IBS 550

Week 2

Most Significant Business Assets Demographic Information Behavioral information

gained through direct interaction with customers online and offline.

Make a difference with What you know, How you are organized to use it, How you plan to add more of what

you need to know

If you don’t know where you are going you probably aren't going to get there

To target a specific niche market as your point of attack and focus all your resources on achieving the dominant leadership position in that segment

The Fundamental Principle of Marketing is:

Trying to cross the chasm without taking a niche market approach is like trying to light a fire without firewood.

Correct Approach First you divide up the universe of possible customers into

market segments. Then you evaluate each segment for its attractiveness. After the targets get narrowed down to a very small

number, the “finalists”, then you develop estimates of such factors as

• the market niches’ size,• their accessibility to distribution, • the degree to which they are well defended by

competitors. Then you pick one and go after it.

But nobody seems to do it very well

High risk low data decision

By definition the market we will enter will not have experienced our type of product before.

We are in high risk low data state.

Lack of Data

Acknowledge the lack of data as a condition of the process.

To be sure you can fight back against this ignorance by gathering highly focused data yourself.

You can not expect to transform a low data situation to high data situation quickly.

Informed Intuition The key is to understand how informed intuition actually

works. Unlike numerical analysis, it does not rely on processing a

statistically significant sample of data in order to achieve a given level of confidence.

Rather it involves conclusions based on isolating a few high quality images that it takes to be prototype of a broader and more complex reality.

They are the ones that are memorable.

Memorable Images

Only work with memorable images. Please note that we are not focusing on

target market characterization. But target customer.

Let Them Guide Us

Markets are impersonal abstract things like the PC market,

Neither the names nor the descriptions of markets evoke any memorable images.

We need something that feels a lot more like real people.

We are just going to have to make them up.

We can let them guide us to developing a truly responsive approach to their needs.

Target Customer Characterization

A formal process for making up these images, getting them out of individual heads and in front of a

marketing decision making group.

Target Customer Characterization Create as many characterizations as

possible Built a basic library of possible

target customer profiles Apply techniques to reduce these

data into a prioritized list of desirable target market segment opportunities.

Sample Scenario for a Pen based Laptop Customer Personal profile and job description Technical resources (environment) A day in life (before) The problem your product solves A day in life (after)

We are still operating in a low data situation

We just have a better set of material to work with.

Currently

Value Triad

Product Application

Customer

Value Proposition

Lifetime Value Calculation

Why Lifetime Value Analysis?

• 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.

The Importance of Measurements• Measures determine vision and strategy deciding what to

measure and how to link measures to incentives are the most important DBM decisions.

• NPV of customer base should be at the top of the measurement hierarchy.

LTV Analysis Goal:

Determine…

• Where to put your retention dollars• The value of each retention strategy • Where to put your acquisition dollars• How much to spend on acquisition

What is Life Time Value

• NPV of the profit to be realized on the average new customer during a given number of years.• Life time value is goodwill• To compute it you must be able to track customers from

year to year• Main use: To evaluate strategy

Birthday Club Strategy We will examine Ridgeway Fashions

before and after it adopted the new strategy of writing letters to husbands before their wives birthdays.

While this is a retail example the principles apply to any kind of industry.

Financial,Telecommunications, B2B

Variable Costs Include any variable cost. Do not include fix costs rent long

term debt overhead. These costs do not vary with number of customers.

The costs of servicing a customer tend to decrease with the number of years that the customer has been buying from you.

Acquisition Cost Advertising + Marketing+Sales

money you spend during the year. Than

Advertising + Marketing+Sales/the number

of new customers who actually make purchases from you each year.

The Discount Rate The profits you receive from your

customers come in over several years. Money received in future years is not

worth as much as money received today. We must discount it by a certain

percentage so we can equate it to the present money.

Use the market rate of interest to discount the future revenue And include the risk factor

How to figure the Discount Rate

• Market rate of interest …. 8 %• Assume risk ( Double rate ) …16 % • Years = n Interest = I• Formula :D = ( 1 + I)n

• Calculation of rate after 3 years• D= (1+ .16 )2 = ( 1.16 ) 2 = 1.3456

Other Calculations: NPV Profits : Gross Profits / Discount rate Cumulative NPV profits

NPV year 1 + NPV year 2 + NPV year 3 LTV : Cumulative NPV profits in each year / original

group of customersThe LTV of the average new customer for Nine

West in the 3rd year is 60.05 1,201,057 / 20,000 = $60.05

Recency, Frequency, Monetary Analysis

RFM Direct Marketers have been using

RFM Analysis to predict customer behavior for more than 50 years.

It is the basis for any model of customer behavior

You only need your Customer database with purchase history. You don’t need to hire a statistician.

RFM The predictor of future behavior is

past behavior RFM is pure behavior, it only works

with customer files It requires knowledge of the

customer purchase history. It works with any industry.

How to code your customers by Recency

You need the most recent purchase date.

Divide the database into 5 exactly equal parts. Number 5 ( the most

recent ) Down to 1 ( the most

ancient )

5

4

3

2

1

03/20/2001

11/20/1998

Response by Recency Quintile 37

The customers were offered a video package that cost them about $100including S&H charges.The graph represents the responses to a test mailing to 30 000 of 2.1 million names.

How to code your customers by Frequency You need the

total number of times that the customer has made a purchase from you.

5

4

3

2

1

3.254

1

Averageproductspurchased per month

Frequency Average number of telephone calls

made per month Total number of checks and deposits

made during a month This is a measure of how important

is doing business with you is in the minds of your customers.

Response by Frequency Quintile

Frequency is also a good predictor of behavior but much less so than Recency.

Lowest quintile contains an abnormal number of recent buyers. Joined yesterday.This customer did not have the chance to become a frequent buyer yet

How to code your customers by Monetary

We need the total amount spent on our products or services,per month,per year or in some other way.

5

4

3

2

1

$12,456

$10

Average amount purchasedper month

Response by Monetary Quintile

1.61%

Monetary coding is far less predictive of behavior than either recency or frequency.

Monetary response to $100product

Putting It All Together

300 000 Records

Creating an Nth

Results of test mailing $100 offer to 30 000 customers

RFM Cell

Bre

akev

en I

ndex

34 of 125 cells better than breakeven

Profit from Test Mailing

For a net cost of $420 the company learned how 30,000 customer, an Nth of it s 2.1 million customer database would respond to this offer.

Test Full File & RFM Selects Compared

Test v.s. Response Rates

Ridgeway Fashion Assumption: The birthday club will

be successful and there will be a 5 % referral rate.