Realizing Profits from Databases
Many organizations struggle not only with maintaining their customer database but with putting it to the best possible use, i.e., increasing its profitability and using it to manage customer relationships both short- and long-term.
Customer records, past purchases, and details on those purchases hold the key to realizing the highest possible return on investment from a company’s marketing strategies, and knowing how to analyze the purchasing behavior of customers, an organization can reap the benefits of database segmentation.
Profit-Based Segmentation (PBS) is the result of a data-driven process that defines customer segments using their own buying behavior within the organization. Using existing records and past purchases, PBS enables organizations to maximize profits by building upon existing customer relationships.
The following basic information provides an introduction to the subject of PBS; a database analyst can provide details and advice on how PBS can be incorporated into an organization’s marketing strategies.
Who can benefit from Profit-Based Segmentation?
Any organization that has collected the necessary data can benefit from PBS, which can be used to determine:
- Organization's best customers
- The lifetime value of its customers
- How many Tryers, Buyers and Advocates there are (see TRG White Paper: “A Deeper Look at Database Segmentation”)
- Whether different products are purchased by different kinds of buyers
- Which sources, offers, media, and sales channels attract which kinds of customers
- Which of these customers are most effective for improving customer retention
- Which customers should be contacted more often, less often, or not at all
- The correct balance between customer acquisition and customer retention in terms of resources expended
When should Profit-Based Segmentation be completed?
PBS is often completed before using other techniques, such as profiling or predictive modeling, because
- PBS can normally be accomplished with data that has already been captured by most organizations.
- PBS greatly improves the accuracy and effectiveness of more advanced analytical techniques by providing an understanding of who the Tryer, Buyer, and Advocate customers are.
- By itself, PBS is typically an adequate technique for mining the customer base.
A variety of analyses can be conducted to create PBS. They include:
- Pareto’s Rule - Often called the “80/20 rule,” Pareto’s Rule determines whether the bulk of sales or profits (80%) comes from a minority of customers (20%), and who those “best customers” are.
- RFM (Recency, Frequency, Monetary commitment) or RFM-A (Recency, Frequency, Average Purchase Amount) RFM or RFM-A builds a hierarchy of customers based on Recency (how long ago they purchased), Frequency (how many times they purchased), and Monetary commitment (how much they spent in total). For many organizations, Average Purchase Amount can be used in place of Monetary commitment, as it tends to be a better predictor of future behavior.
- RFM-P - Product (what customers bought) or Profitability may also be analyzed. Often customers are segmented either by category of item they purchased or by the profit margin of items they bought.
- LTV (Lifetime Value) - A Lifetime Value analysis is conducted to determine different buyer segments by type (business versus consumer) or source (direct mail versus retail) and to evaluate whether prospecting efforts are in balance with retention efforts.
- House File Inventory - A House File Inventory analysis reveals the number of customers in each identified segment. A house file database is the key component to building a successful direct mail marketing strategy.
Conclusion
Organizations should use the highly effective tool of Profit-Based Segmentation to increase their profitability with existing customers in the short-term; it is also useful for managing their relationships with customers in the long-term. PBS requires an experienced professional to know which segmentation techniques will most effectively achieve the highest possible return on a company’s investment of its direct mail marketing budget.
To learn more about Profit-Based Segmentation and how it can benefit your company, please contact Will Lester, Vice President, Target Resource Group at 719.314.5835 or email wlester@trgarts.com.
