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

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What KnowledgeBase Marketing Does

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

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Marketing Databases and Operational Databases

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Daily updating permits greater customer contact and service

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

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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.

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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.

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

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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

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Retention is the way to measure loyalty

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Retention pays better than acquisition

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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 doesnt work: Treating all customers alike This 28% lost 22% of the banks profits! Bank Customers by Profitability

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

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

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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 proves that relationship building works?

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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

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Change in the number of orders

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Change in the Average Order Size

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Total revenue gain: $2.6 million dollars

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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 Business to business relationship marketing is the way to go

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Lifetime Value

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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

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

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

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Event driven communication: Dear Mr. Hughes: I would like to remind you that your wife Helenas 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 youd prefer. Sincerely yours, Robin Baumgartner Robin Baumgartner, Store Manager Ridgeway Fashions Leesburg, VA 22069

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LTV Before New Strategies

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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 Discount Rate Basic Formula

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LTV Before New Strategies

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

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LTV With New Strategies

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Effect of adoption of new strategies This is the effect of a few strategies. Later we will see the cumulative effect of many strategies

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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 Dont undertake any new strategy until you can prove it will be successful

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

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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

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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 CFOs can understand Base your budget on solid numbers backed up by valid tests

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What your new budget will buy

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How you got there

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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 CFOs can understand Base your budget on solid numbers backed up by valid tests

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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 get your budget approved

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