Hierarchical Modelling of Consumer Heterogeneity: An Application to Target Marketing

Abstract

An important aspect of marketing practice is the targeting of consumer segments for differential promotional activity. The premise of this activity is that there exist distinct segments of homogeneous consumers who can be identified by readily available demographic information. The increased availability of individual consumer panel data opens the possibility of direct targeting of individual households. Direct marketing activities hinge on the identification of distinct patterns of household behavior (such as loyalty, price sensitivity, or response to feature advertisements) from the consumer panel data for a given household. The goal of this paper is to assess the information content of various standard segmentation schemes in which variation in household behavior is linked to demographic variables versus the information content of individual data. To measure information content, we pose a couponing problem in which a blanket drop is compared to drops targeted on the basis of consumer demographics alone, and finally to a targeted drop which is based on household panel data. We exploit new econometric methods to implement a random coefficient choice model in which the heterogeneity distribution is related to observable demographics.