1. UCEA Mini-Workshop on Database Marketing Arthur Middleton Hughes Hyatt Fisherman’s Wharf San Francisco Feb 14, 2002 Dbmarkets@aol.com

2. CSC – 20 Years of Experience

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. Retention is the way to measure loyalty

5. Retention pays better than acquisition

6. 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?

7. 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

8. Improvement in Response rate

9. Change in the number of orders

10. Change in the Average Order Size

11. Total revenue gain: $2.6 million dollars

12. 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

13. 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

14. 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

15. 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.

17.  Market Rate of Interest...6%  Assume Risk 1.2 first year, 1.1 afterwards  Years = n Interest = i  Formula: D = (1 + I * risk) n  Calculation of rate after 2 years:  D = (1.06 * 1.1) 2 = 1.36 Discount Rate Basic Formula

18.  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

19.  Build a database linked to the website  Web registration  Frequent personal communications  Web site cost $30 per student per year  Communications extra cost $18 per student per year New Retention Strategies

21. Effect of adoption of new strategies $1.8 million in the third year Profit, after all expenses paid

22. 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: continuing education.

23. 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

24. 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

25. Find LTV of Customer Segments Many UCEA 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

26. Dividing Customers into Three Segments Develop a different strategy for each segment

27. Different marketing strategies Job training: market to companies Degree Candidates: market both to companies and individuals Senior Citizens: market to individuals

28. 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

29. What your new budget will buy

31. 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

32. Recency, Frequency, Monetary Analysis

33. 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

34. 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

35. 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

36. RFM Can Predict Responders Use RFM to select most likely responders Use combination of mail, phone, and emails to responsive relationship buyers.

37. 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

38. Response by Recency Quintile

39. 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

40. Response by Frequency Quintile

41. 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

42. Response by Monetary Quintile

43. 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

44. 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

45. Appended RFM Codes

46. 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

47. Result of Test Mailing to 30,000

48. Test Response Rate by RFM Cell

49. Profit from Test Mailing

50. Determine Break Even and Test Sizes

51. 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%

52. Test, Full File & RFM Selects Compared

53. Test Vs Rollout Response Rates

54. 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.

55. 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

56. 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.

57. 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

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

59. Second Recency Quintile Had More Responses. Why?

60. Even so, First Recency Quintile Had Higher Sales

61. Recent buyers spend more per order

62. Lowest two recency quintiles did not break even

63. Frequency was very predictive of response

64. Monetary did not predict response rate very well

65. But Monetary does predict average sales by quintile

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

67. 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

68. Arthur Middleton Hughes Vice President for Business Development CSC Advanced Database Solutions 1100 Woodfield road Schaumburg. IL 60173 847 330-1313 ahughes@computerstrategy.com

69. Arthur Hughes, Vice President for Business Development of CSC in Schaumburg, IL, 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. 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. CSC are leaders in Customer Management and Internet Marketing. Arthur may be reached at (703) 525-9637 Fax 703 351 7417 or at ahughes@computerstrategy.com About the speaker

70. 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

71. 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