1. Page - 1 Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes, VP Strategic Planning msdbm www.msdbm.com DMA 84 th Annual Conference McCormick Place Chicago Oct 29 th 2001 2:45 PM

2. Page - 2 Client Roster --

3. Page - 3 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

4. Page - 4 Retention is the way to measure loyalty

5. Page - 5 Retention pays better than acquisition

6. Page - 6 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!

7. Page - 7 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

8. Page - 8 Examples of Profitable Strategies  Newsletters  Surveys and Responses  Loyalty Programs  Customer and Technical Services  Friendly, interesting interactive web site  Event Driven Communications

9. Page - 9 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

10. Page - 10  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?

11. Page - 11 What did they offer?  Follow up on bids and quotes  Schedule product training  Make aware of pricing specials  Ask about customer needs  Product comparison information  New Product information  They did not offer discounts

12. Page - 12 Improvement in Response rate

13. Page - 13 Change in the number of orders

14. Page - 14 Change in the Average Order Size

15. Page - 15 Total revenue gain: $2.6 million dollars

16. Page - 16 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

17. Page - 17 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

18. Page - 18 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

19. Page - 19 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.

21. Page - 21  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

22. Page - 22  Market Rate of Interest...8.4%  Calculate risk factor…r..1.8  Calculate payment time … (12/Months)  Interest = i n+t = (n years + t pay time)  Formula: D = (1 + i*r) n+t  Calculation of rate after 3 years:  D = (1 +.084*1.8) 3.25 = (1.15) 3.25 = 1.60 Discount Rate Complex Formula

23. Page - 23  Annual Rate = (Repurchase rate) (1/years)  77% repurchase after 11 years  Annual Rate = (.77) (1/11) = 98%  45% repurchase after 4 years = 82%  99% per week = 59.2% per year  Annual = (.99) (1/(1/52))  Annual Rate = 59.2% Convert to Annual

24. Page - 24  Put 45,000 pages of tech info on web  Create extranet for Gold & Silver Custs.  24 hour email response time  Total cost of these strategies $450/cust  Referral Program with $800 incentives New Retention Strategies

25. Weldon with new strategies

26. Page - 26 Effect of adoption of new strategies

27. Page - 27 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.

28. Page - 28  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

29. Page - 29 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

30. Page - 30 Find LTV of Customer Segments  Many B-t-B 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

31. Page - 31 Dividing Customers into Four Segments

32. Page - 32 Focus on Retention

33. Page - 33 Weldon’s Acquisition Focus  It is easier to acquire customers where you are well known: where you have a high penetration ratio.  Weldon has only 3% of heavy manufacturing.  They have 42% of the High Technology.  The return from concentration on high technology will probably be greater.

34. Page - 34 Focus on Acquisition by LTV Target Potential = LTV * Penetration Ratio

35. Page - 35 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

36. Page - 36 What your new budget will buy

37. Page - 37

38. Page - 38 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

39. 10866 Wilshire Blvd., Suite 650 Los Angeles, CA 90024-4354 Phone (310) 208-2024 Fax (310) 208-5681 www.msdbm.com www.dbmarketing.com

40. Page - 40 Arthur Hughes, Vice President for Strategic Planning of msdbm Marketing in Los Angeles, (www.msdbm.com) has been designing and maintaining marketing databases for Fortune 500 companies and others for the past sixteen years. His database experience includes telephone companies, banks, pharmaceuticals, package goods, software and computer manufacturers, resorts, hotels, automobiles, and non-profit fund raisers.www.msdbm.com A graduate of Princeton University with a Masters in Public Affairs, Arthur taught economics at the University of Maryland for 32 years. He lectures in the U. S., Canada, Europe, Latin America and Asia on marketing and economics. When it comes to Database Marketing, he wrote the book! He is the author of The Complete Database Marketer: Tapping your customer base to maximize sales and increase profits. 2 nd Ed. (McGraw Hill 1996), and Strategic Database Marketing (McGraw Hill 2000). Arthur's articles have appeared in leading publications. He has served as a key speaker in marketing conferences in the U.S., Canada, U.K., Japan, Taiwan, Australia, Brazil, Venezuela, Malaysia and Portugal. M\S are leaders in Customer Management and Internet Marketing. Arthur may be reached at (703) 525-9637 Fax 703 351 7417 or at ahughes@msdbm.com About the speaker

41. Page - 41 THE COMPLETE DATABASE MARKETER by Arthur Middleton Hughes Chicago: McGraw Hill 600 pp Glossary Revised Edition 1996 This is the bible of database marketing. Over 16,000 copies sold. John Stevenson Exec. VP of Krupp Taylor: "Not only does this book succeed in being clear and accessible, it is also the first complete treatise...The full power and practice of database marketing are here, to be sure. This is the long awaited survival manual for every marketer on the cutting edge. I can't think of a book that is more rewarding." This comprehensive book covers such subjects as how to build customer loyalty, lifetime value calculation, RFM analysis, customer service, telemarketing, fulfillment, hardware and software, clustering and profiling, prospecting, media selection. Order from www.DBMarketing.com

42. Page - 42 STRATEGIC DATABASE MARKETING by Arthur Middleton Hughes Chicago: McGraw Hill 2000 400 pp Millions have been spent on database marketing pro­grams that did not work. In this book Arthur Hughes shows how to evaluate strategies in advance using life­ time value analysis. He explains how to use RFM analysis to boost profits. Russ Richmond, President of Grey Direct said: "Well, Arthur has done it again. He has not only integrated the complicated world of data­bases with the traditional concepts of direct marketing, but he accurately points out the pitfalls and the how-tos. I know of a few careers that would have been saved had this book been available sooner. Without a doubt this will be the cheapest investment you'll make in your database, and perhaps the most important one." Thousands of customer marketing databases are being built. Unfortunately, many mistakes have been made. The reasons for these failures center on one central fault: the inability of marketers to develop logical, practical and winning strategies for their database marketing programs. We must study past mistakes to develop sound principles for marketing strategy. Order from www. DBMarketing.com