Database Marketing and Lifetime Value

1. Database Marketing and Lifetime Value 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 Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc.

2. What KnowledgeBase Marketing Does

3. How a modern database system works Data Access And Analysis Software Marketing Staff -Access By Web Customer Transactions Marketing Database Model Inputs from Retail, Phone, Web Appended Data Website

4. Marketing Databases and Operational Databases

5. Daily updating permits greater customer contact and service

6. Outbound: Days “I have an offer …” offer “Let me find the best offer for this person.” Inbound: Milliseconds “I have a person …” offer offer offer offer Possible direction of things to come…

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.

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.

9. Users access their databases through the web. They can run queries to get reports from their databases

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

11. Retention is the way to measure loyalty

12. Retention pays better than acquisition

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!

14. What doesn’t work:Treating all customers alike This 28% lost 22% of the bank’s profits! Bank Customers by Profitability

15. 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

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

17. What proves 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

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

19. Change in the number of orders

20. Change in the Average Order Size

21. Total revenue gain: $2.6 million dollars

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

23. Lifetime Value

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

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.

26. Lets look at a retail operation • Before and after a loyalty program • Lets begin with a retention building communication

27. Examples of Profitable Strategies • Newsletters • Surveys and Responses • Loyalty Programs • Customer Services • Membership cards and status levels • Event Driven Communications

28. 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

29. LTV Before New Strategies

30. 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

31. LTV Before New Strategies

32. New Retention Strategies • Birthday Club • Communicate with them • Give them premiums if they shop a lot • Lets see what could happen

33. LTV With New Strategies

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

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 • Don’t undertake any new strategy until you can prove it will be successful

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

37. Focus retention programs on A and B: 44% of your customers.

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

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 CFO’s can understand • Base your budget on solid numbers backed up by valid tests

40. What your new budget will buy

41. How you got there

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 CFO’s can understand • Base your budget on solid numbers backed up by valid tests

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

44. Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com