Page - 1 Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes, VP...
-
Upload
thomasina-watts -
Category
Documents
-
view
221 -
download
0
Transcript of Page - 1 Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes, VP...
Page - 1
Using Lifetime Value to Determine Your Marketing
Strategy
Arthur Middleton Hughes, VP Strategic Planning msdbm
www.msdbm.com
DMA 84th Annual Conference
McCormick Place Chicago
Oct 29th 2001 2:45 PM
Page - 2
Client Roster --
Page - 3
Compared with newcomers, Long term customers: Buy more per yearBuy higher priced optionsBuy more oftenAre less price sensitiveAre less costly to serveAre more loyalHave a higher lifetime value
Page - 4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Percentage Retained
from Previous
Year
1 2 3 4 5
Years as a customer
Retention is the way to measure loyalty
Page - 5
Retention pays better than acquisition
($62)
$48
($80)($60)($40)($20)
$0$20$40$60
New Customer 3rd YearCustomer
Annual Profit
Page - 6
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!
Page - 7
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
Page - 8
Examples of Profitable Strategies
NewslettersSurveys and ResponsesLoyalty ProgramsCustomer and Technical ServicesFriendly, interesting interactive web siteEvent Driven Communications
Page - 9
Event driven communication:
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
Ridgeway Fashions
Leesburg, VA 22069
Page - 10
Manufacturer of building productsCatalog sent to 45,000 contractorsPrevious policy: wait for the ordersTest: pick 1,200 customers, split into test of
600 and control of 600Two person pilot program build relationship
with test customers to see the results
Credit: Hunter Business Direct
What proves that relationship building works?
Page - 11
What did they offer?
Follow up on bids and quotesSchedule product trainingMake aware of pricing specialsAsk about customer needsProduct comparison informationNew Product informationThey did not offer discounts
Page - 12
73%
76%
72%72%73%73%74%74%75%75%76%76%
Percent who
purchased in 6 months
1 2
Control vs Test Group
Improvement in Response rate
Page - 13
82%
112%
0%
20%
40%
60%
80%
100%
120%
Change in number of
orders
1 2
Control vs Test Groups
Change in the number of orders
Page - 14
86%
114%
0%
20%
40%
60%
80%
100%
120%
Change in average
order size
1 2
Control vs Test Group
Change in the Average Order Size
Page - 15
70%
127%
0%
20%
40%
60%
80%
100%
120%
140%
Change in total
revenue
1 2
Control vs Test Group
Total revenue gain: $2.6 million dollars
Page - 16
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
Page - 17
Why we need Lifetime Value Analysis
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
Page - 18
Lifetime Value Analysis Goal: Determine...
where to put your retention dollarsthe value of each retention strategywhere to put your acquisition dollarshow much to spend on acquisition
Page - 19
What is lifetime value?
Net present value of the profit to be realized on the average new customer during a given number of years.
Lifetime value is “Good Will.”To compute it, you must be able to
track customers from year to year.Main use: To evaluate strategy.
Weldon Instruments Before New Strategy
Revenue Year1 Year2 Year3Customers 30,000 22,355 18,523Retention Rate 74.52% 82.86% 85.00%Spending Rate $19,500 $20,280 $22,400Total Revenue $585,000,000 $453,359,400 $414,915,200
CostsDirect Percent 75.00% 65.00% 60.00%Direct Costs $438,750,000 $294,683,610 $248,949,120Acquisition Cost $630 $18,900,000 $0 $0Total Costs $457,650,000 $294,683,610 $248,949,120
ProfitsGross Profit $127,350,000 $158,675,790 $165,966,080Discount Rate 1.21 1.37 1.51NPV Profit $105,247,934 $115,821,745 $109,911,311Cumulative NPV Profit $105,247,934 $221,069,678 $330,980,990
Customer lifetime value $3,508.26 $7,368.99 $11,032.70
Page - 21
Market Rate of Interest...8%Assume Risk (Double rate)...16%Years = n Interest = iFormula: D = (1 + i)n
Calculation of rate after 3 years: D = (1 + .16)3 = (1.16)3 = 1.56
Discount Rate Basic Formula
Page - 22
Market Rate of Interest...8.4%Calculate risk factor…r..1.8Calculate payment time … (12/Months)Interest = i n+t = (n years + t pay time)Formula: D = (1 + i*r)n+t
Calculation of rate after 3 years: D = (1 + .084*1.8)3.25 = (1.15)3.25 = 1.60
Discount Rate Complex Formula
Page - 23
Annual Rate = (Repurchase rate) (1/years)
77% repurchase after 11 years Annual Rate = (.77)(1/11) = 98%45% repurchase after 4 years = 82%99% per week = 59.2% per yearAnnual = (.99) (1/(1/52))
Annual Rate = 59.2%
Convert to Annual
Page - 24
Put 45,000 pages of tech info on web
Create extranet for Gold & Silver Custs.
24 hour email response timeTotal cost of these strategies
$450/custReferral Program with $800
incentives
New Retention Strategies
Weldon with new strategiesRevenue Year1 Year2 Year3Referral Rate 5.00% 6.00% 7.00%Referred Customers - 1,500 1,620 Retention Rate 85.00% 88.00% 90.00%Retained Customers - 25,500 23,760 Total Customers 30,000 27,000 25,380 Spending Rate $21,000 $24,000 $27,000Total Revenue $630,000,000 $648,000,000 $685,260,000
CostsDirect Percent 75.00% 65.00% 60.00%Direct Costs $472,500,000 $421,200,000 $411,156,000Acquisition Cost $630 $18,900,000 0 0Retention Building Program $450 $13,500,000 $12,150,000 $11,421,000Referral Program Costs $800 $0 $1,200,000 $1,296,000Total Costs $504,900,000 $434,550,000 $423,873,000
ProfitsGross Profits $125,100,000 $213,450,000 $261,387,000Discount Rate 1.21 1.37 1.51Net Present Value Profit $103,388,430 $155,802,920 $173,103,974Cumulative NPV Profit $103,388,430 $259,191,349 $432,295,323Customer Lifetime Value $3,446.28 $8,639.71 $14,409.84
Page - 26
Effect of adoption of new strategies
Year1 Year2 Year3New LTV $3,446.28 $8,639.71 $14,409.84
Old LTV $3,508.26 $7,368.99 $11,032.70
Difference -$61.98 $1,270.72 $3,377.14
With 30,000 Customers -$1,859,400 $38,121,600 $101,314,200
Page - 27
What is the proper computation period?
Which is the correct lifetime value? 1, 2, 3, 4, 5 or more years?
They are all correct. Which you use depends on your product or service.
Long lifetimes: banks, insurance, utilities.Short lifetimes: discount houses, package
goods, catalogers.
Page - 28
Increase the retention rateIncrease the referral rateIncrease the spending rateDecrease the direct costsDecrease the marketing costs
Five Ways to Boost LTV with DB Strategies
Page - 29
How to use lifetime value
Compute a base lifetime valueDream up a new strategyEstimate the benefits and costsDetermine whether your new lifetime value
goes up or goes downDon’t undertake any new strategy until you
can prove it will be successful
Page - 30
Find LTV of Customer Segments
Many B-t-B customers are quite different in their purchase patterns
Create actionable segments and determine the value of each
Use the results to focus your retention programs and acquisition programs on the most profitable segments
Page - 31
Dividing Customers into Four Segments
Weldon Instruments Corporation Customer SegmentsAverage Total Sales Lifetime LTV
Customers Sale Sales Ranking Value Ranking
Metal Production 254 $339,736 $86,293,000 4 $145,067.37 2Light Manufacturing 15442 $13,851 $213,892,000 1 $5,914.51 4Heavy Manufacturing 44 $2,314,159 $101,823,000 3 $988,145.93 1High Technology 612 $299,007 $182,992,000 2 $127,675.79 3Total 29,198 $20,036 $585,000,000 $8,555.74
Page - 32
Focus on Retention
Where should Weldon's Retention Dollars Go?Weldon Lifetime
Customers Value Rank
Metal Production 254 $145,067 2Light Manufacturing 15,442 $5,914 4Heavy Manufacturing 44 $988,145 1High Technology 612 $127,675 3Total 29,198
Page - 33
Weldon’s Acquisition Focus
It is easier to acquire customers where you are well known: where you have a high penetration ratio.
Weldon has only 3% of heavy manufacturing.They have 42% of the High Technology.The return from concentration on high
technology will probably be greater.
Page - 34
Focus on Acquisition by LTV
Where are Weldon's Prime Acquisition Targets?Weldon US Penetration Lifetime Target Rank
Customers Universe Ratio Value Potential
Metal Production 254 2,433 10.44% $145,067 $15,144.68 3Light Manufacturing 15,442 162,009 9.53% $5,914 $563.70 4Heavy Manufacturing 44 1,288 3.42% $988,145 $33,756.51 2High Technology 612 1,453 42.12% $127,675 $53,776.39 1Total 29,198 167,183 17.46%
Target Potential = LTV * Penetration Ratio
Page - 35
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
Page - 36
What your new budget will buy
Year1 Year2 Year3New LTV $3,446.28 $8,639.71 $14,409.84
Old LTV $3,508.26 $7,368.99 $11,032.70
Difference -$61.98 $1,270.72 $3,377.14
With 30,000 Customers -$1,859,400 $38,121,600 $101,314,200
Page - 37
Revenue Year1 Year2 Year3Referral Rate 5.00% 6.00% 7.00%Referred Customers - 1,500 1,620 Retention Rate 85.00% 88.00% 90.00%Retained Customers - 25,500 23,760 Total Customers 30,000 27,000 25,380 Spending Rate $21,000 $24,000 $27,000Total Revenue $630,000,000 $648,000,000 $685,260,000
CostsDirect Percent 75.00% 65.00% 60.00%Direct Costs $472,500,000 $421,200,000 $411,156,000Acquisition Cost $630 $18,900,000 0 0Retention Building Program $450 $13,500,000 $12,150,000 $11,421,000Referral Program Costs $800 $0 $1,200,000 $1,296,000Total Costs $504,900,000 $434,550,000 $423,873,000
ProfitsGross Profits $125,100,000 $213,450,000 $261,387,000Discount Rate 1.21 1.37 1.51Net Present Value Profit $103,388,430 $155,802,920 $173,103,974Cumulative NPV Profit $103,388,430 $259,191,349 $432,295,323Customer Lifetime Value $3,446.28 $8,639.71 $14,409.84
Page - 38
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
10866 Wilshire Blvd., Suite 650Los Angeles, CA 90024-4354
Phone (310) 208-2024Fax (310) 208-5681www.msdbm.com
www.dbmarketing.com
Page - 40
Arthur Hughes, Vice President for Strategic Planning of msdbm Marketing in Los Angeles, (www.msdbm.com) has been designing and maintaining marketing databases for Fortune 500 companies and others for the past sixteen years. His database experience includes telephone companies, banks, pharmaceuticals, package goods, software and computer manufacturers, resorts, hotels, automobiles, and non-profit fund raisers.
A graduate of Princeton University with a Masters in Public Affairs, Arthur taught economics at the University of Maryland for 32 years. He lectures in the U. S., Canada, Europe, Latin America and Asia on marketing and economics. When it comes to Database Marketing, he wrote the book! He is the author of The Complete Database Marketer: Tapping your customer base to maximize sales and increase profits. 2nd Ed. (McGraw Hill 1996), and Strategic Database Marketing (McGraw Hill 2000).
Arthur's articles have appeared in leading publications. He has served as a key speaker in marketing conferences in the U.S., Canada, U.K., Japan, Taiwan, Australia, Brazil, Venezuela, Malaysia and Portugal. M\S are leaders in Customer Management and Internet Marketing. Arthur may be reached at (703) 525-9637 Fax 703 351 7417 or at [email protected]
About the speaker
Page - 41
THE COMPLETE DATABASE MARKETERby Arthur Middleton Hughes
Chicago: McGraw Hill 600 pp GlossaryRevised Edition 1996
This is the bible of database marketing. Over 16,000 copies sold. John Stevenson Exec. VP of Krupp Taylor: "Not only does this book succeed in being clear and accessible, it is also the first complete treatise...The full power and practice of database marketing are here, to be sure. This is the long awaited survival manual for every marketer on the cutting edge. I can't think of a book that is more rewarding."
This comprehensive book covers such subjects as how to build customer loyalty, lifetime value calculation, RFM analysis, customer service, telemarketing, fulfillment, hardware and software, clustering and profiling, prospecting, media selection. Order from www.DBMarketing.com
Page - 42
STRATEGIC DATABASE MARKETINGby Arthur Middleton Hughes
Chicago: McGraw Hill 2000 400 pp
Millions have been spent on database marketing pro grams that did not work. In this book Arthur Hughes shows how to evaluate strategies in advance using life time value analysis. He explains how to use RFM analysis to boost profits. Russ Richmond, President of Grey Direct said: "Well, Arthur has done it again. He has not only integrated the complicated world of data bases with the traditional concepts of direct marketing, but he accurately points out the pitfalls and the how-tos. I know of a few careers that would have been saved had this book been available sooner. Without a doubt this will be the cheapest investment you'll make in your database, and perhaps the most important one." Thousands of customer marketing databases are being built. Unfortunately, many mistakes have been made. The reasons for these failures center on one central fault: the inability of marketers to develop logical, practical and winning strategies for their database marketing programs. We must study past mistakes to develop sound principles for marketing strategy. Order from www. DBMarketing.com