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Database Marketing |
Series Editor Jehoshua Eliashberg The Wharton School University of Pennsylvania Philadelphia, Pennsylvania USA Books in the series Blattberg, R., Kim, B., Neslin, S. Database Marketing: Analyzing and Managing Customers Ingene, C. A. and Parry, M. E. Mathematical Models of Distribution Channels Chakravarty, A. and Elias... |
Robert C. Blattberg, Byung-Do Kim and Scott A. Neslin Database Marketing Analyzing and Managing Customers 123 |
Robert C. Blattberg Byung-Do Kim Kellogg School of Management Graduate School of Business Northwestern University Seoul National University Evanston, Illinois, USA Seoul, Korea and Tepper School of Business Carnegie-Mellon University Pittsburgh, Pennsylvania, USA Scott A. Neslin Tuck School of Business Dartmouth Colleg... |
To Our Spouses and Families |
Preface The confluence of more powerful information technology, advances in method-ology, and management's demand for an approach to marketing that is both effective and accountable, has fueled explosive growth in the application of database marketing. In order to position the field for future advances, we believe this is... |
viii Preface Ph. D. Students : Ph. D. students should utilize this book to gain the re-quired background needed to conduct thesis research in the field of database marketing. Advanced Business Students : By “advanced” business students, we mean undergraduate and MBA students who need a resource book that goes intodepth ... |
Preface ix that are tempting to ignore, but whose resolution can have a crucial impact on practice (Chapters 5-7). Part III: Database Marketing Tools: The Basics-DBM has one ab-solute requirement-customer data. We discuss the sources and types ofcustomer data companies use (Chapter 8). We provide in-depth treatment of ... |
x Preface Ailawadi, Eric Anderson, Kenneth Baker, Anand Bodapati, Bruce Hardie, Wai-Ki Ching, Kristoff Coussement, Preyas Desai, Ravi Dhar, Jehoshua Eliashberg, Peter Fader, Doug Faherty, Helen Fanucci, Fred Feinberg, Edward Fox, Frances Frei, Steve Fuller, Bikram Prak Ghosh, Scott Gillum, William Greene, Abbie Griffin, J... |
Contents Preface....................................................... v i i Part I Strategic Issues 1 Introduction.............................................. 3 1. 1 W h a t I s D a t a b a s e M a r k e t i n g ?............................ 3 1. 1. 1 D e fi n i n g D a t a b a s e M a r k e t i n g.................... |
xii Contents 2. 3. 3 Assessment...................................... 44 2. 4 S u m m a r y.............................................. 4 5 3 Organizing for Database Marketing....................... 4 7 3. 1 The Customer-Centric Organization...................... 47 3. 2 D a t a b a s e M a r k e t i n g S t r a t e ... |
Contents xiii 4. 3. 2 Collecting Data.................................. 87 4. 3. 3 The Legal Environment........................... 88 4. 4 P o t e n t i a l S o l u t i o n st o P r i v a c y C o n c e r n s................... 9 1 4. 4. 1 S o f t w a r e S o l u t i o n s................................ 9 14. 4. 2 R e... |
xiv Contents 7 Customer Lifetime Value Applications.................... 1 6 1 7. 1 Using LTV to Target Customer Acquisition................ 161 7. 2 Using LTV to Guide Customer Reactivation Strategies...... 1637. 3 U s i n g S M C ' s M o d e lt o V a l u e C u s t o m e r s................... 1 6 47. 4 A Case Example ... |
Contents xv 9. 5. 2 Multifactor Experiments: Full Factorials............. 238 9. 5. 3 Multifactor Experiments: Orthogonal Designs........ 241 9. 5. 4 Q u a s i-E x p e r i m e n t s............................... 2 4 3 10 The Predictive Modeling Process......................... 2 4 5 10. 1 Predictive Modelling and the ... |
xvi Contents 12 RFM Analysis............................................ 3 2 3 1 2. 1 I n t r o d u c t i o n........................................... 3 2 3 1 2. 2 T h e B a s i c so ft h e R F MM o d e l........................... 3 2 4 12. 2. 1 Definition of Recency, Frequency, and M o n e t a r y V a l u e............ |
Contents xvii 14. 4 Current Issues in Collaborative Filtering.................. 368 14. 4. 1 Combining Content-Based Information Filtering with Collaborative Filtering............................ 368 14. 4. 2 Implicit Ratings.................................. 372 1 4. 4. 3 S e l e c t i o n B i a s........................ |
xviii Contents 1 7. 4 F i n d i n gt h e R i g h t S i z e d T r e e............................. 4 3 2 1 7. 4. 1 P r u n i n g......................................... 4 3 2 17. 4. 2 Other Methods for Finding the Right Sized Tree..... 434 17. 5 Other Issues in Decision Trees............................ 435 17. 5. 1 Mu... |
Contents xix 1 9. 6 B a y e s i a n N e t w o r k s..................................... 4 8 4 19. 7 Support Vector Machines................................ 48619. 8 Combining Multiple Models: Committee Machines.......... 489 1 9. 8. 1 B a g g i n g......................................... 4 9 01 9. 8. 2 B o o s t i n ... |
xx Contents 2 1. 4. 6 E v a l u a t i o n...................................... 5 4 6 21. 5 Research Needs........................................ 547 22 Frequency Reward Programs............................. 5 4 9 22. 1 Definition and Motivation............................... 549 22. 2 How Frequency Reward Programs Infl... |
Contents xxi 23. 3. 4 Canadian Grocery Store Chain (Grant and Schlesinger 1995)................................. 598 23. 3. 5 Major US Bank (Rust et al. 2000).................. 599 23. 3. 6 Viking Office Products (Miller 2001)................ 600 23. 3. 7 Swedbank (Storbacka and Luukinen 1994, see also Storbacka 1993)...... |
xxii Contents 25. 4 Industry Examples..................................... 672 25. 4. 1 Retail “Best Practice” (Crawford 2002)............. 672 25. 4. 2 Waters Corporation (CRM ROI Review 2003)........ 67225. 4. 3 The Pharmaceutical Industry (Boehm 2002)......... 67325. 4. 4 Circuit City (Smith 2006; Wolf 2006)........... |
Contents xxiii 2 7. 2. 3 B u d g e t.......................................... 7 1 7 2 7. 2. 4 S u m m a r y........................................ 7 1 8 27. 3 Developing Copy....................................... 719 27. 3. 1 Creative Strategy................................ 7192 7. 3. 2 T h e O ff e r.................. |
xxiv Contents 29. 2 Customer Pricing when Customers Can Purchase Multiple O n e-T i m e P r o d u c t sf r o mt h e F i r m........................ 7 8 3 29. 2. 1 Case 1: Only Product 1 Is Purchased............... 786 29. 2. 2 Case 2: Two Product Purchase Model with Lead P r o d u c t1..................................... |
Chapter 1 Introduction Abstract Database marketing is “the use of customer databases to enhance marketing productivity through more effective acquisition, retention, and de-velopment of customers. ” In this chapter we elaborate on this definition, pro-vide an overview of why database marketing is becoming more important,... |
4 1 Introduction Catalogers routinely use “predictive models” to decide which customers should receive which catalogs. “E-tailer Z” uses “recommendation engines” to customize which productsit “cross-sells” to which customers. Dell Computer uses data analyses of prospects to improve its customer acquisition rate (Direct... |
1. 1 What Is Database Marketing? 5 quantify that effectiveness and improve it. It does this through effective tar-geting. The retail pioneer John Wannamaker is credited with saying, “I know half of my advertising doesn't work; I just don't know which half. ” Thinking more broadly, in terms of marketing rather than advert... |
6 1 Introduction that it is impossible for every salesperson to really know each customer. Para-doxically, the software and computer systems for compiling the data needed to implement database marketing to enhance customer relationships have been marketed as CRM software or technology. Direct marketing's emphasis is on... |
1. 2 Why Is Database Marketing Becoming More Important? 7 (Direct Marketing Association 2004, p. 167). These numbers provide indica-tions of the size of the industry, but do not include budgets for marketing analytics groups that analyze the data, for campaigns that implement data-base marketing programs, or for the mu... |
8 1 Introduction DBM Strategy Organization Legal Environment Define Problem Situation Analysis Objectives Methodology Implement Analyze Data Compile Data Evaluate Learn Design Campaign Fig. 1. 1 The database marketing process. 1. 3 The Database Marketing Process Database marketing is implemented through a process depic... |
1. 3 The Database Marketing Process 9 Table 1. 1 Database marketing activities Acquiring customers Retaining and developing customers Cross-and up-selling Customer tier programs Frequency reward programs Churn management programs Coordinating acquisition, retention, and development Multichannel customer management Acqu... |
10 1 Introduction Table 1. 2 Database marketing analysis techniques Lifetime value of the customer (LTV) Predictive modeling Statistical techniques Logistic regression Tobit models Hazard models RFM analysis Market basket analysis Collaborative filtering Cluster analysis Decision trees Neural networks Machine learning ... |
1. 3 The Database Marketing Process 11 Table 1. 3 Organization of the book Part 1: Strategic Issues Part 2: Customer Lifetime Value (LTV) Chapter 5: Customer Lifetime Value-Fundamentals Chapter 6: Issues in Computing Customer Lifetime Value Chapter 7: Customer Lifetime Value Applications Part 3: Database Marketing Tool... |
12 1 Introduction 1. 4 Organization of the Book We have organized the book according to Table 1. 3. Part I deals with the issues that shape the database marketing process-firm strategy, firm orga-nization, and the legal environment. Chapter 2, “Why Database Marketing”,relates to the firm's database marketing strategy, pos... |
Chapter 2 Why Database Marketing? Abstract A basic yet crucial question is: why should the firm engage in database marketing? We discuss three fundamental motivations: enhancing marketing productivity, creating and enhancing customer relationships, and creating sustainable competitive advantage. We review the theoretica... |
14 2 Why Database Marketing? Table 2. 1 The economics of database marketing: A prospecting example Untargeted Mailing Number of offers mailed: 1,000,000 Profit contribution per response: $80 Cost per mailing: $0. 70 Response rate: 1% Profit = 1,000,000 ×0. 01×$80-1,000,000 ×$0. 70 =$800,000-$700,000 =$100,000 Targeted mai... |
2. 1 Enhancing Marketing Productivity 15 The prioritization is determined by a process called predictive modeling (Chapter 10). Predictive modeling identifies a top decile of customers who have a response rate of 3%. The second decile has a response rate of 2%, etc., down to the 10th decile, which has a response rate of... |
16 2 Why Database Marketing? and product preferences associated with particular television shows, or geo-graphic regions, but this produces nowhere near the desired level of individual targetability. Blattberg and Deighton (1991) pioneered the notion that data technol-ogy can improve targeting in their concept of the “... |
2. 1 Enhancing Marketing Productivity 17 2. 1. 2. 2 Marketing Accountability and the ROI Perspective Emerging from the period of high inflation in the 1970s, senior manage-ment became very concerned with costs-production, labor, and materials. Webster (1981) (see also Lodish 1986) reported that by the early 1980s, CEO's... |
18 2 Why Database Marketing? consist of revenues generated by new customers divided by expenditures on acquiring new customers, “adjusted by a customer satisfaction index” (p. 11). The adjustment serves to quantify the long-run benefits of this acquisition. Customer retention productivity would consist of revenues from ... |
2. 1 Enhancing Marketing Productivity 19 Customer Acquisition Customer Interactions Customer Response (purchase, usage patterns, etc. ) Information Information Strategy Refinement Product Communications Price Promotion Fig. 2. 1 The learning marketing system fostered by database marketing. We call the process of implem... |
20 2 Why Database Marketing? 0%20%40%60%80% 1 23 456789 1 0 Decile% Who Click Through Fig. 2. 2 Lift chart for an e-mail campaign (From Ansari and Mela 2003). on targeted e-mail. The goal was to use e-mail to generate visits to an information-oriented website. As the figure shows, the average response rate was 20%. Howe... |
2. 1 Enhancing Marketing Productivity 21 0%2%4%6%8% 1234 56789 1 0Decile% Buy Fig. 2. 4 Lift chart for predicting adoption of web banking using a next-product-to-buy (NPTB) model (From Knott et al. 2002). The average adoption rate is 2. 3%; the adoption rate in the top 3 deciles is 5%. These customers appear to be good... |
22 2 Why Database Marketing? shows one example from Knott et al. (2002). A predictive model was used to prioritize customers according to their likelihood of purchasing a home eq-uity loan. The top prospects were then targeted with a direct mail campaign. Note that this tests the ability of the predictive model predict... |
2. 2 Creating and Enhancing Customer Relationships 23 continue into the future. In addition, the targeting and ROI components of the argument have received direct empirical support. While the marketing productivity argument is indeed powerful and undoubtedly has contributed to the growth of database marketing, the pro-... |
24 2 Why Database Marketing? processes rather than functional tasks(the 4 P's). More recently, the motiva-tion for emphasizing customer relationships stems from the simple economics of lifetime value. The lifetime profits or “customer equity” delivered by a set of Ncustomers can be written as (see Chapter 5): Profits =N∞... |
2. 2 Creating and Enhancing Customer Relationships 25 $0$5,000,000$10,000,000$15,000,000$20,000,000$25,000,000$30,000,000 0 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 1 Retention Rate Long-Term Total Profits a= $30 acquisition cost per customer N= 100,000 number of customers m= 10 ongoing marketing cost per customer ... |
26 2 Why Database Marketing? telecommunications. He measured the closeness, strength, and emotional tone of the relationship, and found that closeness correlated strongly with satisfaction. Bolton (1998) studied the effect of satisfaction on the length of the re-lationship. She found that prior cumulative satisfaction d... |
2. 2 Creating and Enhancing Customer Relationships 27 Trial Repeat Purchasing Share of Requirements Affinity Brand Recommendation Loyalty Brand Relationship Service Recommendation Fig. 2. 7 Brand relationship management model. driven,” and “lifetime value. ” Peppers and Rogers (1997) emphasize that the way to manage th... |
28 2 Why Database Marketing? management. ” This is a framework for implementing customer relationship management. The framework inter-twines data, data analysis, and relation-ship building, and consists of the following steps: 1. Creating a customer database 2. Analyzing the data 3. Selecting customers to target 4. Tar... |
2. 2 Creating and Enhancing Customer Relationships 29 Organizational Barriers : Database marketing-based CRM requires orga-nizational coordination. Companies have not been able to achieve this. Marketing quarrels with sales over who owns the customer (Boehm 2001). Marketing and finance quarrel about how deeply to go dow... |
30 2 Why Database Marketing? amenable to information technology (see Deshpand´ e et al. 1993). These points have been raised by Sheth and Sisodia (2001) as well as Day (2000). Companies Have Not Been Able to Balance Customer-Centricity and Product-Centricity : CRM exhorts firms to become customer centric, that is, view ... |
2. 2 Creating and Enhancing Customer Relationships 31 customers” (initiation), “We continuously track customer information in or-der to assess customer value” (maintenance), “We have formalized procedures for cross-selling” (maintenance), and “We have a formal system for identify-ing nonprofitable or lower-value custome... |
32 2 Why Database Marketing? on acquisition. However, more research is needed to understand the alloca-tion of resources between acquisition versus retention efficiencies and costs. Another question is whether database marketing can be used to create or improve customer relationships. There is evidence on both sides, inc... |
2. 3 Creating Sustainable Competitive Advantage 33 they could provide companies with a competitive edge. In the third step, economists have developed formal models explaining how the customer in-formation file could provide a sustainable increase in profits. 2. 3. 2. 1 Marketing Orientation Kohli and Jaworski (1990) defin... |
34 2 Why Database Marketing? As described in Sect. 2. 2. 3, more recent work (Zahay and Griffin 2004; Reinartz et al. 2004) has specifically linked database marketing activities to firm performance. The information utilization constructs in these studies relate more directly to database marketing activities, and therefore ... |
2. 3 Creating Sustainable Competitive Advantage 35 Customer Responses to Purchase Profit Characteristics Firm Marketing History Potential Customer 1 Demographics Offers and responses Purchases Lifetime value Customer 2 Demographics Offers and responses Purchases Lifetime value Customer 3 Demographics Offers and responses P... |
36 2 Why Database Marketing? source of competitive advantage to a firm is a combination of creating customer information files, processing of the information and then utilizing the information to drive superior marketing strategies. 2. 3. 2. 3 Economic Theories of Customer Information as a Strategic Asset The marketing o... |
2. 3 Creating Sustainable Competitive Advantage 37 is that firms cannot practice price discrimination. They want to charge high prices to their loyal customers but cannot do so because the competing firm can attract these “loyals” with a steeply discounted coupon. As a result, prices for loyal customers are not high enou... |
38 2 Why Database Marketing? but sometimes from Merrill Lynch), but they do not have information on cus-tomers who are loyal to Merrill Lynch. Chen et al. create a targetability index equal to 0 if the firm's ability to classify is no better than random and 1 if targeting is perfect. In their first set of analyses, the t... |
2. 3 Creating Sustainable Competitive Advantage 39 0 0. 2 0. 4 0. 6 0. 8 1 Targetability Index Firm Profits Fig. 2. 9 Relationship between targetability and firm profits (From Chen et al. 2001). accurately identified loyal users. Database marketing can become a sustain-able competitive advantage especially for the firm wit... |
40 2 Why Database Marketing? switchers. Chen and Iyer assume that firms can perfectly identify the prefer-ences of all customers it can reach, but that it cannot target all customers. In Chen and Iyer's model, there are three main groups of consumers: Group 1 consists of customers that can be reached by Firm 1 but not b... |
2. 3 Creating Sustainable Competitive Advantage 41 to the competitive firm (Group 3 is small). The database marketing leader is able to practice price discrimination along the Hotelling line, unfettered by worries about what its competitor might be doing. Chen and Iyer also show that if addressability is high for both fi... |
42 2 Why Database Marketing? The Strategic Consumer The Chen et al. and Chen and Iyer papers assume that firms are pre-scient. They do not have perfect targeting information, but they are awareof what they know and do not know, and consider the short and long-term implications of their information set. The consumer, on ... |
2. 3 Creating Sustainable Competitive Advantage 43 of firms to price discriminate, which is the driving force behind the economic arguments to date for database marketing. The economic models described above make a set of key assumptions which drive their results: (1) the only strategic variable is price, (2) the purpos... |
44 2 Why Database Marketing? 2. 3. 3 Assessment The evidence to date regarding database marketing as a route to sustainable competitive advantage is built on the following arguments: Empirical studies find some, although not overwhelming, evidence that marketing orientation-the ability of firms to collect, process, and i... |
2. 4 Summary 45 their product line, or by tailoring their product line to the customer. It might be that this type of targeting is more sustainable because it is more difficult for a competitor to understand the details of a customer's preferences for vari-ous product attributes than it is to understand price response. R... |
46 2 Why Database Marketing? we need survey-based research similar to the marketing orientation literature that links database marketing, as opposed to customer information in general, to firm profits. We need more economic theory on non-price targeting, high versus low prices for loyals, and the strategic consumer. We n... |
Chapter 3 Organizing for Database Marketing Abstract Quantitative analysis is endemic to database marketing, but these analyses and their implementation are not conducted in an organizational vacuum. In this chapter, we discuss how companies organize to implement database marketing. The key concept is the “customer-cen... |
48 3 Organizing for Database Marketing Strategy Customer Intimacy * Operational Efficiency * Marketing Efficiency * The Strategy Locator Structure Customer Managers Customer Portfolios Acquisition vs. Retention People Training Coordination Culture Rewards Customer Metrics Short vs. Long Term Processes Knowledge Managem... |
3. 2 Database Marketing Strategy 49 strategy, and (2) How will the organizational design establish a competitive advantage? 3. 2. 1 Strategies for Implementing DBM 3. 2. 1. 1 The Langerak/Verhoef Taxonomy Langerak and Verhoef (2003) distinguish three types of CRM strate-gies: Customer Intimacy, Operational Efficiency, an... |
50 3 Organizing for Database Marketing The main point is that the three generic CRM strategies identified by Langerak and Verhoef each require different organizational designs and dif-ferent levels of customer-centricity. 3. 2. 1. 2 Galbraith's “Strategy Locator” Galbraith (2005, pp. 32-33) also proposes that the desired... |
3. 2 Database Marketing Strategy 51 the “competencies” of its employees to make sure they match customer needs. 3. 2. 2 Generating a Competitive Advantage Firms are constantly trying to establish a competitive advantage-a corecompetence that gives them a sustainable edge over its competition. One possibility is that th... |
52 3 Organizing for Database Marketing Vice President Marketing Product Management Marketing Services Advertising Promotion Product A Manager Product B Manager Product C Manager Fig. 3. 2a Product management (Adapted from Peppers and Rogers 1993). Vice President Marketing Marketing Services Customer Management Advertis... |
3. 3 Customer Management 53 medium, and light user customer portfolios. Each customer would be as-signed to one and only one portfolio. Each portfolio would be managed by a customer manager. The customer manager would draw support from ad-vertising and promotion departments, and from “capabilities managers,” theformer ... |
54 3 Organizing for Database Marketing owning the wrong products. A good example would be financial services, where the customer becomes over-invested in retirement products like IRAs when he or she should be investing in college-funding instruments. In short, the firm spends too much money on marketing, many of its effor... |
3. 3 Customer Management 55 3. 3. 4 Is Customer Management the Wave of the Future? To flesh out the key issues for firms deciding whether to pursue customer management organizational structures, in this section we discuss the pros and cons from an advocacy viewpoint. 3. 3. 4. 1 Why Customer Management Is Inevitable Custo... |
56 3 Organizing for Database Marketing Customer management will steer companies away from their distinctive competencies. Most companies have distinctive competencies and cannot deliver the best product in each category. Customer managers may urge afinancial services firm sell a mutual fund, but if this is not a high qua... |
3. 4 Processes for Managing Information: Knowledge Management 57 retention. These are two very different functions. For example, Del Rio (2002) describes a wireless phone company with separate departments for acquisi-tion and retention. Publishers have traditionally employed acquisition edi-tors, who sign up authors and... |
58 3 Organizing for Database Marketing For example, consider a cross-selling campaign for audio speakers that can be used with a computer. Each customer's response can be recorded. This is data. The data can be compiled to yield a response rate. This is information. It can be used to calculate profitability of the campa... |
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