Database Marketing and Lifetime Value DMA Tuesday, October 18, 2005 2:00 – 3:00 PM Georgia World Congress Center Atlanta, Georgia 2:30 – 3:40 PM Georgia World Congress Center Atlanta, Georgia Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing, Inc.

What KnowledgeBase Marketing Does

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

Marketing Databases and Operational Databases

Daily updating permits greater customer contact and service

Possible direction of things to come…

Outbound: Days

“I have an offer …”

offer Inbound: Milliseconds

“I have a person …” “Let me find the best offer for this person.”

offer offer offer offer

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.

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.

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

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

Retention is the way to measure loyalty 90% 80% 70%

Percentage

60%

Retained from Previous Year

50% 40% 30% 20% 10% 0% 1 2 3 4

Years as a customer

5

Retention pays better than acquisition Annual Profit $48 $60 $40 $20 $0 ($20) ($40) ($60) ($80) ($62) New Customer 3rd Year Customer

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!

80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% What doesn’t work: Treating all customers alike 79.67% This 28% lost 22% of the bank’s profits!

5% 24.82% 15.83% 1.52%

Bank Customers by Profitability

-21.83% 11% 28% 28% 28%

Marketing to Customer Segments Your Best Customers GOLD Spend Service Dollars Here 80% of Revenue Your Best Hope for New Gold Customers Move Up Spend Marketing Dollars Here 1% of Total Revenue These may be losers Reactivate or Archive

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

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

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

Change in the number of orders 112% 120% 100%

Change in number of orders

80% 60% 40% 20% 0% 82% 1 2

Control vs Test Groups

Change in the Average Order Size 114% 120% 86% 100%

Change in average order size

80% 60% 40% 20% 0% 1 2

Control vs Test Group

Total revenue gain: $2.6 million dollars 127% 140% 120%

Change in total revenue

100% 80% 60% 40% 20% 0% 70% 1 2

Control vs Test Group

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

Lifetime Value

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

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.

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

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

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

LTV Before New Strategies

Retention Rate Customers Visits Per Year Spending Per Visit Revenue Acquisition Year

40% 200,000 1.4

$50 $14,000,000

Second Year

45% 80,000 1.6

$60 $7,680,000

Third Year

50% 36,000 1.8

$70 $4,536,000

Cost Percentage Costs Acquisition Cost $32 Total Costs

50% $7,000,000 $6,400,000 $13,400,000 49% $3,763,200 $3,763,200 48% $2,177,280 $2,177,280

Profit Discount Rate NPV Profit Cum NPV Profie Lifetime Value

$600,000 $600,000 $600,000 1 $3.00

$3,916,800 1.12

$3,497,143 $4,097,143 $20.49

$2,358,720 1.32

$1,786,909 $5,884,052 $29.42

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

LTV Before New Strategies

Retention Rate Customers Visits Per Year Spending Per Visit Revenue Acquisition Year

40% 200,000 1.4

$50 $14,000,000

Second Year

45% 80,000 1.6

$60 $7,680,000

Third Year

50% 36,000 1.8

$70 $4,536,000

Cost Percentage Costs Acquisition Cost $32 Total Costs

50% $7,000,000 $6,400,000 $13,400,000 49% $3,763,200 $3,763,200 48% $2,177,280 $2,177,280

Profit Discount Rate NPV Profit Cum NPV Profie Lifetime Value

$600,000 $600,000 $600,000 1 $3.00

$3,916,800 1.12

$3,497,143 $4,097,143 $20.49

$2,358,720 1.32

$1,786,909 $5,884,052 $29.42

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

LTV With New Strategies

Acquisition Second Third Retention Rate Customers Visits Per Year Spending Per Visit Revenue Year

50% 200,000 1.6

$55 $17,600,000

Year

60% 100,000 2 $70 $14,000,000

Year

65% 60,000 2.4

$80 $11,520,000

Cost Percentage Costs Acquisition Cost $32 Database Costs Loyalty Program Loyalty Costs Total Costs

50% $8,800,000 $6,400,000 $500,000 $5.00

$1,600,000 $17,300,000 49% $6,860,000 $250,000 $8.00

$1,600,000 $8,710,000 48% $5,529,600 $150,000 $10.00

$1,440,000 $7,119,600

Profit Discount Rate NPV Profit Cum NPV Profie Lifetime Value

$300,000 $300,000 $300,000 1 $1.50

$5,290,000 1.12

$4,723,214 $5,023,214 $25.12

$4,400,400 1.32

$3,333,636 $8,356,851 $41.78

Effect of adoption of new strategies

Old LTV New LTV Change With 200,000 members Acquisition Year

$3.00

$1.50

-$1.50

-$300,000

Second Year

$20.49

$25.12

$4.63

$926,071

Third Year

$29.42

$41.78

$12.36

$2,472,799 This is the effect of a few strategies. Later we will see the cumulative effect of many strategies

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

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

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

LTV

High Medium Low

Probability of Leaving Soon

High Medium Low Priority A Priority B Priority C Priority B Priority B Priority C Priority C Priority C Priority C

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

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

What your new budget will buy

Old LTV New LTV Change With 200,000 members Year 1

$3.00

$1.50

-$1.50

-$300,000

Year 2

$20.49

$25.12

$4.63

$926,071

Year 3

$29.42

$41.78

$12.36

$2,472,799

How you got there

Retention Rate Customers Visits Per Year Spending Per Visit Revenue Year 1

50% 200,000 1.6

$55 $17,600,000

Year 2

60% 100,000 2 $70 $14,000,000

Year 3

65% 60,000 2.4

$80 $11,520,000

Cost Percentage Costs Acquisition Cost $32 Database Costs Loyalty Program Loyalty Costs Total Costs

50% $8,800,000 $6,400,000 $500,000 $5.00

$1,600,000 $17,300,000 49% $6,860,000 $250,000 $8.00

$1,600,000 $8,710,000 48% $5,529,600 $150,000 $10.00

$1,440,000 $7,119,600

Profit Discount Rate NPV Profit Cum NPV Profie Lifetime Value

$300,000 1 $300,000 $300,000 $1.50

$5,290,000 1.12

$4,723,214 $5,023,214 $25.12

$4,400,400 1.32

$3,333,636 $8,356,851 $41.78

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

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

Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com

Contact Arthur: [email protected]