Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc. NCDM Tuesday July 13, :15 – 12:30 PM Fairmont Hotel San Francisco, California

What KnowledgeBase Marketing Does

Marketing Database Data Access And Analysis Software Customer Transactions Marketing Staff Inputs from Retail, Phone, Web How a modern database system works

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

Retention is the way to measure loyalty

Retention pays better than acquisition

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!

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

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

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

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 What proves that relationship building works?

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

Change in the number of orders

Change in the Average Order Size

Total revenue gain: $2.6 million dollars

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

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

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

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.

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

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 $ 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 you’d prefer. Sincerely yours, Robin Baumgartner Robin Baumgartner, Store Manager Ridgeway Fashions Leesburg, VA 22069

LTV Before New Strategies

 Market Rate of Interest...8%  Assume Risk (Double rate)...16%  Years = n Interest = i  Formula: D = (1 + i) n  Calculation of rate after 3 years:  D = (1 +.16) 3 = (1.16) 3 = 1.56 Discount Rate Basic Formula

 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 New Retention Strategies

With New Strategies

Effect of adoption of new strategies

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.

Increase the retention rate Increase the referral rate Increase the spending rate Decrease the direct costs Decrease the marketing costs Five Ways to Boost LTV with DB Strategies

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

Find LTV of Customer Segments Many 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

Dividing Customers into Four Segments –B-2-B Example

Focus on Acquisition by LTV Target Potential = LTV * Penetration Ratio

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

What your new budget will buy

How you got there

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

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

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

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

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