Presentation on theme: "LTV and RFM for Non Profits DMA Non Profit Forum Friday February 4 2005 10:30 - 11:45 The Capitol Hilton Washington, DC Arthur Middleton Hughes Vice President."— Presentation transcript:
1 LTV and RFM for Non Profits DMA Non Profit Forum Friday February : :45 The Capitol Hilton Washington, DCArthur Middleton HughesVice President / Solutions ArchitectKnowledgeBase Marketing
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 causeUsing 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 valueDream up a new strategy. Estimate 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
11 Discount Rate Basic Formula Market Rate of Interest...5%Assume Risk (Double rate)...10%Years = n Interest = iFormula: D = (1 + i)nCalculation 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 andSent retention communications besides just appealsPersonalize all messages to existing donorsPersonalize web site “Welcome back, Susan”
15 Compute LTV of all donors Use software to insert the actual donor record of each donorUse the spreadsheet to pretend that there are 200,000 donors just like each donorPut 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 GOLDSpend Service Dollars HereSpend Marketing Dollars HereReactivate or ArchiveYour Best Customers - 80% of RevenueYour Best Hope for New Gold CustomersMove Up1% of Total RevenueThese may be losers
19 Recency Frequency Monetary (RFM) Analysis Used for marketing to customersAlways improves response and profitsBetter than any demographic modelThe most powerful segmentation method for predicting response
20 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” next, etc.Put quintile number in customer record
22 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 customer record
24 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
35 RFM Deals with Very Small Numbers Only a small percentage (such as 5%) of customers respond to the typical offer95% or more will not respond at allRFM 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 TestMany times there is not enough time or funding to run an Nth test in advanceSolution: apply RFM codes to last year’s completed outgoing promotion.Since you know who responded, you can determine response rates by cellUse 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
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 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 sparingly; when you need a boostUse it to identify your best customersDon’t go hog wild!
47 Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: