sustainable and profitable customer relationships The deployment of segmentation across its commercial operation enables Tommy Hilfiger to optimize its allocation of total marketing spend (ATL and BTL) and increase average revenue per customer (in particular, for of the Tommy Hilfiger loyalty program). Launching tailored CRM activities aimed at segments with the highest current and potential value will help to:

to focus on have now been validated and are used to (re-)direct investment in products, channels and communication. Today, consumer profitability is understood and managed holistically from a segmentation point of view, suring the traditional functional areas. The segmentation perspective is becoming a key element in the creative briefing process for the design of new collections. A segmentation-driven CRM strategy is now being implemented, with of the Tommy Hilfiger loyalty program soon to be approached with offerings and communication tailored to their segmentspecific needs, value and potential.

• Improve margin by steering customers to the direct channel • Increase revenue by stimulating crossand up-sell through optimized product portfolio • Increase customer profitability by strengthening brand loyalty and by increasing customer lifetime value Strategic market segmentation has gained ground as a philosophy throughout the organization. Whilst the program initially started from a European CRM perspective, over time we engaged Tommy Hilfiger’s wider commercial operation and helped the global marketing team to embed segmentation in its commercial decisionmaking processes. The “primary segments”

14 The likelihood of allocating customers correctly to the right segment (accuracy level) differs for each segment/country.

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