Chapter 17: Direct and Online Marketing: The New Marketing Model

The Growth of Direct Marketing

While direct marketing through traditional channels is growing rapidly, online marketing is growing explosively. The number of U.S. households with access to the Internet has grown from only about 6 million in 1994 to more than 40 million today, to a projected 60 million by 2003. Sales via the Internet are expected to grow at an incredible 60 percent per year over the next five years.⁷ We will examine online and Internet marketing more closely later in this chapter.

In the consumer market, the extraordinary growth of direct marketing is a response to rapid advances in technology and to the new marketing realities discussed in previous chapters. Market "demassification" has resulted in an ever-increasing number of market niches with distinct preferences. Direct marketing allows sellers to focus efficiently on these minimarkets with offers that better match specific consumer needs.

Other trends have also fueled the rapid growth of direct marketing in the consumer market. Higher costs of driving, traffic congestion, parking headaches, lack of time, a shortage of retail sales help, and lines at checkout counters all encourage at-home shopping. Consumers are responding favorably to direct marketers' toll-free phone numbers, their willingness to accept telephone orders 24 hours a day, 7 days a week, and their growing commitment to customer service. The growth of 24-hour and 48-hour delivery via Federal Express, Airborne, UPS, DHL, and other express carriers has made direct shopping fast as well as easy. Finally, the growth of affordable computer power and customer databases has enabled direct marketers to single out the best prospects for any product they wish to sell.

	Table 17.1	Mass Marketing versus One-to-One Marketing
Mass Marketing One-to-One Marketing Average customer Individual customer Customer anonymity Customer profile Standard product Customized market offering Mass production Customized production Mass distribution Individualized distribution Mass advertising Individualized message Mass promotion Individualized incentives One-way message Two-way messages Economies of scale Economies of scope Share of market Share of customer All customers Profitable customers Customer attraction Customer retention
Source: Adapted from Don Peppers and Martha Rogers, The One-to-One Future (New York: Doubleday/Currency, 1993).

Many companies confuse a customer mailing list with a customer database. A customer mailing list is simply a set of names, addresses, and telephone numbers. A customer database contains much more information. In business-to-business marketing, the salesperson's customer profile might contain the products and services the customer has bought; past volumes and prices; key contacts (and their ages, birthdays, hobbies, and favorite foods); competitive suppliers; status of current contracts; estimated customer spending for the next few years; and assessments of competitive strengths and weaknesses in selling and servicing the account. In consumer marketing, the customer database might contain a customer's demographics (age, income, family members, birthdays), psychographics (activities, interests, and opinions), buying behavior (past purchases, buying preferences), and other relevant information. For example, the catalog company Fingerhut maintains a database containing some 1,300 pieces of information about each of 30 million households. Ritz-Carlton's database holds more than 500,000 individual customer preferences. And Pizza Hut's database lets it track the purchases of more than 50 million customers.⁹

Database marketing is most frequently used by business-to-business marketers and service retailers (hotels, banks, and airlines). Increasingly, however, other kinds of companies are also employing database marketing. Armed with the information in their databases, these companies can identify small groups of customers to receive fine-tuned marketing offers and communications. Kraft Foods has amassed a list of more than 30 million users of its products who have responded to coupons or other Kraft promotions. Based on their interests, the company sends these customers tips on issues such as nutrition and exercise, as well as recipes and coupons for specific Kraft brands. Blockbuster, the massive entertainment company, uses its database of 36 million households and 2 million daily transactions to help its video-rental customers select movies and to steer them to other Blockbuster subsidiaries. American Express uses its database to tailor offers to cardholders. In Belgium, it is testing a system that links cardholder spending patterns with postal-zone data. If a new restaurant opens, for example, the company might offer a special discount to cardholders who live within walking distance and who eat out a lot. And FedEx uses its sophisticated database to create 100 highly targeted, customized direct-mail and telemarketing campaigns each year to its nearly 5 million customers shipping to 212 countries. By analyzing customers carefully and reaching the right customers at the right time with the right promotions, FedEx achieves response rates of 20 to 25 percent and earns an 8-to-1 return on its direct-marketing dollars.¹⁰

Smaller companies can also make good use of database marketing. Here are two examples:¹¹

• 
  Over the last few years, nearly 9,000 grocery chains have introduced frequent-shopper programs. Now they're rifling through household shopping histories as fast as they can to tell cardholders what's running low in the pantry. Dick's Supermarkets, an eight-store chain in Wisconsin, uses transaction data from its loyalty-card program to personalize shopping lists that it mails every two weeks to nearly 30,000 members. The shopping lists . . . contain timed offers based on past purchases. A consumer who bought Tide several weeks ago, for example, may be offered a $1.50 coupon to restock. If that customer buys laundry detergent every week, he or she may be offered twice as much to purchase a larger size of Tide, or two packages of the size normally purchased.
  
• 
  Some grocers are going a step further, tweaking promotions based on past responses as well as purchase data. Nature's NorthWest health food chain [uses its database] to distribute custom-printed newsletters at its checkouts. When the cashier scans a frequent shopper card, the card's transaction history triggers a newsletter reflecting that consumer's purchase history and areas of interest (individuals can check off interests on their application for the card). Bought herbal supplements and organic meat on your last visit? Interested in exercise? Your newsletter might have a schedule of local exercise classes, a recipe for meat, and a coupon for more herbs. The newsletter prints at the checkout counter in seven seconds, faster than a cashier can make change and bag the groceries. Nature's NorthWest tracks which bar coded coupons are redeemed from the newsletter, and then adjusts the newsletter each time to better suit that shopper.
  

1. 
   Identifying prospects: Many companies generate sales leads by advertising their products or offers. Ads generally have some sort of response feature, such as a business reply card or toll-free phone number. The database is built from these responses. The company sorts through the database to identify the best prospects, then reaches them by mail, phone, or personal calls in an attempt to convert them into customers.
   
2. 
   Deciding which customers should receive a particular offer: Companies identify the profile of an ideal customer for an offer. Then they search their databases for individuals most closely resembling the ideal type. By tracking individual responses, the company can improve its targeting precision over time. Following a sale, it can set up an automatic sequence of activities: One week later, send a thank-you note; five weeks later, send a new offer; ten weeks later (if the customer has not responded), phone the customer and offer a special discount.
   
3. 
   Deepening customer loyalty: Companies can build customers' interest and enthusiasm by remembering their preferences and by sending appropriate information, gifts, or other materials. For example, Mars, a market leader in pet food as well as candy, maintains an exhaustive pet database. In Germany, the company has compiled the names of virtually every German family that owns a cat. It has obtained these names by contacting veterinarians, via its Katzen-Online.de Web site, and by offering the public a free booklet titled "How to Take Care of Your Cat." People who request the booklet fill out a questionnaire, providing their cat's name, age, birthday, and other information. Mars then sends a birthday card to each cat in Germany each year, along with a new cat food sample and money-saving coupons for Mars brands. The result is a lasting relationship with the cat's owner.
   
4. 
   Reactivating customer purchases: The database can help a company make attractive offers of product replacements, upgrades, or complementary products just when customers might be ready to act. For example, a General Electric customer database contains each customer's demographic and psychographic characteristics along with an appliance purchasing history. Using this database, GE marketers assess how long specific customers have owned their current appliances and which past customers might be ready to purchase again. They can determine which customers need a new GE videorecorder, compact disc player, stereo receiver, or something else to go with other recently purchased electronics products. Or they can identify the best past GE purchasers and send them gift certificates or other promotions to apply against their next GE purchases. A rich customer database allows GE to build profitable new business by locating good prospects, anticipating customer needs, cross-selling products and services, and rewarding loyal customers.
   

	Figure 17.1	Forms of direct marketing