Database Marketing and Lifetime
Value
DMA Tuesday, October 18, 2005
2:00 – 3:00 PM
Georgia World Congress Center
Atlanta,October
Georgia15, 2005
DMA Saturday,
2:30 – 3:40 PM
Georgia World Congress Center
Atlanta, Georgia
Arthur Middleton Hughes
Vice President / Solutions Architect
KnowledgeBase Marketing, Inc.
What KnowledgeBase
Marketing Does
How a modern database
system works
Customer
Transactions
Marketing
Database
Data Access
And Analysis
Software
Marketing
Staff -Access
By Web
Model
Inputs from Retail,
Phone, Web
Website
Appended
Data
Marketing Databases and
Operational Databases
Daily updating permits greater
customer contact and service
Possible direction of things
to come…
Outbound: Days
“I have an offer …”
offer
Inbound: Milliseconds
“I have a person …”
“Let me find the best
offer for this person.”
offer
offer
offer
offer
What is a relational
database?





A method of storing an unlimited amount of data about
customers in a way that makes it easy to retrieve it, modify it,
add to it, create new fields, etc.
A relational database consists of fields, tables, and records.
A field is the smallest structure (the atom) of the relational
database.: A last name, a date, a dollar amount, a product
number.
A table is the chief structure in a relational database. It
represents a single specific subject which can be either an object
or an event. Object: Customers. Event Orders.
Records are unique instances of the subject of the table. An
example is Bill Jones, one of the records in the Customers table.
Tables are related through keys

Tables are related to each other by keys. Each has a
unique primary key (PK). A foreign key (FK) is the primary
key of another table that it is related to.
Users access their databases through the
web. They can run queries to get reports
from their databases
Compared with newcomers,
Long term customers:







Buy more per year
Buy higher priced options
Buy more often
Are less price sensitive
Are less costly to serve
Are more loyal
Have a higher lifetime value
Retention is the way to
measure loyalty
90%
80%
70%
Percentage
Retained
from
Previous
Year
60%
50%
40%
30%
20%
10%
0%
1
2
3
4
Years as a customer
5
Retention pays better than
acquisition
A n n u a l P ro fit
$48
$60
$40
$20
$0
($ 2 0 )
($ 4 0 )
($ 6 0 )
($ 8 0 )
($ 6 2 )
N e w C u s to m e r
3 rd Y e a r
C u s to m e r
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!
What doesn’t work:
Treating all customers alike
79.67%
This 28% lost 22% of the
bank’s profits!
8 0 .0 0 %
6 0 .0 0 %
24.82%
4 0 .0 0 %
15.83%
1.52%
2 0 .0 0 %
0 .0 0 %
-2 0 .0 0 %
Bank Customers by Profitability
-21.83%
-4 0 .0 0 %
5%
11%
28%
28%
28%
Marketing to Customer
Segments
Spend Service
Your Best Customers 80% of Revenue
Your Best Hope for New
Gold Customers
1% of Total
Revenue
GOLD
Move Up
These may be losers
Dollars Here
Spend Marketing
Dollars Here
Reactivate or
Archive
Examples of Profitable
Strategies






Newsletters
Surveys and Responses
Loyalty Programs
Customer and Technical Services
Friendly, interesting interactive web site
Event Driven Communications
What proves that relationship
building works?





Manufacturer of building 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
Credit: Hunter Business Direct
What did they offer?

Follow up on bids and quotes
Schedule product training
Ask about customer needs
New Product information

They did not offer discounts



Change in the number of
orders
112%
120%
82%
100%
Change in
number of
orders
80%
60%
40%
20%
0%
1
2
Control vs Test Groups
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
Total revenue gain: $2.6
million dollars
127%
140%
120%
100%
Change in
total
revenue
70%
80%
60%
40%
20%
0%
1
2
Control vs Test Group
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
Business to business relationship
marketing is the way to go
Lifetime
Value
How Lifetime Value is used to
direct retention strategy


We need to know the value of our
customers, so as to properly target our
sales and retention efforts
We need to discriminate among our
customers to acquire and retain the
best
What is lifetime value?



Net present value of the profit to be realized
on the average new customer during a given
number of years.
To compute it, you must be able to track
customers from year to year.
Main use: To evaluate strategy.
Lets look at a retail operation


Before and after a loyalty program
Lets begin with a retention building
communication
Examples of Profitable
Strategies






Newsletters
Surveys and Responses
Loyalty Programs
Customer Services
Membership cards and status levels
Event Driven Communications
Event driven communication:
Ridgeway Fashions
Leesburg, VA 22069
Dear Mr. Hughes:
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
LTV Before New Strategies
R e te n tio n R a te
C u s to m e rs
V is its P e r Y e a r
S p e n d in g P e r V is it
R evenue
A c q u is itio n
Y ear
40%
2 0 0 ,0 0 0
1 .4
$50
$ 1 4 ,0 0 0 ,0 0 0
Second
Y ear
45%
8 0 ,0 0 0
1 .6
$60
$ 7 ,6 8 0 ,0 0 0
T h ird
Y ear
50%
3 6 ,0 0 0
1 .8
$70
$ 4 ,5 3 6 ,0 0 0
C o s t P e rc e n ta g e
C o s ts
A c q u is itio n C o s t $ 3 2
T o ta l C o s ts
50%
$ 7 ,0 0 0 ,0 0 0
$ 6 ,4 0 0 ,0 0 0
$ 1 3 ,4 0 0 ,0 0 0
49%
$ 3 ,7 6 3 ,2 0 0
48%
$ 2 ,1 7 7 ,2 8 0
$ 3 ,7 6 3 ,2 0 0
$ 2 ,1 7 7 ,2 8 0
$ 6 0 0 ,0 0 0
1
$ 6 0 0 ,0 0 0
$ 6 0 0 ,0 0 0
$ 3 .0 0
$ 3 ,9 1 6 ,8 0 0
1 .1 2
$ 3 ,4 9 7 ,1 4 3
$ 4 ,0 9 7 ,1 4 3
$ 2 0 .4 9
$ 2 ,3 5 8 ,7 2 0
1 .3 2
$ 1 ,7 8 6 ,9 0 9
$ 5 ,8 8 4 ,0 5 2
$ 2 9 .4 2
P ro fit
D is c o u n t R a te
N P V P ro fit
C u m N P V P ro fie
L ife tim e V a lu e
Discount Rate Basic Formula
Market Rate of Interest...5%
Assume Risk (Double rate)...10%
Years = n Interest = i
Formula: D = (1 + i)n
Calculation of rate after 2 years:
 D = (1 + .10)2 = (1.10)2 = 1.21
LTV Before New Strategies
A c q u is itio n
Year
Second
Year
T h ird
Y ear
R e te n tio n R a te
C u s to m e rs
V is its P e r Y e a r
S p e n d in g P e r V is it
R evenue
40%
2 0 0 ,0 0 0
1 .4
$50
$ 1 4 ,0 0 0 ,0 0 0
45%
8 0 ,0 0 0
1 .6
$60
$ 7 ,6 8 0 ,0 0 0
50%
3 6 ,0 0 0
1 .8
$70
$ 4 ,5 3 6 ,0 0 0
C o s t P e rc e n ta g e
C o s ts
A c q u is itio n C o s t $ 3 2
T o ta l C o s ts
50%
$ 7 ,0 0 0 ,0 0 0
$ 6 ,4 0 0 ,0 0 0
$ 1 3 ,4 0 0 ,0 0 0
49%
$ 3 ,7 6 3 ,2 0 0
48%
$ 2 ,1 7 7 ,2 8 0
$ 3 ,7 6 3 ,2 0 0
$ 2 ,1 7 7 ,2 8 0
$ 6 0 0 ,0 0 0
1
$ 6 0 0 ,0 0 0
$ 6 0 0 ,0 0 0
$ 3 .0 0
$ 3 ,9 1 6 ,8 0 0
1 .1 2
$ 3 ,4 9 7 ,1 4 3
$ 4 ,0 9 7 ,1 4 3
$ 2 0 .4 9
$ 2 ,3 5 8 ,7 2 0
1 .3 2
$ 1 ,7 8 6 ,9 0 9
$ 5 ,8 8 4 ,0 5 2
$ 2 9 .4 2
P ro fit
D is c o u n t R a te
N P V P ro fit
C u m N P V P ro fie
L ife tim e V a lu e
New Retention Strategies
Birthday Club
Communicate with them
Give them premiums if they
shop a lot
Lets see what could happen
LTV With New Strategies
R e te n tio n R a te
C u s to m e rs
V is its P e r Y e a r
S p e n d in g P e r V is it
R evenue
A c q u is itio n
Second
T h ird
Y ear
Y ear
Y ear
50%
60%
65%
2 0 0 ,0 0 0
1 0 0 ,0 0 0
6 0 ,0 0 0
1 .6
2
2 .4
$55
$70
$80
$ 1 7 ,6 0 0 ,0 0 0 $ 1 4 ,0 0 0 ,0 0 0 $ 1 1 ,5 2 0 ,0 0 0
C o s t P e rc e n ta g e
C o s ts
A c q u is itio n C o s t $ 3 2
D a ta b a s e C o s ts
L o ya lty P ro g ra m
L o ya lty C o s ts
T o ta l C o s ts
50%
$ 8 ,8 0 0 ,0 0 0
$ 6 ,4 0 0 ,0 0 0
$ 5 0 0 ,0 0 0
$ 5 .0 0
$ 1 ,6 0 0 ,0 0 0
$ 1 7 ,3 0 0 ,0 0 0
49%
$ 6 ,8 6 0 ,0 0 0
48%
$ 5 ,5 2 9 ,6 0 0
$ 2 5 0 ,0 0 0
$ 8 .0 0
$ 1 ,6 0 0 ,0 0 0
$ 8 ,7 1 0 ,0 0 0
$ 1 5 0 ,0 0 0
$ 1 0 .0 0
$ 1 ,4 4 0 ,0 0 0
$ 7 ,1 1 9 ,6 0 0
$ 3 0 0 ,0 0 0
1
$ 3 0 0 ,0 0 0
$ 3 0 0 ,0 0 0
$ 1 .5 0
$ 5 ,2 9 0 ,0 0 0
1 .1 2
$ 4 ,7 2 3 ,2 1 4
$ 5 ,0 2 3 ,2 1 4
$ 2 5 .1 2
$ 4 ,4 0 0 ,4 0 0
1 .3 2
$ 3 ,3 3 3 ,6 3 6
$ 8 ,3 5 6 ,8 5 1
$ 4 1 .7 8
P ro fit
D is c o u n t R a te
N P V P ro fit
C u m N P V P ro fie
L ife tim e V a lu e
Effect of adoption of new
strategies
Acq u isitio n
Y ear
O ld L T V
$3.00
N ew L T V
$1.50
C h an g e
-$1.50
W ith 200,000 m em b ers
-$300,000
S eco n d
Y ear
$20.49
$25.12
$4.63
$926,071
T h ird
Y ear
$29.42
$41.78
$12.36
$2,472,799
This is the effect of a few strategies. Later we will see the
cumulative effect of many strategies
How to use lifetime value




Compute a base lifetime value
Dream up a new retention building strategy.
Estimate the benefits and costs
Determine whether your new lifetime value goes
up or goes down
Don’t undertake any new strategy until you can
prove it will be successful
Who is going to defect?



Besides LTV, you can develop a model
that predicts which customers are most
likely to leave.
Putting that model with LTV you can
refocus your entire retention strategy
You create a Risk Revenue Matrix
Focus retention programs on A
and B: 44% of your
customers.
P robability of Leaving S oon
LTV
High
Medium
Low
High
Medium
Low
P riority A
P riority B
P riority C
P riority B
P riority B
P riority C
P riority C
P riority C
P riority C
Using Risk Revenue Matrix



Telecom company sent special messages
to priorities A and B.
Ignored customers in priority C
Result: Boost in retention and profits
Using lifetime value to get
budget approval




Database marketing budgets are usually carved from
somewhere else
You have to prove that you will make better use of
the funds than the others
Lifetime value can supply testable numbers that
CFO’s can understand
Base your budget on solid numbers backed up by
valid tests
What your new budget will
buy
Old LTV
New LTV
Change
With 200,000 members
Year 1
$3.00
$1.50
-$1.50
-$300,000
Year 2
$20.49
$25.12
$4.63
$926,071
Year 3
$29.42
$41.78
$12.36
$2,472,799
How you got there
Retention Rate
Customers
Visits Per Year
Spending Per Visit
Revenue
Year 1
50%
200,000
1.6
$55
$17,600,000
Year 2
60%
100,000
2
$70
$14,000,000
Year 3
65%
60,000
2.4
$80
$11,520,000
Cost Percentage
Costs
Acquisition Cost $32
Database Costs
Loyalty Program
Loyalty Costs
Total Costs
50%
$8,800,000
$6,400,000
$500,000
$5.00
$1,600,000
$17,300,000
49%
$6,860,000
48%
$5,529,600
$250,000
$8.00
$1,600,000
$8,710,000
$150,000
$10.00
$1,440,000
$7,119,600
$300,000
1
$300,000
$300,000
$1.50
$5,290,000
1.12
$4,723,214
$5,023,214
$25.12
$4,400,400
1.32
$3,333,636
$8,356,851
$41.78
Profit
Discount Rate
NPV Profit
Cum NPV Profie
Lifetime Value
Using lifetime value to get
budget approval




Database marketing budgets are usually carved
from somewhere else
You have to prove that you will make better use of
the funds than the others
Lifetime value can supply testable numbers that
CFO’s can understand
Base your budget on solid numbers backed up by
valid tests
Conclusion: you can do this




Create a lifetime value table for your
customers.
Put LTV into each customer record
Use LTV to determine your marketing
strategy
Use it to get your budget approved
Books by Arthur Hughes
From McGraw Hill. Order at
www.dbmarketing.com
Contact Arthur: arthur.hughes@kbm1.com