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 dont know that

4 How to develop a strategy Collect data on your customers 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 Helenas 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 $ 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) to let me know which youd 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? Whats in it for me? If you cant 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 FSIs. 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 employees

16 Failure: Citicorp Reward America Program cancelled. Employees fired. Why? Manufacturers didnt 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:

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

25 Catalog Success Cataloger selected 40,000 who had bought on the web. 20,000 got s 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 cant 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 Profitability Segment

30 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

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 , 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 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 What proves that database marketing works?

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 Summary: The Nine Mistakes 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

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

Thank You

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