Database Marketing and Lifetime Value Arthur Middleton Hughes Vice President / Solutions Architect...
44
Database Marketing and Lifetime Value Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc. 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
Database Marketing and Lifetime Value Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc. DMA Tuesday, October 18,
Database Marketing and Lifetime Value Arthur Middleton Hughes
Vice President / Solutions Architect KnowledgeBase Marketing, Inc.
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
Slide 2
What KnowledgeBase Marketing Does
Slide 3
Marketing Database Data Access And Analysis Software Customer
Transactions Marketing Staff -Access By Web Inputs from Retail,
Phone, Web How a modern database system works Appended Data Website
Model
Slide 4
Marketing Databases and Operational Databases
Slide 5
Daily updating permits greater customer contact and
service
Slide 6
Possible direction of things to come I have an offer offer
Outbound: Days Let me find the best offer for this person. offer I
have a person Inbound: Milliseconds
Slide 7
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.
Slide 8
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.
Slide 9
Users access their databases through the web. They can run
queries to get reports from their databases
Slide 10
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
Slide 11
Retention is the way to measure loyalty
Slide 12
Retention pays better than acquisition
Slide 13
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!
Slide 14
What doesnt work: Treating all customers alike This 28% lost
22% of the banks profits! Bank Customers by Profitability
Slide 15
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
Slide 16
Examples of Profitable Strategies Newsletters Surveys and
Responses Loyalty Programs Customer and Technical Services
Friendly, interesting interactive web site Event Driven
Communications
Slide 17
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?
Slide 18
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
Slide 19
Change in the number of orders
Slide 20
Change in the Average Order Size
Slide 21
Total revenue gain: $2.6 million dollars
Slide 22
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
Slide 23
Lifetime Value
Slide 24
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
Slide 25
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.
Slide 26
Lets look at a retail operation Before and after a loyalty
program Lets begin with a retention building communication
Slide 27
Examples of Profitable Strategies Newsletters Surveys and
Responses Loyalty Programs Customer Services Membership cards and
status levels Event Driven Communications
Slide 28
Event driven communication: Dear Mr. Hughes: I would like to
remind you that your wife Helenas 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 youd prefer. Sincerely yours,
Robin Baumgartner Robin Baumgartner, Store Manager Ridgeway
Fashions Leesburg, VA 22069
Slide 29
LTV Before New Strategies
Slide 30
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 Discount Rate Basic
Formula
Slide 31
LTV Before New Strategies
Slide 32
Birthday Club Communicate with them Give them premiums if they
shop a lot Lets see what could happen New Retention Strategies
Slide 33
LTV With New Strategies
Slide 34
Effect of adoption of new strategies This is the effect of a
few strategies. Later we will see the cumulative effect of many
strategies
Slide 35
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 Dont undertake any new strategy until you can prove it will be
successful
Slide 36
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
Slide 37
Focus retention programs on A and B: 44% of your
customers.
Slide 38
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
Slide 39
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 CFOs can understand Base
your budget on solid numbers backed up by valid tests
Slide 40
What your new budget will buy
Slide 41
How you got there
Slide 42
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 CFOs can understand Base
your budget on solid numbers backed up by valid tests
Slide 43
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
Slide 44
Books by Arthur Hughes From McGraw Hill. Order at
www.dbmarketing.com Contact Arthur: [email protected]
www.dbmarketing.com