The Customer Database: Analysis and Application

Nathan George, M.S., J.D.

2009 1

Learning objectives
Appreciate

how a marketing database can improve customer understanding Understand techniques to analyse custoemer data Be able to contribute to the process of database analysis

Why analyze customer information?

Shopkeeper

chats with customers to learn about them and keep what good customers need in stock He remembers them (ex. GNC) Larger companies try to get as close as possible to customers using database analysis

Segmentation and targeting

Database

helps segmentation by:

Volume and type of data held conveniently Once segments are made, each customer

can be allocated to each group and then contacted at the right time and with right offer
This

gets company closer to knowing the customer at the individual level (like the shopkeeper)

Two major data types

Behavioral

(purchase) data: allows marketer to segment customers according to their value to the company (meaning how much and what they buy) and to determine customer need (characteristics) data: develops pictures of customers to decide which ones would respond best to a certain campaign

Profile

Using purchase data to segment by value

At

the heart of the concept is the simple notion that we dont have to worry all that much about relationship with everybody. Relationships with some customers are more important than relationships with others. Paretos 80/20 principle This is why more marketing budget spent per customer is worth it

Using purchase data to set budget

Customers

lifetime value: how much the customer is likely to be worth to the company in total Allowable marketing spend per customer: the amount a company can spend marketing to a customer based on that customers lifetime value

Segmenting according to customer need

Marketers

can segment according to customer need to decide how to market to certain segments and what promotions to use Ex.- A credit card company partnering with another company to offer tie-in deals to big spenders on certain products so that all three benefit Pg. 56 Harley Davidson

Segmenting by propensity to respond to a Maximizes ROI (return on investment) campaign

by choosing which customers should be included in a marketing campaign using statistical forecasting techniques described below Pg. 34 segmenting by lifestage

Profiling
Targeting

new prospects based on existing customer descriptions Your new customers will have a similar profile to your existing customers. This is a way general marketing can supplement DDM

Analytical techniques

Time series Methods Lifetime value analysis/allowable market spend per customer Frequency, recency, amount, category (FRAC)

Continued...

Statistical Procedures Regression Analysis Cluster Analysis Discriminant Analysis Factor Analysis CHAID (Chi-square automatic interaction detection) Artificial Intelligence Software Neural Networks

Pearson Education 2005

Tapp: Principles of Direct and Database Marketing, 3e

Lifetime values analysis

Lifetime

values are the sum of all future net incomes expected from a customer, translated into present-day terms
Net income means income after costs to

attain it are deducted Money in the future is always worth less than the same amount today (so this analysis adjusts for present-day value=net present value)

Calculating lifetime value and allowable market spend Need:

Number of years a customer buys from a

company Percentage of customers remaining loyal to the company Amount spent per annum

Continued
Step

1: Calculation of lifetime revenue Step 2: Calculation of allowable marketing spend per customer Step 3: Calculation of expected ROI Good luck!

Pg.

60-62 book club example

FRAC Scoring

FRAC = Frequency, Recency, Amount, Category

Frequency refers to the time elapsed

between purchases Recency is the date of the most recent purchase Amount is the average value of that customers purchases Category refers to that segment which the product bought comes under
Pearson Education 2005 Tapp: Principles of Direct and Database Marketing, 3e

Continued
Past

behaviors predict future buying ?Your next customer is likely to be one who has just bought from you A customers with many accounts is more likely to purchase further products from you than one with few or no accounts The more your customers have spent with you, the more they are likely to spend with you in the future

How to Calculate a Customers Score:

Heres a typical example:

Recency points:
24 points current qtr 12 points last 6 months 6 points last 9 months 3 points

last 12 months

Frequency points:
Number of purchases * 4 points

Monetary points
No of points = 10% of purchase value , with a ceiling of 9

points

Does this sound logical?

Pearson Education 2005 Tapp: Principles of Direct and Database Marketing, 3e

Gains Charts
Customers divided into cells based on predicted

response level Segment Decile (%) Score Decision 1 0-10 60+ 2 11-20 54-60 telephone 3 21-30 48-54 4 31-40 42-48 5 41-50 36-42 2 contact mail 6 51-60 30-36 7 61-70 24-30 8 71-80 18-24 1 contact mail 9 81-90 12-18 10 91-100 6-12 do not contact Tapp: Principles of Direct and Database Marketing,
3e

Pearson Education 2005

Regression Analysis

At its simplest level, this method is used to predict an outcome from a given set of independent variables
Graph data in a scatter plot Identify your dependent variable (the variable you

want to predict such as future responses) Run the regression using the computer program Check the regression statistics: T-squared and Rsquared. T-squared should be within -2 and +2 or else it is rubbish because it does not predict well. R-squared should be over 60% Adjust your strategy based on results
Pearson Education 2005 Tapp: Principles of Direct and Database Marketing, 3e

Cluster Analysis

It is a technique for segmenting markets Data is searched to find natural groupings, the members of each group having more in common with each other than they do with members of other groups important criteria for effective segmentation There is no distinction between dependent and independent variables Quality of cluster analysis is often checked by splitting the data randomly into 2 groups and performing analysis on each group separately and comparing results

Pearson Education 2005

Tapp: Principles of Direct and Database Marketing, 3e

Factor Analysis

Is a method of reducing a large number of variables to a more manageable set of underlying constructs or themes This is done by examining relationships among sets of many interrelated variables There are no dependent / independent variables simply interdependence between variables The resultant factors (themes) are normally labelled in a subjective manner The process can be either as needed for a project (a priori ) or exploratory
Tapp: Principles of Direct and Database Marketing, 3e

Pearson Education 2005

CHAID (Chi-squared Automatic Interaction Detection)

Used in direct marketing to automatically segment files into unique combinations It works by repeatedly splitting segments into smaller segment. At each step it looks at a segment (or cell), considers all the variables within it, decides which split is the most statistically reliable, and divides the cell into two smaller cells. It then repeats the process until it decides there are no more statistically significant splits to make In direct marketing CHAID may be used to find the most significant factor to cause a response or non-response. Hence a powerful mechanism for targeting and forecasting Requirements: data must be in categorical form Particular strength - can select respondents (theoretically) at individual level Weakness - cell populations can becomes very small, and the process may not be statistically robust when it is applied to small samples
Tapp: Principles of Direct and Database Marketing, 3e

Pearson Education 2005

Example of CHAID Analysis : Who Buys and Why?

T 1 0 3 t a l 0 0 0 0 n a % b u y o m e s

1 3 S 0 3

A 2

g e < 0 0 0 . 9 %

3 A0 g e 3 0 - A 5 g5 e > 5 5 n a m 0 e 0s n a m 0 e 0s n a m 6 6 0 2 2 0 b 2u .y 3 % b 4u .y 4 % b u y

i n g le M a r r i eI n c o m d 0 0 n a 0 0e 0s n a 0 0e 0s 5 m 7 m . 3 % b 4u .y 8 % b 3u .y 1 %

e I n< c2o 0mK e > n 1a 5 m 0 e 0 s 0 n a b u5 y % b u y

2 0 m

Pearson Education 2005

Tapp: Principles of Direct and Database Marketing, 3e

CHAID steps
Step

1: compare the records of responders with those of nonresponders Step 2: computer decides which variable best explains the difference between responders and non-responders Step 3: split the responders file into two cells according to the biggest difference in response between the cells

Continued
Step

4: model then looks at each of the segments separately to see if they can be broken down further Step 5: continue until cell sizes are too small to be of further value if split further Step 6: output as tree segmentation