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

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

What's Ahead

What is Direct Marketing?


The New Direct-Marketing Model

Benefits and Growth of Direct Marketing


Benefits to Buyers


Benefits to Sellers


The Growth of Direct Marketing

Customer Databases and Direct Marketing

Forms of Direct Marketing


Face-to-Face Selling




Direct-Mail Marketing


Catalog Marketing


Direct-Response Television Marketing


Kiosk Marketing

Online Marketing and Electronic Commerce


Rapid Growth of Online Marketing


The Online Consumer


Conducting Online Marketing


The Promise and Challenges of Online Marketing

Integrated Direct Marketing

Public Policy and Ethical Issues in Direct Marketing


Irritation, Unfairness, Deception, and Fraud


Invasion of Privacy

Chapter Wrap-Up

What's Ahead

When 19-year-old Michael Dell began selling personal computers out of his college dorm room in 1984, few would have bet on his chances for success. In those days, most computer makers sold their PCs through an extensive network of all-powerful distributors and resellers. Even as the fledgling Dell Computer Corporation began to grow, competitors and industry insiders scoffed at the concept of mail-order computer marketing. PC buyers, they contended, needed the kind of advice and hand-holding that only full-service channels could provide.

Yet young Michael Dell has proved the skeptics wrong—way wrong. In little more than a decade and a half, he has turned his dorm-room mail-order business into a burgeoning, $22 billion computer empire. Dell Computer is now the world's largest direct marketer of computer systems, the number-two PC maker, and the world's fastest-growing computer manufacturer. Over the past three years, Dell's sales have increased at an average of 53 percent per year, twice as fast as any competitor and five times the industry average. Profits have skyrocketed 89 percent per year. Since 1990, Dell's stock has risen an incredible 29,600 percent! Direct buyers now account for nearly a third of all PC sales, and Dell's once-skeptical competitors are now scrambling to build their own direct-marketing systems.

What's the secret to Dell's stunning success? Anyone at Dell can tell you without hesitation: It's the company's radically different business model—the direct model. "We have a tremendously clear business model," says Michael Dell, the 34-year-old founder. "There's no confusion about what the value proposition is, what the company offers, and why it's great for customers. That's a very simple thing, but it has tremendous power and appeal." It also garners tremendous success for the company.

Dell's direct-marketing approach delivers greater customer value through an unbeatable combination of product customization, low prices, fast delivery, and award-winning customer service. A customer can talk by phone with a Dell representative on Monday morning; order a fully customized, state-of-the-art PC to suit his or her special needs; and have the machine delivered to his or her doorstep by Wednesday—all at a price that's 10 to 15 percent below competitors' prices for a comparably performing PC. Dell backs its products with high-quality service and support. As a result, Dell consistently ranks among the industry leaders in product reliability and service, and its customers are routinely among the industry's most satisfied.

Dell customers get exactly the machines they need. Michael Dell's initial idea was to serve individual buyers by letting them customize machines with the special features they wanted at low prices. However, this one-to-one approach also appeals strongly to corporate buyers, because Dell can so easily preconfigure each computer to precise requirements. Dell routinely preloads machines with a company's own software and even undertakes tedious tasks such as pasting inventory tags onto each machine so that computers can be delivered directly to a given employee's desk. As a result, nearly two-thirds of Dell's sales now come from large corporate, government, and educational buyers.

Direct selling results in more efficient selling and lower costs, which translate into lower prices for customers. Because Dell builds machines to order, it carries barely any inventory. Dealing one-to-one with customers helps the company react immediately to shifts in demand, so Dell doesn't get stuck with PCs no one wants. Finally, by selling directly, Dell has no dealers to pay. As a result, on average, Dell's costs are 12 percent lower than those of Compaq, its leading PC competitor.

Dell knows that time is money, and the company is obsessed with "speed." For example, Dell has long been a model of just-in-time manufacturing and efficient supply chain management. It has also mastered the intricacies of today's lightning-fast electronic commerce. The combination makes Dell a lean and very fast operator. According to one account, "Dell calls it 'velocity'—squeezing time out of every step in the process—from the moment an order is taken to collecting the cash. [By selling direct, manufacturing to order, and] tapping credit cards and electronic payment, Dell converts the average sale to cash in less than 24 hours. By contrast, Compaq Computer Corp., which sells primarily through dealers, takes 35 days, and even mail-order rival Gateway 2000 takes 16.4 days." Such blazing speed results in more satisfied customers and still lower costs. For example, customers are often delighted to find their new computers arriving within as few as 36 hours of placing an order. And because Dell doesn't order parts until an order is booked, it can take advantage of ever-falling component costs. On average, its parts are 60 days newer than those in competing machines, and, hence, 60 days farther down the price curve. This gives Dell a 6 percent profit advantage from parts costs alone.

Flush with success, Dell has taken its direct-marketing formula a step further. It's selling PCs on the Internet—lots of PCs. Now, by simply clicking the "Buy a Dell" icon at Dell's Web site, customers can design and price customized computer systems electronically. Then, with a click on the "purchase" button, they can submit an order, choosing from online payment options that include a credit card, company purchase order, or corporate lease. Dell dashes out a digital confirmation to customers within five minutes of receiving the order. After receiving confirmation, customers can check the status of the order online at any time.

The Internet is a perfect extension of Dell's direct-marketing model. Customers who are already comfortable buying direct from Dell now have an even more powerful way to do so. "The Internet," says Michael Dell, "is the ultimate direct model. . . . [Customers] like the immediacy, convenience, savings, and personal touches that the [Internet] experience provides. Not only are some sales done completely online, but people who call on the phone after having visited are twice as likely to buy."

The direct-marketing pioneer now sells more than $30 million worth of computers daily from its Web site, accounting for over 40 percent of revenues. In just a single quarter last year, received some 25 million visits at more than 50 country-specific sites. Buyers range from individuals purchasing home computers to large business users buying high-end $30,000 servers. Michael Dell sees online marketing as the next great conquest in the company's direct-marketing crusade. "The Internet is like a booster rocket on our sales and growth," he proclaims. "Our vision is to have all customers conduct all transactions on the Internet, globally."

As you might imagine, competitors are no longer scoffing at Michael Dell's vision of the future. It's hard to argue with success, and Michael Dell has been very successful. By following his hunches, at the tender age of 34 he has built one of the world's hottest computer companies. In the process, he's amassed a personal fortune exceeding $16.5 billion.

Many of the marketing tools that we've examined in previous chapters were developed in the context of mass marketing: targeting broad markets with standardized messages and offers distributed through intermediaries. Today, however, with the trend toward more narrowly targeted or one-to-one marketing, more and more companies are adopting direct marketing, either as a primary marketing approach or as a supplement to other approaches. Increasingly, companies are turning to direct marketing in an effort to reach carefully targeted customers more efficiently and to build stronger, more personal, one-to-one relationships with them.

In this chapter, we explore the exploding world of direct marketing. We look at the nature, role, and growing applications of direct marketing and its newest form, Internet marketing and e-commerce. We address the following questions: What is direct marketing? What are its benefits to companies and their customers? How do customer databases support direct marketing? What channels do direct marketers use to reach individual prospects and customers? What marketing opportunities do online and Internet channels provide? How can companies use integrated direct marketing for competitive advantage? What public and ethical issues are raised by direct and online marketing?

What is Direct Marketing?

Mass marketers have typically sought to reach masses of buyers with a single product and a standard message delivered through the mass media. Thus, Procter & Gamble originally launched Crest toothpaste in one version with a single message ("Crest fights cavities"), hoping that hundreds of millions of Americans would get the message and buy the brand from their local retailer. P&G did not need to know its customers' names or anything else about them, only that they wanted to take good care of their teeth. Under this mass-marketing model, most marketing involved one-way connections aimed at consumers, not two-way interactions with them.

In contrast, direct marketing consists of direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships. Direct marketers communicate directly with customers, often on a one-to-one, interactive basis. Using detailed databases, they tailor their marketing offers and communications to the needs of narrowly defined segments or even individual buyers. Beyond brand and image building, they usually seek a direct, immediate, and measurable consumer response. For example, Dell Computer interacts directly with customers, by telephone or through its Web site, to design built-to-order systems that meet customers' individual needs. Buyers order directly from Dell, and Dell quickly and efficiently delivers the new computers to their homes or offices.

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