Database Marketing and Lifetime Value DMA Tuesday, October 18, 2005 2:00 – 3:00 PM Georgia World Congress Center Atlanta, Georgia DMA Saturday, October 15, 2005 2:30 – 3:40 PM Georgia World Congress Center Atlanta, Georgia Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc. 33

What KnowledgeBase Marketing Does 33

How a modern database system works Data Access And Analysis Software Marketing Staff -Access By Web Customer Transactions Marketing Database Model Inputs from Retail, Phone, Web Appended Data Website 33

Marketing Databases and Operational Databases 33

Daily updating permits greater customer contact and service 33

Inbound: Milliseconds Possible direction of things to come… “I have an offer …” offer Outbound: Days “Let me find the best offer for this person.” “I have a person …” Inbound: Milliseconds 33

What is a relational database? A method of storing an unlimited amount of data about customers in a way that makes it easy to retrieve it, modify it, add to it, create new fields, etc. A relational database consists of fields, tables, and records. A field is the smallest structure (the atom) of the relational database.: A last name, a date, a dollar amount, a product number. A table is the chief structure in a relational database. It represents a single specific subject which can be either an object or an event. Object: Customers. Event Orders. Records are unique instances of the subject of the table. An example is Bill Jones, one of the records in the Customers table. 33

Tables are related through keys Tables are related to each other by keys. Each has a unique primary key (PK). A foreign key (FK) is the primary key of another table that it is related to. 33

Users access their databases through the web Users access their databases through the web. They can run queries to get reports from their databases 33

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 33

Retention is the way to measure loyalty 33

Retention pays better than acquisition 33

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! 33

What doesn’t work: Treating all customers alike This 28% lost 22% of the bank’s profits! Bank Customers by Profitability 33

Marketing to Customer Segments 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 33

Examples of Profitable Strategies Newsletters Surveys and Responses Loyalty Programs Customer and Technical Services Friendly, interesting interactive web site Event Driven Communications 33

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 33

What did they offer? Follow up on bids and quotes Schedule product training Ask about customer needs New Product information They did not offer discounts 33

Change in the number of orders 33

Change in the Average Order Size 33

Total revenue gain: $2.6 million dollars 33

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 Business to business relationship marketing is the way to go 33

Lifetime Value 33

How Lifetime Value is used to direct retention strategy 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 33

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. 33

Lets look at a retail operation Before and after a loyalty program Lets begin with a retention building communication 33

Examples of Profitable Strategies Newsletters Surveys and Responses Loyalty Programs Customer Services Membership cards and status levels Event Driven Communications 33

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 33

LTV Before New Strategies 33

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 33

LTV Before New Strategies 33

New Retention Strategies Birthday Club Communicate with them Give them premiums if they shop a lot Lets see what could happen 33

LTV With New Strategies 33

Effect of adoption of new strategies This is the effect of a few strategies. Later we will see the cumulative effect of many strategies 33

How to use lifetime value Compute a base lifetime value Dream up a new retention building 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 33

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

Using Risk Revenue Matrix Telecom company sent special messages to priorities A and B. Ignored customers in priority C Result: Boost in retention and profits 33

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 33

What your new budget will buy 33

How you got there 33

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 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 get your budget approved 33

Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com 33