1. LTV and RFM for Non Profits DMA Non Profit Forum Friday February : :45 The Capitol Hilton Washington, DC
Arthur Middleton Hughes
Vice President / Solutions Architect
KnowledgeBase Marketing

2. What KnowledgeBase Marketing Does

3. Two goals today
Explain how to compute donor lifetime value, and use it to improve marketing strategy
Explain how RFM works, and how you can use it to improve response rates

4. 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!

5. How a modern database marketing system works
Data Access
And Analysis
Software
Customer Transactions
Marketing Staff
Inputs from Retail, Phone, Web
Appended
Data
Website

6. Lifetime Value

7. We can determine the lifetime value of every donor
Lifetime value is the net revenue we will receive from each donor during his lifetime with our cause
Using historical data, we can compute this for every donor, and put it in their record.

8. What is lifetime value?
Net present value of the profit to be realized on the average new customer during a given number of years.
To compute it, you must be able to track customers from year to year.
Main use: To evaluate strategy.

9. 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

11. Discount Rate Basic Formula
Market Rate of Interest...5%
Assume Risk (Double rate)...10%
Years = n Interest = i
Formula: D = (1 + i)n
Calculation of rate after 2 years:
D = ( )2 = (1.10)2 = 1.21

12. New Strategies Add a website that takes donations
Make website interesting with lots of interesting info on the cause being promoted.
Collect donor’s s. Send appeals by both direct mail and
Sent retention communications besides just appeals
Personalize all messages to existing donors
Personalize web site “Welcome back, Susan”

14. Results of new strategies

15. Compute LTV of all donors
Use software to insert the actual donor record of each donor
Use the spreadsheet to pretend that there are 200,000 donors just like each donor
Put the resulting LTV into each donor database record.
Let’s look at Susan Smith

17. Segment donors by LTV – Develop a marketing strategy for each segment
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

18. RFM Analysis

19. Recency Frequency Monetary (RFM) Analysis
Used for marketing to customers
Always improves response and profits
Better than any demographic model
The most powerful segmentation method for predicting response

20. 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” next, etc.
Put quintile number in customer record

21. Response by Recency Quintile

22. 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 customer record

23. Response by Frequency Quintile

24. 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

25. Response by Monetary Quintile

27. R F M RFM Code Construction One Sort Five Sorts Twenty-five sorts
Database 5 4 3 2 1 35 34 33 32 31
335
334
333
332
331

28. Appended RFM Codes

29. Creating an Nth Customer Database Nth 300,000 Records 30,000 Records
For Nth by 10, select every tenth record.
Nth
Result will be statistical replica of database
30,000 Records

30. Result of Test Mailing to 30,000

31. Test Response Rate by RFM Cell

32. Profit from Test Mailing

33. Test, Full File & RFM Selects Compared

34. Test Vs Rollout Response Rates

35. RFM Deals with Very Small Numbers
Only a small percentage (such as 5%) of customers respond to the typical offer
95% or more will not respond at all
RFM tells you which customers are most likely to be in the responsive 5%
Those who respond may not be your most profitable customers

36. Retroactive RFM Test
Many times there is not enough time or funding to run an Nth test in advance
Solution: apply RFM codes to last year’s completed outgoing promotion.
Since you know who responded, you can determine response rates by cell
Use last year’s rates to govern this year’s rollout.

37. Recent Case History User sells personalized product by mail
45,000 selected for a test

38. Second Recency Quintile Had More Responses. Why?

39. Even so, First Recency Quintile Had Higher Sales

40. Recent buyers spend more per order

41. Lowest two recency quintiles did not break even

42. Frequency was very predictive of response

43. Monetary did not predict response rate very well

44. But Monetary does predict average sales by quintile

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

46. When NOT 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; when you need a boost
Use it to identify your best customers
Don’t go hog wild!

47. Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com
Contact Arthur:

48. Thank You