Summary Strategic Database Marketing

The Masterplan for Starting and Managing a Profitable, Customer-Based Marketing Program

Arthur M. Hughes

ohn !i"it # Multis$ope %ohn&multis$ope.nl May '()(

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+atabase Marketing And the ,eb

-ntrodu$tion
,hat $ustomers .ant $an be summari/ed in a fe. general $on$epts0 *e$ognition Ser"i$e Con"enien$e Helpfulness -nformation *e$ognition

There are t.o types of $ustomers0 - Transa$tion buyers 1pri$e oriented2 - *elationship buyers 1looking for a reliable supplier2 34ou $an not make money from transa$tion buyers, the money is in the relationship buyers5. Basi$ information in the relational $ustomer database0 6ame and address 7-mail 8 Cookies that keep tra$k of their .ebsite "isits Complete pur$hase history Customer ser"i$e $alls, $omplaints, returns, in9uiries :utgoing marketing promotions and responses *esults of $ustomer sur"eys Household 1or business2 demographi$s

There are really t.o different kinds of databases0 - Operational databases: *un by -T 8 a$$ounting. ;sed to pro$ess transa$tions and get out the monthly statements - Marketing databases: gets it data from the operational database, but in$ludes more data. o Preferen$es and profiles o Promotion and response history from marketing $ampaigns o +ata from e<ternal 1marketing2 sour$es o =ifetime "alue and *>M analysis, leading to $ustomer segments o Modeling for $hurn and ne<t best produ$t The marketing database passes data ba$k to the operational database. -t may ad"ise the operational database .hi$h segment the $ustomer is in 1e.g. gold $ustomers2 and e<pressed $ustomer preferen$es leading to different operational treatment 1e.g. smoking or non-smoking rooms2.

What about CRM? 3 C*M enthusiasts assumed that the C*M soft.are used .ould build $ustomer loyalty and profits. -n most bases that .as a mistaken "ie.. ,hat builds $ustomer loyalty and profits are $reati"e marketing strategies using $ustomi/ed $ommuni$ations based on a database. Sophisti$ated soft.are is used, of $ourse, but the marketer, not the soft.are, does the thinking and de"elops the strategy5. The fo$us of database marketing is the de"elopment and testing of "arious marketing strategies. The fo$us of C*M is automation of $ustomer relationships.

). Strategi$ +atabase Marketing and the ,eb0 An :"er"ie.

3A$$ountants ha"e de"eloped sophisti$ated te$hni9ues for appraising $apital assets and their depre$iation? they ha"e learned ho. to monitor the $onstantly $hanging "alue of .ork-in-progress? but they ha"e not yet de"ised a .ay to tra$k the "alue of a $ompany@s $ustomers in"entory5. 3They make no distin$tion bet.een sales re"enue from brand-ne. $ustomers and sales re"enue from long-term, loyal $ustomers, be$ause they do not kno. or $are that it $oast mu$h more to ser"e a ne. $ustomer than and old one. ,orse, in most businesses, a$$ountants treat in"estment in $ustomer a$9uisition as one more $urrent e<pense, instead of assigning it to spe$ifi$ $ustomer a$$ountants and amorti/ing it o"er the life of the $ustomer relationship5. ,hy =ong is most money spent on a$9uisition instead of retentionA A$9uisition is easier to measure than retention A$9uisition is easier to $arry out than retention A$9uisition in"ol"es produ$t managers *etention in"ol"es maintaining a database To measure retention, you must ha"e test and $ontrol groups term and loyal $ustomers0 Buy more often and spend more on ea$h pur$hase Ha"e higher retention and referral rates Are less $ostly to ser"e Are .illing to refer others .ho be$ome loyal $ustomers

3+is$ounts do not build loyalty. They destroy relationships5. :n$e you gi"e a $ustomer a dis$ount you send a number of messages0 - :ur regular produ$t is o"erpri$ed. -f you pay full pri$e, you are being ripped off. - 4ou fo$us the $ustomers on .hat they are paying, rather than .hat they are getting. - 4ou en$ourage $ustomers to shop around. +is$ounts $an be $opied by the $ompetition. Solid relationships are hard to $opy. +isloyal $ustomers may found to be0 - Transient indi"iduals - 4oung people rather than old people - Single people, rather than married people - *enters, rather than homeo.ners - People .ho respond to lo.-ball dis$ount offers - People .ho respond to temporary sales Important: Figure 1-1. Segmenting customers by lifetime value

status level

4our first step, as soon as you ha"e built a database, is to determine the lifetime "alue of your $ustomers. 4ou .ill learn0 - The retention rate - The referral rate - The spending rate - Ho. $osts go do.n .ith loyal $ustomers - Ho. to $reate $ustomer segments - Ho. the lifetime "alue "aries by segment - Ho. to identify gold $ustomers and de"elop strategies to keep them loyal - Ho. to identify .orthless $ustomers .ho are losing your $ompany money - Ho. to modify $ustomer beha"ior .ith re$ognition, relationships and re.ards - Ho. to determine the *:- for your efforts The 24 essential techniques The follo.ing is a list of 'B essential te$hni9ues used in database marketing. After reading this book you .ill be familiar .ith and able to use all of these te$hni9ues0 ). =TC 1Customer lifetime "alue2 '. *>M 1*e$en$y, >re9uen$y, Monetary Analysis2 D. Customer $ommuni$ations B. Appended data E. Predi$ti"e models F. *elational databases G. Caller -+ H. ,eb sites I. 7-mail )(. Tests and $ontrols )). =oyalty programs )'. Business -ntelligen$e Soft.are )D. ,eb A$$ess )B. *ented =ists )E. Campaign management soft.are )F. Address Corre$tion Ser"i$es )G. Profitability Analysis )H. Customer segmentation )I. Status le"els '(. Multi$hannel marketing '). Treating $ustomers differently ''. 6e<t Best Produ$t 16BP2 'D. Penetration Analysis 'B. Cluster Coding Nice !"ecutive# $ui% & test for in-company training on page '()

'. 3The Cision Thing5

,hat is database marketing, and ho. does database marketing .orkA Ho. does it relate to the -nternetA This $hapter is aimed at ans.ering these 9uestionsJ The Industrial Revolution: >or the first time in the history of mankind, mass produ$tion, making e<tensi"e use of $apital, in$reased the produ$ti"ity and brought the pri$e of $onsumer goods do.n dramati$ally. The Central Role o Marketing0 Produ$ing a million pounds of $otton thread .ould not ha"e been made possible if marketers had not found a .ay to sell a million pounds of $otton thread. The !"erican Market: The dri"ing for$e has been free $ompetiti"e market a$ti"ity. 7a$h entrepreneur trying to satisfy the publi$ best so as to reali/e his o.n personal dream. The gro#th o "ass "arketing: .e ha"e all gained. :ur basi$ needs are met. ,e .ant something more. What the "arket consists o toda$: o Consumers be$ame the o.ners of the e$onomy o 6e. produ$ts .ere $reated at an a$$elerating rate

,hy -

the ;S e$onomy is so su$$essful0 >reedom to produ$e >reedom to market =o. inflation due to trade defi$it .ith the rest of the .orld High in"estment Customers $an buy produ$ts to redu$e uneasiness The "alue of produ$ts is sub%e$ti"e -n free market e<$hanges, both parties make a profit Pur$hase de$isions $ause internal $onfli$ts in potential $ustomers minds - The internal struggle affe$ts different sides of the brain - Ad"ertising $an appeal to either side of the mind

The pur$hase de$ision pro$ess0 !% Right he"is&here: Patterns and relationships. Cisual and spatial pro$essing. -magination and desire. 3-f - had that produ$t, - .ould be handsome, $ultured, sophisti$ated and popular. - must ha"e it. '% (e t he"is&here: =anguage, linear thinking. Mathemati$s, a$$ounting and logi$. 3- only ha"e KL in my bank a$$ount as a result of yesterday@s e<tra"agan$e. - must resist the right side@s $ustomary e<uberan$e.5 Marketers are fa$ed .ith a dilemma on the approa$h. Should they base their message on the pri$e 1a left brain argument2 or on the benefits of the produ$t 1.hi$h appeals to the right brain2A

-t is .ell kno.n in retailing that 3buy one, get one free! out-pulls 50 percent off!

)rice and qualit$ ha"e been the staples of marketing for years. Today, there is a ne. dimension entering into $onsumer de$ision-making that is of e9ual importan$e. -t is ti"e. People ha"e less and less time a"ailable for shopping 1or for anything2. ,hat .e marketers are selling today, therefore, is more than the produ$t. -t is the produ$t, plus the deli"ery method. The $on"enien$e and ser"i$e is part of .hat .e are selling. The real de$ision-making pro$ess re9uired for a pur$hase from the $ustomer@s point of "ie., looks something like this0 Custo"er &ro it M a (utility of product) N b (value of brand) # $ (money cost) # d (time) The numbers a, b, $, and d are .eights .hi$h "ary .ith ea$h $ustomer. 3-n the )IG(@s, a$ross the Te<as border in Me<i$o gasoline $ost mu$h more, but there .ere no lines and unlimited gas supplies. >or a number of months, Te<ans dro"e south of the border to fill up their gas tanks at high pri$es, .hile Me<i$ans $ame north a$ross the border to .ait in lines for the $heap gas5. +atabase marketing and the ,eb $ame along %ust .hen they .ere needed. They sol"ed the information problem? the pro"ided re$ognition, personal ser"i$e, and a profit to the $ustomer. The .eb is an e<tension of that database, pro"iding re$ognition and helpful information. *erfect e"ample & case of database marketing is t+e ,M letter at page (-))) +atabase marketing and the ,eb are aimed at the $ustomer@s right brain. -nstead of being bombarded .ith dis$ounts, the $ustomer is sho.ered .ith attention, re$ognition, friendship and ser"i$e. +atabase marketing and the ,eb are the only .ay to start a t.o-.ay dialog in .hi$h the $ustomers are able to tell you .hat is on their minds, and you are able to rea$t to their thoughts by "arying your ser"i$es and produ$t mi<.

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Marketing Strategy +e"elopment

D. =ifetime Calue # The Criterion of Strategy

3The only .ay to gro. a business is to get $ustomers to $ome ba$k for more and tell their friends5 # 7nterprise *ent-A-Car@s C7: Andy Taylor (i eti"e value is the net present "alue 16PC2 of the profit that you .ill reali/e on the a"erage ne. $ustomer during a gi"en number of years. !"ample of a lifetime value table: Figure (-1 on page .-. *le"ents o (i eti"e +alue: - /etention rate: is the single most important number in a lifetime "alue table. -t is a measure of $ustomer loyalty. *etention rate M Year x Customers !revious Year customers. 4ear < Customers represent those pre"ious years $ustomers .ho are still buying in the later year. - 0isits per year - Spending per visit - 0ariable costs: the $ost of the produ$ts 8 ser"i$es pro"ided, plus the "ariable administrati"e $osts su$h as $ustomer ser"i$e, debt $olle$tion, deli"eries, returns, $redits et$. - 1c$uisition costs: add up all the money you spend on your ad"ertising and marketing efforts during the year 1e<$lusi"e of retention programs2 during the year. The marketing efforts $an in$lude ad"ertising, sales $ommissions, sales salaries et$. Then di"ide this total by the number of ne. $ustomers .ho a$tually make pur$hases from you ea$h year. - 2ross &ro its: they are e9ual to the total re"enue less the total $osts. - ,iscount rate: future money is .orth less than present money. -n$lude the market rate of interest and the risk fa$tor 1rising interest rates, obsoles$en$e, $ompetition, other business risk2. A good guesstimate is doubling the interest rate. >ormula for dis$ount rate + M 1) N 1" < #$22n .here % is the dis$ount rate, " the interest rate, #$ the risk fa$tor and & the number of years you ha"e to .ait. -f you .ant to in$lude payment delays in the dis$ount rate, there is a formula for on page FG. - Net present value profits: e9uals gross profits O dis$ount rate. - 3umulative N*0 profits: add together the 6PC of all the profits in the present year and ea$h pre"ious year. The lifetime "alue is simply the Cumulati"e 6PC profit in ea$h year, di"ided by the original group of $ustomers0 (T+ M C;M 6PC O a$9uired $ustomers. 3-f you are selling soft.are the $ustomers are likely to tie up you $ustomer ser"i$e lines during the first F( days until they learn ho. your soft.are .orks. >or the ne<t F( months, you may ne"er hear from them again5.

A $ustomer relationship building strategy $an affe$t fi"e 1and only fi"e2 basi$ things0 ). *etention rate '. *eferrals D. -n$reased sales B. *edu$ed dire$t $osts E. *edu$ed marketing $osts ,hat determines the retention rateA >a$tors that marketers $annot $ontrol0 - The strength of the $ompetitor@s marketing strategy - The saturation of the market for their produ$t - Ma$roe$onomi$ e"ents >a$tors that marketers $an $ontrol0 - The type of $ustomer that you a$9uire in the first pla$e - The pri$e $harged for the produ$t - The efforts made to build a relationship .ith the $ustomers - The .ay you treat your $ustomers 3*esear$h sho.s that referred people are more loyal, ha"e a higher retention and spending rate than the a"erage ne. a$9uisition5. -n your database you put the -+ number of the referred person in the referrer@s re$ord, and "i$e "ersa. *esear$h sho.s that those .ho refer other $ustomers are also better $ustomers. They are ad"o$ates. They spend more and are more loyal. ,hen a business is sold, good.ill is often .hat the buyers pay the most for. Pood.ill is nothing other than the "alue of the $ustomer base that the $ompany has built up o"er the years, and $urrently is holding on to. Compute lifetime "alue for ea$h of se"eral years, use the period of time that makes the most sense to you based on your parti$ular produ$t situation. To determine the =TC of a single $ustomer, you in$lude her in a "alid segment or group? determine the =TC of the group, and then attribute to her the =TC of the group members.

,hat $an you do to in$rease your profits by in$reasing $ustomer lifetime "alueA ). *etain e<isting $ustomers0 a. Pro"ide strategies that en$ourage $ustomers to rene. or retain membership b. Build a relationship .ith $ustomers to make them more loyal $. Segment the database and target the $ompany@s relationship to the appropriate groups of $ustomers d. 7stablish spe$ial groups 1e.g. President@s $lub, Pold $ard group2 e. Setup a fre9uent buyer $lub f. -n$rease rene.al or rea$ti"ation efforts '. Add ne. $ustomers0 a. Study e<isting $ustomers .ho stayed .ith you. Then de"ise strategies to a$9uire that kind b. +etermine the $ustomer a$9uisition budget .ith more pre$ision $. Profile e<isting $ustomers and use the profiles to find ne. $ustomers d. ;se the database to 9ualify prospe$ts -f you need help in $reating a =TC spreadsheet, you $an do.nload a sample from the +atabase Marketing -nstitute@s .ebsite0 ....dbmarketing.$om ,hat is the annual retention rate if E(Q of the $ustomers buy again after four yearsA Here a formula is ne$essary. The formula is0 ** M 1*P*2 1)Oy2 ## is the annual retention rate, #!# the repur$hase rate and Y the number of years bet.een pur$hases.

B. +esigning a Su$$essful Customer Strategy

+i"iding $ustomers into =TC segments0 ). 2old customers: your best $ustomers, H(Q of re"enue. Spend ser"i$e dollars here. -n most $ases, do not market to your Pold $ustomers. Pro"ide spe$ial ser"i$es for them. '. Move up: your best hope for ne. $ustomers. Spend marketing dollars here. (. Marketing opportunity 415 .. Marketing opportunity 465 E. 7osers: )Q of total re"enue. *ea$ti"ate or ar$hi"e See figure .-1 on page 81 for details. Sometimes Rlosers@ ha"e temporary reasons .hy they are not profitable0 - They may a$tually be doing a lot of business .ith $ompetitors - They may be small, but fast gro.ing businesses - They are buying the .rong produ$ts from you - They are true losers, transa$tion buyers .ho only buy .hen you are on sale. Pi"e them your $ompetitor@s numberJ Strategy de"elopment steps0 ). ,rou& your $ustomers into profitability, demographi$ or beha"ioral segments '. +etermine the (T+ o each seg"ent D. +etermine .hether you $an "odi $ their behavior to make them more profitable B. )ut $oursel in the shoes of the members of the segments E. Develo& a list of possible ser"i$es, benefits, re.ards, premiums or relationships F. Put those $hanged beha"iors and their $osts into a li eti"e value table G. Run little tests to make sure you are right. ,hat is .rong .ith dis$ounts as an indu$ement for ne. $ustomers0 -t brings in the .rong kind of $ustomers 1transa$tion based2 -t sends the .rong message 1pri$e based, not "alue based -t $osts a lot of money

Some basi$s of a relational database0 ). -ields are the smallest stru$ture 1the atom2 of a database 1e.g. last name2. '. Tables are groups of fields. A table al.ays represents a single spe$ifi$ sub%e$t that $an be an ob%e$t 1e.g. $ustomers2 or an e"ent 1e.g. orders2. D. .e$s are spe$ial fields used to uni9uely identify a re$ord .ithin a table. 7"ery table $ontains a primary key field and may ha"e one or more foreign key fields 1primary fields from other tables2. B. Records are the stru$tures in a table that represent uni9ue instan$es of the sub%e$t of the table. E. Relationshi&s are $onne$tions established bet.een pairs of tables. F. 'usiness rules are $entral to marketing use of a relational database. They are built into a relational database stru$ture. Business rules $an di$tate not only the $orre$tness of data, but they $an also permit marketers to $reate e"ent dri"en $ommuni$ations. G. ! vie# is really a "irtual table. -t usually $ontains data from many tables arranged like a report or a s$reen shot. S$reen "ie.s are often $alled dashboards.

E. Building Profits .ith *e$en$y, >re9uen$y, Monetary Analysis

3+ire$t marketers ha"e been using *e$en$y, >re9uen$y and Monetary 1*>M2 analysis to predi$t $ustomer beha"ior for more than E( years. -t is one of the most po.erful te$hni9ues a"ailable to a database marketer5. There are t.o types of fa$ts that you $an learn about $ustomers0 .ho they are 1demographi$s2 and .hat they do 1beha"ior2. A$$urate beha"ior predi$tions are important for making profitable marketing de$isions. The best predi$tor of future beha"ior is past beha"ior. *>M is pure beha"ior. Recenc$: to $ode your $ustomer base for re$en$y, you need to store one "ital pie$e of information in e"ery $ustomer@s database re$ord0 the most re$ent pur$hase data. Then you di"ide the databse into fi"e e<a$tly e9ual parts 19uintiles2, .hi$h you number from E 1most re$ent2 do.n to one 1most an$ient2. More re$ent $ustomers .ill respond better than an$ient $ustomers. *e$en$y is a po.erful predi$tor of response. 7"eryone in the .orld feels a rush of enthusiasm .hen he pur$hases a ne. produ$t or ser"i$e. The feeling lasts for a .hile. There is another .ay $alled Rhard $oding@. ;sing hard $oding, the top 9uintile is set as being some arbitrary date range, su$h as (-D months. The ne<t is D-F months et$. -f you are a telephone $ompany or a bank, re$en$y $annot be the last time the $ustomer made a phone $all or paid a bill. *e$en$y is the last time they $hanged their ser"i$e or bought an e<tra ser"i$e. -requenc$: to $ode a database for fre9uen$y .e need another pie$e of information in e"ery $ustomer re$ord. -t is a number0 the total number of times that the $ustomer made a pur$hase from you. There are many .ays of measuring fre9uen$y0 a"erage number of pur$hases per year, the a"erage number of produ$ts bought per year, the total number of ser"i$es bought et$. The rest of the pro$ess is identi$al to that of re$en$y. ,ork .ith fi"e 9uintiles. >re9uen$y is a good predi$tor of beha"ior, but less Rsteep@ as re$en$y. That is .hy *>M is *>M instead of >*M or >M*. 4ou put the most predi$ti"e first. The )@s on a fre9uen$y graph respond better than you .ould suppose, be$ause they $ontain of a lot of re$ent 1ne.2 buyers. A $ustomer .ho %ust %oined you yesterday is your most re$ent buyer. -f you lo.est 9uintile on fre9uen$y is not higher than the trend, then you probably ha"e done something .rong. Monetar$: same methods as abo"e, but no. di"ide the same people by their monetary spending. +i"ide by the total amount spent on our produ$ts or ser"i$es in total, by month, year or in some other .ay. Monetary $oding is far less predi$ti"e of beha"ior than either re$en$y or fre9uen$y.

The million-dollar $ustomer .ould be less likely to Ropen the en"elope@ be$ause he is on e"erybody@s list. But the thousand-dollar $ustomer .ho opens up .ill ha"e to think it o"er to spend 1or get permission2. The monetary graph is a $ombination of t.o opposite human emotions0 .illingness to open the en"elope and ability to pay. )utting it all together: ,hen the $oding pro$ess is finished, e"ery $ustomer should ha"e in his or her database re$ords three single digits. :ne for re$en$y, one for fre9uen$y and one for monetary. 7"ery $ustomer is a EEE, EEB, EED, S do.n to ))). There are )'E *>M Cell Codes in all. ,hen you do promotions to your $ustomers, therefore, you keep tra$k of the *>M $ell $ode that ea$h is o$$upying. Selecting a /th: Sele$t a test group using an &th. An &th is a test group that is an e<a$t statisti$al repli$a of the full database. >or e<ample, if a database had D((,((( $ustomers and .e .anted to sele$t a test group of D(,((( using an &th, .e need to sele$t e"ery tenth re$ord. 2ood grap+ of a test using t+e /FM cells in calculating break even in Figure --9 on page 1:1. 'reak0even Break-e"en in dire$t marketing means that the net profits from sales to a test group e<a$tly e9uals the $ost of promoting that test group. >ormula for the break-e"en response rate0 B7 M 1$ost per pie$e2 O 1net profit from a single sale2 >ormula for the break-e"en inde<0 B7- M 11r # B72 O B722 < )(( -n this formula, r is the a$tual response rate of the *>M $ell. A break-e"en inde< of ( means that the $ell %ust broke e"en. A negati"e number means that the $ell lost money. 1o# R-M sorting is done To $reate *>M $ells, you sort the database on$e by re$en$y, di"iding the database into fi"e e9ual parts. Then sort ea$h of these fi"e 9uintiles by fre9uen$y, di"iding ea$h into fi"e groups. >inally, ea$h of these 'E groups is sorted again by monetary, .ith )'E *>M $ells resulting. There is soft.are that $an help that is $alled *>M for ,indo.s. 4ou $an do.nload it for free from ....dbmarketing.$om -n $onsumable produ$ts, re$ent buyers not only ha"e higher response rates, but also tend to buy more per order and higher pri$ed options. R-M or '2'

There are some limits for B'B files in using *>M - 223 cells are too "an$ or a s"all ile: the solution is to bring do.n the $ells 1e.g. E re$en$y < ' fre9uen$y < ' monetary M '( $ells2 - R-M does not beat a sales visit: use *>M for the $ustomers that are not being $alled on by the sales for$e

When not to use R-M? - -f you use it all the time, some $ustomers .ill ne"er hear of you - -f you use it all the time, more responsi"e $ustomers may suffer from Rfile fatigue@ - >igure something out for the less responsi"e $ustomers. Birthday and holiday $ards are useful, thank you $ards are al.ays in season. When should $ou use R-M? - -ntrodu$tion of ne. produ$ts - +uring budget season -!4 about R-M: 1. ;o< big do /FM test cells +ave to be to be accurate= Minimum *>M Test Cell Si/e M B O B7 '. >+y use $uintiles for /FM cells= >+y not deciles= :nly for "ery large files, but test get "ery e<pensi"eJ (. ;o< do you measure recency <it+ continuity products= ,hat .e are trying to get at is 3The last time that the $ustomer made a business de$ision $on$erning your $ompanies ser"i$es5. .. ;o< do you measure fre$uency of purc+ase= The uni"ersal method is this0 test ea$h of se"eral possible methods and see .hi$h of them does the best %ob predi$ting a$tual response rates. A predi$ti"e graph is one in .hi$h there is a dramati$ differen$e bet.een the response rates of ea$h 9uintile. -. ,oes /FM measure profitability= :nly "ery indire$tly. There are really t.o different $ustomer beha"iors0 responsi"eness and profitability. ?. >+y do rollouts not do as <ell as tests= Marketers try hard1er2 to get su$$essful tests. Be sure to dis$ount the test by a fa$tor su$h as )(Q. -f you do that and the rollout is better than e<pe$ted, you look like a hero. 8. ;o< do you kno< t+e best <ays to measure recency@ fre$uency and monetary amount= The basi$ rule is to be $reati"e. 4ou are trying to determine ho. important the produ$ts and ser"i$es of your $ompany are to ea$h $ustomer. +o A-B testing .hen in doubt an pi$k the *>M system that does the best %ob of predi$ting beha"ior.

F. Communi$ating .ith $ustomers

People $all it database marketing, but the $entral idea is $ustomer $ommuni$ations. To pro"e that $ommuni$ations .ork, you absolutely must 'ave a control group. ,hy is the .eb importantA -t@s $heaper -t@s 'BOG -t ne"er puts $ustomers on hold 4ou kno. .ho read your message -t enables $ustomers to find out information themsel"es -t $an build a bound .ith $ustomers -t $an e<pand you trading area

The reason .hy .eb $ommuni$ations .ork so .ell0 - -ntera$ti"e - -ne<pensi"e - Addi$ti"e Risk Revenue Matri5 M lifetime "alue < likelihood of $hurn. ;se lo., medium high on both s$ales to get a nine-$ell matri<. =essons learned from $ustomer $ommuni$ations programs0 ). Intervie# $ustomers and employees to $ome up .ith a plan '. 'uild a database that $ontains enough data to determine =TC and likelihood to $hurn D. Run a churn "odel, and determine =TC and potential "alue 4% Create a risk revenue "atri5 E. Test $ommuni$ation against a $ontrol group F. Measure $ou success ever$ ste& of the .ay against $ontrol groups to make sure $hanges are not due to market shift. A+is c+apter is not very interestingB it describes some cases of t+e company of t+e aut+or. /eading t+e summary on page 1(( is enoug+.

G. Customer *etention and =oyalty

3The first step in loyalty-based business system is finding and a$9uiring the right $ustomers. - think loyalty is something like a su$$essful marriage5. =oyal $ustomers0 ). Ha"e higher retention rates '. Ha"e higher spending rates D. Ha"e higher referral rates B. Ha"e a higher lifetime "alue E. Be less e<pensi"e to ser"e F. Buy higher pri$ed options The link bet.een loyalty and database marketing is $ommuni$ation. =oyalty is built and maintained by t.o-.ay $ommuni$ations bet.een you and the $ustomer. 4ou ask the $ustomer for their preferen$es, they respond. 4ou store their preferen$es in your database. Then you modify your ser"i$es to make sure that their preferen$es are respe$ted. =oyalty-building Communi$ations0 - Custo"er &re erences: today its in$reasingly done on the ,eb - Caller ID and cookies: Caller -+ permits you to kno. .ho is $alling before you ans.er the phone, the same goes for $ookies on your .ebsite. - *vent0driven relationshi& "essages: these are not sales pit$hes. They are e<pressions of friendship. ;se tra.ling to trigger e"ents like birthdays, making big pur$hases or an anni"ersary as a $ustomer .ith your $ompany. Send kind notes on the e"entsJ - *vent0driven "arketing "essages: look for .hat they are sear$hing for on your .ebsite and $ommuni$ate it as Rprodu$t of the month@. *e$ord .hat they are asking for at $ustomer ser"i$e and send personali/ed messages. =oyalty programs0 The $ard does t.o things0 it pro"ides the $ustomer .ith some benefit he $ould not get .ithout the $ard and it pro"ides you .ith "aluable information that you $an use to understand the $ustomer and build loyalty. The registration is the entran$e to the .orld of loyalty marketing. 3,e must .ater .hat .e .ant to gro.. But first .e must de$ide .hat .e .ant to gro.SAll $ustomers are not e9ual. Beha"ior usually follo.s re.ards5. ,ealthy $ustomers are more loyal. 7"en more influential than age, gender, or geography, household in$ome pro"ed to be the most indi$ati"e of the strength and impa$t of $ustomer loyalty.

=oyalty-based $ompanies should remember three rules of thumb0 2% So"e custo"ers are inherentl$ &redictable and lo$al, no matter .hat $ompany they are doing business .ith. The simply prefer stable, long-term relationships. 2% So"e custo"ers are "ore &ro itable than others% They spend more money, pay their bills more promptly, and re9uire less ser"i$e. 6% So"e custo"ers #ill ind $our &roducts and services "ore valuable than those of the $ompetition. 6o $ompany $an be all things to all people. 4our parti$ular strengths .ill simply fit better .ith $ertain $ustomer@s needs and opportunities. Satisfa$tion s$ores may be .orthless as a means of measuring $ustomer loyalty. -n the automobile industry, Ameri$an $ars typi$ally ha"e satisfa$tion s$ores in the I( per$ent, but the repur$hase rates ho"er around DE per$ent. *epur$hase is the best indi$ator of loyalty. Petting $ustomers to be loyal0 - We can treat lo$al custo"ers better% o Spe$ial $ustomer ser"i$e lines, .ebsites or phone numbers o Create ad"isory panels made up of the best $ustomers o Ha"e spe$ial member only nights o Ha"e spe$ial seminars or reports o Host an annual retreat at a resort for the C7:@s of the best $ustomers - We can re#ard lo$alt$ .ith points or benefits - We can var$ our custo"er acquisition "ethods to attra$t good $ustomers and a"oid the bad ones. -nter"ie.ing the defe$tors0 Probably the most important name on your $ustomer database are those of the people .ho ha"e re$ently deserted your. These people are "aluable. They pro"ide important $lues as to .hat you are doing right and .rong. 4ou should set up an ongoing program to inter"ie. them to determine .hy they left.

H. Customer Segmentation
3Today .e ha"e thousands or e"en millions of $ustomers. To mange them .e $annot $reate a million different marketing programs. ,e $reate a fe. segments, and $reate a marketing program for ea$h segment5. Segment strategy $on$epts0 ). Segment definition '. Segment strategy de"elopment D. Segment analysis 8 $ampaign infrastru$ture plan B. -mplementation a$tion plan An ideal segment is one .hi$h0 - Has definable $hara$teristi$s - -s large enough - Has members .ho $an be moti"ated - Makes effi$ient use of a"ailable data - Can be measured in performan$e 1.ith $ontrol groups2 - ustifies an organi/ation de"oted to it 1someone in the $ompany .ho o.ns the segment2 +efining the segments re9uires0 - Insight: de"elop hypotheses about ea$h possible segment - !nal$tics: statisti$al analysis .hi$h supports or re%e$ts ea$h hypothesis - !necdotes: su$$ess or failure stories, they offer a $lue .hat does O does not .ork Strategy0 - Co""unications to the segment - Re#ards designed to modify the beha"ior - Controls to measure the su$$ess of the strategy - A budget for implementation of the strategy - S&eci ic goals and metri$s for the engagement - !n organi7ation that a$$epts responsibility for the segment A$tion plan0 - *oadmap - Budget - Standard appli$ation of the segmentation - *esponsibilities for the segment - Spe$ifi$ goals .ith milestones 3+e"elopment of segments begins .ith the dreaming up op segment hypothesis # - think that a segment e<ists thatS5 6ot e"ery segment that you $an dream up .ill be a profitable one to pursue. Segment strategy de"elopment begins by understanding ea$h $ustomer segment, its si/e, potential "alue, and the best .ay to rea$h them. Then

you start mapping the $ontent, the offers, the $hannel and the $onta$t strategy .ith that segment. The strategy for ea$h segment should in"ol"e0 - Targeted $ommuni$ations to the segment - ;sing the $hannel that .ords best for ea$h $ustomer -f your program is not .orking, it may be be$ause your are not offering the $orre$t re.ards. 2reat e"ample at t+e end of page 1?? & beginning of page 1?8. ,hat this means is that your segments should refle$t the lifestyle and attitudes of the people you are dealing .ith, at their parti$ular life stage. Status le"els and segments0 Segments are different from status le"els. 4ou $an look at a segment as a marketer, trying to build loyalty and repeat sales, 4ou $an look at a status le"el as a $ustomer trying to earn re$ognition, in$reased status and perks. Pood 9uestions to ask .hen doing segmentation0 ,ho are my best $ustomersA ,hat per$entage of sales do they generateA Ho. big is their budget and my Rshare of .allet@A ,hat are their $hara$teristi$sA ,hen and .hat do they buy in our $ategoryA ,ho buys full pri$es "ersus on dis$ount onlyA ,hen and .hat do they buy from the $ompetitionA

>i"e steps to $reate a segment0 - +etermine the beha"ior that dri"es ea$h segment - -dentify naturally o$$urring $lusters of $ustomers ea$h .ith a uni9ue buying pattern - 7nhan$e these $lusters .ith lifestyle data and demographi$s - Condu$t an in-depth sur"ey of ea$h $luster for $ompetiti"e information and attitudes - 7merge .ith an multi-dimensional pi$ture of ea$h segment Appending data to your segments0 - Claritas 1....$laritas.$om2 .ith its P*-TM 67 system has de"eloped $onsumer segments $ontaining FF $lusters organi/ed into )B groups sin$e )IGB. Ser"i$e bureaus like !no.ledgeBase Marketing, 7<perian or A$<iom often ha"e the Claritas database in house. - Census data - Digital /eighborhoods: !no.ledgeBase Marketing, ,underman and Coms$ore $ombined on-line insight gleaned from a $ross-se$tion of the online population. This $ombination produ$ed a segmentation of $onsumers # and an interesting set of $lusters # based on detailed on-line $hara$teristi$s and a$ti"ity. +igital neighborhoods $reated three $omponents of $onsumers@ in"ol"ement .ith the internet0

o Presen$e o *elationship o Transa$tion The higher the $onsumers s$ored on ea$h of these three fa$tors, the more in"ol"ed they .ere online. The system segmented $onsumers into )G $lusters using three age groups a$ross three ma%or ein"ol"ement le"els. See figure H-I on page )GE for more detailsJJJ 4uadrant anal$sis: one of the most po.erful 1and simple2 te$hni9ues of looking at $ustomers is 9uadrant analysis. Pi$k t.o des$ribing fa$tors on the a<is 1e.g. in$ome "ersus spend2 and populate it .ith other des$ribing data in the 9uadrants. Then de$ide .hat the strategy is for ea$h 9uadrant. For e"amples see figure 9-1: on page 18?) Ho. many segments should you ha"eA Some marketers $reate hundreds of segments. That is a mistake. =imit yourself to the ones that you $an manage. >or most $ompanies, ten segments are plenty.

I. Ho. Predi$ti"e Modeling Boost *esponse

,ith a good predi$ti"e model you $an determine0 - ,hi$h $ustomers and prospe$ts are likely to buy, and .hi$h are unlikely to buy - ,hi$h $ustomers are in danger of lea"ing you, and .hi$h are more likely to stay - ,hi$h produ$ts they are more likely to buy The ideas behind database marketing predi$ti"e models rest on some simple prin$iples0 - Prospe$ts and $ustomers in many segments rea$t in predi$table .ays. - Clues to e<pe$ted $ustomer beha"ior $ould sometimes be dis$erned in their pre"ious beha"ior and their demographi$s. - A predi$ti"e model is usually de"eloped from the response to pre"ious promotions. ;sing the result of a pre"ious promotion, you build a statisti$al model, .hi$h su$$essfully indentifies the $hara$teristi$s of the responders and the non-responders. 4ou use that model to s$ore a ne. bat$h of )((,((( names. -f you mail only to the E(,((( .ho the model identifies as the most likely responders, you should get a response rate of more than ' per$ent # perhaps D per$ent or more. This .ill be mu$h more profitable for you, and a"oid bothering people .ho are not interested in your produ$t. The 1simple2 steps for predi$ti"e modeling0 2% Do a &ro"otion8 or use a &revious &ro"otion as $our base% 4ou .ill need enough $ustomers in your model. The rule of thumb is you need about E(( $on"ersions 1sales2 '. !&&end de"ogra&hic and behavioral data to your responders and non-responders D. !dd geogra&hic data, besides this appended data, you should add pre"ious pur$hase history .ith your $ompany to your mi< of data grouped .ith e"ery $ustomer re$ord that you plan to use in your model. 4% Divide $our data into t#o &arts A test group of )','E( non-responders and 'E( responders and a "alidation group of )','E( non-responders and 'E( responders. Both groups should ha"e e<a$tly the same type and "ariety of people. E. Discard the outliers% These are $ustomers .hose pur$hases .ere so unusual that they .ill distort the out$ome F. Construct $our "odel% ;se a multiple regression model. A regression is an e9uation that des$ribes the relationship bet.een a dependent "ariable and more than one independent "ariable. The dependent "ariable is the pur$hase that the $ustomer made as a result of your promotion. The

independent "ariables are the beha"ior and appended data listed abo"e. ,hen the model is run, it applies .eights or le"els of importan$e to ea$h of the independent "ariables. A "ariable importan$e is a number that indi$ates ho. important 1.eighty2 is ea$h "ariable in predi$ting the desired result 1they bought the produ$t2. For an e"ample of t+e outcome see Figure C-( on page 19-. G. Deter"ine the #eights or each variable Con$entrate on using in the model those independent "ariables that ha"e a high .eight in determining the out$ome. Build your model based on the fi"e or si< "ariables that pro"ide the greatest predi$ti"e po.er. 9% Develo& an algorith" -n the $ase of a statisti$al model in marketing, the algorithm usually in$ludes the $omputer $ode that $reates a s$ore for ea$h $ustomer or prospe$t re$ord. The s$ores may "ary from IE per$ent $ertain to buy the produ$t do.n to E per$ent. :% Score the validation grou&% -f the algorithm de"eloped for the test group is going to be useful in predi$ting, it should $orre$tly identify most of the people in the "alidation group .ho bought 1.ith a high s$ore2 and those .ho did not buy 1.ith a lo. s$ore2. -f the algorithm does $orre$tly s$ore the "alidation group, then you ha"e a su$$essful model, .hi$h $an be used to predi$t $ustomer response in your ne<t promotion. What i it does not #ork? 4ou either ha"e to redo your model, or gi"e up the .hole pro$ess as a bad %ob. -t may be that .ith the data you ha"e a"ailable, a model $annot pi$k predi$t the responders. This is "ery often the $ase. A general rule of thumb0 if the solution does not seem to make sense to you, then it probably does not make sense. Modeling does not al.ays .ork. Modeling is not magi$. -t is only a 9uantifi$ation of intuiti"e logi$. Who #ill bu$? After s$oring the file of prospe$ts you typi$ally di"ide the s$ored file into de$iles. The top de$ile 1)( per$ent2 of the file2 $ontains those people most likely to buy. 4ou probably should not mail de$iles F-)(. 4ou should, ho.e"er, mail a fe. 1E per$ent2 of ea$h of these lo. performing de$iles %ust to pro"e to yourself, and to your management, that the model is still .orking properly and a$tually does predi$t the buyers $orre$tly. 34ou $an pur$hase $ompiled names from list brokers based on the model, in that .ay you only pay for re$ords that ha"e a high Rbuying@ s$ore5. 3-n a model, beha"ioral data typi$ally is more po.erful than demographi$ data. -n other .ords, you $an predi$t better .hat people are going to do in the future base on .hat they ha"e already done in the past than by basing your model on .ho they are 1age, in$ome, home "alue25.

3The po.er of prior beha"ior is one reason .hy it is important in building a marketing database that you keep n your database as mu$h of the $ustomer transa$tion and promotion history as possible5. 3Banks ha"e a lot of data about their $ustomers. They $an use their database to e<amine $ustomers .ho ha"e only $he$king a$$ounts. >rom the data they $an determine .hether our ne<t produ$t should be a home e9uity loan, an auto loan, a sa"ings a$$ount, or mutual funds. Ho. do the do thisA By using a model to see .hat thousands of their depositors ha"e pur$hased mutual funds look like in terms of beha"ior and demographi$s, and ho. the differs form those depositors .ho ha"e been offered mutual funds but ha"e not bought them. The model is used to s$ore all their depositors. Those depositors .hose s$ores resemble the mutual fund buyers are likely targets for a mutual fund promotion. Mutual funds are their ne<t best produ$t. The ne<t best produ$t is put into the $ustomer re$ord and $alled up on the tellers@ s$reen .hen you $ome in to $ash a $he$k or make a deposit. -t is also used in mailings to depositors5. 3-n the ;S re$ently, the $hurn rate in tele$om .as '.I per$ent per month, or DE per$ent per year5. Modeling ;sing C1!ID !nal$sis -n addition to regressions modelers use CHA-+, or Chi-s9uare Automati$ -ntera$tion +ete$tion. CHA-+ is a $lassifi$ation tree te$hni9ue that displays the modeling results in an easy-to-interpret tree diagram going from top do.n instead of from the bottom up. Smart+rill 1....smartdrill.$om2 are e<perts in this te$hni9ue. See Figure C-1( on page 1C- for an e"ample. The segment in the tree diagram $an be sho.n in a 3gains $hart5. The gains $hart is a handy tool for seeing .hat le"els of e<pe$ted profitability .ould result from going in$reasingly deeper into a prospe$t file. CHA-+ helps to $reate market segments. The tree diagram predi$ts the performan$e of ea$h segment.

)(. Customer a$9uisition

3,hat is the best .ay to a$9uire $ustomersA That is a tri$k 9uestion, be$ause there is no best .ay. Ho. do you kno. $hi$k is bestA 4ou try e"erything, and see .hat .orks best5. 1o# direct "ail acquisition #orks 4ou begin .ith a list. There are more than B(,((( different lists of $onsumers and businesses a"ailable for rent for dire$t mail a$9uisition 1in the ;S2. 4ou $an e<pe$t to pay bet.een KE( and K'E( per thousand names for a one-time rental. Types of lists0 - Res&onse lists $onsists of $ustomers .ho ha"e made a pur$hase ore responded to an offer. - Co"&iled lists $onsist of nearly all the names in a $ountry 1$onsumers2 3-n general, e"ery database marketing $ommuni$ation should al.ays be a test, so you .ill be testing at least t.o offers5. Choice kills: 4ou should not gi"e re$ipients a $hoi$e. 4ou .ill find that your response rate to a spe$ifi$ offer beats your response rate to an offer about .hi$h the re$ipients has to make a de$ision. A ser"i$e bureau .ill go through a series of steps no. $alled traditional merge purge, .hi$h are des$ribed in detail belo.0 ). Con"ert your lists into a single or"at, keeping tra$k of the sour$e of ea$h name '. *unning the file through the /ational Change o !ddress 16C:A2 D. De0du&ing the $ombined file to $onsolidate the dupli$ates and to suppress names on your house file B. Dividing the ile into seg"ents that permit you to test the effe$ti"eness of ea$h of our files and your t.o offers E. *unning the file through a series o &ostal so t#are routines to be sure that they are deli"erable, and organi/ed to re$ei"e the ma<imum postal ser"i$e dis$ount. 3-n the ;S, about '(Q of households mo"e e"ery year5. A dire$t mail $ampaign often $onsists of hundreds of different mailing $ells, ea$h designed to test something. >or ea$h $ell you $reate a mail $ode0 HAD'', HAD'D, HAD'B et$. ,hen the $ustomers respond by phone or through the -nternet, you attempt to $apture this $ode from them so that you $an see .hi$h list and .hi$h offer gets the $redit for the response. -f you use e-mail addresses from opt-in lists, there are some rules that you should follo.0

Al.ays identify yourself $learly in the address line Pro"ide a physi$al address, a ;*= and a phone number 7<plain ho. you got the persons name and address Pro"ide a simple one-$li$k opportunity to ha"e the person@s name dropped from you mailing list What kind o res&onse rates #ill $ou get? +ire$t mail response rates are seldom "ery high. >or most mailings, a ' per$ent response rate is normal. Some mailings ha"e a$hie"ed response rates of )( per$ent or '( per$ent but that is "ery rare. The +ire$t Marketing Asso$iation 1....the-dma.org2 pro"ides a report on a"erage response rates in "arious industries. The response rate you get .ill depend on a number of fa$tors0 - The offer - The $opy - The pa$kage - The $ompetition - 6ut t+e most important factor is A;! 7ISA Ba$kend analysis is "ital to su$$essful database marketing. 4ou should get better and better at $ustomer a$9uisition as a result. Che$k the response by produ$t, $ell $ode, list, offer, pa$kage and /ip $ode. -f you ha"e appended demographi$ data to your mailing file, you .ill .ant to see ho. you offer did by in$ome, age, edu$ation, type of home, length of residen$e and many other fa$tors. Se"eral .ays of a$9uiring retail $ustomer names0 - Creating an in-house $redit or fre9uent buyer $ard - *egistering $ustomer $redit $ards - *e"erse phone append A &ros&ect database .orks this .ay0 A mailer negotiates .ith list suppliers to let him ha"e their name on his file for an entire year 1or a 9uarter2. He pays the list o.ner .hene"er one of their names is used. Sin$e he has the names for a year, he $an afford to append demographi$s to the names. Armed .ith this information, after the first mailing he $an use ba$k end analysis to see .hi$h groups respond better. The ne<t step of $ourse is to de"elop models that predi$t the type of person that .ill respond to ea$h offer. ,ith your model, a compiled list be$omes also more "aluable 'usiness0to0business custo"er acquisition: -n trying to a$9uire business $ustomers, your primary interest is industry 1S-C $ode2, annual sales of the $ompany and number of employees. A+e 3aterpillar case on page '1- is pure gold in +o< to do good database marketing)))

)). Strategy Cerifi$ation0 Testing and $ontrol groups

3The holy grail of dire$t marketing is the single-"ariable test. 4ou .ant only one thing to $hange in ea$h test. -f you@re going to test pri$e, then you test t.o pa$kages that are the same in all respe$ts e<$ept for pri$e.5 The first step in any testing program is to determine .hat you are tying to a$$omplish. The goal of database marketing programs is usually to0 - -n$rease sales to e<isting $ustomers - *edu$e attrition - Pain ne. $ustomers The best method is to define your $ustomer lifetime "alue, and test the effe$ti"eness of "arious alternate .ays of in$reasing lifetime "alue. To set up a test you need t.o groups of $ustomers0 a test group 1.ho gets the offer2 and a $ontrol group 1.hi$h does not get the offer2. ,ithout the $ontrol group, you .ill learn "ery little. Control groups do not ha"e to be the same si/e as test groups. They $ould be larger or similar. They ha"e to be large enough to gi"e "alid results, and they ha"e to be e<a$tly the same type of people in the test group. ,hen the groups are set up, a promotional offer is made to the test group. The $ontrol group is treated like e"eryone else. Their pur$hase beha"ior is $ompared in the marketing database. >ollo. your groups o"er a longer period of time, be$ause the testing group .ill mo"e up higher in *>M $ells and there .ill be positi"e effe$ts long after the promotion .ill be o"er. Pood testing programs .ill follo. the test and $ontrol groups for the follo.ing )' months to determine the residual effe$ts of the test. -n some $ases the residual effe$ts $an be e"e more important than the initial response to the promotion. =ifetime "alue, rather than the immediate short-term payoff, should be the real goal of marketing database strategy. Control grou& si7e Ho. big should a test or a $ontrol file beA 7a$h group must be big enough so that you $an anti$ipate a minimum of E(( responses from the promoted group. -f you anti$ipate a t.o per$ent response rate, then your test group must ha"e at least 'E,((( people in it. ;sing hal li e in tests -f you sent out a promotion, it may take many .eeks before all the responses ha"e $ome in. That is .hy half-life analysis is useful. 4ou should re$ord e"ery day ho. many responses ha"e $ome in that day., both the number of responses, the 9uantity sold and the amount of money re$ei"ed. =et us say that you get ',((( orders from a promotion in total. -f you re$ord your sales daily, you .ill find that there is one day on .hi$h the ),(((th order is re$ei"ed. Hat is your half-life day. >ree soft.are a"ailable from the +atabase Marketing -nstitute 1*>M for ,indo.s2 enables you to

do half-life analysis 1....dbmarketing.$om2

)'. -nternet Marketing

3To use the -nternet to generate leads for agents, you data strategies must fo$us on 9ualifying the leads generated, so that agents $an handle the in$reased "olumes. -f you $an impro"e the $on"ersion rates .ith demographi$s, it@s .orth any amount of money5. :n the .hole, the aggregate .eb sales numbers are still small. So .hy is the ,eb important as a marketing $hannel0 - 1ffluent people: .eb shopping people ha"e higher in$omes - *urc+asing researc+: many .eb users do their pur$hasing resear$h before they go out and buy - /evie<s: on$e people start making a habit of looking up lo$al retailers before they "enture forth, the re"ie.s .ill be$ome a part of their li"es. Ho. does this apply to database marketingA - Searc+ bo": the .ebsite should build a file that stores .hat people put in the sear$h bo< - Searc+ engine: put a lot of information like $ase studies, .hite papers, produ$t des$riptions, maga/ine arti$les on you .ebsite to be found. 3-n designing your site, think like a $ustomer. +o not think .hat you .ant to sell5. T.o tips0 - =et $ustomers register .ithout hassle - Pro"ide li"e help 1e.g. ....li"eperson.$om2 a$ob 6ielsen point out that transa$tional e-mail has three goals0 ). A"oid being mistaken for spam '. Be a $ustomer ser"i$e representati"e D. Pre"ent $ustomers from $alling in 3Pood e-mail should respe$t users@ time and 9ui$kly tell them .hat they need to kno.. Start .ith the information that matters most to users5. Tra#ling: looks at e"er re$ord in the database .hi$h has been $hanged sin$e the last update and applies business rules tot the data it finds. >or e<ample it .ill determine if the $ustomer0 - -s about to ha"e a birthday or anni"ersary - Had an unusually large transa$tion - *ea$hed a milestone .ith the $ompany in terms of total sales, years

.ith the $ompany et$. 7a$h hit during tra.ling has a programmed marketing response. These are automated $ommuni$ations. Nice case study about tra<ling: A+e National 1ustralian 6ank on page '.C)

Ho. to respond to $ommuni$ationsA :n$e you are set up to send automated $ommuni$ations, you also ha"e to be prepared to respond to them. There are t.o things that you $an, and should do to prepare for $ustomer response0 - ;se a "icro site - Install an e0"ail res&onse s$ste": you $an get help from $ompanies like ....e-mailtopia.$om This $hapter .as not "ery interesting. -t sho.s the author has a little bit la$k in kno.ledge about modern -nternet marketing.

PA*T

D
Profiting by 7<perien$e

)D. *etailing and Pa$kaged Poods

Ho. to a$ti"ate $ustomers for retailers0 Create intera$ti"e .ebsites *egister $ustomer@s $redit $ards =earn more through sur"eys and append data Targeted solo mailing offers >ollo. up .ith personal ser"i$e !eep tra$k of important data 1birthday, anni"ersary2 ;nderstand the geo-demographi$ of the store trading area better Profile $ustomers into profit groups 7<periment .ith $ataloging Sears introdu$ed in their ne. database system0 Planning 1*>M2 Migration analysis 1by *>M $ells2 Tra$king $ustomers 7arly .arning system 1performan$e by media2 Payment method analysis Half-life analysis

,hat -

3,e are no longer trying to take $ustomers a.ay from our ma%or $ompetitors. :ur fo$us is to make money .ho are already shopping at us5. 3,e are $on$entrating on our top customers, not our top merc+andise. -t is more profitable that .ay5. *eason for failure0 - Aimidity: top management is not $ommitted - *uny re<ards: dis$ounts .ere not meaningful - Over reliance on vendors: the program only features slo. mo"ing items that the "endor .ants to push, instead of .hat the $ustomer .ant to buy - Information starvation: $ompanies forget to $apture $lient beha"ior - Failure to differentiate: one si/e fits all does not .ork - 3ustomer specific marketing <as not t+e core strategy: do not use it as Rthe ne<t promotion@ - Internal political problems There are se"eral reasons .hy pa$kaged goods database pro%e$ts seldom .ork out on the .eb0 - There is not enough margin to do database marketing - 4ou $annot find out .hat the $ustomer is doing - Coupons ha"e seriously eroded brand loyalty So .hat $an you doA - 4ou $an .ork .ith retailers

- 4ou $an build a .ebsite - 4ou $an set up a $lub 16intendo $ase2 Affinity groups !imberly Clark $ase 1pregnant mothers2 3-f you feel that - am .arning you to go slo.ly and $arefully before you rush into database marketing for pa$kaged goods, you ha"e gotten the message5.

)B. Building *etention and =oyalty in Business Customers

3There are many produ$ts and ser"i$es .here database marketing has limited "alue. -n business-to-business marketing, ho.e"er, relationship building a$ti"ities al<ays pay off5. There are se"eral reasons0 - The sales amounts are usually large - The data on $ustomer pur$hases is almost al.ays a"ailable - The number of $ustomers is usually 9uite small - 7a$h business $ustomer has problems of his o.n to sol"e Professor Paul ,ang di"ides business $ustomers in four basi$ $ategories. There are t.o a<es0 pri$e and ser"i$e0 ). 'argain 1unters are $ustomers .ho ha"e tremendous bargain po.er 1e.g. ,al-Mart2 '. )rogra" bu$ers are on the other end of the s$ale. They do not ha"e the market po.er that $omes from "olume pur$hases 1e.g. small pur$hasers of offi$e supplies2 D. Transaction bu$ers ha"e absolutely no loyalty. The 9uestion is .hat your pri$e is today. Transa$tion buyers usually get little ser"i$e. Ser"i$e is not important to them. Pri$e is e"erything. Paul ,ang suggests that the only .ay to make money .ith transa$tion buyers is to negotiate annual "olume pur$hase agreements. B. Relationshi& bu$ers are the $ustomers for .hom database marketing .as in"ented. They are looking for a dependable supplier0 a. Someone .ho $ares about their needs b. Someone .ho remembers .hat they bought in the past and gi"es spe$ial ser"i$es as a re.ard $. Someone .ho takes an interest in their business and treats them as indi"iduals. By $lassifying your $ustomers into these four segments, you $an fo$us your marketing efforts on the one segment that is really profitable, the relationship buyers. 4ou already kno. the bargain hunters. Program buyers $an almost be ignored. They make small pur$hases on o$$asional basis. 4our big problem lies in distinguishing transa$tion buyers from relationship buyers. 4ou $an identify the transa$tion buyers by a small sur"ey. Ask one 9uestion0 Ho. important are the follo.ing in making your de$ision about .here to buy this produ$tA *ank from ) # most important to E # least important. Those .ho $ode pri$e as most important are probably the transa$tion buyers0 a. Pri$e b. Ser"i$e $. *eputation d. *e$ommendation of friend

e. Company poli$y f. Pre"ious e<perien$e g. Customer ser"i$e ,hat should you do for relationship buyersA - +es$ribe .hat your produ$ts do - +i"ide your $ustomers into groups and send them different messages - Create an ad"isory panel for ea$h group - Sponsor $ontests in trade asso$iations for the most $reati"e use of your produ$ts - =earn the birthdays of key people in your database and send them a $ard - ,rite thank you letters periodi$ally for their pur$hases Integrated account "anage"ent +i"ide the $ustomers into three $ategories0 - Pold $ustomers0 sales for$e $alls on all of these - Profitable $ustomers0 sales for$e .on@t $all them, use relationship and database marketing - =o.er "alue $ustomers0 don@t bother .ith them -AM 1integrated a$$ount management2 is a ne. approa$h to integrated a$$ount management0 ). The sales for$e is repla$ed by 1regional2 marketing team. The 1regional2 marketing manager talks to $ustomers on the phone and e-mail and s$hedules the "isits of the field representati"es '. The field representati"es no longer sell? instead, they be$ome business $onsultants that help the $ustomers to sol"e their business problems. D. Customer ser"i$e is empo.ered to sol"e problems. The $ustomer ser"i$e representati"e must stay .ith the $ase until it is sol"ed. -ntegrated a$$ount management is usually highly effi$ient as $ompared to more traditional methods of dealing .ith b'b $ustomers. Customers like it better, and respond .ell to the ne. setup. 3Hundreds of $ompanies are sa"ing money and building $ustomer relationships on the ,eb. -n the long run, these t.o fun$tions .ill probably be more important than the total amount of dire$t sales to ne. people5.

)E. >inan$ial Ser"i$es

>inan$ial ser"i$es offer one of the most profitable appli$ations for database marketing. This is so be$ause finan$ial institutions0 - Ha"e a lot of useful information about their $ustomers - Can a$$urately determine the profitability of ea$h $ustomer - Are usually important to their $ustomers@ li"es - Ha"e many opportunities to intera$t .ith their $ustomers during the a"erage month To build a marketing database, most banks had to start by attempting to $onsolidate all their $ustomers@ a$$ounts into a single Marketing Customer -nformation >ile 1MC->2. To impro"e sales and retention, they ha"e to be$ome a total finan$ial solution, looking at $ustomers and households, instead of indi"idual produ$t o.ners. Banks ha"e dis$o"ered that there is a $lear relationship bet.een the number of bank produ$ts o.ned by a $ustomer and the $ustomer@s retention rate. See figure 1--1 on page (:1. Steps in $reating profitable relationships .ith $ustomers0 - +e"elop an a$$urate and $redible system for deter"ining the &ro itabilit$ of ea$h $ustomer on a periodi$ basis - +e"elop seg"entation sche"es that di"ide $ustomers into useful and a$tionable segments - Develo& and i"&le"ent tactics, .hi$h are used to modify the beha"ior of employees and $ustomers to in$rease sales, impro"e retention, lo.er $osts and impro"e profits. Cital $on$epts for understanding profitability0 - 3ost of funds0 the amount of interest e<pense paid for the funds uses - Funding credit: the amount earned on the deposits - Margin: the differen$e bet.een the interest earned and the interest e<pense - 7oan loss provision: the pool of dollars reser"ed to $o"er e<pe$ted loan losses - 3apital allocation: the amount of $apital set aside for ea$h produ$t to $o"er une<pe$ted losses and is based on the o"erall risk profile of the produ$t - 3apital c+arge: $apital allo$ated multiplied by the bank@s desired rate of return - Over+ead: the fi<ed and "ariable e<penses asso$iated .ith the produ$t - F,I3 e"pense: the $ost of pro"iding deposit insuran$e though the >ederal +eposit -nsuran$e Corporation Three measures of $ustomer "alue0 - (i eti"e &ro itabilit$: the net present "alue of the e<pe$ted future

stream of net in$ome after the $ost of $apital, dis$ounted at the $orporate hurdle 1re9uired rate of return in a dis$ounted $ash flo. analysis2 )otential &ro itabilit$: probability of pur$hase 1other produ$ts2 < e<pe$ted 6-ACC 16et -n$ome after Cost of Capital2 from usage # Promotional e<pense )otential custo"er value: adding together lifetime profitability and potential profitability

Se"en typi$al indu$ements for retention of $redit $ard holders0 ). -n$rease the $redit line '. ;pgrade the $ard to Pold status D. Pro"ide $ash ad"an$e $he$ks B. *edu$e the interest rate E. *edu$e the annual fee F. ,ai"e the annual fee G. Pro"ide Rmiles@ for e"ery dollar spent

)F. ,hy +atabases >ail

Mistake 2: (ack o "arketing strateg$ Some.here in your plan there must be a pra$ti$al program for using the names, .hi$h a$$omplishes a definiti"e ob%e$ti"e. 4ou .ill need0 - Some benefit that the $ustomer .ill gain by being on the database - A $ontrol group that does not get spe$ial attention so you $an measure - A a$hie"able numeri$ goal - A series of pra$ti$al steps, .hi$h modify beha"ior of $ustomers - A segmentation system that separates profitable from unprofitable $ustomers - A long-range 1three year2 plan .ith a budget 4ou .ill need both $onstru$ters and $reators. A constructor is someone .ho is interested in building a database? a creator is someone .ho figures out ho. to make money .ith the database. A simple re$ipe for database marketing strategy0 ). +e$ide .hat you .ant your $ustomers to do '. ,hen you ha"e defined your goal, 9uantify it D. +etermine ho. you are going to modify the $ustomers $urrent beha"ior B. +etermine ho. mu$h you are prepared to spend on a$hie"ing your goal Mistake 2: ocus on &rice instead o service 3+atabases are built on relationships. :n$e you begin talking dis$ount, it sends the .rong message. A dis$ount is .hat e"eryone else offers. +is$ounts do not build loyalty5. So .hat is .rong .ith dis$ountsA - A dis$ount erodes your margin - A dis$ount tells $ustomers that your produ$t is o"erpri$ed - A dis$ount makes people think about ho. mu$h they are paying instead of ho. mu$h they are getting - Any $ompetitor $an mat$h your dis$ount Solid relationships built through database marketing are immune to dis$ounts. 4ou $ustomers prefer you be$ause you are an old friend .ho re$ogni/es them, .ho pro"ides personal ser"i$es and deli"ers a .ellkno.n 9uality produ$t. Mistake 6: getting the econo"ics #rong 3=ife is too short to spend it $orresponding .ith the makers of all the produ$ts and ser"i$es that .e use e"ery day. :n the other hand, if you sell automobiles, rental $ars, insuran$e, po.er tools, "a$ation $ruises,

soft.are or $omputers, your $ustomer list $ould be turned into a "aluable database5. Big-ti$ket items, repeat sales items, $ross-brand possibilities0 these are the lifeblood of marketing databases. Tips for getting the e$onomi$s0 Test first Compute the $osts ,ork out lifetime "alue !no. your market

Mistake 4: ailure to link $our database to the #eb *ules for .eb su$$ess0 - The ,eb should not be the only $hannel - Companies .ith established business $an in$rease their business .ith ,eb $onta$ts and sales - Colle$ting e-mails .ith permission to use them is one of the most "aluable a$ti"ities - ,eb response is so mu$h less e<pensi"e than phone responses - ,ebsites must be managed by marketing and not by -T - The ,eb is an ordering medium, not primarily a sales medium - ;se $ookies to re$ogni/e you $ustomers - ;se tests and $ontrols to pro"e that .hat you are doing is profitable 3omment: poor part about t+e >eb againD Mistake 3: building the database in0house ,hy this is a mistake0 - >e. $omputer systems are built for marketing - -n-house M-S staff seldom ha"e the spe$iali/ed soft.are and e<perien$e needed to do database marketing - Most $omputer operations are stable systems that run for years .ithout $hange. Marketing is dynami$ - -t .ill take you longer to get your database up and running and $ost you mu$h more :n$e your database is su$$essfully built and running, it $an al.ays be migrated to your in-house $omputer. But in the $ru$ial formati"e years, you $annot afford to rely on a part-time pi$k-up %ob done by an ine<perien$ed in-house $re.. Mistake <: treating all custo"ers alike ,hat does it take to $hange an organi/ation to begin to fo$us on the $ustomerA - -nformation - +etermine $ustomer profitability and =TC - Create a $hart that sho. $ustomer retention and profitability based on the number of different produ$ts o.ned

Proup $ustomers into segments +e"elop strategies for ea$h segment =ook at $ompensation system that permits you to $arry them out Change your organi/ation and $ompensation system to assure that you be$ome $ustomer $entri$

Mistake =: ailure to use tests and controls -t $ould be that business during a spe$ifi$ 9uarter is do.n e"ery.here. Those .ho .ere e<posed to your ne. strategy might be the only bright spot in an other.ise dismal situation. Mistake 9: lack o a retention &rogra" *etention programs .ill impro"e your bottom line. Many industry reports sho. that K)(( spent on retention programs has a higher payoff in terms of profit than K)(( spent on ne. a$9uisitions. Mistake :: lack o a orce ul leader -f you are planning a database in your $ompany, be sure you ha"e found a strong leader and that he or she has been delegated the responsibilities and authority to make it .ork. ,ithout this, your database .ill ne"er get of the ground. 1o# to do things right: Put yourself in the $ustomer@s shoes Build a database team Think small and a$t fast !eep your eye on the bottom line

)G. +atabase types that su$$eed

There are really to separate 1but related2 forms of database marketing0 a. *elationship building .ith $urrent $ustomers b. Marketing to prospe$ts sele$ted by de"eloping profiles of the most profitable $ustomers *5a"&les #here relationshi& "arketing #orks i done correctl$ >igure )G-) on page DBH, .ith e<amples of produ$ts and ser"i$es. Di icult relationshi& "arketing situations >igure )G-' on page DBH, .ith e<amples of produ$ts and ser"i$es. Criteria for su$$ess0 - The pro"ider has a .ell thought through database marketing program - There must be a payment system for the produ$t or ser"i$e that makes it easy to get names, addresses and pur$hase beha"ior - The produ$t or ser"i$e in"ol"es periodi$ repeat pur$hases - There is a definite affinity group from .hi$h a database $an be $onstru$ted - The pro"ider $an $onstru$t a fre9uen$y re.ard system .ith signifi$ant benefits for both parties ,hen it .ill not .ork0 - The produ$t is a $ommodity .ith a markup that is too narro. to finan$e relationship-building a$ti"ity - The pur$hase is made seldom and unpredi$tably

)H. Choosing Business Partners

,hat fun$tions $an you outsour$eA Strategy de"elopment +esigning and building the database Customer ser"i$e and $ommuni$ations Telesales Building a .ebsite Maintaining a database and .ebsite >ulfillment

,hy .ould you outsour$eA - !"perience: the mistakes they made in the past .ill not be repeated - !"pertise: some $ompanies ha"e a$hie"ed uni9ue kno.ledge of parti$ular fields - Speed - !conomy - !ntrepreneurs+ip: for e<ternal ser"i$e bureaus you business is money, they .ill .ork hard to keep you satisfied and $an hire more people if ne$essary. The first step in an *>P is a definition of the .ork to be done. There are se"eral parts to a s$ope of .ork0 - 6ackground: $ompany, produ$ts and its $ustomers - *roblem: you .ould not be .riting this *>P if there .as not some problem to be sol"ed - Solution: .hat do you think the outsiders $an do to helpA Pi"e your ideal ans.er - 2oal: a one-paragraph statement - Strategy: the big pi$ture and ho. this pro%e$t fits into it - 3ustomers - Si%e of t+e <ork: ho. big a solution are you looking for right no.A +on@t think to big, start .ith small su$$esses. - *roEect p+ases - Fuantitative measures: gi"e your prospe$ti"e partners some idea of the numbers they are dealing .ith - Organi%ation: .ho is in"ol"ed in the pro$ess - Aiming - *ricing sc+eme: gi"e them some sort of numeri$al measurements to pri$e out? other.ise you .ill be $omparing apples and pears. - 6udget: if asked for it, only pro"ide a range - 3ompetition: pro"ide a small test to let them sho. .hat they $an do - !valuation criteria: $riteria in$luding any .eighting that you .ant to in$lude - 3onfidentiality agreement

*ules of the *>P0 - +ue date - Uuestions 1.here and ho. to ask2 - +igital submission 1allo.ed or not2 - ,here to send - 7<tensions 1.ill e<tensions of time be permitted2 - Bidders list 1sometimes it is a good idea that all bidders kno. .hat they are up against2 3The psy$hology of management tells us that your effe$ti"eness as a manager is determined by the e<tent that you allo. your employees to influen$e you. -f you listen to .hat your employees say, and us your influen$e to $arry out the good suggestions that they make, then they .ill feel that they are an important part of the $ompany. They .ill put their hearts and minds into the .ork. 4ou .ill be su$$essful as a super"isor. The same prin$iples apply to outsour$ing fun$tions. Treat these $ompanies as partners and you .ill reap signifi$ant benefits.5 !ey 9uestions to ask to potential partners0 - Company history - Their solution to the problem - The training in"ol"ed - ,ho o.ns the soft.are - -nno"ati"e ideas - Biographies of the leaders - *eferen$es - 7<e$uti"e summary - Pro%e$t $osts ,hat not to do0 Too many 9uestions Too many pages Co"er too mu$h in one do$ument 6ot enough time to fill it out Boring 6o money S$am *>P Pullibility

)I. +atabase Marketing and the -nternal Struggle for Po.er

3-n our business, you ha"e to ha"e a $hampion at the top, or there .ill be no database marketing program. This is the story of $orporate Ameri$a. 4ou lose your $hampion, you lose your program5. 1Case0 :MC, manufa$turer of the ohnson 8 7"inrude outboard motors2 +atabase marketing $annot pro"e itself unless it re$ei"es0 - 7nough funding o"er a three-year period - =aun$h of a group of relationship-building programs - The establishment of $ontrol groups - The measurement of =TC $hange during the three years T.o .ays database marketers $an get the resour$es0 - 7du$ating top management - +emonstrating results through su$$essful e<periments 3 ust as a C>: $an look at a balan$e sheet and an in$ome statement and determine a profitable dire$tion for $ompany a$ti"ity, so $an an alert marketer look at the information stored in a $ustomer database, and learn of profitable marketing opportunities. Su$h kno.ledge in the hands of a skillful marketer is market po.er5. Steps to kno.ledge0 - Build a $ustomer marketing database .ith $omplete pur$hase history and demographi$s - +e"elop an a$ti"e marketing program - Build a .ebsite that in"ol"es the $ustomers - +etermine =TC - ;se the database and the .ebsite to analy/e marketing a$ti"ities - ;se the kno.ledge to obtain suffi$ient resour$es Modern database marketing uses e"erything that .e kno.0 strategy, organi/ation, use of *>M, use of the .eb and personali/ation to re$reate the old family gro$er. -f you $an $reate a $hart like this for your $ompany, you .ill be a database hero and a su$$ess at our .ork. Pood lu$kJ