Chapter 7 “Data Mining”

The Need for Data Mining:

 Companies developed a need to understand their customers better
 They must be proactive and anticipate customer desires
 Many companies have full access to detailed customer data
 Data mining provides businesses with the ability to make knowledge-driven strategic business decisions
 The increasing data deluge instead of lack of data generates a problem for many companies which leads into an
obstacle (to use data)
 Companies need to implement a standardized data mining procedure in order to extract customer intelligence
and value from that data

The Business Value of Data Mining:

 Data mining can assist in selecting the right target customers or in identifying customer segments with similar
behavior and needs
 Applications of data mining include the following:
 Identifying customers that are likely to stop business with the company with the help of predictive AU1
models
 Increasing customer profitability by identifying customers with a high growth potential
 Reducing marketing costs by more selective targeting

The Data Mining Process:

Extent of Involvement of The Three Main Groups Participating in a Data Mining Project :

Groups:
1. Business groups
a. Check plausibility and soundness of the solution from the business perspective
b. Take lead in deploying new insights into corporate action (e.g., a call center or direct mail campaign)
2. Data mining
a. Understand business objectives and support the business group to refine and sometimes correct the
scope and expectations
b. Most active during the variable selection and modeling phase
c. Share obtained customer insights with the business group
3. IT Resources
a. Source and extract required data used for modeling

Chapter 8 “Using Databases“

Three Types of databases:

1. Categorization based on information in the databases
2. Categorization based on the nature of the underlying marketing activities
3. Categorization based on the database technology
First type of Categorization based on information in the databases is four categories:
A. Customer Database
 Data from active and inactive customers
 Information included in customer databases:
 Basic information: name, address, zip code, and telephone number
 Demographic information: age, gender, marital status, education, number of people in household,
income
 Psychographic information: values, activities, interests, preference
 Transaction history: frequency of purchase, amount of spending
 Other relevant information: inquiries and referrals, satisfaction, loyalty
 Data from Inactive Customers:
 How long have the customers been inactive? Or How long have they been active?
 What was their purchasing pattern when they were active?
 How much did they spend? How were they initially acquired? Why are they inactive?
 B. Prospect Database
 Non-customers that have profiles that are similar to the profiles of existing customers
 Segments prospects and positions the company’s differentiated products to the prospects’ specific needs

C. Cluster Database
 Clusters defined based on geographic reference groups, affinity groups, and lifestyle reference groups
 Depending on the membership of prospective customers to specific clusters, firms can customize their
marketing communications

D. Enhancement Database
 Used to transfer additional information on customers and prospects
 An overlaying process is used that eliminates duplications
 Enhancements may include: demographic and psychographic data, transaction history, changes in
address, changes in income levels, privacy status, new product categories bought recently

Second type of Categorization Based on The Nature of Underlying Marketing Activities:

A. Passive marketing database
 A mailing list that passively stores information about acquired customers
 Future marketing efforts target the same customers in the list
Campaign 1 customer list Database Customer list Campaign 2

B. Active Marketing Database

Marketing
Third type of Categorization Based on Database Technology: program

A. Hierarchical Database
 All information pertaining to a customer will be in a
master record
 Useful when the queries are standard and routine but
high speed processing is required
 Preferred in the banking, airline, and hotel industries
 Organized in a tree-like structure

B. Inverted Database
 Suited for direct marketing application
 Has speed and flexibility to respond to unanticipated questions
 Easy to add new elements, when updated information is acquired

C. Relational Database
 Has the greatest flexibility
 Users can create queries to extract and combine information
 Examples of Relational Database:
o Oracle, SQL Server, and Microsoft Access
Benefits of Marketing Databases:

 Ability to carry out profitable segmentation

 Ability to retain customers and repeat business
 Ability to spot potential profitable customers
Uses of Marketing Databases:

1. Uses that directly influence Customer Relationship:

 Identify and profile the best customers
 Develop new customers
 Deliver customized messages consistent with product/service usage
 Send follow-up messages to customers for post-purchase reinforcement
 Cross-sell products/services
 Ensure cost-effective communication with customers
 Improve promotion result by efficient targeting
 Personalize customer service
 Stealth communication with customers
2. Uses that directly influence other business operations:
 Evaluate and refine existing marketing practice
 Maintain brand equity
 Increase effectiveness of distribution channels
 Conduct product and market research
 Integrate the marketing program
 Create a new valuable management resource
CRM at Work:
1. Effective use of email marketing
 Emails are the most financially efficient form of direct communication between firms and customers
 Most effective day of the week to communicate with potential customer:
 B2C firms: Wednesday and Friday
 B2B firms: Monday or Tuesday
2. American Express and Database Clustering
 American Express clusters customers’ purchasing behavior data and provide upgrades or cross-selling offers
based on the customer’s change in cluster group
 Accurate database clustering is important for marketers, as customer databases evolve over time
 Evolving and moving clustering system allows customers to move freely in and out of clusters as is warranted by
their purchase behavior
3. Enhancement Database
 County drains, a drainage service company, has built its business around superior customer service
 Challenged to provide premium customer service, as its customer base was expanding rapidly
 Chose an adaptive database, GoldMine Premium Edition, which allowed County Drains to : a) continue with it
premium customer service and (b) proactively engage with customer to provide more relevant services
4. Active Marketing Database
 Best Buy updates in-house customer database, Athena, regularly
 Athena helps Best Buy identify students, likely-to-be-students and parents of students, who were sent back to
school promotions
 Store saw 17% increase in online sales in 2015 second quarter
 Did not have to spend as much money on TV or print ads
 Chapter 9: Software Tools and Dashboards

CRM Implementation Options:

 Developing Software In-House, Example: Facebook
 Buying Licensed Software, Example: Oracle
 Outsourcing a Managed Service , Example: American Express

Developing Software In-House:

Requires the company to define all its requirements, pay for software development, and internally bear all the R&D
costs.
Advantage:
 Tailor-made solution fit to the current business practices
 Develop internal skills that allow them to develop the system each time the company requirements change
 Avoid dependence on CRM software vendors
Disadvantage:
 Most Expensive option (high development maintenance, and operating costs)
 Difficult to attract and retain the employees needed to solve data warehouse challenges
 Long time commitment (One to two years)

Buying Licensed CRM Software:

Companies can license CRM software packages, which are sold as a block (different modules) or as independent
modules.
Advantage:
 Many of these CRM software packages have a proven record of success
 CRM vendors will provide knowledge and training for the IT concepts
Disadvantage:
 Expensive option (high initial fees, licensing costs, and maintenance costs)
 Companies need to develop the IT infrastructure and integrate the new software with existing applications
 Each time a new or upgraded version is released, companies have to repurchase and retrain for them
 Resistance from employees in terms of adapting to the new system dependent modules.

Outsourcing a Managed Service:

Companies can outsource the CRM solution to a third-party company, which provides the hardware, software, and
human resources in exchange for a monthly fee.
Advantage:
 Lowest upfront costs: no software licensing fee, hardware system, recruiting, or internal IT system costs
 Pay-as-you-go approach: Pertinent for smaller companies or those with limited marketing budget to benefit
from CRM programs
Disadvantage:
 High dependency on the outsourcing CRM company
 Not viable for companies who need specific requirements in their CRM package
 Decision Process for Implementation:

CRM Software and Applications:

Stage-Wise Implementation vs. an Enterprise Wide CRM Solution

CRM industry mainly offers two types of CRM software solutions based on the company’s needs and processes:

1. Stage Wise Implementation:

 Offered in different and independent modules
 Each module is adapted to a specific department needs
 Ex) the company buys the sales automation software and the contact management module from
different providers
2. Enterprise Wide CRM Solution
 Composed of different modules from the same provider
 Modules may be adapted to each department’s needs, yet they are implemented as a whole

Relationship and flows between CRM Modules:

CRM modules, whether implemented independently in phases or together in a global solution, need to be integrated to
have an integrated view of the customer.

Chapter 10:Loyalty Programs: Design and Effectiveness

What is Loyalty? Behavioral Versus Attitudinal Loyalty:

 Behavioral loyalty refers to the observed actions that customers demonstrate toward a particular product or
service
 Attitudinal loyalty instead refers to the perception and attitudes a customer has toward a particular product or
service
 There should be a strong correlation between customers‘ attitudes and behaviors. However, in some instance
customer behavior differs strongly from their attitudinal perceptions about the product or service

What is a Loyalty Program? Definition and Key Objectives:

 A loyalty program (LP) comprises a marketing process that generates rewards for customers, based on their
repeat purchases. LPs offer an important CRM tool that marketers use to identify, award and retain profitable
customers
  Key objectives of introducing LPs:
1. Building true (attitudinal and behavioral) loyalty
2. Effiency profits
3. Effictiveness profits
4. Value alignment

1. Building True Loyalty:

 Enforcing loyalty by enticing customers with rewards and bonuses is unlikely to create true loyalty
 True loyalty is a function of the value provided to customers, comprising various factors .
For example:
 Degree of involvement in the product category
 Visibility of product usage
 Value expressive nature of the product

2. Efficiency Profits:
 Efficiency profits result from a change in the customer‘s buying behavoir induced by the LP
 Change of behavior can be measured in several ways as Basket size, Purchase frequency acceleration , Price
sensitivity, Share of category requirements (SCR) or share of wallet, Retention, Lifetime duration but genetally
The most widely used measure of behavioral loyalty is SCR which describes the extent of purchases in a
category that are served by focal brand or retailer.
 Assumption: Customers build up switching costs.The accumulation of loyalty-based assets encourages them to
forgo their free choice because the expected reward makes this reduction appear worthwhile

Effiency Profits – Criticism:

 Two key criticisms of this viewpoint
a. For a customer to engage in an LP, the overall utility of being in the LP must be higher than the utility of
not being in an LP. The cost for the firm to entice the customer to change behavior accordingly may be
higher than it would be without the LP , Money that could be invested in, for example, cutting prices
b. The customer segment most likely to join the LP consists of those who are truly loyal anyway, so their
business is already likely. In this case, the question arises about whether LPs actually change buying
behavior

3. Effectiveness Profits:
Effectiveness profits are likely to generate sustainable competitive advantages and yield the highest profits in the long
run

Derive Knowledge Improve Knowledge Better Offerings

Gather information about This process of learning allows the firm to improve Increasingly better-tailored value
behavior and preferences of knowledge of customer preferences through effective proposition offerings to various
individuals product and communication offerings customer is possible

4. Value Alignment
 Aligning the cost to serve a particular customer with the value he/she brings to the firm
 Allows firms to serve their most valuable customers in the best manner
 Value alignment is particularly critical when there is great heterogeneity in the customer’s value and in the cost
to serve the customer, Example: the airline business, the hospitality industry and the financial services industry
Problems with Loyalty Programs:
 Although LPs have become widespread and popular, the benefits are not always clear
 Large corporations that have spent millions of marketing dollars on LPs closely evaluated their costs
 For some companies this reassessment lead to the elimination of any further investments in LPs

Design Characteristics of Loyalty Programs:

 Reward mechanism
 Reward structure:
 Hard versus soft rewards
 Product proposition support (choice of rewards)
 Aspirational value of reward
 Rate of rewards
 Tiering of rewards
 Timing of rewards
 Rewards based on specific criteria
 Participation requirements:
 Voluntary or automatic enrollment
 Open versus closed loyalty program
 Automatic or manual point accumulation
 Payment function
 Sponsorship: (existence of partner network, network externalities)
 Single versus multiform LP
 Within- versus across-sector LP
 Ownership (focal firm versus other firm
 Cost and renues of LPs

Drivers of Loyalty Program Effectiveness:

 Chapter 11: Campaign Management
Campaign:
 A series of interconnected promotional efforts designed to achieve precise marketing goals
 Composed of one or more promotions, each of which is an initiative or a device designed to attract the
customers’ interest
 Aimed at prospects or existing customers
 Usually undertaken within a defined timeframe (ex. season)

Campaign Management Stages:

1. Planning
• Strategic process by which decisions are taken
• Definition of purposes and objectives of the campaign
2. Development
• Tactical process of creating thr offer, choosing the support and the design, choosing the media, and selecting the
customer names
3. Execution
• Operational process of running the campaign in the media chosen and controlling all related aspects
4. Analysis
• Evaluation process of the campaign results in light of the original objectives

Campaign Management Process:

Campaign Planning and Development:

1. Setting Objectives and Strategies

 Categories:
a. Market penetration (increase usage or market
share)
b. Market extension (find new user groups or enter
new segments)
c. Product development (new products or services)
d. Diversification (find new markets and products,
discover new strategies)
 Examination of different marketing strategies in
place:
a. Product strategy b. Pricing strategy
c.Distribution strategy d. Promotion strategy
 Defining the Campaign Strategy:
a. Who to target?
o Retention strategy: focusing on existing customers
 Ideally the company should target its most profitable customers (often done through LTV and/or
RFM analysis)
 Approaches: Loyalty programs, cross selling, up-selling, cross-merchandising
o Acquisition strategy: concentrating on getting new customers
 If company wants to sell the same product to new customers:
 target “prospects” based on the profile and behavior model of existing customers
 If company wants to offer different products to new customers:
 develop new markets
o Mixed strategy between retention-acquisition: targeting existing and new customers at the same time
 b. Where should you target?
o Marketing penetration or marketing extension
 Targeting the existing market
o Market diversification or new product development
 Targeting new markets
o Strategies: Multi-channel or single-channel strategy
c. How do you get to them?
o Choose the most effective media to efficiently reach its target segment
d. When is the best time?
o Pick the best month or season that are better to promote products and services than others
 Computer Games : November and December (Holiday season)
 Retail bank personal loans: January (Post-Holiday Season)

Effectiveness Profits:
Allocate resources between existing and new customers
Retention Strategy Acquisition Strategy:
Retention Strategy Acquisition Strategy:
Keep existing customers Attract new customers
 Market decisions:  Market decisions:
 Segment your customers by lifetime value  Target the customers based on the model of
 Retain your best customers existing customer
 Develop one-to-one marketing  Develop new markets
 Product/Service decisions  Product decisions:
 Develop relationship marketing  Highlight your price/ product offer
 Retain your clients with superior quality service  Have a clear positioning on the market
 Develop tailor-made products  Develop attractive branding
 Cross-sell and up-sell  Give incentives to add initial value to the new
 Cross-merchandise customer

2. Identifying Customer Segments

 Customer segments: Homogenous groups of individuals that have similar tastes, want and needs with respect to
the company’s products or services
 Identification by:
 Purchase behavior
a. Recorded in the CRM database
b. Allows the marketer to segment by product need and by LTV
 Profile data:
a. Relate the individual customer to his or her response to past campaigns
b. Allows implementation of a ROI-driven marketing
c. Identifies tastes, needs and preferences of customer
d. Can be used to target new customers accurately

3. Developing the Communication Strategy

 Marketing Communications (marcom): Targeted interactions Generic
between company and its customers and prospects, using one or Push Promotional Pull Promotional
Strategy Strategy
more media
Informational Pre-emptive
 Can use a single approach (e.g. a direct mail) or combine several
approaches (e.g. direct mail with advertising in television, radio and
Communication
newspapers) Affective/ Strategy Unique Selling
 Integrated marketing communications (IMC): management and Emotional Proposition (USP)

organization of all marketing communication tools (media, messages,

promotions and channels) to deliver consistent marketing messages
Resonance Brand Image
Positioning
  CRM database system: stores information about customer and prospect preferences, allows firm to focus
marketing activities toward specific targets - effective use of IMC

4. Developing the Offer

5. Campaign Budget

6. Testing

Analysis and Control:

 Evaluates campaign results in light of original objectives and determines campaign level of success or
failure
 Measuring campaign results
 Comparing the CPM, CPS, ROI, and the CR with the budgeted KIP
 Back-end performance analysis
 Direct mailing: statement of profit or loss for the campaign promotion
 For a loyalty program: allowable marketing cost and break-even
 Contribution: Campaign costs deducted from the gross margin and resulting value
divided by the number of new customers
 New customer lifetime value and attrition rate
 Return on Promotion (ROP)
ROP = [(Contribution – Cost per order) / Cost per order] x 100