Database Marketing

Database Marketing

At the heart of CRM is database marketing. Your company needs to develop separate databases on customers, employees, products, services, suppliers, distributors, dealers, and retailers. The databases make it easier for marketers to develop relevant offerings for individual customers.

In building the customer database, you have to decide on what information to collect.

• The most important information to capture is the transaction history of each buyer. Knowing what a customer has purchased in the past affords many clues as to what he or she might be interested in buying next time.
• You could benefit by collecting demographic information about each buyer. For consumers, this means age, education, income, family size, and other attributes. For business buyers, this means job position, job responsibilities, job relationships, and contact addresses.
• You may want to add psychographic information describing the activities, interests, and opinions (AIO) of individual customers and how they think, make decisions, and influence others.

The second challenge is to get this information. You train your salespeople to gather and enter useful information into the customer’s file after each sales visit. Your telemarketers can gather additional information by phoning customers or credit rating agencies.


The third challenge is to maintain and update the information. About 20 percent of the information in your customer database can become obsolete each year. You need telemarketers to phone a sample of customers each working day to update the information.

The fourth challenge is to use the information. Many companies fail to use the information they have. Supermarket chains have mountains of scanner data on individual customer purchases but fail to use these data for one-to-one marketing.

Banks collect rich transaction information that mostly goes unanalyzed. At the very least, these companies need to hire a person skilled in data mining. By applying advanced statistical techniques, the data miner might detect interesting trends, segments, and opportunities.

With all these benefits, why don’t more companies adopt database marketing? All this costs money. Consultant Martha Rogers of Peppers & Rogers Group does not deny the costs: “Establishing a rich data warehouse can cost millions of dollars for the technology and the associated implementation and process changes.

Throw in a few hundred thousand for strategic consulting, a little more for various data integration and change management issues, and voilà, you’ve got yourself one hefty investment.”

Clearly one-to-one marketing is not for everyone. It is not for companies that sell a product purchased once in a lifetime, such as a grand piano. It is not for mass marketers like Wrigley to gather individual information about the millions of its gum-chewing customers. It is not for companies with small budgets, although the investment costs can be scaled down somewhat.

However, companies such as banks, telephone companies, business equipment firms, and many others normally collect lots of information on individual customers or dealers. The first company in each of these respective industries to exploit database marketing could achieve a substantial competitive lead.

There is a growing threat to effective database marketing that is coming from the inherent conflict between customer and company interests.

What Customers Want:

• We want companies not to have extensive personal information about us.
• We would be willing to tell some companies what we might like to be informed about.
• We would want companies to reach us only with relevant messages and media at proper times.
• We would want to be able to reach companies easily by phone or e-mail and get a quick response.

What Companies Want

• We want to know many things about each customer and prospect.
• We would like to tempt them with offers, including those that they might not have awareness of or initial interest in.
• We would like to reach them in the most cost-effective way regardless of their media preferences.
• We want to reduce the cost of talking with them live on the phone.

The irony is that as companies learn more about each customer in order to make more relevant offers, customers see this as an invasion of privacy. The matter is made worse by intrusive junk mail, junk phone calls, and junk e-mail.

As privacy concerns rise and lead to legislation curtailing what companies may know about individual customers and how the companies can reach customers, companies will be forced to return to less efficient mass marketing and transaction oriented marketing.

One answer is for companies to practice permission marketing, as promoted by Seth Godin. You should ask your customers what information they will volunteer, what messages they would accept, and what contact media they would prefer.

Design

Design

Design is a big idea, covering product design, service design, graphic design, and environmental design. Design provides a set of tools and concepts for preparing successful products and services. Yet too few managers know what design is or value it.

At best, they equate design with style. Style is important, of course: We must accept that the Jaguar automobiles’ success in the past was based on style. It certainly wasn’t based on dependability, since most Jaguars had to be repaired frequently. An acquaintance of mine always owned two Jaguars, because one was usually in the repair shop.

Style, or appearance, does play a major role in many products: Apple’s new computers, Bang & Olufsen’s stereo equipment, Montblanc’s writing instruments, Coca-Cola’s famous bottle, and so on. Style can play a major role in differentiating your product from other products.

But design is a larger idea than how a product looks. A well-designed product, in addition to being attractive, would meet the following criteria:

• Easy to open the packaging.
• Easy to assemble.
• Easy to learn how to use.
• Easy to use.
• Easy to repair.
• Easy to dispose of.

Just consider “Easy to learn how to use.” I recently purchased HP/Compaq’s iPAQ, the personal digital assistant handheld computer. I couldn’t remove a cellophane covering (not mentioned in the booklet) nor open the device’s protective plastic cover nor figure out how to switch the cover to the other side.

I couldn’t figure out how to switch the data from my Palm handheld to my new iPAQ, something that most new buyers would want to do. After finally switching the data with the help of a friend, I encountered numerous screens that were hard to understand or perform operations on.

The booklet, whose print could be read only under a microscope, was of no help. The whole product was a design fiasco, committed by engineers who thought they were selling it to engineers. I returned quietly to my beloved Palm and let the iPAQ languish.

This boils down to the fact that great design requires thinking through all of the customer’s activities in acquiring, using, and disposing of the product. The most basic thing is to know who the target customer is. I remember a company that designed a floor-cleaning machine to be used after hours to clean offices.

The machine looked great and had nice features. But the machine didn’t sell. The machine could easily be pushed by the average man but was too heavy to be pushed by most women. It turned out that many of the users would be women, and this had been overlooked by the designers.

Toyota is smarter about defining the customer and thinking like the customer. In designing new doors for a car targeted largely toward women, Toyota engineers put on long fingernails to see how this would affect opening and closing the doors.

Some companies—Gillette, Apple, Sony, Bang & Olufsen have appointed a high-level vice president of design to add value to every product their companies create. By establishing this position, they are announcing to everyone the importance of design to the success of their products.

Design applies to service businesses as well as products. Walk into Starbucks for coffee and you will appreciate the role of environmental design. Dark wood counters, bright colors, fine textures. Walk into a Ritz-Carlton hotel and appreciate the lobby’s regal quality.

Differentiation

The stock market is a perfect example of an undifferentiated market. If you want to buy 100 shares of IBM, you will buy it at the lowest price. There may be 1,000 people ready to sell shares of IBM.

All you care about is who will charge the least. No characteristic of the seller—how long he/she has held the shares, whether he/she cheats on income tax or spouse, what his/her religion is—matters to you.

We say that a product market resembles a commodity market when we don’t care whose product or brand we take (“They are all the same”) or we don’t need to know anything about the seller. Thus we would say that oranges in a supermarket amount to a commodity if they all look alike and we don’t care to know the grower or the orchard.

But there are three things that could violate the assumption of an undifferentiated market.

• First, the products may look different. In the case of oranges, they may come in different sizes, shapes, colors, and tastes, and with different prices. We can call this physical differentiation.
• Second, the products may bear different brand names. We call this brand differentiation. Oranges carry brand names such as Sunkist or Florida’s Best.
• Third, the customer may have developed a satisfying relationship with one of the suppliers. We call this relationship differentiation. For example, although the brands are well known, one company may have provided better and faster answers to the customer’s questions.

Harvard’s Theodore Levitt threw down the gauntlet when he said: “There is no such thing as a commodity. All goods and services are differentiable.” He saw commodities as simply products waiting for a redefinition.

Frank Perdue, who produces one of the most popular brands of chicken, would boast: “If you can differentiate a dead chicken, you can differentiate anything.” No wonder one professor tells his MBA class that any student who uses the word “commodity” during a case discussion would be fined $1.

Yet some companies believe they can win through pure will power. Some years ago, the runner-up razor blade manufacturer in Brazil challenged Gillette, the market leader.

We asked the challenger if his company offered the consumer a better razor blade. “No” was the reply. “A lower price?” “No.” “A better package?” “No.” “A clever advertising campaign?” “No.” “Better allowances to the trade?” “No.” “Then how do you expect to take share away from Gillette?” “Sheer determination” was the reply. Needless to say, the offensive failed.

Tom Peters broadcasts the mantra: “Be distinct or extinct.” But not every difference is distinctive. Establish “meaningful differences, not better sameness.”

Differentiation can be achieved in many ways:

• Product (features, performance, conformance, durability, reliability, repairability, style, design).
• Service (delivery, installation, customer training, consulting, repair).
• Personnel (competence, courtesy, credibility, reliability, responsiveness, communication skill).
• Image (symbols, written and audio/video media, atmosphere, events).

Jack Trout’s book, Differentiate or Die, shows dozens of ways companies have managed to produce a differentiated product, service, experience, or image in the minds of customers.

Greg Carpenter, Rashi Glazer, and Kent Nakamoto, don’t even hold that the differentiation needs to be meaningful. For some products, such as detergents, all the valuable attributes may have already been discovered and exploited. They argue that “meaningless differentiation” can work.

For example, Alberto Culver makes a shampoo called Natural Silk to which it does add silk, despite admitting in an interview that silk does nothing for hair. But this kind of attribute attracts attention, creates a distinction, and implies a better working formula.

Direct Mail

When direct mail is at its worst, it consists of a cold mailing to a list of names and addresses with the hope of hitting a 1 to 2 percent response. The response is low because the message doesn’t go to people with a need for the product or arrive at the time they need it. Hence the term “junk mail.”

When direct mail is refined, the company segments the list, finds the best prospects, and limits the mailing to them. In this way, the company saves money with a smaller mailing and achieves a higher response rate.


Most mailings focus on achieving a single sale. They lack anything related to building a customer relationship and an emotional bond. The best case is where the company’s offers satisfy the customers and where the company mails neither too frequently nor too infrequently and becomes a respected supplier of a certain set of satisfying products and services.

What I can’t understand is why I receive the same catalogs over and over even though I never buy anything. Don’t they notice this? Why don’t they send an e-mail asking whether I want to continue receiving their catalog? This is the essence of permission marketing, and it would save these catalog companies a lot of money.

Distribution and Channels

For many companies, making the product doesn’t cost as much as bringing it to the market! Farmers know this well when they see how small a percentage of the final retail price they receive for their crops. Marketing in many cases now averages 50 percent of total company costs.

Producers would like to eliminate the middleman, whom they see as charging too much. But while you can eliminate the middleman, you cannot eliminate the functions he performs. You and/or the customer would have to perform the same functions and probably wouldn’t do them as well.

How can a company bring its new products into the market? Every company has to figure out a go-to-market strategy. In simpler times, the company would hire salespeople to sell to distributors, wholesalers, retailers, or directly to final users. Today the number of go-to-market alternatives has exploded:

Field sales reps	Intranet
Strategic allies	Extranet
Business partners	Web sites
Master or local distributors	E-mail
Integrators	Business-to-business exchanges
Value-added resellers	Auctions
Manufacturers’ agents	Fax machines
Brokers	Direct mail
Franchises	Newspapers
Telemarketers	Television
Telesales agents

No wonder Peter Drucker said: “The greatest change will be in distribution channels, not in new methods of production or consumption.” Choosing the right channels, convincing them to carry your merchandise, and getting them to work as partners is a major challenge. Too many companies see themselves as selling to distributors, instead of selling through them.

How many marketing channels should a company use to distribute its products and services? The higher the number of channels, the greater the company’s market coverage and rate of growth of its sales. This principle is well illustrated by Starbucks Coffee Company.

Starbucks started with only one channel, namely company-owned stores that were staffed carefully and operated profitably. Later Starbucks franchised operations in other venues: airports, bookstores, and college campuses. The company recently signed a licensing agreement with Albertson’s food chain to open coffee bars in its supermarkets.

Not only is Starbucks coffee served in these venues, but other Starbucks products are sold along with coffee. A comedian quipped about Starbucks: “I don’t know how fast they are growing but they just opened one in my living room.” Adding more channels creates rapid growth.

But at least two problems can arise in adding new market channels. First, product or service quality may suffer because the company gained market coverage at the expense of market control.

Does Starbucks coffee served on a United Air Lines flight taste as good as a cup made and served in a Starbucks store? Do all vendors remember to dispose of Starbucks coffee if it isn’t sold within two hours? Secondly, the company may encounter growing problems of channel conflict.

Some Starbucks outlets may complain that the company franchised nearby outlets to also sell Starbucks coffee, thus hurting their sales. Or that some outlets are charging less for Starbucks coffee than other outlets. In both cases, Starbucks would have gained increased market coverage but lost some market control.

The alternative is to stick to one channel and develop it with very tight controls. For example, the Rolex Watch Company could easily place its famous watches in many more outlets.

Instead it restricts its coverage to only high-end jewelers who are spaced geographically and who agree to carry a certain level of inventory, use certain display patterns, and place specific levels of annual local advertising. Rolex thus has achieved high market control and does not face poor service problems or channel conflict problems. But its market growth is slower.

Whatever the number of market channels a company uses, it must integrate them to achieve an efficient supply system. Most companies rely on a high percentage of their business results coming from their channel partners.

They need to systematize partner relationship management (PRM) through adopting PRM software. The software can improve the information flow and reduce the cost of communication, ordering, transactions, and payment.

Manufacturers who use distributors to reach retailers give up some control of the retailers and the final customers. Yet if the manufacturer sold direct to either the retailers or the final customers, it would have to carry on the same channel functions of selling, financing, information gathering, servicing, risk taking, transportation, and storage.

If distributors can do this better and add value, then the distributor channel is justified. The key point is that all the channel functions must be performed and allocated efficiently among the channel partners.

A company operating multiple channels must operate them with similar policies. A bookstore chain such as Borders must have its brick-and-mortar stores be prepared to also accept returned books purchased from Borders online. Nor can Borders charge lower prices online without hurting its store sales.

Here are two excellent examples of integrated channels:

• Charles Schwab, the financial powerhouse, delivers an excellent branded experience to its customers whether reached online, over the telephone, or in its walk-in branches.
• Hewlett-Packard (HP) has an excellent web site where customers can find information about any HP product or service. Customers can place an order online or by phoning Hewlett-Packard. They will receive postsale support by contacting HP and being directed to the nearest local business partner.

Another option is to set up special channels for favored customers. Many banks provide private banking channels to customers with large deposits. Dell provides a separate extranet for each high-value business customer. Schwab’s premier customers are assigned to a dedicated account team that can always be reached through a toll-free phone number.

Your company must not only develop and operate efficient marketing channels but be prepared to add new ones and drop failing ones. Distribution channels are dynamic. They can create a competitive advantage when used right, but become a competitive liability when used poorly.