When Not to Model (1,934 words)
Finally the gallery looked at total spending by RFM cell. We looked at the break-even index: which cells were profitable, and which were not. The contrast was striking: Of the 75 cells into which customers were divided, 37 lost money and 38 made money. Armed with this knowledge, it didn't mail the entire customer base for the rollout, as it had done previously. Instead, it mailed only those customers in the 38 profitable cells. And to be sure that it wasn't making a mistake, the gallery mailed 10 percent of the customers in the unprofitable cells. The selective rollout resulted in mailing to only 148,455 customers instead of 267,028. This was a savings in postage of about $100,000—a very significant savings, since customers in these dropped cells would have made very few purchases. The result of this selective rollout was a profit gain of $93,487.
Note that this gain in profit does not result from the running of a model. There is no cost for appended data. There is no modeling fee. The cost of this exercise was essentially nothing, since it already had the data and the RFM software. If a model had been used, the profit would have been reduced by the cost of the model.
External appended data and modeling is profitable in some instances for prospecting. For customer communications, it is better to use customer product-specific data combined with affinity analysis and transaction-based data with RFM analysis.
Arthur Hughes is executive vice president of ACS Inc. of Reston, VA, a database marketing company. You may reach Hughes at DBmarkets@aol.com or (703) 742-9798. The RFM software mentioned in the article is available from Jon Lowder at (703) 730-5656.