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Introduction to Database Marketing Concepts

1 It’s 7:15 p.m., Keri Lee, a 29-year-old account executive for a technology company, stops at a supermarket in Southbury, Connecticut, on her way home from work. After picking up Diet Pepsi, a few tomatoes, lettuce, and a package of Swiss cheese, she goes to the express checkout line. Keri hands her store card to the clerk, who scans it prior to processing her order. Using the store card allows her to get a discount on the cheese. With her sales receipt, she also gets a $0.40 coupon for Ritz Crackers. The bill came to $6.20. Keri paid with her VISA card.

Keri picks up her mail before going into the house. There are catalogs from Bloomingdales, L. L. Bean, Macy’s, and Pottery Barn. She puts the Pottery Barn catalog to the side. Her sister’s birthday is in two weeks and the items in the catalog are consistent with her sister’s decorating style.

In addition to the electric and VISA bills, she has a letter from the Volkswagen dealership thanking her for her recent purchase and a letter from the American Red Cross. Remembering that the Red Cross recently helped her friend who was caught in a flood, she makes a contribution by checking a box and entering her VISA number.

Keri also got the new issues of Smart Business, Business Week, and Self magazines. An ad in Business Week about a technology conference attracts her attention, and she fills out an attached response card requesting more information.

After dinner, she receives a phone call from an insurance company. At first, she is irritated by the call. She then remembers that her car insurance rates increased substantially since she leased her new Volkswagen and asks the person on the phone for a quote. Later that evening, she goes on the Internet to look for other insurance companies and requests three more quotes online.

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Drozdenko, Ronald G., and Perry D. Drake. Optimal Database Marketing : Strategy, Development, and Data Mining, SAGE Publications, 2002. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/nyulibrary-ebooks/detail.action?docID=996727. Created from nyulibrary-ebooks on 2020-06-01 16:11:26.

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2 OPTIMAL DATABASE MARKETING

Browsing the Web, she remembers that she has almost finished the book she has been reading and goes to Amazon.com. The Amazon page provides her with suggestions based on her previous purchase, A Certain Justice, by P. D. James. A new mystery by Elizabeth George is on the suggestion list. It can be shipped within 24 hours. Keri places the book into the Shopping Cart and uses 1-Click to check out.

Before leaving the Amazon site, she clicks on the Music tab and searches for Sarah McLachlan. She heard a new single by McLachlan on the radio and was curious about the other songs on the CD. Keri listens to five cuts from McLachlan’s new CD but decides not to order yet.

At 10:00 p.m., she scans through the channels on TV and pauses at QVC when a bracelet grabs her attention. Calling QVC, she gives her account number that she used 2 months ago when she purchased a color printer. In less than 1 minute, the bracelet is ordered and she returns to scanning the channels.

Keri’s daily routine is similar to the routines of millions of other peoplein the United States and other countries. These transactions provide us with the goods and services that are a part of our lives. In the scenario above, databases underlie all the transactions that Keri made. They underlie the purchases in the grocery store, catalogs, TV shopping, Internet, tele- marketing, and the charitable contributions. Databases are a collection of information related to a particular subject or purpose that are usually maintained on a computer for easy search, retrieval, and analysis. Although databases are not new, they are becoming an essential element of marketing. Organizations in consumer products, business-to-business (b-to-b), char- ities, health care, politics, media, investments, government, insurance, and so on are finding marketing databases essential to their survival and success. In addition, because technology has become more accessible, small businesses are finding the use of databases a cost-effective way to stay in touch with their customers.

Several changes in the business, social, and technological environments have led to the widespread use of databases in marketing. However, the one underlying reason for the adoption of databases is that they allow marketers to use information about individual customers to reach those customers and cultivate relationships more effectively and efficiently.

Databases provide a means to establish and enhance relationships, but they can also be used incorrectly, inefficiently, and unethically. Organ- izations can use databases to help customers make shopping easier and make better purchase decisions, or they can use databases to intrude into people’s lives. Good marketers know that maintaining customer satisfac- tion is the key to long-term success, and using a database to flood people

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with unwanted promotional materials is not only wasteful but is unlikely to build productive long-term relationships with customers. One of the goals of this book is to look beyond the temptation of the quick sale and consider the long-term impact of database marketing techniques on the organization, customers, prospective customers, and society in general.

This first chapter introduces marketing database concepts. We begin by defining marketing databases and examining the environmental trends that help to explain why the use of marketing databases is growing so rapidly. Because one of the principal uses of marketing databases is in direct/interactive marketing, we examine this type of marketing, compare it to marketing through conventional retail channels, and briefly explore its advantages and disadvantages. We conclude the chapter by providing a framework for the concepts and techniques covered in this book.

Introduction to Concepts 3

___________________________ What Is a Marketing Database?

A marketing database is a file containing information about individual customers or potential customers that is relevant to the marketing process. This file can be simple or sophisticated. For centuries, businesspeople recorded customer information on slips of paper or in notebooks. Some organizations still use these manual databases. In contrast, companies like American Express and Macy’s have computer databases that contain millions of names. Some of these names have hundreds of pieces of information.

Whether the database uses simple or sophisticated technologies, the purpose is the same—to gain a better understanding of customers in order to increase the customer’s satisfaction and the organization’s objectives. Although some organizations still use paper databases, the focus of this book is on computer databases and how data about customers are stored, manipulated, and analyzed on a computer.

Where do the data about customers come from? Companies build mar- keting databases from a number of sources. Like Keri Lee, if you receive product offers in the mail, such as a catalog, you are on a database. Your name could have been added to the database from a telephone book list, a membership list, or lists of public notices (like a home purchase). When you respond to an offer for a product, your name usually gets added to another database.

There are companies that specialize in gathering and renting lists of customers. You might be surprised at the range and diversity of available lists. For example, as a marketer, you could rent lists of female corporate decision makers, residential pool owners, neuroscientists, serious collectors of plates, coins, and stamps, and people who have contributed to humani- tarian causes. In deciding on which list to select, you would match the

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characteristics of these lists to your target market. Often the lists include detailed demographic and psychographic data.

4 OPTIMAL DATABASE MARKETING

Trends Leading to the Use of Databases in Marketing__________

At this point, we define some of the terms we use in the book. Note that there is ambiguity in the literature on how these terms are used; therefore, our definitions may not correspond with all others in the field. We have already defined a marketing database as a file containing information about individual customers or potential customers that is relevant to the marketing process. Database marketing refers to marketing activities (e.g., selecting prospective customers) that utilize a marketing database. The term direct marketing is often used interchangeably with database market- ing. In this book, we discriminate between database marketing and direct marketing on the basis of the marketing activities. We view direct market- ing as a broader term that includes other activities such as development of offers and advertisements that are indirectly related to the database. The Direct Marketing Association’s (DMA) definition takes this broader view of direct marketing:

Direct Marketing is an interactive system of marketing that uses one or more advertising media to effect a measurable response and/or transaction at any location, with this activity stored on database.

This definition implies that the marketer is obtaining specific informa- tion about the customer. Each time a customer orders a product or requests literature, this response information is recorded on the database, allowing the marketer to determine the effectiveness of specific marketing programs such as mailings or Internet promotions.

When we use the term database marketing, our focus is on the strategy, development, and analysis of the database for marketing purposes rather than on the broader range of activities implied in the term direct market- ing. In addition, companies that are involved in personal selling also use database marketing, and personal selling is often not considered a part of direct marketing.

The term interactive marketing is often used interchangeably with direct marketing. However, interactive marketing sometimes refers only to Internet marketing. In this book, we use the terms interactive marketing and direct marketing interchangeably.

Direct marketing has been increasing at a rapid rate. According to the DMA (2000), direct marketing sales revenues are expected to increase by 9.6% from 2000 to 2005. This increase is greater than the expected increase of 5.4% in total U.S. sales during that same period. U.S. sales revenue attri-

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butable to direct marketing is estimated to reach $1.7 trillion in 2000 and grow to $2.7 trillion in 2005.

A readers’ survey conducted by Direct magazine (Levey, 2001) shows data- base investment continuing to grow. About 48% of the respondents indicated that their company planned to increase database development/maintenance budgets in 2002. They indicated that the databases were used for a variety of purposes, including (in descending order) promotion, cross-selling products, customized offers, profiling customers, providing information to the direct sales staff, upselling products, supporting the telemarketing staff, personaliz- ing offers, modeling customers, obtaining revenues from the sales of names, and performing regression analysis.

Why is database marketing increasing so rapidly? Several trends in the marketplace may provide insights. These trends include the following and are discussed below.

♦ Greater use of market segmentation ♦ Emphasis on service and customer relationship management (CRM) ♦ Changes in media ♦ Changes in distribution structure and power ♦ Lifestyle and demographic trends ♦ Accountability for marketing actions ♦ Integration of business functions ♦ Technological advances ♦ More informed customers

Market Segmentation

Market segmentation means dividing a market into smaller pieces based on demographic, psychographic, or behavioral (purchase) patterns. The marketer takes a diverse (heterogeneous) market and attempts to find similar (homogenous) groups of people or organizations. Because of intense competition and diverse customer needs, marketers have to develop products and marketing plans that are responsive to more specific groups of customers. It is almost impossible to find a market that has not been segmented. The automobile market, for example, is extensively segmented by a number of variables such as age, gender, income level, personality, task situation (e.g., weather conditions, off-road), lifestyle, and activities, interests, and opinions (AIO).

For example, Polk, a company offering database management and analy- sis services (“Full-Size Sport Utility Market,” 1997), determined that there are differences between domestic and import sport utility vehicle (SUV) owners. Seventy-nine percent of Tahoe, Suburban, Yukon, and Ford Expedition owners are interested in boating and sailing, home workshop,

Introduction to Concepts 5

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6 OPTIMAL DATABASE MARKETING

camping and hiking, hunting and shooting, crafts, domestic travel, and fish- ing, compared to 40% of Land Rover, Land Cruiser, and Lexus LX450 owners. On the other hand, import owners (36%) are more interested in cultural arts and events, tennis, fashion, wines, and foreign travel, com- pared to domestic full-size SUV owners (23%). “Our analysis paints a clear picture of the differences between domestic and import full-size SUV owners,” said Glenn Forbes, Polk’s vice president of transportation. “A domestic SUV is more likely to be found with a deer strapped to its hood, while an evening at the theater might be a prime time to spot import full- size SUVs.” Polk also segmented this market by demographic characteristics such as income and geography.

By specifically targeting people who share these defined characteristics, a marketer can increase the probability of reaching potential customers. A database that can be segmented according to these target characteristics can be a valuable marketing tool.

Emphasis on Service and CRM

Service offerings such as banking, airlines, and insurance have grown at a greater rate than more tangible categories of goods such as grocery items and household appliances. Services are estimated to represent about three quarters of the U.S. gross domestic product and nearly 80% of all jobs. In addition, the service element of products is becoming a more important aspect of the overall product. In the b-to-b market, for example, buyers are increasingly less concerned with a product’s tangible features and technical specifications and more concerned with whether the product meets their needs. For this reason, companies like IBM now stress “solutions” rather than “boxes.” IBM’s Web site provides exam- ples from different industries and business applications to guide customers and potential customers through sample solutions to business problems. IBM is concerned about selling the right combination of software, hardware, consulting, and ongoing support that achieves their clients’ objectives.

A database allows customers’ needs to be precisely documented and tracked. The increased emphasis on CRM has brought database marketing to the forefront of many organizations. When a customer calls with a question, the database allows the customer service representative or technician to get a good understanding of the situation rapidly. More responsive service increases the probability of developing long-term relationships with customers, which leads to repeat purchases. That is a major advantage to the marketer, because retaining old customers is usually more profitable and less costly than acquiring new customers.

However, CRM has become a controversial topic. Skeptics point to the hype that is associated with a concept that is not always clearly defined.

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Others question the premise that it is even possible for marketers to develop true relationships with customers. Few companies actually can develop one-to-one marketing, which is the basis of any real relationship. For many companies, CRM just means increasing the probability of repurchase. (Beardi, 2001, p. 1).

In a response to CRM cynics, Ray Schultz (2001) acknowledges that true one-to-one marketing is unlikely, but customer-centric marketing (marketing that focuses on customer needs) and a two-way dialogue with customers is possible. Direct marketers, through their databases, can develop programs to establish this dialogue with customers and measure the effectiveness of these programs.

Changes in Media

Marketers have traditionally reached customers through media that are today becoming more and more fragmented. Just a few decades ago, when there were three major television networks, a marketer could reach a large audience with a single ad. Now, hundreds of cable and satellite television channels target the special interests of segments of viewers from sports to classic movies. Some of these categories have been segmented even further, such as classic sports, golf, racing, and radical sports. Some magazine categories also show increasing fragmentation. In the food category, you can subscribe to magazines that focus on home cooking, gourmet cuisine, vegetarian fare, cooking with chocolate, low-calorie cooking, and spicy-hot food, among others.

The Internet represents an extreme in fragmentation. Althoug e-commerce is still in the process of developing, we can be certain that more people in the future will use the Internet as a source of information. Internet communica- tion has the potential to reach even smaller, more specialized segments of the market. Databases containing these special-interest cable viewers, magazine subscribers, and Internet site registrants provide highly targeted lists for goods and services.

Direct marketing, including mail, e-mail, and telemarketing, can bring targeted messages to individual consumers and business customers with very specific characteristics. Mail and telemarketing have the potential to communicate to people based on individual needs and relate these needs to the offer. Many organizations have not developed this ability to adequately and efficiently target and communicate with individual customers, and therefore resources are wasted. The challenge for direct marketers is both to increase the relevance of the communication in order to increase response to an offer and also to reduce contacts with individuals who have a low probability of responding to the offer. Databases provide the means to meet the challenge of fragmented media by focusing marketing commu- nications on the specific needs of customers.

Introduction to Concepts 7

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8 OPTIMAL DATABASE MARKETING

Changes in Distribution Structure and Power

Power in the distribution channel has shifted. No longer are manufacturers in control of distribution channels, as they were in the past. Now, with the consolidation of retailing on a regional, national, and even multinational level, one retailer has much more impact on the bottom line of a manufac- turer. If Wal�Mart or Home Depot decides not to carry a manufacturer’s product, the manufacturer may lose millions of dollars in sales annually. Even large manufacturers like Proctor & Gamble do not take lightly their relationships with national retailers. In fact, some manufacturers have changed their organizational structure in order to focus on these important retail customers. By establishing databases, such as the one at the supermar- ket that contains Keri Lee’s information, retailers are gaining even more power. They now have extensive databases on the purchasing patterns of millions of customers. These customer databases can be used to locate segments that may be important to marketers such as customers loyal to specific brands, frequent purchasers, high-volume purchasers, brand switchers, and promotion-sensitive customers.

In an attempt to maintain direct contact with customers, manufacturers have developed their own databases. Often these manufacturers’ databases have been used for promotions rather than direct sales. For example, Kellogg’s has used databases for new product introductions, sending potential customers free samples and coupons. The objective of these data- base promotions is to help generate retail sales. On the other hand, some manufacturers have developed alternative distribution channels. It may not be possible to sell low margin products, like many of the products found in supermarkets, directly to consumers. However, manufacturers may be able to develop more exclusive niche products that have the potential to become profitable through direct channels. General Foods, the maker of Maxwell House Coffee, uses database marketing to sell a premium coffee directly to consumers. The brand, Gevalia Kaffee, is positioned as “fine coffees of Europe,” and customers receive shipments of coffee at a regular interval. To entice customers to become members of this program, Gevalia provides a free coffeemaker and the option to drop out of the program at any time without obligation. The initial risk for Gevalia management is great, and profit is not expected until after several purchase cycles. However, over the longer term, the product can be profitable.

Some marketing experts, such as Lester Wunderman (1998), see dramatic changes in the way we think about distribution channels. Single distribution channels will become multiple-channel distribution systems. Products will be available where people want to buy them. The Internet has become a vehicle for moving rapidly to multiple distribution channels. A number of products, including cars, computers, greeting cards, books, groceries, and even M&M’s (see www.ColorWorks.com), can be purchased

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Introduction to Concepts 9

directly on the Internet as well as through their conventional retail channels.

Proctor & Gamble, the manufacturer of many supermarket items, includ- ing Tide, Pringles, Oil of Olay, and Folgers, also markets a premium coffee direct to consumers through the mail and the Internet. Although P&G uses the Internet and other direct channels to promote its products, it offers very few directly to consumers. Expansion into direct channels can be viewed as a direct challenge to store retailers, and P&G wants to avoid any impressions of a threat (“P&G Makes AOL Debut,” 1999). So even though databases allow marketers distribution channel options, a number of factors such as product category and current channel arrangements have to be considered.

Lifestyle and Demographic Trends

A number of lifestyle and demographic trends have moved consumers away from traditional retailers. Although store-based retailing is still strong, people seem to have less and less time for the process of getting into the car, driving miles to stores, searching for products, and waiting in lines to buy them. In our Keri Lee scenario, you might have noticed that she did not leave work until after 7:00 p.m. With the current pressures on businesses to perform more work with fewer employees, many people are in Keri’s situation. Keri still shops at the supermarket and other retail stores, but she shops more often from catalogs, shopping channels, and on the Internet. As Internet commerce expands, consumers have more opportunities to shop for more products from home. Internet companies are delivering groceries, drugs, and general merchandise directly to homes in certain parts of the United States.

The demographic trends that contribute to the movement of shoppers away from store retailers include

♦ Higher percentage of women in the workforce ♦ Higher percentage of family members working ♦ More child-rearing activities that require parents’ time (e.g., lessons,

carpools, sports, trips) ♦ Increasing access to the Internet at home, which increases the chances

of online shopping ♦ Increase in ethnic populations seeking products that may not be avail-

able from local store retailers ♦ Less brand loyalty, driving people to find convenient alternative

sources for products

In response to these trends, marketers will make more types of products available from nonstore sources (Internet, mail, TV). As more nonstore

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sources become available, competition will increase, driving more consumers away from store retailers. As mentioned previously, direct marketing sales are expected to increase at a rate that is higher than sales in general. Because all forms of direct marketing are dependent on databases, the use of databases will also increase.

Accountability for Marketing Actions

Accountability for expenditures is more prevalent in business today. In pub- licly held companies, shareholders are becoming more sensitive to financial reports. Within the organizations, upper-level managers want to know whether expenditures on specific promotions (ad campaigns, trade promo- tions, etc.) yield an appropriate return on investment. It is often difficult, however, to directly relate mass media advertising to changes in sales. Marketing databases allow expenses and revenues to be tracked and evaluated.

In particular, the database can be used to track the profitability of prod- ucts over time. As mentioned above, companies have to invest in customers through the costs of promotions. Sometimes these promotions include free items such as the coffeemaker that Gevalia sends new customers and free CDs offered by record clubs. Even if no incentives are used, an investment is needed in list rentals, the cost of the mailing, and overhead expenses. Often these investments are not recovered immediately. However, in the long term, these promotions may become very profitable as the customer makes additional purchases. Similarly, in the b-to-b market, marketing and other costs related to customer acquisition can be substantial and must be evaluated over a long period of time. Sometimes, return on investment may not come for several years, if at all.

With the database, a marketer can track profits from individual cus- tomers over time and further break down the effectiveness of individual marketing programs such as promotions with incentives. This long-term tracking of customers is only possible with a database. Without the long- term tracking of individual customers, a potentially profitable marketing program may be stopped prematurely.

Not only are databases important to upper management as an accountabil- ity tool, but other marketing personnel can directly benefit from them. As an account executive, Keri Lee wants to use her time productively. Part of her compensation is based on commissions. She uses a database to manage customer relationships by scheduling contacts at critical times, such as prior to contract renewals. She can also respond to customers more efficiently and effectively, because critical data on the account are easily available. She can determine who her best customers are, and she can evaluate the amount of time she spends on less productive accounts. Methods such as

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lifetime value (LTV) analysis have been developed that evaluate promotional activities, customer segments, and product lines.

Integration of Business Functions

When all the functional areas of a business work together (marketing, accounting, finance, operations, human resources, information systems, etc.), the organization usually becomes more effective and efficient. In the older business model, the functional areas work almost independ- ently. Tasks are moved from one area to another in a sequential manner. Problems often arise from this “silo” approach to business organiza- tions. For example, Production may not be aware of marketing programs that might require increases in production levels, and Marketing may not be aware of increases in production costs that may require pricing modifications.

Today, more and more businesses seek to increase the efficiency by inte- grating functional areas. Databases facilitate this integration. Costs can be clearly documented, and sales levels can be more accurately forecasted and monitored to allow for adjustments in production, inventory, and staffing levels. From the financial perspective, sales revenues from individual items and product lines can be tracked more closely for better financial planning and resource allocation.

A direct marketing organization is centered on its database. The database can provide all functional areas immediate access to the progress of marketing programs, individual items, product lines, and divisions. Although technology as greatly improved the ability of manufacturers to monitor products through conventional retail distribution channels, problems getting data quickly from the many distributors and retailers still exist. Therefore, the organization that uses marketing databases well can be more responsive to internal and external changes.

Technological Advances

In recent years, the computer technology needed for developing marketing databases has decreased in price and increased in power. Consequently, more organizations have the financial resources to purchase the hardware and software necessary to develop a marketing database. In addition, because of the increasing power of low-cost PCs, smaller organizations can utilize databases. Within the organization, more people have access to technology and, therefore, can take advantage of the database. In Keri’s organization, all account executives have a powerful notebook computer that allows access to the database even on the road. Through the network,

Introduction to Concepts 11

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the database is constantly updated, allowing all areas of the business to be aware when a transaction is made.

Software has also become more user friendly, so that people don’t have to be computer experts to take advantage of the benefits of databases. Not only are there general database programs that are easy to learn and use such as Access and Paradox, but even small businesses can use sales and marketing databases such as ACT! and GoldMine. Furthermore, industry-specific database programs are available that allow small organizations to coordinate marketing and other business functions.

More Informed Customers

Consumers and business customers have access to substantially more infor- mation now than in the past. Greater product knowledge brings more crit- ical evaluation of products and greater consideration of price. Information from marketers extends to areas outside traditional mass advertising. Sales promotion methods such as rebates, sweepstakes, contests, and coupons continue to be widely used. Event marketing that associates products with sporting, music, and other events have been used with a greater frequency in the last few years. Marketers of prescription pharmaceuticals now target patients directly, providing information about product benefits (and side effects) in an attempt to induce patient-physician discussions about the possible trial of a drug. The Internet and infomericals have provided marketers with an opportunity to present detailed information about products to consumers.

However, marketers have to compete not only with information provided by other marketers but also with information from other sources such as public interest groups, governmental agencies, journalists, and not-for-profit organizations. In our Keri Lee scenario, you may have noticed that she was able to get insurance quotes online. Furthermore, it is now common for car customers to get product information, reviews, ratings, invoice pricing, and price quotes via the Internet (see, e.g., www.edmunds.com). In addition to its magazine, Consumers Union has a Web site (www.consumerreports.org), and television news programs routinely present CU’s product reviews and consumer information. Organizations such as the Center for Science in the Public Interest (www.cspinet.org) often present information that is in conflict with information given by marketers. For example, the Center opposes the marketing of products containing Proctor and Gamble’s low-calorie fat, Olestra. Network programs such as Dateline and 20/20 frequently feature segments on consumer issues. Chat rooms allow consumers to ask questions and voice opinions about products. In addition, with the expan- sion of specialized cable channels and magazines, consumers are learning

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more about products in specific categories such as home improvement, fashion, sporting equipment, food, and health care.

Although the availability of information is increasing, some consumers feel overwhelmed and confused by the conflicting information they are receiving from various sources. For example, consumers may hear from some sources and marketers that food supplements like ginseng are benefi- cial and from other sources that there is no benefit from using the product.

Consequently, access to more information does not always result in more informed consumers. Access to the proper type of information is more critical. With databases, marketing communications can be more speci- fically targeted so that the information matches the characteristics of the consumer. For example, if a database contains information on the purchase history of potential customers of financial services, a mail campaign can be designed to communicate differently to novice versus experienced investors.

Introduction to Concepts 13

____________ Database Marketing Versus Aggregate Marketing In database marketing, customers are selected from a database or list to receive a marketing communication through the mail, by phone, or by e-mail. In some cases, as with direct TV or newspaper inserts, traditional mass media is used for the initial contact. Direct TV and newspaper inserts have a response mechanism (e.g., phone number or post card) that direct marketers can use for initiating and tracking a contact. Although the media used are mass (as opposed to mailing or calling an individual), it is still direct marketing because of the response mechanism that allows customer tracking. With traditional mass media, the response to the ad is not directly tracked. For example, someone sees a Burger King ad and goes out to buy something at a Burger King. We can’t directly relate that purchase to the ad. On the other hand, if someone orders a diet plan after seeing an infomer- cial, the order and ad are linked and the transaction for the specific cus- tomer is put into a database. The customer may respond to the offer, and the marketer acts to fulfill an order or send additional information (see Exhibit 1.1). When a customer responds to an offer, the specific character- istics (e.g., date, payment, quantity) of the response are recorded on the database.

In contrast, in a traditional retail transaction, there is no feedback loop to a database, and no information on individual customers is obtained (see Exhibit 1.2). Note that the arrow goes in only one direction.

In a traditional retail environment, product success or failure is deter- mined by aggregate sales through the distribution system (see Exhibit 1.3).

Exhibit 1.4 shows that the consumer obtains information about the product in a traditional retail environment through mass media or retailer promotions, and the marketer does not know the individual customer.

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14 OPTIMAL DATABASE MARKETING

Fulfillment

Process Order

Provide Info

Sales Contact

Marketer

Individual Customer

Database Data Storage and Analysis

Media Mail

Phone

Internet

Response

Purchase

Further Contact Other

Exhibit 1.1 Transaction Flow in Database Marketing.

Marketer

Individual Customer

Intermediaries

Retailer

(e.g., wholesalers, brokers)

Exhibit 1.2 Transaction Flow in Traditional Retail Marketing.

With aggregate marketing, information about the end consumer is obtained through anonymous marketing research sampling methods. Marketers can obtain information about the demographic and psycho- graphic characteristics of customers and customer segments, but this information is not related to an individual’s purchase patterns as it is with database marketing (see Exhibit 1.5).

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Introduction to Concepts 15

Reorder Marketer

Individual Customer

RetailerSale

(e.g., wholesalers, brokers) Intermediaries

Reorder

Exhibit 1.3 Customer Feedback in Traditional Retail Marketing.

Exhibit 1.4 Flow of Marketing Information to Customers in Traditional Retail Marketing.

Individual Customer

Retailer

MASS MEDIA

Television

Radio

Store

Promotions

Marketer

Advantages of Database Marketing

The preceding discussion highlights the advantages of database marketing over aggregate or mass marketing. Aggregate marketing is based on the “average” customer, so messages cannot be tailored to individuals. With

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the database, the capability exists to segment down to the individual level, allowing personalized messages. Only the media limit the ability to seg- ment markets. This can be a problem for aggregate marketers. In some circumstances, magazines, television channels, radio stations, or news- papers do not adequately reach a target segment. A direct mail or telemar- keting campaign can reach people who are difficult to reach through mass media. Recording customer response (e.g., purchases, requests for information, redeeming a coupon) makes the database a powerful marketing tool, and it allows us to develop effective and efficient marketing programs.

Disadvantages of Database Marketing

Although the use of databases can increase the effectiveness and efficiency of marketing programs, some disadvantages need to be evaluated and obstacles overcome.

Cost Issues

The cost of establishing sophisticated database marketing systems can be substantial for some organizations. With database marketing, the organization requires a higher level of technical skills. Start-up costs for internal databases and order fulfillment can be high compared to traditional brick and mortar

16 OPTIMAL DATABASE MARKETING

Individual Customer

Marketer

Marketing Research

(Anonymous Sample)

Individual Customer Individual Customer

Exhibit 1.5 Research Process in Traditional Retail Marketing.

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retailing, and often database marketing has higher costs per contact (con- sider the cost of mailing a catalog versus running a print ad). For all these reasons, database marketing may not be feasible for many low-margin products. Therefore, it is important that the organization set clear objectives for the database and conduct an analysis to estimate the expected return on the investment in the database. In the next chapter, we outline a process for evaluating how the database might fulfill organizational objectives.

In addition, although the costs of database technologies have generally decreased, some printing and mailing costs have increased. In response to these cost increases, marketers have developed strategies and tactics to reduce costs. One method is exploring e-commerce and communicating through the Internet. Other methods include automated dialing for tele- marketing and sorting for postal discounts. Some of these methods require performing analyses on the database to determine which customers are most likely to respond.

Global Markets

The use of marketing databases presents special challenges to companies doing business internationally. Many U.S. corporations are experiencing more growth in foreign markets compared to domestic markets. As markets have become more saturated at home, companies have been expanding into both developed and developing countries. For database marketers, global expansion is limited by technology, the legal and political environment, and cultural factors. In some developing countries, support systems for technol- ogy are not readily available, and it is difficult or impossible to acquire lists of potential customers. Even where the technology and support systems do exist, the legal and political environment may be more restrictive. For example, there are more stringent regulations on the use of personnel infor- mation in most European countries than in the United States. In the final chapter, we discuss factors in the global environment that have an impact on database marketing.

Competition From Traditional Retailers

Traditional brick and mortar retailers (i.e., retailers who have physical locations) have become more effective and efficient. In some product categories, it is difficult, if not impossible, for direct marketers to com- pete on price with traditional retailers, at least in the near future. What may emerge is a greater use of integrated multichannel marketing. For example, a customer may order a product online and pick it up at a local retailer.

Introduction to Concepts 17

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Negative Perceptions

One of the greatest threats to database marketing is the generally nega- tive attitude of consumers and politicians. People commonly refer to mailings from direct marketers as junk mail and disdain telemarketers. Consumers are also concerned about how their personal data are used. In particular, public interest groups have initiatives to protect medical data and information on children. With the expansion of Internet commerce, debates go on in Congress and in the Federal Trade Commission about how to protect consumers making online transactions. The industry wants to establish self-regulation, whereas many public interest groups want man- dated regulation. In response to such concerns, one important objective of database marketers is to develop strategies and techniques to contact only those individuals who may be interested in their product.

18 OPTIMAL DATABASE MARKETING

Framework for This Book ________________________________

This book starts by covering general concepts and examples of marketing databases and then moves on to more specific techniques. To facilitate learning, we use examples and short cases to illustrate concepts and explain techniques. We have also made use of tables and diagrams when- ever appropriate. Our objective is to build on previous knowledge in sequential steps.

We have already examined the factors that have led to the widespread use of databases and how marketing with databases is different from brick and mortar marketing. In the next chapters, we provide examples of databases and take a strategic view of database development. It is important to con- sider if and how an organization could benefit from developing a marketing database.

We then start to examine more technical aspects of the database. We explore how databases are developed, enhanced, and maintained. We also examine the basics of database technology. Our objective for these chapters is to provide fundamental concepts about database technology that can assist you in using databases in marketing.

One of the most important aspects of database marketing is the exten- sive capability to understand customers through data analysis (also known as data mining). Starting with the fundamental concept of segmentation, we explore how databases are partitioned to isolate the “best” customers and track them over an extended period of time to determine profitability. The discussion of data analysis expands to cover statistical techniques that help predict which customers are most likely to respond to a particular offer. We also examine testing alternative marketing programs as a method to increase effectiveness and efficiency. Our objective with these

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chapters on data analysis is not to train marketers to become statisticians but rather to facilitate an understanding of the concepts and techniques that enhance the marketing process. We have also included two chapters on databases in Internet marketing. Chapter 15 points out the differences between Internet marketing and other database marketing methods. Chapter 16 provides an introduction to data analysis on the Internet.

The book concludes with a discussion of important current topics related to database marketing: ethics, the global marketplace, and future trends. After you have finished reading this book, you should have obtained a good general understanding of the strategic use of marketing databases and the techniques that are used to help realize the database’s potential in achieving organizational objectives.

Introduction to Concepts 19

_______________________________________ Chapter Summary

In this chapter, we introduce marketing database concepts and define some common terms. The marketing environment has changed dramatically in recent years, and we discuss those trends leading to the use of databases in marketing. We compare database marketing with conventional aggregate marketing and point to potential advantages and disadvantages. The chapter concludes with a description of the framework of the book.

1. In the vignette about Keri Lee, how have databases benefited her life? Are these benefits substantial or superficial?

2. What is a marketing database, and why are databases important to marketers?

3. What are some of the trends that have led to the utilization of mar- keting databases?

4. How is database marketing different from aggregate marketing?

5. What are some of the advantages and disadvantages of database marketing compared to traditional brick and mortar marketing?

6. What do you think about the concerns some consumers have about database marketing? How would you respond to those concerns?

_______________________________________ Review Questions

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