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Tags are a way in which you can record areas of interest against your contacts.
There are a number of ways in which contact's can be tagged.
You can schedule an email to be sent to all contacts with a particular tag.
Tags can also be used to personalise email messages. You can specify that specific blocks of content are only sent to contacts tagged in a particular way.
Tags are not simply on/off flags, instead they store a number indicating how many times a contact has received a particular tag. When you looking a contact's profile, you can see that tags are used like scores to help describe the contact in more detail.