Understanding Customer

Database & its Applications

Module II
Marketing Database
A marketing database is a list of customers’ and prospects’ records that
enables strategic analysis, and individual selections for communication
and customer service support. The data is organised around the
customer.
 Minimum Requirements of a Marketing
Database
IDM (2002) lists four types of data that a marketer is likely to want to store in their
database:
1. Primary Data - Names and addresses of customers, details of products and/ or
services your organisation offers, pricing details, campaign details and definitions
of various channels of distribution.
2. Secondary Data - Data used to qualify primary data, such as demographics,
lifestyle information, geographical profiles or levels of penetration into markets.
3. Performance Data - Record of how your customers have responded, what they
bought, how much they spent and to which campaigns they responded.
4. External Data - Covering everything rented or bought in lists to data from
various agencies that can enhance your base data.
Principles of Data Collection
1. Data should be split into ‘essential now’ and ‘possible future use’.
2. Data should allow ease of sourcing and updating.
3. The cost of raw data, for example external bought-in data, must be
offset against benefits
• The golden rule for data collection can be summed up as ‘only hold
data that is required for your strategy. If you don’t use it, don’t collect
it and if you collect it, use it.’
Data sources
• Internal and External to the company’s records.
• External data could include commercially available lists, census data,
and so on.
Direct Contact Companies
Direct contact businesses include examples such as retailers and sports
clubs – sectors where the consumer and the business have a direct
interface and a data- gathering opportunity exists.
• Direct contact companies
• Records held by anyone within the company who deals with customers
• Retail outlets, agents, dealers
• Guarantee forms
• Invoices
• Enquirers, past, present and future
• People who visit your stand when you are at any exhibitions or shows
• Competition entrants
• Responders to sales promotions
Companies with no Direct Contact
• List purchase – www.marketingfile.com / www.listbroker.com
• Data building schemes
• Introduce new contact channels
• Product registration documents
• Product warranties
• Credit card details
• Subscription details
• Questionnaire responses
• In-store offer details
• Requests for product information
• Events/ promotions requiring response
• Established direct channels
Database Management Issues
Main stages to Database Management:
1 Manage the data sources
2 Manage the data entry
3 Manage the database – in-house or in a bureau
4 Manage the applications
Managing the Data
Manage the Data Entry
The main steps in managing the data entry are:
1 Verification - Verifying that the data has been put in accurately should
be standard procedure.
2 Validation - Validation is checking the accuracy of personal and
product data provided by the customer.
3 De-duplication - The act of ensuring that the database does not
contain duplicate records of the same customer.
4 Merge purge - While merging two files, ensuring that same customer
is not listed twice in the final file.
Manage the Database
In‑house - Managing data by using employees of organization.
Bureau - making use of an expert outside supplier for managing
database.
Manage the Applications
Selection
Outputs
Uses of the Database Application
1. Use purchase behaviour to segment by customer value (also, use
current purchase behaviour to forecast lifetime values).
2. Use purchase behaviour to segment by product need, and to assess
product/market strategy.
3. Use profile data to relate to campaign response (ROI driven
marketing).
4. Use profile data to target new customers accurately.
Analytical Techniques
1. Time Series Methods
Lifetime value analysis and allowable marketing spend per customer
Calculation of expected return on investment

2. Explanatory Methods
Lifetime Value Calculation
Acquisition marketing budget =
Allowable recruitment spend per customer * target number of customers
= £20 * 1000 = £20,000

• An amount of £20,000 would allow us to send about 40,000 mailers

We need 1,000 customers, which is a response rate of 2.5 per cent
from the mailer.
• Retention marketing budget for years 2 to 5 and £3 p.a for four years,
making a total of £32.
Frequency, Recency, Amount and Category (FRAC)
scoring on the database Explanation of FRAC
• Frequency refers to the time elapsed between purchases.
• Recency is the date of the most recent purchase.
• Amount is the average value of that customer’s purchases.
• Category refers to that segment which the product bought comes
under.
• No. of points = No. of purchases * 4
Recency points:
• 24 points purchase in current quarter
• 12 points purchase in last 6 months
• 06 points purchase in last 9 months
• 03 points purchase in last 12 months
No. of points = 10 per cent of purchase value, with a ceiling of 9 points.
Explanatory analytical techniques
Wine Direct customer data
Calculation of expected return on investment
Returns on investment per customer, over the expected lifetime.
lifetime value income per customer - marketing spend per customer
Expected return on investment per customer
£58.70 - £32.00 = £26.70
Expected ROI per annum = £26.70 / 5 = £5.34
Segmentation applications for database
marketers
• Using purchase data to segment by value - Pareto’s Principle applied
to business
‘Twenty per cent of your customers will provide you with 80 per cent of your profits.’
• In general marketing, this attempt to split off the firm’s most valuable
customers and treat them differently is not done with the same
precision or conviction as it is by direct marketers. In contrast, direct
marketing spend is often deliberately spread unevenly amongst
customers, such that returns are maximized.
Segmentation applications for database
marketers …
• Using purchase data to set budgets - Companies can analyze their
customers’ purchase data in order to calculate how much each
customer is likely to be ultimately worth to the company. This forecast
is known as the ‘customer’s lifetime value’.
• Segmenting according to customer need - the database can help the
marketer to understand the different benefits that the same product
may give customers.
• Maximizing response on a per campaign basis – ROI
Segmenting according to lifestyle needs:
Harley Davidson
• Swinyard (1996) conducted an elegant analysis of Harley Davidson motorbike
owners. He analyzed their responses to a series of lifestyle opinion statements,
and then used cluster analysis to split up and group the riders into six
segments, according to how Harley Davidson meets their needs. The following
lifestyle segments provide a firm basis on which to split the existing customer
database and direct the marketing of Harley accessories accordingly:
1 Tour Gliders. Use their motorcycles for long trips. Agree with statements like:
‘My bike is made for comfort rather than speed.’
2 Dream Riders. Now they have their Harley, but are trying to figure out what to
do with it. Agree with statements like: ‘Most of the time my motorbike is just
parked.’ ‘I mainly use my bike for short trips around town.’
3 Hard Core. Gang bikers who like that sort of society. Agree with statements like:
‘Some people would call me and my friends outlaws.’ ‘I think it’s true that real
men wear black.’
4 Hog Heaven. In love with the Harley mystique. Agree with statements like:
‘When I ride, I feel like an old wild west cowboy.’
5 Zen Riders. Find spiritual solace in riding bikes. Agree with statements like: ‘I like
the attention I get when I am on my bike.’ ‘Most of the time my bike is just parked.’
6 Live to Ride. Passionate about motor biking and do so rain or shine. Agree with
statements like: ‘I love to ride long distances; to me 500 miles is a short trip.’
‘Motorcycles are a total lifestyle to me.’
Swinyard then calculated purchase predictions of new Harleys and accessories for
each segment. For example, using historical purchase data, he calculated that
Dream Riders and Zen Riders spent much more on accessories than did Hog
Heavens. He concluded that Harley Davidson riders were a much more complex
set of people than the old stereotype of ‘hard core outlaw gang riders’ would
seem to imply!
Analytical techniques - Applications and
techniques in direct marketing analysis
Regression analysis
Regression analysis takes two variables – one dependent and the other
independent – and uses statistical formulae to describe how strongly the two
are linked.
CHAID analysis
CHAID stands for Chi-squared Automatic Interaction Detector.
Steps in CHAID analysis
Step 1
Compare the records of ‘responders’ with those of non-responders’.
Step 2
Computer model asks, ‘Which variable best explains the difference between responders and non-
responders?’ This is done in a systematic rather than an intuitive way.
Step 3
Split the responders’ file into two cells according to the biggest difference in response between the cells.
Step 4
The model then looks at each of the segments separately to see if they can be broken down any further.
Different variables may now be appropriate to segment the cells further.
Step 5
Continue process until cell sizes are too small for it to be of value to split them further.
Step 6
Output as a tree segmentation
Using External Databases in Direct
Marketing
• Geodemographic Products
• Lifestyle Databases
• The Electoral Register
External Databases Uses
• Profiling using External Databases
Using a Matching Process to Profile Customers
 Conventional research v/s research based on
lifestyle surveys
Conventional Research Research based on lifestyle Surveys
High Cost Low Cost
Use restricted to research applicants Respondents can be mailed
Inflexible Ease of follow‑up
 Advantages of Market Research

Market research does have its advantages over the lifestyle database
route:
- Accuracy of data
-Representativeness
 Using external data as a basis for
segmentation
• External databases can potentially add a lot of value to analysis of
customers product needs.
• It is usually the case that a company’s internal data is more valuable
than external data in determining customer behaviour.
Geodemographic Databases
• Geodemographic profiling suggests there are a number of factors that
will be common to neighbourhoods.
• One would expect that our income, the size of our families, our stage
of life and so on, could be predicted by where we live. But the
profilers have found that it is also our interests, lifestyle and
psychographic variables, such as our social image – how we want
others to see us – that are predicted by where we live.
• These findings are useful to direct marketers: geodemographic,
attitudinal and lifestyle traits often ‘explain’ what we buy.
Geodemographic Databases
• Geodemographic products provide a ‘statistical probability’ that
people living in a described area are more likely than average to fit
that description.
• In other words, in the absence of perfect information, you are better
off using these products to target prospects than relying on random
chance. Geodemographic operators will give you scores that reflect
the extent to which the chosen postcodes fit the descriptions.
Lifestyle Databases
• Lifestyle databases were introduced into the UK in 1983.
• lifestyle databases were originally developed by consumer goods
manufacturers who were finding conventional advertising and market
research methods either inadequate or poor value for money.
How the lifestyle products are created
Four broad categories of data are collected by lifestyle companies
(Reynolds, 1993):
1. Name and address information
2. Data relating to the purchase of products and services, known as
‘lead-to-purchase’ data
3. Demographic and socio-economic information
4. Values and lifestyle (VALS) information
VALS
• VALS looked for a link between product/service consumption and the
attitudes held towards benefits sought from the service; activities,
interests and opinions; and value systems subscribed to by
consumers.
Building up Virtual Consumers