Marketing Strategies, Customer Loyalty & The Web

Arthur Middleton Hughes

VP Strategic Planning

M\S Database Marketing www.msdbm.com

National Center for Database Marketing

Orlando Sunday Dec 3 2000

8:30 – 11:30 AM

Walt Disney Dolphin

Customer Management

Internet ServicesCompetitive Advantage Through Advanced Technology

Agenda Introduction: Database Marketing

and the Web Break Lifetime Value Recency Frequency Monetary

Analysis

Compared with newcomers, Long term customers: Buy more per year Buy higher priced options Buy more often Are less price sensitive Are less costly to serve Are more loyal Have a higher lifetime value

Retention is a measure of loyalty

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage Retained

from Previous

Year

1 2 3 4 5

Years as a customer

Retention pays better than acquisition

($62)

$48

($80)($60)($40)($20)

$0$20$40$60

New Customer 3rd YearCustomer

Annual Profit

Customers today want:

Recognition Service Information Convenience Helpfulness

Two Kinds of Database People Constructors People who build databases

Merge/Purge, Hardware, Software Creators People who understand strategy

Build loyalty and repeat sales You need both kinds!

Examples of Profitable Strategies

Newsletters Surveys and Responses Loyalty Programs Customer and Technical Services Friendly, interesting interactive

web site Event Driven Communications

Event driven communication:

Dear Mr. Hughes:

I would like to remind you that your wife Helena’s birthday is coming up in two weeks on November 5th. We have the perfect gift for her in stock.

As you know, she loves Liz Claiborne clothing. We have an absolutely beautiful new suit in blue, her favorite color, in a fourteen, her size, priced at $232.00.

If you like, I can gift wrap the suit at no extra charge and deliver it to you next week, so that you will have it in plenty of time for her birthday. Or, I can put it aside so you can come in to pick it up. Please call me at (703) 754-4470 to let me know which you’d prefer.

Sincerely yours,

Robin Baumgartner Robin Baumgartner, Store Manager

Ridgeway Fashions

Leesburg, VA 22069

Marketing to Customer Segments

GOLD Spend Service Dollars Here

Spend Marketing Dollars Here

Reactivate or Archive

Your Best Customers - 80% of Revenue

Your Best Hope for New Gold Customers

Move Up

1% of Total Revenue These may be losers

The web is the greatest direct marketing vehicle ever invented

How the Web is changing Database Marketing Recognition Reaching out Customer service Supplier Relationships Information Ordering parts and replacements Building personal relationships

Communicating Screen: Thank you for your order Email: Your order has been received Email: Your order will be shipped Email: Your order was shipped Email: Was everything to your

satisfaction?

Cost of all of the above? Nothing!!!

Now, this is recognition!

Welcome Back, Arthur!

Immediate Feedback!

30 seconds later: Email

Reaching out: How Web Ads Differ

Traditional Media Web AdvertisingSurrogate MeasurementsDirect MeasurementsHigh cost of waste Low cost of wasteSingle messages Multiple MessagesDelayed feedback Immediate FeedbackHard to adjust Real time testing & tuning

Four steps in web response Impression: your banner appears

on a viewer’s screen: $6 per thousand.

Response: Viewer clicks on your banner and sees your web site

Lead: viewer gives you her name and email address

Sale: she buys something.

Three categories of Web Ad Space Run of Network (RON) from $4 to

$6 CPM. Very good values here. Affinity Group Space (Sports,

business, travel) $10 to $20 CPM Can be productive

Branded Space (Yahoo, Excite, AOL) Very expensive $30 to $70 Often has very low response rate.

Where should we put this ad?

In three days we discover that travel sites work best

for Casio

0 0.5 1 1.5 2 2.5 3

Entertainment

Games

Automotive

Shopping

News

Health

Business

Sports

Travel

Technology

Women

AVERAGE

Clickthrough

Result of One Week's RON Test by Site Top Eleven out of 780 Sites

Site Impress. Clicks Rate Leads Lead Rate Cost Lead CostEyegive 14,091 1,384 9.82% 23 1.66% $85 $3.68LotteryUSA 43,112 132 0.31% 12 9.09% $259 $21.56The onion 126,732 263 0.21% 10 3.80% $760 $76.04The Huddle 62,722 49 0.08% 6 12.24% $376 $62.72123Greetings 361,345 673 0.19% 4 0.59% $2,168 $542.023DFiles 56,600 57 0.10% 4 7.02% $340 $84.90Rogue Market 14,932 10 0.07% 3 30.00% $90 $29.86Netsurfer Digest 23,333 29 0.12% 3 10.34% $140 $46.67Nordic Music 28,397 34 0.12% 3 8.82% $170 $56.79ShowBiz 5,063 6 0.12% 3 50.00% $30 $10.13People-Talk 37,028 103 0.28% 3 2.91% $222 $74.06

2,166,196 6,495 0.30% 105 1.62% $12,997 $123.78

Which sites work best for E*Trade?

Site Category Impr. Clicks Resp. Leads Conv. Cost LeadMarketPlayer Business & Finance 555 4 0.72% 1 25.00% $3 $3.33Igive Charity 14,091 1,384 9.82% 23 1.66% $85 $3.68StockInvestor Business & Finance 1,145 8 0.70% 1 12.50% $7 $6.87ShowBiz Business to Business 5,063 6 0.12% 3 50.00% $30 $10.13Regent Commerce Business & Finance 2,037 37 1.82% 1 2.70% $12 $12.22CyberInvest Business & Finance 2,442 13 0.53% 1 7.69% $15 $14.65Critical Path Automotive 3,520 7 0.20% 1 14.29% $21 $21.12I-Escrow Business & Finance 7,051 15 0.21% 2 13.33% $42 $21.15Lottery USA News & Information 43,112 132 0.31% 12 9.09% $259 $21.56Rogue Market Entertainment & Movies 14,932 10 0.07% 3 30.00% $90 $29.86ezines Database Automotive 6,014 18 0.30% 1 5.56% $36 $36.08Netsurfer Digest Consumer Technology 23,333 29 0.12% 3 10.34% $140 $46.67Nordic Music Consumer Technology 28,397 34 0.12% 3 8.82% $170 $56.79Your New House Learning 19,591 61 0.31% 2 3.28% $118 $58.77TheHuddle Sports & Outdoors 62,722 49 0.08% 6 12.24% $376 $62.72People-Talk Business & Finance 37,028 103 0.28% 3 2.91% $222 $74.06

Total 817,123 3,108 0.38% 95 3.06% $4,903 $51.61

Results Optimized by Cost Per Lead – after one week!

Something new: Collaborative Filtering On-line deciding what a customer

is interested in, based on a few known facts

The principal behind collaborative filtering: Each person has a unique (and

changing) view of the world. In large populations, there are

often similar preferences If hundreds of people who like A,

G, and X also like W Then if you like A, G and X, you

may also like W.

Collaborative Filtering requires sophisticated software It is possible, on line, to determine the

next best product for any customer, based on the customer’s past preferences and those of hundreds of others with similar preference profiles.

While the customer is on the phone, you can develop a profile and come up with intelligent recommendations.

How Netperceptions used Collaborative Filtering in the UK

GUS is largest cataloger in UK. Gets 20% cross sell on catalog orders.

Installed NetPerceptions system In six weeks got 40% cross sell on

catalog orders with same staff. Very “spooky” results which really

worked.

The big Web winner: Customer Service Hundreds of millions of dollars

being saved today through use of the web

Much bigger than consumer sales

How the Web is changing Customer Service

1980s: toll free numbers Thousands of agents reading

screens Heavy cost: phone call and agents 2000: let the customers get their

own information No cost for phone or for agents Customers like it better!

Letting them go behind the counter

Open your entire company to your customers

Let them find what they want themselves

It is cheaper for you, and customers like it better.

How Amazon saves millions

How Fedex Saves Millions

Let’s try it. Let Marriott plan a meeting in Ft. Lauderdale

We want 3 rooms with 50 attendees, golf and pool

Here are the properties. Let’s try the North Marriott

Here are the conference rooms we need

Here is the hotel

And, here is the location. Let’s make a reservation!

The Marriott Web Site: 1,500 Hotels $10 billion revenue Marriott doesn’t own most of the

hotels Internet team began in 1997 More interactive, the more business Meeting planners don’t need to visit

the sites. All they want is on the web. Booking a room for a business

traveler is very fast

Supplier Relationships All manufacturers will link to their

suppliers through the web Suppliers will check inventories,

and replenish parts automatally Manufacturers and retailers will

buy through the web

The National Semiconductor FedEx Partnership National Semiconductor handed

over its logistics management to FedEx

Products from 6 factories shipped to FedEx warehouse in Singapore

National Order center in Santa Clara linked to FedEx in Memphis

FedEx directs shipments to customers from Singapore

How FedEx Manages National Semiconductor Shipments

N

atio

nal F

acto

ries

Order Center in Santa Clara

Orders from customers

Shipments

OrdersInventory Mgt.In MemphisSingapore

Warehouse

Benefits to

Reduction in customer delivery cycle from four weeks to one week

Reduction in distribution costs from 2.9% of sales to 1.2% of sales

Elimination of seven regional warehouses in the US, Asia and Europe

FedEx – Omaha Steaks

Orders to Omaha simultaneously sent to FedEx and to Omaha warehouse with FedEx tracking numbers.

Both Omaha and Customer use FedEx numbers for tracking.

Omaha is out of the delivery business, and can concentrate on steaks and marketing.

FedEx - Omaha Steaks

CustomerOrdersSteaks

Orders sent to Steak WarehouseAnd to FedEx atThe same time

Steaks deliveredTo FedEx

FedEx Delivers to Customer

Boeing Spare Parts

Idle airplanes cost $7,000 per hour Quick access to Boeing parts keeps

customers loyal Spare parts are an important revenue Buying Boeing parts keeps quality There are 2,000 Boeing part suppliers Old system: Binders or CDs + phone

+fax

Boeing Spare Parts Website

New Boeing System

Runs 24 hours a day Automatic verify part number Electronic self service Customers order without help Customers know which warehouse

has the parts!

Why customers like it: My vacuum cleaner problem We have a Hoover with a

MicroFiltration Bag. We wasted an afternoon going to

six (yes six) stores looking for new bags. No luck.

So we tried the internet.

Finding Hoover on the Web

Ordering a Micro-Filtration Bag for my Hoover

The Web will change our lives No one knows the extent today Like the automobile, telephone, or

electricity – it will take time If you can imagine it, it probably

already exists The costs of participation are

amazingly cheap

Conclusion:You can do this!

Invite your best customers into your company.

Let them rummage through your warehouse.

Let them look up technical data themselves

Make them a part of your company. You will have them for life.

My Excite Cookie 

UID8015688C36ACCA03excite.com/0199652966430859116239114608029248020*

You can do this!

It costs nothing!

Bring back the old corner grocer:

Break

Using Lifetime Value to Determine Your Marketing

Strategy

Why we need Lifetime Value Analysis We need to know the value of

our customers, so as to properly target our sales and retention efforts

We need to discriminate among our customers to acquire and retain the best

The importance of measurements

Measures determine vision and strategyDeciding what to measure and how to link measures to incentives are the most important database marketing decisions“Net present value of the customer base should be at the top of the measurement heirarchy” -- Reichheld

Lifetime Value Analysis Goal: Determine...

where to put your retention dollars the value of each retention strategy where to put your acquisition dollars how much to spend on acquisition

What is lifetime value?

Net present value of the profit to be realized on the average new customer during a given number of years.

Lifetime value is “Good Will.” To compute it, you must be able to

track customers from year to year. Main use: To evaluate strategy.

Weldon Instruments Before New Strategy

Revenue Year1 Year2 Year3Customers 30,000 22,355 18,523Retention Rate 74.52% 82.86% 85.00%Spending Rate $19,500 $20,280 $22,400Total Revenue $585,000,000 $453,359,400 $414,915,200

CostsDirect Percent 75.00% 65.00% 60.00%Direct Costs $438,750,000 $294,683,610 $248,949,120Acquisition Cost $630 $18,900,000 $0 $0Total Costs $457,650,000 $294,683,610 $248,949,120

ProfitsGross Profit $127,350,000 $158,675,790 $165,966,080Discount Rate 1.21 1.37 1.51NPV Profit $105,247,934 $115,821,745 $109,911,311Cumulative NPV Profit $105,247,934 $221,069,678 $330,980,990

Customer lifetime value $3,508.26 $7,368.99 $11,032.70

How to figure the Discount Rate - Basic Formula

Market Rate of Interest...8%Assume Risk (Double rate)...16%Years = n Interest = iFormula: D = (1 + i)n

Calculation of rate after 3 years: D = (1 + .16)3 = (1.16)3 = 1.56

How to figure the Discount Rate - Complex Formula

Market Rate of Interest...8.4% Calculate risk factor…r..1.8 Calculate payment time … (12/Months) Interest = i n+t = (n years + t pay time) Formula: D = (1 + i*r)n+t

Calculation of rate after 3 years: D = (1 + .084*1.8)3.25 = (1.15)3.25 = 1.60

Long term customers buy more often

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Number of purchases

per yer

1 2 3 4 5

Years as a customer

Long term customers buy higher priced items

$0

$10

$20

$30

$40

$50

$60

$70

Average Purchase

Price

1 2 3 4 5

Years as a customer

How to figure costs Lifetime value is incremental:

“The extra profit you earn by adding one more customer”

Include any variable costs Do not include fixed costs: Rent,

long term debt, overhead Recognize that costs go down

for longer term customers

Costs of servicing customers go down over

time

0%

10%

20%

30%

40%

50%

60%

70%

Costs as a % of

revenue

1 2 3 4 5

Years as a customer

First year costs are often high

How to figure the Retention Rate

Track all customers in acquisition year How many purchasing in following year Divide Year1 into Year2 Example:30,000 Customers acquired 25,500 of these buying in

year2 Retention rate = 25,500 / 30,000 =

74.5%

Retention rates go up over time

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage Retained

from Previous

Year

1 2 3 4 5

Years as a customer

To compare retention periods - convert to annual

Annual Rate = (Repurchase rate) (1/years)

77% repurchase after 11 years Annual Rate = (.77)(1/11) = 98%45% repurchase after 4 years = 82%99% per week = 59.2% per yearAnnual = (.99) (1/(1/52))

Annual Rate = 59.2%

New Retention Strategies

• Put 45,000 pages of tech info on web

• Create extranet for Gold & Silver Custs.

• 24 hour email response time• Total cost of these strategies

$450/cust• Referral Program with $800

incentives

Weldon with new strategies

Revenue Year1 Year2 Year3

Referral Rate 5.00% 6.00% 7.00%Referred Customers - 1,500 1,620 Retention Rate 85.00% 88.00% 90.00%Retained Customers - 25,500 23,760 Total Customers 30,000 27,000 25,380 Spending Rate $21,000 $24,000 $27,000Total Revenue $630,000,000 $648,000,000 $685,260,000

Costs

Direct Percent 75.00% 65.00% 60.00%Direct Costs $472,500,000 $421,200,000 $411,156,000Acquisition Cost $630 $18,900,000 0 0Retention Building Program $450 $13,500,000 $12,150,000 $11,421,000Referral Program Costs $800 $0 $1,200,000 $1,296,000Total Costs $504,900,000 $434,550,000 $423,873,000

Profits

Gross Profits $125,100,000 $213,450,000 $261,387,000Discount Rate 1.21 1.37 1.51Net Present Value Profit $103,388,430 $155,802,920 $173,103,974Cumulative NPV Profit $103,388,430 $259,191,349 $432,295,323Customer Lifetime Value $3,446.28 $8,639.71 $14,409.84

Effect of adoption of new strategies

Year1 Year2 Year3

New LTV $3,446.28 $8,639.71 $14,409.84

Old LTV $3,508.26 $7,368.99 $11,032.70

Difference -$61.98 $1,270.72 $3,377.14

With 30,000 Customers -$1,859,400 $38,121,600 $101,314,200

What is the proper computation period?

Which is the correct lifetime value? 1, 2, 3, 4, 5 or more years?

They are all correct. Which you use depends on your product or service.

Long lifetimes: banks, insurance, utilities.

Short lifetimes: discount houses, package goods, catalogers.

Five ways to increase lifetime value with database programs Increase the retention rate Increase the referral rate Increase the spending rate Decrease the direct costs Decrease the marketing costs

How to use lifetime value

Compute a base lifetime value Dream up a new strategy Estimate the benefits and costs Determine whether your new lifetime

value goes up or goes down Don’t undertake any new strategy

until you can prove it will be successful

Find LTV of Customer Segments Many B-t-B customers are quite

different in their purchase patterns Create actionable segments and

determine the value of each Use the results to focus your

retention programs and acquisition programs on the most profitable segments

Dividing Customers into Four Segments

Weldon Instruments Corporation Customer SegmentsAverage Total Sales Lifetime LTV

Customers Sale Sales Ranking Value Ranking

Metal Production 254 $339,736 $86,293,000 4 $145,067.37 2Light Manufacturing 15442 $13,851 $213,892,000 1 $5,914.51 4Heavy Manufacturing 44 $2,314,159 $101,823,000 3 $988,145.93 1High Technology 612 $299,007 $182,992,000 2 $127,675.79 3Total 29,198 $20,036 $585,000,000 $8,555.74

Focus on Retention Where should Weldon's Retention Dollars Go?

Weldon LifetimeCustomers Value Rank

Metal Production 254 $145,067 2Light Manufacturing 15,442 $5,914 4Heavy Manufacturing 44 $988,145 1High Technology 612 $127,675 3Total 29,198

Weldon’s Acquisition Focus

It is easier to acquire customers where you are well known: where you have a high penetration ratio.

Weldon has only 3% of heavy manufacturing.

They have 42% of the High Technology. The return from concentration on high

technology will probably be greater.

Focus on Acquisition by LTV

Where are Weldon's Prime Acquisition Targets?Weldon US Penetration Lifetime Target Rank

Customers Universe Ratio Value Potential

Metal Production 254 2,433 10.44% $145,067 $15,144.68 3Light Manufacturing 15,442 162,009 9.53% $5,914 $563.70 4Heavy Manufacturing 44 1,288 3.42% $988,145 $33,756.51 2High Technology 612 1,453 42.12% $127,675 $53,776.39 1Total 29,198 167,183 17.46%

Target Potential = LTV * Penetration Ratio

Using lifetime value to get budget approval

Database marketing budgets are usually carved from somewhere else

You have to prove that you will make better use of the funds than the others

Lifetime value can supply testable numbers that CFO’s can understand

Base your budget on solid numbers backed up by valid tests

What your new budget will buy

Year1 Year2 Year3

New LTV $3,446.28 $8,639.71 $14,409.84

Old LTV $3,508.26 $7,368.99 $11,032.70

Difference -$61.98 $1,270.72 $3,377.14

With 30,000 Customers -$1,859,400 $38,121,600 $101,314,200

Weldon with new strategies

Revenue Year1 Year2 Year3

Referral Rate 5.00% 6.00% 7.00%Referred Customers - 1,500 1,620 Retention Rate 85.00% 88.00% 90.00%Retained Customers - 25,500 23,760 Total Customers 30,000 27,000 25,380 Spending Rate $21,000 $24,000 $27,000Total Revenue $630,000,000 $648,000,000 $685,260,000

Costs

Direct Percent 75.00% 65.00% 60.00%Direct Costs $472,500,000 $421,200,000 $411,156,000Acquisition Cost $630 $18,900,000 0 0Retention Building Program $450 $13,500,000 $12,150,000 $11,421,000Referral Program Costs $800 $0 $1,200,000 $1,296,000Total Costs $504,900,000 $434,550,000 $423,873,000

Profits

Gross Profits $125,100,000 $213,450,000 $261,387,000Discount Rate 1.21 1.37 1.51Net Present Value Profit $103,388,430 $155,802,920 $173,103,974Cumulative NPV Profit $103,388,430 $259,191,349 $432,295,323Customer Lifetime Value $3,446.28 $8,639.71 $14,409.84

Using lifetime value to get budget approval

Database marketing budgets are usually carved from somewhere else

You have to prove that you will make better use of the funds than the others

Lifetime value can supply testable numbers that CFO’s can understand

Base your budget on solid numbers backed up by valid tests

Recency, Frequency, Monetary Analysis

Four Types of Business Customers

Pri

ce

Service

Program Buyers

Relationship Buyers

Transaction Buyers

Bargain Hunters

From Paul Wang

How to attract and hold relationship buyers

Forget price. Think and talk about quality and service.Build a relationship with the buyerAdd value to product and relationshipFind way for buyer to build equityMake it expensive to switch

What is the proof that relationship building works?

Manufacturer of building products Catalog sent to 45,000 contractors Previous policy: wait for the orders Test: pick 1,200 customers, split into test

of 600 and control of 600 Two person pilot program build

relationship with test customers to see the results

Credit: Hunter Business Direct

What did they offer? Follow up on bids and quotes Schedule product training Make aware of pricing specials Ask about customer needs Product comparison information New Product information They did not offer discounts

Improvement in repurchase rate

73%

76%

72%72%73%73%74%74%75%75%76%76%

Percent who

purchased in 6 months

1 2

Control vs Test Group

Change in number of orders Six Month Test vs Previous

Year

82%

112%

0%

20%

40%

60%

80%

100%

120%

Change in number of

orders

1 2

Control vs Test Groups

Change in Average Order Size

86%

114%

0%

20%

40%

60%

80%

100%

120%

Change in average

order size

1 2

Control vs Test Group

Change in total revenue$2,600,000 additional

sales

70%

127%

0%

20%

40%

60%

80%

100%

120%

140%

Change in total

revenue

1 2

Control vs Test Group

This stuff works! Building a relationship with

customers can be highly profitable

Using a database to recreate the old family grocer is a winning strategy

Business to business relationship marketing is the way to go

How to identify responsive customers

Some customers respond, some don’t How can you predict behavior? Best method: look at past behavior Behavioral indicators:

Recent purchasers Frequent purchasers Large spenders

Responsive customers may not be the most profitable

Profitable Customers

Responsive Customers

Not all responsive customers are profitable

Not all profitable customers will respond when you write them.

LTV RFM

RFM Can Predict Responders For product launch, select SICs

with highest penetration ratios Use RFM to select most likely

responders Use combination of mail,

phone, and sales visits to responsive relationship buyers.

How to Apply Recency Codes

Put most recent purchase date into every customer record

Sort database by that date - newest to oldest

Divide into five equal parts - Quintiles Assign “5” to top group, “4” to next, etc. Put quintile number in each customer

record

Response by Recency Quintile

3.49%

1.25% 1.08%0.63%

0.26%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

5 4 3 2 1

Recency Quintile

Res

pons

e R

ate

How to compute a Frequency Index Keep number of transactions in

customer record Sort Recency Groups from

highest to lowest Divide into five equal groups Number groups from 5 to 1 Put Quintile number in each

customer record

Response by Frequency Quintile

1.99%

1.56%1.31%

0.92% 0.93%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

5 4 3 2 1Frequency Quintile

Re

sp

onse

Ra

te

How to compute a Monetary Index Store total dollars purchased in

each customer record Sort Frequency Groups from

highest to lowest Divide into 5 equal groups

(Quintiles) Number Quintiles 5, 4, 3, 2, 1 Put Quintile number in each record

Response by Monetary Quintile1.61%

1.45% 1.46%

1.22% 1.23%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

5 4 3 2 1

Monetary Response to $5,000 Product

Monetary Quintile

Percentage of households promoted who purchased

1.68

1.170.88

0.66

0.32

5 4 3 2 10

0.5

1

1.5

2

RFM Code Construction

FM

One SortFive Sorts

Twenty-five sorts

Database

5

4

3

2

1

35

34

33

32

31

335334333332331

R

Appended RFM Codes

Customer Database

Nth

Creating an Nth

300,000 Records

30,000 Records

For Nth by 10, select every tenth record.

Result will be statistical replica of database

Result of Test Mailing to 30,000

# RFM Mailed Response Rate1 555 240 20 8.15%2 554 240 16 6.56%3 553 240 13 5.62%4 552 240 10 4.33%5 551 240 11 4.51%

6 545 240 9 3.78%7 544 240 12 4.98%8 543 240 6 2.88%9 542 240 10 4.26%10 541 240 7 3.10%

11 535 240 10 4.13%12 534 240 9 3.83%13 533 240 8 3.35%14 532 240 6 2.70%

Test Response Rate by RFM Cell

-200

-100

0

100

200

300

400

500

555 455 355 255 111

Index of Response 0 = Break Even

Profit from Test Mailing

Quantity Rate Amount

Goods Sold 402 $40.00 $16,080

Mailing Costs 30,000 $0.55 $16,500

Profits (Loss) ($420)

Determine Break Even and Test Sizes

How to Compute the Response Rate Divide number of responses by

number mailed. Multiply by 100 Example: Responses = 1034

Mailed = 40,000Rate = 1034 /

40,000Rate = 2.59%

Test, Full File & RFM Selects Compared

Test Full File RFM SelectResponse Rate 1.34% 1.17% 2.76%Responses 402 23,412 15,295Net Revenue $16,080 $936,480 $611,800No. Mailed 30,000 2,001,056 554,182Mailing Cost $16,500 $1,100,581 $304,800

Profits ($420) ($164,101) $307,000

Test Vs Rollout Response Rates

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

554 553 552 551 545 544 543 542 541 535 534 533 532 531 525 524 523 522 521 515 514 513 512 511 455 451 445 444 443 355 354 351 344

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Retroactive RFM Test

Many times there is not enough time or funding to run an Nth test in advance

Solution: apply RFM codes to your last completed outgoing promotion.

Since you know who responded, you can determine response rates by cell

Use previous rates to govern this rollout.

How Many RFM Cells Needed? Test File = (Test Budget) / (per piece cost)

Example = $15,000 / $0.76 = 19,737

Cells Needed = 19,737 / 274 = 72

Cell Division Determination To create 72 cells, some must

be less than 5 Recency most powerful. Do not

scrimp. Example R-F-M = 6 X 4 X 3 =

72 Is this best? Test and see.

RFM For Business Databases Business databases are small For small databases, use quartiles

or thirds Quartile = 4 X 4 X 4 = 64 Cells Thirds = 3 X 3 X 3 = 27 Cells Custom = 5 X 2 X 2 = 20 Cells

Recent Case History

User sells personalized product by mail

45,000 selected for a test

Second Recency Quintile Had More Responses.

Why?

Even so, First Recency Quintile Had Higher Sales

Recent buyers spend more per order

Lowest two recency quintiles did not break

even

Frequency was very predictive of response

Monetary did not predict response rate very well

But Monetary does predict average sales by quintile

RFM Cells clearly show who to mail to, and who to drop

When NOTNOT to use RFM

If you use it all the time, half your customers will never hear from you

They will be lost The others will suffer from File

Fatigue Use it sparingly Product launch is ideal use

10866 Wilshire Blvd., Suite 370Los Angeles, CA 90024-4354

Phone (310) 208-2024Fax (310) 208-5681www.msdbm.com

www.dbmarketing.com

ARTHUR MIDDLETON HUGHES

Arthur Hughes, Vice President for Strategic Planning of M\S Database Marketing in Los Angeles, (www.msdbm.com) has been designing and maintaining marketing databases for Fortune 500 companies and others for the past fourteen years. His database experience includes telephone companies, banks, pharmaceuticals, package goods, software and computer manufacturers, resorts, hotels, automobiles, and non-profit fund raisers.

A graduate of Princeton University with a Masters in Public Affairs, Arthur taught economics at the University of Maryland for 32 years. He lectures in the U. S., Canada, Europe, Latin America and Asia on marketing and economics. When it comes to Database Marketing, he wrote the book! He is the author of The Complete Database Marketer: Tapping your customer base to maximize sales and increase profits. 2nd Ed. (McGraw Hill 1996), and Strategic Database Marketing (McGraw Hill 1994).

Arthur's articles have appeared in leading publications. He has served as a key speaker in marketing conferences in the U.S., Canada, U.K., Japan, Taiwan, Australia, Brazil, Venezuela, Malaysia and Portugal. M\S are leaders in Customer Management and Internet Marketing. Arthur may be reached at (703) 525-9637 Fax 703 351 7417 or at ahughes@msdbm.com

THE COMPLETE DATABASE MARKETERby Arthur Middleton Hughes

Chicago: McGraw Hill 600 pp GlossaryRevised Edition 1996

This is the bible of database marketing. Over 16,000 copies sold. John Stevenson Exec. VP of Krupp Taylor: "Not only does this book succeed in being clear and accessible, it is also the first complete treatise...The full power and practice of database marketing are here, to be sure. This is the long awaited survival manual for every marketer on the cutting edge. I can't think of a book that is more rewarding."

This comprehensive book covers such subjects as how to build customer loyalty, lifetime value calculation, RFM analysis, customer service, telemarketing, fulfillment, hardware and software, clustering and profiling, prospecting, media selection. Order from www.DBMarketing.com

STRATEGIC DATABASE MARKETINGby Arthur Middleton Hughes

Chicago: McGraw Hill 2000 400 pp

Millions have been spent on database marketing pro grams that did not work. In this book Arthur Hughes shows how to evaluate strategies in advance using life time value analysis. He explains how to use RFM analysis to boost profits. Russ Richmond, President of Grey Direct said: "Well, Arthur has done it again. He has not only integrated the complicated world of data bases with the traditional concepts of direct marketing, but he accurately points out the pitfalls and the how-tos. I know of a few careers that would have been saved had this book been available sooner. Without a doubt this will be the cheapest investment you'll make in your database, and perhaps the most important one."

Thousands of customer marketing databases are being built. Unfortunately, many mistakes have been made. The reasons for these failures center on one central fault: the inability of marketers to develop logical, practical and winning strategies for their database marketing programs. We must study past mistakes to develop sound principles for marketing strategy. Order from www. DBMarketing.com