Healthy imitation
• Win-lose strategies can backfire due to
imitation
• Imitation is bad for strategies designed to
achieve ‘competitive advantage’, i.e. to do
better than others
• With win-win strategies, imitation is healthy!
Frequent-flyer programs
• American Airlines introduced AAdvantage
• This may have attracted some passengers
from other airlines
• One step forward for American, one step
back for United - so far it is win-lose
• When United imitated AAdvantage,
American lost its ability to gain share
• One step forward for United, one step
back for American – a net wash
Frequent-flyer programs
• But now, with more loyal customers,
American wasn’t about to start a price-war
• In fact it had room to raise prices
• That gave United some room to raise
prices
• The win-lose competition in terms of
share-shifts can give way to win-win
element in terms of pricing
Most-favored-customer clause
(MFC)
• Contractual arrangement that guarantees
a customer the best price the seller gives
to anyone
• Very common in B2B situations
• MFCs make it difficult for sellers to give
price breaks to anyone
• This makes it easier for sellers to maintain
high prices
• So, why do buyers agree?
Meet-the-competition clause
(MCC)
• A contractual arrangement that gives a company
the option to retain a customer by matching a
rival bid
• Also called ‘last-look- provision’ or ‘meet-orrelease-clause’
• Very common in commodity markets where
business stealing is based primarily on price
cuts
• Has the same competition reducing effects of an
MFC
MFC/MCC-like strategies for
consumer markets
• Guaranteed rebates over a certain future period are
sometimes given. Advantages are:
-consumers less likely to wait for sales
-seller not likely to offer many sales
• MFCs don’t work with idiosyncratic products
• MCCs don’t work since consumers are not required
to give you the option to serve them
• Charging a low price to all customers is problematic
• Solution: charge a low price to only your own
customers but not to your rival’s customers
Overview of CRM / Database mkt
• Mass Production, Mass Media and Mass Mkt now
replaced by a one-to-one economic system
• The one-on-one future represents:
- customized products
- individually addressable media
- individualized delivery channels
- personalized pricing
• Database mkt is the engine that powers the movement
towards effective CRM
• The goal is ‘share-of-customer’ rather than market share
(also called ‘share-of-wallet’ or ‘share-of-requirements’)
Basic Premise of CRM/ Database
Marketing
• Retaining an existing customer is better than acquiring a
new one
• Not all customers are alike
• Past behavior is a strong predictor of future behavior
• Thus, gathering, maintaining, and analyzing customer and
prospect info allows marketers to
- identify their ‘better’ and ‘worse’ customers
- individually tailor products, prices and promotions to
reflect the rankings of various customers
- develop relationships satisfying both buyers and
sellers
Acquisition vs Retention
• Why do companies find it easier to spend on
acquisition rather than on retention:
- Acquisition is easier to measure
- With retention you have to rebut the claim that
“they would have come anyway”
- Managers find acquisition easier to carry out
- Retention involves maintaining an extensive
database and analyzing it for patterns
• To measure effectiveness of retention, you must
have a test and control groups
What is required for Database
Marketing?
• Relevant data about customers and prospect
• Database tech to transform raw data into powerful
and accessible mkt info
• Statistical techniques to rank customers in terms
of their likeliness to
- respond to mkt communication
- buy products
- return products
- pay for products
- stay or leave
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’s 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
• 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
Recency Group
1
How does RFM work?
• An RFM chart
depicting the
groups and the
response rates for
each group
Response Rates by
Frequency
2
Response
Rate (%)
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: 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