BookBinders BookClub –1

BookBinders Book Club

BookBinders BookClub –2

Quote for the Day

You will lose money sending a terrific piece of mail to a lousy list, but make money sending a lousy piece of mail to a terrific list!

-- Direct mail lore

BookBinders BookClub –3

Current Industry Practice

Dominant “Scoring Rule” used in the industry is the RFM (Recency, Frequency, and Monetary) model:

Recency

Last purchased in the past 3 months 25 points

Last purchased in the past 3 - 6 months 20

Last purchased in the past 6 - 9 months 10

Last purchased in the past 12 - 18 months 5

Last purchased in the past 18 months 0

Come up with similar “scoring rules” for Frequency and Monetary.

BookBinders BookClub –4

Summary of Coefficients

Coefficient Regression Model

MNL Neural Network

Gender - - - Amount Purchased NS - - Months since first purchase NS NS NS Months since last purchase - - - Frequency of purchase + + + Purchase of art books + + + Purchase of children’s books - - - Purchase of Cook books - - - Purchase of DIY books - - - Purchase of Youth books - NS -

BookBinders BookClub –5

Predictions of Probability of Purchase

Regression:

MNL:

Neural Network:

Predicted values are computed from within the model using the “verify” feature.

Score for respondent i b b Xj ijj

( ) 0

i s obability of responding to mailinge

e

b b X

b b X

j ij

j ij'

Pr

0

01

BookBinders BookClub –6

Expected Response Rates in Holdout Sample by Mailing to the Top 60%

Model

Number of hits (favorable responses at 60th percentile of

ordered list) (a)

Expected response rate by mailing the

top 60% of customers in the ordered list

(a)/1380

% of favorable respondents recovered at

60th percentile (a)/205

Regression 184 13.33 89.7 MNL 181 13.12 88.3 Neural Network 182 13.18 88.8 RFM 151 10.86 73.7 Note: If we mail to the entire list, the response rate will be 8.9%, which will give us 205 out of the 2,300 customers in the holdout sample.

BookBinders BookClub –7

Economics of Mailings

Note: If we mailed to everyone on the list, we can expect a response rate of 8.9%.

Financial Component

Regression MNL Neural Network

RFM

Cost of Book + Overhead (a)

$86978.25* 85608.00 85999.00 70861.50

Mailing costs (30,000*0.65) (b)

19500.00 19500.00 19500.00 19500.00

Expected sales (c) 127768.05 125755.20 126330.30 104093.10 Net revenue (d) 21289.80 20647.20 20831.30 13731.60 ROI = d/(a+b) 19.99% 19.64% 19.75% 15.20% * Computed as follows: (50000 0.6) 0.1333 (15 + 15 0.45)