Why Databases Fail

Nine deadly mistakes that will ruin your chances for success.

Houston Direct Marketing Association

Thursday, October 14, 2004

Arthur Middleton Hughes

Vice President / Solutions Architect

KnowledgeBase Marketing, Inc.

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What KnowledgeBase Marketing Does

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Mistake: Lack of a Marketing Strategy

Building a database is easy

Making money with a database is hard

Most people don’t know that

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How to develop a strategy

Collect data on your customer’s purchases, demographics and lifestyle

Build a database that permits ad-hoc analysis

Construct a lifetime value table

Figure out what motivates your customers

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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!

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Examples of Profitable Strategies

User Groups

Newsletters

Surveys and Responses

Loyalty Programs

Customer and Technical Services

Membership cards and status levels

Event Driven Communications

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Event driven communication:Dear Mr. Hughes:

I would like to remind you that your wife Helena’s birthday is coming up in two weeks on November 5th. We have the perfect gift for her in stock.

As you know, she loves Liz Claiborne clothing. We have an absolutely beautiful new suit in blue, her favorite color, in a fourteen, her size, priced at $232.00.

If you like, I can gift wrap the suit at no extra charge and deliver it to you next week, so that you will have it in plenty of time for her birthday. Or, I can put it aside so you can come in to pick it up. Please call me at (703) 754-4470 to let me know which you’d prefer.

Sincerely yours,

Robin Baumgartner Robin Baumgartner, Store Manager

Ridgeway FashionsLeesburg, VA 22069

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Basic Strategy Rule:Put yourself in customer shoes

Say: “What would I want to be on this database? What’s in it for me?”

If you can’t come up with a good answer, the database will fail

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Mistake: Focus on Price instead of Service

Database marketing builds loyalty.

Discounts do not build loyalty.

Do not use the database to provide discounts.

Use the database to provide dialog, recognition and service.

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Customers today seek more than low prices

Recognition

Service

Information

Convenience

Helpfulness

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Example: Quaker Direct

Budget: $18 Million. Coupons to 20 million “targeted households.”

Quaker goal: “real one-to-one bonding with consumers”.

Cost: four times as much as FSI’s.

Why failed: Coupons do not build relationships.

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Example:Kraft Crystal Light

Million club members receive quarterly newsletter.

Catalog: Watches, mugs, jogging suits, with Crystal Light emblem.

Theme: fitness, exercise, weight loss, diet.

Why succeeded: Club based on valid idea, not just on discounting product.

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Mistake: Failure to use tests and controls

Database marketing is accountable

Everything you do can be measured

You must set up control groups that do not get your new communications

Key measurements: response rates, return on investment, profits, lifetime value.

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Example: Western Union

Preferred customer card sent to everyone who had used WU 3+ times

Worked well, but after 2 years, WU asked, “How has this boosted profits?”

Agency did not have a control group.

Profits could not be verified.

Agency lost the account.

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Example: Citicorp Reward America

Frequent shopper program for supermarkets

Goal: sign up 40% of all chains fast

Profit idea: sell data to manufacturers

Budget: $200 million -- 174 employees

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Failure: Citicorp Reward America

Program cancelled. Employees fired. Why?

Manufacturers didn’t buy the names.

Computers choked on the data.

Failure to test on small scale first.

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Mistake: Too big and slow

Database should be built in six months or less.

DB Marketing builds loyalty and sales -- but only when it is up and running.

If your plan requires more than a year, maybe your plan is too complicated.

Start small. Build Small. Learn as you go. Add to it later.

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How a database builds relationships

Hold information on customersAdd new data every day:

Surveys, Promotion history, Points Transaction history, Lifetime value, RFM Create a relational database that you can build inexpensively

Update it as often as required – several times a day if needed.Use it to create communications

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Mistake: Failure to use the Web

Your database contains customer information: purchases, preferences, contact names, etc.

Customer service has to have this info when they talk on the phone.

Your web site must have this info when you receive customers as visitors.

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Using a database to personalize

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Provide recognition!

Welcome Back, Arthur!

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Immediate Feedback!

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30 seconds later: Email

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Retail Email Success

Video chain sent email newsletters to 170,000 customers about movies

16,000 asked for but got no emails

Test group total sales over 6 months were 28% higher than the control group

Emails can be a powerful sales boost

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Catalog Email Success

Cataloger selected 40,000 who had bought on the web.

20,000 got emails saying “watch mailbox for our new catalog”

20,000 got only the catalog.

Sales to the test group were 18% higher than the control group.

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Mistake: building in-house

Marketing databases are unlike any other IT function.

DB requires special skills and software

There are scores of vendors with experience in building marketing DBs

In-house will take far longer and cost far more.

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What to do?

Send an RFP to find a vendor that understands you and has experience

Get it going fast and at lower cost. Once it is up and running, you can

migrate it inside. But even then, you should not do it. Why? Because you should concentrate on

marketing: building profits from it.

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Mistake: Treating all customers alike Loyal customers are more profitable

than new or disloyal customers Loyalty can be built and maintained $1 million retention budget spread over

1 million customers is $1 per year. You can’t build much loyalty for $1

$1 million spread over 100,000 is $10 per year. You can build loyalty with that

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Segment by profitability & focus your attention

79.67%

24.82%15.83%

1.52%

-21.83%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

5% 11% 28% 28% 28%

Pro

fita

bili

ty

Profitability Segment

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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

Marketing to Customer Segments

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Mistake: Failure to develop a retention program

Most companies are set up for acquisition

Few have a specific retention program.

$1 spent to retain customers returns more profit than $1 of acquisition

($62)

$48

($80)($60)($40)($20)

$0$20$40$60

New Customer 3rd YearCustomer

Annual Profit

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Retention = Communications

People like to hear from you.

Personalize your communications.

Use email, direct mail, phone calls

Set aside control groups so you know that your communications are working

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Key retention strategy: cross selling

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Retention Rate

1 2 3 4 5

Number of Products Owned

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Concentrate retention $$ on where you need help

Probability of Leaving SoonLTV High Medium LowHigh Priority A Priority B Priority CMedium Priority B Priority B Priority CLow Priority C Priority C Priority C

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• Manufacturer of lighting products

• Catalog sent to 45,000 contractors

• Previous policy: wait for the orders

• Test: pick 1,200 customers, split into test of 600 and control of 600

• Two person pilot program build relationship with test customers to see the results

What proves that database marketing works?

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82%

112%

0%

20%

40%

60%

80%

100%

120%

Change in number of

orders

1 2

Control vs Test Groups

Change in the number of orders after 6 months

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86%

114%

0%

20%

40%

60%

80%

100%

120%

Change in average

order size

1 2

Control vs Test Group

Change in the Average Order Size

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70%

127%

0%

20%

40%

60%

80%

100%

120%

140%

Change in total

revenue

1 2

Control vs Test Group

Total revenue gain: $2.6 million over six months

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This stuff works!

Building a relationship with customers can be highly profitable

Using a database to recreate the old family grocer is a winning strategy

Relationship marketing is the way to go

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Mistake: Lack of a forceful leader

Success requires directing the activities of many internal and external units

The Web, MIS, Customer Service, Tech Support, Telemarketers, Service Bureau, Direct Agency, Fulfillment, Market Research

Database Marketers must be leaders

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Summary: The Nine Mistakes

Lack of a Strategy

Focus on Price

Lack of tests & controls

Too big and delayed

Failure to use the web

Building In-House

Treating all customers alike

Lack of a retention program

Lack of leadership

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Rules for success

Put yourself in your customer’s shoes

Build a lifetime value table

Build a database team

Think small, and think fast

Keep your eye on the bottom line

Thank You

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Books by Arthur Hughes

From McGraw Hill. Order at www.dbmarketing.com

Contact Arthur: arthur.hughes@kbm1.com