Bookbinder Case 2

Q1. Summarize the results of your analysis for all three models.
Develop your models using

the case data file (calibration sample) and assess them (the models' performance) using
the Holdout Sample data file (separate). For the logit model, compute the overall hit rate
from the confusion matrix.
We performed analysis using the case data file and handout sample data. During our analysis,
we discovered the following. The results from each file are very similar.
Case Data File

Based on 1600 customers including 400 customers who purchased the book and 1,200
customers who did not purchase the book. (Book Title: The Art History of Florence)
 The total RFM score is 70, which means the average customer made their last
purchase with 3 to 6 months, he\she purchased an average of 12 books and they
spent approximately $200 per purchase.
 Most customers purchased cook and children books while very little customers
purchased youth books.
Variables / Amount Freque Last First P_Chil

Gender P_Youth P_Cook P_DIY P_Art
Alternatives purchased ncy purchase purchase d
Response 0.659 200.916 12.314 3.199 22.576 0.739 0.338 0.760 0.391 0.425
Dummy (No
0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Choice)
Handout Sample Data File

Based on 2300 customers
 The total RFM score is also 70 which means the average customer made their last
purchase with 3 to 6 months, he\she purchased an average of 13 books and they spent
approximately $195 per purchase.
 Most customers purchased cook and children books while very little customers
purchased youth books and art books.
Variables / Last First

Gende Amount Frequenc P_Chil P_Yout P_Ar
Alternative purchas purchas P_Cook P_DIY
r purchased y d h t
s e e
0.33
Response 0.687 195.277 13.304 3.059 22.848 0.729 0.343 0.786 0.406
0
Dummy (No 0.00
0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Choice) 0
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Q2. Interpret the results of the logit model (their coefficients). State clearly whether or not
each factor influences the customer's decision to buy or not to buy the book and, if so, in
which way (increased or decreased likelihood to buy).
Based on the analysis of the case data file coefficients, there was some influence on customers
who previously purchased art books to likely purchase the advertised book “The Art History of
Florence”. The other variables did not influence the customer to purchase the book.
Considering that most customers regularly purchased child or cookbooks probably deterred
them from purchasing the art book.
Variables / Coefficient Standard

t-statistic
Coefficient estimates estimates deviation
Gender -0.863231928 0.137449972 -6.280335407

Amount purchased 0.001864141 0.000791821 2.354246515
Frequency -0.075514189 0.016593743 -4.550762847
Last purchase 0.611771295 0.093812738 6.521196424
First purchase -0.014779211 0.01280267 -1.154385053
P_Child -0.811248872 0.116706767 -6.951172553
P_Youth -0.637042191 0.143377884 -4.443099419
P_Cook -0.923006595 0.119481526 -7.725098827
P_DIY -0.905869743 0.143702626 -6.303780018
P_Art 0.686112359 0.127017631 5.40170961
Const-1 -0.351528079 0.214384096 -1.639711552
Baseline n/a n/a
Q3. Bookbinders is considering a similar mail campaign in the Midwest where they have data
for 50,000 customers. Such mailings typically promote several books. The allocated cost of the
mailing is $0.65/addressee (including postage) for the art book, and the book costs
Bookbinders $15 to purchase and mail. The company allocates overheads to each book at 45%
of cost. The selling price of the book is $31.95. Based on the model, which customers should
Bookbinders target? How much more profit would you expect the company to generate using
the model as compared to sending the mail offer to the entire list?
I would recommend that mailing be sent to those who have previously made a purchase within
the last 3 months and included an art book. Based on the mailing of 20,000 to Pennsylvania,
New York and Ohio, there was a 9.03% response rate with 1806 orders. If we did analysis on the
50,000 and discovered that similar segment of 9% previously purchased art books, the mailing
would be reduced 91%.
The original cost of the mailing for 50,000 customers would be approximately $32,500 plus the
shipment and overhead of 4500 sold art books (9%) is $97,875. The grand total cost using the
full list would be $130, 375 whereas the net profit would be $45,900. This campaign could
potentially be a loss of $84, 475.
If the company only mailed to the 4500, the mailing, shipment and overheat cost would be
$2925 (4500 * 0.65) + 97,875 (4500 * 21.75) = 100,800 whereas the net profit would be
$45,900. This limited campaign can potentially lead to a loss of $54,900, which is a savings of
$29, 575 compared to full list campaign.
Mailing Cost 50,000 X 0.65 = $32,500
Cost Per Book

Purchase & Mail - $15.00
Overhead Cost - $6.75
Total Cost - $21.75
Selling Price - $31.95
Net Profit = $10.20
Q4. Based on the insights you gained from this modeling exercise, summarize the advantages
and limitations of each of the modeling approaches. Look at both similar and dissimilar
results. What important element is missing in the models?
RFM Model: RFM refers to how recently a customer has purchases, how often they purchase,
and how much the customer spends on purchases. This model is very simple and easy to
understand. This model is also very cost effective. It analyzes customer behavior and helps
define the market segment. The RFM model helps build customer relationships and customer
loyalty. On the other hand, RFM does have some limitations and it is very important that
companies do not neglect potential customers based on RFM results. It is not useful when the
customers are only purchasing the item once.
Regression: Regression analysis is used to find the relationship between two variables. It can
also quantify the nature of that relationship. The regression model can be used to find customer
satisfaction and customer loyalty. A major limitation to regression is the inability to know what
variable should predict what.
Logit Choice Model: The logit choice model takes advantage of actual customer choices to infer
the customer’s value. This model provides explicit measures that help companies understand
the factors contributed to customer value. It is difficult to make statistical estimates for each
person in this model.
An important element missing in the models is the connection to these various pieces of data.
For example, we cannot identify a customer by name based on each of these models.
Q5. As part of your recommendations to the company, indicate whether it should invest in
developing expertise in either (or all) of these methods to develop an in-house capability to
evaluate their direct mail campaigns.
We would recommend that the company invest in the RFM model. This model provides
adequate date on purchasing and behaviors. Considering the company is beginning to focus on
predicative technology, the RFM would provide some of the analysis that is needed to increase
response rates for campaigns. I would also recommend sending emails, which also includes
predictive analysis. Lastly, I would recommend a loyalty program to gain more increased
spending from other customers.
Executive Summary:
In this case, we used the three models: (1) RFM model, (2) regression, and (3) logit
choice model to identify where our marketing dollars for promoting “The Art History of
Florence” would bring the highest purchases. It was essential for us to identify the
demographics and behaviors of the customers that are the most and least effective targets. This
data helped us determine which customers we should target to help Bookbinders Book Club
achieve the highest number of purchases. As a result, we found the most relevant factors to be
the following: last purchase, frequency, cookbook, and child book. The last purchase seemed to
be the most predictive among all of the other factors. These results suggest that Bookbinders
Book Club should target the most recent customers with not a high frequency of purchases.
Based on the analysis of the case data file coefficients, there was some influence on
customers who previously purchased art books to likely purchase the advertised book “The Art
History of Florence”. The number of children books, youth books, and cookbooks purchased,
the lower the purchase of “The Art History of Florence.” The total RFM score for both solutions
in question 1 was 70. In our analysis, we found that the average customer made their last
purchase within 3 to 6 months, purchased an average of 13 books and spent approximately
$200 per purchase.
Our data in question 3 demonstrates the profitability of using the model versus sending
the full campaign list out to all of the customers. By using the model, we found that the
company can potentially save money by only sending to 4,500 customers compared to the full
list. The company can potentially lose $54,900 by sending out the campaign to 4,500 customers,
and $84,475 for the full list. This saves the Bookbinders Book Club approximately $29, 575 when
sending to the limited target segmentation. The company ends up making a net profit of $10.20
per book.
Our recommendations for the Bookbinders Book Club would be to send out an email to
the most customers who have made a purchase within the last 3 to 6 months. This e-mail would
thank the customer for their most recent purchase and suggest the next book they read be “The
Art History of Florence.” This suggestion could most certainly spark interest in the next potential
buyer. The message would be directed toward our target audience: the most recent buyer, with
a low frequency of purchases, and a need for an advanced piece of literature aside from a
cookbook or children’s book. The use of technology is a great feature to reach our target
segmentation. Through this technology, we will be able to reach our target audience and
campaign for the purchase of “The Art History of Florence.”
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Q1. Summarize the results of your analysis for all three models.

Develop your models using

Case Data File

Variables / Amount Freque Last First P_Chil

Handout Sample Data File

Variables / Last First

Variables / Coefficient Standard

Gender -0.863231928 0.137449972 -6.280335407

Mailing Cost 50,000 X 0.65 = $32,500

Cost Per Book

Selling Price - $31.95

Net Profit = $10.20

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