Transcript No Slide Title

Using Lifetime Value to
Increase Customer
Retention and Repeat
Sales
Title Boston
ACCM
Subtitle
Wednesday,
May 23 2007
10:45 a.m. - 12:00 p.m.
Arthur Middleton Hughes
Vice President / Solutions Architect
KnowledgeBase Marketing
Date
How a modern database system works
Customer
Transactions
Marketing
Database
Data Access
And Analysis
Software
Marketing
Staff Access By
Web
Website
Modeling
Inputs from Retail,
Phone, Web
2
Appended
Data
Why retention is important
• Repeat buyers:
–
–
–
–
–
–
–
3
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
Repeat sales is the way to measure loyalty
90%
80%
70%
Percentage
Retained
from
Previous
Year
60%
50%
40%
30%
20%
10%
0%
1
2
3
4
Years as a customer
4
5
Keys to Retention
• Recruit loyal relationship buyers rather than price
cutting transaction buyers.
• How? Emphasize service and quality rather than
price
• Greet customers when they come back
• Find out more about your customers. Use this
info in your messages
• Give them a reason to come back soon.
• We will cover 16 possible strategies…
5
Recruit relationship buyers
Relationship Vs Transaction Buyers
120
Transaction
Buyers
100
80
60
Relationship
Buyers
40
20
0
Company A
Company B
Company C
Company D
• Transaction buyers only interest is price
• Relationship buyers want a firm that gives good service to whom
they can be loyal
6
How to find relationship buyers
• Lowball offers will attract transaction buyers
• You cannot make a profit from them
• Relationship buyers are interested in good
service, high value and two way loyalty
• They will stick with you and provide a
profitable bottom line
7
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!
8
We are going to explore ways of increasing catalog
customer retention
• We will list sixteen different things that you can
try with your customer database to increase
sales.
• The beauty of a customer database is that it
permits many tests with control groups.
• We can test each new idea to see how well it will
work before we roll it out.
• First, we will develop a base line customer
lifetime value…
9
What is Lifetime Value?
• The net profits that you expect to
receive from the average new
customer during the next three or
four years.
• It includes the revenue, the costs,
the profit and the discount rate.
• Revenue includes the retention
rate, number of orders per year,
average order size.
10
Original LTV
Typical
Catalog
Customer
Lifetime
Table
Customers
Retention Rate
Orders
Avg. # Orders
Avg Order Size
Revenue
S&H Income
Total Revenue
Acquisition
Year
167,278
20.50%
212,443
1.27
$191.00
$40,576,624
$5,315,538
$45,892,162
Year 2
34,292
52.00%
37,721
1.10
$192.00
$7,242,468
$948,763
$8,191,232
Year 3
17,832
57.00%
23,181
1.30
$193.00
$4,474,007
$586,095
$5,060,102
S&H Income %
COGS %
S&H Exp %
Op Cost / Order
Cost of Goods
Catalogs/Customer
Follow Up Catalogs
Acquisition Catalogs
Cost per catalog
Cat. Cost
S&H Cost
Op Cost / Order
Total Costs
13.10%
47.00%
7.60%
$2.70
$19,071,013
2.08
348,340
31,732,000
$0.640
$20,531,417
$3,083,823
$573,596
$43,259,851
13.10%
47.00%
7.60%
$2.70
$3,403,960
6.82
1,140,669
13.10%
47.00%
7.60%
$2.70
$2,102,783
4.93
824,011
$0.640
$730,028
$550,428
$101,847
$4,786,263
$0.640
$527,367
$340,025
$62,590
$3,032,765
Gross Profit
Profit / Cust
Disc Rate
NPV Profit
Cum NPV Profit
Lifetime Value
$2,632,312
$15.74
1.00
$2,632,312
$2,632,312
$15.74
$3,404,969
$99.29
1.16
$2,935,318
$5,567,630
$33.28
$2,027,337
$113.69
1.35
$1,501,731
$7,069,361
$42.26
Computing the discount rate
• D = (1 + (Interest rate X 2) ^ n
• Where n = years to wait.
• If interest rate is 6%, then after 2 years
• D = (1.12)^2
• D = 1.2544
12
How to get them to order more
• You have a very narrow time window
• People are in a buying mood, or they are not.
• Give them a reason for buying more while they
are in that mood.
• Use the order confirmation process to get info
and create a second sale
• Here is how one company does this:
13
Get customers to register
14
When they register, use their name
when they return
15
Shoeline.com provides 10% off on
your next order
• Coupon in the box when your shoes arrive.
Coupon has a number.
• Just use that number when you order
16
The
Magic
Coupon
17
Thank you for your order, Arthur Hughes.
Most in stock orders will ship within two business days. As soon as your order has
shipped, you will receive a second email with your tracking number.
Should you have any questions concerning your order, please contact us by email at
[email protected] or by phone at 1 (877) 818-4461 and be sure to mention
your order number: SL-12301599.
Best regards,
ShoeLine.com Management.
Phone: 1 (877) 818-4461
Email: [email protected]
| -------------------------------------------------------| G350001_115W - Grand Prix - Black
| qty. 1 - price ea. $100.95 - amount $100.95
-------------------------------------------------------| Subtotal:
$100.95
| Coupon:
-$10.10
| Adjusted Subtotal:
$90.86
| Tax Total:
$0.00
| Shipping:
$0.00
--------------------------------------------| Total:
$90.86
---------------------------------------------
Next step: Get customers to rate their
ordering process
From: ShoeLine.com Customer Service [
Sent: Monday, November 06, 2006 11:08 AM
To: Hughes, Arthur
Subject: Write a review for your purchase!
Dear Arthur:
We at ShoeLine.com would like to thank you for your purchase of the
Supremes Grand Prix - Black. We hope you enjoy the product and
that it met all your expectations!
We would love to know what you thought of the shoe/accessory.
Please visit our Customer Reviews page for your product and submit
a review! The link is below:
http://www.ShoeLine.com/asp/writereview.asp?style=G350001&Email
[email protected]
19
The rating form
Comments
20
From rating form, get testimonials. Put
them on your website
21
Provide personalized order status
22
Improve the Search box
23
Provide Gift Wrapping.
24
Analyze the database
• See which is worth more: Peak Season buyers or
Off Peak Season Buyers.
• Which customers buy more: Sale item buyers vs.
Regular Price Customers
• Which spend more by merchandise categories
• Let the answers dictate marketing strategy.
25
Test use of emails with catalog mailing
• Objective: understand incremental sales from
catalog plus emails
• Method: Send three different catalogs to test
and control group with and without emails.
• Measure: increased sales and reduced costs
from use of emails.
26
Case Study: look in your mailbox for
our catalog
27
Email advance of catalog test
• Randomly selected 2 panels of 20,000
• All purchased on line
• All received 3 print catalogs: Winter, Winter
Remail and Spring.
• Second panel also received three email
newsletters: two after the catalog arrived, one
before the catalog mailing.
28
Results – Email & Catalog vs. Catalog
Only
• Email & Catalog had total increase in sales of
18% over catalog only.
• Email & Catalog increased number orders by
6%
• Average order size increased by 11.8%
29
Total contribution* increase from
emails plus catalogs
• Increase in sales and decrease in operating
expense resulted in:
• Increase in total contribution by 43%
• Increased contribution per order increased by
35%
• Response rate increased by 5.9%
* Contribution includes income from S&H plus
sales
30
Provide a personalized gift organizer
31
A linen gift registry?
32
Use a gift registry
Outfit new college students
33
College Student Segment
– will they need linens?
34
Identify customer segments.
An ideal segment…
• Has definable characteristics
• Is large enough to justify a custom marketing
strategy with appropriate rewards and budget
• Has members who can be motivated
• Makes efficient use of available data
• Can be measured in performance
• Justifies an organization devoted to it. Can be
part of a person’s time, but there should be
someone who “owns” each segment.
35
Strategy for each segment:
• Communications to the segment (direct mail, email, onlocation personal attention)
• Rewards designed to modify behavior
• Controls to measure the success of the strategy
• A budget for implementation of the strategy
• Specific goals and metrics for engagement: for behavior
modification
• An organization that accepts responsibility for the
segment
36
Marketing to Customer Status
Levels
Your Best Customers 80% of Revenue
Your Best Hope for New
Gold Customers
1% of Total
Revenue
37
GOLD
Move Up
These may be losers
Spend Service
Dollars Here
Spend Marketing
Dollars Here
Reactivate or
Archive
Segments and Status Levels
38
How one women’s chain segments
their customers
39
How Sears Determines Segments
How I feel about brands:
1. I typically buy top of the line name brand products
2. I buy name brand products at a moderate price
3. I am always looking for a bargain. I will try any brand if the price is right.
How I feel about technology:
1. I buy products with the latest features and innovations
2. I buy products with mainstream features and technology
3. I am not interested in technology. Keep it simple for me.
Home status
 Home Owner  Renter
 Lived in my home for less than 6 months
 Plan to move in the next 6 months
 Plan to remodel in the next 6 months.
Presence of Children:
 Baby (age 0 – 1)  Kids (ages 1 – 12) Teenagers  None
40
Next Best Product
• Collaborative Filtering can be used
to determine for each customer her
next most likely product.
• Customer service and the web
have this info available whenever a
customer visits or calls.
• Tests with GUS, largest cataloger
in the UK, resulted in doubling the
cross sale rate (from 20% to 40%)
using the next best product on the
telemarketers screens
41
Amazon’s Next Best Product
42
Who offers collaborative filtering?
• www.tornago.com/ : Users: Brylane, GUS, J C Penney
• http://recommendations.loomia.com/
• http://eecs.oregonstate.edu/iis/CoFE/
Collaborative filtering (CF) is the method of making
automatic predictions (filtering) about the interests
of a user by collecting taste information from many
users (collaborating). The underlying assumption of
CF approach is that: Those who agreed in the past
tend to agree again in the future.
Study Netflix.com – Masters of Collaborative Filtering
43
Creating a club on the internet
• A company selling sporting goods created an
internet member club.
• When database was built they learned that:
– Club members bought 11 times more than non club
members.
– In two years, 81% of club members became multibuyers.
– The club boosted retention
44
Another example of a club
45
Gold Customer Loyalty Test
• Selected 4,000 highly loyal
customers
• Divided into 2,000 test and 2,000
control
• Sent a discontinued item as a gift to
the 2,000 test with a thank you
letter.
• Included a catalog in the box.
• Also sent same catalog without the
letter or gift to the controls.
46
March 31, 2003
Mrs. Helena Hughes
2100 South Ocean Drive, Apartment 16A
Fort Lauderdale, FL 33316
Dear Mrs. Hughes:
You have been a loyal Miles Kimball customer since 1999. I see that you have
trusted Miles Kimball with purchases on numerous occasions and we can’t thank
you enough!
Our long term success at Miles Kimball rests on our ability to meet the needs of
loyal customers like you. In recognition of your on-going loyalty to our company,
we are sending you the enclosed gift. I hope that you find it personally useful or
handy as a gift for a friend or loved one.
All of us here at Miles Kimball hope that this gift lets you know how much we
value you as a customer. We thank you sincerely for your on-going patronage.
We look forward to providing the very best product value and service to you in
the months and years ahead.
Sincerely yours,
47
Michael D. Muoio
Chairman, President and CEO
Miles Kimball
Results of Gold Customer Gifts
• Test group placed 3% more orders than the
control group.
• Items per order increased by 2%
• Average order size increased by 6%
• Total dollars spent increased by 19%
• Loyalty program was an outstanding success.
48
One Click Ordering
• With the web we use cookies to say,
“Welcome back Susan”.
• We keep her credit card on file if she wants
so she can do one click ordering
• Result, compared to controls, is 18% higher
annual revenue from those who have one
click ordering available.
49
Summary of the possible strategies. Test
the increase in LTV with…
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
50
Possible Strategies
Recruit Relationship Buyers
10% off on next order
Get them to register
Get them to rate their purchase
Put testimonials on the website
Say, "Welcome back, Susan"
Determine next best product
Improve the search box
Identify & market to segments
Send emails with catalogs
Send gifts to gold customers
Provide Gift Wrapping
Provide a gift registry
Market to profitable segments
Create a club
One Click Ordering
Total
Increased Sales
2%
8%
2%
3%
2%
3%
10%
3%
8%
16%
3%
2%
5%
4%
9%
3%
83%
Will these strategies work?
• Not all of them will be successful
• How can you know?
• Set up test and control groups
• Try each strategy on 20,000 customers, with
20,000 in a control group.
• Roll out the ones that work
• Forget the ones that don’t
• Get better, and better, and better
51
With New Strategies
Revised
Lifetime
Value
Table
including
new
strategies
Customers
Retention Rate
Orders
Avg. # Orders
Avg Order Size
Revenue
S&H Income
Total Revenue
S&H Income %
COGS %
S&H Exp %
Op Cost / Order
Cost of Goods
Catalogs/Customer
Follow Up Catalogs
Acquisition Catalogs
Cost per catalog
Cat. Cost
S&H Cost
Op Cost / Order
Analytics
Emails with catalogs
Wesite Improvements
10% on repeat orders
Total Costs
Gross Profit
Profit / Cust
Disc Rate
NPV Profit
Cum NPV Profit
Lifetime Value
Acquisition
Year
167,278
29.00%
234,189
1.40
$195.00
$45,666,894
$5,982,363
$51,649,257
13.10%
48.00%
7.60%
$2.70
$21,920,109
2.08
348,340
31,732,000
$0.640
$20,531,417
$3,470,684
$632,311
$100,000
$10,000
$250,000
$1,304,768
$48,219,290
$3,429,967
$20.50
1.00
$3,429,967
$3,429,967
$20.50
Year 2
48,511
54.00%
72,766
1.50
$198.00
$14,407,654
$1,887,403
$16,295,057
13.10%
48.00%
7.60%
$2.70
$6,915,674
6.82
1,140,669
Year 3
26,196
59.00%
41,913
1.60
$205.00
$8,592,201
$1,125,578
$9,717,779
13.10%
48.00%
7.60%
$2.70
$4,124,256
4.93
824,011
$0.640
$730,028
$1,094,982
$196,468
$100,000
$30,000
$250,000
$720,383
$10,037,534
$6,257,522
$128.99
1.16
$5,394,416
8,824,383.31
52.75
$0.640
$527,367
$653,007
$113,166
$100,000
$30,000
$250,000
$429,610
$6,227,407
$3,490,373
$133.24
1.35
$2,585,461
$11,409,845
$68.21
Effect of new strategies – Profit
increased by $9 million per year
Previous LTV
New LTV
Change
With 350,000 Cust
Acquisition
$15.74
$20.50
$4.77
$1,668,955
Year 2
$33.28
$52.75
$19.47
$6,814,188
Year 3
$42.26
$68.21
$25.95
$9,081,704
This is pure
profit. All
costs are
included.
53
Books by Arthur Hughes
54
From McGraw Hill. Order at
www.dbmarketing.com
Contact Arthur: [email protected]