Case Studies

Mining Databases for "Gold"

Labe, R. P., Jr. (1994). Database marketing increases prospecting effectiveness at Merrill Lynch. Interfaces, 24(5), 1-12.

Merrill Lynch. Companies that market their goods or services directly to the public often engage in prospecting. Just as prospectors from the Nineteenth Century mined for gold, these companies "mine" databases containing information on prospective customers for "gold" in the form of new customers.

Merrill Lynch applied various multivariate statistical and analytic techniques, including regression analysis, to develop a database marketing program. A summary of the particular approach used follows:

  1. Define and identify the target population.
  2. Prepare two random samples: one of known members of the target population and the other of members of the potential prospect universe.
  3. Append appropriate demographic and behavioral data to both samples.
  4. Conduct a statistical analysis of the data to develop an analytical model that evaluates and prioritizes the prospect universe in terms of its similarity to the target population.
  5. Conduct a field test to measure actual performance.
Previous statistical studies at Merrill Lynch had yielded 85-90% accuracy in determining the characteristics of priority customers. These results suggested the potential of the database marketing approach to mining the prospect universe for potential customers. Merrill Lynch conducted a field test with limited usage of a newly selected prospect universe in order to minimize field impact until the benefits of the new database marketing approach could be demonstrated.

A model was developed that generated "scores" for each potential client. The scores were then used to prioritize the list of prospects. A cut-off score for qualifying prospects was established based on the probability that the potential customer would be a priority client.

Merrill Lynch estimates that the impact of the new approach will be between $3.5 and $6 billion in additional client assets. The estimates for production credits ranged between $200,000 and $400,000. Production credits are used throughout the brokerage industry to measure commission-related revenue. The success of the database marketing approach at the general business level has led to interest at Merrill Lynch in developing customized models to identify the best prospects for specific investment products. Research efforts are currently underway to develop specialized prospecting models for selected Merrill Lynch products.

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