1. Predictive Modeling for E-Mail Marketing
Arthur Middleton Hughes – Senior Strategist
Anna Lu - Director of Research and Analytics
Predictive Analytics World Feb 18, 2009

2. What Does E-mail Marketing Do?
3/25/2017
Produces online sales – in many cases
Produces retail sales – in many more cases
Produces customer retention and loyalty
Helps to acquire new customers
Announces new products
Creates cross-sales and upgrades
Can be the most powerful and cost effective marketing method that marketers have available today -- particularly in an economic downturn

3. E-mail’s Role Not Understood
3/25/2017
In many companies, is not recognized as the marketing powerhouse that it is
It is somewhere off on the side, producing Web sales which are about 3% or less of total sales
That may be the perception, but companies that think that way are missing the boat
Here is the reality…

4. E-mail Produces Four Times as Much Offline as Online
3/25/2017

5. The value of multi-channel customers
3/25/2017
marketing budgets are often based only on online sales
This is a mistake, because produces four times as many sales offline as they do online
Calculate the true effect of so that the marketing budget can reflect the true worth of e- mail marketing

6. E-mail Influences all channels
3/25/2017

7. Predictive models seldom used
Most marketers today do not use predictive modeling. Why not?
Predictive modeling is used in Direct Mail where the CPM is $600 or more. In marketing the CPM is $8 or less. Many marketers feel that the savings from a model would not pay for the model.
Many marketers are young people who have never heard of predictive modeling
The philosophy is: “Mail ‘em all. Someone is going to buy…”
This attitude is beginning to change. Here’s why….

8. Email open rates are falling

9. People are unsubscribing
It costs between $10 and $40 to acquire a permission based subscriber address.
Inboxes today are so crowded with s that millions unsubscribe or delete s en masse without reading them.
A relevant to a good customer gets lost in the spam.
Many marketers are mailing too often
The annual loss from unsubscribers from large mailers comes to millions of dollars

10. Predicting the unsubscribers
Unsubscribe rates are often 3% or more per month.
If a mailer has 4 million subscribers, and the value of each subscriber is $15, he could be losing $21 million per year.
If the unsubscribe rate could be reduced by 10% he would save $2.1 million per year.
You could pay for several predictive models with that kind of saving.

11. Finding Likely Unsubs with CHAID
Case Study: Loyalty program for a major US low cost airline

12. Program Background
Frequent flyer program for a major low cost airline in US
Semi-weekly program offered to members who wish to accumulate "points" they can put towards flights, SkyMall products and more
drives a significant percentage of the total revenue

13. Business Problem
18.5% have opted out of the program communications but they represent 30% of the total revenue generated by all members
In addition, 88% of the opt-outs happened within the past 12 months
Status
% of Program Base
% of Revenue Generated (Lifetime)
% of Revenue (2 yrs.)
% of Revenue (12 months)
Mailable
81.5%
70.6%
78.7%
82.4%
Opt-out
18.5%
29.4%
21.3%
17.6%

14. Objective Understand key characteristics of previous opt-outs
Identify likely unsubs
Initiate save programs to prevent unsubs from happening

15. Analysis Background Random sample of 5% of member base
Approx 50 predictor variables
Program attributes such as enrollment date, mile accumulation, usage, recency of mile redemption, total reward points, Lifetime revenue, etc.
behaviors such as opens, clicks and purchases (from s sent)
Response variable – Unsubscribed versus still mailable (binary level variable)
CHAID (Chi-square Automatic Interaction Detector) algorithm
Cross validation method

16. About CHAID A type of decision tree technique
Use of the chi-square test for contingency tables to decide which variables are of maximal importance for classification
Advantages are that its output is highly visual and easy to interpret
Often used as an exploratory technique and is an alternative to multiple regression

17. Output (Partial) % Unsub Overall
% Unsub among people with # of opens in last 60 days=1

18. Predictors Selected # of e-mails opened last 60 days
Days since loyalty club enrollment
# of s opened last 30 days
# of Bonus (partner) credits earned YTD
Days since last travel
Days since most recent opened or clicked
Date of Last earn/ or redemption of flight/ or Bonus (partner) credit
# of s opened last 365 days
# of vouchers redeemed in lifetime

19. Node Gain
Gain Chart on model development sample

20. Revenue
Top 10% of the members contributed to 67% of total revenue

21. X-Tab: Node vs. Revenue
Each of the top nodes have high revenue producing members

22. Identifying most profitable flyers
4% (or 120K) of frequent flyers contributed 15% (~$3.1 million) of program revenue

23. A risk-revenue matrix

24. Using the output of the model
Now that you know those most likely to unsubscribe
And know who are the most valuable
You can single out these folks and make them an offer that they cannot refuse.
Analytics helps the airline target the right people.

25. How modeling reduced churn
In one year, analytics was used for a wireless phone company –Cingular - to reduce monthly churn by 26% -- Millions of dollars.

26. Identify Best-Customer Look-Alike with Logistic Regression
Case Study: US off-price e-tailer

27. Background
Off-price e-tailer of name-brand apparel and other goods in US
is their single largest marketing channel, and their most important retention tool
communication delivers 40% of the total revenue

28. What can be measured Attrition and retention
Migration upward and downward
Incremental sales per program and per season
Frequency of seasonal purchases
Dollars spent per trip and per season
Number of departments shopped per trip and per season.
Number of items shopped per trip and per season–
Share of customers’ wallet

29. Business Problem
About 50% of revenue are actually driven by their loyalty club members
An annual membership fee is required
Size of loyalty club is small – just 1.8% of base
Client asked:
Who should we focus as the next tier of subscribers amongst the other ~98% of the list
Who look like the best customers I have
How can we find people who might become best customers if nurtured

30. Objective Understand what variables describe best customers
Identify likely best customers
Initiate programs to nurture these subscribers, to keep them happy

31. Analysis Background Random sample of 10% of e-mail subscriber base
Approx 10 predictor variables
Attributes such as # of lifetime purchases, first/most recent order, address acquisition source, etc.
behaviors such as tenure, opens, clicks and purchases (from s sent)
Response variable – Loyalty program member vs. non-Loyalty program member (binary level variable)
Logistic Regression
Cross validation method

32. About Logistic Regression
Prediction of the probability of occurrence of an event by fitting data to a logistic curve
Very useful techniques when one wants to understand or to predict the effect of a series of variables on a binary response variable (a variable which can take only two values, 0/1 or Yes/no, for example)
For example, it’s help to anticipate the likelihood of customers responding to a direct mail, or the likelihood a person is about to churn from a subscription

33. Impact of Predictors Some variables used included:
Total # of purchases
The more the better
Time on file
The younger the better
Months since first purchase
Months since last purchase
The less (or more recent) the better
Total s clicked on over the past year
Total s opened over the past year
The more the better… though not always predictive

34. Model Gain
Gain Chart on model development sample

35. Now that we know who to target…
The model enables us to focus on those most likely to be interested in the loyalty club.
We can target only those folks with messages and rewards that will get them to join.
We make them offers that we could not afford to offer to everyone.
How the model boosts profits and reduces churn…

36. Model beats random select
A model predicts those subscribers who would be interested in a particular product.
Mailing these 273,334 produces 842 sales and only 273 unsubscribers.
If the model had not been used, there would have been only 41 sales and 3,553 unsubscribers.
Replacing each unsubscriber costs $14.
Without the model, the mailing would have been a disaster.

37. Conclusions
Predictive modeling is just getting started in marketing.
Reason: s are so inexpensive that the attitude was: “Blast ‘em all!”
We now realize that subscribers are very valuable. We can lose them by random blasting.
Models help us by reducing unsubscribes and also by identifying those subscribers who are most interested in what we have to say.
Predictive modeling works with marketing.

38. To learn more….
Available from Amazon.com or BarnesandNoble.com

39. Thank you for viewing.
For more information, please contact: Arthur Middleton Hughes, Senior Strategist | Anna Lu, Director of Research and Analytics |