6 What proves that relationship building works? Manufacturer of building productsCatalog sent to 45,000 contractorsPrevious policy: wait for the ordersTest: pick 1,200 customers, split into test of 600 and control of 600Two person pilot program build relationship with test customers to see the resultsCredit: Hunter Business Direct
7 What did they offer? Follow up on bids and quotes Schedule product trainingMake aware of pricing specialsAsk about customer needsProduct comparison informationNew Product informationThey did not offer discounts
12 This stuff works!Building a relationship with customers can be highly profitableUsing a database to recreate the old family grocer is a winning strategyRelationship marketing is the way to go
13 Why we need Lifetime Value Analysis We need to know the value of our customers, so as to properly target our sales and retention effortsWe need to discriminate among our customers to acquire and retain the best
14 Lifetime Value Analysis Goal: Determine... where to put your retention dollarsthe value of each retention strategywhere to put your acquisition dollarshow much to spend on acquisition
15 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.
17 Discount Rate Basic Formula Market Rate of Interest...6%Assume Risk 1.2 first year, 1.1 afterwardsYears = n Interest = iFormula: D = (1 + I * risk)nCalculation of rate after 2 years:D = (1.06 * 1.1)2 = 1.36
18 Convert to Annual Annual Rate = (Repurchase rate) (1/years) 77% repurchase after 11 yearsAnnual 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%
19 New Retention Strategies Build a database linked to the websiteWeb registrationFrequent personal communicationsWeb site cost $30 per student per yearCommunications extra cost $18 per student per year
21 Effect of adoption of new strategies $1.8 million in the third yearProfit, after all expenses paid
22 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: continuing education.
23 Five Ways to Boost LTV with DB Strategies Increase the retention rateIncrease the referral rateIncrease the spending rateDecrease the direct costsDecrease the marketing costs
24 How to use lifetime value Compute a base lifetime valueDream up a new strategyEstimate the benefits and costsDetermine whether your new lifetime value goes up or goes downDon’t undertake any new strategy until you can prove it will be successful
25 Find LTV of Customer Segments Many UCEA customers are quite different in their purchase patternsCreate actionable segments and determine the value of eachUse the results to focus your retention programs and acquisition programs on the most profitable segments
26 Dividing Customers into Three Segments Develop a different strategy for each segment
27 Different marketing strategies Job training: market to companiesDegree Candidates: market both to companies and individualsSenior Citizens: market to individuals
28 Using lifetime value to get budget approval Database marketing budgets are usually carved from somewhere elseYou have to prove that you will make better use of the funds than the othersLifetime value can supply testable numbers that CFO’s can understandBase your budget on solid numbers backed up by valid tests
31 Using lifetime value to get budget approval Database marketing budgets are usually carved from somewhere elseYou have to prove that you will make better use of the funds than the othersLifetime value can supply testable numbers that CFO’s can understandBase your budget on solid numbers backed up by valid tests
33 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
34 How to identify responsive customers Some customers respond, some don’tHow can you predict behavior?Best method: look at past behaviorBehavioral indicators:Recent purchasersFrequent purchasersLarge spenders
35 Not all responsive customers are profitable Responsive customers may not be the most profitableResponsive CustomersProfitable CustomersRFMLTVNot all responsive customers are profitableNot all profitable customers will respond when you write them.
36 RFM Can Predict Responders Use RFM to select most likely respondersUse combination of mail, phone, and s to responsive relationship buyers.
37 How to Apply Recency Codes Put most recent purchase date into every customer recordSort database by that date - newest to oldestDivide into five equal parts - QuintilesAssign “5” to top group, “4” to next, etc.Put quintile number in each customer record
39 How to compute a Frequency Index Keep number of transactions in customer recordSort Recency Groups from highest to lowestDivide into five equal groupsNumber groups from 5 to 1Put Quintile number in each customer record
41 How to compute a Monetary Index Store total dollars purchased in each customer recordSort Frequency Groups from highest to lowestDivide into 5 equal groups (Quintiles)Number Quintiles 5, 4, 3, 2, 1Put Quintile number in each record
54 Retroactive RFM TestMany times there is not enough time or funding to run an Nth test in advanceSolution: apply RFM codes to your last completed outgoing promotion.Since you know who responded, you can determine response rates by cellUse previous rates to govern this rollout.
55 How Many RFM Cells Needed? Test File = (Test Budget) / (per piece cost)Example = $15,000 / $0.76 = 19,737Cells Needed = 19,737 / 274 = 72
56 Cell Division Determination To create 72 cells, some must be less than 5Recency most powerful. Do not scrimp.Example R-F-M = 6 X 4 X 3 = 72Is this best? Test and see.
57 RFM For Business Databases Business databases are smallFor small databases, use quartiles or thirdsQuartile = 4 X 4 X 4 = 64 CellsThirds = 3 X 3 X 3 = 27 CellsCustom = 5 X 2 X 2 = 20 Cells
58 Recent Case History User sells personalized product by mail 45,000 selected for a test
59 Second Recency Quintile Had More Responses. Why?
60 Even so, First Recency Quintile Had Higher Sales
64 Monetary did not predict response rate very well
65 But Monetary does predict average sales by quintile
66 RFM Cells clearly show who to mail to, and who to drop
67 When NOT to use RFMIf you use it all the time, half your customers will never hear from youThey will be lostThe others will suffer from File FatigueUse it sparinglyProduct launch is ideal use
68 THE COMPLETE DATABASE MARKETER by Arthur Middleton Hughes Chicago: McGraw Hill 600 pp GlossaryRevised Edition 1996This 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
69 STRATEGIC DATABASE MARKETING 2nd Ed. by Arthur Middleton Hughes Chicago: McGraw Hill ppMillions have been spent on database marketing programs that did not work. In this book Arthur Hughes shows how to evaluate strategies in advance using lifetime 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 databases 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
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