The Meaning of Customer Databases in Direct Marketing

Table of Contents

The Meaning of Customer Databases in Direct Marketing: Introduction

1. Direct Marketing – an Overview
1.1 The History of Direct Marketing
1.2 Forms of Direct Marketing

2. Databases in Direct Marketing
2.1 Classical Direct Marketing versus Database Marketing
2.2 What Benefits Databases yield in Direct Marketing

3 Database technology as a tool
3.1 A short history of databases
3.2. Generations of customer databases

4. About privacy: a conclusion

References

The Meaning of Customer Databases in Direct Marketing: Introduction

‘Every established norm in advertising and promotion is being transformed … we are living through the shift from selling virtually everyone the same thing a generation ago to fulfilling the individual needs and tastes of better educated consumers by supplying them with customized products and services’^[1]

A hint of what this shift to fulfilling individual needs and tastes may look like in a few years can be experienced today in a new shopping concept for clothes, implemented by the Prada fashion company in one of it’s New York stores. All the pieces of clothing are fitted with Radio-Frequency-Identification-Tags (RF-IF-Tags) which send out signals to media terminals throughout the store. When a customer enters the changing cubicle, the video screens in the walls of the cubicle show clips of the chosen piece of fashion worn by different models in various combinations. Monitors in the cubicle and throughout the store show video clips suggesting complementary pieces of clothing that fit the customers taste. Whenever a customer tries on or buys a piece of fashion, this is automatically appended to the personal profile, which is activated by the customers personal credit card with RF-IF function. Whenever the Prada company communicates with it’s customers in form of mailings or through the internet, the personal profile is used as a reference for the optimal personal marketing strategy.^[2] The key aim of the 40 million Dollar project is customer commitment by creating a one-to-one relationship.

20 years ago, the story of the Prada store would not have seemed realistic, it is only the rapid progress of information technology and database development that makes this new form of direct marketing possible. This paper takes a look a the history of direct marketing as well as the growing role that databases play in direct marketing today and in the coming years.

1. Direct Marketing – an Overview

1.1 The History of Direct Marketing

When one looks back in history, to the roots of marketing, it becomes clear that Direct Marketing was actually the original and only way that products were promoted. Traveling salesmen and peddlers brought their products to the towns and villages and confronted their costumers face to face at their doorsteps or on marketplaces. The salesmen knew the names of their customers, their habits and their needs^[3]. Over time and with upcoming economic power as well as mass media, marketers concentrated on promoting their goods and services on a larger scale, adapting their offers to a broad market and a standardized customer. This method called mass marketing saved time and money while reaching a large group of customers. Profiting from economies of scale, companies perfected methods of mass production of identical products that tried to suit the needs of as many customers as possible. In most cases, networks of distributors and retailers ensured the convenient availability of goods.

With time, markets grew full and competition fierce. Consumers found more and more almost alike products to choose from, with radio and printed media aggressively promoting the mass produced one-size-fits-all products to the anonymous consumer.

Trying to find new ways of selling their goods, producers started collecting addresses of potential customers and sending their offers directly per post. Thus, at the end of the 19th century, direct marketing was reborn. Mail order business developed and so called l etter shops started offering their service of sending standardized mail to pools of consumers. In Germany, this revival of direct marketing, although using only a single message and to a mass market, was led by catalogue sellers such as OTTO or Neckermann^[4].

In the 1960’s, data processing technologies opened new possibilities of sorting and cataloguing customer data to define target groups for direct marketing activities. Nevertheless, most products sold by companies were still being sold through mass marketing. With television available to most households and production methods profiting from automation and data processing, manufacturers where more than ever selling uniform products to a broad market.

The 1966/67 global recession caused the marketing strategies of many companies to collapse. As economic growth ground to a halt, consumers reacted to excess supply of mass produced goods and services by becoming even more price conscious and selecting carefully from the amplitude of quasi-identical products. Realizing the failure of their previous marketing strategies, producers moved away from mass marketing of their so called Me-Too Products to suiting the individual needs and wants of consumers through relationship or direct marketing^[5].

In the 1970’s, more and more companies from traditionally mass-marketed lines of business discovered direct marketing as a way to survive in saturated markets. Also, companies with a history of large field sales forces started cutting down on costs and replacing field staff by means of catalogues and telemarketing^[6]. With businesses moving closer to their customers and the dismantling of intermediary structures, a new way of thinking emerged. In the 1980’s the strictly product-way-of-thinking gave way to the customer-centered marketing view of today^[7].

Today we find a situation, where “successful companies are using detailed knowledge of their customers to help them spot sales opportunities”^[8]. To gather and to manage this detailed customer knowledge has become a key component in modern marketing^[9].

1.2 Forms of Direct Marketing

Through time and with proceeding technology, direct marketing developed in a number of different directions.

The original and most imminent form is face-to-face selling. This two-way communication provides a forum for immediate exchange. A salesperson can listen to the customer and react to the information being conveyed. Product-related information can be tailored to the individual and presented in a way that is meaningful and pertinent to the situation. Selling tools include sales presentations, trade shows, and door-to-door distribution. A disadvantage of face-to-face selling is the limited access to certain customer groups and the high cost^[10].

Another successful form of direct marketing is direct-mail-marketing. Implemented and refined over the course of the last century, many companies have found it to be an effective way to target particular interest groups in a relatively inexpensive way. Marketing messages can be personalized to fit the individual consumers’ interests and allows for the distribution of product samples, CD-ROM’s and complementary give-away’s to attract additional attention to the product. Efficient post and electronic mail systems have made direct-mail-marketing popular to a degree where it is sometimes regarded as nuisance – e.g. junk mail and Spam emails^[11].

Like direct-mail-marketing, catalogue marketing is a tool from the end of the 19th century. In it’s traditional paper form, it can not be tailored to individual consumers but works well with larger target groups. The advantages that catalogue shopping bears for consumers have made it a profitable and recognized way of selling products. The world’s largest catalogue selling company OTTO A.G. from Hamburg reached a turnover of over € 20 billion in the year 2000^[12]. In the past years the increased number of households with internet access has triggered a shift from catalogue marketing in paper form to online shopping. For the OTTO A.G., online shopping made for 11,5% of the group’s turnover. In addition to being less costly then sending printed catalogues by mail, online shopping allows for the personalization of offers and the tracking of individual buying habits^[13].

Telemarketing is a direct marketing tool which uses the telephone as a medium to reach the consumer. Marketers use it to contact consumers to collect information, to follow up on sales or to offer goods and services directly to targeted individuals (outbound). Telemarketing also works in an inbound way, where consumers can contact marketers to place orders, gather information or take part in sweepstakes. In this context, a further form of direct marketing called direct-response television marketing comes in. Here consumers respond to television advertisements by directly contacting the marketer via telephone^[14].

As a result of rapid technological development and widespread internet usage, a new form of direct-marketing called online-marketing has emerged in the past decade. The internet offers marketers an interactive and affordable medium to target individual consumers with personalized web content^[15]. A successful example is Amazon.com, which collects information about the interests and behavior of each customer and aims it’s marketing efforts directly at every individual by sending customized offers per eMail or directly on the Amazon web site^[16].

2. Databases in Direct Marketing

2.1 Classical Direct Marketing versus Database Marketing

In general, the different forms of direct marketing can be divided into two groups. On the one hand, classical direct marketing, which is used by many traditional direct marketers such as mail order companies, newsletters and fund raisers. Classical direct marketing does not really deal with information about individuals, but rather with clusters or groups. An example may be a subscription offer for a PC magazine sent out by mail to several thousand individuals known to own a personal computer. The information collected and stored is clustered and analyzed according to group characteristics such as geographic, demographic or lifestyle attributes^[17].

Database marketing on the other hand goes beyond this and concentrates on the individual. The marketing effort is not focused to the average customer characteristics but tailored to fit each specific customer. In the case of the subscription offer for the PC magazine, this may mean changing the offer according to the prospective customer’s age, financial status, buying habits or household situation. Although this may seem to be quite costly and complicated compared to sending the same offer to all targeted consumers, the chance of winning new customers is higher^[18].

2.2 What Benefits Databases yield in Direct Marketing

The main goal and primary benefit of using sophisticated databases in direct marketing is the prospect of building a lasting one-to-one relationship between the marketer and the individual customer. This is based on the insight, that a retained consumer is more profitable than a consumer which has to be newly solicited. Databases can help design individual relationships to suit individual consumers needs and wants. A further insight in this context is, that satisfied customers influence others and thereby expand the referral rate, possibly through a system of rewards^[19].

Databases allow for detailed analysis of buying habits and can therefore serve to target existing loyal consumers, as well as prospective buyers in a customized way. Marketers can better promote upgrades, companion products and new products, hereby increasing the sales volume from the individual consumer. Often, the sales realized on this direct way, yield a much higher profit, as provisions and profit margins of distributors fall away.

Another important advantage of using database technology is the possibility to use analysis, testing and modeling techniques to specify target groups. This can reduce marketing costs by downsizing marketing efforts to the audience that is most likely to respond. For example catalogue sellers use RFM-analysis to determine the recency, the frequency and the monetary value of customers purchases and structure their marketing efforts toward the individual customer accordingly^[20].

3 Database Technology as a Tool

3.1 A short History of Databases

The basis for the revolutionary changes in marketing methods was provided by the development of data processing technology. Like a lot of technologies in the computer industry, the foundations of relational databases can be tracked back to IBM in the 1960's and 70's, and their research into automating office functions. It was during this period in history that firms discovered that it was becoming far too expensive to hire the number of people required do certain jobs, such as storing and indexing files, and that it was worth the investment to fund research into to cheaper, and more efficient mechanical solutions.^[21]

The technical capabilities of modern databases go far beyond the limited cataloguing and indexing functions of their predecessors. The evolution has today reached a point, where integrated databases provide possibilities so vast, that they remain unused by most companies.

3.2 Generations of Customer Databases

The most modern fourth-generation database systems offer a fully integrated environment that combines a company’s business, decision support and marketing systems into a single application. Whereas in the past, databases were developed to support “… transaction-oriented, single-event-driven businesses …”^[22], marketers today need to understand how all the factors that constitute their relationship to the customer are interrelated.

Many older database systems still used today are not capable of showing this picture, instead they where conceived to provide limited data, such as addresses or income situation. For example a travel agent, wondering which of his customers is most likely to book a 5-star holiday to Jamaica in the next 6 months, may very quickly find out about the restricted capabilities of his 3rd generation database, which may find individual pieces of data like when consumers have gone on holiday, how much they have spent, if they traveled alone or as a family, which destinations they have booked in the past etc., but would probably not be able to combine this information with present lifestyle trends or spending patterns to give a complete picture of the potential business relationship. This is due to the way that older databases captured and linked information according to predefined data structures and paths^[23].

4. About the Limits of Databases in Marketing: a Conclusion

As the technical boundaries of collecting and processing information are becoming less of a cost factor, more and more marketers are building up databases. Companies that gather consumer information are thriving and the hunt on details about peoples wants and habits is on. Servers all around the globe are recording every single click on the World Wide Web and marketing agencies are busy fostering consumer profiles with data from questionnaires and sweepstakes.

More and more often, pools of information are merged, sold or exchanged to give companies and government agencies even better consumer profiles. With increasing exchange of information and global cooperation, the individual profiles will get very exact. For example information recorded from an internet search engine, merged with a catalogue seller’s database or the data from a credit card company would give a picture of a person which could reveal even the most intimate personal details.

The positive aspects of this development have been discussed in this paper but the dangers and down sides stay unexposed. On the one hand, we find a situation, where enterprises act globally and information has no borders, on the other hand, national legislation about data security and protection of privacy are just being adapted to the new reality. No one can really say, let alone control, to what degree information is collected and used. While European countries have a tradition of strict privacy laws, the United States live a different culture of data protection and in some other countries legislation in this regard is completely unknown.

Before a comprehensive and international solution can be found, consumers will have to be conscious of the fact, that there is a lot of personal information about them on the market. Buying decisions may be easier in the future as offers may seem more attractive. Consumers will have to be increasingly critical, to find their way in the upcoming omni-informed marketing world.

List of References

HILKE, W. (1993), Direkt-Marketing,Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH

KOTLER, P. et al. (2001), Principles of Marketing, Harlow: Prentice Hall Europe

POLLACK, K. Peep-Show bei Prada. Brand Eins Wirtschaftsmagazin, Ausgabe 04/02

RAPP, S and COLLINS, T (1997). Maxi-Marketing. New York: McGraw-Hill

SHEPARD, D ASSOCIATES (1995), THE NEW DIRECT MARKETING How to Implement a Profit-Driven Database Marketing Strategy, Chicago: Richard d. Irwin inc.

”Smart Selling ... How Companies Are Winning Over Today’s Tougher Customers“, Business Week, August 3, 1992

http://www.info.cern.ch/

http://marketing.cba.uh.edu/asorescu/

http://marketing.cba.uh.edu/asorescu/http://marketing.cba.uh.edu/asorescu/Spring_2002/class_17-_Database_Marketing.ppt

http://www.extension.umn.edu/mainstreet/curriculum/webmake/wm_dbase.html

http://www.otto.com/ueber_uns/ueber_uns_press_250500.html

http://dict.leo.org/

Declaration

I guarantee that I wrote this piece of work myself and that I have not used any sources other than the ones I have named.

Osnabrück, June 6th 2001

Christof Jan Strejcek

[...]

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^[1] RAPP, S and COLLINS, T (1997). Maxi-Marketing. New York: McGraw-Hill

^[2] cf. POLLACK, K. Peep-Show bei Prada. Brand Eins Wirtschaftsmagazin, Ausgabe 04/02

^[3] cf. KOTLER, P. et al. (2001), Principles of Marketing, Harlow: Prentice Hall Europe, p. 784

^[4] cf. HILKE, W. (1993), Direkt-Marketing,Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, p. 32

^[5] cf. SHEPARD, D ASSOCIATES (1995), THE NEW DIRECT MARKETING How to Implement a Profit-Driven Database Marketing Strategy, Chicago: Richard d. Irwin inc., p. 2 et seq.

^[6] cf. HILKE, W. (1993), Direkt-Marketing,Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, p. 34

^[7] cf. SHEPARD, D ASSOCIATES (1995), loc. cit., p. 2 et seq.

^[8] ”Smart Selling ... How Companies Are Winning Over Today’s Tougher Customers“, Business Week, August 3, 1992, p.46

^[9] cf. SHEPARD, D ASSOCIATES (1995), loc. cit. p. 2 et seq.

^[10] cf. KOTLER, P. et al. (2001), loc cit. p. 791

^[11] cf. KOTLER, P. et al. (2001), ibid.

^[12] Retrieved on May 30th 2002 online in the internet: http://www.otto.com/ueber_uns/ueber_uns_press_250500.html

^[13] cf. KOTLER, P. et al. (2001), loc cit. p. 791 et seq.

^[14] cf. KOTLER, P. et al. (2001), ibid.

^[15] cf. KOTLER, P. et al. (2001), ibid.

^[16] Retrieved on May 30th 2002 online in the internet: http://www.extension.umn.edu/mainstreet/curriculum/webmake/wm_dbase.html

^[17] cf. SHEPARD, D ASSOCIATES (1995), loc. cit., p. 235 et seq.

^[18] cf. SHEPARD, D ASSOCIATES (1995), loc. cit., p. 235 et seq.

^[19] Retrieved on June 1st 2002 online in the internet: http://marketing.cba.uh.edu/asorescu/http://marketing.cba.uh.edu/asorescu/Spring_2002/class_17-_Database_Marketing.ppt

^[20] Retrieved on June 1st 2002 online in the internet: http://marketing.cba.uh.edu/asorescu/

^[21] Retrieved on May 21st 2002 online in the internet: http://www.info.cern.ch/

^[22] SHEPARD, D ASSOCIATES (1995), loc. cit., p. 41.

^[23] cf. SHEPARD, D ASSOCIATES (1995), loc. cit., p. 41.