The cost of mailing the solicitations is about 100

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Unformatted text preview: allenge BB&CC faces is getting to those 10,000 people most efficiently. The cost of mailing the solicitations is about $1.00 per piece for a total cost of $1,000,000. Over the next couple of years, these customers will generate about $1,250,000 in profit for the bank (or about $125 each) for a net return from the mailing of $250,000. Data mining can improve this return. Although it won’t precisely identify the 10,0000 eventual credit card customers, it will help focus marketing efforts much more cost-effectively. First BB&CC did a test mailing of 50,000 and carefully analyzed the results, building a predictive model of who would respond (using a decision tree) and a credit scoring model (using a neural net). It then combined these two models to find the people who were both good credit risks and most likely to respond to the offer. The model was applied to the remaining 950,000 people in the mailing list from which 700,000 people were selected for the mailing. The result was that from the 750,000 pieces mailed overall (including the test mailing), 9,000 acceptable applications for credit cards were received. In other words, the response rate had risen from 1% to 1.2%, a 20% increase. While the targeted mailing only reaches 9,000 of the 10,000 prospects – no model is perfect – reaching the remaining 1,000 prospects is not profitable. Had they mailed the other 250,000 people on the mailing list, the cost of $250,000 would have resulted in another $125,000 of gross profit for a net loss of $125,000. The following table summarizes the results. Old Number of pieces mailed Cost of mailing Number of responses Gross profit per response Gross profit Net profit Cost of model Final profit New Difference 1,000,000 750,000 (250,000) $1,000,000 10,000 $125 $750,000 9,000 $125 ($250,000) (1,000) $0 $1,250,000 $250,000 0 $250.000 $1,125,000 $375,000 40,000 $335,000 ($125,000) $125,000 $40,000 $85,000 Notice that the net profit from the mailing increased $125,000. Even when you include the $40,000 cost of the data mining software, computer, and people resources used for this modeling effort the net profit increased $85,000. This translates to a return on investment for modeling of over 200% which far exceeded BB&CC’s ROI requirements for a project. Increasing the value of your existing customers: cross-selling via data mining Guns and Roses (G&R) is a company that specializes in selling antique mortars and cannons as outdoor flower pots. They also offer a line of indoor flower pots made from large caliber antique pistols and a collection of muskets that have been converted to unique holders of long stemmed flowers. Their catalog is sent to about 12 million homes. 3 When a customer calls in to place an order, G&R identifies the caller using caller ID when possible; otherwise they ask for a phone number or customer number from the catalog mailing label. Next, they look up the customer in the database and then proceed to take the order. G&R has an excellent chance of selling the caller something additional – cross-selling. But G&R had found that if the first suggestion fails and they...
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This note was uploaded on 11/25/2010 for the course CENG ceng taught by Professor Ceng during the Spring '10 term at Universidad Europea de Madrid.

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