Title

Subtitle

Date

Using Lifetime Value to Increase Customer

Retention and Repeat Sales

ACCM Boston

Wednesday, May 23 200710:45 a.m. - 12:00 p.m.

Arthur Middleton HughesVice President / Solutions Architect

KnowledgeBase Marketing

2

How a modern database system works

MarketingDatabase

Data AccessAnd Analysis

Software

Customer Transactions

Marketing Staff -

Access By Web

Inputs from Retail, Phone, Web

AppendedData

Website

Modeling

3

Why retention is important

• Repeat buyers:– 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

4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage Retained

from Previous

Year

1 2 3 4 5

Years as a customer

Repeat sales is the way to measure loyalty

5

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…

6

Recruit relationship buyers

• Transaction buyers only interest is price

• Relationship buyers want a firm that gives good service to whom they can be loyal

Relationship Vs Transaction Buyers

0

20

40

60

80

100

120

Company A Company B Company C Company D

Relationship Buyers

Transaction Buyers

7

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

8

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!

9

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…

10

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.

Typical

Catalog

Customer

Lifetime

Table

Original LTV AcquisitionYear Year 2 Year 3

Customers 167,278 34,292 17,832 Retention Rate 20.50% 52.00% 57.00%Orders 212,443 37,721 23,181 Avg. # Orders 1.27 1.10 1.30 Avg Order Size $191.00 $192.00 $193.00Revenue $40,576,624 $7,242,468 $4,474,007S&H Income $5,315,538 $948,763 $586,095Total Revenue $45,892,162 $8,191,232 $5,060,102

S&H Income % 13.10% 13.10% 13.10%COGS % 47.00% 47.00% 47.00%S&H Exp % 7.60% 7.60% 7.60%Op Cost / Order $2.70 $2.70 $2.70Cost of Goods $19,071,013 $3,403,960 $2,102,783Catalogs/Customer 2.08 6.82 4.93 Follow Up Catalogs 348,340 1,140,669 824,011 Acquisition Catalogs 31,732,000 Cost per catalog $0.640 $0.640 $0.640Cat. Cost $20,531,417 $730,028 $527,367

S&H Cost $3,083,823 $550,428 $340,025Op Cost / Order $573,596 $101,847 $62,590Total Costs $43,259,851 $4,786,263 $3,032,765

Gross Profit $2,632,312 $3,404,969 $2,027,337Profit / Cust $15.74 $99.29 $113.69Disc Rate 1.00 1.16 1.35NPV Profit $2,632,312 $2,935,318 $1,501,731Cum NPV Profit $2,632,312 $5,567,630 $7,069,361Lifetime Value $15.74 $33.28 $42.26

12

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

13

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:

14

Get customers to register

15

When they register, use their name when they return

16

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

17

The

Magic

Coupon

Thank you for your order, Arthur Hughes. Most in stock orders will ship within two business days. As soon as your order has shipped, you will receive a second email with your tracking number. Should you have any questions concerning your order, please contact us by email at customerservice@shoeline.com or by phone at 1 (877) 818-4461 and be sure to mention your order number: SL-12301599. Best regards, ShoeLine.com Management. Phone: 1 (877) 818-4461 Email: customerservice@shoeline.com | -------------------------------------------------------- | G350001_115W - Grand Prix - Black | qty. 1 - price ea. $100.95 - amount $100.95 -------------------------------------------------------- | Subtotal: $100.95 | Coupon: -$10.10 | Adjusted Subtotal: $90.86 | Tax Total: $0.00 | Shipping: $0.00 --------------------------------------------- | Total: $90.86 ---------------------------------------------

I got 10% off on my

second order. Nothing

to send in. Just order

with discount code, and

they keep track of it.

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Next step: Get customers to rate their ordering process

From: ShoeLine.com Customer Service [Sent: Monday, November 06, 2006 11:08 AMTo: Hughes, ArthurSubject: Write a review for your purchase!

Dear Arthur:We at ShoeLine.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.ShoeLine.com/asp/writereview.asp?style=G350001&Email=arthur.hughes@kbm1.com

20

The rating form

Comments

21

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

22

Provide personalized order status

23

Improve the Search box

24

Provide Gift Wrapping.

25

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.

26

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.

27

Case Study: look in your mailbox for our catalog

28

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.

29

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%

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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

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Provide a personalized gift organizer

32

A linen gift registry?

33

Use a gift registry Outfit new college students

34

College Student Segment – will they need linens?

35

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.

36

Strategy for each segment:

• Communications to the segment (direct mail, email, on-location 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

37

GOLD Spend Service Dollars Here

Spend Marketing Dollars Here

Reactivate or Archive

Your Best Customers - 80% of Revenue

Your Best Hope for New Gold Customers

Move Up

1% of Total Revenue These may be losers

Marketing to Customer Status Levels

38

Segments and Status Levels

39

How one women’s chain segments their customers

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How Sears Determines Segments

How I feel about brands: 1. I typically buy top of the line name brand products 2. I buy name brand products at a moderate price 3. I am always looking for a bargain. I will try any brand if the price is right.

How I feel about technology: 1. I buy products with the latest features and innovations 2. I buy products with mainstream features and technology 3. I am not interested in technology. Keep it simple for me.

Home status Home Owner Renter Lived in my home for less than 6 months Plan to move in the next 6 months Plan to remodel in the next 6 months. Presence of Children: Baby (age 0 – 1) Kids (ages 1 – 12) Teenagers None

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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

42

Amazon’s Next Best Product

43

Who offers collaborative filtering?

• www.tornago.com/ : Users: Brylane, GUS, J C Penney

• http://recommendations.loomia.com/

• http://eecs.oregonstate.edu/iis/CoFE/

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

44

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 multi-buyers.

– The club boosted retention

45

Another example of a club

46

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.

47

March 31, 2003 Mrs. Helena Hughes 2100 South Ocean Drive, Apartment 16A Fort Lauderdale, FL 33316 Dear Mrs. Hughes: You have been a loyal Miles Kimball customer since 1999. I see that you have trusted Miles Kimball with purchases on numerous occasions and we can’t thank you enough! Our long term success at Miles Kimball rests on our ability to meet the needs of loyal customers like you. In recognition of your on-going loyalty to our company, we are sending you the enclosed gift. I hope that you find it personally useful or handy as a gift for a friend or loved one. All of us here at Miles Kimball hope that this gift lets you know how much we value you as a customer. We thank you sincerely for your on-going patronage. We look forward to providing the very best product value and service to you in the months and years ahead. Sincerely yours,

Michael D. Muoio Chairman, President and CEO Miles Kimball

48

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.

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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.

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

Possible Strategies Increased Sales1 Recruit Relationship Buyers 2%2 10% off on next order 8%3 Get them to register 2%4 Get them to rate their purchase 3%5 Put testimonials on the website 2%6 Say, "Welcome back, Susan" 3%7 Determine next best product 10%8 Improve the search box 3%9 Identify & market to segments 8%

10 Send emails with catalogs 16%11 Send gifts to gold customers 3%12 Provide Gift Wrapping 2%13 Provide a gift registry 5%14 Market to profitable segments 4%15 Create a club 9%16 One Click Ordering 3%

Total 83%

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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, and better

Revised Lifetime Value Table including new strategies

With New Strategies AcquisitionYear Year 2 Year 3

Customers 167,278 48,511 26,196 Retention Rate 29.00% 54.00% 59.00%Orders 234,189 72,766 41,913 Avg. # Orders 1.40 1.50 1.60 Avg Order Size $195.00 $198.00 $205.00Revenue $45,666,894 $14,407,654 $8,592,201S&H Income $5,982,363 $1,887,403 $1,125,578Total Revenue $51,649,257 $16,295,057 $9,717,779S&H Income % 13.10% 13.10% 13.10%COGS % 48.00% 48.00% 48.00%S&H Exp % 7.60% 7.60% 7.60%Op Cost / Order $2.70 $2.70 $2.70Cost of Goods $21,920,109 $6,915,674 $4,124,256Catalogs/Customer 2.08 6.82 4.93 Follow Up Catalogs 348,340 1,140,669 824,011 Acquisition Catalogs 31,732,000 Cost per catalog $0.640 $0.640 $0.640Cat. Cost $20,531,417 $730,028 $527,367S&H Cost $3,470,684 $1,094,982 $653,007Op Cost / Order $632,311 $196,468 $113,166Analytics $100,000 $100,000 $100,000Emails with catalogs $10,000 $30,000 $30,000Wesite Improvements $250,000 $250,000 $250,00010% on repeat orders $1,304,768 $720,383 $429,610Total Costs $48,219,290 $10,037,534 $6,227,407Gross Profit $3,429,967 $6,257,522 $3,490,373Profit / Cust $20.50 $128.99 $133.24Disc Rate 1.00 1.16 1.35NPV Profit $3,429,967 $5,394,416 $2,585,461Cum NPV Profit $3,429,967 8,824,383.31 $11,409,845Lifetime Value $20.50 52.75 $68.21

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Effect of new strategies – Profit increased by $9 million per year

This is pure profit. All costs are included.

Acquisition Year 2 Year 3Previous LTV $15.74 $33.28 $42.26New LTV $20.50 $52.75 $68.21Change $4.77 $19.47 $25.95With 350,000 Cust $1,668,955 $6,814,188 $9,081,704

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Books by Arthur Hughes

From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com