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The Marketing Database: Return On Investment
Ronald Kahan, RKC Database Marketing Resources, Inc.

Introduction

The evolution of Data Warehousing began as a means for efficiency in production and the overall operation of businesses. This was done with the only technology available at the time, mainframe computers and flat file formats and/or proprietary databases. Then came the mid-range and relational databases. Then the minis and a "light" form of the full-blown relational database software. And, of course, desktops and servers have been getting more powerful and less expensive. Even disk space, once a precious commodity, has become affordable.

Over the last ten years we have witnessed a technological revolution unfolding before our very eyes. And with this advancement comes an ever-growing desire to expand the responsibilities of internal systems. Marketing, in particular, sets its collective eyes on the new technologies available to them.

Marketing systems have been in place for many years. In fact, database marketing began sometime in the 1970s. But even these binary, flat file, and proprietary database systems that have been the only means for accessing marketing data, are becoming old technology.

Whichever the scenario; updating current marketing database systems, or just now entering the marketing database arena due to the new technological advances, many companies are becoming more aggressive in leveraging data for strategic, (hopefully) profitable marketing initiatives.

Some organizations have a driving force from an executive management which realizes the opportunities now available using database marketing. Others have key management personnel in Marketing and/or Information Technology that have the vision. However the case, the beginning of a successful marketing database project starts with the ability to outline the return on investment involved with the associated cost of building the system.

By showing the return on investment potential, the marketing database initiative will have stronger internal support, from both the executive level and managers throughout departments which the database will encompass. These can include Marketing, Information Technology, Sales, Distribution, New Product Development, Customer Service, and Fulfillment.

Strategies

Following is a brief description of seven strategies for realizing a return on investment from a marketing database:

1. Customer Retention

It is easier to keep existing customers than to find new ones. Easier in two areas - cost and response. Figures vary between six and ten times more expensive to acquire a new customer than to retain an existing one. Further, consumers having an existing relationship with a business are more likely, by a factor of 3/1, to respond to an offer than those without the existing relationship.

What are the gains from keeping a customer for one more month? How much additional revenue would be generated due to one more sale from a customer? There are incremental revenues to be had if a percentage of your current customers, who might otherwise have defected or churned, remained customers through just one more billing cycle. Using your own figures, calculate the return from reducing attrition by building loyalty. How much would a one percent reduction generate?

It is possible to create specific tactics which increase your customer retention rate.

Generally, along with quality and value, customers want five things from a company:

  • Customized Attention
  • Special Services
  • Convenience
  • Information
  • Recognition
Database Marketing and Relationship Marketing revolve around the total worth of the consumer over the lifetime of the relationship with the business. It allows a business to create and maintain a bond with the consumer, extending the lifetime value of the consumer and ultimately adding profits to the bottom line.

2. Sales Volumes & Market Penetration

Database Marketing can be used to influence the buying patterns of your existing customers. By learning about your customers and their behavioral characteristics, you can more precisely make the right offer to the right people at the right time (see Cross-selling & Up-selling). Remember, there is no greater predictor of future customer behavior than past behavior.

Prospect sales will also increase as a benefit from database marketing. Understanding current customers will also enable smarter marketing to your prospect universe (see Profiling). Remember, Database Marketing revolves around generating revenue to the bottom-line. In many cases, this means higher sales volumes. In others, it is a case of waste reduction.

3. Triggers & New Product Development

Establishing contact points with your customers and prospects is important as a form of customer service. It behooves a business to give customers options that make it easy for them to communicate with you. This can include person-to-person, telephone, fax, mail, and e-mail.

However, capturing what is being said and using the information is where Database Marketing can show a return. Listening to your loyal customers about your product/service and tabulating the results can lead to more sales of current products, product enhancements and new product development targeted at the customers### interest.

4. Cross-Selling & Up-Selling

By analyzing your current customers### purchases, you can look at patterns of buying behavior with regard to multiple products. Does one product/service seem to be purchased with another, or within a definable time period of another? Could offering these products together increase sales? Or perhaps, could offering the related product within a specific time period increase response?

In addition, by profiling customers, you will begin to see patterns of consumers which will drive your marketing strategy to gain a larger share of each customer.

5. Direct Costs of Acquisition

Successful Database Marketing allows a business to understand the return on investment from every advertising or marketing campaign. With an understanding of the cost of acquiring a customer and the return on investment, not only for each product, but for each distribution channel per product offering, comes smarter strategies to reduce this operating cost and maximize net profits.

6. Profiling & Waste Elimination

Consumer profiling involves matching customer information with third party demographic (age, gender, income, presence of children, etc.) and psychographic information (likes cultural events, wine drinker, golfer, etc.). This allows a business to understand what customers of specific products or genre interest "look like" and find more households that look just like them. By targeting your marketing campaigns at consumer households that have a higher propensity to buy, you increase response while saving on costs associated with marketing to households that do not share the same attributes.

Another proven technique for waste elimination is an analysis of your customers by recency, frequency, and monetary (RFM) values. By performing a decile (or quartile) analysis, you can test which RFM segments respond at a profitable rate and which do not. The roll-out of your marketing campaign should then (logically) be delivered to only the profitable segments. Now with database marketing techniques you can actually predict who will respond to an offer and who won###t. Wouldn###t that knowledge be of value to your organization?

7. Bad Debt Reduction

This strategy is specifically geared toward products/services that are invoiced.

Suppose you have a customer that received one of your products/services and is overdue on the invoice. If this customer orders another product/service, will it be fulfilled? And what are the chances that it will be paid for?

A consolidated Marketing Database can stop a recurring bad debt customer from furthering your bad debt burden with them. Further, once a profile of bad debt customers is established, prospects having the same characteristics can be omitted from offer solicitations, reducing the volume of new bad debt.

Conclusion

Here is a summary of benefits from a successful Marketing Database and Database Marketing programs:

  • Increasing market penetration
  • Reducing attrition by building loyalty
  • Increasing sales by developing long