Using Lifetime Value to Determine Your Marketing Strategy
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Using Lifetime Value to Determine Your Marketing Strategy Direct Marketing Association Tues. Oct 19 2004, 2:15 – 3:15 Morial Convention Center New Orleans, LA Arthur Middleton Hughes VP / Solutions Architect What KnowledgeBase Marketing Does Data Access And Analysis Software Marketing Staff

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Using Lifetime Value to Determine Your Marketing Strategy

Direct Marketing AssociationTues. Oct 19 2004, 2:15 – 3:15 Morial Convention CenterNew Orleans, LAArthur Middleton HughesVP / Solutions Architect



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Data Access

And Analysis

Software

Marketing Staff

Customer Transactions

Marketing

Database

Inputs from Retail, Phone, Web

How a modern database system works

Appended

Data


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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!


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What proves that relationship building works?

  • Manufacturer of indoor lighting 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





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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


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Why long term loyal customers are important. They:

  • 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




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Lifetime Value


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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


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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


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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.


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Examples of Profitable Strategies

  • User Groups

  • Newsletters

  • Surveys and Responses

  • Loyalty Programs

  • Customer and Technical Services

  • Membership cards and status levels

  • Event Driven Communications


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Event driven communication:

Ridgeway Fashions Leesburg, VA 22069

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


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Lets look at a retail operation

  • Before and after a loyalty program



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Discount Rate Basic Formula

  • 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


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New Retention Strategies

  • 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




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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.


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Five Ways to Boost LTV with Database Strategies

  • Increase the retention rate

  • Increase the referral rate

  • Increase the spending rate

  • Decrease the direct costs

  • Decrease the marketing costs


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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



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Segments are essential for marketing

  • 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


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What doesn’t work:Treating all customers alike

This 28% lost 22% of the bank’s profits!

Bank Customers by Profitability


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Spend Service Dollars Here

  • GOLD

Your Best Customers - 80% of Revenue

Spend Marketing Dollars Here

Your Best Hope for New Gold Customers

Move Up

1% of Total Revenue

Reactivate or Archive

These may be losers

Marketing to Customer Segments


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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




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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


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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



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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 improve retention, cross sales, and profits


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Books by Arthur Hughes

From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: [email protected]