Direct Marketing Contents

1. Objectives 2. 1 What is direct marketing?

3. 2 The development of a discipline

4. 3 The cornerstones of direct marketing

5. 4 Customer lifetime value

6. 4.1 Calculating the LTV of individual customers

7. 4.2 The benefits of LTV analysis

8. 4.2.1 Assigning acquisition allowances

9. 4.2.2 Choosing media for initial customer acquisition

10. 4.2.3 Setting selection criteria for retention marketing

11. 4.2.4 Investing in the reactivation of lapsed customers

12. 4.2.5 Assigning an asset value to the marketing database

13. Forecasting is very difficult—especially about the future!

14. 5 Customer acquisition versus retention

15. Loyal customers are worth a fortune

16. 6 Customer Acquisition

17. 6.1 Objectives

18. 6.3 Targeting

19. 6.3.1 Geodemographic lists

20. 6.3.2 Lifestyle lists

21. 6.3.3 Choosing a list

22. 6.3.4 Other sources of prospects

23. 6.4 Media selection

24. 6.4.1 Direct mail

25. 6.4.2 Telemarketing

26. 6.4.3 Direct Response Press Advertising (DRPA)

27. 6.4.4 Door-to-door distribution

28. 6.4.5 Direct Response Television Advertising (DRTV)

29. 6.4.6 Inserts

30. 6.4.7 The internet and electronic media

31. 6.5 Communication of the offer

32. 6.6 Fulfilment

33. 6.7 Response analysis

34. Box 26.2 An illustration of an ACORN area

35. Demographics

36. Socio-Economic Profile

37. Housing

38. Food and Drink

39. Durables

40. Financial

41. Media

42. Leisure

43. Atitudes

44. 7 Building a customer database

45. 8 Customer retention

46. 9 The future

47. Guaranteeing privacy may be the differentiator

48. 10 Summary

49. Further reading

50. Discussion questions

51. Mini Case: Benedictine liqueur: the repositioning of a brand

52. Discussion question:

Section: Issues in Implementing Marketing Strategies Objectives The objectives of this chapter are:

1. to introduce the role of direct marketing in the marketing porcess; 2. to explain the benefits fo direct marketing; 3. to introduce the concept of customer lifetime value; 4. to distinguish between customer acquisition and customer retention activity, providing examples

of each; 5. to consider the critical role of the customer database.

1 What is direct marketing?

BY this stage in the text you will already be familiar with a number of standard definitions of marketing. You will also have appreciated the centrality of customer requirements to the marketing management process and the necessity of satisfying those requirements better than the competition. The same basic principles apply in the realm of direct marketing. Indeed, direct marketing has much in common with the underlying philosophy of ‘general’ marketing; it is only the approach that is different.

Specifically, direct marketing is an approach to marketing that treats customers as individuals and characterizes them, not only by their individual characteristics, but also by how they have behaved in the past. Thus, for example, organizations engaged in direct marketing will tend not to view all 30–40-year-old customers as alike. They will endeavour to identify subtle differences in behaviour, each of which could potentially be used to inform the development of a uniquely tailored customer relationship. In short, database information about historic behaviours is integrated into the marketing decision-making process and utilized to ensure that all customers receive a marketing mix specifically adapted to their requirements.

This contrasts sharply with the days of the traditional mass-marketing approach, when organizations treated all customers alike. A standard campaign was developed to address everyone, regardless of individual preferences or whether they had been a customer in past. Fortunately the death knell for this form of marketing was sounded when, in 1970, Alvin Toffler introduced the term demassification into marketing vocabulary, noting that mass markets were gradually eroding and with them the need for mass-marketing approaches. By the mid-1970s consumers had started to become more discerning, thoughtful, and individualist. Indeed, in the modern era consumers have come to expect greater choice and products/services that are ever more tailored to their own individual requirements. For evidence of the impact of this new thinking, Naisbitt (1982) reminds us of those not so distant days when bathtubs were white, telephones were black, and cheques were green. Marketing certainly came a long way in the last thirty years of the twentieth century.

This increasing consumer choice has also been reflected in the proliferation of communication channels. In the late 1940s it was possible to reach half the adult population of the UK with a single ad in the Radio Times. The early days of commercial television offered similar opportunities for mass marketing. Brands could be created almost instantaneously with high-profile campaigns and market shares could be doubled virtually overnight. With the onset of the new millennium and the proliferation of communication media, mass advertising is losing its appeal. Highly focused channels now exist that can reach a customer group much more cost effectively than would previously have been the case. Indeed, the profile of individuals using particular media can be carefully compared with the known profile of a particular organization's customers and the closest match identified. Media can now be selected with a high concentration of customers possessing very specific characteristics. Advances in targeting and database technology have greatly facilitated this process and media wastage is being rapidly eliminated.

One of the pioneers of mass marketing, William Hesketh Lever, famously remarked that he knew half the money he spent on advertising was wasted, but that he did not know which half. Even at the time he was making this comment one group of marketers had a pretty good idea how their advertising was working. For some time, early direct marketers had been testing customer responses to various media and using this information to tailor both their media selection and the creative approach employed. Direct marketing activity has the advantage of being infinitely measurable. Whilst marketers can only make educated guesses about the impact of a traditional advertising campaign, the customer response to most forms of direct marketing can be measured to two or even three decimal places. Opportunities for testing abound and direct marketers rolling out an expensive campaign are now in a position to predict with a high degree of accuracy the consumer response that will ultimately be achieved.

This characteristic of measurability is reflected in the Direct Marketing Association's definition 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.’ Although this is a definition now widely supported by leading practitioners (e.g. Nash 1995; Stone 1996), it

does perhaps lack an emphasis on the collection and manipulation of customer data that characterize so much direct-marketing activity. The definition developed by the UK's Institute of Direct Marketlng makes this additional dimension clear. Direct marketing is: ‘the planned recording, analysis and tracking of customers' direct response behaviour over time … in order to develop future marketing strategies for long-term customer loyalty and to ensure continued business growth.’

In the modern era, this process of recording, analysing, and tracking customer behaviour is greatly facilitated by database technology. Customer information can now be easily captured, processed, and used to inform the development of strategy. Advances in computing power have made it much easier for organizations to process vast quantities of information and hence to develop more personalized relationships with their customers. We will explore later in this chapter exactly how this might be achieved.

‘Direct marketing also offers marketers audience selectivity, since they can select those whom they wish to reach and observe the responses.’ (Chapter 12, p. 282)

2 The development of a discipline MANY people assume that direct marketing is a new phenomenon. This could not be further from the truth. Direct marketing has its roots in the mail-order industry and, as the chart in Box 26.1 makes clear, the basic ideas have been around for centuries. Indeed, those early pioneers would have adopted many of the same distinctions between categories of customer that are made today. Most, for example, would have recognized the distinction between active/lapsed customers and unconverted enquiries. Certainly from the middle of the nineteenth century a separate marketing approach would have been adopted for each distinct customer group.

Most of the organizations listed in Box 26.1 constitute early examples of stand-alone direct marketing. In fact, this is only one of three categories of approach to direct marketing now commonly adopted: stand-alone, integrated, and peripheral. Each is briefly described below.

Stand-alone direct marketing In many ways this might best be regarded as the ‘ultimate’ directmarketing approach. Organizations that employ stand-alone direct marketing employ no other means to manage the relationship with their customers. Organizations such as First Direct and Direct Line insurance clearly fall within this category. Customers are typically recruited via direct response press advertising and/or direct mail. Thereafter the relationship is managed by a combination of telephone and mail. Both organizations pride themselves on the degree of service provided and both maximize the benefit they can provide for their customers through a careful manipulation of their database.

Integrated direct marketing A second approach is to employ direct marketing as part of an integrated marketing mix. Here direct marketing may be viewed as complementing the other marketing activities undertaken. Organizations such as the AA, or a major charity such as Save the Children, can be classified as adopting this general approach. The AA, for example, recruits new customers through its kiosks at motorway service areas, press advertising, mass television advertising, and even direct mail. The organization has also a network of retail outlets situated in many high-street locations. Once customers are recruited, direct marketing is employed to develop the value of these customers to the organization, perhaps through cross-selling other product lines, or even asking them to ‘recommend a friend.’ In such cases direct marketing is an integral part of a very broad mix.

Peripheral direct marketing The final category of direct-marketing activity embraces those organizations for which direct marketing is only an occasional tactical marketing tool. The customer database may be poorly developed and direct marketing is regarded as a peripheral activity. Indeed it may often be initiated as a knee-jerk response to falling sales, or a short-term response to competitive pressures. It will typically be employed for the purposes of customer recruitment and the second side of the equation—namely, customer retention and development—will be all but ignored.

3 The cornerstones of direct marketing HOLDER (1998) argues that direct marketing comprises four components. These are continuity, interaction, targeting, and control. Continuity contrasts with the mass-marketing approach where the ‘contact’ with the customer is standardized and regarded merely as a series of one-off exchanges. All customers are treated alike and very simple ‘product’-based messages are employed stressing the desirability of making a particular purchase. The emphasis lies in making a profit on each sale and budgets and communications strategy are developed accordingly.

In direct marketing, the goal is to use customer information to develop an ongoing relationship with each individual on the database. Direct marketers recognize that it is not essential that the organization makes a profit on each transaction with the customer, provided that over the full duration of their relationship a respectable return on investment (ROI) can be obtained. Thus the costs of recruitment are less of an issue for direct marketers, as they recognize the future potential (or lifetime value) that will accrue from each customer. Indeed, the concept of customer lifetime value lies at the core of successful directmarketing activity and drives both what the organization is prepared to spend on recruiting each new customer and what it is prepared to spend on developing a relationship with a customer over time.

The interaction component emphasizes the fact that direct channels afford marketers numerous opportunities to engage the customer, with creative opportunities far superior to those that would be available through traditional channels. A Royal National Institute for the Deaf (RNID) Christmas mailing to its donors, for example, included a newsletter, a donation form, an audio cassette featuring a Christmas message from the charity's chief executive, and even a festive party whistle in keeping with the ‘celebratory’ nature of the season.

The concept of targeting stresses that directmarketing activity is also characterized by a unique ability to target customers with relevant communications. Modern geodemographic and lifestyle lists make it possible to target consumers with increasingly relevant marketing offers (see Section 7). Once customers have been recruited, information in respect of past-purchase behaviour can be used to develop ever more refined communication strategies. Customers ordering baby clothes from a mail-order catalogue today, for example, are likely to be in the market for ‘toddler toys’ in 18–24 months. Database information can thus be used to ensure that they receive relevant product information at the appropriate time.

The control component draws attention to direct marketing's ability to pre-test almost every dimension of a direct communication. In the case of the RNID mailing, for example, the charity could conceivably have tested the impact of

including, or not including, the cassette; including, or not including, the party whistle; the presence of a message on the envelope;. the choice of colour(s) to appear in the newsletter; the impact of asking the donor for specific sums.

In practice perhaps three or four versions of a mailing might be developed and mailed to a small sample of the database. The pattern of response can then be assessed and the most effective version of the mailing rolled out to the remainder of the customer base. Not only does this allow an organization to select the most appropriate mailing; it also allows it to predict with a high degree of accuracy the performance of the overall campaign.

It is these four elements together that combine to make direct marketing a unique discipline within marketing. At its core, however, is the concept of customer lifetime value, since it is this that will shape the strategy to be adopted.

4 Customer lifetime value BITRAN and Mondschein (1997: 109) define lifetime value (LTV) as ‘the total net contribution that a customer generates during his/her lifetime on a house-list’. It is, therefore, a measure of the total worth to an organization of its relationship with a particular customer. To calculate it one has to estimate the costs and revenues that will be associated with managing the communication with that customer during each year of his/her relationship. If, for example, the relationship extends over a period of four years, one can subtract the likely costs of servicing the relationship with that customer (e.g. product costs, catalogues, newsletters, telephone calls, etc.) from the revenue so generated. In essence, the contribution each year to the organization's overheads can then be calculated. Of course, there is a certain amount of crystal-ball gazing involved, since it becomes increasingly more difficult to predict costs and revenues the further one looks into the future. To take account of this uncertainty and to reflect the fact that a £50 sale in four years' time will be worth in real terms much less than it would today, it is also important to discount the value of the future contribution streams that will be generated. After all, instead of investing the money in dealings with its customers, an organization could simply elect to place the money in an interestbearing account at a building society. Unless the return from direct-marketing activity can be expected to match, or hopefully exceed, what could be generated by an interest-bearing account, it will clearly not be worthwhile. If this analysis is conducted right across the database, a key advantage accrues. Organizations can employ an LTV analysis to increase their overall profitability by getting rid of customers who will never be profitable and concentrating resources on recruiting and retaining those that will (Dwyer 1989; Jackson 1989).

4.1 Calculating the LTV of individual customers

The formula for calculating LTV in the case of an individual customer is as follows.

Multiple line equation cannot be represented in ASCII text.

where: C = net contribution from each year's marketing activities d = discount rate i = the expected duration of the relationship (in years).This somewhat complex-looking equation merely indicates that it is necessary to calculate the likely future contribution by a customer each year, discount these future contributions, and then add them all together. The grand total is the LTV of a given customer. Table 26.1 shows a worked example.

Suppose for the sake of argument that a customer has just been recruited. We know that she was recruited from a standard cold mailing and, from the details she supplied when she made her first purchase, that she is female, aged 45, living in a certain type of housing (identifiable from her postcode information), and interested in a very specific product category (e.g. classical music CDs). On the basis of a historical analysis of the database, the marketer can determine the future revenue that a person matching this profile would be likely to generate. On the basis of this information, coupled with projected costs, it is possible to produce the forecast given in Table 26.1 of the contribution that this customer will make to the organization over the duration of her predicted five-year relationship. As previously indicated, the value of the future contributions must be discounted and on this basis the predicted LTV of the customer is calculated to be £387. This informa= tion can be used to facilitate planning and to assign the customer to an appropriate pattern of communication.

Many organizations now employ this analysis. The Ford Motor Company estimates the LTV of a typical customer to be of the order of £100,000, whilst, in the USA, Domino Pizzas have calculated their average customer LTV to be $4,000. In this latter case, the knowledge that customers are actually worth such a substantial sum, instead of the few cents profit that might accrue from an individual sale, has had a considerable impact on the way the organization has developed its marketing activity.

4.2 The benefits of LTV analysis

LTV can be used to drive five management decisions:

assigning acquisition allowances; choosing media for initial customer acquisition; setting selection criteria for retention marketing; investing in the reactivation of lapsed customers; Assigning an asset value to the marketing database.

Each of these will now be considered in turn.

4.2.1 Assigning acquisition allowances

An understanding of the LTV of an organization's customers can guide the determination of how much a particular organization may be willing to spend to recruit each new customer (Lewis 1995) (see Insert). As was highlighted earlier, many organizations conscientiously strive to achieve as close as possible a break-even position at the end of each of their recruitment campaigns. Whilst commendable, this is not at all necessary, so long as the future income stream from the customers being recruited is a healthy one. Organizations employing the LTV concept would, therefore, tend to assign somewhat higher acquisition allowances than those that do not. In financial terms this is simply because a marketer employing a traditional approach will calculate campaign ROI thus:

Multiple line equation cannot be represented in ASCII text.A direct marketer employing the LTV concept would, by contrast,calculate ROI as:Multiple line equation cannot be represented in ASCII text.whereROI = return on customer acquisition investmentfuture contribution = estimated annual contribution to profitdiscount = reduction in value of future pounds to today's rate(discounted cashflow).

4.2.2 Choosing media for initial customer acquisition

Marketers engaged in the perennial problem of customer acquisition are well versed in the necessity of asking questions such as

Which media should I be using for my recruitment activity? What balance should I adopt between the media options that are available? On what basis should I select potential customers for target

The traditional approach to answering these questions would have been to consider the pattern of response typically received from each media in the past, calculate likely ROIs for each, and then select the most attractive option on this basis.

Such analyses, however, suggest suboptimal allocations of marketing resources, because they ignore certain known customer behaviours. Customers recruited from one medium may never

buy again, whilst customers recruited by another medium exhibit much greater degrees of loyalty. The overall profitability from one relationship can, therefore, vary considerably from that of another. LTV analysis can be used to good effect as an aid to selection of recruitment media and to help focus marketing activity on those customers who are likely to have the highest value to the organization over time.

Of course, to be in a position to utilize LTV as a decision-making tool, an organization needs a considerable amount of historical transactional data. Successful forecasting of the LTV of a given individual, or (more usually) segment of the database, requires a detailed understanding of how similar individuals or segments have behaved in the past.

4.2.3 Setting selection criteria for retention marketing

LTV calculations can prove instructive for more than just recruitment planning, The information can be used to guide contact strategies for ongoing customer development. LTV analysis can be employed to identify customers with whom it will never be possible to conduct profitable business. In many cases it may cost an organization more to mail them with catalogues, product reminders, etc., than it could ever hope to recoup from an individual's pattern of purchase.

If an organization calculates a projected LTV for each customer on the database, customers can be assigned to specific segments, and contact strategies can be customized to raise LTV. Initially, this may involve simply recognizing the difference in contribution, so as to offer particularly high-value customers a differentiated pattern of care that reflects their status. Many of the airlines, for example, now offer ‘membership’ benefits to their frequent fliers, or those that they perceive will become frequent fliers in the future. As companies become more experienced in the use of LTV analysis, it will also be possible to associate the impact of differentiated standards of care, or forms of contact, upon the LTV for a given customer. As Peppers and Rogers (1995: 49) note: ‘Instead of measuring the effectiveness of a marketing programme by how many sales transactions occur across an entire market during a particular period, the new marketer will gauge success by the projected increase or decrease in a customer's expected future value to the company.’

4.2.4 Investing in the reactivation of lapsed customers

Most organizations now recognize the value of their database. Few would question the established wisdom that existing customers will always be the most cost-effective source of additional sales. Few would also disagree with the notion that reactivating lapsed customers can be profitable. Having been sufficiently motivated to buy at least once in the past, with the proper encouragement it is eminently possible that such individuals will buy again. The problem, however, for many organizations lies in deciding which lapsed customers should be selected for contact. Whilst one could do this easily on the basis of the total amount spent, the size of the average purchase, or the length of time since the last purchase, it can be instructive to use projected LTV to inform the decision. With the right persuasion to respond, targeting those with a higher forecast LTV is likely to prove the most efficient use of resources. A ‘reactivation allowance’ can be built into the budget. How much an organization is prepared to commit to reactivating one customer would inform the nature and quality of the contact strategy employed.

4.2.5 Assigning an asset value to the marketing database

There are many competing demands upon the income of a typical company. Quite reasonably, expenditure on marketing is often perceived as a cost to be minimized. Whilst it is certainly true that marketing could be regarded as a cost, it should actually be seen as an investment. Using LTV analyses, organizations can explore the future behaviour of their database; this information can be used to place an overall value on customers as intangible assets. This can have a remarkably sobering impact on those responsible for the organization's financial management.

The justification for customer recruitment activity suddenly becomes clear, and the rationale for doing more for customers than simply sending them catalogues is obvious.

Forecasting is very difficult—especially about the future!

‘Many companies that know average lifetime values still manage their customers on their past value rather than predicted lifetime value.’

Source; Stone (1997:49).

5 Customer acquisition versus retention As will already be clear from the previous section, direct marketers draw a firm distinction between customer-acquisition activity (that is, activity designed to attract new customers to the organization) and customer-retention activity (that is, activity designed to keep them loyal over time). It is estimated to cost up to five times as much to conduct business with a new customer than to conduct it with an existing one. An organization's cheapest source of custom will always be its existing customers. Existing customers have, after all, already demonstrated their interest in the available products/services by virtue of their past purchase and are therefore considerably more likely to purchase again. Thus, for example, a supplier of garden seeds is likely to generate a much higher response from mailings to its past customers than it will ever achieve using a cold list of prospects, because inevitably its catalogues could be sent to some individuals who have little/no interest in gardening, or who are perfectly happy buying from another supplier.

Indeed, in the case of direct mail, there is a world of difference in response rates between cold mailings (that is, those to prospective customers) and warm mailings (those to existing customers). It would be usual for the former to achieve a response rate of between 0.1 and 5 per cent, whilst response rates to the latter have been known to exceed even 50 per cent.

In practice, direct marketers draw a distinction between four distinct groups of customers, each possessing its own unique response characteristics. This is illustrated in Fig. 26.1. As one works along the continuum from repeat sales to the generation of completely new business, the attainable response rates worsen considerably.

It is not only response rates, though, that make targeting existing customers a particularly attractive option. Organizations generally know more about the needs and wants of their existing customers, if only by virtue of their purchase history. This makes it possible to tailor the market offerings more precisely to those customer needs, quite possibly allowing the organization to change a premium for the enhanced quality of service that results.

Existing customers can also be cross-sold different product lines and be encouraged to generate referrals of other individuals who might have a similarly enhanced interest in the organization's products. There is, therefore, a world of difference between the likely profitability of customeracquisition activity and customer-retention activity. Indeed, many organizations expect to do little more than initially break even from acquisition activity, but are content in the knowledge that they will be able to cultivate quite profitable relationships with the customers they recruit over the full duration of their relationship with them.

In terms of the balance of resources, it makes sense to target the majority of the marketing resources at those customers that will be worth the most to an organization and generate the highest levels of profitability. Typically, therefore, in the case of an established organization, customerretention activity normally accounts for between 70 and 80 per cent of a direct-marketing budget, with a much smaller percentage being allocated to the more speculative customer-acquisition side of the business (see Insert). This balance will obviously vary dependent on the direct-marketing strategy adopted and may be different in the case of organizations setting themselves aggressive market-share targets, as the emphasis in such a case would be on building numbers in the database.

The use of direct marketing for both customer acquisition and customer retention will now be considered in turn.

Loyal customers are worth a fortune

‘Good long-standing customers are worth so much that in some industries, reducing customer defections by as little as five points—from say 15% to 10% per year—can double profits.’

Source: Caulkin (1996:9)

6 Customer Acquisition EVERY organization needs to consider ongoing customer acquisition. New customers will always be necessary to replace those that for one reason or another will stop doing business with an organization in a given year. Even if the service provided is excellent and levels of satisfaction are high, some customers will still terminate their relationship. In some markets this may be because they have outgrown the need for the product, their interests have changed, they no longer have the necessary moneys, or they may have died or moved away. Customer-acquisition activity is essential to preserve and if necessary enhance the overall number of customers on the database. It can also help to inject ‘freshness’ into a house list, because it is often the case that customers will be at their most profitable in the period immediately following their recruitment (Holder 1998).

In developing a customer-acquisition campaign there are seven stages that should normally be considered. These are illustrated in Fig. 26.2. Each of these steps will now be briefly reviewed in turn.

6.1 Objectives

The first step in developing a customeracquisition programme is to decide on the objectives the organization wishes to achieve. Objectives are an important part of the plan, as they are the only mechanism by which its success can be measured. If a plan achieves its stated objectives, one might reasonably conclude that it has been a success. Without them, one can only speculate as to the planner's original intent and the effectiveness of the activities undertaken has no benchmark against which to be assessed. Valuable resources could be being wasted, but the organization would have no mechanism for identifying that was in fact the case.

Recruitment objectives would normally address the following issues.

The target response rate that will be achieved. The number of new customers that will be attracted over a given time period or campaign. This is

not the same as the previous point, since it takes into account the conversion rate of new customers. A large number of customers might respond to a press ad, requesting a brochure, for example, but ultimately only a few of these enquirers might actually make a purchase.

The desired return on investment (ROI), although it is important to note that many recruitment campaigns are expected initially to operate at a loss.

The desired LTV of the customers recruited. Organizations with an established database will already lmow the profile of their high-value customers. Newly recruited customers can be compared with this profile to assess their likely future potential. Objectives can, therefore, be couched in terms of the degree of ‘match’ obtained.

The allowable cost per sale (i.e. how much is the organization prepared to spend to make each new sale?)

6.2 Segmentation and profiling

Having delineated recruitment objectives, the next stage is to determine which potential customers (or prospects) will be targeted. In essence there are two approaches, the appropriateness of which will be determined by the extent to which an organization has a prior knowledge of its markets. These methods can be categorized as being either apriori or cluster based and post hoc. An apriori approach is based on the notion that marketers decide in advance of any research which categories of customer they intend to target. Typically this might involve classifying customers into segments according to their demographic, geodemographic, or lifestyle characteristics. The marketer would then carry out research to identify the attractiveness of each segment and make a decision on the basis of the results as to which segment or segments to pursue.

Post hoc segmentation, by contrast, may be most appropriate where the marketer is already familiar with the market for a particular product/service and is perhaps in possession of a database of customers who are already purchasing the product category in question. It is now a comparatively simple matter to employ an analytical tool to develop a profile of the ‘typical’ customer. The level of detail an organization can achieve with this profile will clearly depend on the number of variables stored in the database, but most organizations should be able to develop a demographic and/or geodemographic profile of consumers who have typically responded well in the past.

Indeed, some organizations may be in a position to take this analysis one stage further. Consider Fig. 26.3. Organizations with larger databases will undoubtedly find that purchase patterns are not uniform. Individuals exhibit wildly different LTVs and this information can be employed to great effect in informing recruitment activity. Figure 26.3 shows an example of a database that has been profiled by customer LTV. At the bottom of the pyramid there is a large number of customers who will contribute very little to the organization over the duration of their lifetime. At the top there are a small number of individuals who will contribute a great deal.

There is no particular mystique about this pattern. It is commonly observed in database analysis and reflects what has come to be known as the Pareto Rule. It is often the case that 80 per cent of the contribution gained by an organization can be accounted for by 20 per cent of the organization's customers.

Whilst many organizations base their recruitment activity on the profile of a ‘typical’ customer, it is actually those individuals towards the top of the pyramid that should be of greatest interest. Ideally recruitment activity should, therefore, be based on a profile of the highest value customers and NOT on that of the database as a whole. It is, therefore, now common practice to divide a database into decile segments based on value and to use the profile of the top deciles to inform the nature of recruitment activity.

6.3 Targeting

This detailed customer profile can then be employed to inform the selection of appropriate recruitment media to reach other individuals in society who match these characteristics. If direct mail is to be employed, the information can be used to inform the criteria for the selection of appropriate prospects from commercially available lists.

In the late 1990s there were estimated to be over 4,000 such lists in existence in the UK alone. Navigating the range of alternatives can, therefore, be somewhat problematic, unless an organization has considerable past experience on which to draw. For this reason, many organizations engage the services of a highly specialized list broker, who can offer advice on the best lists to meet a specific set of recruitment requirements.

The list is the singularly most important concern in any customer-acquisition campaign. No matter how strong the creative activity—no matter how strong the offer—if it is sent to individuals with no interest in the product category, the mailing is doomed to failure.

Consumer lists fall broadly into the categories of geodemographic and lifestyle and a detailed profile of existing customers can greatly assist an organization in refining the criteria that will be used to select between the various options available.

6.3.1 Geodemographic lists

Geodemographics represent an attempt to categorize consumers by the type of housing they live in. The idea underlying the use of the approach is that ‘birds of a feather will flock together’—in other words, that similar types of people will tend to live in similar types of housing, have similar interests, and be in the market for similar categories of product.

There are a variety of commercial geodemographic systems now available, each capable of supplying a list of consumers matching a certain set of characteristics. These include ACORN, MOSAIC, PINPOINT, and FINPIN.

The common point in all of these systems is their use of census data. In the UK, a detailed census of the population is conducted every ten years. The next census is due in 2001. The census consists of a questionnaire sent to every household in the country, which gathers data on over 300 variables. The majority of households receive a standard census document, whilst a small percentage (15 per cent) receive a more detailed document for completion. In a typical census, over 96 per cent of the questionnaires will be completed.

Contrary to what many people believe, census information is not published at an individual level. Census information is available only at the level of the ‘enumeration district’, which typically contains ten postcodes (see Table 26.2). For direct marketers this poses something of a problem, because the most useful unit of analysis for marketing purposes is undoubtedly the postcode. Geodemographic systems such as ACORN have, therefore, to match census data from the enumeration district to the relevant bundle of postcodes. They achieve this match by employing the relevant map references for enumeration districts and postcodes. In practice this stage is the most common source of error in a geodemographic system, for the following reasons (Fairlie 1992).

The boundary for some enumeration districts can cut across a postcode. One postcode could thus include households in two different enumeration districts.

The map references for postcodes are often imprecise. The only map references available outside London for enumeration districts (EDs) are those for the

centroid of the ED. Since EDs do not have a regular shape, attempts to associate the relevant postcodes could introduce a substantial amount of error.

By this stage in the analysis, each postcode now has a mass of relevant census data associated with it. Geodemographic systems then employ a number of analytical processes that allow them to reduce the high number of census variables down to a more manageable number that is capable of explaining key differences in consumer behaviour. To develop market segments, a technique such as cluster analysis will then be utilized to identify groups of postcodes that appear to behave similarly in relation to this reduced number of variables. The aim is to group together postcodes with similar behaviours, whilst ensuring that the difference between these postcode groups is as large as possible.

All the major suppliers of geodemographic information employ slightly different sets of census data and employ differing statistical techniques to derive the final segments that will comprise their system. Typically this might include information in respect of:

age marital status

household composition household size employment type travel to work unemployment car ownership housing tenure amenities housing type socio-economic group

Some suppliers of geodemographic systems will enhance the utility of their system by conducting research with a representative sample of households from each segment. This allows the supplier to overlay information about the detailed purchasing behaviour of each group of customers. An example, drawn from the ACORN system, is depicted in Box 26.2.

The system has had a number of benefits for marketers, notably that, when a particular company has some knowledge of its customer base, it may profile it and obtain a geodemographic ‘picture’ of the typical target segment (or segments) that it is addressing. This information may then be utilized to target other individuals who exhibit similar characteristics, perhaps with direct mail. Wastage is minimized and response rates have been shown to be consistently higher than those achieved through the use of lists selected on the basis of geographical location alone.

Towards the end of the 1990s there were moves to create segmentation systems based on socalled fuzzy geodemographics. Instead of allocating households to one of a prescribed number of segments on the basis of their response to a combination of census variables, these new systems will be capable of identifying the key census variables that drive behaviour in relation to a given product category. Using consumer responses to these variables, the systems will then identify an appropriate number of market segments and allocate postcodes to these segments accordingly. What results is in essence a separate geodemographic classification system for every corporate use of the system. Hence, for one manufacturer, the fuzzy system might group postcodes into twenty segments that behave differently in relation to their product. For another manufacturer, in a different sector, it might identify sixty-three distinct segments of customer behaviour. These new systems will allow direct marketers much more flexibility to relate geodemographic analysis, specifically to their own unique needs.

6.3.2 Lifestyle lists

A plethora of lifestyle information is now available commercially. Lifestyle databases differ from geodemographic databases since they collect data at an individual level. Organizations offering this service draw on the results from large commercial surveys, or product registration cards, completed by individuals with a willingness to take part. Questionnaires are often very detailed, with a typical lifestyle survey containing over 200 questions. To facilitate completion respondents are often lured by the prospect of a prize draw, or a promotional premium that ensures that they derive some direct benefit in exchange for the time necessary to complete the instrument. A number of typical lifestyle products are presented in Table 26.3.

Four broad categories of data collected by lifestyle companies were identified by Reynolds (1993):

names and addresses; data pertaining to product purchase patterns—or anticipated product purchase patterns; demographic and socio-economic information; values and lifestyle information.

There are many systems available commercially most of which work on a similar principle, although the variables utilized in each case are slightly different. It would, therefore, be advantageous prior to utilizing one of these systems to have carried out some initial market research to identify specifically which lifestyle variables are significant in a given market.

6.3.3 Choosing a list

Typically, 2,000 names and addresses may be purchased from a commercial list for between £80 and £150, a much lower cost than many people believe. In practice, the exact costs will be determined by the following factors.

The level of detail that is to be employed in prospect selection. Some suppliers will charge less for a list of single males that they will for a list of single males who own their own homes, have a disposable income in excess of £30,000, and take an interest in rugby. In this latter example, it may take a supplier a little longer to extract the required individuals from their system and costs will vary accordingly.

Whether it is intended to purchase the list or merely rent it. Most suppliers offer organizations a choice and lists can be purchased outright, or rented for a specified number of uses. Dummy addresses are often inserted to ensure that the list is used only on the number of occasions that was originally specified!

Whether the list can be bought ‘off the shelf’. Organizations can elect either to employ an existing list, or to pay to have one constructed specifically to meet their requirements. This would be more normal in industrial markets where a very specific set of criteria may often need to be met. This is an expensive option—because of the time required to conduct the necessary research—and charges may reach as high as £30 per name.

Given the plethora of available lists, it is always essential to evaluate the alternatives available. A number of the criteria that can be employed to assess lists for their suitability are given below.

The level of detail that can be supplied. Lists vary considerably in terms of the sophistication they can offer marketers for targeting purposes.

The level and nature of previous usage. It is important to clarify the extent to which prior use has been made of the list and in particular whether competitors have already employed the list to market their own goods and services. Lists can become ‘tired’ very quickly, and assessing the extent to which they have been previously employed can be a very significant issue.

Past results. Suppliers can often give an indication of the response rates achieved by previous clients. Accepting that these might tend to fall as the list ages, such information can nevertheless prove invaluable in assessing the desirability of using a particular list.

There are also a number of tests that can be conducted in-house. Whilst most suppliers have a minimum order quantity, it should always be possible to obtain a small sample of the members of a list and ascertain response rates with a test mailing. Subsequent analysis of the response should allow an organization to predict with a high degree of accuracy the response it will

achieve when the whole list is eventually mailed. If two competing lists are being evaluated, the pattern of response can be compared and the most appropriate option pursued.

6.3.4 Other sources of prospects

Throughout this chapter we have made numerous references to the use of cold lists for recruitment purposes. Whilst these do typically represent a common source of new customers, they are by no means the only source that may be employed. Indeed there are a number of sources of potential new customers. These are illustrated in Fig. 26.4. The diagram has been arranged as a pyramid to reflect both the number of prospects likely to be generated and the likely response rates that will be achieved by an approach. The most highquality prospects any organization can hope to generate are those supplied by its own satisfied customers. So-called member-get-member (MGM) schemes have become increasingly popular. In essence, current customers are invited to introduce a friend or acquaintance to a company in return for a small gift or premium. When the newly introduced customer makes his or her first purchase, the premium is shipped. Such schemes have a high conversion rate, since those newly introduced individuals are often expecting to receive their first mailing and have been recommended because they already possess an interest in the products/services available.

At the next level down are an organization's former customers. Companies often neglect this group, feeling that perhaps they are no longer interested in the products/services available. Whilst this may be true, organizations will still achieve a higher response rate from the members of this group than they will by targeting any of the remaining three groups in the pyramid. This is simply because an interest in the product category clearly exists. The problem lies in incentivizing former customers to make a further purchase and an organization may wish to test a combination of different offers and creative ideas, to identify the campaign with the greatest reactivation potential.

Unconverted enquiries are also a good source of new customers. Again, such individuals must have had an interest in the broad product category available, but were unwilling or unable to make a purchase at the time the original enquiry was made. The enquirer's circumstances may change over time and a timely reminder may well pay dividends.

The remaining categories of selective and broadscale media are also available for recruitment purposes. Dell Computers, for example, could elect to advertise in either a selective media—for example, Personal Computer World—or a broadscale media—for example, the Daily Mail. The response to an advert in the former is likely to be much stronger, since all the readers of Personal Computer World have by definition an interest in personal computing. The same cannot be said of the readers of the Daily Mail and the relative levels of response will reflect this.

In attempting to meet recruitment objectives it would always be advisable to consider working down through the pyramid, progressing through each level, until such time as the recruitment objectives are met. Bearing in mind the likely response rates that will be obtained, it would be folly to progress immediately to broadscale media without first exhausting the possibility of reactivating former customers or generating sales from unconverted enquiries.

6.4 Media selection

A variety of media can be employed for the purposes of customer recruitment. These include direct mail, telemarketing, direct response press advertising (DRPA), door-to-door distribution, direct response television advertising (DRTV), inserts, and the Internet and electronic media, as well as, radio, in-house magazines, vending machines, and so on. The major recruitment media are described below.

6.4.1 Direct mail

The terms direct mail and direct marketing have become almost synonymous. A steadily increasing volume of items from 1.5 billion items in 1986 to well in excess of 3.5 billion items in 1997 has contributed to an increasing consumer awareness of the medium. It has suffered historically, though, from a poor image, with early, poorly targeted campaigns leading to a public perception of the medium as ‘junk mail’. In fairness to the industry, however, improvements in targeting technology have greatly reduced the number of poorly targeted mailings and the majority of consumers now receive mailings that relate, at least in part, to their likely needs. It is also important to recognize that the label ‘junk’ is perhaps most fairly attributed to cold mailings, since once a customer has started doing business with an organization they are much less likely to be antagonized by its subsequent communications.

As a medium, direct mail has a number of advantages. It is a genuinely one-to-one medium that facilitates the communication of a very distinct and targeted message. Mail-order companies can mail only those customers that they know will be interested in a given product category and those that they know can afford to purchase the range on offer. Organizations can also make use of the enhanced creative opportunities the medium offers.

The mailing illustrated in Fig. 26.5 was dispatched by Honda to those individuals on its database it thought might be interested (and financially able) to purchase its new CRV vehicle. Each item was sent separately, with a few days between each mailing. As the car sponge, ice cube tray, and salt and pepper pot were sequentially dispatched, the only accompaniment to the mailing was a sleeve surrounding each item proclaiming ‘something for the glove compartment of the ultimate recreational vehicle’. There was no other clue as to the origin of each mailing. In the final mailing of the sequence, consumers received a storage case for a pair of Ray-Ban sunglasses. On opening the case, consumers discovered that they could collect a pair of Ray-Bans to fill the case when they arranged to test drive the new Honda CR-V—the ultimate recreational vehicle!

Mailings such as the one described engage consumers in a way that would be impossible in other media. Indeed, some mailings now appeal to a variety of different consumer senses. Some organizations now mail audio or video cassettes to get their message across. A leading cruise line, specializing in cruises to the Orient, even went so far as to include a sachet of Jasmine tea with their brochure, So that consumers could experience the ‘taste of the Orient’ as they read through the details of the cruises on offer.

6.4.2 Telemarketing

Despite the commonly held perception that telemarketing is a relatively new medium, expenditure in this area in both the USA and UK now outstrips what is spent each year on direct mail. Telemarketing has been used to good effect for both ‘inbound’ and ‘outbound’ purposes.

In respect of the former, many organizations now offer their customers a convenient number to call the organization for information, or to place an order. On occasions the organization concerned will bear the full cost of the inbound call, whilst, on others, the consumer can call in for the cost of a local call, with the organization paying any balance that might be due directly to the telephone company. The earliest example of successful inbound telemarketing was the campaign in the USA to restore the Statue of Liberty. Consumers who wanted to make a donation were asked to call 1–800 THE LADY. Indeed, the increasing incidence of alphanumeric keypads has recently led to some particularly creative telemarketing approaches. During the 1990s in the USA, for example, if you wished to apply for an American Express Gold Card, you dialled 1–800 WEALTHIER.

The term ‘outbound’ telemarketing, by contrast, refers to telephone communications initiated by the organization. Early use ofthis medium by organizations selling double glazing and other home-improvement products was viewed as intrusive and the use of telemarketing for coldcustomer recruitment has been much criticized. More acceptable, perhaps, are ‘warm’ uses of the technique, where customer interest in a product category has already been established and where the content of the call is thus more likely to be of interest.

Companies new to the use oftelemarketing can either elect to employ their own telemarketing staff, or engage the services of a specialist agency, who will answer or initiate calls as if they were part of the client's organization. The use of such agencies can be particularly helpful, where it could prove difficult to anticipate the customer response. Not only can they offer guidance based on their experience, but the fact that they service a number of clients often means they have the necessary manpower to cover an especially large and perhaps unanticipated response.

6.4.3 Direct Response Press Advertising (DRPA)

DRPA differs from traditional press advertising in that the purpose of the ad is always to initiate a direct response. The ad will typically contain a high degree of information about the product/service and a response mechanism will be provided such as a coupon or an ‘0800’ inbound telemarketing number. As with other forms of direct marketing, it is possible to track the response from particular ads. Telephone operators can be instructed to record the source of the enquiry and, in the case of coupons, a code can be printed on each coupon, uniquely identifying the nature and date of the publication. Replies can be carefully analysed and the most effective media identified.

6.4.4 Door-to-door distribution

Carriers such as the Royal Mail offer a service that allows a direct-marketing organization to concentrate its resources in particular geographical regions. Leaflets or fliers can be delivered with the mail to all the households in a specified area. It is clearly less targeted than direct mail, but has considerable advantages in terms of cost, since there are no postal charges to pay. For these reasons it is now common practice to employ door-to-door distribution in the case of those products/services with a fairly universal appeal (Bird 1989).

6.4.5 Direct Response Television Advertising (DRTV)

As with DRPA, the aim of this form of advertising is to engender a direct response. An increasing proportion of television advertising now contains a response number and may hence be classified under this general heading. The fragmentation of television channels means that advertisers can now reach highly specialized audiences with this form of communication (Young 1994). The birth of digital TV only served to increase the pace of fragmentation and, since highly specialized audiences are usually more willing to watch commercials that relate specifically to their needs, the duration of commercials will lengthen. In effect, television advertising has come ‘full circle’. The earliest forms of television commercial were quite bland affairs, where the details of the product would be recounted in great detail. Indeed some commercials in the late 1940s were as long as thirty minutes in duration. Advertising carried by some specialist channels is now beginning to resemble these early approaches. Indeed, some channels (e.g. QVC) are now entirely given over to DRTV appeals.

6.4.6 Inserts

Inserts are loose-leaf or bound in cards inserted into many newspapers and magazines. Anyone buying a magazine in recent times will be familiar with the use of this medium, particularly if they have held the magazine upside down and shaken it. A flood of paper and card inserts will doubtless have assembled on the carpet. As a direct response media, these inserts would typically carry a response telephone number or a reply coupon. Indeed, many inserts are actually designed as response cards in themselves and on completion can be placed directly in the mail for return to the company.

Inserts are typically much more effective than press advertising and can often generate between four and six times the response of an equivalent press ad (Stone 1996). Inserts can also offer enhanced opportunities for testing, since several different versions of the insert can be printed,

with no additional insertion costs being incurred, since the inserts are delivered en masse to the media owner. The principal drawback of inserts is the cost. The cost per thousand is usually four to five times that of the equivalent press advertising.

6.4.7 The internet and electronic media

Since the introduction of the World Wide Web in 1991, the use of the Internet has grown almost exponentially. By the late 1990s the Internet was attracting what has been described as a ‘sophisticated consumer’ demanding timely information and a prompt and personalized service. Research indicates that a typical internet user is male, aged 35 years, with an above-average level of education and household income (Nua What's New 1997). The gender gap is narrowing, though, and the profile continues to soften with each passing year, embracing ever more broader sections of society.

Not only is access to the Internet widening; users appear ever more likely to use the Internet to make product purchases, despite early concerns over the security of transmitting credit-card information over the Web. Indeed, between 20 and 30 per cent of users have made at least one purchase using this new electronic medium. Many organizations are, therefore, beginning to exploit the potential of the Internet for marketing purposes, and the proportion of sites offering visitors the capacity to purchase goods and services is increasing rapidly every year.

Davenport (1996) identifies four levels of internet presence.

Electronic brochure. This is a site that provides only the most basic of information about the organization and its services.

electronic catalogue. A detailed online catalogue enables customers to browse and if so desired, to place an order by using the phone or fax.

diret response without cash transactions. This category is similar to the above, but the site permits online ordering. Payment must, however, be handled via conventional means.

Full direct response andpayment. Some sites permit all of the above, but in addition allow the user to pay for the goods ordered on line. To deal with concerns over the security of personal financial information, many sites now provide a data encryption facility to ensure that the link with them is secure.

The household penetration of Internet use is expected to increase dramatically with the advent of Web TV. The merging of traditional entertainment channels with the flexibility and information provision of the Web will represent a considerable marketing opportunity. Consumers exposed to DRTV will shortly be able to request further information direct from the manufacturer, seek wider information about other suppliers of a given product category, or even make a purchase direct from their own armchair at the simple press of a button. Web TV should also allow advertisers to target individuals with a known interest in particular products/services. The pattern of advertising to which we are all exposed will be made to vary at an individual level and will be driven by our unique needs and preferences.

This personalization is already prevalent on the Internet. Users visiting a web site for the first time are often asked to provide information about themselves that can be stored by the company for future reference. As a service to their customers, companies store basic information about each individual in a ‘cookie’ file on the customer's home (or office) pc. Most users are unaware that data are being stored on their computer in this way, but it can be a helpful facility, since the next time they call into the company's web site, the organization requests information from their cookie file and is able to identify them. The appearance of the site can then be made to vary by the individual's known preferences. The ‘home page’ of the Internet bookshop Amazon is presented in Box 26.3. As you can see, although this is the first screen in the site I have visited,

the organization has already recognized me, addressed me by name, and prepared a list of texts it believes I will find of interest.

Of course, web sites are not the only media opportunity offered by Internet technology. Electronic mail (e-mail) is increasing in popularity and many organizations now communicate with their customers on a regular basis using this medium. At present, the majority of this activity is inbound (i.e. customer initiated) or undertaken primarily with the customer's consent. Whilst it is technically possible for organizations to send out large numbers of unsolicited e-mails, or SPAM as it has come to be known in Internet jargon (reflecting the effect of a can of spare thrown into a fan), such forms of communication are extremely unpopular. Most organizations therefore respect the wishes of other Net users and avoid their use. When immigration lawyers Cantor and Siegel failed to observe this ‘netiquette’ and advertised their legal services through every available Internet discussion group, their organization received many thousands of hate-mail responses which resulted in the organization being thrown off the network. The lawyers have since claimed, however, that their tactics gained them over $100,000 worth of new business.

6.5 Communication of the offer

Having selected appropriate media, the offer can then be communicated to the target audience. There may typically be several different ways of framing the offer and incentivizing a response. Direct marketers will often test a series of different creative approaches and compare the likely ROIs achievable by offering a range of different incentives to engender a response.

In the direct-marketing context, it is possible that a multi-stage approach to communication may be planned. In the example in Box 26.4 there are several different approaches that may be used to engender a response. In general, the greater the number of stages in a communications strategy, the greater will be the ultimate response. It is, of course, a matter of balancing the cost of employing additional stages, with the return that will be generated by the additional investment. Past experience or additional research will often suggest the optimal number of stages to employ.

Box 26.4 Contact strategy: consumer* Mail* Mail → 0800* Mail → Phone* Press → 0800 → Mail follow-up* Mail → 0800 → Mail follow-up → phoneSource: Holder (1998).

6.6 Fulfilment

When the response from customers is received, the organization must then ensure that the order (or request for further information) is processed within the time frame promised in the original communication The response must be handled as efficiently and effectively as possible. This process is known as ‘fulfilment’. Testing will have suggested the likely response rates that will be achieved and the organization can use this information to plan fulfilment resources accordingly. In many consumer markets, manufacturers will elect to outsource the fulfilment aspect of the campaign to ensure that an adequate level of service is provided. Fulfilment is a highly specialized operation and it will often be more economic for a manufacturer to rely on an external supplier than to have resources of its own standing idle between direct-marketing campaigns.

6.7 Response analysis

The final step in a recruitment campaign is perhaps the most critical. A detailed assessment of campaign performance can be invaluable in guiding future direct-marketing strategy and tactics. Performance can be compared against the objectives that were originally set for the campaign and against other campaigns that have been run in the past. The profile of responding customers can also be compared with the profile that was originally envisaged and any refinements necessary can be made to the targeting of future campaigns.

The most common financial criteria that are employed to assess recruitment campaigns are as follows:

% response; % conversion (i.e. from enquiries to sales); £ cost per customer; £ revenue per customer; £ profit per customer; £ projected LTV per customer; ROI.

‘Geodemographic segmentation combines the use of location and demographic variables. Simply defined geodemographics is “the analysis of people by where they live”…’ (Chapter 16, p. 388)

Box 26.2 An illustration of an ACORN area

These comfortable, mature neighbourhoods have very low levels of recent home mvers. The largely middleaged population contains very many people who own their homes outright. ACORN Type 26 is found all over Britain, but the highest concentrations are in Norfolk, the Isle of Wight and North York-shire. Cleethorpes is a typical town with many areas of this type.

Demographics

These neighbourhoods have a mature age profile. There are below average numbers of children, especially 0–4 yea olds, and younger adults. The largest age group is the 45–64 year olds, of whom there are 35% more than average. The household structure is characterized by a high proportion of older couples, in the 55+ age group, with no dependent children. The proportion of adults who are married is 23% above average.

Socio-Economic Profile

The unemployment rate in these neighbourhoods is only half the national average. The poportion of retired people is 23% above average. Women in couples without children are much more likely to be working part time or not working than working full time. Of those in emloymen, 19% work in manufacturing, a proportion just above the national average, while 61% work in services (identical to the national average). The socio-economic profile peaks in the skilled, non-manual groupings. Whilst the proportion of people with degrees is 15% below average, the proportion holding diplomas is nearly 30% above average.

Housing

44% of homes are owned outright—this is 84% higher than the average. A further 48% are being purchased by mortgage and so levels of rented housing ae very low in these areas. Nearly 90% of the housing stock is either detached or semi-detached. In terms of house size, there is an average representation of very large homes (7+rooms), but the majority are 3–6 rooms in size.

Food and Drink

Grocery shopping trips tend to be made by car and on a weekly or less frequent basis. Both freezer ownership and usage of freezer centres are average. Consumption of most food products, including frozen foods, is below average, partly as a result of small household sizes. A few products, however, are dog food. Beer consumption is well below average. Table wine and, in particular, sherry are the favourite drinks.

Durables

Car ownership levels are above average, bu not dramatically so. People in these neighbourhoods change their cars much less often than average, and the proportion of people who have owned their car for more than 5 years is over 30% higher than average. The proportion of large cars is relatively high. Purchase rates for most durables are low with the exception of video cameras and dishwashers, both of which are purchased at above average rates. The proportion of homes having replacement windows fitted is nearly 50% higher than average.

Financial

Financially, these are very comfortable areas. The income profile peaks in the £25–30,000 per annum band. Ownership of most financial products is above average, with the exception of hire purchase agreements. 59% more people than average have National Savings Certificates. The rate of new savings account opening is 35% above average.

Media

These are areas where The Telegraph and The Mail have well above average readership levels. Amongst Sunday titles, The Sunday Telegraph, The sunday Express and The Mail on Sunday are all read here by significantly more people than average. ITV viewing is medium, but commercial radio listening is light.

Leisure

The proportion of people taking holidays is above average, especially for winter and long holidays. Caravanning and camping are both more popular in this ACORN Type than on average. Gardening is a very popular activity: 70% more people than average have a greenhouse and garden expenditure is about 30% above average. People are more likely than average to eat out during the day and steakhouses ae a very popular choice. These people are less active in terms of both sports and cultural pursuits. Activities which do show above average popularity are golf, rambling and visiting stately homes.

Atitudes

An interesting aspect of these people is that they do not have particularly strong views on anything. They are happy with their standard of living and less likely than average to budget carefully when shopping or to search for the lowest prices.

Source: CACI Ltd. 1999, all rights reserved. ACORN and CACI are registered trademarks of CACI Ltd.

7 Building a customer database AS soon as new customers have been recruited, their details and purchase behaviour will be stored in the marketing database. This information can then be used to refine the targeting of additional customer-acquisition activity and it can also be used to inform the development of ongoing relationships with the individuals concerned.

As Kotler (1994) notes: ‘A marketing database is an organized collection of comprehensive data about individual customers, prospects or suspects that is current, accessible and actionable for such marketing purposes as lead generation, lead qualification, sale of a product or service, or maintenance of customer relationships.’ Given Kotler's definition, the creation of a computerized database is the single most important investment that many organizations can maike. As will already have become clear, the benefits a database can offer in terms of a more detailed understanding of consumer behaviour can lead to an infinitely more effective use of marketing resources.

Before taking the decision to invest in a database, however, an organization needs to be clear;

what the primary purpose of the database will be; what secondary functions the database will be expected to fulfil; the other systems with which the database must interact—e.g. accounting; the categories of data it is intended to store; the volume of data it is intended to store; the forms of analysis and/or segmentation the database will be expected to accomplish; the forms of marketing it is intended to support; the range of outputs that will be expected. 7.1 Three ways of producing adatabase

An understanding of these issues should enable an organization to select between the various options open to it in the acquisition of appropriate database software. For a typical organization, these are likely to include the following.

Purchasing or leasing a commercially available software package. There are a great many packages currently on the market and their number continues to grow on an almost daily basis. Packages will support many forms of direct-marketing activity, including direct mail and telemarketing. Other more sophisticated systems will aid in market research and even allow the development of geodemographic profiles of the customers on the system.

Using proprietary software. This differs from packaged software in that it is usually developed by highly specialized third parties such as Marketing Computer Bureaux. These organisations usually lease the software and work with the users to help them carry out their marketing activity and analysis.

Designing a custom database. This is clearly the most expensive of the three options and therefore beyond the reach of most smaller organizations. Moreover, one would need a very strong argument in favour of this alternative, since the range of proprietary or packaged software is likely to meet all but the most specialized of needs perfectly adequately. Circumstances that are likely to warrant this considerable investment include the necessity to link with a wide range of other

systems, the desire for a particularly specialized function, and/or the sheer size of the database to be created.

7.2 What information should be stored?

Data in respect of customers are typically held in ‘files’ that usually require the user to follow a set format. Each variable that is stored (for example, age, gender, and so on) will have a specific ‘field’ into which such information must be entered. More sophisticated packages also contain a number of user-definable fields, so that the database can to a certain extent be customized to the needs of the individual organization. Box 26.5 illustrates the information that would typically be stored in the case of both consumer and businessto-business contexts.

It is interesting to note that the collection of a customer's telephone number has taken on a new significance since telephone systems have been equipped with a facility known as caller recognition. This allows the system to recognize the person calling by his or her telephone number and to display the relevant customer file in front of an operator so that he or she can welcome the caller by name. Not only is this a more personal service, since the operator has immediate access to the customer record, but the time taken to process an enquiry is considerably shortened-something of benefit to both parties to the transaction. This facility is likely to become ever more powerful now that telephone users can be allocated their own unique telephone number, which they can then use for a lifetime, talcing it with them when they move from house to house.

‘Marketing-database data become “information” when we identify the recency, frequency, and monetary value (RFM) of customer orders.’ (Chapter 8, p. 169)

8 Customer retention THE role of the database for the purposes of recruitment has already been explained. It can also offer considerable utility, however, for customer development and retention. This is achieved by segmenting the database and developing a uniquely tailored service for each of the segments identified. Customers will thus receive communications that are relevant to them as individuals, with improvements in satisfaction and loyalty likely to result.

A number of criteria can be applied to segment a database and thus select individuals (or organizations) to receive a particular campaign. Variables such as age, gender, income, geographic location, geodemographic coding, occupation, lifestyle, and so on could all be used for this purpose. Communications with specific themes can be sent to those who experience suggests would be most receptive. In the context of database segmentation, there are, however, a number of other variables that could be utilized—namely:

original recruitment media; amount of most recent purchase; product categories purchased; date of most recent purchase; frequency of purchase; nature of the desired relationship; LTV.

Each of these variables is considered below.

Original recruitment media Data in respect of the original recruitment media can be used to good effect, since all customers are unlikely to behave in the same way. Customers recruited by DRTV, for example, are notoriously poor responders to direct mail. There would, therefore, be little point in attempting to develop a relationship with this group by mail. An approach based on the telephone, however, may prove more productive.

Amount of most recent purchase Similarly, the amount of the most recent purchase (or average order value) can be used to develop a customer from a low-value category (say £30 per annum) to a higher-value category (say £100 per annum). As an organization starts to understand more about the interests of its customers, it can refine the content of communications accordingly. It can also flame the ‘offer’ to encourage the customer to spend ever greater amounts of money with the organization concerned—what direct marketers refer to as building ‘share of the customer’ (McDonald 1998). It is important to note that average order value can also be used to ensure that mailings containing the details of high-value products are not sent to those with insufficient resources to purchase.

Product categories purchased A knowledge of the product categories purchased can be employed to ensure not only that customers receive future mailings that are particularly pertinent to their interests, but also those concerning related products/services that are also likely to be of interest. This is known as cross-selling.

Some organizations will also use this information for a second purpose—what direct marketers refer to as ‘up-selling’. Customers, for example, currently buying a car at the bottom of a manufacturer's range can be targeted to receive details of a slightly larger vehicle when they are considering repurchase. Recent purchasers of a Peugeot 106, for example, could be sent details of the 206 eighteen months after purchasing their previous vehicle.

Date of most recent purchase The date of most recent purchase can be used to control the timing of the next contact that an organization will have with a given customer. There are few things that irritate customers more than placing an order one day and then receiving another marketing communication a few days later for a similar product. Marketing communications should be timed at appropriate intervals, based on the record of previous correspondence and the customer's purchase history.

Information about the date of last order can also be used to identify customers who appear to have lapsed. On the basis of the value of their prior relationship, a decision can then be taken in respect of whether to delete them from the active portion of the database, or whether to attempt to reactivate them with a particularly attractive promotional offer.

Frequency of purchase Many organizations make the mistake of attempting to develop customers solely by order value. Mail-order catalogues, for example, often encourage their ‘agents’ to place ever larger orders through the provision of a series of financial and/or gift-related incentives. It is important to recognize though that customers can also be developed by the frequency with which they make an order. Persuading a customer who might typically make two purchases a year worth £40 to an organization to make a third will have the same effect on overall revenue as developing their average order value to £60. There are, therefore, two distinct alternatives.

Nature of the desired relationship Rather than manipulating the database to provide customers with the contact strategy the organization believes customers will find most appropriate, many organizations are now allowing customers to select for themselves whether and how they might wish to hear from an organization again. Increasingly customers are being offered a choice over the receipt of further communications, the product lines they wish to be kept informed about, and when and how often they would like these communications to be received. Some organizations even offer their customers choice over the media that will subsequently be employed (for example, mail, e-mail, telephone, fax, and so on).

LTV As was noted previously, the projected LTV of customers can be used to ensure that they receive a standard of care that reflects their value to the organization. Whilst losing any customer is regrettable, losing higher-value customers should be a matter of great concern. Database information can hence be employed to ensure that a particular effort is expended to retain and develop higher-value customers.

Data in respect of LTV can also be used periodically to clean the database. In almost every database there will be groups of customers with whom it will never be profitable to develop a relationship. Customers that make no contribution to the organization's profit, or who are actually costing the organization money to support, can be identified and deleted from the active portion of the database. In the author's experience, as much as 10 per cent of the active portion of a database can be made up of customers who will never be profitable.

9 The future THE direct-marketing revolution has barely begun. As the pace of technological change quickens, opportunities for direct marketers to develop what Business Week has referred to as a ‘silicon simulacrum’ of the relationships that people used to have with tradesmen such as butchers, bakers, and so on will abound. Tailored approaches will become the norm and tailoring the approach to dealing with different categories of customers will no longer mean increasing marketing cost. Modern databases can greatly facilitate the identification of discrete customer segments and suggest contact strategies designed specifically to build customer value.

Whilst it is always difficult to speculate about the future, a number of trends can already be observed. These include:

Channel integration The need for households to own a separate hi-fi, television, video recorder, and home computer will shortly be ended. Integrated home entertainment and information systems are already in the development stage. A new generation of intelligent Web TVs, for example, will record user preferences and search for the programming and information that will be of most interest. Facilities will exist to download relevant audio, video, and printed information and users will be able to purchase most of the goods and services they require from the comfort of their own armchair. There can be little doubt that the fragmentation of the advertising media will continue, but that it will become increasingly easier to navigate the alternatives from one central point of access. Direct marketers of the future will hence find it easier to reach potential new customers, but perhaps more difficult to retain them, as information about alternative products becomes much easier to assemble.

Rise in integrated communications Marketers have been making increasing efforts to integrate direct-marketing activities within their overall communications mix. Organizations can no longer afford to manage each of these activities separately—opportunities for synergy have now to be exploited to have the maximum impact on the target market. When launching the new Peugeot 406, Peugeot was keen to integrate every aspect of its campaign. In the run-up to the launch, dealerships received packs of promotional material, including point of sale material featuring stills from the forthcoming television commercials, CDs with the music from the commercials for distribution to customers, and a range of full-colour brochures—again featuring scenes from the ads.

Past customers of Peugeot, likely to be interested in this category of vehicle, received ‘teaser’ mailings to generate an awareness of the launch, without giving anything away about the look of the car. These mailings were also designed to make the recipients feel special, as they were amongst the few individuals to be aware of the launch. The copy informed them of the timing of the first television commercial, when the details of the new car would finally be revealed. Press ads were also designed and placed in the broadscale media to draw attention to the launch. These featured the numbers 406 and the date and time the first commercial could be viewed.

The television commercial itself was aired after the national news and space was bought on every major television channel. Viewers to ITV, Channel 4, and the major satellite channels were

all exposed to the first ad simultaneously—the first time in television history such an event had been orchestrated.

In this example, each of the direct channels was carefully integrated to build up consumer awareness of, and interest in, the television commercial, where all would finally be revealed about the look and style of the new car. Such integrated approaches are likely to become the norm in the future, as companies recognize that the impact of one media can be greatly enhanced by the synergistic impact of others.

Share of customer not share of market Much of this chapter has been concerned with the concept of customer LTV. Whilst this is a fundamental concept in direct marketing, organizations are only just starting to recognize the implications thereof. As database technology improves and companies are able to gather and store more information about their customer base, opportunities for a more meaningful analysis of LTV will abound. Until the second half of the 1990s, for example, the major airlines targeted their frequent flier programmes at the individuals who had historically flown most frequently with their airline. In other words, they were basing their approach on the historic value ora given group of customers. As airlines gained more knowledge about the flying behaviour of their customers, however, it soon became apparent that frequent fliers were only frequent fliers for a period of around four years. After that, the individual's job role would typically change and it was no longer necessary for him or her to travel on such a frequent basis.

The problem from the airline marketer's perspective was that it would typically take between eighteen months and two years to identify frequent fliers (on the basis of past purchases), which allowed the airline a small window of only two years in which to keep them loyal and develop a larger share of their custom.

At the end of the twentieth century the smarter airlines were in a position to profile the behaviour of their customers and to predict with a fair degree of accuracy those individuals who would become frequent fliers in the future. This maximized the airline's ability to keep the customers loyal throughout their most intensive period of travel.

Technology will thus allow organizations of the future to identify potentially high-value customers early in their relationship with a given organization and allow marketers to concentrate on developing a relationship that will generate an ever larger percentage of that customer's overall expenditure in a given product category. When Tesco's introduced its loyalty card, its purpose was largely to ensure that the customer had good reasons for conducting every weeldy shop at the Tesco's store. The company was trying to attract a greater share of its existing customers' overall spend, rather than concentrating on bringing in ever greater numbers of customers. This is a change of emphasis that will continue to permeate many sectors in the future.

Ethical behaviours Mention has also been made in this chapter about consumer concerns over different forms of direct-marketing activity. Many traditional forms of direct marketing have been judged intrusive and an invasion of an individual's privacy. Organizations will need to become increasingly sensitive to such issues, as many of the new direct channels rely on the electronic transmission of data. Customer privacy and security will become an intrinsic consideration in any new media campaign (McDonald 1998). Organizations will need to educate consumers about how their data will be held and how, if at all, it will be used by them in the future. Changing regulatory flameworks will also give customers greater control over this process and companies will need to ensure that they have an appropriate infrastructure in place to respect the wishes of their individual customers (see Insert).

Guaranteeing privacy may be the differentiator

‘Businesses that use data to deliver better service to customers while also respecting their privacy will be the real winners in the direct marketing revolution.’ The economist, (9 Jan. 1999, p. 69)

10 Summary IN this chapter we have provided a general overview of the subject of direct marketing. We have defined it as a unique discipline within marketing, the aim of which is to deal with customers on a one-to-one basis, through a careful analysis of information stored on an organization's database. It is this unique emphasis on the use of customer information that characterizes so much directmarketing activity.

We have also explored in detail the role of the marketing database and explained its role in informing both customer-acquisition and customerretention activity. The structure of a typical customer-acquisition plan was highlighted and a range of recruitment media was discussed.

The chapter concluded by speculating as to the likely direction the discipline will take. The rise of new electronic channels, improvements in technology and a general move towards media fragmentation look set to secure its future. Indeed it may not be long before all marketing activity can be legitimately classified under this one general heading.

Further reading Introductory text books

McDonald, W. J. (1998), Direct Marketing: An Integrated Approach (Singapore: McGraw Hill).

Tapp, A. (1998), Principles of Direct and Database Marketing (London: Pitman/FT Publishing).

Practitioner texts

Baler, M. (1996), How To Find and Cultivate Customers Through Direct Marketing (Lincolnwood, Ill.: NTC Publications).

McCorkell, G. (1997), Direct and Database Marketing (London: Kogan Page).

Stone, M., Davies, D., and Bond, A. (1995), Direct Hit: Direct Marketing with a Winning Edge (London: Pitman Publishing).

Textbooks on specific aspects of direct marketing

King, J. M., Knight, R, and Mason, J. H. (1997), Web Marketing Cookbook (New York: John Wiley).

Lewis, H. G., and Nelson, C. (1995), World's Greatest Direct MailSales Letters (Lincolnwood, II1.: NTC Publications).

Reitman, J. I. (1996), Beyond 2000: The Future of Direct Marketing (Lincolnwood, II1.: NTC Publications).

Shaver, D. (1996), The Next Step in Database Marketing: Consumer Guided Marketing (New York: John Wiley).

Some useful journal articles

Evans, M., O'Malley, L, and Patterson, M. (1996), ‘Direct Marketing Communications in the UK: A Study of Growth, Past, Present and Future’,Journal of Marketing Communications, 2: 51–65.

Muranyi, N. R. (1995), ‘Database Marketing in FMCGs: What is The State of the Art?’, Journal of Database Marketing, 4/1:13–20.

Thwaites, D., and Lee, S. C. I. (1994), ‘Direct Marketing in the Financial Services Industry’, Journal of Marketing Management, 10: 377–90.

Wang, P., and Petrison, I. (1993), ‘Direct Marketing Activities and Personal Privacy’, Journal of Direct Marketing, 7/1:7–19.

Discussion questions 1. How would you characterize direct marketing? How does it differ from a mass-marketing

approach? 2. Explain how a manufacturer of consumer goods might employ a knowledge of customer lifetime

value to inform the development of its marketing strategy. 3. How might an organization typically generate a list of potential new customers to receive a

recruitment campaign? 4. What are the key differences between lifestyle and geodemographic lists? 5. In your role as the fundraising director of the Royal National Lifeboat Institution (RNLI), develop a

customer-acquisition plan to recruit l00,000 new donors to the organization. 6. A manufacturer of industrial fasteners is about to develop a customer database for the first time.

What advice would you offer its marketing department? What information should be stored on the new database? How might it be used to inform marketing strategy?

7. What are the primary concerns that consumers have about the use of direct-marketing techniques? How might the direct-marketing industry counter these criticisms?

Mini Case: Benedictine liqueur: the repositioning of a brand In the 1990s the drinks market was replete with attempts to move brands towards a younger target audience. Tia Maria and Harvey's Bristol Cream have both made successful and highly publicized attempts to reposition their brands. Other big names such as Southern Comfort have chosen to broaden their appeal, by moving away from the perception of an after-dinner drink towards that of an exotic cocktail mixer.

Against this background, Benedictine, too, has recognized the need for change. The brand has a 400-year-old history and has been around for long enough for drinkers to form a distinctive perception of the ‘values’ of the product. The organization recognized in 1996, however, that the perception was no longer one that was appropriate, given the competitive pressures in the market. The profile of drinkers was ageing and the brand was viewed as being rather staid and old-fashioned.

The marketing team, therefore, sought a way to reposition the brand, add some excitement, and build sales volumes, without alienating the existing and loyal customer base. The budget to achieve this goal was comparatively small. Whilst competitors such as Tia Maria or Southern Comfort were both able to consider the use of television advertising to assist in their repositioning, the Benedictine brand is small by comparison, with much smaller sums being available for the purposes of marketing. The marketing team, therefore, decided on a highly targeted djrect-marketing approach—any other approach would have resulted in a high degree of wastage, which the team was keen to avoid.

An additional problem with television advertising was the likely timing thereof. In common with other alcoholic drinks, Christmas is a period of peak sales for the Benedictine brand. It would, therefore, have been logical to advertise in the period immediately prior to the holiday, but in so doing the brand would have had to compete with a concentration of other advertising messages from competitors with a larger share of the voice.

The decision to invest in direct marketing was triggered by the existence of a small but accurate database of existlng customers that had been built in the past from onbottle promotions, money-

off vouchers, and an offer of free miniatures. This made it possible for Benedictine to have its customer base profiled against the Target Group Index (TGI) and for the lifestyle characteristics of its drinkers to be identified.

The results of the analysis revealed that the Benedictine drinker could be either male or female, was typically well educated, aged 35+ from socio-economic groups ABC1, and culturally aware. Drinkers appeared to enjoy leisure activities such as theatre visits, gardening, art, travel, and food. The Benedictine team decided to develop a campaign that would focus on these drinkers, developing lifetime value rather than attempting expensive customer acquisition. Direct mail was to be the chosen medium.

The TGI profile made it possible to identify that existing drinkers had a distinct set of interests and that these interests were generally related to sensory stimulation of one form or another. The marketing team soon recognized that customers would be likelyto respond to an appeal designed, equally, to stimulate the senses. Customer mailings were hence given an ‘awaken your senses’ theme.

The Benedictine liqueur is made from a traditional (and secret) recipe in the Normandy region of France. This, together with its 4oo years of history, combine to give the brand an interesting story to tell. The mailings Benedictine developed were designed to build on these characteristics and associate the brand with art, good food, and the beauties of the garden. Drinkers were offered recipes and cocktail mixes and given many different reasons for increasing their product usage. Mailings (which took place twice a year) also included money-off tokens and an opportunity to earn discounts for a second purchase. Takeup rates to these offers is usually very high and response rates of over 4o per cent have been reported.

Product packaging was also redesigned to include a new promotional sleeve, inviting drinkers to send in their details in return for entry to a promotional prize draw. As a consequence the organization's database grew from a mere 6,000 to well over 17,000 in just two years. These enhanced numbers and ongoing consumer response to new direct-marketing campaigns provided ever more detailed information for the organization about the nature of its customer group. As the organization continued to learn, the quality and targeting of its communications strategy continued to be refined.

Discussion question: 1. Critically appraise Benedictine's strategy? Can you discern any weaknesses in the approach

adopted? 2. In developing its retention programme, what controls would you expect the Benedictine team to

have put in place? 3. How mightthe Benedictine team approach a customer-acquisition programme? What form might

this take?

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Box 26.1 The history of a discipline1498 Aldus Manutius published the first book catalougue to appear with prices in Italy.1667 William Lucas published the first gardening catalogue.1727 Benjamin Franklin's mail-order library was established in Philadelphia.

1833 Antonio Fattorini established his mail-order watch club in Bradford (what was later to become Empire Stores).1905 Freeman's established the first modern mail-order catalogue.1926 Sherman and Sackheim launched their now famous Book of the Month Club in the USA.Table 26.1 Example LTV Analysis (£)Revenue and costs Year1 Year2 Year3 Year4 Year5 Total1 Total income 60 70 130 140 150 5502 Total costs 9 9 10 17 18 633 Contribution (1–2) 51 61 120 123 132 4874 discounted value 51 55 99 92 90 387Note: Discount rate of 10% per annum.Table 26.2 UK postal unitsPostal unit Example Number in UK Number of householdsPostal area Reading(R) 121 200,000Postal district RG9 2,900 8,275Post sector RG9 1 9,000 2,700Enumeration district Approx, 148,000 c.150 ten postcodesPostcode RG9 1PD 1,600,000 10–15Source:Royal Mail.Legend for Chart:A-SupplierB-Product NameC-DescriptionD-Size (m.individuals)Table 26.3 Lifestyle productsA B C DCACI Lifestyle UK List and profiling tool, 44 capable of tagging existing databases. Each individual may be se-- lected by 300 different lifestyle attibutes.NDL The lifestyle Data collected from product 16 Selector registration guarantees; c. 4 million returned annually.Claritas Lifestyle Data collected from in-- 12 Selector product questionnaires and satisfaction surveys.ICD Facts of livng Compiled by mailing members 8 Survey of the electoral roll.Consumer Surveys Lifestyle Complied by mailing 14 4 Focus Ltd. million households. Typically 200 lifestyle questions posed.Box 26.5 Elements of a databaseConsumer database Business-to-business databaseID Number ID NumberTitle Title of organizationName Names and titles ofGender ContactsAddress AddressesTelephone number Telephone numbers

Fax number Fax numbersE-mail E-mail addressesRecruitment source Classification (SIC code)Socio-economic group Business sizeGeodemographic coding Geographic characteristicsPurchase history Purchase historyCredit limit Purchase channelsCommunication history Credit limitPreferences Communicaton historyOther information Preferences Other informationBy Adrian Sargeant

Edited by Keith Blois