SORA Seminar Series on Analytics in Business & Industry EXPO Case Study - Using analytics to drive ROI

May 20th, 2008 Presented By: Chris Osborne

branded content. thinking ahead.

Agenda
Background Strategic Approach

Analytics Deployed
Value Segmentation Response Model Geo-targeting Implementation Results

branded content. thinking ahead.

Background
Purpose Redwood provides a strategic and analytic framework around which EXPO can build and execute its direct marketing to ensure every DM tactic and execution align and deliver against identifiable business objectives.

Business Objectives EXPO identifies two objectives: increased sales and increased profitability. 1. Sales activity refers to revenue generated through a product sale as well as revenue generated through project and service sales.

2. Profitability in the scope of this recommendation refers to classic ROI measurements in general and per DM execution in particular.

branded content. thinking ahead.

Background

We developed a customer lifecycle communication strategy which identifies and tracks customers from initial inspiration through to post-purchase and customer maintenance and delivered the following elements Customer strategic framework using ExCELTM Customer value segmentation Acquisition response model Experimental design for ROI measurement of all DM tactics

CRM communications
Direct mail components for each stage Integrated online solution

Required infrastructure at EXPO to support the communications

branded content. thinking ahead.

EXPO Strategy & Customer Lifecycle Framework

Benefits of EXCEL Ensures the timeliness and relevancy of the communication message. Is flexible; the consumer can move through at their own pace. Takes into consideration the two unique purchase cycles Expo has: 1) project purchase (approx. 18 mths) and 2) product purchase (may occur in a single visit). Maintains contact with consumer post-purchase.00

branded content. thinking ahead.

EXCEL & EXPO Acquisition Plan

Managing the prospect through an acquisition funnel is key for identification of the optimal marketing investment at each stage. As each EXPO prospect moves down the funnel, they will become more qualified; a hot prospect; the marketing investment will increase at the same rate. Seduce

Interact Transact

Low marketing investment (postcards / mass / web) Casts a wide net

Increase marketing investment (2xs that of seduce) DM Roll fold / posters / web / email More qualified consumers, warm lead

More expensive marketing investment (3xs that of seduce) Welcome Kits/Survival Guides / web / email Expo customer Engage & Maintain
Highest marketing spend for communications (at least 4xs that of seduce) regular communication stream (exposure to full DM solution based on customer value) Retain Expo customer

branded content. thinking ahead.

Strategic Approach to Segmentation

Multi-Dimensional Customer Segmentation Customer Value Segmentation Model Defining customer value based on product and project purchase behaviour and segment based on that value Customer Profiling Profile for each segment based on transactional behavior, payment preferences, response history and demographic information Customer Acquisition Built a logical regression model based on the response to DM initiatives

branded content. thinking ahead.

Using Analytics to Drive ROI

With the strategic approach in place, the following models were created and tested in market: Value based segmentation model Acquisition response model Geo-targeting response model

branded content. thinking ahead.

Value Based Segmentation

Data Used Transactional data: 12 months time period and services data from 24 months time period Additional variables were demographic data, Home Depot credit card, distance traveled Missing data elements should be noted due to data capture capabilities at POS level Several ways of differentiating customers at EXPO were used in the final segmentation. Based on type of transactional activity Project Purchasers Services and Products for Complex Projects Services and Products for Simple Projects Products Purchasers: Products which are ordered Products which are purchased directly from the store: Using EXPO, THD Credit Card or other credit cards

Based on recency of activity in order to identify defectors and new customers

Based on household income and home ownership in order distinguish customers based on their potential Home Owner/Renter Household income: more than $100,000 (customers with the highest potential) less than $100,000 Home market value: more than $333,000 (customers with the highest potential) less than $333,000

branded content. thinking ahead.

Value Based Segmentation - Results

Group # Active Segments New Customers Complex Projects Group 5 Group 1a Group 1b Group 1c Group 2a Group 2b Group 2c Group 2d Group 3a Group 3b Group 3c Group 3d Group 4 Group 6a Group 6b Group 6c Group 6d Group 6e Group 7 Quantity n/a 466 3,553 7,156 40,414 17,788 2,164 6,758 198,503 46,437 130,868 18,117 n/a 60,989 240,007 125,917 385,535 16,710 222,178 1,523,560

Groups 1 through 6 do not include anyone who has >50 mile distance from an open EXPO location New Customers will be accumulated as the year progresses; they will be placed into their appropriate segment in the following fiscal year (est.: ~ 15K / month, totaling ~ 172K) New Credit Card received customers will be accumulated as the year progresses; they will be placed into their appropriate segment in the following fiscal year

Simple Projects

Products

Credit Card Non Active

New Credit Card Received Potential Defectors

DNR Total

Do not recessitate

Value Based Segmentation - Results

Value Based Segmentation - Results

High Value Customer Segment comprises 10% of the EXPO customer base and delivers over 30% of sales.

Contribution of Medium Value Segment to the EXPO customer base is comparable to their contribution to the total sales

The contribution of the Low Value Segment to the sales is almost half of their contribution to the EXPO customer base

Value Based Segmentation In-market Test

High Value customers display some of the highest actual performance (conversion rates, average sale*, lift in average sale* and ROI)

Lift in response rate is the highest for lower value segments; indicating the higher opportunity for growth in SOW in those segments (migrate up)

Value Based Segmentation In-market Test

New customers who are in their Honeymoon Phase with EXPO have the actual highest average sale and lift in average sale

High value customers drive significant ROI

Acquisition Response Model Performance

Decile 1 (Top Decile) 2 3 4 5 6 7 8 9 10 (Bottom Decile) Overall

Response Rate

Lift

0.7287% 0.4213% 0.2526% 0.1141% 0.0942% 0.0644% 0.0396% 0.0298% 0.0149% 0.0198% 0.1780%

409 237 142 64 53 36 22 17 8 11

Top 3 deciles perform better than the random; the random group response rate represents the expected response rate in the absence of the model. The implication of these results is that based on top 3 deciles performing better than the random, these deciles will be selected for mailings; selections of the remaining 7 deciles will be dependent on test results. branded content. thinking ahead.

15

Acquisition Response In-market Test

Top deciles (top 3 or 4 deciles) outperform the random sample (comparison sample used in the absence of a model)

Lift Results consistent with conversion rates

Prospecting at the HHLD Level

Map illustrating market potential for prospecting

Map illustrating current DM Penetration

Map illustrating current Newspaper Penetration

Geo-targeting

Identify zips in the trade areas Rank order based on value of a zip Value based on customer profiling

There are over 9M additional high potential prospects living within the store trade area of an EXPO location

branded content. thinking ahead.

18

Using Analytics New Communication Flow

branded content. thinking ahead.

19

Ongoing Testing and Implementation

The following principles should be applied when integrating into existing communication strategy: 1. Test models during different times of the year to determine seasonality

2.
3. 4.

Test in-market DM with models ensuring different types of mailing formats experience similar results
Determine what level/type of versioning can be applied Determine optimal ratio for acquisition / customer audiences for communication strategy (70/30 or 60/40) for all creative formats

5.

Upon ratio determination; apply to DM initiatives plan to identify audience size for mailing and testing

6.

Model refinement
On existing model; apply variable adjustments as necessary

branded content. thinking ahead.

20

EXPO Results
50% reduction in campaign data costs due to efficiencies of which customers are targeted Over 80% of all DM now drives positive ROI versus 0% prior to model implementation Management of customer through purchase cycle Versioning of direct mail for acquisition and customer One consumer experience, regardless of channel (in-store, web, TV)

branded content. thinking ahead.

21