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Transcript of Marketing Strategies, Customer Loyalty & The Web Arthur Middleton Hughes VP Strategic Planning M\S...
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 [email protected]
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