Licensed to Markus Christen, INSEAD ([email protected]). Do not copy or distribute.

CASE STUDY

Bookbinders Book Club

GARY L. LILIEN AND ARVIND RANGASWAMY

Copyright © 2016 by DecisionPro Inc.

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 Licensed to Markus Christen, INSEAD ([email protected]). Do not copy or distribute.

Introduction
About 50,000 new titles, including new editions, are published in the United States each year, giving rise to a $20+
billion book publishing industry. About 10 percent of the books are sold through mail order.

Book retailing in the 1970s was characterized by the growth of chain bookstore operations in concert with the
development of shopping malls. Traffic in bookstores in the 1980s was enhanced by the spread of discounting. In
the 1990s, the superstore concept of book retailing was responsible for the double-digit growth of the book
industry. Generally situated near large shopping centers, superstores maintain large inventories of anywhere from
30,000 to 80,000 titles. Superstores are putting intense competitive pressure on book clubs, mail-order firms and
retail outlets. Recently, online superstores, such as www.amazon.com, have emerged, carrying 1–2.5 million titles and
further intensifying the pressure on book clubs and mail-order firms. In response to these pressures, book clubs are
starting to look at alternative business models that will make them more responsive to their customers’ preferences.

Historically, book clubs offered their readers continuity and negative option programs that were based on an
extended contractual relationship between the club and its subscribers. In a continuity program, popular in such
genres as children’s books, a reader signs up for an offer of several books for a few dollars each (plus shipping and
handling on each book) and agrees to receive a shipment of one or two books each month thereafter. In a negative
option program, subscribers get to choose which and how many additional books they will receive, but the default
option is that the club’s selection will be delivered to them each month. The club informs them of the monthly
selection and they must mark “no” on their order forms if they do not want to receive it. Some firms are now
beginning to offer books on a positive-option basis, but only to selected segments of their customer lists that they
deem receptive to specific offers.

Book clubs are also beginning to use database marketing techniques to work smarter rather than expand the
coverage of their mailings. According to Doubleday president Marcus Willhelm, “The database is the key to what we
are doing…. We have to understand what our customers want and be more flexible. I doubt book clubs can survive
if they offer the same 16 offers, the same fulfillment to everybody.”2 Doubleday uses modeling techniques to look at
more than 80 variables, including geography and the types of books customers purchase, and selects three to five
variables that are the most influential predictors.

The Bookbinders Book Club

The BBB Club was established in 1986 for the purpose of selling specialty books through direct marketing. BBBC is
strictly a distributor and does not publish any of the books it sells. In anticipation of using database marketing, BBBC
made a strategic decision right from the start to build and maintain a detailed database about its members
containing all the relevant information about them. Readers fill out an insert and return it to BBBC which then enters
the data into the database. The company currently has a database of 500,000 readers and sends out a mailing
about once a month.

BBBC is exploring whether to use predictive modeling approaches to improve the efficacy of its direct mail program.
For a recent mailing, the company selected 20,000 customers in Pennsylvania, New York and Ohio from its database
and included with their regular mailing a specially produced brochure for the book The Art History of Florence. This
resulted in a 9.03 percent response rate (1806 orders) for the purchase of the book. BBBC then developed a
database to calibrate a response model to identify the factors that influenced these purchases.

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 Licensed to Markus Christen, INSEAD ([email protected]). Do not copy or distribute.

For this case analysis, we will use a subset of the database available to BBBC. It consists of data for 400 customers
who purchased the book, and 1,200 customers who did not, thereby over-representing the response group. The
dependent variable for the analysis is Choice -- purchase or no purchase of The Art History of Florence. BBBC also
selected several independent variables that it thought might explain the observed choice behavior. Below is a
description of the variables used for the analysis:

Choice: Whether the customer purchased the The Art History of Florence. 1 corresponds to a purchase and
0 corresponds to a nonpurchase.

Gender: 0 = Female and 1 = Male.

Amount purchased: Total money spent on BBBC books.

Frequency: Total number of purchases in the chosen period (used as a proxy for frequency.)

Last purchase (recency of purchase): Months since last purchase.

First purchase: Months since first purchase.

P_Child: Number of children’s books purchased.

P_Youth: Number of youth books purchased.

P_Cook: Number of cookbooks purchased.

P_DIY: Number of do-it-yourself books purchased.

P_Art: Number of art books purchased.

To assess the performance of the model, the data set includes a second sheet with 2300 customers--a holdout
sample representative of the entire target market. The use of such a validation sample is an appropriate way to
compare alternative models.

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 Licensed to Markus Christen, INSEAD ([email protected]). Do not copy or distribute.

Case study questions

BBBC is evaluating three different modeling methods to isolate the factors that most influenced customers to order
The Art History of Florence: an RFM (Recency, Frequency and Monetary Value) model, an ordinary linear regression
model, and a binary logit model.


Question 1
Summarize the results of your analysis for all three models.
Develop your models using the case data files and then assess
them on the holdout data sample.

Question 2
Interpret the results of these models. In particular, highlight
which factors most influenced the customers’ decision to buy
or not to buy the book.

Question 3
Bookbinders is considering a similar mail campaign in the
Midwest where it has data for 50,000 customers. Such mailings
typically promote several books. The allocated cost of the
mailing is $0.65/addressee (including postage) for the art book,
and the book costs Bookbinders $15 to purchase and mail. The
company allocates overhead to each book at 45 percent of
cost. The selling price of the book is $31.95. Based on the
model, which customers should Bookbinders target? How
much more profit would you expect the company to generate
using these models as compared to sending the mail offer to
the entire list?

Question 4
Based on the insights you gained from this modeling exercise,
summarize the advantages and limitations of each of the
modeling approaches. Look at both similar and dissimilar
results.

Question 5
As part of your recommendations to the company, indicate
whether it should invest in developing expertise in any of these
methods to develop an in-house capability to evaluate its direct
mail campaigns.

Question 6
How would you simplify and automate your recommended
method(s) for future modeling efforts at the company.

1
The case and the database were developed by Professors Nissan Levin and Jacob Zahavi at Tel Aviv University. We have adapted
these materials for use with our software, with their permission.
2
DM News, May 23, 1994.

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