Why Databases Fail
Nine deadly mistakes that will ruin your
chances for success.
Houston Direct Marketing Association
Thursday, October 14, 2004
Arthur Middleton Hughes
Vice President / Solutions Architect
KnowledgeBase Marketing, Inc.
What KnowledgeBase Marketing Does
2
Mistake: Lack of a Marketing Strategy
Building a database is
easy
Making money with a
database is hard
Most people don’t
know that
3
How to develop a strategy
 Collect data on your customer’s
purchases, demographics and lifestyle
 Build a database that permits ad-hoc
analysis
 Construct a lifetime value table
 Figure out what motivates your customers
4
Two Kinds of Database People
 Constructors
People who build databases
Merge/Purge, Hardware, Software
 Creators
People who understand strategy
Build loyalty and repeat sales
 You need both kinds!
5
Examples of Profitable Strategies
 User Groups
 Newsletters
 Surveys and Responses
 Loyalty Programs
 Customer and Technical Services
 Membership cards and status levels
 Event Driven Communications
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Event driven communication:
Dear Mr. Hughes:
Ridgeway Fashions
Leesburg, VA 22069
I would like to remind you that your wife Helena’s
birthday is coming up in two weeks on November 5th. We
have the perfect gift for her in stock.
As you know, she loves Liz Claiborne clothing. We have
an absolutely beautiful new suit in blue, her favorite
color, in a fourteen, her size, priced at $232.00.
If you like, I can gift wrap the suit at no extra
charge and deliver it to you next week, so that you
will have it in plenty of time for her birthday. Or, I
can put it aside so you can come in to pick it up.
Please call me at (703) 754-4470 to let me know which
you’d prefer.
Sincerely yours,
Robin Baumgartner
Robin Baumgartner, Store Manager
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Basic Strategy Rule:
Put yourself in customer shoes
Say: “What would I want to be on
this database? What’s in it for me?”
If you can’t come up with a good
answer, the database will fail
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Mistake: Focus on Price instead of
Service
 Database marketing builds loyalty.
 Discounts do not build loyalty.
 Do not use the database to provide
discounts.
 Use the database to provide dialog,
recognition and service.
9
Customers today seek more than low
prices
 Recognition
 Service
 Information
 Convenience
 Helpfulness
10
Example:
Quaker Direct
 Budget: $18 Million. Coupons to 20 million
“targeted households.”
 Quaker goal: “real one-to-one bonding
with consumers”.
 Cost: four times as much as FSI’s.
 Why failed: Coupons do not build
relationships.
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Example:
Kraft Crystal Light
 Million club members receive quarterly
newsletter.
 Catalog: Watches, mugs, jogging suits,
with Crystal Light emblem.
 Theme: fitness, exercise, weight loss,
diet.
 Why succeeded: Club based on valid
idea, not just on discounting product.
12
Mistake: Failure to use tests and
controls
 Database marketing is accountable
 Everything you do can be measured
 You must set up control groups that do not
get your new communications
 Key measurements: response rates,
return on investment, profits, lifetime
value.
13
Example: Western Union
 Preferred customer card sent to everyone who
had used WU 3+ times
 Worked well, but after 2 years, WU asked, “How
has this boosted profits?”
 Agency did not have a control group.
 Profits could not be verified.
 Agency lost the account.
14
Example: Citicorp Reward America
Frequent shopper program for
supermarkets
Goal: sign up 40% of all chains fast
Profit idea: sell data to
manufacturers
Budget: $200 million -- 174
employees
15
Failure: Citicorp Reward America
Program cancelled. Employees fired.
Why?
Manufacturers didn’t buy the names.
Computers choked on the data.
Failure to test on small scale first.
16
Mistake: Too big and slow
 Database should be built in six
months or less.
 DB Marketing builds loyalty and
sales -- but only when it is up
and running.
 If your plan requires more than a
year, maybe your plan is too
complicated.
 Start small. Build Small. Learn
as you go. Add to it later.
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How a database builds
relationships
Hold information on customers
Add new data every day:
Surveys, Promotion history, Points
Transaction history, Lifetime value, RFM
Create a relational database that you can
build inexpensively
Update it as often as required – several
times a day if needed.
Use it to create communications
18
Mistake: Failure to use
the Web
 Your database contains customer information:
purchases, preferences, contact names, etc.
 Customer service has to have this info when
they talk on the phone.
 Your web site must have this info when you
receive customers as visitors.
19
Using a database to personalize
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Provide recognition!
Welcome Back, Arthur!
21
Immediate Feedback!
22
30 seconds later: Email
23
Retail Email Success
 Video chain sent email newsletters to
170,000 customers about movies
 16,000 asked for but got no emails
 Test group total sales over 6 months were
28% higher than the control group
 Emails can be a powerful sales boost
24
Catalog Email Success
 Cataloger selected 40,000 who had
bought on the web.
 20,000 got emails saying “watch mailbox
for our new catalog”
 20,000 got only the catalog.
 Sales to the test group were 18% higher
than the control group.
25
Mistake: building in-house
 Marketing databases are unlike any other
IT function.
 DB requires special skills and software
 There are scores of vendors with
experience in building marketing DBs
 In-house will take far longer and cost far
more.
26
What to do?
 Send an RFP to find a vendor that
understands you and has experience
 Get it going fast and at lower cost.
 Once it is up and running, you can
migrate it inside.
 But even then, you should not do it.
 Why? Because you should concentrate on
marketing: building profits from it.
27
Mistake: Treating all
customers alike
 Loyal customers are more profitable than new
or disloyal customers
 Loyalty can be built and maintained
 $1 million retention budget spread over 1
million customers is $1 per year. You can’t
build much loyalty for $1
 $1 million spread over 100,000 is $10 per
year. You can build loyalty with that
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Segment by profitability &
focus your attention
Profitability Segment
79.67%
Profitability
80.00%
60.00%
24.82%
40.00%
15.83%
1.52%
20.00%
0.00%
-20.00%
-21.83%
-40.00%
5%
11%
28%
28%
28%
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Marketing to Customer Segments
Your Best Customers 80% of Revenue
Your Best Hope for
New Gold Customers
1% of Total
Revenue
GOLD
Move Up
These may be losers
Spend Service
Dollars Here
Spend Marketing
Dollars Here
Reactivate or
Archive
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Mistake: Failure to develop a retention
program
 Most companies are set up for acquisition
 Few have a specific retention program.
 $1 spent to retain customers returns more
profit than $1 of acquisition
Annual Profit
$48
$60
$40
$20
$0
($20)
($40)
($60)
($80)
($62)
New Customer
3rd Year
Customer
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Retention = Communications
 People like to hear from you.
 Personalize your communications.
 Use email, direct mail, phone calls
 Set aside control groups so you know that
your communications are working
32
Key retention strategy: cross selling
90%
80%
70%
60%
Retention 50%
Rate
40%
30%
20%
10%
0%
1
2
3
4
Number of Products Owned
5
33
Concentrate retention $$ on where you need
help
Probability of Leaving Soon
LTV
High
Medium Low
High
Priority A Priority B Priority C
Medium Priority B Priority B Priority C
Low
Priority C Priority C Priority C
34
What proves that
database marketing
works?
• Manufacturer of lighting products
• Catalog sent to 45,000 contractors
• Previous policy: wait for the orders
• Test: pick 1,200 customers, split into test of 600 and control of
600
• Two person pilot program build relationship with test customers
to see the results
35
Change in the number of orders after 6
months
112%
120%
82%
100%
Change in
number of
orders
80%
60%
40%
20%
0%
1
2
Control vs Test Groups
36
Change in the Average Order Size
114%
120%
86%
100%
80%
Change in
average 60%
order size
40%
20%
0%
1
2
Control vs Test Group
37
Total revenue gain: $2.6 million over
six months
127%
140%
120%
100%
Change in
total
revenue
70%
80%
60%
40%
20%
0%
1
2
Control vs Test Group
38
This stuff works!
 Building a relationship with customers can be
highly profitable
 Using a database to recreate the old family
grocer is a winning strategy
 Relationship marketing is the way to go
39
Mistake: Lack of a forceful leader
 Success requires directing the activities of
many internal and external units
 The Web, MIS, Customer Service, Tech
Support, Telemarketers, Service Bureau,
Direct Agency, Fulfillment, Market Research
 Database Marketers must be leaders
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Summary: The Nine Mistakes
 Lack of a Strategy
 Building In-House
 Focus on Price
 Treating all
customers alike
 Lack of tests &
controls
 Too big and
delayed
 Lack of a retention
program
 Lack of leadership
 Failure to use the
web
41
Rules for success
Put yourself in your customer’s shoes
Build a lifetime value table
Build a database team
Think small, and think fast
Keep your eye on the bottom line
42
Thank You
Books by Arthur Hughes
From McGraw Hill. Order at
www.dbmarketing.com
Contact Arthur:
arthur.hughes@kbm1.com
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