UCEA Mini-Workshop on Database Marketing

1. UCEA Mini-Workshop onDatabase 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. 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 emails 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 0 5 4 3 2 1 Monetary Quintile

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

45. Appended RFM Codes

46. Creating an Nth 300,000 Records Customer Database 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