Database marketing: fad, fantasy or reality?

True database marketing programs must balance both high-tech systems with creative innovation to produce the level of breakthrough results promised by the latest database marketing technologies.

Everyone thinks they are doing database marketing, but are they really? Many people are putting

all their eggs in the technology basket and creating programs that are extremely sophisticated and laden with high-tech gadgetry. Others, who don't have the technology skills, focus primarily on creative innovation to provide a strong impact and build long-term, more profitable relationships with their clients. True database marketing programs must balance both high-tech systems with creative innovation to produce the level of breakthrough results promised by the latest database marketing technologies.

Database Marketing or Direct Marketing: Best of Both Worlds

At the core, direct marketing methods and database marketing should be well integrated to provide a product or service to a particular customer. The definition of direct marketing is imprinted on each monthly issue of Direct Marketing Magazine and it includes the word "database." The phrase that includes the word database was added as technology offered an opportunity to use computerized databases online.

The separation of the concepts starts with redefining the term "database marketing" into "relationship marketing." This term is not original or new. It has been used extensively in mainstream conversation and some believe the term is a better "fit" than database marketing. However, because it does not sound high-tech enough in today's business environment and since marketing budgets and stock values tend to be greater when high-tech jargon is used, the term may not be universally applied.

In addition, the term "relationship marketing" may not have caught on because it may be considered a passing fad. Components of database marketing programs are described but do not fully explain the entire concept. Everyone in the database marketing industry has had exposure to direct marketing, some to greater degrees than others. Still, most forget the basics and get caught up in the features of database marketing rather than the actual benefits. The origin of the confusion stems from a basic misconception of what a database marketing program is designed to accomplish: generation of maximum revenue from existing customers and those prospects who most closely match the profile of existing customers.

The Marketing Revolution/Prophecy

The marketing revolution that began in the mid-1980s forges ahead. Companies are continually shifting from a product-driven marketing orientation to a much more customer-driven emphasis. The 1987 book Maxi-Marketing, co-authored by Stun Rapp and Tom Collins and published by McGraw-Hill, provides an excellent summary of the new direction that was emerging at the time. The authors wrote, "Every established norm in advertising and promotion is being transformed...We are living through the shift from selling virtually everyone the same thing a generation ago to fulfilling the individual needs and tastes of better-educated consumers by supplying them with customized products and services. The shift [is] from a 'get a sale now at any cost' to building and managing customer databases that track the lifetime value of your relationship with each customer. As the cost of accumulating and accessing data drops, the ability to talk directly with prospects and customers, building one-to-one relationships with them, will grow." For many companies this philosophy has revolutionized marketing efforts.

High Tech Intimacy

Research shows that the more a company is able to engender loyalty from its customers, the more likely the relationships will be enduring and profitable. Development of customer loyalty comes from constantly refining the information available on specific customers including customer preferences, buying habits and patterns, product usage and other data specific to individual customers. Business Week noted in a cover story that a key to better selling (and marketing) is to focus the entire company on its customers [and forge] electronic links [that] use computerized marketing and distribution technology to track relationships with customers. It is also important to make order-taking easier and to make sure the right products get to the right stores at the right times. This process adds up to a new form of high-tech intimacy.

A Target Base-Going for the Gold!

There are many documented case histories of success stories from organizations that conceive and implement targeted marketing campaigns. Today, more companies are spending billions of dollars to develop database marketing programs capable of identifying the profiles of the most qualified prospects and desirable customers. The airlines' "Frequent Flyer" programs are just one example of highly sophisticated, successful target marketing programs that work.

Another golden example comes from Land Rover, Ltd. In 1995, the company used in-house database marketing capabilities to identify 4,000 Range Rover owners and invited them to a special marketing event that sold 1,000 new vehicles at $52,000 each. The cost of the mailing and database management was $150,000, which represented a 346 percent return on investment. The result: a DMA Gold Mailbox for their profitable $52 million marketing program. It does not take a marketing genius to realize that Land Rover's particular target base was clearly established from the start and then managed very effectively.

Effort and Terms Applied

Gathering and storing database information can be costly and time consuming and therefore must be used wisely. To take advantage of database marketing opportunities and to properly manage the process, marketers need to understand the whole spectrum of database marketing, the methodologies as well as the economics.

Most marketers are familiar with terms such as break-even analysis, return on investment, net and gross response, cost-per-order, cost-per-inquiry and other measurements that are used to help them define their financial success (or failure). The phrase "lifetime value of a customer" is the subject of less discussion but is often used in computations. Briefly, this is a way to assess how much revenue a marketer can expect from a particular customer from the date of first purchase until the relationship terminates. This is a critical number because it will reveal not only how much a marketer can afford to spend to acquire a customer, but how much to budget for subsequent marketing activities to that customer. It also helps define other critical decisions, such as how much data should be collected on a particular database. The formula used will vary with the marketer and his/her criteria. In its base form, it is a matter of matching total computed marketing revenues against total revenues per customer, including present value of future profits.

Flight of Fancy

Database marketing may seem to involve a lot of effort for what some believe to be a fad or passing trend. A recent posting to an online mailing list contained a note that illustrated one subscriber's concern that database marketing is becoming a fad, "I see DB marketing becoming yet another fad only surviving through the proselytizations of soapbox opportunists eager to get in on the action of training and seminar circuits. What long-term value does it give us to know what color underpants our customers wear or when their pet canary has a birthday? I guess my point is that we can't get carried away with gathering information just for the sake of gathering information." The time, money and effort spent has to generate meaningful information that can be used to accomplish specific goals.

The First Step: Segment the Client Base

Ideally, the goal is to break down segments where each individual represents a different profile. Start with broader categories where certain behavior patterns are shared. At the lowest level, this is accomplished intuitively as certain assumptions are made about who would likely be the best prospects for certain products. As the sophistication evolves more exotic segmentation routines are used, for example, "CHAID" (Chi-Squared Automatic Interaction Detector), the algorithm that predicts both responses and profitability. Another method might be "Regression Analysis," where a formula is created that can measure a prospect's odds of responding by comparing data from those who did respond to an offer against those who did not. Still others might be "Neural Networks" and "Fractals" to identify relationships and patterns as new data becomes available. In each case, the principle is the same regardless of the statistical tools applied. The end goal is to narrow the proverbial "needle in the haystack" down to what a specific customer wants and is willing to purchase from a company, and when the buyer is most likely to make the purchase.

The Second Step: Effective Communications

After the segmentation is completed, the next step is to send out the promotional communication piece to prospective clients and repeat the process more than once. If a marketer goes through all the defining processes and then communicates through mail or phone only once, then database marketing is not being used. Rather, this becomes a glorified direct mail program at best. In today's marketing environment, with rising costs, overstuffed mailboxes and supermarket and retail shelves inundated with products, multiple communications and distribution channels are the most efficient ways to generate leads and sales. Repetition plays an essential role in the communication process.

The establishment of an ongoing dialogue with customers that goes beyond nurturing or increasing customer loyalty is as important as exchanging goods and services. Making use of special questionnaires, opinion polls, point of sales programs, data warehouses, parallel processors and relational databases using proprietary software supplied by Cybase, Oracle, Informix, IBM and others to manipulate and update data quickly, facilitates the gathering information of value to both consumers and marketers in real-time. Consumer preferences can be registered regarding merchandise and method of purchase to allow marketers access to information available quickly so they can mold new products and services based upon the clients' interests, purchase patterns and lifestyles.

The dialogues established through multiple communication channels and subsequent follow-ups enable consumers or clients to continually make known their perceptions about the marketer's products and services. This timely and accurate information helps companies track individual usage behavior and identify individual purchase habits so marketers can account for a specific products' or brands' share of consumers' total purchases.

One grocery chain in Texas has a powerful database marketing program where millions of customers participate in a frequent shopper program that allows the grocery chain to capture every transaction made in the store. This creates a customer profile that includes such valuable data as what store location a customer frequents and whether or not the store is the primary, secondary or tertiary branch used. In addition, the system tracks every item on the receipt, down to the quantity, brand and size as well as use of a coupon for a particular item, electronic discount applied, method of payment (i.e., check, cash, credit card, debit card) and every other imaginable item that produces meaningful information about each customer.

In return, this chain supplies customers with coupons that enable the shoppers to receive "silent" discounts while shopping. For example, a customer could conceivably receive a self-mailer from the grocery store chain that addresses his/her particular needs. The announcement might read something like, "Dear Mr. Smith. It has been six weeks since your purchase of the five-ounce jar of Grandmother's Boysenberry Jam, and your supply may be running low. Included are coupons for discounts on that and other fine Grandmother's products. We look forward to continuing to provide you with the products and customer service you prefer."

Marketers are able to use the information gathered from complete database marketing tools and processes to develop customized marketing strategies for small groups or even individuals. No longer do they have to settle for one single program or solution to meet their sophisticated marketing needs. They now have an arsenal of means from which to ascertain such information.

The Third Step: Identifying Key Functions

The technological capabilities in database marketing are staggering. Usually articles written about database marketing are incredibly technical. There is a great deal of discussion about database configurations, personal computers vs. mainframes vs. parallel processing, what kind of statistical routines to run, what kind of matrices to build, etc. Rarely are there articles that address what marketers actually get after all of the processes have been performed. To get to the root of how a marketer might effectively integrate the information available into a usable program requires identifying a database marketing program's key functions and determining the value of the database to that marketer.

The Fourth Step: Assessing the Information Available

In addition to identification of key functions, assessing the value of the database marketing program itself is important in determining the processes needed to effectively integrate the volume of information available. The size of a database marketing program can represent hundreds of thousands or even millions of pieces of data plus equal or additional amounts of dollars invested. It also includes a long-term commitment and investment of people and resources for data entry and daily operations, sometimes including around-the-clock monitoring. So a key question is: What is the potential ROI of a database marketing program?

Response marketers will typically generate a return on investment financial models that management will approve and that they themselves can meet, based on increased response rates, increased lifetime values, etc. Unfortunately, the ROI projection will never answer the greater question management asks of WIIFM (What's in it for me?).

Capabilities and Limitations

Too many corporations operate on the assumption that access to databases will automatically improve marketing programs. The analysis of abilities, resources, budgets and even the willingness to put together state-of-the-art marketing programs and test them over time is not considered, and therefore, the ROI projection often crumbles. The system simply cannot provide value if it is not used properly. An in-depth understanding and effective use of database marketing is the key to database ROI. Many times systems and tools have been developed with significant cost and then shelved because business processes did not lend themselves to usage. Databases can be mismanaged and marketers can (and do) make mistakes that result in significant losses because of lack of understanding or under-utilization of the system capabilities.

When the capabilities and limitations of databases are more clearly understood the potential for significant opportunities exist. Increasing customer retention and loyalty are the biggest benefits created through effective database or relationship marketing. Any incremental increase in customer retention can have a significant, even exponential, effect on the value of each customer. Cost savings achieved in a database system investment and database marketing can be measured as well. Optimizing processing routines through avoidance of redundant tasks can result in significant savings. For instance, reducing mailing costs by eliminating duplications is one area where expenses can be minimized.

True measurements of increased revenues achieved through improved marketing decisions or increased efficiencies are dependent upon marketing activities, not on the system itself. Assessing organizational readiness, the willingness to change old methods used in marketing programs and the ability to adapt and incorporate new technology, expertise and experience in database marketing are important when looking at capitalizing on new, as well as existing opportunities and can insure a positive return on the database marketing investment.

Effective Database Marketing

Real database marketing doesn't happen overnight. Several components must be in place before a true "relationship marketing" program can be successful. Here are three of the key elements for creating a successful relationship marketing program:

1. A Good Database Program

An effective way to understand database marketing is to understand the programs designed for it. Popular contact managers like ACT! and Goldmine are used by dentists and veterinarians to great advantage. PC based database programs are of the relational and flat file type. Relational database programs are more powerful and flexible, but flat file database programs work fine for small mailers. Some PC based DBMS include Microsoft Access, Lotus Approach, Paradox and dbase. Oracle and FoxPro are mainly designed for mainframe and client server programs. There are others designed for particular mail management needs. Use the program that most effectively meets your requirements. Be prepared to seek the advice of outside consultants if your company doesn't have technological expertise in-house.

2. An Understanding of the Real Value of a Customer

A lifetime commitment from a customer is much more important than a one-time shot. Some reports indicate it is now eight to 10 times more costly to find new customers than it is to market to existing ones. Therefore, it makes sense to focus on building maximum loyalty from existing customers and provide them with the services and products they want and will buy as their needs change.

3. Test and Evaluate Different Offers and Promotional Vehicles

When creating a direct response campaign, it's important to evaluate all the variables (offers, price points, timing, response vehicle, graphics, lists, etc.) that can contribute to the success or failure of a program. "Test, test, test" are the watch words of savvy marketers. When testing different offers, companies may find that some offers appeal to certain segments of the marketplace, while others are more successful with a different target audience. Obviously, list selection plays an important role and the ability to accurately profile prospects and customers affects what offers are communicated to specific groups. The response device used can also impact the success of a program. For example, the ability to respond via telephone appeals to some groups, while others prefer high-tech options such as e-mail or the Internet.

Fantasy Into Reality: Striking a Balance

The stage is set for marketers who strive for balance between mass-marketing methods of the past and the promise of more lasting and profitable relationships with customers in the future. When creative effort and innovation are coupled with ever changing advances in high technology, direct marketing fantasies will become realities. That is a hopeful outlook for the new millennium as direct marketers look for ways to fine tune their processes to build customer loyalty, identify best prospects and generate maximum return on investment.

Gerri Knilans is president of Trade Press Services, a specialized marketing company based in Thousand Oaks, CA. Knilans' career spans 25 years as a sales and sales management professional, marketing/management consultant and educator. She is well-versed in all aspects of marketing with a special emphasis on direct response. To contact her call (805) 496-8850.