Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes Vice President /...

Using Lifetime Value to Determine Your Marketing

Strategy

Arthur Middleton Hughes

Vice President / Solutions Architect

KnowledgeBase Marketing, Inc.

ACC

Gaylord Palms, OrlandoTuesday May 24, 2005

3:45 – 5:00 PM

MarketingDatabase

Data Access& AnalysisSoftware

Customer Transactions

Marketing Staff

Inputs from Retail, Phone, Web

How a modern database system works

AppendedData

Customer Service

Web Site

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!

Why long term loyal customers are important. They:

• 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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage Retained

from Previous

Year

1 2 3 4 5

Years as a customer

Retention is the way to measure loyalty

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 cataloger

• Before and after a loyalty program(Illustrative Examples only. No data from these catalogers)

Cataloger Customer Lifetime Value

Acquisition Second Third

Year Year Year

Customers 304,211 104,005 56,892

Retention 34.19% 54.70% 64.12%

Orders 399,401 145,112 119,004

Avg No Ord 1.31 1.40 2.09

Avg Order $33.84 $37.38 $42.87

Revenue $13,516,445 $5,423,881 $5,102,003

S&H INC $2,720,860 $1,091,827 $1,027,033

Total Revenue $16,237,305 $6,515,708 $6,129,036

Cost of Goods Sold $6,082,400 $2,440,746 $2,295,901

Catalogs / Customer 3.75 7.41 5.37

Follow Up Catalogs 1,139,691 2,254,969 1,634,367

Acquisition Catalogs 6,000,000

Cost Each $0.539 $0.539 $0.539

Catalog Costs $3,234,000 $163,970 $56,059

S&H Cost $1,486,809 $596,627 $561,220

Cost per order $2.70 $2.70 $2.70

Operating Costs $1,078,383 $391,802 $321,311

Total Costs $11,881,592 $3,593,145 $3,234,491

Gross Profit $4,355,713 $2,922,563 $2,894,545

Discount Rate 1.00 1.12 1.25

NPV Profit $4,355,713 $2,609,431 $2,315,636

Cum NPV Profit $4,355,713 $6,965,145 $9,280,781

Lifetime Value $14.32 $22.90 $30.51

Discount Rate Basic Formula

Market Rate of Interest...5%Assume Risk (Double rate)...10%Years = n Interest = iFormula: D = (1 + i)n

Calculation of rate after 2 years: D = (1 + .10)2 = (1.10)2 = 1.21

Strategies

1. Gold Customer Gifts

2. Emails with catalogs

3. Shift sales to the web

4. One Click Ordering

5. Next Best Product

6. Use caller ID to bring customer history on screen.

7. Live Agent

8. Create a customer club

Gold Customer Gifts

• Identify Gold Customers – those in the top 5% who bring in 60% of business.

• Send them thank you gifts with letters

• Overall impact on revenue results in increased average order size and number of orders per year.

Gold Customer Gifts• Cataloger 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.

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.

Emails with catalogs

• Miles Kimball sent 20,000 emails with three different catalogs, and 20,000 with the three catalogs alone.

• Those who got the emails bought 18% more than those who got the catalogs alone.

100

118

90

95

100

105

110

115

120

Control Test

Shift sales to the web

• Web customers are more affluent

• Their average order size is 12% higher than phone orders.

• The cost of the web order is 16% lower than phone orders.

• Incentive offered is 5% off on any order over $50.

• Result: shift of 11% of non web customers to the web every year.

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.

Next Best Product

• Collaborative Filtering 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

http://www.lizclaiborne.com/product/index.jsp?productId=1923725&cp=1759667.1759736.1472289.1780906&altCatId=1472289&parentPage=family

Caller ID

• Use Caller ID to bring customer’s complete purchasing history on the screen before the agent begins talking.

• Result, she can talk to the customer as if she knew her.

• Result: better relationship. Greater opportunity for cross sales.

• Screen also brings up Next Best Product for discussion.

http://www.amazon.com/exec/obidos/tg/detail/-/B0003TN3O8/qid=1109617710/sr=8-7/ref=sr_8_xs_ap_i7_xglna/102-5345325-3184929?v=glance&s=hpc&n=507846

Live Agent

• 74% of shopping carts abandoned at checkout.

• Reason: customers have some question. They are unsure about the product, service, color, delivery, etc.

• Solution: put a live chat button at checkout time.

• Have live agents available to answer questions.

• Result: increased sales

Loyalty Club members may have 8X to 10X the contribution level vs. non-members.

Second year and long term performance difference is even more significant.

Helps establish criteria for investment in loyalty conversion.

$3.50

$16.43

$4.16

$26.10

$5.79

$49.29

$2.71

$37.23

$-

$10.00

$20.00

$30.00

$40.00

$50.00M

ktg

Co

ntr

ibu

tio

n

0-3mo 0-6mo 0-12mo 13-24mo

Months After 1st Purchase

Loyalty Club Contribution

Non-ClubGoal Club

Create a Loyalty ClubCreate a Loyalty Club

Summary of new strategies

Multi Channel Percent Increase Increase Increase Reduce CostInitiative Sales or Order Number Retention Admin to

Incr. Custs. Size Orders Rate Costs Use1 Gold Customer Gifts 18% 60% 10.80% 10.80% 2.16% $0.102 Emails with catalogs 18% 20% 3.60% 1.80% 1.80% $0.053 Shift Sales to the Web 5% 20% $2.00 $0.204 One Click Ordering 4% 25% 1.00% 0.50% 1.00% $0.10 $0.105 Next Best Product 4% 80% 3.20% 0.80% $0.126 Caller ID for CSR 3% 80% 2.40% 0.60% 1.20% $0.10 $0.107 Live Chat 8% 20% 1.60% 1.60% 0.80% $0.408 Loyalty Club 10% 30% 3.00% 1.50% 3.00% $0.20

Total 25.60% 16.80% 10.76% $2.20 $1.27

New Cataloger Customer Lifetime Value


Year Year Year

Customers 304,211 136,738 89,510

Retention 44.95% 65.46% 74.88%

Orders 466,500 222,834 218,689

Avg No Ord 1.53 1.63 2.44

Avg Order $42.51 $46.95 $53.85

Revenue $19,828,733 $10,461,115 $11,775,941

S&H INC $3,991,524 $2,105,822 $2,370,497

Total Revenue $23,820,257 $12,566,937 $14,146,438



Follow Up Catalogs 1,140,791 2,254,204 1,633,613


Cost Each $0.539 $0.539 $0.539

Catalog Costs $3,234,000 $1,215,016 $880,517

S&H Cost $2,181,161 $1,150,723 $1,295,353

Cost per order $1.77 $1.77 $1.77

Operating Costs $825,706 $394,416 $387,079

Total Costs $15,163,796 $7,467,656 $7,862,124

Gross Profit $8,656,461 $5,099,281 $6,284,314


NPV Profit $8,656,461 $4,552,929 $5,027,451

Cum NPV Profit $8,656,461 $13,209,390 $18,236,841

Lifetime Value $28.46 $43.42 $59.95

Effect of adoption of new strategies: $8.8 million more profits

• These are profits, not revenue.

• All expenses including marketing are already deducted.

Summary Acquisition Second Third

Year Year Year

Base Lifetime Value $14.32 $22.90 $30.51New Lifetime Value $28.46 $43.42 $59.95Increase $14.14 $20.53 $29.44With 300,000 Customers $4,241,215 $6,157,811 $8,832,088

How to use lifetime value• Compute a base lifetime value

• Dream up a new 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

Customer Segmentation

Segments are essential for marketing

• Many customers are quite different in their purchase patterns

• Create actionable segments and determine the value of each

• Use the results to focus your retention programs and acquisition programs on the most profitable segments

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 Segments

Segment: Senior CustomersSeniors Catalog Value


Year Year Year

Customers 94,005 42,302 28,766

Retention 45.00% 68.00% 76.00%

Orders 154,168 77,836 64,722

Avg No Ord 1.64 1.84 2.25

Avg Order $40.11 $42.99 $52.87

Revenue $6,183,687 $3,346,176 $3,421,876

S&H INC $1,244,776 $673,585 $688,824

Total Revenue $7,428,463 $4,019,761 $4,110,699



Follow Up Catalogs 352,519 696,577 504,807


Cost Each $0.539 $0.539 $0.539

Catalog Costs $997,150 $375,455 $272,091

S&H Cost $680,206 $368,079 $376,406

Cost per order $3.07 $3.07 $3.07

Operating Costs $473,296 $238,957 $198,698

Total Costs $4,933,311 $2,488,270 $2,387,039

Gross Profit $2,495,152 $1,531,490 $1,723,660


NPV Profit $2,495,152 $1,367,402 $1,378,928

Cum NPV Profit $2,495,152 $3,862,554 $5,241,482

Lifetime Value $26.54 $41.09 $55.76

Put LTV into each customer record

• First: Segment your customers

• Second: Determine the LTV of the segment

• Third: Determine the LTV of each member of the segment

• Fourth: Put the LTV into each customer’s database record.

• Update it monthly as transactions take place.

Yvette Donovan Senior LTVYvette Donovan


Year Year Year

Customers 94,005 42,302 28,766

Retention 45.00% 68.00% 76.00%

Orders 188,010 0 86,297

Avg No Ord 2.00 0.00 3.00

Avg Order $44.80 $0.00 $82.50

Revenue $8,422,848 $0 $7,119,469

S&H INC $1,695,519 $0 $1,433,149

Total Revenue $10,118,367 $0 $8,552,618

Cost of Goods Sold $3,790,282 $0 $3,203,761


Follow Up Catalogs 352,519 696,577 504,807


Cost Each $0.539 $0.539 $0.539

Catalog Costs $997,150 $375,455 $272,091

S&H Cost $926,513 $0 $783,142

Cost per order $3.07 $3.07 $3.07

Operating Costs $577,191 $0 $264,931

Total Costs $6,291,136 $375,455 $4,523,924

Gross Profit $3,827,232 -$375,455 $4,028,694


NPV Profit $3,827,232 -$335,228 $3,222,955

Cum NPV Profit $3,827,232 $3,492,004 $6,714,959

Lifetime Value $40.71 $37.15 $71.43

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 on A and B: 44% of your customers.

Probability of Leaving SoonLTV High Medium LowHigh Priority A Priority B Priority CMedium Priority B Priority B Priority CLow Priority C Priority C Priority C

What should you do?

• Maintain a customer database

• Determine customer lifetime value

• Create new strategies. Estimate the benefits and costs.

• See what the strategies will do for your bottom line.

• Get started with multi-channel marketing

• Learn what other marketers are doing

Books by Arthur Hughes

From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: [email protected]

http://www.dbmarketing.com/

Using Lifetime Value to Determine Your Marketing Strategy Arthur Middleton Hughes Vice President /...

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