Why Databases Fail

Why Databases Fail

LTV and RFM for Non Profits DMA Non Profit Forum Friday February 4 2005 10:30 - 11:45 The Capitol Hilton Washington, DC Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing What KnowledgeBase Marketing Does 2 Two goals today Explain how to compute donor lifetime value, and use it to improve marketing strategy Explain how RFM works, and how you can use it to improve response rates 3

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! 4 How a modern database marketing system works Customer Transactions Marketing Database Inputs from Retail, Phone, Web

Data Access And Analysis Software Website Marketing Staff Appended Data 5 Lifetime Value We can determine the lifetime value of every donor Lifetime value is the net revenue we will receive from each donor during his lifetime with our cause Using historical data, we can

compute this for every donor, and put it in their record. 7 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. 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 Dont undertake any new strategy until you can prove it will be successful Non Profit Lifetime Value Donors Retention Rate Acq. Resp Rate Gifts per year Average Gift Total Revenue Acquisition Year

200,000 35% 5.0% 1.10 $10.00 $2,200,000 Overhead Overhead Cost Acquisition Mail Appeal Mail Cost Each Mail Costs Total Costs 20% $440,000 4,000,000 50,000 $0.42 $1,701,000 $2,141,000 $59,000 1.00

$59,000 $59,000 $0.30 Net Profit Discount Rate Net Present Value Cum. NPV Lifetime Value Year 2 70,000 45% Year 3 31,500 55% 1.30 $11.00 $1,001,000 1.50 $12.00

$567,000 20% $200,200 20% $113,400 400,000 $0.42 $168,000 $368,200 400,000 $0.42 $168,000 $281,400 $632,800 1.14 $555,088 $614,088 $3.07

$285,600 1.30 $219,692.31 $833,780.03 $4.17 10 Discount Rate Basic Formula Market Rate of Interest...5% Assume Risk (Double rate)...10% Years = n Interest = i Formula: D = (1 + i)n Calculation of rate after 2 years: D = (1 + .10)2 = (1.10)2 = 1.21 11 New Strategies Add a website that takes donations

Make website interesting with lots of interesting info on the cause being promoted. Collect donors emails. Send appeals by both direct mail and email Sent retention communications besides just appeals Personalize all messages to existing donors Personalize web site Welcome back, Susan 12

Non Profit Lifetime Value Donors Retention Rate Acq. Resp Rate Gifts per year Average Gift Web Average Web Gifts /Yr Web Givers Web Gifts Total Revenue Overhead Overhead Cost Email & Website Acquisition Mail Retention Mail Appeal Mail Cost Each Mail Costs Total Costs Net Profit Discount Rate Net Present Value

Cum. NPV Lifetime Value Acquisition Year 200,000 45% 5.0% 1.30 $11.00 $16.00 1.30 8% $332,800 $3,192,800 20% $638,560 $150,000 4,000,000 50,000 $0.42 $1,701,000 $2,489,560 $703,240

1.00 $703,240 $703,240 $3.52 Year 2 90,000 55% Year 3 49,500 54% 1.50 $12.00 $20.00 1.40 12% $302,400 $1,922,400 1.60 $13.00 $24.00

1.50 14% $249,480 $1,279,080 20% $384,480 $150,000 20% $255,816 $150,000 200,000 400,000 $0.42 $252,000 $786,480 200,000 400,000 $0.42 $252,000 $657,816

$1,135,920 $621,264 1.14 1.30 $996,421 $477,895.38 $1,699,661 $2,177,556.44 $8.50 $10.89 13 Results of new strategies Old LTV New LTV Difference Times 200,000 Acquisition Year $0.30 $3.52

$3.22 $644,240 Year 2 $3.07 $8.50 $5.43 $1,085,573 Year 3 $4.17 $10.89 $6.72 $1,343,776 14 Compute LTV of all donors Use software to insert the actual donor record of each donor

Use the spreadsheet to pretend that there are 200,000 donors just like each donor Put the resulting LTV into each donor database record. Lets look at Susan Smith 15 Susan Smith Lifetime Value Donors Retention Rate Acq. Resp Rate Gifts per year Average Gift Web Average Web Gifts /Yr Web Givers Web Gifts

Total Revenue Overhead Overhead Cost Email & Website Acquisition Mail Retention Mail Appeal Mail Cost Each Mail Costs Total Costs Net Profit Discount Rate Net Present Value Cum. NPV Lifetime Value Acquisition Year Year 2 200,000 90,000 45% 55% 5.0%

1.00 2.00 $20.00 $20.00 $0.00 $0.00 0.00 0.00 8% 12% $0 $0 $4,000,000 $3,600,000 20% $800,000 $150,000 4,000,000 50,000 $0.42 $1,701,000 $2,651,000 Year 3 49,500

54% 1.00 $25.00 $0.00 0.00 14% $0 $1,237,500 20% $720,000 $150,000 20% $247,500 $150,000 200,000 400,000 $0.42 $252,000 $1,122,000 200,000

400,000 $0.42 $252,000 $649,500 $1,349,000 $2,478,000 $588,000 1.00 1.14 1.30 $1,349,000 $2,173,684 $452,307.69 $1,349,000 $3,522,684 $3,974,991.90 $6.75 $17.61 $19.87 16 Segment donors by LTV Develop a marketing strategy for each segment Your Best Customers 80% of Revenue Your Best Hope for New Gold Customers

1% of Total Revenue GOLD Move Up These may be losers Spend Service Dollars Here Spend Marketing Dollars Here Reactivate or Archive 17 RFM Analysis Recency Frequency Monetary (RFM)

Analysis Used for marketing to customers Always improves response and profits Better than any demographic model The most powerful segmentation method for predicting response How to Apply Recency Codes Put most recent purchase date into every customer record

Sort database by that date - newest to oldest Divide into five equal parts - Quintiles Assign 5 to top group, 4 next, etc. Put quintile number in customer record ResponseRate Response by Recency Quintile 4.00% 3.50% 3.00% 2.50% 2.00% 1.50%

1.00% 0.50% 0.00% 3.49% 1.25% 1.08% 0.63% 5 4 3 Recency Quintile 2 0.26% 1

How to compute a Frequency Index Keep number of transactions in customer record Sort Recency Groups from highest to lowest Divide into five equal groups Number groups from 5 to 1 Put Quintile number in customer record Response by Frequency Quintile 2.50%

2.00% 1.99% Response Rate 1.56% 1.50% 1.31% 1.00% 0.92% 0.93% 2 1 0.50% 0.00%

5 4 3 Frequency Quintile How to compute a Monetary Index Store total dollars purchased in each customer record Sort Frequency Groups from highest to lowest Divide into 5 equal groups (Quintiles) Number Quintiles 5, 4, 3, 2, 1

Put Quintile number in each record Response by Monetary Quintile 1.80% 1.61% 1.60% 1.45% 1.46% 1.40% 1.22% 1.23% 2 1 1.20%

1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 5 4 3 Response to CD Offer by Monetary Percentage of households promoted who purchased 2 1.68 1.5 1.17 1

0.88 0.66 0.5 0.32 0 5 4 3 Monetary Quintile 2 1 RFM Code Construction R 5

F 35 4 34 3 33 2 32 31 1 Database One Sort Five Sorts

M 335 334 333 332 331 Twentyfive sorts Appended RFM Codes Creating an Nth 300,000 Records Customer Database For Nth by 10, select every tenth record. Nth 30,000 Result will be statistical replica of database

Result of Test Mailing to 30,000 # 1 2 3 4 5 RFM 555 554 553 552 551 Mailed 240 240 240 240 240

Response 20 16 13 10 11 Rate 8.15% 6.56% 5.62% 4.33% 4.51% 6 7 8 9 10 545 544 543 542

541 240 240 240 240 240 9 12 6 10 7 3.78% 4.98% 2.88% 4.26% 3.10% 11 12 13 14

535 534 533 532 240 240 240 240 10 9 8 6 4.13% 3.83% 3.35% 2.70% Test Response Rate by RFM Cell Index of Response 0 = Break Even 500

400 300 200 100 0 -100 -200 555 455 355 255 111 Profit from Test Mailing Quantity Rate Goods Sold Mailing Costs

Profits (Loss) Amount 402 $40.00 $16,080 30,000 $0.55 $16,500 ($420) Test, Full File & RFM Selects Compared Response Rate Responses Net Revenue No. Mailed Mailing Cost Profits

Test Full File RFM Select 1.34% 1.17% 2.76% 402 23,412 15,295 $16,080 $936,480 $611,800 30,000 2,001,056 554,182 $16,500 $1,100,581 $304,800 ($420) ($164,101) $307,000 Test Vs Rollout Response Rates 8.00% 7.00% 7.00% 6.00%

6.00% 5.00% 5.00% 4.00% 4.00% 3.00% 3.00% 2.00% 2.00% 1.00% 1.00% 0.00% 0.00% 554 553 552 551 545 544 543 542 541 535 534 533 532 531 525 524 523 522 521 515 514 513 512 511 455 451 445 444 443 355 354 351 344

RFM Deals with Very Small Numbers Only a small percentage (such as 5%) of customers respond to the typical offer 95% or more will not respond at all RFM tells you which customers are most likely to be in the responsive 5% Those who respond may not be your most profitable customers Retroactive RFM Test Many times there is not enough time or funding to run an Nth test in advance

Solution: apply RFM codes to last years completed outgoing promotion. Since you know who responded, you can determine response rates by cell Use last years rates to govern this years rollout. Recent Case History User sells personalized product by mail 45,000 selected for a test

37 Second Recency Quintile Had More Responses. Why? 38 Even so, First Recency Quintile Had Higher Sales 39 Recent buyers spend more per order 40 Lowest two recency quintiles did not break even 41

Frequency was very predictive of response 42 Monetary did not predict response rate very well 43 But Monetary does predict average sales by quintile 44 RFM Cells clearly show who to mail to, and who to drop 45 When NOT to use RFM If you use it all the time, half your customers will never hear from

you They will be lost The others will suffer from File Fatigue Use it sparingly; when you need a boost Use it to identify your best customers Dont go hog wild! Books by Arthur Hughes From McGraw Hill. Order at

www.dbmarketing.com Contact Arthur: [email protected] 47 Thank You

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