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

1. LTV and RFM for Non ProfitsDMA Non Profit ForumFriday February 4 200510:30 - 11:45The Capitol HiltonWashington, DC Arthur Middleton Hughes Vice President / Solutions Architect KnowledgeBase Marketing

2. What KnowledgeBase Marketing Does

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

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!

5. Data Access And Analysis Software Marketing Staff Customer Transactions Marketing Database Inputs from Retail, Phone, Web How a modern database marketing system works Appended Data Website

6. Lifetime Value

7. 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.

8. 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.

9. 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

11. 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

12. 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”

14. Results of new strategies

15. 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

17. Spend Service Dollars Here • GOLD Your Best Customers - 80% of Revenue Spend Marketing Dollars Here Your Best Hope for New Gold Customers Move Up 1% of Total Revenue Reactivate or Archive These may be losers Segment donors by LTV – Develop a marketing strategy for each segment

18. RFM Analysis

19. 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

20. 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

21. Response by Recency Quintile

22. 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

23. Response by Frequency Quintile

24. 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

25. Response by Monetary Quintile

27. F 5 M 35 335 4 34 334 3 33 333 332 32 2 331 31 Twenty-five sorts 1 Five Sorts Database One Sort RFM Code Construction R

28. Appended RFM Codes

29. Creating an Nth 300,000 Records Customer Database For Nth by 10, select every tenth record. Nth Result will be statistical replica of database 30,000 Records

30. Result of Test Mailing to 30,000

31. Test Response Rate by RFM Cell

32. Profit from Test Mailing

33. Test, Full File & RFM Selects Compared

34. Test Vs Rollout Response Rates

35. 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

36. 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.

37. Recent Case History • User sells personalized product by mail • 45,000 selected for a test

38. Second Recency Quintile Had More Responses. Why?

39. Even so, First Recency Quintile Had Higher Sales

40. Recent buyers spend more per order

41. Lowest two recency quintiles did not break even

42. Frequency was very predictive of response

43. Monetary did not predict response rate very well

44. But Monetary does predict average sales by quintile

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

46. WhenNOTto 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!

47. Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com

48. Thank You