| Experts Corner |  "How Can Email Marketing Help Me Keep Customers and Build Customer Relationships?"
Dan Forootan, StreamSend
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Personalized checks
Arthur Middleton Hughes, VP/ Solutions Architect, KnowledgeBase Marketing, Inc.
 I received a phone call from a company that mails offers for personalized checks and other supplies. They are getting about a six and a half percent response (sales) rate. The question, is this an adequate response?
To understand the question, we have to recognize that in the direct mail business, a response (sales) rate of 2% is usually considered a success. Their rate is more than three times the normal rate. But there are other factors at play here. The company looked at their normal sales rate to former purchasers of their products. Since personalized checks are a consumable commodity, people run out and have to buy more. There are scores of companies offering such products. Their annual response rate from former purchasers is about 3%. We can take that as the control.
Using 3% annual sales to former purchasers as a control, six and a half percent is a little more than double the response rate from former purchasers. It seems as if they are doing well. But there is more to it than that.
In a highly competitive market, loyalty is an important issue. The best way to keep customer loyalty (measured by the repurchase rate) is to sell a second or a replacement product. Banks have known this for a long time. Banks create graphs like this one:
Banks find that if you can sell a second product (a home equity loan, a savings account, a credit card, etc.) you will not only make a profit on the product, you will also increase the overall retention rate of the bank customer. If you will look at the left hand axis, you will see that the retention rates are very high. This is normal in the banking world. It is a nuisance to change banks. This is not so in a business like personalized check printing. Here there is much less loyalty, and much more competition. It is effortless to shift to another supplier. A similar graph for a check printing company would look something like this:
What this shows is that if the check printing company does nothing, they can expect that 20% of their customers will return to purchase checks from them. If they can manage to sell a second product (more checks, rubber stamps, envelopes, etc.), their retention rate will go up to some higher number, such as 30%. Checks last a long time. Let’s assume that the average person runs out of checks in three years. When they run out, they may buy from the same company, or from a competitor. Assuming that 60% buy from the same company, then the annual repurchase rate from previous customers is about 20% as shown on this chart. The mailing to existing customers, which results in the purchase of a second product puts the customer into the two-product category with a higher retention rate. Therefore, the result of the mailing provides two benefits to the check company: profit from the sales and increased retention rate.
Let’s look at the effect on lifetime value. Here is a basic LTV table before the cross sales:
We are starting with 800,000 newly acquired customers whose initial retention rate is 20%. This rate increases with those loyalists who are still there in the second and third years. We are figuring the costs of the checks and the commissions paid to the banks. The LTV of the newly acquired 800,000 customers is $32.05 in the third year.
Now let’s see the effect of the cross sales of new products:
We are mailing three times to the acquired customers for two years at a cost of $1.20 per customer per year. We can add those who respond to the number of customers, since their purchase of a second product puts them in the newly acquired category. Adding these additional sales has then two effects: profit from the sales, and increased retention from the responders (shown by adding them to the yearly totals). LTV in the third year has grown to $34.97.
When we look at the overall effect of the cross sales, we get this picture:
This tells us that the net effect of the cross sales, after deducting the cost of the mailing program, is $2.3 million dollars. This is getting close to the true value of the cross sales program. Cross selling for this type of product is a winner.
| Arthur Middleton Hughes is Vice President / Solutions Architect at KnowledgeBase Marketing, Inc. He is the author of The Customer Loyalty Solution (McGraw Hill 2003). You can reach Arthur at 954 767 4558 or arthur.hughes@kbm1.com
Company: KnowledgeBase Marketing, Inc.
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