Case study

How Tommy Hilger capitalizes

on its most protable customers

Authors

Tommy Hilger 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

n todays competitive global fashion

market in which Tommy Hilger
operates, companies struggle
with building sustainable and
protable customer relationships.
In this environment, segmentation
becomes the key to effective customer
protability 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 protable customers and
with their underlying proles helps to build
targeted marketing strategies around
them. This segmentation method enabled
Tommy Hilger to stimulate the change
of its mindset from traditional productcentric thinking to a more customer-centric
thinking. As a result, Tommy Hilger
will optimize the allocation of the total
marketing spend, launch tailored CRM
activities and effectively increase its sales
margins and revenue.

57

Todays global fashion market: redening

the balance between efciency and
effectiveness - building brand loyalty as
the next competitive battleground
The high-quality global fashion market
in which Tommy Hilger 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 deation and at 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 inefciencies to reduce cycle
times and cut costs. At the same time,
as protability becomes more difcult
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 companys main assets and should
be managed carefully to build brand loyalty and
successfully differentiate the brand from its
competitors.

Loyalty in this context is dened as a

Building sustainable
and protable customer
relationships
Tommy Hilger is a recognized premium
fashion brand, offering customers a range
of high-quality product lines including
mens, womens and childrens casual
apparel, denim, accessories and a range of
licensed products such as fragrances.
Tommy Hilger 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 rst 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 Hilger case

wholesale3 and direct selling through retail4

and e-commerce.5

management (CRM) strategy, including a

loyalty program.

In order to achieve sustainable and

protable growth, Tommy Hilger 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 Hilger, 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 protable customer
relationships?

An improved sales margin

Strengthened brand positioning to
increase sales revenue
Furthermore, Tommy Hilgers marketing
divisions hypothesis is that by focusing
on brand loyalty and building a direct
relationship with customers, Tommy
Hilger can make a structural improvement

Managing customer
protability through strategic
market segmentation
The segmentation of consumers in Tommy
Hilgers target market6 is the cornerstone
of customer protability 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 Hilger
to outline a customer relationship

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.

Direct selling to customers through single brand

stores, both owned and operated as well as
franchisees.

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 signicantly
different from other groups.
Strategic market segmentation
demonstrates how one can capitalize
on deep customer insight to re-align the
organization around its most protable
customers. Identifying customers with the
highest present and potential value and
6

The project team has helped Tommy Hilger to

dene its target market, based on specic criteria
taking into account customers fashion literacy
and premium brand-buying behaviour.

building operating models around them is

the key to driving growth and protable
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 protable customer
relationships, an in-depth understanding
of the underlying motives and values
that drive customer behavior is needed.
Capturing these driving forces of customer
protability requires a multidimensional
approach to the market and segments.
We developed a four-dimensional market
segmentation framework for Tommy
Hilger 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
Hilgers key markets in Europe.7
Statistical analysis of this research resulted
in the identication of seven European
market segments, each of them with a
distinct prole in terms 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 terms of overall revenue.
Tommy Hilger is present in each of these
7

The market research comprises nearly 6,000

consumers in Belgium, Germany, Italy, Spain and
the United Kingdom.

59

market segments, its presence varying

in terms of the number of consumers
who buy the brand and the share of each
segment in total Tommy Hilger 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
Hilger with an in-depth prole 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 benets of this strategic market
segmentation program delivered are
twofold:
1. A common basis in facts for the
selection of the most protable
customer segments
2. The ability to optimize product
management, channel management
and communication

A common factual basis

for the selection of most
protable 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 Hilger
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 Hilger brand
pyramid. This brand pyramid (see Figure
1) represents the ve 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 t
A. Conversion ratio from knowing the
brand to recurring buying
For a fashion brand like Tommy Hilger,
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 rst time
(buyers)
Buying the brand year after year
(recurring buyers)
By building a brand pyramid for each
market segment, we found signicant
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 qualied as a
primary segment.

Leakage refers to the loss of customers in each

stage of the brand pyramid.

Tommy Hilger case

Figure 1. Brand pyramid for Tommy Hilger conversion from

brand awareness to recurring buyers
Recurring
buyers

The segmentation
of consumers in
Tommy Hilgers
target market is
the cornerstone
of customer
protability
management

Buyers

Brand purchase
intention

Brand proximity

Brand awareness

Conversion ratio =

Recurring buyers %
__________________
Brand awareness %

Source: Authors research

61

B. Average annual customer spend in

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

the segments share in Tommy Hilgers

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 t
By conducting both a quantitative and
qualitative assessment of brand t, 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 Hilger

150
Segment 3, 25%

Highest scoring segments 3, 4

and 7 account for 53% of sales
revenue (while representing
42% of total consumer base of
Tommy Hilger)

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 Hilger customers
50
50

100
Index of average annual customer spending on Tommy Hilger

Source: Authors research

150

Tommy Hilger case

Hilger brand personality and its relative

position toward direct competitors
brands9 t with the unique characteristics
and growth potential of a particular
segment.
Taking into considerations the ndings
from our four-dimensional segmentation
framework, we carefully mapped the
Tommy Hilger brand personality with
the characteristics of each of the seven
segments. In order to nd the segments
that qualied as primary segments, we
looked at the segments that had the
strongest t with the Tommy Hilger
brand.
Our evaluation of the seven segments on
these three main criteria has led Tommy
Hilgers 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 Hilger was able to
use the insights gained on each segments
distinct prole to optimize the following:
Product management which
product ranges to offer to the primary
segments?

Index of conversion ratios of Tommy Hilger

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
Hilger 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 ndings from the segmentation
program have stimulated a change of
mindset from traditional product-centric
thinking to more customer-centric
thinking. Tommy Hilger is now capable of
supplementing market segmentation as the
guiding principle for future product design.
This involves differentiating product
categories and designing collections
attuned to specic 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 Hilger was the
business case for a more segmented
diversication and expansion of the
existing product range. In this respect we
have carefully evaluated each primary
segment in terms of its attitude towards
fashion, its product categories bought, its
reasons for buying and its sales channels
usage.

By working with Tommy Hilgers 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
Hilger 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 Hilger owned and
operated stores, both ofine and online)
are most signicant when it comes to
online shopping in Tommy Hilgers 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
Hilger from indirect to direct (Tommy
Hilger 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
accounts for 25% of total sales revenue,
making it Tommy Hilgers largest
segment.
In order to achieve this identied channel
migration potential, Tommy Hilger
needs to use its in-depth insights into the
distinctive drivers and characteristics of
the segment. The segmentation provides

63

Figure 3. Improving margin through channel optimization for primary segment 3

Index of buying at branded Tommy Hilger shops online and ofine
Size of bubble represents share
of segment in total sales revenue
of Tommy Hilger

200%

Segment 7, 16%

Index of buying online via branded

Tommy Hilger 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 Hilger customers

0%
50%

100%
Index of buying ofine via branded Tommy Hilger high street shop

Source: Authors research

Tommy Hilger 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
Hilger 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 Hilgers

customers have been buying the brand
already for more than ve 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 Hilger has built
a strong brand and a loyal customer base.
10 These gures are not presented graphically in this
article.

Tommy Hilger case

Figure 4. Establishing a strong brand relationship is reected 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 Hilger

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 Hilger customers
50
80

100

120

Index of brand proximity

Source: Authors research

The deployment of segmentation across its

commercial operation enables Tommy Hilger to
optimize its allocation of total marketing spend
and increase average revenue per customer

65

From a segmentation perspective, one

can argue that the primary segments in
the target market may not be effectively
reached by a one size ts 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 signicant BTL
battles than ATL wars with well-funded
competition.12 The same is true for Tommy
Hilger, for which segmention-based BTL
communication could potentially be more
efcient 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 difcult
to dene and it is efcient and cost-effective for
targeting a specic 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 Quanties Fundamental
Marketing Shift as Spending Moves Below-theLine//PR Newswire, 23 January, 2006.

customer lifetime value. The fact that

Tommy Hilger 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 Hilger,
investing in building customer relationships
is protable. The average annual
sales revenue per customer increases
signicantly as the relationship with the
brand evolves over time, with customers
demonstrating behavioral loyalty
(repeat purchase) toward the brand.13
Furthermore, the ndings in Figure 6
indicate that the performance differences
between segments increase even more
signicantly over time, indicating the
added value of targeting the primary
segments.

13 The percentage of customers who indicate that

Tommy Hilger 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 gures 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 Hilger is the brand they
purchase most often (compared with 25%
for segment 3). This suggests that there is
a signicant revenue potential to increase
this percentage from 9% to 25%.

Tommy Hilger 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 rst-time
buyers of Tommy Hilger)

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 Hilger

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 rst-time
buyers of Tommy Hilger)

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 Hilger
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 Hilger (see Figure 7), the
customer preference for Tommy Hilger
among this segment is weaker than in
segment 3.

If Tommy Hilger 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 nd
out segments preferences for the range of

potential customer offerings that Tommy

Hilger could introduce. The preferences
that emerged differed by segment. This
information provided Tommy Hilger with
a direction for the development of its CRM
program.
Recently, Tommy Hilger launched its rst
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 Hilger

160

Index of consumer prefeence

Tommy Hilger 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 Hilger customers
70
70

100

130

Index of variety of Tommy Hilger product categories bought

Source: Authors research

160

Tommy Hilger case

in the direct sales channel. They are now

building up their customer database across
Europe, with both ofine and online direct
sales data. As the number of customers
that have signed up for membership of the
loyalty program grows, Tommy Hilger
will be able to implement large-scale
segmented marketing campaigns. Using
the segments prole and the analysis of
individual customers buying patterns,
Tommy Hilger plans to approach
individual customers using personalized
communication such as tailored sales and
service offerings.
In order to do so, Tommy Hilgers
marketing division needed to tag each
customer in the database with a segment
label. We provided Tommy Hilger 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 identier 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 Hilger is now in

pole position for building
sustainable and protable
customer relationships
The deployment of segmentation across
its commercial operation enables Tommy
Hilger to optimize its allocation of total
marketing spend (ATL and BTL) and
increase average revenue per customer
(in particular, for members of the Tommy
Hilger 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 protability is
understood and managed holistically from
a segmentation point of view, surpassing
the traditional functional areas. The
segmentation perspective is becoming
a key element in the creative brieng
process for the design of new collections.
A segmentation-driven CRM strategy is
now being implemented, with members
of the Tommy Hilger loyalty program
soon to be approached with offerings and
communication tailored to their segmentspecic 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 protability 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 Hilgers
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.

69