using lifetime value to determine your marketing strategy arthur middleton hughes vice president /...
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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
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MarketingDatabase
Data Access& AnalysisSoftware
Customer Transactions
Marketing Staff
Inputs from Retail, Phone, Web
How a modern database system works
AppendedData
Customer Service
Web Site
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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!
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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
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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
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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.
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Lets look at a cataloger
• Before and after a loyalty program(Illustrative Examples only. No data from these catalogers)
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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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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
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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.
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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
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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
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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
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New Cataloger Customer Lifetime Value
Acquisition Second Third
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
Cost of Goods Sold $8,922,930 $4,707,502 $5,299,173
Catalogs / Customer 3.75 7.41 5.37
Follow Up Catalogs 1,140,791 2,254,204 1,633,613
Acquisition Catalogs 6,000,000
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
Discount Rate 1.00 1.12 1.25
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
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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
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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
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Customer Segmentation
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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
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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
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Segment: Senior CustomersSeniors Catalog Value
Acquisition Second Third
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
Cost of Goods Sold $2,782,659 $1,505,779 $1,539,844
Catalogs / Customer 3.75 7.41 5.37
Follow Up Catalogs 352,519 696,577 504,807
Acquisition Catalogs 1,850,000
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
Discount Rate 1.00 1.12 1.25
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
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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.
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Yvette Donovan Senior LTVYvette Donovan
Acquisition Second Third
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
Catalogs / Customer 3.75 7.41 5.37
Follow Up Catalogs 352,519 696,577 504,807
Acquisition Catalogs 1,850,000
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
Discount Rate 1.00 1.12 1.25
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
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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
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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
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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
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Books by Arthur Hughes
From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: [email protected]