Arthur Middleton Hughes VP / Solutions Architect

1. Customer Retention: how to measure it, build it and keep it. Arthur Middleton HughesVP / Solutions Architect San Francisco DMA March 16, 2006 3:00 – 5:00

2. How a Modern Database Works Customer Transactions Marketing Campaigns Marketing Staff -Access By Web Analytic & Campaign Software Marketing Database Inputs from retail, phone, web Modeling & Analytics Data Cleaning Standardization Appended Data Website

3. Why retention is important: long term loyal 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. How to retain them • Recruit the right customers to begin with • Once you have them, segment them by lifetime value • Communicate with them to build loyalty

5. What proves that communications work? • Manufacturer of indoor lighting 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

6. Change in the number of orders

7. Change in the Average Order Size

8. Total revenue gain: $2.6 million dollars

9. Communications work! • 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

10. But, with millions of customers… • Which ones should you spend resources on? • If you communicate with everyone, you will not have enough resources to retain the very best. • To select the best, you need to compute customer lifetime value

11. Lifetime Value

12. 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

13. 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

14. 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.

15. Examples of Profitable Strategies • User Groups • Newsletters • Surveys and Responses • Loyalty Programs • Customer and Technical Services • Membership cards and status levels • Event Driven Communications

16. Event driven communication: Ridgeway Fashions Leesburg, VA 22069 Dear Mr. Hughes: I would like to remind you that your wife Helena’s birthday is coming up in two weeks on November 5th. We have the perfect gift for her in stock. As you know, she loves Liz Claiborne clothing. We have an absolutely beautiful new suit in blue, her favorite color, in a fourteen, her size, priced at $232.00. If you like, I can gift wrap the suit at no extra charge and deliver it to you next week, so that you will have it in plenty of time for her birthday. Or, I can put it aside so you can come in to pick it up. Please call me at (703) 754-4470 to let me know which you’d prefer. Sincerely yours, Robin Baumgartner Robin Baumgartner, Store Manager

17. Lets look at a retail operation • Before and after a loyalty program

18. LTV Before New Strategies

19. 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

20. New Retention Strategies • Provide all customers with a card or register their credit cards • Birthday Club • Communicate with them • Give them premiums if they shop a lot • Lets see what could happen

21. With New Strategies

22. Effect of adoption of new strategies

23. 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: discount houses, package goods, catalogers.

24. Five Ways to Boost LTV with Database Strategies • Increase the retention rate • Increase the referral rate • Increase the spending rate • Decrease the direct costs • Decrease the marketing costs

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. 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

27. What your new budget will buy

28. How you got there

29. 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

30. 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

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

32. Who uses LTV in marketing?* • DMA survey shows 52% of Consumer Only marketers use LTV. • 25% of B to B use LTV. • 49% Larger companies ($100 million or more) use LTV. 32% smaller companies use LTV • 65% plan to use LTV more extensively in 2006 • 70% use LTV to decide when to reactivate a lapsed customer. • 68% determine promotions by LTV *DMA Survey 2005

33. Conclusion: you can do this • Create a lifetime value table for your customers. • Put LTV into each customer record • Use LTV to determine your marketing strategy • Use it to improve retention, cross sales, and profits

34. Break

35. Why you need customer segments • Customers are usually very different • College students, senior citizens, families with children, empty nesters… • The same message to all may not work so well. • Solution: create segments, and design a program for each segment.

36. How one retail store created 9 customer segments.

37. Segments differ from status levels

38. Segment Strategy

39. An ideal segment… • Has definable characteristics in terms of behavior and demographics: for example, Retired Couples • Is large enough in terms of potential sales to justify a custom marketing strategy with appropriate rewards and budget • Has members who can be motivated by cost effective rewards to modify their behavior in ways that are profitable for your company • Makes efficient use of available data to support segment definition and marketing efforts • Can be measured in performance, with control groups • Justifies an organization devoted to it: can be a single person, or part of a person’s time, but there should be someone who “owns” each segment.

40. A valid segment strategy involves: • Communications to the segment (direct mail, email, on-location personal attention) • Rewards designed to modify behavior • Controls to measure the success of the strategy • A budget for implementation of the strategy • Specific goals and metrics for engagement: for behavior modification • An organization that accepts responsibility for the segment

41. Segment action plan: • A roadmap showing what will happen when. “Send each policyholder a birthday card and a policy review 45 days before their policy renewal date.” • A budget for the infrastructure and for the segment marketing plans • An organization chart that shows who is responsible for each segment • Specific goals to be achieved with milestones for measurement of success

42. Using Clusters as segments

43. How one non profit measured success by cluster- Their best

44. Their worst – in terms of response and contributions

45. Success from mailing only to the best, and not mailing the worst • $5 Million more in net gross revenue.

46. Multi-channel users are more loyal Illustrative numbers from several case studies

47. Why the web is important to retention • 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. • Typical incentive offered is 5% off on any order over $50. • Result: 11% of non web customers shift to the web every year.

48. Creating a club on the internet • A company selling sporting goods created an internet member club. • When DB was built they learned that: • Club members bought 11 times more than non club members. • In two years, 81% of club members became multi-buyers. • The club boosted retention

49. Club Members Retention

50. Cataloger Customer Retention • 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. More sales = Higher overall retention levels