University of Washington MBA Program Managing Customer Relationships through Direct Marketing “Lists/RFM” Instructor: Elizabeth Stearns

In store, said “Do NOT put me on your mailing list”. Received these within the next 9 weeks…

Remember…Your Direct Marketing Is Only As Good As Your List! The 40/40/20 Rule

Navy Direct Mail, Received by Fully Employed Evening MBA… Target

Leveraging of Variables in Increasing Response The Right Audience The Right Adv. Elements The Right Timing The Right Offer 50% 20% 10% Image Response

Type of Lists Compiled –Names and addresses derived from directories, public records, newspapers, retail sales slips, trade show registrants, etc., to identify groups of people who have something (single identifiable characteristic) in common. –There is NO information about purchase or response behavior.

Type of Lists Response –Names and addresses of consumers or business executives who ordered and paid for a product or service through the mail. Response Enhanced –Consumers(purchasers) who have filled out questionnaires and mailed in those questionnaires which describe their demographics, psychographics and specific product buying habits. Can also be enhanced through overlay of lifestyle or other external list. House List –Purchased or inquired, 5-6 times better results

Other Important Selection Criteria Sex State Carrier Route/ZIP Age Product or Service Specific

Other Important Selection Criteria Source –Direct mail sold –Print –Other direct mail media (Renewals, M-G-M’s, Package Inserts, Co-Ops, Statement Stuffers, Syndicated Products, School Marketing) –Broadcast –Telemarketing –Take Ones, FSI’s, ETC. –Warranty Cards

Merge/Purge (Cost or savings?)

Consider merge/purge by address.

Merge/Purge Advantages Previously mailed names are eliminated. Each prospect gets only one mailing piece. Current customers are eliminated. Bad debts are eliminated. DMA pandering names are eliminated (House pandering also). Inter-file duplicated are analyzed.

Merge/Purge Advantages Multi-buyers are flagged for r ing. Nixi’s are eliminated, (NCOA). Demographic data can be appended. Phone numbers can be appended. Carrier route coding provides for postal savings. Decoys are added in.

R-F-M Recency –When was the last time they purchased? Frequency –How often do they purchase? Monetary Value –How much money do they spend?

Typically used to select likely profitable customers to receive direct marketing treatment It postulates that the most likely prospects are recent purchasers who have historically demonstrated more frequent than average purchase behavior in larger than average dollar amounts It is based on a correlation between RFM and response Historically it has proven to be an effective segmentation technique for many situations The variables RFM are frequently influential in many advanced statistical modeling techniques RFM Definition RFM is a behavioral segmentation technique

RFM Definition (cont’d) The variables must be interpreted within the context of product purchase dynamics –Durable –Consumables –Periodic Can be used to manage marketing investment by selecting target customers Can also be used to improve marketing performance by managing message/offer components

RFM Elements Segmentation Concept Behavioral Question Data Element/ Measurement RecencyWhen did they last buy? Date of last purchase Process: Sort by date Create groups by date range FrequencyHow often do they buy? # of purchases over time Options: Within recency group, months on file, # times mailed Monetary Value How much do they spend? $ value of purchases Options: Within recency group, months on file, # times mailed

RFM / Customer Treatment RFM segmentation can be used to manage customer treatment across functions Functional DimensionTreatment Implication Customer ServiceService Level BillingAdjustment Practices CollectionsMinor delinquency action CreditOver limit action MarketingIncentives/Premiums

Gains Chart for Responsiveness DecileQty. Mailed (000) Number Resp. (#) Percent Resp. (%) Resp. Gain Index* Revenue Generated (000) Mailing Cost (000) Total Profit (000) , %225$506$240$266 21,20034, ,80048, , ,40060, , ,00067, ,6871, ,60076, ,9171, ,20081, ,0471, ,80084, ,1241, ,40087, ,1872, ,00090, ,2502, Mailing Cost: $400/thousandRevenue: $25/response *Index of Relative Responsiveness; Universe Indexed to 100. Source: Direct Marketing, November 1988

Remember…Your Direct Marketing Is Only As Good As Your List! The 40/40/20 Rule

Thank you!