1. UCEA Mini-Workshop on Database Marketing
Arthur Middleton Hughes
Vice President / Solutions Architect
KnowledgeBase Marketing
Hyatt Fisherman’s Wharf
San Francisco
Feb 14, 2002

2. What KnowledgeBase Marketing Does

3. Compared with newcomers, Long term customers:
Buy more per year
Buy higher priced options
Buy more often
Are less price sensitive
Are less costly to serve
Are more loyal
Have a higher lifetime value

4. Retention is the way to measure loyalty

5. Retention pays better than acquisition

6. What proves that relationship building works?
Manufacturer of building products
Catalog sent to 45,000 contractors
Previous policy: wait for the orders
Test: pick 1,200 customers, split into test of 600 and control of 600
Two person pilot program build relationship with test customers to see the results
Credit: Hunter Business Direct

7. What did they offer? Follow up on bids and quotes
Schedule product training
Make aware of pricing specials
Ask about customer needs
Product comparison information
New Product information
They did not offer discounts

8. Improvement in Response rate

9. Change in the number of orders

10. Change in the Average Order Size

11. Total revenue gain: $2.6 million dollars

12. This stuff works!
Building a relationship with customers can be highly profitable
Using a database to recreate the old family grocer is a winning strategy
Relationship 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 efforts
We need to discriminate among our customers to acquire and retain the best

14. Lifetime Value Analysis Goal: Determine...
where to put your retention dollars
the value of each retention strategy
where to put your acquisition dollars
how 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 afterwards
Years = n Interest = i
Formula: D = (1 + I * risk)n
Calculation 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 years
Annual Rate = (.77)(1/11) = 98%
45% repurchase after 4 years = 82%
99% per week = 59.2% per year
Annual = (.99) (1/(1/52))
Annual Rate = 59.2%

19. New Retention Strategies
Build a database linked to the website
Web registration
Frequent personal communications
Web site cost $30 per student per year
Communications extra cost $18 per student per year

21. Effect of adoption of new strategies
$1.8 million in the third year
Profit, 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 rate
Increase the referral rate
Increase the spending rate
Decrease the direct costs
Decrease the marketing costs

24. 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

25. Find LTV of Customer Segments
Many UCEA customers are quite different in their purchase patterns
Create actionable segments and determine the value of each
Use 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 companies
Degree Candidates: market both to companies and individuals
Senior Citizens: market to individuals

28. Using lifetime value to get budget approval
Database marketing budgets are usually carved from somewhere else
You have to prove that you will make better use of the funds than the others
Lifetime value can supply testable numbers that CFO’s can understand
Base your budget on solid numbers backed up by valid tests

29. What your new budget will buy

31. Using lifetime value to get budget approval
Database marketing budgets are usually carved from somewhere else
You have to prove that you will make better use of the funds than the others
Lifetime value can supply testable numbers that CFO’s can understand
Base your budget on solid numbers backed up by valid tests

32. Recency, Frequency, Monetary Analysis

33. How to attract and hold relationship buyers
Forget price. Think and talk about quality and service.
Build a relationship with the buyer
Add value to product and relationship
Find way for buyer to build equity
Make it expensive to switch

34. How to identify responsive customers
Some customers respond, some don’t
How can you predict behavior?
Best method: look at past behavior
Behavioral indicators:
Recent purchasers
Frequent purchasers
Large spenders

35. Not all responsive customers are profitable
Responsive customers may not be the most profitable
Responsive Customers
Profitable Customers
RFM
LTV
Not all responsive customers are profitable
Not all profitable customers will respond when you write them.

36. RFM Can Predict Responders
Use RFM to select most likely responders
Use combination of mail, phone, and s to responsive relationship buyers.

37. 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” to next, etc.
Put quintile number in each customer record

38. Response by Recency Quintile

39. 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 each customer record

40. Response by Frequency Quintile

41. 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

42. Response by Monetary Quintile

43. Monetary Response to $5,000 Product
Percentage of households promoted who purchased 2
1.68
1.5
1.17
0.88 1
0.66
0.5
0.32 5 4 3 2 1
Monetary Quintile

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

45. Appended RFM Codes

46. 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

47. Result of Test Mailing to 30,000

48. Test Response Rate by RFM Cell

49. Profit from Test Mailing

50. Determine Break Even and Test Sizes

51. How to Compute the Response Rate
Divide number of responses by number mailed. Multiply by 100
Example: Responses = 1034
Mailed = 40,000
Rate = 1034 / 40,000
Rate = 2.59%

52. Test, Full File & RFM Selects Compared

53. Test Vs Rollout Response Rates

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

55. How Many RFM Cells Needed?
Test File = (Test Budget) / (per piece cost)
Example = $15,000 / $0.76 = 19,737
Cells Needed = 19,737 / 274 = 72

56. Cell Division Determination
To create 72 cells, some must be less than 5
Recency most powerful. Do not scrimp.
Example R-F-M = 6 X 4 X 3 = 72
Is this best? Test and see.

57. RFM For Business Databases
Business databases are small
For small databases, use quartiles or thirds
Quartile = 4 X 4 X 4 = 64 Cells
Thirds = 3 X 3 X 3 = 27 Cells
Custom = 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

61. Recent buyers spend more per order

62. Lowest two recency quintiles did not break even

63. Frequency was very predictive of response

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 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
Product launch is ideal use

68. THE COMPLETE DATABASE MARKETER by Arthur Middleton Hughes
Chicago: McGraw Hill 600 pp Glossary
Revised Edition 1996
This 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 pp
Millions 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

70. Thank You