Top Market Strategy

6.2 Create Proxy Variables

After the data is collected and summarized, the next step of profitability segmentation is to define proxy variables that represent each customer's volume of items, potential profit per item, and potential profitability. In our fictitious research, the proxy for volume of items measures purchases while our proxy for potential profit per item aggregates loyalty scores into the loyalty index. Multiplying purchases by the loyalty index generates the profitability index, our proxy for potential profit from customers. For example, Appendix 4 specifies the keystrokes that create these proxy variables with our JetSpray data.

The profitability index is purchases times the loyalty index.