University of Washington MBA Program

Managing Customer Relationships

through Direct Marketing

“Lists/RFM”

Instructor: Elizabeth Stearns

In store, said “Do NOT put me on your mailing list”. Received these within the next 9 weeks…

Remember…Your Direct Marketing Is Only As Good As Your List!

The 40/40/20 Rule

Navy Direct Mail, Received by Fully Employed Evening MBA…

Target

Leveraging of Variables in Increasing Response

The Right Audience

The Right Adv. Elements

The Right Timing

The Right Offer

50%

20% 20%

10%

Image Response

Type of Lists

• Compiled

– Names and addresses derived from directories,

public records, newspapers, retail sales slips,

trade show registrants, etc., to identify groups of

people who have something (single identifiable

characteristic) in common.

– There is NO information about purchase or

response behavior.

Type of Lists

• Response

– Names and addresses of consumers or business executives who ordered and paid for a product or service through the mail.

• Response Enhanced

– Consumers(purchasers) who have filled out questionnaires and mailed in those questionnaires which describe their demographics, psychographics and specific product buying habits. Can also be enhanced through overlay of lifestyle or other external list.

• House List

– Purchased or inquired, 5-6 times better results

Other Important Selection Criteria

• Sex

• State

• Carrier Route/ZIP

• Age

• Product or Service Specific

Other Important Selection Criteria• Source

– Direct mail sold– Print– Other direct mail media

• (Renewals, M-G-M’s, Package Inserts, Co-Ops, Statement Stuffers, Syndicated Products, School Marketing)

– Broadcast– Telemarketing– Take Ones, FSI’s, ETC.– Warranty Cards

Merge/Purge(Cost or savings?)

Consider merge/purge by address.

Consider merge/purge by address.

Merge/Purge Advantages

• Previously mailed names are eliminated.

• Each prospect gets only one mailing piece.

• Current customers are eliminated.

• Bad debts are eliminated.

• DMA pandering names are eliminated (House pandering also).

• Inter-file duplicated are analyzed.

Merge/Purge Advantages

• Multi-buyers are flagged for remailing.

• Nixi’s are eliminated, (NCOA).

• Demographic data can be appended.

• Phone numbers can be appended.

• Carrier route coding provides for postal savings.

• Decoys are added in.

R-F-M

• Recency– When was the last time they purchased?

• Frequency– How often do they purchase?

• Monetary Value – How much money do they spend?

• Typically used to select likely profitable customers to receive direct marketing treatment

• It postulates that the most likely prospects are recent purchasers who have historically demonstrated more frequent than average purchase behavior in larger than average dollar amounts

• It is based on a correlation between RFM and response• Historically it has proven to be an effective segmentation

technique for many situations• The variables RFM are frequently influential in many

advanced statistical modeling techniques

RFM DefinitionRFM is a behavioral segmentation technique

RFM Definition (cont’d)

• The variables must be interpreted within the context of product purchase dynamics– Durable– Consumables– Periodic

• Can be used to manage marketing investment by selecting target customers

• Can also be used to improve marketing performance by managing message/offer components

RFM Elements

Segmentation Concept

Behavioral Question

Data Element/ Measurement

Recency When did they last buy?

Date of last purchase

Process:

•Sort by date

•Create groups by date range

Frequency How often do they buy?

# of purchases over time

Options:

Within recency group, months on file, # times mailed

Monetary Value

How much do they spend?

$ value of purchases

Options:

Within recency group, months on file, # times mailed

RFM / Customer Treatment

RFM segmentation can be used to manage customer treatment across functions

Functional Dimension Treatment Implication

Customer Service Service Level

Billing Adjustment Practices

Collections Minor delinquency action

Credit Over limit action

Marketing Incentives/Premiums

Gains Chart for Responsiveness

Decile Qty. Mailed (000)

Number Resp. (#)

Percent Resp. (%)

Resp. Gain Index*

Revenue Generated (000)

Mailing Cost (000)

Total Profit (000)

1 600 20,250 3.37% 225 $506 $240 $266

2 1,200 34,200 2.85 190 855 480 375

3 1,800 48,330 2.68 179 1,208 720 488

4 2,400 60,840 2.53 169 1,521 960 561

5 3,000 67,500 2.25 150 1,687 1,200 487

6 3,600 76,680 2.13 142 1,917 1,440 477

7 4,200 81,900 1.95 130 2,047 1,680 367

8 4,800 84,960 1.77 118 2,124 1,920 204

9 5,400 87,480 1.62 108 2,187 2,160 27

10 6,000 90,000 1.50 100 2,250 2,400 -150

Mailing Cost: $400/thousand Revenue: $25/response*Index of Relative Responsiveness; Universe Indexed to 100.Source: Direct Marketing, November 1988

Remember…Your Direct Marketing Is Only As Good As Your List!

The 40/40/20 Rule

Thank you!