1. Marketing Strategies, Customer Loyalty & The Web Arthur Middleton Hughes VP Strategic Planning M\S Database Marketing www.msdbm.com National Center for Database Marketing Orlando Sunday Dec 3 2000 8:30 – 11:30 AM Walt Disney Dolphin

2.  Customer Management  Internet Services Competitive Advantage Through Advanced Technology

3. Agenda Introduction: Database Marketing and the Web Break Lifetime Value Recency Frequency Monetary Analysis

4. 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

5. Retention is a measure of loyalty

6. Retention pays better than acquisition

7. Customers today want: Recognition Service Information Convenience Helpfulness

8. 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!

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

10. 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

11. 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

12. The web is the greatest direct marketing vehicle ever invented

13. How the Web is changing Database Marketing Recognition Reaching out Customer service Supplier Relationships Information Ordering parts and replacements Building personal relationships

14. Communicating Screen: Thank you for your order Email: Your order has been received Email: Your order will be shipped Email: Your order was shipped Email: Was everything to your satisfaction? Cost of all of the above? Nothing!!!

15. Now, this is recognition! Welcome Back, Arthur!

16. Immediate Feedback!

17. 30 seconds later: Email

18. Reaching out: How Web Ads Differ

19. Four steps in web response Impression: your banner appears on a viewer’s screen: $6 per thousand. Response: Viewer clicks on your banner and sees your web site Lead: viewer gives you her name and email address Sale: she buys something.

20. Three categories of Web Ad Space Run of Network (RON) from $4 to $6 CPM. Very good values here. Affinity Group Space (Sports, business, travel) $10 to $20 CPM Can be productive Branded Space (Yahoo, Excite, AOL) Very expensive $30 to $70 Often has very low response rate.

21. Where should we put this ad?

22. In three days we discover that travel sites work best for Casio Clickthrough

23. Which sites work best for E*Trade?

24. Results Optimized by Cost Per Lead – after one week!

25. Something new: Collaborative Filtering On-line deciding what a customer is interested in, based on a few known facts

26. The principal behind collaborative filtering: Each person has a unique (and changing) view of the world. In large populations, there are often similar preferences If hundreds of people who like A, G, and X also like W Then if you like A, G and X, you may also like W.

27. Collaborative Filtering requires sophisticated software It is possible, on line, to determine the next best product for any customer, based on the customer’s past preferences and those of hundreds of others with similar preference profiles. While the customer is on the phone, you can develop a profile and come up with intelligent recommendations.

28. How Netperceptions used Collaborative Filtering in the UK GUS is largest cataloger in UK. Gets 20% cross sell on catalog orders. Installed NetPerceptions system In six weeks got 40% cross sell on catalog orders with same staff. Very “spooky” results which really worked.

29. The big Web winner: Customer Service Hundreds of millions of dollars being saved today through use of the web Much bigger than consumer sales

30. How the Web is changing Customer Service 1980s: toll free numbers Thousands of agents reading screens Heavy cost: phone call and agents 2000: let the customers get their own information No cost for phone or for agents Customers like it better!

31. Letting them go behind the counter Open your entire company to your customers Let them find what they want themselves It is cheaper for you, and customers like it better.

32. How Amazon saves millions

33. How Fedex Saves Millions

34. Let’s try it. Let Marriott plan a meeting in Ft. Lauderdale

35. We want 3 rooms with 50 attendees, golf and pool

36. Here are the properties. Let’s try the North Marriott

37. Here are the conference rooms we need

38. Here is the hotel

39. And, here is the location. Let’s make a reservation!

40. The Marriott Web Site: 1,500 Hotels $10 billion revenue Marriott doesn’t own most of the hotels Internet team began in 1997 More interactive, the more business Meeting planners don’t need to visit the sites. All they want is on the web. Booking a room for a business traveler is very fast

41. Supplier Relationships All manufacturers will link to their suppliers through the web Suppliers will check inventories, and replenish parts automatally Manufacturers and retailers will buy through the web

42. The National Semiconductor FedEx Partnership National Semiconductor handed over its logistics management to FedEx Products from 6 factories shipped to FedEx warehouse in Singapore National Order center in Santa Clara linked to FedEx in Memphis FedEx directs shipments to customers from Singapore

43. How FedEx Manages National Semiconductor Shipments National Factories Order Center in Santa Clara Orders from customers Shipments Orders Inventory Mgt. In Memphis Singapore Warehouse

44. Benefits to Reduction in customer delivery cycle from four weeks to one week Reduction in distribution costs from 2.9% of sales to 1.2% of sales Elimination of seven regional warehouses in the US, Asia and Europe

45. FedEx – Omaha Steaks Orders to Omaha simultaneously sent to FedEx and to Omaha warehouse with FedEx tracking numbers. Both Omaha and Customer use FedEx numbers for tracking. Omaha is out of the delivery business, and can concentrate on steaks and marketing.

46. FedEx - Omaha Steaks Customer Orders Steaks Orders sent to Steak Warehouse And to FedEx at The same time Steaks delivered To FedEx FedEx Delivers to Customer

47. Boeing Spare Parts Idle airplanes cost $7,000 per hour Quick access to Boeing parts keeps customers loyal Spare parts are an important revenue Buying Boeing parts keeps quality There are 2,000 Boeing part suppliers Old system: Binders or CDs + phone +fax

48. Boeing Spare Parts Website

49. New Boeing System Runs 24 hours a day Automatic verify part number Electronic self service Customers order without help Customers know which warehouse has the parts!

50. Why customers like it: My vacuum cleaner problem We have a Hoover with a MicroFiltration Bag. We wasted an afternoon going to six (yes six) stores looking for new bags. No luck. So we tried the internet.

51. Finding Hoover on the Web

52. Ordering a Micro-Filtration Bag for my Hoover

53. The Web will change our lives No one knows the extent today Like the automobile, telephone, or electricity – it will take time If you can imagine it, it probably already exists The costs of participation are amazingly cheap

54. Conclusion: You can do this! Invite your best customers into your company. Let them rummage through your warehouse. Let them look up technical data themselves Make them a part of your company. You will have them for life.

55. My Excite Cookie UID 8015688C36ACCA03 excite.com/ 0 1996529664 30859116 2391146080 29248020 * You can do this! It costs nothing!

56. Bring back the old corner grocer:

57. Break

58. Using Lifetime Value to Determine Your Marketing Strategy

59. 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

60. The importance of measurements  Measures determine vision and strategy  Deciding what to measure and how to link measures to incentives are the most important database marketing decisions  “Net present value of the customer base should be at the top of the measurement heirarchy” -- Reichheld

61. 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

62. 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.

64. How to figure the Discount Rate - Basic Formula  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

65. How to figure the Discount Rate - Complex Formula 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

66. Long term customers buy more often

67. Long term customers buy higher priced items

68. How to figure costs Lifetime value is incremental: “The extra profit you earn by adding one more customer” Include any variable costs Do not include fixed costs: Rent, long term debt, overhead Recognize that costs go down for longer term customers

69. Costs of servicing customers go down over time

70. How to figure the Retention Rate Track all customers in acquisition year How many purchasing in following year Divide Year1 into Year2 Example:30,000 Customers acquired 25,500 of these buying in year2 Retention rate = 25,500 / 30,000 = 74.5%

71. Retention rates go up over time

72. To compare retention periods - convert to annual  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%

73. New Retention Strategies 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

74. Weldon with new strategies

75. Effect of adoption of new strategies

76. 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.

77. Five ways to increase lifetime value with database programs Increase the retention rate Increase the referral rate Increase the spending rate Decrease the direct costs Decrease the marketing costs

78. 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

79. 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

80. Dividing Customers into Four Segments

81. Focus on Retention

82. 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.

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

84. 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

85. What your new budget will buy

86. Weldon with new strategies

87. 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

88. Recency, Frequency, Monetary Analysis

89. Four Types of Business Customers Price Service Program Buyers Relationship Buyers Transaction Buyers Bargain Hunters From Paul Wang

90. How to attract and hold relationship buyers  Forget price. Think and talk about quality and service.  Build a relationship with the buyer  Add value to product and relationship  Find way for buyer to build equity  Make it expensive to switch

91. What is the proof 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

92. 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

93. Improvement in repurchase rate

94. Change in number of orders Six Month Test vs Previous Year

95. Change in Average Order Size

96. Change in total revenue $2,600,000 additional sales

97. 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

98. How to identify responsive customers Some customers respond, some don’t How can you predict behavior? Best method: look at past behavior Behavioral indicators: Recent purchasers Frequent purchasers Large spenders

99. Responsive customers may not be the most profitable Profitable Customers Responsive Customers Not all responsive customers are profitable Not all profitable customers will respond when you write them. LTV RFM

100. RFM Can Predict Responders For product launch, select SICs with highest penetration ratios Use RFM to select most likely responders Use combination of mail, phone, and sales visits to responsive relationship buyers.

101. How to Apply Recency Codes Put most recent purchase date into every customer record Sort database by that date - newest to oldest Divide into five equal parts - Quintiles Assign “5” to top group, “4” to next, etc. Put quintile number in each customer record

102. Response by Recency Quintile

103. How to compute a Frequency Index Keep number of transactions in customer record Sort Recency Groups from highest to lowest Divide into five equal groups Number groups from 5 to 1 Put Quintile number in each customer record

104. Response by Frequency Quintile

105. How to compute a Monetary Index Store total dollars purchased in each customer record Sort Frequency Groups from highest to lowest Divide into 5 equal groups (Quintiles) Number Quintiles 5, 4, 3, 2, 1 Put Quintile number in each record

106. Response by Monetary Quintile

107. Monetary Response to $5,000 Product Monetary Quintile Percentage of households promoted who purchased 1.68 1.17 0.88 0.66 0.32 54321 0 0.5 1 1.5 2

108. RFM Code Construction F M One Sort Five Sorts Twenty- five sorts Database 5 4 3 2 1 35 34 33 32 31 335 334 333 332 331 R

109. Appended RFM Codes

110. Customer Database Nth Creating an Nth 300,000 Records 30,000 Records For Nth by 10, select every tenth record. Result will be statistical replica of database

111. Result of Test Mailing to 30,000

112. Test Response Rate by RFM Cell

113. Profit from Test Mailing

114. Determine Break Even and Test Sizes

115. How to Compute the Response Rate Divide number of responses by number mailed. Multiply by 100 Example: Responses = 1034 Mailed = 40,000 Rate = 1034 / 40,000 Rate = 2.59%

116. Test, Full File & RFM Selects Compared

117. Test Vs Rollout Response Rates

118. Retroactive RFM Test Many times there is not enough time or funding to run an Nth test in advance Solution: apply RFM codes to your last completed outgoing promotion. Since you know who responded, you can determine response rates by cell Use previous rates to govern this rollout.

119. How Many RFM Cells Needed? Test File = (Test Budget) / (per piece cost) Example = $15,000 / $0.76 = 19,737 Cells Needed = 19,737 / 274 = 72

120. Cell Division Determination To create 72 cells, some must be less than 5 Recency most powerful. Do not scrimp. Example R-F-M = 6 X 4 X 3 = 72 Is this best? Test and see.

121. RFM For Business Databases Business databases are small For small databases, use quartiles or thirds Quartile = 4 X 4 X 4 = 64 Cells Thirds = 3 X 3 X 3 = 27 Cells Custom = 5 X 2 X 2 = 20 Cells

122. Recent Case History User sells personalized product by mail 45,000 selected for a test

123. Second Recency Quintile Had More Responses. Why?

124. Even so, First Recency Quintile Had Higher Sales

125. Recent buyers spend more per order

126. Lowest two recency quintiles did not break even

127. Frequency was very predictive of response

128. Monetary did not predict response rate very well

129. But Monetary does predict average sales by quintile

130. RFM Cells clearly show who to mail to, and who to drop

131. NOT When NOT to use RFM If you use it all the time, half your customers will never hear from you They will be lost The others will suffer from File Fatigue Use it sparingly Product launch is ideal use

132. 10866 Wilshire Blvd., Suite 370 Los Angeles, CA 90024-4354 Phone (310) 208-2024 Fax (310) 208-5681 www.msdbm.com www.dbmarketing.com

133. ARTHUR MIDDLETON HUGHES Arthur Hughes, Vice President for Strategic Planning of M\S Database Marketing in Los Angeles, (www.msdbm.com) has been designing and maintaining marketing databases for Fortune 500 companies and others for the past fourteen 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 1994). 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

134. 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

135. 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