Transcript Why Databases Fail

LTV and RFM for Non Profits
DMA Non Profit Forum
Friday February 4 2005
10:30 - 11:45
The Capitol Hilton
Washington, DC
Arthur Middleton Hughes
Vice President / Solutions Architect
KnowledgeBase Marketing
What KnowledgeBase Marketing Does
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Two goals today
• Explain how to compute donor
lifetime value, and use it to
improve marketing strategy
• Explain how RFM works, and
how you can use it to improve
response rates
3
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!
4
How a modern database
marketing system works
Customer
Transactions
Marketing
Database
Inputs from Retail,
Phone, Web
Data Access
And Analysis
Software
Website
Marketing
Staff
Appended
Data
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Lifetime
Value
We can determine the lifetime value of every
donor
• Lifetime value is the net
revenue we will receive from
each donor during his lifetime
with our cause
• Using historical data, we can
compute this for every donor,
and put it in their record.
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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.
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
Non Profit
Lifetime Value
Donors
Retention Rate
Acq. Resp Rate
Gifts per year
Average Gift
Total Revenue
Acquisition
Year
200,000
35%
5.0%
1.10
$10.00
$2,200,000
Overhead
Overhead Cost
Acquisition Mail
Appeal Mail
Cost Each
Mail Costs
Total Costs
20%
$440,000
4,000,000
50,000
$0.42
$1,701,000
$2,141,000
$59,000
1.00
$59,000
$59,000
$0.30
Net Profit
Discount Rate
Net Present Value
Cum. NPV
Lifetime Value
Year 2
70,000
45%
Year 3
31,500
55%
1.30
$11.00
$1,001,000
1.50
$12.00
$567,000
20%
$200,200
20%
$113,400
400,000
$0.42
$168,000
$368,200
400,000
$0.42
$168,000
$281,400
$632,800
1.14
$555,088
$614,088
$3.07
$285,600
1.30
$219,692.31
$833,780.03
$4.17
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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 Strategies
•
Add a website that takes donations
•
Make website interesting with lots of interesting info on the cause
being promoted.
•
Collect donor’s emails. Send appeals by both direct mail and
email
•
Sent retention communications besides just appeals
•
Personalize all messages to existing donors
•
Personalize web site “Welcome back, Susan”
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Non Profit
Lifetime Value
Donors
Retention Rate
Acq. Resp Rate
Gifts per year
Average Gift
Web Average
Web Gifts /Yr
Web Givers
Web Gifts
Total Revenue
Overhead
Overhead Cost
Email & Website
Acquisition Mail
Retention Mail
Appeal Mail
Cost Each
Mail Costs
Total Costs
Net Profit
Discount Rate
Net Present Value
Cum. NPV
Lifetime Value
Acquisition
Year
200,000
45%
5.0%
1.30
$11.00
$16.00
1.30
8%
$332,800
$3,192,800
20%
$638,560
$150,000
4,000,000
50,000
$0.42
$1,701,000
$2,489,560
$703,240
1.00
$703,240
$703,240
$3.52
Year 2
90,000
55%
Year 3
49,500
54%
1.50
$12.00
$20.00
1.40
12%
$302,400
$1,922,400
1.60
$13.00
$24.00
1.50
14%
$249,480
$1,279,080
20%
$384,480
$150,000
20%
$255,816
$150,000
200,000
400,000
$0.42
$252,000
$786,480
200,000
400,000
$0.42
$252,000
$657,816
$1,135,920
$621,264
1.14
1.30
$996,421
$477,895.38
$1,699,661 $2,177,556.44
$8.50
$10.89
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Results of new strategies
Old LTV
New LTV
Difference
Times 200,000
Acquisition
Year
$0.30
$3.52
$3.22
$644,240
Year 2
$3.07
$8.50
$5.43
$1,085,573
Year 3
$4.17
$10.89
$6.72
$1,343,776
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Compute LTV of all donors
•
Use software to insert the actual donor record of each donor
•
Use the spreadsheet to pretend that there are 200,000 donors
just like each donor
•
Put the resulting LTV into each donor database record.
•
Let’s look at Susan Smith
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Susan Smith
Lifetime Value
Donors
Retention Rate
Acq. Resp Rate
Gifts per year
Average Gift
Web Average
Web Gifts /Yr
Web Givers
Web Gifts
Total Revenue
Overhead
Overhead Cost
Email & Website
Acquisition Mail
Retention Mail
Appeal Mail
Cost Each
Mail Costs
Total Costs
Net Profit
Discount Rate
Net Present Value
Cum. NPV
Lifetime Value
Acquisition
Year
Year 2
200,000
90,000
45%
55%
5.0%
1.00
2.00
$20.00
$20.00
$0.00
$0.00
0.00
0.00
8%
12%
$0
$0
$4,000,000 $3,600,000
20%
$800,000
$150,000
4,000,000
50,000
$0.42
$1,701,000
$2,651,000
Year 3
49,500
54%
1.00
$25.00
$0.00
0.00
14%
$0
$1,237,500
20%
$720,000
$150,000
20%
$247,500
$150,000
200,000
400,000
$0.42
$252,000
$1,122,000
200,000
400,000
$0.42
$252,000
$649,500
$1,349,000 $2,478,000
$588,000
1.00
1.14
1.30
$1,349,000 $2,173,684
$452,307.69
$1,349,000 $3,522,684 $3,974,991.90
$6.75
$17.61
$19.87
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Segment donors by LTV – Develop a
marketing strategy for each segment
Your Best Customers 80% of Revenue
Your Best Hope for New
Gold Customers
1% of Total
Revenue
GOLD
Move Up
These may be losers
Spend Service
Dollars Here
Spend Marketing
Dollars Here
Reactivate or
Archive
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RFM Analysis
Recency Frequency Monetary (RFM)
Analysis
•
Used for marketing to customers
•
Always improves response and profits
•
Better than any demographic model
•
The most powerful segmentation method for predicting response
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” next, etc.
•
Put quintile number in customer record
Response Rate
Response by Recency Quintile
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
3.49%
1.25%
1.08%
0.63%
0.26%
5
4
3
Recency Quintile
2
1
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 customer record
Response by Frequency Quintile
2.50%
2.00%
1.99%
Response Rate
1.56%
1.50%
1.31%
1.00%
0.92%
0.93%
2
1
0.50%
0.00%
5
4
3
Frequency Quintile
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
Response by Monetary Quintile
1.80%
1.61%
1.60%
1.45%
1.46%
1.40%
1.22%
1.23%
2
1
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
5
4
3
Response to CD Offer by Monetary
Percentage of households promoted w ho purchased
2
1.68
1.5
1.17
1
0.88
0.66
0.5
0.32
0
5
4
3
Monetary Quintile
2
1
RFM Code Construction
R
5
F
35
4
34
3
33
2
32
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1
Database
One Sort
Five
Sorts
M
335
334
333
332
331
Twentyfive sorts
Appended RFM Codes
Creating an Nth
300,000 Records
Customer Database
For Nth by 10, select every
tenth record.
Nth
30,000 Records
Result will be
statistical replica of
database
Result of Test Mailing to 30,000
#
1
2
3
4
5
RFM
555
554
553
552
551
Mailed
240
240
240
240
240
Response
20
16
13
10
11
Rate
8.15%
6.56%
5.62%
4.33%
4.51%
6
7
8
9
10
545
544
543
542
541
240
240
240
240
240
9
12
6
10
7
3.78%
4.98%
2.88%
4.26%
3.10%
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12
13
14
535
534
533
532
240
240
240
240
10
9
8
6
4.13%
3.83%
3.35%
2.70%
Test Response Rate by RFM Cell
Index of Response 0 = Break Even
500
400
300
200
100
0
-100
-200
555
455
355
255
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Profit from Test Mailing
Quantity Rate
Goods Sold
Mailing Costs
Profits (Loss)
Amount
402
$40.00 $16,080
30,000
$0.55 $16,500
($420)
Test, Full File & RFM Selects
Compared
Response Rate
Responses
Net Revenue
No. Mailed
Mailing Cost
Profits
Test
Full File RFM Select
1.34%
1.17%
2.76%
402
23,412
15,295
$16,080 $936,480 $611,800
30,000 2,001,056
554,182
$16,500 $1,100,581 $304,800
($420) ($164,101)
$307,000
Test Vs Rollout Response Rates
8.00%
7.00%
7.00%
6.00%
6.00%
5.00%
5.00%
4.00%
4.00%
3.00%
3.00%
2.00%
2.00%
1.00%
1.00%
0.00%
0.00%
554 553 552 551 545 544 543 542 541 535 534 533 532 531 525 524 523 522 521 515 514 513 512 511 455 451 445 444 443 355 354 351 344
RFM Deals with Very Small Numbers
•
Only a small percentage (such as 5%) of customers respond to
the typical offer
•
95% or more will not respond at all
•
RFM tells you which customers are most likely to be in the
responsive 5%
•
Those who respond may not be your most profitable customers
Retroactive RFM Test
•
Many times there is not enough time or funding to run an Nth test
in advance
•
Solution: apply RFM codes to last year’s completed outgoing
promotion.
•
Since you know who responded, you can determine response
rates by cell
•
Use last year’s rates to govern this year’s rollout.
Recent Case History
•
User sells personalized product by mail
•
45,000 selected for a test
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Second Recency Quintile Had
More Responses. Why?
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Even so, First Recency Quintile Had
Higher Sales
39
Recent buyers spend more per
order
40
Lowest two recency quintiles
did not break even
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Frequency was very predictive
of response
42
Monetary did not predict
response rate very well
43
But Monetary does predict average
sales by quintile
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RFM Cells clearly show who to mail
to, and who to drop
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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; when you need a boost
•
Use it to identify your best customers
•
Don’t go hog wild!
Books by Arthur Hughes
From McGraw Hill. Order at
www.dbmarketing.com
Contact Arthur:
[email protected]
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Thank You