Why Databases Fail

1. Why Databases Fail Nine deadly mistakes that will ruin your chances for success. Houston Direct Marketing Association Thursday, October 14, 2004 Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc.

2. What KnowledgeBase Marketing Does

3. Mistake: Lack of a Marketing Strategy • Building a database is easy • Making money with a database is hard • Most people don’t know that

4. How to develop a strategy • Collect data on your customer’s purchases, demographics and lifestyle • Build a database that permits ad-hoc analysis • Construct a lifetime value table • Figure out what motivates your customers

5. 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!

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

7. Event driven communication: 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 Ridgeway Fashions Leesburg, VA 22069

8. Basic Strategy Rule:Put yourself in customer shoes • Say: “What would I want to be on this database? What’s in it for me?” • If you can’t come up with a good answer, the database will fail

9. Mistake: Focus on Price instead of Service • Database marketing builds loyalty. • Discounts do not build loyalty. • Do not use the database to provide discounts. • Use the database to provide dialog, recognition and service.

10. Customers today seek more than low prices • Recognition • Service • Information • Convenience • Helpfulness

11. Example: Quaker Direct • Budget: $18 Million. Coupons to 20 million “targeted households.” • Quaker goal: “real one-to-one bonding with consumers”. • Cost: four times as much as FSI’s. • Why failed: Coupons do not build relationships.

12. Example:Kraft Crystal Light • Million club members receive quarterly newsletter. • Catalog: Watches, mugs, jogging suits, with Crystal Light emblem. • Theme: fitness, exercise, weight loss, diet. • Why succeeded: Club based on valid idea, not just on discounting product.

13. Mistake: Failure to use tests and controls • Database marketing is accountable • Everything you do can be measured • You must set up control groups that do not get your new communications • Key measurements: response rates, return on investment, profits, lifetime value.

14. Example: Western Union • Preferred customer card sent to everyone who had used WU 3+ times • Worked well, but after 2 years, WU asked, “How has this boosted profits?” • Agency did not have a control group. • Profits could not be verified. • Agency lost the account.

15. Example: Citicorp Reward America • Frequent shopper program for supermarkets • Goal: sign up 40% of all chains fast • Profit idea: sell data to manufacturers • Budget: $200 million -- 174 employees

16. Failure: Citicorp Reward America • Program cancelled. Employees fired. Why? • Manufacturers didn’t buy the names. • Computers choked on the data. • Failure to test on small scale first.

17. Mistake: Too big and slow • Database should be built in six months or less. • DB Marketing builds loyalty and sales -- but only when it is up and running. • If your plan requires more than a year, maybe your plan is too complicated. • Start small. Build Small. Learn as you go. Add to it later.

18. How a database builds relationships • Hold information on customers • Add new data every day: Surveys, Promotion history, Points Transaction history, Lifetime value, RFM • Create a relational database that you can build inexpensively • Update it as often as required – several times a day if needed. • Use it to create communications

19. Mistake: Failure to use the Web • Your database contains customer information: purchases, preferences, contact names, etc. • Customer service has to have this info when they talk on the phone. • Your web site must have this info when you receive customers as visitors.

20. Using a database to personalize

21. Provide recognition! Welcome Back, Arthur!

22. Immediate Feedback!

23. 30 seconds later: Email

24. Retail Email Success • Video chain sent email newsletters to 170,000 customers about movies • 16,000 asked for but got no emails • Test group total sales over 6 months were 28% higher than the control group • Emails can be a powerful sales boost

25. Catalog Email Success • Cataloger selected 40,000 who had bought on the web. • 20,000 got emails saying “watch mailbox for our new catalog” • 20,000 got only the catalog. • Sales to the test group were 18% higher than the control group.

26. Mistake: building in-house • Marketing databases are unlike any other IT function. • DB requires special skills and software • There are scores of vendors with experience in building marketing DBs • In-house will take far longer and cost far more.

27. What to do? • Send an RFP to find a vendor that understands you and has experience • Get it going fast and at lower cost. • Once it is up and running, you can migrate it inside. • But even then, you should not do it. • Why? Because you should concentrate on marketing: building profits from it.

28. Mistake: Treating all customers alike • Loyal customers are more profitable than new or disloyal customers • Loyalty can be built and maintained • $1 million retention budget spread over 1 million customers is $1 per year. You can’t build much loyalty for $1 • $1 million spread over 100,000 is $10 per year. You can build loyalty with that

29. Segment by profitability & focus your attention Profitability Segment Profitability

30. Spend Service Dollars Here • GOLD Your Best Customers - 80% of Revenue Spend Marketing Dollars Here Your Best Hope for New Gold Customers Move Up 1% of Total Revenue Reactivate or Archive These may be losers Marketing to Customer Segments

31. Mistake: Failure to develop a retention program • Most companies are set up for acquisition • Few have a specific retention program. • $1 spent to retain customers returns more profit than $1 of acquisition

32. Retention = Communications • People like to hear from you. • Personalize your communications. • Use email, direct mail, phone calls • Set aside control groups so you know that your communications are working

33. Key retention strategy: cross selling

34. Concentrate retention $$ on where you need help

35. What proves that database marketing works? • Manufacturer of 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

36. Change in the number of orders after 6 months

37. Change in the Average Order Size

38. Total revenue gain: $2.6 million over six months

39. 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

40. Mistake: Lack of a forceful leader • Success requires directing the activities of many internal and external units • The Web, MIS, Customer Service, Tech Support, Telemarketers, Service Bureau, Direct Agency, Fulfillment, Market Research • Database Marketers must be leaders

41. Lack of a Strategy Focus on Price Lack of tests & controls Too big and delayed Failure to use the web Building In-House Treating all customers alike Lack of a retention program Lack of leadership Summary: The Nine Mistakes

42. Rules for success • Put yourself in your customer’s shoes • Build a lifetime value table • Build a database team • Think small, and think fast • Keep your eye on the bottom line

43. Thank You

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