Chapter 2: Direct Marketing Lists and Segmentation

Instructor’s Manual-2E

Chap. 2: Building Databases, Selecting Customers, and Managing Relationships

CHAPTER2-2/E

Building Databases, Selecting Customers, and Managing Relationships

Opening Vignette: Tidewater Exterminating

Customer Database

Database Development

Customer Loyalty Programs

Examples of Loyalty Programs

Source Data

Recency/Frequency/Monetary Assessment

Database Maintenance

Match Codes and Merge-Purge

Multibuyers

Keeping Records Current

Database Security

Information Privacy

Proper Database Storage

List Seeding

Database Uses and Applications

Using a Customer Database

Performing Database Analytics

Database Enhancement

Internal Data Enhancement

External Data Enhancement

Customer Relationship Management

Customer Value

Lifetime Customer Value

One-on-One Personalized Marketing

Partner Relationship Management (PRM)

Summary

Key Terms

Review Questions

Exercise

Case: Smithfield Foods

Summary

A customer is the company’s most important asset. Customer retention is more beneficial to most companies than is new customer acquisition. A customer database is a tool used to retain customers. It enables a company to establish and strengthen relationships with customers by allowing them to interact with each customer on a personalized basis. The information captured and stored in a database provides the company with knowledge about the particular needs, wants, and interests of each customer. Armed with this knowledge, marketers are better able to develop products and services that will satisfy each customer’s needs and wants. In addition, the information housed in the customer database may assist the marketer in more effectively communicating with each customer. The end result is this—a highly satisfied customer—a loyal customer!

Database marketing employs a number of activities designed to acquire, store, and use customer information. Database marketing activities commonly include customer loyalty programs, such as the many airline, hotel, and grocery programs. In addition, direct marketers regularly assess the value of their customers. This may include applying the

recency/frequency/monetary assessment and calculating the lifetime value of a customer over a period of time. Of course, direct marketers must keep their customer database current and accurate for it to be of value. Direct marketers perform common database

maintenance activities, such as applying match codes and a merge-purge process to identify and delete duplicate customer records, identifying multibuyers, and performing status updates to keep each record current. Direct marketers also carry out a variety of activities designed to safeguard their database against improper use or theft. Some of these activities include salting or seeding their customer lists, applying access passwords, and ensuring information privacy protection for their customers. Each of these database marketing activities is critical in maintaining strong customer relationships, which, in

turn, lead to the retention of customers. Database analytics, including data mining, are enabling marketers to better understand its current customers and target key prospects. CRM programs are highly valuable and are growing in popularity.

Learning Objectives

After completing this chapter, students should:

Understand what a customer database is, how to create one and its value and uses for direct marketing

Explain the function of a customer loyalty program and overview examples of customer loyalty programs

Be able to explain the various database maintenance activities that direct marketers should implement on a regular basis

Know the importance and the various kinds of database security activities

Understand the role and value of database analytics and database enhancement

Be familiar with R-F-M assessment and customer LTV tools

Understand the role a database plays in managing relationships with customer and partners

Key Terms

Attrition- the assumed (historic) drop off in active customers from one time period to the next

Continuity selling- offers that are continued on a regular (weekly, monthly, quarterly, annually (also called “club offers”)

Cross-selling- an important characteristic of direct marketing where new and related products (or even unrelated products) are offered to existing customers

Customer database- a list of customer names to which additional information has been added in a systematic fashion

Customer loyalty program- programs sponsored by an organization or firm to encourage customer repeat purchases through program enrollment processes and the distribution of awards and/or benefits

Customer relationship management (CRM)- a business strategy to select and manage customers to optimize value.

Database enhancement- adding and overlaying information to customer records to better describe and understand the customer

Data mining- the process of using statistical and mathematical techniques

Lifetime value of a customer (LTV)- the discounted stream of revenue a customer will generate over the lifetime of his or her relationship or patronage with a company (also called “customer lifetime value”)

Match code- abbreviated information about a customer record that is constructed so that each individual record can be matched, pair wise, with each other record

Merge-purge- a computerized process used to identify and delete duplicate names/addresses within house lists

Micro-targeting- the creating and direct delivery to customers of customized winning messages, proof points, and offers, and accurately predicting their impact.

Multi-buyers- an individual’s name/address that appears on two or more response lists simultaneously

Nixie- mail that has been returned by the United States Postal Service because it is undeliverable as addressed

Partner relationship management (PRM)- the generation of greater value to customers through companies’ cooperation and close work with partners in other companies or departments.

Recency/Frequency/Monetary (RFM)- an assessment of the date and volume of purchases, in the master list record over a period of time marketers can determine the transaction record of each customer in a given period, which helps determine the future potential of that customer

Salting- the process whereby a direct marketer places decoys, which are either incorrect spellings or fictitious names, on a customer list to track and identify any misuse (also called “seeding”)

Seeding- the process whereby a direct marketer places decoys, which are either incorrect spellings or fictitious names, on a customer list to track and identify any misuse (also called “salting”)

Source data- the information contained in a customer database

Stealth communications- communications secrecy in that direct marketers can communicate with small market segments or individual customers without competitors or other customers having knowledge of it.

Transactional data- the information contained in a customer database.

Review Questions

What is a customer loyalty program? Identify three customer loyalty programs with which you are familiar. What are the benefits to each of the organization’s sponsoring these loyalty programs?

The customer loyalty program is a program sponsored by an organization or firm to encourage customer repeat purchases through program enrollment processes and the distribution of awards and/or benefits. (p. 8)

One customer loyalty program is the Harris Teeter VIC card. This card allows you to enjoy grocery discounts, while the company collects information on your purchases. By understanding what you are purchasing, they can provide coupons for certain grocery items specific to your tastes. The second customer loyalty program is the McDonaldGardenCenter, which rewards customer loyalty via its Garden Rewards Program. The Garden Reward Program enables its customer to receive discounts on certain plants and other purchases. Finally, the Marriott Honored Guest program launched the Marriott Rewards program in 1997. Members of this program can redeem point for more than 85 award options such as hotel stays, travel packages, room upgrades, etc.

When building a customer database, what must an organization first determine? What must they first identify? (p. 8)

When building a customer database, an organization must first determine the company’s primary goals. They must identify the objectives that it hopes to achieve with a customer database. For example, a company may want to get to know its customers better in order to develop more effective future promotional activities, encourage referral business, thank customers for their patronage, introduce a new product or service, introduce a new staff member, etc.

What is a match code? Explain its importance for database development and maintenance. (p. 12)

A match code is abbreviated information about a customer record, which is constructed so that each individual record can be matched, pair wise, with each other record. This is important for database development because matching entire customer records would require a tremendous amount of computer memory. The match code makes this operation possible with a fraction of computer memory. Also, the match code can be designed in such a way to catch common errors in database development. This is of great assistance in maintaining an accurate customer database.

Describe the activities required to maintain a customer database? How often do you think database maintenance should be preformed? (pp. 11-17)

The activities required to maintain a customer database is that the list is complied and developed in a uniform manner. Only when such uniformity exists within a computerized list is it possible to use match codes with any assurance of control. Database maintenance should be performed on a “regularly” scheduled basis to avoid any miscommunication with the consumers.

What is the purpose of the merge-purge process? How does it work? (p. 13)

The merge-purge process is a computerized process used to identify and delete duplicate names/addresses within house lists. It can also be used to eliminate names on house lists from outside response and/or compiled lists that the marketer is using for new customer solicitation. The merge-purge process is a highly sophisticated and complex process, but essentially it generates a match code for each name/address on each list and these match codes, potentially many million of them at a time, are matched, with every other name on the list in sequence

If incorrect addresses or phone numbers result in misdirected advertising promotions, what is the cost to the organization? How can this be avoided? (p. 14)

If incorrect addresses or phone numbers result in misdirected advertising promotions, it would cost the organization the cost of the mailing package, list rental, postage and all other associated promotional costs. This can be avoided by performing the merge-purge process on a regular basis.

Explain the value of applying the recency/frequency/monetary assessment to an organization’s customer database. Is it possible to determine when an organization should place more weight on one of the three variables over the other? If so, explain why. If not, explain why not. (p. 10)

The value of applying the recency/frequency/monetary assessment to an organization’s customer database cannot be understated. By carrying the date and volume of purchases, in the master list record over a period of time marketers can determine the transaction record of each customer in a given period, which helps determine the future potential of that customer. It is possible to determine when certain variables should be assigned more weight than other variables. For some promotions, marketers might need to manipulate their calculations by weighting one of the factors, so that, for example, the results will show those customers who had purchased most recently.

Describe the value of database analytics. Provide example of what can be learned via data mining. (p. 27)

The value of database analytics is that it enables a direct marketer to better understand the needs and wants of its consumer so that it can create greater value and satisfaction for that customer. Companies use database analytics to make strategic decisions to retain current customers and attract new ones. Database analytics also enable companies to mine the most likely best customers from prospect lists and databases.

One example presented in the text is that of Teredata, a division of NCR, which analyzed sales data of a well-known retailer and found correlations between purchases of beer and diapers.

Explain what is meant by the term lifetime value of a customer. Why is it important? (p. 36)

Lifetime value of a customer is the discounted stream of revenue a customer will generate over the lifetime of his or her relationship or patronage with a company (also called “customer lifetime value”). The information for calculating LTV is derived from transactions recorded in an organization’s database.

Customer LTV is important because it enables direct marketers to strategically determine which customers are more valuable to the company or organization so that it can concentrate its marketing efforts and expenditure on those more valuable customers.

Imagine that you have recently started a new business venture and that you already have a database of 10,000 customers. You are going to a financial institution to obtain a loan to expand your business. The financial officer asks you “What is the biggest asset of your business?” How will you respond? Provide support for your answer using the information presented in this chapter. (p. 41)

A customer is the company’s most important asset. Without customers there is no business. The customer database is key to developing the strong customer relationships and retaining current customers. The stronger the relationship with each customer, the more likely that the customer will continue purchasing from the company. A customer database is an asset—just like buildings and equipment. However, the value of a customer database is intangible.

Exercise Completion Guide

This exercise requires students to:

understand and assume the role of a list manager

comprehend the list rental process

analyze the products/services of a catalog and determine its appropriate target market customer(s)

determine appropriate list users for a catalog

explain the circumstances when a list owner should not permit list rental activity

Tips for Incorporating the Smithfield Foods, Inc. Case into Lectures

1. This case demonstrates the power of a company’s customer database when used properly. Students could be asked to detail the ways the company used its customer database.

2. The case alsoexamines the role of multi-media strategies and creative promotional offers targeted to the needs and wants of the target customer. Numerous “how to” examples can be gleaned from this case to demonstrate the successful integration of customer database marketing activities into a company’s overall promotional mix.

3. A visit to the Smithfield Foods web site might enable the class to discuss evolution in the promotional activities of the company.

Case Discussion Questions

Smithfield Foods, Inc.

Think about the objectives of Smithfield Food’s customer loyalty card program. What other objectives could they try to achieve with their database marketing program?

[In responding to this question, students may go off in many different directions.] The database program is useful in collecting, measuring, and storing customer information enabling the company to segment and better understand each consumer. Some objectives they could try to achieve with their database marketing program could include increasing product knowledge and usefulness. Understanding the products many uses and how to make a product work is all part of many reasons why customer will buy your product. Smithfield Foods could also place increased emphasis on the lifestyle of the customer, enabling the company to distribute coupons to a family of four instead of sending coupons to a single individual who purchases the product on an infrequent basis. Knowing background information will help the company to better understand and determine customer wants and needs when purchasing a product.

How does Smithfield currently obtain customer information? Identify some additional mechanisms by which they could gather customer data.

Smithfield currently obtains customer information through customer loyalty card programs. The loyalty cards collect the purchasing information of the customer and are organized in a database. The website is another avenue for obtaining customer information.

Answers to the second question will vary. Keep in mind that methods for gathering customer data are likely to evolve with new high-tech digital innovations.

If you were the vice president of marketing forSmithfieldFoods, how might you allocate your promotional budget?

Answers will likely vary according to statistics related to media effectiveness. Certainly all answers should encompass multiple media and a blend between high-tech digital formats and more traditional media formats. Finally, students should examine what promotional methods have been effective for the company and incorporate that data into their strategic analysis for promotional budget allocations.

What role should the company’s web site play in future marketing programs and activities for Smithfield Food?

Answers will likely vary according to new high-tech digital media formats that are created. While there is no “right or wrong” answer to this question, students should be encouraged to think out-of-the-box while keeping the company’s goals and its target market in mind.