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LTV and RFM for Non Profits DMA Non Profit Forum Friday February 4 2005 10:30 - 11:45 The Capitol...

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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
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Page 1: 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.

LTV and RFM for Non ProfitsDMA Non Profit ForumFriday February 4 2005

10:30 - 11:45The Capitol HiltonWashington, DC

Arthur Middleton Hughes

Vice President / Solutions Architect

KnowledgeBase Marketing

Page 2: 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.

2

What KnowledgeBase Marketing Does

Page 3: 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.

3

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

Page 4: 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.

4

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!

Page 5: 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.

5

MarketingDatabase

Data AccessAnd Analysis

Software

Customer Transactions

Marketing Staff

Inputs from Retail, Phone, Web

How a modern database marketing system works

AppendedDataWebsite

Page 6: 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.

Lifetime Value

Page 7: 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.

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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.

Page 8: 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.

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.

Page 9: 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.

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

Page 10: 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.

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Non Profit AcquisitionLifetime Value Year Year 2 Year 3Donors 200,000 70,000 31,500 Retention Rate 35% 45% 55%Acq. Resp Rate 5.0%Gifts per year 1.10 1.30 1.50Average Gift $10.00 $11.00 $12.00Total Revenue $2,200,000 $1,001,000 $567,000

Overhead 20% 20% 20%Overhead Cost $440,000 $200,200 $113,400Acquisition Mail 4,000,000 Appeal Mail 50,000 400,000 400,000 Cost Each $0.42 $0.42 $0.42Mail Costs $1,701,000 $168,000 $168,000Total Costs $2,141,000 $368,200 $281,400

Net Profit $59,000 $632,800 $285,600Discount Rate 1.00 1.14 1.30Net Present Value $59,000 $555,088 $219,692.31Cum. NPV $59,000 $614,088 $833,780.03Lifetime Value $0.30 $3.07 $4.17

Page 11: 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.

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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

Page 12: 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.

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New Strategies

• Add a website that takes donations

• Make website interesting with lots of interesting info on the cause being promoted.

• Collect donor’s 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”

Page 13: 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.

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Non Profit AcquisitionLifetime Value Year Year 2 Year 3Donors 200,000 90,000 49,500 Retention Rate 45% 55% 54%Acq. Resp Rate 5.0%Gifts per year 1.30 1.50 1.60Average Gift $11.00 $12.00 $13.00Web Average $16.00 $20.00 $24.00Web Gifts /Yr 1.30 1.40 1.50Web Givers 8% 12% 14%Web Gifts $332,800 $302,400 $249,480Total Revenue $3,192,800 $1,922,400 $1,279,080

Overhead 20% 20% 20%Overhead Cost $638,560 $384,480 $255,816Email & Website $150,000 $150,000 $150,000Acquisition Mail 4,000,000 Retention Mail 200,000 200,000Appeal Mail 50,000 400,000 400,000 Cost Each $0.42 $0.42 $0.42Mail Costs $1,701,000 $252,000 $252,000Total Costs $2,489,560 $786,480 $657,816

Net Profit $703,240 $1,135,920 $621,264Discount Rate 1.00 1.14 1.30Net Present Value $703,240 $996,421 $477,895.38Cum. NPV $703,240 $1,699,661 $2,177,556.44Lifetime Value $3.52 $8.50 $10.89

Page 14: 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.

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Results of new strategies

AcquisitionYear Year 2 Year 3

Old LTV $0.30 $3.07 $4.17New LTV $3.52 $8.50 $10.89Difference $3.22 $5.43 $6.72Times 200,000 $644,240 $1,085,573 $1,343,776

Page 15: 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.

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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.

• Let’s look at Susan Smith

Page 16: 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.

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Susan Smith AcquisitionLifetime Value Year Year 2 Year 3Donors 200,000 90,000 49,500 Retention Rate 45% 55% 54%Acq. Resp Rate 5.0%Gifts per year 1.00 2.00 1.00Average Gift $20.00 $20.00 $25.00Web Average $0.00 $0.00 $0.00Web Gifts /Yr 0.00 0.00 0.00Web Givers 8% 12% 14%Web Gifts $0 $0 $0Total Revenue $4,000,000 $3,600,000 $1,237,500

Overhead 20% 20% 20%Overhead Cost $800,000 $720,000 $247,500Email & Website $150,000 $150,000 $150,000Acquisition Mail 4,000,000 Retention Mail 200,000 200,000Appeal Mail 50,000 400,000 400,000 Cost Each $0.42 $0.42 $0.42Mail Costs $1,701,000 $252,000 $252,000Total Costs $2,651,000 $1,122,000 $649,500

Net Profit $1,349,000 $2,478,000 $588,000Discount Rate 1.00 1.14 1.30Net Present Value $1,349,000 $2,173,684 $452,307.69Cum. NPV $1,349,000 $3,522,684 $3,974,991.90Lifetime Value $6.75 $17.61 $19.87

Page 17: 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.

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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

Segment donors by LTV – Develop a marketing strategy for each segment

Page 18: 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.

RFM Analysis

Page 19: 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.

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

Page 20: 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.

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

Page 21: 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.

Response by Recency Quintile

3.49%

1.25% 1.08%0.63%

0.26%

0.00%0.50%1.00%1.50%2.00%

2.50%3.00%3.50%4.00%

5 4 3 2 1

Recency Quintile

Resp

onse

Rate

Page 22: 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.

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

Page 23: 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.

Response by Frequency Quintile

1.99%

1.56%

1.31%

0.92% 0.93%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

5 4 3 2 1

Frequency Quintile

Re

spo

nse

Ra

te

Page 24: 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.

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

Page 25: 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.

Response by Monetary Quintile

1.61%

1.45% 1.46%

1.22% 1.23%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

5 4 3 2 1

Page 26: 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.

Response to CD Offer by Monetary

Monetary Quintile

Percentage of households promoted who purchased

1.68

1.17

0.88

0.66

0.32

5 4 3 2 10

0.5

1

1.5

2

Page 27: 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.

RFM Code Construction

FM

One SortFive Sorts

Twenty-five sorts

Database

5

4

3

2

1

35

34

33

32

31

335334333332331

R

Page 28: 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.

Appended RFM Codes

Page 29: 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.

Customer Database

Nth

Creating an Nth

300,000 Records

30,000 Records

For Nth by 10, select every tenth record.

Result will be statistical replica of database

Page 30: 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.

Result of Test Mailing to 30,000

# RFM Mailed Response Rate1 555 240 20 8.15%2 554 240 16 6.56%3 553 240 13 5.62%4 552 240 10 4.33%5 551 240 11 4.51%

6 545 240 9 3.78%7 544 240 12 4.98%8 543 240 6 2.88%9 542 240 10 4.26%10 541 240 7 3.10%

11 535 240 10 4.13%12 534 240 9 3.83%13 533 240 8 3.35%14 532 240 6 2.70%

Page 31: 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.

Test Response Rate by RFM Cell

-200

-100

0

100

200

300

400

500

555 455 355 255 111

Index of Response 0 = Break Even

Page 32: 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.

Profit from Test Mailing

Quantity Rate Amount

Goods Sold 402 $40.00 $16,080

Mailing Costs 30,000 $0.55 $16,500

Profits (Loss) ($420)

Page 33: 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.

Test, Full File & RFM Selects Compared

Test Full File RFM SelectResponse Rate 1.34% 1.17% 2.76%Responses 402 23,412 15,295Net Revenue $16,080 $936,480 $611,800No. Mailed 30,000 2,001,056 554,182Mailing Cost $16,500 $1,100,581 $304,800

Profits ($420) ($164,101) $307,000

Page 34: 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.

Test Vs Rollout Response Rates

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

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

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Page 35: 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.

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

Page 36: 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.

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 year’s completed outgoing promotion.

• Since you know who responded, you can determine response rates by cell

• Use last year’s rates to govern this year’s rollout.

Page 37: 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.

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Recent Case History

• User sells personalized product by mail

• 45,000 selected for a test

Page 38: 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.

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Second Recency Quintile Had More Responses.

Why?

Page 39: 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.

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Even so, First Recency Quintile Had Higher Sales

Page 40: 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.

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Recent buyers spend more per order

Page 41: 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.

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Lowest two recency quintiles did not break

even

Page 42: 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.

42

Frequency was very predictive of response

Page 43: 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.

43

Monetary did not predict response rate very well

Page 44: 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.

44

But Monetary does predict average sales by quintile

Page 45: 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.

45

RFM Cells clearly show who to mail to, and who to drop

Page 46: 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.

When NOTNOT 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

• Don’t go hog wild!

Page 47: 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.

47

Books by Arthur Hughes

From McGraw Hill. Order at www.dbmarketing.com

Contact Arthur: [email protected]

Page 48: 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.

Thank You


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