We all believe that building a relationship with customers should result in increased retention, repurchases, average order size, sales and profits. But how can you demonstrate that?
How can you prove the costs of the relationship program don’t wipe out the profits? To conduct database marketing properly, you need to set up test and control groups so you are absolutely sure of what you’re doing. Then you have to sell the results to senior management.
This is the story of a very creative, successful business-to-business database marketing program that serves as an example of the profits that can come of building customer relationships.
A few years ago, Mark Peck, executive vice president and chief operating officer of Hunter Business Direct in Milwaukee, was approached by a large manufacturer of building products that sells primarily to building contractors. The company produces a big catalog each year that it sends to 45,000 contractors. Business was good, but management knew it could be better. They wanted to experiment with database marketing, so they went to Hunter.
Peck formed a marketing strategy team composed of his staff and members of the manufacturer’s marketing group. They ranked all the previous year’s customers into deciles by total sales. They chose to zero in on the top three deciles, a group of about 1,000 business customers. Customers in the top percentile placed about 18 orders during the year, amounting to about $20,000 each. Those in the third decile placed about six orders, averaging about $5,500.
The team decided on a pilot program to determine what could be done to stimulate increased sales from these top three deciles. The team divided the customers into a test group of 500 and a control group of 500. The goal was to increase repurchase, purchase frequency, average order size and annual account revenue by building close relationships with the test group, while giving the control group no special attention. The control group was treated exactly the same as customers had been treated by the company for the past three years.
Statistics on previous purchase behavior enabled Hunter to predict with some accuracy what the groups would do during the test year. The team studied and predicted trends of retention, repurchase, product penetration, average order size and number of product lines per customer. As the test worked out, the control group behaved exactly as expected.
The team selected two people to call the decision-makers in the 500 companies selected as a test group. One person was from customer service, and the other was a building products application engineer. Their job was to build close relationships with the personnel in the 500 test firms using telephone, mail, fax and email. They called each of the companies to learn who the decision-makers were. Then, on a periodic basis during the next six months, they called these decision-makers to provide engineering support and discuss the customers’ needs for and use of the company’s building products. They did not offer any discounts or special benefits, only friendship, information and customer support. Their calls involved:
* Following up on bids and quotes.
* Providing product training.
* Calling attention to existing pricing specials.
* Discussing customers’ needs.
* Giving product comparison information.
* Explaining new products.
* Offering sample programs. The results were amazing.
In the first place, the relationship building had a small but measurable impact on repurchase. Of the 500 companies in the control group, 365 made purchases during the following six months. Of those in the test group, 380 – or 15 more companies – made purchases during the same period.
With an average revenue of $9,000 by these 1,000 firms over a six-month period, customer retention was highly important. The spending by these 15 additional firms alone during the six months amounted to $135,000. That was a worthwhile return for the $50,000 spent on the two-person relationship-building staff in the same period.
But the benefits were not limited solely to retention. The number of orders increased as well.
The control group placed fewer orders (82%) than they had in the previous six-month period. The test group placed more orders (112%) than they had before.
This amounted to a 30% increase in orders as a result of the six-month test.
The number of orders doesn’t tell the whole story. The average orders the test group placed were larger in size than the control group – and larger than the orders they themselves had placed during the previous six-month period. Those in the control group spent 14% less on the average order, while those in the test group spent 14% more than they had on the average order in the previous six months. The overall difference was an increase of 28% in the size of the average order.
The combination of increased orders and average order size in the two-person test resulted in a whopping 81% gain in total revenue.
What this showed was that by spending $50,000 over six months to build relationships with 500 customers, revenue could be increased by nearly $2.6 million.
No one can look at these numbers without seeing the power of successful database marketing. The vice president of marketing was thrilled with the results, and prepared for a major rollout in the following year.
But in the business world things don’t always work out “happily ever after.” Soon after the test was completed, the manufacturer was purchased by another company.
In the reshuffling, the relationship-building program lost its champion and its funding. While the program could be started again in the future, it will require the reeducation of new management and marketing staffs.
The setback, however, doesn’t invalidate the tremendous success of this powerful pilot study. Relationship marketing works, particularly in a business-to-business setting.
Even so, it is an uphill battle to get the ideas of relationship marketing adopted throughout the DM industry.