How To Advertise: An Analysis of Contemporary Advertising (part 24)

The Impact of Databases on Direct Marketing

by

Charles Lamson

Modern computer technology enables marketers to compile and analyze important customer information in unprecedented ways. Pitney Bowes, for instance, is the dominant company in the postal meter business. However, its growth rate and profitability were flattering. So the company used its database to identify its best customers, their value to the organization, and their needs and buying behavior. From this, Pitney Bowes created a customer lifetime value (LTV) model based on historical and potential share of wallet. Computing and ranking the lifetime value of all its 1.2 million customers showed that more than two-thirds of the customer base value resided in fewer than 10 percent of the customers. The company also found it had a major retention program within its low-volume, low-cost accounts. Cancellation rates were running as high as 40 percent per year in some segments. This analysis enabled Pitney Bowes to develop a distinct direct marketing strategy for both its best and its worst customers. It began a sophisticated loyalty program for its best customers and a retention program for its problem accounts. By the end of the first year, the program had reduced attrition by 20 percent, and the reduction in sales alone paid back the entire direct marketing investment. In another situation, a company might determine from its LTV analysis that its best course of action is simply to drop the most unprofitable customers.

The database is the key to direct marketing success, especially in an IMC (integrated marketing communications) program. It enables marketers to target, segment, and grade customers. It is the corporate memory of all important customer information: name and address, telephone number, email address, NAIC (The National Association of Insurance Commissioners is a nationwide organization whose main responsibility is to protect the interests of insurance consumers.) code (if a business firm), source of inquiry, cost of inquiry, history of purchases, and so on. It should record every transaction across all points of contact with both channel members and customers. The company that understands its customers' needs and wants better than any of its competitors, and retains more of its best customers, will create a sustainable competitive advantage. Strategically, therefore, companies have to determine if they will focus on share of market or on retention and loyalty (share of customer). More often than not, this is a short-term versus long-term trade-off.

The database also lets the company measure the efficiency of its direct-response advertising efforts to see, for instance, which radio or TV commercials, or which mailing lists, perform the best.

Working with a marketing database requires two processes: data management and data access. Data management is the process of gathering, consolidating, updating, and enhancing the information about customers and prospects that resides in the database. For most companies of any significant size, this requires a sophisticated computer system due to the complexity and volumes of the processes involved.

Most important, the database gives marketers data access, enabling them to manipulate, analyze, and rank all the information to make better marketing decisions. Thanks to new software, this can now usually be accomplished on PCs hooked up to client/server computers.

Rob Jackson, coauthor of Strategic Database Marketing, suggests that database marketing should start with customer profiling. Profiling allows marketers to get a snapshot of what their customers look like at any given time by identifying common characteristics and ranking their relative importance in different segments.

In the same vein, direct marketing expert Bob Stone recommends using an RFM formula (recency, frequency, monetary) to identify the best customers---the ones most likely to buy again. The best customers have bought recently, they buy frequently, and they spend the most money. Customers may be further ranked by the type of merchandise or services they buy, information that becomes very useful in the effort to cross-sell other merchandise.

Some companies may simply purchase a mailing list as its initial database. There are typically three types of data available for purchase: demographics, lifestyle (leisure interests), and behaviorists (purchase habits). 

*SOURCE: CONTEMPORARY ADVERTISING 11TH ED., 2008, WILLIAM F. ARENS, MICHAEL F. WEIGOLD, CHRISTIAN ARENS, PGS. 310-311*

END