Contact strategy

Contact Strategy: What is it?• Contact strategy deals with using information

about • Customer purchases• Promotion patterns• Interests, and• Preferences

• In order to• Regulate the frequency and sequence of

customer contact• Customize the offer, creative thrust, and

positioning of contacts

What is new in today’s Contact Strategy

• All the key decision criteria are based at the

customer or individual level

• A customer is included in a promotion or

campaign depending on whether there is

any incremental profit from contacting the

customer

What is new in today’s Contact strategy• Previously all customers who did not own product A

were mailed promotions about product A.

• Today, a customer is mailed promotions about product A depending on

• How long a person has been a customer?

• What products the person has previously bought?

• What were the person’s responses to previous mailings, or contacts?

• What are the purchase patterns of the person?

• These factors are then combined to compute the Return on Investment (ROI) for a particular customer

Customer Lifetime Value

• Lifetime value is the NPV of the profit that you will realize on a new customer during a given number of years

• Factors in calculation of CLTV- Retention rate- Spending rate- Acquisition cost- Discount rate- NPV calculation- Referral rate

Customer Lifetime Value

• Ridgeway Fashions is in fashion retailing• Wants to test idea of a Birthday Club• Women provide their fashion preferences and their

husband’s business address. Ridgeway sends husbands a reminder and hints for gifts before wife’s birthday

• We will look at Ridgeway before and after the Birthday Club

• Look at 20000 customers over a 3 year period

Customer Lifetime Value

• Retention rate

- The single most important number in the lifetime value table

- Is calculated by a simple formula:

RR=year X customers/year 1 customers

eg RR=8000/20000=40%

- Year X customers represent those Year 1 customers who are still buying in the later year

Customer Lifetime Value

• Spending rate- Average amount spent by the average customer each year- Calculated by dividing total sales for group being studied in a given year by the number of customers in the group- Year 2 rate represents revenue from customers who are still active out of the original year 1group- Typically the longer customers are with you, the more they will spend per year, per visit, per order

Customer Lifetime Value

• Acquisition cost- Add up all money spent on advertising, marketing and sales efforts during the year - Divide this by the number of new customers who actually make purchases from you each year

• Discount rate used because profits are received from customers over many years

Customer Lifetime Value

• Net Present Value

- Once you have the discount rate for each year, each of your profits must be discounted by the corresponding rate

- NPV profits=gross profits/discount rate

- Add up NPVs of all profits to get cumulative NPV

Customer Lifetime Value

• Lifetime value is simply the cumulative NPV profit (CUM-NPV) in each year divided by the original group of customers

• CLTV=CUM-NPV/acquired customers 3rd year CLTV in above example is

$1201057/20000=$60.05

• Represents the average profit that you can expect to receive, after a given number of years, from the average new customer whom you can sign up

Customer Lifetime Value

• Referral rate- Management assumes that the Birthday Club will be successful enough that 5% of it’s customers will recommend Ridgeway to friends/relatives

• Usually referred people are more loyal and have higher retention and spending rate than the average new acquisition

RFM: The Workhorse• Key variables to consider for contact strategy:

– Recency

– Frequency

– Monetary Value

• Additional help comes from

– Promotion History

– Demographic Data

– Survey data

RFM definitions

• Recency• How recently has a customer bought?

• Frequency• How frequently does a customer purchase?

• Monetary Value• How much does a customer spend on each

purchase?

How does RFM work?

• Rank Customers according to each variable into

say 5 groups.

• Give preference to contacting customers who are

in the top groups for each variable

• Give the most preference to contacting customers

who are in the top group for all the variables

How does RFM work?

• An RFM chart

depicting the groups

and the response

rates for each group

0

1

2

3

4

Response Rate (%)

5 4 3 2 1

Recency Group

Response Rates by Recency

How does RFM work?

• An RFM chart

depicting the groups

and the response

rates for each group

0

1

2

Response Rate (%)

5 4 3 2 1

Frequency Group

Response Rates by Frequency

How does RFM work?

• An RFM chart

depicting the groups

and the response

rates for each group0

1

2

Response Rate (%)

5 4 3 2 1

Monetary Value Group

Response Rates by Monetary Value

Purchase History Information

• Time or Tenure of being a customer– Treat new and old customers differently

• For new customers send welcome packages• For old customers send offers that recognize

their tenure • Offer special privileges to long life

customers

Purchase History Information

• Total Sales Dollar or Total Sales Dollar over Time– Calculate Revenue Velocity

Revenue Velocity (RV) = total amount customer spenttotal time customer has been

purchasing

– RV for a customer who has spent $100 in 2 months = 50

– RV for a customer who has spent $100 in 20 months = 5

– First customer preferred over the second

Purchase History Information

• Product Ownership

– Avoid offending customers by recommending them to

buy a product they already have

– Very critical for expensive items like cars, insurance,

and financial services

– Contact customers who do not have a do-not-contact

code and are outside the too-soon to contact limit

Purchase History Information

• Product Ownership over time

– How do you effectively eliminate customers who first

sign-up for all offers and then cancel them all within a

month?

– Look for customers who have owned products/services

for a long time and offer only them additional offers

Promotion History

• Used to define who is eligible for an upcoming contact

• Helpful in creating a market segment

• Propensity Indicator– Person’s response rate over time

Promotion History

Propensity Indicator (PI) = (# of times bought/ # of times promoted/ time period)

• Customer A was promoted 6 times, and bought twice in the last 12

months, PI = (2/6/12)= 0.027

• Customer B was promoted 6 times, and bought twice in the last 18

months, PI = (2/6/18)= 0.018

• Customer C was promoted 4 time, and bought twice in the last 6

months, PI = (2/4/6) = 0.08

• Customer C > Customer A > Customer B

Demographic Information

• Create relatively similar customer segments based on demographic and lifestyle characteristics

• Characteristics include• Gender, marital status, age, income, home value,

presence of children, education level, etc.

• Age, marital status, income, presence of children best bets!!!

Attitudinal Information• Survey data used to find

• Motivation for purchase

• Barriers to purchase

• Brand’s impression as compared to a competitor

• Brand Equity

• Loyalty within a category

• Takes a long time to collect

• Not very reliable

• Use in combination with purchase history and demographic data to profile segments

Combining all Types of Information

• Sequentially rank customers based on– First by Purchase History

– Second by Demographic Information

– Third by attitudinal information

• Give preferences to customers who are ranked first in all three categories, then to the ones ranked first in purchase history and so forth

Example: Consumer Products Company

• Situation– A number one market share company finds that

its market share is eroding– Fall-off in store traffic by loyal and previously

high spending customers– High Ad-spending, target trade promotions and

in-store promotions don’t work

Example:Consumer Products Company• Strategy

– In-store survey designed to collect data on • Name, address, phone number, birthday• How many of a certain product were purchased in

the last 10 months?• How many were purchased in this store?• What were the primary reasons/occasions the

customer bought the product?– Used this information to target customers as discussed

before– The contact strategy involved multiple mailings over 12

months that involved a gift, and valuable tips to use the product.

Example:Consumer Products Company

• Outcome– Market share increased for the product line and

for the overall brand– Customers in the program purchased at a higher

rate

Example: Using RFM for a Promotion

• A database marketer with a customer database of 2.1 million names

• Wants to do a promotional Rollout • Does a Test promotion first on 30,000

customers• It sent videos costing $100 and it made $40

on each successful sale. Cost of mailing was $0.55 per piece

Example: Using RFM for a Promotion• First all 2.1 mn customers were coded by Recency,

Frequency and Monetary Value• Then database was sorted by recency and divided into

5 equal parts (quintiles) which were numbered from 5 (most recent) to 1 (most ancient)

• Then each of the 5 recency quintiles was further sorted by Frequency (total no of times a customer purchased from you) and divided in to 5 equal parts

• Each recency quintile was thus numbered from 5 (most frequent) to 1 (least frequent)

• Then each of the 25 Recency-Frequency combinations was further sorted by Monetary Value and divided into 5 equal parts. Each combo was numbered from 5(most value) to 1(least value)

Example: Using RFM for a Promotion

• The Test group of 30000 was selected using an Nth

• A Breakeven Index is calculated for each of the 125 cells using the actual responses

• Breakeven is the response rate required for the net profit from promotion to a test group to exactly equal cost

Example: Using RFM for a Promotion

• The company found that only 34 of the 125 RFM cells broke even

• The final promotional offer was mailed to only people in the 34 cells with positive breakeven

• Response rate and profits were higher by not promoting to people unlikely to respond