Contact strategy
Contact Strategy: What is it?
• Contact strategy deals with using information
about
• Customer purchases
• Promotion patterns
• Interests, and
• Preferences
• In order to
• Regulate the frequency and sequence of
customer contact
• Customize the offer, creative thrust, and
positioning of contacts
What is new in today’s Contact
Strategy
• All the key decision criteria are based at the
customer or individual level
• A customer is included in a promotion or
campaign depending on whether there is
any incremental profit from contacting the
customer
What is new in today’s Contact strategy
• Previously all customers who did not own product
A were mailed promotions about product A.
• Today, a customer is mailed promotions about
product A depending on
• How long a person has been a customer?
• What products the person has previously bought?
• What were the person’s responses to previous mailings, or
contacts?
• What are the purchase patterns of the person?
• These factors are then combined to compute the
Return on Investment (ROI) for a particular
customer
Customer Lifetime Value
• Lifetime value is the NPV of the profit that you will
realize on a new customer during a given number
of years
• Factors in calculation of CLTV
- Retention rate
- Spending rate
- Acquisition cost
- Discount rate
- NPV calculation
- Referral rate
Customer Lifetime Value
• Ridgeway Fashions is in fashion retailing
• Wants to test idea of a Birthday Club
• Women provide their fashion preferences and their
husband’s business address. Ridgeway sends
husbands a reminder and hints for gifts before
wife’s birthday
• We will look at Ridgeway before and after the
Birthday Club
• Look at 20000 customers over a 3 year period
Customer Lifetime Value
• Retention rate
- The single most important number in the lifetime
value table
- Is calculated by a simple formula:
RR=year X customers/year 1 customers
eg RR=8000/20000=40%
- Year X customers represent those Year 1
customers who are still buying in the later year
Customer Lifetime Value
• Spending rate
- Average amount spent by the average customer
each year
- Calculated by dividing total sales for group being
studied in a given year by the number of
customers in the group
- Year 2 rate represents revenue from customers
who are still active out of the original year 1group
- Typically the longer customers are with you, the
more they will spend per year, per visit, per order
Customer Lifetime Value
• Acquisition cost
- Add up all money spent on advertising,
marketing and sales efforts during the year
- Divide this by the number of new
customers who actually make purchases
from you each year
• Discount rate used because profits are
received from customers over many years
Customer Lifetime Value
• Net Present Value
- Once you have the discount rate for each
year, each of your profits must be
discounted by the corresponding rate
- NPV profits=gross profits/discount rate
- Add up NPVs of all profits to get
cumulative NPV
Customer Lifetime Value
• Lifetime value is simply the cumulative NPV profit
(CUM-NPV) in each year divided by the original
group of customers
• CLTV=CUM-NPV/acquired customers
3rd year CLTV in above example is
$1201057/20000=$60.05
• Represents the average profit that you can expect to
receive, after a given number of years, from the
average new customer whom you can sign up
Customer Lifetime Value
• Referral rate
- Management assumes that the Birthday
Club will be successful enough that 5% of
it’s customers will recommend Ridgeway to
friends/relatives
• Usually referred people are more loyal and
have higher retention and spending rate than
the average new acquisition
RFM: The Workhorse
• Key variables to consider for contact strategy:
– Recency
– Frequency
– Monetary Value
• Additional help comes from
– Promotion History
– Demographic Data
– Survey data
RFM definitions
• Recency
• How recently has a customer bought?
• Frequency
• How frequently does a customer purchase?
• Monetary Value
• How much does a customer spend on each
purchase?
How does RFM work?
• Rank Customers according to each variable into
say 5 groups.
• Give preference to contacting customers who are
in the top groups for each variable
• Give the most preference to contacting customers
who are in the top group for all the variables
How does RFM work?
• An RFM chart
depicting the groups
and the response
rates for each group
Response Rates by
Recency
4
3
Response
Rate (%)
2
1
0
5
4
3
2
1
Recency Group
How does RFM work?
• An RFM chart
depicting the groups
and the response
rates for each group
Response Rates by
Frequency
Response
Rate (%)
2
1
0
5
4
3
2
1
Frequency Group
How does RFM work?
• An RFM chart
depicting the groups
and the response
rates for each group
Response Rates by
Monetary Value
2
Response
Rate (%)
1
0
5
4
3
2
1
Monetary
Value Group
Purchase History Information
• Time or Tenure of being a customer
– Treat new and old customers differently
• For new customers send welcome packages
• For old customers send offers that recognize
their tenure
• Offer special privileges to long life
customers
Purchase History Information
• Total Sales Dollar or Total Sales Dollar over Time
– Calculate Revenue Velocity
Revenue Velocity (RV) =
total amount customer spent
total time customer has been purchasing
– RV for a customer who has spent $100 in 2
months = 50
– RV for a customer who has spent $100 in 20
months = 5
– First customer preferred over the second
Purchase History Information
• Product Ownership
– Avoid offending customers by recommending them to
buy a product they already have
– Very critical for expensive items like cars, insurance,
and financial services
– Contact customers who do not have a do-not-contact
code and are outside the too-soon to contact limit
Purchase History Information
• Product Ownership over time
– How do you effectively eliminate customers who first
sign-up for all offers and then cancel them all within a
month?
– Look for customers who have owned products/services
for a long time and offer only them additional offers
Promotion History
• Used to define who is eligible for an
upcoming contact
• Helpful in creating a market segment
• Propensity Indicator
– Person’s response rate over time
Promotion History
Propensity Indicator (PI) =
(# of times bought/ # of times promoted/ time period)
• Customer A was promoted 6 times, and bought twice in the last 12
months, PI = (2/6/12)= 0.027
• Customer B was promoted 6 times, and bought twice in the last 18
months, PI = (2/6/18)= 0.018
• Customer C was promoted 4 time, and bought twice in the last 6
months, PI = (2/4/6) = 0.08
• Customer C > Customer A > Customer B
Demographic Information
• Create relatively similar customer segments
based on demographic and lifestyle
characteristics
• Characteristics include
• Gender, marital status, age, income, home value,
presence of children, education level, etc.
• Age, marital status, income, presence of
children best bets!!!
Attitudinal Information
• Survey data used to find
• Motivation for purchase
• Barriers to purchase
• Brand’s impression as compared to a
competitor
• Brand Equity
• Loyalty within a category
• Takes a long time to collect
• Not very reliable
• Use in combination with purchase history and
demographic data to profile segments
Combining all Types of
Information
• Sequentially rank customers based on
– First by Purchase History
– Second by Demographic Information
– Third by attitudinal information
• Give preferences to customers who are ranked
first in all three categories, then to the ones ranked
first in purchase history and so forth
Example: Consumer Products
Company
• Situation
– A number one market share company finds that
its market share is eroding
– Fall-off in store traffic by loyal and previously
high spending customers
– High Ad-spending, target trade promotions and
in-store promotions don’t work
Example:Consumer Products Company
• Strategy
– In-store survey designed to collect data on
• Name, address, phone number, birthday
• How many of a certain product were purchased in
the last 10 months?
• How many were purchased in this store?
• What were the primary reasons/occasions the
customer bought the product?
– Used this information to target customers as discussed
before
– The contact strategy involved multiple mailings over 12
months that involved a gift, and valuable tips to use the
product.
Example:Consumer Products
Company
• Outcome
– Market share increased for the product line and
for the overall brand
– Customers in the program purchased at a higher
rate
Example: Using RFM for a
Promotion
• A database marketer with a customer
database of 2.1 million names
• Wants to do a promotional Rollout
• Does a Test promotion first on 30,000
customers
• It sent videos costing $100 and it made $40
on each successful sale. Cost of mailing was
$0.55 per piece
Example: Using RFM for a Promotion
• First all 2.1 mn customers were coded by Recency,
Frequency and Monetary Value
• Then database was sorted by recency and divided into
5 equal parts (quintiles) which were numbered from 5
(most recent) to 1 (most ancient)
• Then each of the 5 recency quintiles was further
sorted by Frequency (total no of times a customer
purchased from you) and divided in to 5 equal parts
• Each recency quintile was thus numbered from 5
(most frequent) to 1 (least frequent)
• Then each of the 25 Recency-Frequency combinations
was further sorted by Monetary Value and divided into
5 equal parts. Each combo was numbered from 5(most
value) to 1(least value)
Example: Using RFM for a
Promotion
• The Test group of 30000 was selected using
an Nth
• A Breakeven Index is calculated for each of
the 125 cells using the actual responses
• Breakeven is the response rate required for
the net profit from promotion to a test group
to exactly equal cost
Example: Using RFM for a
Promotion
• The company found that only 34 of the 125
RFM cells broke even
• The final promotional offer was mailed to
only people in the 34 cells with positive
breakeven
• Response rate and profits were higher by
not promoting to people unlikely to respond