The Beauty of 80%
by Arthur Middleton Hughes

 

80% is about the most important number in direct response. Using this number, you can increase your response and sales while lowering your cost per sale. Letís see how valuable 80% is to you.

Gold customers (the top 20% of your customers) bring in 80% of your revenue. These people are really your company. Lose them, and you lose it all. Spend a small amount of money on retaining them and you keep 80% of your total business. How does this work?

When you hear people complaining that CRM is too expensive, you will find that they are talking about 100%. Suppose you develop a retention program consisting of birthday cards, thank you letters, appreciation emails, and special customer services and benefits for certain customers. If you were to do these things for all of your customers, the costs would be quite high. The benefits to you might not pay for the cost of the extra services. But why not concentrate on the Gold customers Ė those who bring in 80% of the revenue, but represent only 20% of the customers? The cost of a program for Gold customers is only 1/5 of a similar program for all customers, but it safeguards 80% of your revenue.

Eighty Percent Correct

Your database is a mess. Many of the names and addresses are wrong. Many lack phone numbers or emails. Cleaning it up will be costly. But, wait a minute. Why clean it all up? Why not clean up only the easiest 80%. Your programmers will tell you that those 80% can be cleaned up in an afternoon. Getting the remaining 20% correct will take several months. Go ahead and clean up the 80% right now. Get it done. Then clean up the remaining 20% at your leisure, in the most inexpensive way possible, or better yet, apply the 80% rule to them! What does that mean? Run through the remaining 20% of bad addresses to pick out the Gold Customers. Clean them up. As for the rest, forget them for now.

You want to send out emails to your customers. But some of them are on AOL and can only read text. Others can read html. Still others want their copy in Spanish. It is a big job, costing a lot of money and resources. How can you solve this problem?  Use the 80% rule. Pick the easiest 80% of your customers and get your message off to them right away. If you have a consumer database, AOL probably represents 80%. If it is a B to B database, the 80% can read html. Design your email for the 80% and get something done now. If the email is a success, then figure out how to reach the remaining 20%. If it is a failure, donít bother with the remainder. Either way, you have kept your costs down.

Building a Data Warehouse

Building a data warehouse has proved to be very expensive for many companies. All large companies that have built one have spent at least $20 million on the project. Why is it so expensive? Because a data warehouse is designed by a committee. It has to include all the data ever conceivably used by a organization: customers, prospects, leads, transactions, promotions, responses, products, prices, models, and employees. Since the accountants are involved, the warehouse has to balance to the penny. Since IT is involved, the warehouse is built by in-house programmers who have never built a warehouse before, and are very excited by the idea, but have no experience at all.

As most people who have studied data warehouses will tell you, they never pay for themselves in terms of increased profits. Why not? Because the benefits of using a warehouse are incremental: the warehouse will enable you to do better targeting of your communications. Instead of getting a 2% response rate, you will get a 2.1% response rate. The question is, will the profits from the 5% increase in the response rate pay for the cost of the warehouse? In most cases, they wonít, and you can prove it to yourself with a simple excel spreadsheet before you begin to build your warehouse.

Suppose your company is taking in $150 million per year in direct sales to customers. The benefits of a warehouse look like this:

  Number
Offers
Response
Rate
Responses Sales
Conversion
Sales Average
Sale
Sales
Currently 100,000,000 2.0% 2,000,000 30% 600,000 $260 $156,000,000
Warehouse 100,000,000 2.1% 2,100,000 30% 630,000 $260 $163,800,000
Increase     100,000   30,000   $7,800,00

Very nice. Your warehouse has brought in 30,000 more sales, totaling $7.8 million more per year. But lets look at the incremental profits. Suppose you are making a 30% profit rate on direct sales. Here is what would happen:

  Increased
Sales
Profit
Rate
Increased
Profits
Annual Warehouse Benefits $7,800,000 30% $2,340,000
Annual Warehouse Costs     $3,500,000
Loss from Warehouse     $1,160,000

Your warehouse will lose you about $1.1 million per year.  So what should you do? Use the 80% rule. Donít build a data warehouse to retail all the data you could possibly need. Build a simple data mart that meets 80% of your marketing needs.  Even the largest corporation in America can build such a data mart for less than $1.5 million total, with an annual cost of about $800,000. Look at the result of the 80% solution:

  80%
Increased
Sales
Profit
Rate
Increased
Profits
Data Mart Benefits $6,240,000 30% $1,872,000
Data Mart Costs     $800,000
Gain from Data Mart     $1,072,000

You have converted a $1 million loss into a $1 million profit increase by using an 80% solution.

Conclusion

Whenever you, or any of your colleagues at work comes up with a large direct response project, web site, or warehouse, ask this question: How much could we save by concentrating only on the easiest 80% and postponing the rest for later? You will be amazed at the profitability of the answers.

 


Arthur Middleton Hughes is Vice President of The Database Marketing Institute. Ltd. (Arthur.hughes@dbmarketing.com) which provides strategic advice on relationship marketing. Arthur is also Senior Strategist at e-Dialog.com (ahughes@e-Dialog.com) which provides precision e-mail marketing services for major corporations worldwide. Arthur is the author of Strategic Database Marketing 3rd ed. (McGraw Hill 2006). You may reach Arthur at (954) 767-4558 .


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