How to use segmentation effectively Source: Warc Best Practice, July 2016 Downloaded from warc.com This paper provides an overview of segmentation and the way in which it is used to identify groups of potential customers who are clustered around common, identifiable traits, and to understand how they may best be reached and how they will respond to different messages and appeals. Technology is now allowing customisation to move into mass markets with notable examples of Amazon, however, many organisations are reporting failures in the implementation of CRM systems designed to support such granular profiling and marketing. Crucially, customer categories must be market-based and not merely convenient; segmentation gains effectiveness from the ongoing process of researching, hypothesising, and testing. Like all papers in the Warc Best Practice series, it includes a list of related articles and items for further reading, many of which are available on Warc. Merry Baskin Baskin Shark Laurie Young This paper, originally authored by the late Laurie Young in 2011, has been one of the most-read items in Warc's Best Practice series. This revised version features updates from Merry Baskin, founder of the planning consultancy Baskin Shark and a frequent contributor to Warc. Jump to: Speed Read | Definition | Where to Start | Essentials | Checklist | Case studies | Further reading Speed Read This paper provides an overview of segmentation and how this marketing tool can be used to identify meaningful subgroups of existing and potential customers who are clustered around common, identifiable traits. The insights gleaned from such analysis help us to understand how various audiences may best be reached with bespoke marketing efforts, while recognising finite resources. It can also help build stronger, longer term relationships and connections between a brand and its customers. In some instances, successful customer segmentation has gone beyond improved message targeting and more effective media planning, to driving NPD and recruiting new users. It can even lead to a re-engineering of the company's business model, drive a new strategic corporate direction and thus help to deliver considerable additional revenue to the bottom line. However, the tool does have its detractors, so it is best to understand the brickbats, hurdles and potential pitfalls, as well as know how to adopt a best practice approach, before a significant investment is made. Definition A Brief History 'Cluster Analysis', a statistical tool, is commonly used for customer segmentation. This technique looks at consumers via a large number of variables, often mostly traditional demographics; sex, age, social grade, presence of children, income, geography, etc. Subsequently, behavioural traits or responses to attitude statements were introduced (psychographics), which grouped consumers into clusters of folk who shared a similar response pattern. Its usage was defined as the "identification of market clusters and knowledge of the ways in which they are similar, leading to changes in the product and marketing methods used to reach a particular group". 'Clustering' was based on the insight that human beings tend to behave like tribes, influenced by their peers to adopt certain behaviours, follow trends and purchase items. This is what we now call the Herd Mentality/how people make decisions when they are in groups. Source: http://clusters.uk.com/ Subsequently, this technique became better known as 'Segmentation', the sub-dividing of an entire market into different customer segments based on their needs, wants, attitudes and feelings about a brand or a category or the world at large. This analysis was then used to decide which ones offered the most potential for the marketer to concentrate upon. The premise was that few companies have the resources to supply and satisfy the demands of an entire market so it was best to choose the audience types you are best equipped to handle and ignore the rest. The supporting theory was that by customising a brand's offer to meet those particular traits, companies can differentiate themselves, gain competitive advantage and save costs by prioritising the most attractive segments for their brand or service. Once developed, one of the key definitions of 'effective segmentation' was when the company's leaders had agreed not to serve sections of the market, rather than try and be all things to all people. The third iteration of segmentation is what direct and digital marketers would call Programmatic Personalisation. It's deemed by its proponents as the ultimate form of dynamic personalised real time targeted marketing where individuals are served bespoke, data-driven, branded content and advertising to their second or even third screen devices to suit their needs. Thanks to multivariate testing and clever algorithms analysing terabytes of data every hour of every day, actionable insights are thrown up about every step on the customer's (digital) journey to purchase. While being hailed as the marketing of the future, this stage of segmentation is still very much in its infancy, despite the success of 'Amazon Recommends' and its ilk. Significant teething problems are emerging, due in part to growing privacy concerns and to the fact that mechanised suggestions can be clumsy and invasive rather than helpful or insightful. However, you wish to label it, a segmentation exercise, of either consumers or brands, markets or categories, remains one of the fundamental building blocks of marketing and targeting. It's one of the key products sold by market researchers and digital consultancies alike. It is hard to imagine creating effective communications, developing innovative products or building successful brands without using some version of it to inform your decision making. Thanks to the advent of Big Data and technology, the analytical methods used to identify, seek out and deliver to audiences are now increasingly sophisticated and focussed. The arguments against segmentation There are some serious detractors with sound arguments against segmentation. Its limitations are outlined here: 1. Target Everyone Regardless Subscribers to the Ehrenberg-Bass Institute and Byron Sharp How Brands Grow school of thought argue that brand and audience segmentation is a marketing myth; Sharp goes so far as to dismiss it as 'esoteric quackery' in his highly regarded book of evidence-based marketing "laws". The Ehrenberg-Bass Institute has proved that big mainstream brands do not grow by solely focussing on certain key customer segments of the market. It states that the user profiles of different brands in the same category are minimal, and the brands themselves are viewed as interchangeable by users. Brand loyalty does not exist except in rare circumstances, so if you wish to grow, you are better off targeting everyone. However, this argument is fine if you are at the 'large brand with a huge budget in a big sector' end of the spectrum, and less true if you are a small discrete charity with very limited resources, where focus is key. 2. The Consumer is a Shape Shifter We all have multiple identities. Personality traits are not fixed, and moods, mind-sets and behaviour can be culturally led by the 'herd' around us. The same person can be different people depending on the situation, and can thus find themselves belonging to two or even three segments depending on which mode or role they are in – pragmatic vs aspirational, health conscious vs indulgent, parent vs career minded, time pressured vs relaxed and so on. The idea of putting people permanently into a box depending on how they responded to a question about attitudes on one day when in a different situation they might answer the same question in another way is both worrisome and dangerous. 3. Context is King A natural consequence of this identity fluidity is the impact of context on triggering changes in how we think, feel and behave. It's a situation which has been exacerbated by the always-on connected world in which we live and the different environments (and their multiple communications channels and brand touchpoints) that are available within them. That's without taking into account the traditional environmental influencers such as the weather, the news or the people we are with. Detractors believe that outdated consumer segmentation models have failed to adapt to the new complexity and fluidity of context in consumers' lives. One thing has not changed, however, which affects both the above points: consumers may not remember what a brand said, or even when or where they said it, but people do remember how a brand made them feel regardless of the context they're currently in. 4. The Robots have Superseded Segmentation Some digital marketers argue that the traditional segmentation approaches, which are a mixture of art and science, have been superseded by technology. They emphasise the increased ability in a digital age to deliver myriad varieties of personalised content to consumers, beyond core products and services. They believe the skills of the segmentation builder are increasingly redundant because clever black box algorithms using real time data and customer interactions to aid their data processing calculations can now be deployed to enable companies to respond to each individual buyer's need or want. However, the absence of human intuition and empathy can lead to inappropriate or weird personalised offers which in turn can damage the brand. While technology has helped drive customisation into mass markets, enabling the likes of Amazon to unite both scale and hyperpersonalisation, some failures in the implementation of automated CRM systems designed to support such granular profiling and marketing have been reported. Barging into people's private lives uninvited, hitting the wrong note, selling access details onto irrelevant third parties has induced a consumer backlash. Increasing numbers of teenagers – the early adopters of public sharing are now seeking to protect their personal information online. 5. Gimmicky Labels Diminish and Distract Critics of segmentation say the names given to segments are inadequate – at best, they are untrue – such as labelling a group as 'Savvy Women Shoppers' when 25% of them are men - or they don't tell the whole story because they are based on just one of the most salient characteristics thus giving the handle a misleading bias. In fact, good naming (an art not a science) by putting a face to the segments, can be a crucial element in weaving the findings into the daily fabric and customer-led functionality of the company. Letting the end users name the results can be critical to getting true buy-in and application. For example, Microsoft, gave each of their seven segments the name of a Star Wars character, (Wookie = IT Support, Han Solo = Web Developer, Jedi Master - Software Architect, and so on). The names gave staffers a lively common vocab which made the segmentation relevant, accessible and engaging. Not only did it move people from being product focussed in search of a customer, it made them customer focussed in search of a relevant product to serve them with. 6. Segments are Unreachable via Bought Media Even if different segments do exist, how are you going to reach them? You can't easily buy media against segments called 'Single City Blues', 'Money and Brains' or 'Furs and Station Wagons'. Or if the segments identified are so fragmented they are difficult to access, it will not be possible to cost effectively or efficiently implement the desired strategies and plans to reach them anyway. However, we can now tap into multidimensional data from myriad sources to bring us closer to real people in real time. The issue now is not how to reach them, but how not to swamp them with invasive, irrelevant nonsense. 7. Segmentation Schemes are Impossible to Integrate into the Business For some naysayers, potential segments can be complex, hard to access, and awkward to reconcile with a company's existing ways of targeting its buyers and prospects via its various departments. In other words, if a segmentation study is confined to the marketing and market research departments and does not effect some culture change within the organisation, it will be ignored, rejected, archived and deemed ineffective. Segmentation schemes must therefore be viewed as long-term, evolving programmes, not short term immediate 'fixes' dreamed up by the marketing department. Insightful findings from the segmentation experience should be applicable across different activities and different departments. They should be forward-looking, sustainable and continually evolving strategically. Where to start Despite these challenges, numerous businesses are creating significant profits through the careful identification of valuable segments and adjusting their business and marketing strategies accordingly. The resulting activities range from the (re)positioning of their brands, products or services and/or the tailoring of communications and relationship building activity toward certain or each of the segments. To identify and deliver such genuinely competitive benefits, effective segmentation needs to be individually tailored, and carefully crafted, with time taken to hypothesise, hone and improve. As a result, it also involves some expense. Thus, the best way to start is probably by jettisoning any groupings of customers which have been used mainly for the internal convenience of the business. For instance, a number of companies simply group their customers around the products and services they buy. This is wrong, restrictive and self-serving. In reality, there is no such thing as a market for mortgages or personal computers. There are only human beings who buy things and they have a multiplicity of different needs, contexts, wants and aspirations. Marketers must start with a desire to understand those human beings. Whether a brand is operating in a business-to-consumer or business-to-business environment, it is important to consider the characteristics of the people targeted. These characteristics may relate to the benefits buyers expect from their purchase, their use of media, attitudes to the category or preferences for different retail and distribution channels. Properly done, segmentation can prefigure the future intentions of buyers. Moreover, although human beings can be unpredictable, difficult and irrational, they tend to group naturally. Data and analytics combined with imagination, creativity and intuition mean that segmentation is both a science and an art, and a certain level of hypothesis testing is required. Essentials There are four key stages that marketers must consider: How to construct a segmentation strategy Choosing your segmentation criteria and technique How to get buy in and agree success criteria/usability How to apply or use it 1. How to construct a segmentation strategy Although this is so fundamental to marketing, there is no recognised process to develop an effective segmentation. Some marketers commission research agencies to look for identifiable clusters in customer data. Some make it an IT project or get their digital communications agencies to crunch the numbers. Others use the planning teams of their advertising and media agencies to unearth crucial insights. In fact, several of the famous segmentation strategies of the past (like "YUPPIES") were created by agencies or the media (e.g. "Baby Boomers" was coined by the Washington Post). Twenty years ago, one academic who studied market planning processes very closely, Professor Malcolm McDonald identified three basic stages and some common steps under each stage, as shown in the diagram below. Source: Market Segmentation: How to do it, how to profit from it, Malcolm McDonald & Ian Dunbar, updated 2012 Most client-side marketers start with a hypothetical idea of the groupings in their market. This might be created by examining customer buying behaviour or it might be the intuitive conclusions of experienced managers. It might even be based on an opinion that a clever segmentation from somewhere else might be used as a starting point (perhaps one published by a social observer or one from the past). During this initial exercise, marketers identify common issues around which the different groups will most likely behave similarly. These segmentation dimensions or variables can be scaled using some simple, judgemental criteria. For example, if the category under examination was coffee, the exercise could seek to use dimensions such as the particular benefits sought by consuming the product, and the impact on attitudes and consumption of variables such as mood, need state, social situation and time of the day. By contrast, in the consumer electronics sector, more focus might be placed on distinguishing technological literacy, early adopters vs laggards and so on. This initial planning can be easily tested and informed by using existing data on the behaviour of existing customers. If this test suggests that the segmentation dimensions might work and that clusters might appear, then further research is called for. Successful marketers normally invest in a two-step process which uses in-depth, qualitative techniques to pursue and tease out trends to start with; backed by quantitative techniques on attitudes and behaviours to confirm that they are representative of the whole market. If not, then it is back to the drawing board. If the research identifies potential segments then these can be tested using marketing programmes which represent, as far as possible, the rough and tumble of the real marketplace. 2. Choosing your segmentation criteria and technique Below are some examples of the different segmentation criteria to consider. The most successful/popular are behaviourally rooted, because behaviours deliver tangible value to the bottom line of the business. Strongly linked to those behaviours are the attitudes that drive them. Demographics and socioeconomics: The a-priori, basic and most simplistic version. It means grouping people according to pre-existing physical characteristics (age, sex) or circumstances (income, occupation or education). They are easy to define and easy for conventional media buyers to target. Examples include the Big Pond Broadband's campaign for Australian empty nesters, The Power of Belonging. Geographic/location: Grouping people according to their country of birth or area of residence. This can focus on the region, population density and climate. It can involve county, town or even street. Such geodemographic classification systems also cover typical household make up and housing type. Life stage: This approach groups buyers according to the phase they have reached in their life such as "married", "creating a home" or "retired". They might become "freedom seekers", "dropouts" or "traditionalists". It is common in financial services as demonstrated by the Halifax's UK Student Current Accounts campaign. Usage: Divide customers according to their weight or frequency of use, or in terms of time and place when consumption takes place. A restaurant might sell different food and drinks at different times because (the same) customers are looking for different things; but in a different need state. Benefits sought: The grouping of people according to the advantages they are seeking from the product or service. Air New Zealand employed a needs based segmentation for long haul travellers. Psychographics: The grouping of people according to various personal characteristics such as personality, interests or values. The US Effie-winning MINI CarFun Footprint campaign shows this approach in action. Related to psychographics is Lifestyle: Grouping customers by a common approach to life. Toyota's US campaign, Are you Venza? used this approach to a segment of African American consumers. Behavioural or attitudinal: This method groups people according to a particular history of behaviour or attitudes, which may affect product and category usage, price sensitivity, and other variables. What do they believe or think about the category or the brand in question? These include purchasing and media preferences and habits in areas such as smoking, drinking and other public policy fields. Public sector and campaigning organisations often build strategies on behavioural and attitudinal data. See HMRC (Her Majesty's Revenue & Customs) case study below. Tribal: This is a specific example of behavioural segmentation which groups customers according to the social groups or cultures with which they identify. The TNS 2014 Connected Life study covers the attitudes and behaviours of 55,000 internet users across the world and offers insights into various digital ecosystems emerging onto the media landscape. Context: Proposed by Professor Paul Fifield in the early 1990s, this method groups customers according to the context in which they use a product or service. In contrast to these consumer approaches, business-to-business segmentation types have included: Industry sector, organisation style, organisational structure and company or industry maturity. Secondly, marketers must consider the choice of technique used to conduct the clustering analysis; the maths behind the algorithm. Some of the most commonly used techniques can be flawed in terms of accuracy. See 'Whitepaper: Technique for robust data-driven clustering' in Further Reading. 3. How to get buy-in Ideally, segmentation should shape more than just marketing. Indeed, if the marketing department adopts a sophisticated segmentation strategy that the rest of the organisation ignores, then serious damage can be done. So, marketers should create a full investment and implementation plan to support their proposed segmentation. As part of the implementation of this plan, having other stakeholders help define what the company or their department are going to do with each segment also engages them with the application of the data in their day to day practice. Eventually, everyone in the organisation will need to be familiar with the new segments and the implications for their particular activity. This initiative is going to involve political lobbying and effective internal communication. Such real world implementation issues are the reason that many sensible and well-worked segmentation concepts fail to take hold. It is, therefore, vital there is an agreement amongst stakeholders from the outset on what the criteria for a successful segmentation should be. These include: Homogeneity: Can the members of a segment be shown to act in the same way? Size and profitability: Is the prioritised segment big and profitable enough? Distinctiveness: Are the segments sufficiently different? Universality: Will this segmentation work across many/all of the organisation's territories? Stability: Will the clusters be reasonably stable over time? Usability: Are the clusters usable in terms of our current marketing processes (especially in media and creative)? Accessibility: Is it possible to reach this segment? Attractiveness/relevance: Would customers want to identify with this segment? 4. How to apply segmentation If the segmentation passes these criteria, it can then be applied to the following areas: i. Communications: all communications to people who form part of the segment can be increasingly customised to their understanding, needs and likely responses. This applies to the choice of media and communications channels, brand positioning and creative components of any campaigns. ii. Brand: a brand is such a multifaceted entity that it will appeal differently to different groups of people. It will need to be progressively adjusted to each segment's perceptions. In some cases, it will be sensible for a brand owner to position different brands at different segments. N.B. it will always be about reducing the complexity of choice. iii. Products, services & innovation: each of the company's offers can be adjusted to the needs of its main segments. Even the innovation process itself might vary according to each segment. For some segments, new ideas might arise from careful, targeted research, whereas in others, they might come from "co-creation" with customers. iv. Pricing: as the firm's offers become progressively adjusted to each segment's need, marketers need to understand the mix of features and price tolerances more precisely. Segmentation can turn pricing from an accounting into a market based exercise. v. Customer care: the markets will need to adjust bland customer service operations (like guarantees, call centres or product replacement mechanisms) toward the more precise expectations of segments by creating experiences that are personal and helpful to them. Good service influences repurchase intent which, in turn, depends on how customer service meets expectations. Segmentation is a major tool in understanding the intended customers' expectations. The company cannot provide excellent, bespoke service without it. vi. Operational communications: there are a range of communications which companies supply to customers which tend to be outside the vision of the marketing function. These include: contracts, invoices and product operations manuals. Segmentation allows the firm to adjust these more precisely for intended customers. Reminder Checklist i. Is the current method of categorising customer really market-based or is it for the convenience of internal management? ii. Have you reviewed successful types of segmentation of the past and, with your knowledge of your own customers, created a hypothesis to research? iii. Have you agreed the criteria for a successful segmentation to be adopted within the firm? iv. Do you understand and agree with the segmentation dimensions used? v. Have you scored the dimensions and tested them with existing customers? vi. Have you planned for research and test marketing programmes? vii. Have you devised a strategy to present to the firm's leadership and sell it into the organisation as whole? Case Studies (Behavioural or attitudinal segmentation) HM Revenue & Customs - Self assessment: how a change in advertising direction proved that tax doesn't have to be taxing In 2005, two UK government departments, the Inland Revenue and HM Customs and Excise, merged. Its mission was to improve 'customer service' and compliance, align strategies and improve efficiencies of scale. At the heart of this merger lies a massive but highly accessible and comprehensive behavioural and attitudinal segmentation exercise which was designed to improve the customer experience, reduce costs and increase yield; something any commercial firm would wish for; you do not have to have a £460 billion turnover to benefit from decent segmentation. This case history has little to do with tax; instead it is based on understanding what motivates people to do the things they do and the choices that they make, and using that insight to achieve a better outcome. This HMRC segmentation study has had three main areas of impact: Internally, it had a huge cultural impact; "we think about customers in a different way now". It's fundamentally based on the assumption that chasing crooks is actually less efficient financially than helping those people who needed help filling out those interminable forms. Prior to the study, people were either 'compliant' (paid their taxes) or non-compliant (bad). By reframing the latter from deliberate evaders to 'wants to do the right thing but needs help', attitudes towards them and their problems were forced to change. Societally, getting the right kind of help to the right people has also had important outcomes for some of the most vulnerable members of society. Externally, HMRC now communicates in a more discrete, targeted and intelligent manner with five core behavioural segmentations; it has actually made everyone's jobs and lives easier on both sides. Financially, big efficiencies and small incremental differences (on say a certain tax form with a high error rate) meant resources were used more efficiently, and allowed millions and millions of pounds to be saved for the Exchequer in the first two years of its implementation. Further details of this case study, and ones from Microsoft and Sony Music co-published by the MRS, Marketing Week and Quadrangle can be accessed here (videos): Introduction: Segmentation Segmentation: HMRC Segmentation: Microsoft UK Segmentation: SONY UK Master class in Segmentation Flying With the Simpsons: An Award Winning Research Paper That Helped Air New Zealand Reinvent the Long Haul Air Travel Horst Feldhaeuser and Hudson Smales, ESOMAR, Asia Pacific, Melbourne, 2011 This detailed research paper outlines how 9 long haul traveller needs states were thoughtfully and creatively reworked via a careful segmentation study into five distinct attitudinal groups (Cocooners, Territorialists, Socialites etc). This clustering and profiling provided clear guidance for a product development, service provision and communications programme for a high value customer segment. Toyota Venza: Are You Venza? ARF David Ogilvy Awards, Silver, Multicultural, 2011 The automotive brand owner set out to lure African-Americans by selling its first cross over vehicle brand as a lifestyle choice in tune with this 'Mixers' segment of its audience, who were relatively affluent, had a unique style and enjoyed defying convention. The Power of Belonging The Communications Council, Gold, Australian Effie Awards, 2010 Telstra's Big Pond Broadband advertising had already driven penetration to near saturation among families with kids, but using a fresh emotional insight to target two new segments - retirees and empty nesters - using the same campaign idea they were able to maintain the brand's leadership position in the Australian broadband market. MINI – Carfun Footprint Effie Worldwide, Silver, North America Effies 2010 This case study explains how MINI persuaded the environmentally-concerned prospect segment of its audience that had been considering buying more environmentally responsible – but rather earnest, sombre and complex - hybrid rivals such as the Toyota Prius. It achieved this by targeting an emotional Achilles Heel – that hybrid cars just aren't any fun; you do not have to suffer to be environmentally responsible. Nestle Fruita Vitals: Fruit Fuel Khalid Naseem and Ainee Kalim, Warc Prize for Asian Strategy, Entrant, 2011 This case study describes how Nestlé achieved ambitious growth targets in Pakistan for its packaged-juices by radically repositioning its brand, creating a new sub brand and targeting the 'Purposeful Go-Getters' one of the four lifestyle and value segments identified. References and further reading Warc Topic Page: Segmenting consumers Warc briefing: Segmentation, 2010 Advertising in context – Use algorithms not segmentation, Magnus Finchett, Admap, May 2015 Advertising in context – the anthropology of contextual media planning, Tom Laranjo, Admap, May 2015 Best Practice: Market segmentation, Adina Poenaru, Sid Simmons, Keith Goffin and Paul Baines, McKinsey & Co and Cranfield School of Management, WARC, November 2014 Oliver Feldwick, The uncanny valley of personalisation: Why we must build humanity and serendipity into our marketing machines, Gold, Admap prize 2016 Meet the four personas of connected consumers, Connected Life, Jonathan Sinton and Anjali Puri, TNS, November 2014 A survey of the challenges and pitfalls of cluster analysis application in market segmentation Michael Tuma, Reinhold Decker, Sören Scholz, , Int journal of market research , Vol 53, no3 2011 What's next for segmentation?Tupot M. L. & Stock T. Admap Feb 2010 The myth of segmentation. J Stienstra, ESOMAR Congress, Sept 2010 Mythbuster: the realities of segmentation. Les Binet & Sarah Carter, Admap October 2010. Segments, Hugs and rock n' roll. J Clark, Jones J, E Romanou & M Harrison, Market Research Society Annual conference,2009 OTHER: Mark Earls, Alex Bentley, Michael J. O’Brien, I'll have what she's having – mapping social behaviour, MIT Press 2011 Byron Sharp, How Brands Grow, OUP Australia & New Zealand 2010 Market Segmentation and Positioning, Baines & Co Paul Fifield, Marketing Strategy: How to Prepare It-How to Implement It. Routledge (2nd edition) July 2012. Malcolm McDonald & Ian Dunbar, Market Segmentation: How to do it, How to profit from it. John Wiley & Sons, 2012 Bryan Urbick, A life beyond segmentation, Research Magazine, October 2009 Cluster technique white paper: http://clusteuk.com/white-papers/robust-data-driven-clustering/ About the authors Merry Baskin founded planning and strategic consultancy Baskin Shark in 2000 after CSO stints at JWT London and Chiat/Day New York. A former chair of the APG, a Cannes Effectiveness Master and a Fellow of the New College of the Humanities, she also teaches planning craft skills around the world. [email protected] Laurie Young died in September 2013. Read the obituary about the marketing practitioner, entrepreneur, consultant and writer. © Copyright Warc 2016 Warc Ltd. 85 Newman Street, London, United Kingdom, W1T 3EU Tel: +44 (0)20 7467 8100, Fax: +(0)20 7467 8101 www.warc.com All rights reserved including database rights. This electronic file is for the personal use of authorised users based at the subscribing company's office location. 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