Project 2: Smaller Customers Revealed Through Large Scale Data: Who Target Should

Target Next
Prepared for Target
Group 2: Jenna Goitiandia, David Milo, Nicholas Hardiman, Andrew Santis
April 2015

April 2015
Brian C. Cornell
Target Corporation
1000 Nicollet Mall
Minneapolis, MN 55403
Dear Mr. Brian C. Cornell,
As you specified in your letter of authorization our team at has completed the customer segmentation
through analyzing a large data set of over 226,000 records. Enclosed you will find a report that outlines
an introduction, background, methods, post-hoc analysis, conclusion, limitations, future research,
references and an appendix including all of the data tables.
Throughout the research, we used IMB SPSS Statistics 19 to conduct hierarchal cluster analysis, and
conduct a K-Means cluster analysis. As a result of our careful execution, we believe the results
adequately address the stated objectives. We believe the findings will help you in your future marketing
programs geared toward Target customers.
If you have any questions or concerns, please feel free to call us at (508)-789-8034, or email us directly
at (Group2Marketing@gmail.com). We greatly enjoyed working with you and your team and look
forward to working with you again in the future
Sincerely,
The team at Group2

TABLE OF CONTENTS
Introduction .................................................................................................................................... 4
Background ..................................................................................................................................... 5
Method ............................................................................................................................................ 6
Conclustion and Recommendations ................................................................................................ 6
Limitations ...................................................................................................................................... 8
Infographic ...................................................................................................................................... 9
Flowchart ...................................................................................................................................... 10
References ..................................................................................................................................... 11
Appendix ....................................................................................................................................... 12

Introduction
Over the past years, online shopping has become increasingly more popular when
compared to brick and mortar retailers. Due to its convenience through ease of access, twentyfour hour availability, and knowledge of sales, shoppers prefer to do the bulk of their planned
shopping online and primarily impulse shop in store.
There are mainly two types of customers: those who shop sparingly and spend a lot, and
those who shop frequently and spend a little each time. Based on our customer analysis, we want
to cultivate both types of customers into clients who shop frequently and spend a lot. Our goal is
to push our customers to use our online shopping services. Most retailers ignore unprofitable
customers, but our goal is to nurture them and help them grow.
According to Gerstner, service quality and customer satisfaction are declining and good
service is increasingly rare. We do not want our under spending customers to not receive the
service that they deserve. We feel that although they do not spend as much as the rest, all
customers should receive the same level of service. Another article stated that their, biggest
customers certainly get more attention than the rest (Brady). The service gap between profitable
and unprofitable customers is growing larger and larger and customer satisfaction is growing
rapidly. It is unfair that customers suffer at the hand of companies not wanting to go the extra mile
to satisfy all of their patrons:
Increasingly, companies have made a deliberate decision to give some people
skimpy service because thats all their business is worth. Call it the dark side of the
technology boom, where marketers can amass a mountain of data that gives them an
almost Orwellian view of each buyer. Consumers have become commodities to
pamper, squeeze, or toss away, according to Leonard L. Berry, marketing professor
at Texas A&M University. He sees a decline in the level of respect given to customers
and their experiences (Brady).

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Our goal is to use this mountain of data for the better. We want to push our
customers based on their past buying behavior to either continue their purchasing habits
with our stores, and to start using our online services for bigger products such as
electronics and furniture. By performing our data analysis, we will be able to target small
clusters of customers and target them based on their needs and past behavior.
Background
Founded in 1962, the first Target store opened in the Minneapolis suburb of Roseville, Min.
(Fact). In 1969, it expanded department store operations while merging with J.L Hudson
Company, thereafter named Dayton-Hudson Corporation. Following the union, two more retailers
were purchased; Mervyns in 1978 as well as Marshall Field & Company in 1990 (Pederson). The
company focused on convenient shopping at competitive discount prices with outstanding
customer service. This focus led directly to the companys name and logo design in which the
Target name and red and white bull's-eye logo were selected for their visual impact and the
underlying message that the stores would be aimed at offering customers the best prices
(Reference).
The founders of Target wanted to make it the preferred shopping destination for their
guests by delivering outstanding value, continuous innovation and an exceptional guest
experience. They believed that shoppers were more than just customers and if they were treated
as guests it would make Target a more user friendly and personable experience. Targets guests,
on average, are made up of individuals in their early 40s with an approximate income of $64K.
43% of these individuals have children at home (Fact). This is an important figure that drives
Targets discount mentality.
Today, Target remains committed to providing a one-stop shopping experience for guests
by delivering differentiated merchandise and outstanding value with its Expect More and Pay

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Less brand promise. Target currently is the second largest general merchandise retailer in
America, with Target.com consistently being ranked as one of the most-visited retail Web sites
(Fact). Target is currently third in what is know as the Big 3 in U.S. customer oriented discount
shopping. The remaining two thirds of the Big 3 are Wal-Mart and Kmart, which make up the
majority of Targets competition (Reference).
Analysis Method
After the data was aggregated, the variables were chosen and created: profit per customer
(profit multiplied by number of orders), number of orders, and recency in months (created using
the date and time wizard). The sample was split into a Calibration (60% of the data) and
Validation (40% of the data) sample. We then ran the hierarchical cluster analysis on 5% of the
broken down data sample to identify the number of clusters and cluster centers. We ran this
analysis using a few different methods including Wards, Furthest Neighbor, Nearest Neighbor,
Squared Euclidean Distance and Euclidean Distance. These results gave us the necessary data to
run the K-Means Cluster Analysis. Running these tests on both the calibration and validation
samples allowed us to see different insights into different clusters of data. The results were
relatively consistent, and we were able to run the test on the dataset as a whole. Our conclusive
test results were consistent with our sample test results, which validated our tests.
Conclusion and Recommendations
Given the shift in consumer behavior and the influx in online shopping we decided to
examine customer profitability given their order numbers, the recency in months that they
ordered and the number of orders per customer. Through hierarchal cluster analysis and k-means
cluster analysis we pinpointed two specific clusters of customers to focus on. This allowed us to
identify the clusters of customers that would be most applicable in targeting for future campaigns.
The customers that were revealed given through the cluster analysis were customers in the

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calibration sample of 60% in cluster number 1 and customers in cluster number 4 of the
validation sample. Initially we realized that there were two overall types of consumers those who
would order once and spend very little making them overall unprofitable customers and those
that ordered more frequently and spend more making them more profitable for Target. The
customers in the two segments we chose had a low order number, low profit and low recency.
There are varying opinions from a managerial standpoint regarding an appropriate
approach to customer segmentation. There are companies such as Sprint that famously
terminated relationships with customers that were most unprofitable and then there are other
companies that focus purely on their most profitable customers as main drivers of sales such as
many companies in the hotel industry. Varying by industry the approach to customer
segmentation and the managerial implications utilizing this constantly evolving consumerism
based upon an influx in consumer behavior data changes drastically.
Given the results of the test it is our recommendation that Target does not ignore the least
profitable customers, but rather make them their priority for upcoming ad campaigns Instead of
taking the Sprint approach and ending a relationship with them we feel that Target needs to make
turn them into life long valuable customers. This is possible by focusing on the influx in online
shopping and the way consumers are purchasing at Target. Through targeted advertising we will
not waste time approaching already profitable customers. These forms of advertising will consist
of online emails, and in person direct mailers that highlight the ease of online shopping with target
and push consumers to download our app. We will incentivize these consumers with discount
promotional codes that can only be redeemed online and will also only be able to be redeemed
once the customer creates an online target account. A big player in the online shopping
competition is Amazon who sells directly to consumers by collecting data on their past purchases
to predict when a customer will need a product again and makes relevant recommendations. We

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recommend that Target also use this approach to advertising to their customers in order to
become a first thought in consumers mind when online shopping. This will also increase customer
profitability in person as they can take any of their online purchases and return them in store
another dynamic aspect that in unique to Target and will be a focus point in the advertising
campaign to differentiate from Amazon.

Limitations
There were a few factors that limited our research and may impact our managerial
recommendations. First, our team does not know how much (if anything) Target pays the credit
card companies it uses for transactions at its stores, and so that may or may not play a role in
managements decision to eliminate the most underutilized credit card. Second, the customer data
we analyzed went as far back as 2012. Consumer spending habits were most likely different three
years ago than they are today because of economic conditions, the number of credit cards that
consumers possessed, and the increase of ordering online and requiring shipping. This might have
altered the results in our findings and showed a smaller customer profit, a smaller number of
orders, and a longer span of time since the last order. Our group was also limited by the number of
variables we could use in our analysis.

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Infographic

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Flowchart

Understand
Target's
strategies and
managerial
needs

Choose
variables
#/Orders
Customer Profit
Order Recency

Hierarchical
Cluster Analysis

K-Means Cluster
Analysis

5% of Calibration and
Validation Sample
Ward's Method,
Furthest Neighbor
Chose Clusters 8-10

on Clusters 8-10

Identify
Cluster

Split Data
Calibration
Sample=60%
Validation
Sample=40%

Hierarchical and
K-Means Cluster
Analysis
on 5% of Clusters 810
Ward's Method,
Furthest Neighbor

Decipher
Data

Summarize
Data

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References
Jay P. Pederson (2004). International Directory of Company Histories. Gale Cengage.
ISBN 9781558625068. Retrieved May 15, 2004.
"Fact Sheet: Quick Facts About Target." Target Pressroom. Target, n.d. Web. 12 Apr. 2015.
"Reference for Business." Target Stores. N.p., n.d. Web. 12 Apr. 2015.
Brady, Diane. Why Service Stinks. Business Week. 11 April 2015. Web. 23 October 2000.
Gerstner, Eitan, and Barak Libai. Why Does Poor Service Prevail? Marketing Science 2006. Web.

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Appendix
Hierarchical Analysis on the 5% of the Calibration Sample using Wards Method:

Hierarchical Analysis on the 5% of the Validation Sample using Wards Method:

Cluster Number of Case

1

Mean
43

Mean

70.91

5158.22

80

94

Mean
Number of Orders
Profit Per
Customer
Recency In
Months

Mean
3

Mean

3060.16

787.48

72

74

Mean

Mean
2

Mean
4

744.80

59.58

174.30

259.11

66

47

51

76