1. Contact strategy

2. Contact Strategy: What is it?
Contact strategy deals with using information about
Customer purchases
Promotion patterns
Interests, and
Preferences
In order to
Regulate the frequency and sequence of customer contact
Customize the offer, creative thrust, and positioning of contacts

3. What is new in today’s Contact Strategy
All the key decision criteria are based at the customer or individual level
A customer is included in a promotion or campaign depending on whether there is any incremental profit from contacting the customer

4. What is new in today’s Contact strategy
Previously all customers who did not own product A were mailed promotions about product A.
Today, a customer is mailed promotions about product A depending on
How long a person has been a customer?
What products the person has previously bought?
What were the person’s responses to previous mailings, or contacts?
What are the purchase patterns of the person?
These factors are then combined to compute the Return on Investment (ROI) for a particular customer

5. Customer Lifetime Value
Lifetime value is the NPV of the profit that you will realize on a new customer during a given number of years
Factors in calculation of CLTV
- Retention rate
- Spending rate
- Acquisition cost
- Discount rate
- NPV calculation
- Referral rate

6. Customer Lifetime Value
Ridgeway Fashions is in fashion retailing
Wants to test idea of a Birthday Club
Women provide their fashion preferences and their husband’s business address. Ridgeway sends husbands a reminder and hints for gifts before wife’s birthday
We will look at Ridgeway before and after the Birthday Club
Look at customers over a 3 year period

7. Customer Lifetime Value
Retention rate
- The single most important number in the lifetime value table
- Is calculated by a simple formula:
RR=year X customers/year 1 customers
eg RR=8000/20000=40%
- Year X customers represent those Year 1 customers who are still buying in the later year

8. Customer Lifetime Value
Spending rate
- Average amount spent by the average customer each year
- Calculated by dividing total sales for group being studied in a given year by the number of customers in the group
- Year 2 rate represents revenue from customers who are still active out of the original year 1group
- Typically the longer customers are with you, the more they will spend per year, per visit, per order

9. Customer Lifetime Value
Acquisition cost
- Add up all money spent on advertising, marketing and sales efforts during the year
- Divide this by the number of new customers who actually make purchases from you each year
Discount rate used because profits are received from customers over many years

10. Customer Lifetime Value
Net Present Value
- Once you have the discount rate for each year, each of your profits must be discounted by the corresponding rate
- NPV profits=gross profits/discount rate
- Add up NPVs of all profits to get cumulative NPV

11. Customer Lifetime Value
Lifetime value is simply the cumulative NPV profit (CUM-NPV) in each year divided by the original group of customers
CLTV=CUM-NPV/acquired customers
3rd year CLTV in above example is $ /20000=$60.05
Represents the average profit that you can expect to receive, after a given number of years, from the average new customer whom you can sign up

12. Customer Lifetime Value
Referral rate
- Management assumes that the Birthday Club will be successful enough that 5% of it’s customers will recommend Ridgeway to friends/relatives
Usually referred people are more loyal and have higher retention and spending rate than the average new acquisition

13. RFM: The Workhorse Key variables to consider for contact strategy:
Recency
Frequency
Monetary Value
Additional help comes from
Promotion History
Demographic Data
Survey data

14. RFM definitions Recency Frequency Monetary Value
How recently has a customer bought?
Frequency
How frequently does a customer purchase?
Monetary Value
How much does a customer spend on each purchase?

15. How does RFM work?
Rank Customers according to each variable into say 5 groups.
Give preference to contacting customers who are in the top groups for each variable
Give the most preference to contacting customers who are in the top group for all the variables

16. How does RFM work?
An RFM chart depicting the groups and the response rates for each group

17. How does RFM work?
An RFM chart depicting the groups and the response rates for each group

18. How does RFM work?
An RFM chart depicting the groups and the response rates for each group

19. Purchase History Information
Time or Tenure of being a customer
Treat new and old customers differently
For new customers send welcome packages
For old customers send offers that recognize their tenure
Offer special privileges to long life customers

20. Purchase History Information
Total Sales Dollar or Total Sales Dollar over Time
Calculate Revenue Velocity
Revenue Velocity (RV) = total amount customer spent
total time customer has been purchasing
RV for a customer who has spent $100 in 2 months = 50
RV for a customer who has spent $100 in 20 months = 5
First customer preferred over the second

21. Purchase History Information
Product Ownership
Avoid offending customers by recommending them to buy a product they already have
Very critical for expensive items like cars, insurance, and financial services
Contact customers who do not have a do-not-contact code and are outside the too-soon to contact limit

22. Purchase History Information
Product Ownership over time
How do you effectively eliminate customers who first sign-up for all offers and then cancel them all within a month?
Look for customers who have owned products/services for a long time and offer only them additional offers

23. Promotion History
Used to define who is eligible for an upcoming contact
Helpful in creating a market segment
Propensity Indicator
Person’s response rate over time

24. Promotion History Propensity Indicator (PI) =
(# of times bought/ # of times promoted/ time period)
Customer A was promoted 6 times, and bought twice in the last 12 months, PI = (2/6/12)= 0.027
Customer B was promoted 6 times, and bought twice in the last 18 months, PI = (2/6/18)= 0.018
Customer C was promoted 4 time, and bought twice in the last 6 months, PI = (2/4/6) = 0.08
Customer C > Customer A > Customer B

25. Demographic Information
Create relatively similar customer segments based on demographic and lifestyle characteristics
Characteristics include
Gender, marital status, age, income, home value, presence of children, education level, etc.
Age, marital status, income, presence of children best bets!!!

26. Attitudinal Information
Survey data used to find
Motivation for purchase
Barriers to purchase
Brand’s impression as compared to a competitor
Brand Equity
Loyalty within a category
Takes a long time to collect
Not very reliable
Use in combination with purchase history and demographic data to profile segments

27. Combining all Types of Information
Sequentially rank customers based on
First by Purchase History
Second by Demographic Information
Third by attitudinal information
Give preferences to customers who are ranked first in all three categories, then to the ones ranked first in purchase history and so forth

28. Example: Consumer Products Company
Situation
A number one market share company finds that its market share is eroding
Fall-off in store traffic by loyal and previously high spending customers
High Ad-spending, target trade promotions and in-store promotions don’t work

29. Example:Consumer Products Company
Strategy
In-store survey designed to collect data on
Name, address, phone number, birthday
How many of a certain product were purchased in the last 10 months?
How many were purchased in this store?
What were the primary reasons/occasions the customer bought the product?
Used this information to target customers as discussed before
The contact strategy involved multiple mailings over 12 months that involved a gift, and valuable tips to use the product.

30. Example:Consumer Products Company
Outcome
Market share increased for the product line and for the overall brand
Customers in the program purchased at a higher rate

31. Example: Using RFM for a Promotion
A database marketer with a customer database of 2.1 million names
Wants to do a promotional Rollout
Does a Test promotion first on 30,000 customers
It sent videos costing $100 and it made $40 on each successful sale. Cost of mailing was $0.55 per piece

32. Example: Using RFM for a Promotion
First all 2.1 mn customers were coded by Recency, Frequency and Monetary Value
Then database was sorted by recency and divided into 5 equal parts (quintiles) which were numbered from 5 (most recent) to 1 (most ancient)
Then each of the 5 recency quintiles was further sorted by Frequency (total no of times a customer purchased from you) and divided in to 5 equal parts
Each recency quintile was thus numbered from 5 (most frequent) to 1 (least frequent)
Then each of the 25 Recency-Frequency combinations was further sorted by Monetary Value and divided into 5 equal parts. Each combo was numbered from 5(most value) to 1(least value)

33. Example: Using RFM for a Promotion
The Test group of was selected using an Nth
A Breakeven Index is calculated for each of the 125 cells using the actual responses
Breakeven is the response rate required for the net profit from promotion to a test group to exactly equal cost

34. Example: Using RFM for a Promotion
The company found that only 34 of the 125 RFM cells broke even
The final promotional offer was mailed to only people in the 34 cells with positive breakeven
Response rate and profits were higher by not promoting to people unlikely to respond