2. Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc. ACC Gaylord Palms, Orlando Tuesday May 24, 2005 3:45 – 5:00 PM

3. Marketing Database Data Access & Analysis Software Customer Transactions Marketing Staff Inputs from Retail, Phone, Web How a modern database system works Appended Data Customer Service Web Site

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. Why long term loyal customers are important. They: 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

6. Retention is the way to measure loyalty

7. 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.

8. Lets look at a cataloger Before and after a loyalty program (Illustrative Examples only. No data from these catalogers)

10. 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 = (1 +.10) 2 = (1.10) 2 = 1.21

11. Strategies 1.Gold Customer Gifts 2.Emails with catalogs 3.Shift sales to the web 4.One Click Ordering 5.Next Best Product 6.Use caller ID to bring customer history on screen. 7.Live Agent 8.Create a customer club

12. Gold Customer Gifts Identify Gold Customers – those in the top 5% who bring in 60% of business. Send them thank you gifts with letters Overall impact on revenue results in increased average order size and number of orders per year.

13. Gold Customer Gifts Cataloger selected 4,000 highly loyal customers Divided into 2,000 test and 2,000 control Sent a discontinued item as a gift to the 2,000 test with a thank you letter. Included a catalog in the box. Also sent same catalog without the letter or gift to the controls.

14. Results of Gold Customer Gifts Test group placed 3% more orders than the control group. Items per order increased by 2% Average order size increased by 6% Total dollars spent increased by 19% Loyalty program was an outstanding success.

15. Emails with catalogs Miles Kimball sent 20,000 emails with three different catalogs, and 20,000 with the three catalogs alone. Those who got the emails bought 18% more than those who got the catalogs alone.

16. Shift sales to the web Web customers are more affluent Their average order size is 12% higher than phone orders. The cost of the web order is 16% lower than phone orders. Incentive offered is 5% off on any order over $50. Result: shift of 11% of non web customers to the web every year.

17. One Click Ordering With the web we use cookies to say, “Welcome back Susan”. We keep her credit card on file if she wants so she can do one click ordering Result, compared to controls, is 18% higher annual revenue from those who have one click ordering available.

18. Next Best Product Collaborative Filtering used to determine for each customer her next most likely product. Customer service and the web have this info available whenever a customer visits or calls. Tests with GUS, largest cataloger in the UK, resulted in doubling the cross sale rate (from 20% to 40%) using the next best product on the telemarketers screens

19. Caller ID Use Caller ID to bring customer’s complete purchasing history on the screen before the agent begins talking. Result, she can talk to the customer as if she knew her. Result: better relationship. Greater opportunity for cross sales. Screen also brings up Next Best Product for discussion.

20. Live Agent 74% of shopping carts abandoned at checkout. Reason: customers have some question. They are unsure about the product, service, color, delivery, etc. Solution: put a live chat button at checkout time. Have live agents available to answer questions. Result: increased sales

21. Loyalty Club members may have 8X to 10X the contribution level vs. non- members. Second year and long term performance difference is even more significant. Helps establish criteria for investment in loyalty conversion. Create a Loyalty Club

22. Summary of new strategies

24. Effect of adoption of new strategies: $8.8 million more profits These are profits, not revenue. All expenses including marketing are already deducted.

25. 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

26. Customer Segmentation

27. Segments are essential for marketing Many 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

28. 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 Marketing to Customer Segments

29. Segment: Senior Customers

30. Put LTV into each customer record First: Segment your customers Second: Determine the LTV of the segment Third: Determine the LTV of each member of the segment Fourth: Put the LTV into each customer’s database record. Update it monthly as transactions take place.

31. Yvette Donovan Senior LTV

32. Who is going to defect? Besides LTV, you can develop a model that predicts which customers are most likely to leave. Putting that model with LTV you can refocus your entire retention strategy You create a Risk Revenue Matrix

33. Focus on A and B: 44% of your customers.

34. What should you do? Maintain a customer database Determine customer lifetime value Create new strategies. Estimate the benefits and costs. See what the strategies will do for your bottom line. Get started with multi-channel marketing Learn what other marketers are doing

35. Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com www.dbmarketing.com