Using Lifetime Value to Increase Customer

• Using Lifetime Value to Increase Customer Retention and Repeat Sales ACCM Boston Title • • • Wednesday, May 23 2007 Subtitle 10: 45 a. m. - 12: 00 p. m. Arthur Middleton Hughes Vice President / Solutions Architect Knowledge. Base Marketing Date

How a modern database system works Customer Transactions Marketing Database Data Access And Analysis Software Marketing Staff Access By Website Inputs from Retail, Phone, Web 2 Modeling Appended Data

Why retention is important • Repeat buyers: – – – – 3 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

Repeat sales is the way to measure loyalty 4

Keys to Retention • Recruit loyal relationship buyers rather than price cutting transaction buyers. • How? Emphasize service and quality rather than price • Greet customers when they come back • Find out more about your customers. Use this info in your messages • Give them a reason to come back soon. • We will cover 16 possible strategies… 5

Recruit relationship buyers • Transaction buyers only interest is price • Relationship buyers want a firm that gives good service to whom they can be loyal 6

How to find relationship buyers • Lowball offers will attract transaction buyers • You cannot make a profit from them • Relationship buyers are interested in good service, high value and two way loyalty • They will stick with you and provide a profitable bottom line 7

Two Kinds of Database People n Constructors People who build databases Merge/Purge, Hardware, Software n Creators People who understand strategy Build loyalty and repeat sales n You need both kinds! 8

We are going to explore ways of increasing catalog customer retention • We will list sixteen different things that you can try with your customer database to increase sales. • The beauty of a customer database is that it permits many tests with control groups. • We can test each new idea to see how well it will work before we roll it out. • First, we will develop a base line customer lifetime value… 9

What is Lifetime Value? • The net profits that you expect to receive from the average new customer during the next three or four years. • It includes the revenue, the costs, the profit and the discount rate. • Revenue includes the retention rate, number of orders per year, average order size. 10

Typical Catalog Customer Lifetime Table

Computing the discount rate • D = (1 + (Interest rate X 2) ^ n • Where n = years to wait. • If interest rate is 6%, then after 2 years • D = (1. 12)^2 • D = 1. 2544 12

How to get them to order more • You have a very narrow time window • People are in a buying mood, or they are not. • Give them a reason for buying more while they are in that mood. • Use the order confirmation process to get info and create a second sale • Here is how one company does this: 13

Get customers to register 14

When they register, use their name when they return 15

Shoeline. com provides 10% off on your next order • Coupon in the box when your shoes arrive. Coupon has a number. • Just use that number when you order 16

The Magic Coupon 17

my ing n ff o Noth er o % er. ord nd 0 t 1 ord ust e, a o I g ond in. J t cod it. f c se end coun ck o s to h dis p tra e wit y ke the

Next step: Get customers to rate their ordering process From: Shoe. Line. com Customer Service [ Sent: Monday, November 06, 2006 11: 08 AM To: Hughes, Arthur Subject: Write a review for your purchase! Dear Arthur: We at Shoe. Line. com would like to thank you for your purchase of the Supremes Grand Prix - Black. We hope you enjoy the product and that it met all your expectations! We would love to know what you thought of the shoe/accessory. Please visit our Customer Reviews page for your product and submit a review! The link is below: http: //www. Shoe. Line. com/asp/writereview. asp? style=G 350001&Emai l=arthur. hughes@kbm 1. com 19

The rating form Comments 20

From rating form, get testimonials. Put them on your website 21

Provide personalized order status 22

Improve the Search box 23

Provide Gift Wrapping. 24

Analyze the database • See which is worth more: Peak Season buyers or Off Peak Season Buyers. • Which customers buy more: Sale item buyers vs. Regular Price Customers • Which spend more by merchandise categories • Let the answers dictate marketing strategy. 25

Test use of emails with catalog mailing • Objective: understand incremental sales from catalog plus emails • Method: Send three different catalogs to test and control group with and without emails. • Measure: increased sales and reduced costs from use of emails. 26

Case Study: look in your mailbox for our catalog 27

Email advance of catalog test • Randomly selected 2 panels of 20, 000 • All purchased on line • All received 3 print catalogs: Winter, Winter Remail and Spring. • Second panel also received three email newsletters: two after the catalog arrived, one before the catalog mailing. 28

Results – Email & Catalog vs. Catalog Only • Email & Catalog had total increase in sales of 18% over catalog only. • Email & Catalog increased number orders by 6% • Average order size increased by 11. 8% 29

Total contribution* increase from emails plus catalogs • Increase in sales and decrease in operating expense resulted in: • Increase in total contribution by 43% • Increased contribution per order increased by 35% • Response rate increased by 5. 9% * Contribution includes income from S&H plus sales 30

Provide a personalized gift organizer 31

A linen gift registry? 32

Use a gift registry Outfit new college students 33

College Student Segment – will they need linens? 34

Identify customer segments. An ideal segment… • Has definable characteristics • Is large enough to justify a custom marketing strategy with appropriate rewards and budget • Has members who can be motivated • Makes efficient use of available data • Can be measured in performance • Justifies an organization devoted to it. Can be part of a person’s time, but there should be someone who “owns” each segment. 35

Strategy for each segment: • Communications to the segment (direct mail, email, onlocation personal attention) • Rewards designed to modify behavior • Controls to measure the success of the strategy • A budget for implementation of the strategy • Specific goals and metrics for engagement: for behavior modification • An organization that accepts responsibility for the segment 36

Marketing to Customer Status Levels Your Best Customers 80% of Revenue Your Best Hope for New Gold Customers 1% of Total Revenue 37 GOLD Move Up These may be losers Spend Service Dollars Here Spend Marketing Dollars Here Reactivate or Archive

Segments and Status Levels 38

How one women’s chain segments their customers 39

How Sears Determines Segments 40

Next Best Product • Collaborative Filtering can be used to determine for each customer her next most likely product. • Customer service and the web have this info available whenever a customer visits or calls. • Tests with GUS, largest cataloger in the UK, resulted in doubling the cross sale rate (from 20% to 40%) using the next best product on the telemarketers screens 41

Amazon’s Next Best Product 42

Who offers collaborative filtering? • www. tornago. com/ : Users: Brylane, GUS, J C Penney • http: //recommendations. loomia. com/ • http: //eecs. oregonstate. edu/iis/Co. FE/ Collaborative filtering (CF) is the method of making automatic predictions (filtering) about the interests of a user by collecting taste information from many users (collaborating). The underlying assumption of CF approach is that: Those who agreed in the past tend to agree again in the future. Study Netflix. com – Masters of Collaborative Filtering 43

Creating a club on the internet • A company selling sporting goods created an internet member club. • When database was built they learned that: – Club members bought 11 times more than non club members. – In two years, 81% of club members became multibuyers. – The club boosted retention 44

Another example of a club 45

Gold Customer Loyalty Test • Selected 4, 000 highly loyal customers • Divided into 2, 000 test and 2, 000 control • Sent a discontinued item as a gift to the 2, 000 test with a thank you letter. • Included a catalog in the box. • Also sent same catalog without the letter or gift to the controls. 46

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Results of Gold Customer Gifts • Test group placed 3% more orders than the control group. • Items per order increased by 2% • Average order size increased by 6% • Total dollars spent increased by 19% • Loyalty program was an outstanding success. 48

One Click Ordering • With the web we use cookies to say, “Welcome back Susan”. • We keep her credit card on file if she wants so she can do one click ordering • Result, compared to controls, is 18% higher annual revenue from those who have one click ordering available. 49

Summary of the possible strategies. Test the increase in LTV with… 50

Will these strategies work? • Not all of them will be successful • How can you know? • Set up test and control groups • Try each strategy on 20, 000 customers, with 20, 000 in a control group. • Roll out the ones that work • Forget the ones that don’t • Get better, and better 51

Revised Lifetime Value Table including new strategies

Effect of new strategies – Profit increased by $9 million per year This is pure profit. All costs are included. 53

Books by Arthur Hughes 54 From Mc. Graw Hill. Order at www. dbmarketing. com Contact Arthur: arthur. hughes@kbm 1. com