When Not to Model (1,934 words)
Gallery staff studied the RFM graphics that the RFM software created from the test results. In previous years, it had always mailed the entire customer base for promotions. Using the RFM test results, this year, the gallery decided to do a selective rollout to determine whether it could increase its profits. The RFM graphics showed that by using this test as a guide for a selective rollout to its customer base, it could increase total profits by a whopping $93,487.
Let's look in some detail at how the gallery went about creating this additional profit.
Recency was a very important factor in customer response rates. It had five recency divisions, from most recent to most ancient. Each division was of equal size: 11,248 customers. (See Chart A for how the divisions responded to the test promotion.)
How profitable were the lower recency divisions? When looked at in terms of break-even, the lower divisions should not have been mailed at all (see Chart B).
Frequency of purchase was even more dramatic in its effect on the success of the promotion. All the frequency divisions were profitable, but in terms of break-even, only the first quintile (most frequent buyers) made a significant contribution to profit (see Chart C).
Perhaps the most interesting view of customer behavior came when these same buyers were compared in terms of their prior spending behavior. The biggest spenders definitely responded better and brought in more profit—from three standpoints. First, look at total sales (see Chart D). The gallery had only three monetary divisions. (In our discussions of monetary value, we have converted Dutch Guilders to U.S. dollars at a rate of 1 Guilder equals 48 cents and calibrated the chart in Guilders.) Why did monetary amount prove to be so decisive in terms of predicting sales? There are two reasons: High dollar spenders tended to respond better, and high dollar spenders had a higher average order size (see Charts E & F).