CHAPTER 1

How Database Marketing Has Changed

But it's not just the stores. It's the social life. The Internet lets ussort ourselves into interest groups and communities that have no relation togeography.

I know dozens of married couples that met through online villages of one sort oranother. Only a few of them met through dating or matchmaking services. Most ofthem were posting on forums. It was as if they had all been invited to an onlineparty, and, liking each other's public conversation, they went off into a cornerand had a long, private chat.

—Orson Scott Card

The purpose of database marketing is the same today as it has always been: tocreate and maintain a bond of loyalty between you and your customers that willlast a lifetime. The goal has not changed, but the methods have. We stillmaintain information about our customers in a database and use it as a basis forour communications with them. In the past we used direct mail, catalogs, andphone calls to communicate. Today we use these plus e-mails, Web sites, cellphone text, voice messages, and social media. These new developments makecommunications much less expensive and more frequent, but they are also muchmore complex. Most companies have found it useful to hire a service bureau tomaintain their database, and an e-mail service provider (ESP) to send their e-mails and cell phone messages.

The process begins with a marketing database that keeps all sorts of informationabout customers: not only what they buy, but their demographics, families,responses, and preferences. Information storage has become much moresophisticated—using relational databases—and much less expensive.Moore's law describes a long-term trend in the history of computing hardware.The number of transistors that can be placed inexpensively on an integratedcircuit doubles approximately every two years. The trend has continued for morethan half a century and is not expected to stop until 2020 or later. This sametrend has affected disk storage and transmission speed and capacity. The resultis that you can afford to retain and use all the information you can collectabout a customer in your marketing programs. The only limitation is humancreative ability and the willingness to devise methods for using the data. Thisis the problem that we address in this book.

The biggest change in database marketing in the last decade has been the arrivalof Web sites, e-mail, and mobile marketing. At first these seemed like agodsend. The main problem with database marketing was the high cost ofcommunications with customers—$600 per thousand messages. You had all thiswonderful information in your database that you could use to buildrelationships, but you were limited, in most cases, to about one letter a monthbecause of the cost. In the last 10 years, with Web sites including socialmedia, e-mail, and the iPhone, you can send messages to your subscribers andcustomers for less than $6.00 per thousand—a cost so low that the deliverycost is inconsequential.

E-mail has become the primary way for companies to communicate with theircustomers. Direct mail is still alive and well, but e-mail is gaining on it. Butthere is a third communication method that is also growing: one-third ofconsumers in both the United States and the United Kingdom are viewing their e-mails on their iPhone or similar mobile devices. The use of mobile e-mail ismost prevalent among younger consumers, with over half of them spending asignificant part of every day glued to their phones. Mobile use is exploding inall directions. All these new communications methods can make use of theinformation in a customer marketing database. Here, at last, is a way to useyour database to build really close relationships with each customer using thedata you have collected. What we had not figured on was that the low cost of e-mail and mobile messages has become a curse because marketers have discoveredthat e-mails are so inexpensive that you can afford to send messages to yourcustomers every week or even every day. The more you send, the more revenue yougain. More and more major corporations in the United States and elsewhere havebeen sending e-mails, and sometimes mobile messages, to all their subscribersall the time.

Subscriber inboxes are overflowing. The big problem is that the messages, whilethey can be and sometimes are personalized, are seldom filled with dynamiccontent based on what we know about each customer. We have these rich databases,but we do not use the rich data that they hold. To use it requires many creativestaff members who dream up the dynamic content. The thought is, "Subscribers whoare over 65 have certain interests, while other subscribers are college studentswho have different interests. We will vary our messages based on this knowledge,and also do that for about a half-dozen other subscriber segments to make ourrelationships richer for them and more profitable for us." This makes a lot ofsense, but few marketers today are doing anything like that. They are blastingidentical content to every subscriber or customer whose e-mail or address theycan get their hands on.

Using the data to target specific customer groups sounds great, doesn't it? Thathas always been the promise of database marketing. We could send dynamic contentwhen we were sending one message a month. We cannot afford to do this today ifwe are sending one message to each person every day. The problem boils down toone simple fact: The lift we get from dynamic content does not seem to be asgreat as the lift we get from frequent communications. You can't afford todo both, so you go with the most profitable.

In the pages of this book, we deal with the ramifications of this tradeoffbetween frequency and dynamic content. There are many solutions, and we pointthem out. To help you understand what is going on today, we present the actualresults of 80 large marketers who together send more than 1.2 billion e-mail andmobile messages to their 174 million subscribers every month. There are graphsthat show how these 80 companies are generating more than $5.4 billion in annualsales resulting from these electronic messages. This $5.4 billionprobably represents about only 5 to 7 percent of their total annual sales in allchannels. The companies in these charts include major airlines, car rentalcompanies, sports associations, and scores of major familiar retailers. You willlearn what is going on in the real electronic marketing world in a way that isavailable nowhere else. You will learn how your company can use similar methodsto yield comparable results.

Take a good look at Figure 1.1. It tells a story that is spelled out indetail in this book. It explains a lot about what has happened to strategicdatabase marketing.

The Old Corner Grocer

In my seven previous books on database marketing, I described the customerrelationships of the Old Corner Grocer and how his loyalty-building methods arecarried out today by modern database marketing. The analogy is still true.

Back in the days before there were supermarkets, all the groceries in the UnitedStates were sold in small corner grocery stores. In many cases, the proprietorcould be seen at the entrance to his store, greeting the customers by name."Hello Mrs. Hughes. Are your son and his family coming for Thanksgiving againthis year?"

These guys built the loyalty of their customers by recognizing them by name, bygreeting them, by knowing them, by doing favors for them. They helped bycarrying heavy packages out to customers' cars (there were no shopping carts inthose days). These veterans no longer exist.

The supermarkets put them out of business. Prices came down. Quality went up.The corner grocer had 800 stock-keeping units (SKUs) in his store. Supermarketstoday have more than 30,000 SKUs. He had a few hundred customers. Supermarketstoday have thousands of customers.

As a result, the familiarity of the Old Corner Grocer that established loyaltyin the old days has become much more difficult to create and sustain—untildatabase marketing came along. Using the techniques in this book, it is nowpossible for a large corporation with a marketing database to build arelationship with customers that re-creates the recognition and loyalty of theOld Corner Grocer. We do this over the phone (using caller ID, voice, text, ande-mails), through creative use of a Web site and e-mails, and by providing ouremployees in marketing, sales, customer service, or at retail counters andteller windows with the kind of information about their customers that thecorner grocer used to keep in his head. We are returning today to methods thatworked wonderfully in the old days. They work today. They build loyalty, repeatsales, cross sales, and profits. This book explains the principles and providesscores of examples.

Customers have become dominant. There are today in most parts of the UnitedStates, the UK and scores of other countries, lots of different stores sellingsimilar products. Most families and businesses today have PCs and advanced smartcell phones—both equipped with Google—so they can look up and findany product or service they want to buy, with comparative prices and customerreviews. You can't fool them anymore. What do they want?

What Customers Want

Companies are discovering what their customers want and selling them that. It iscustomer-based marketing. But it is really more than that. What customers wanttoday can be summed up in a few general concepts:

* Recognition: People want to be recognized as individuals, withindividual desires and preferences. They like being called by name.

* Service: Customers want thoughtful service provided byknowledgeable people who have access to the database and therefore know whomthey are talking to and what they are are interested in.

* Convenience: People are very busy. They don't have time todrive a couple of miles to do business. They want to do business from where theyare by cell or landline phone or by using the Web with companies that remembertheir names, addresses, credit card numbers, and purchase history.

* Helpfulness: Anything that you can do to make customers' livessimpler is appreciated. Merchants have to think every day, "How can I be morehelpful to my customers?" Only those who come up with good answers will survive.

* Information: Customers are more literate today than everbefore. They use the Internet. Technical information is as important to many ofthem as the product itself.

* Identification: People like to identify themselves with theirproducts (like their cars) and their suppliers (like their cell phones).Companies can build on that need for identification by providing customers witha warm, friendly, helpful institution to identify with.

Whom Do They Listen To?

Increasingly today, customers listen to other customers. They participate inblogs. They read product reviews written by other customers. Young peopleparticipate in Facebook and Twitter, exchanging information that suppliers ofproducts and services cannot control.

From 1985 to today, most large modern corporations have built customer marketingdatabases filled with personal information about their customers. Moderncomputer technology has been used to create relational databases that store agreat deal of information on each household (or company, in the case of abusiness-to-business product). Not just the name and address are retained. Alsokept are:

* E-mail address, plus the cookies that keep track of their Web visits

* Complete purchase history

* Customer service calls, complaints, returns, inquiries

* Outgoing marketing promotions and responses

* Results of customer surveys

* Household (or business) demographics: income, age, number of children, homevalue and type, and so on

* The profitability, RFM (Recency, Frequency, Monetary Analysis) code, andlifetime value of every customers in the database

What changed, however, is the method of using the database to communicate withcustomers. Before 2000, we had direct mail and telephone. Now, we have the Web,e-mail, and mobile devices which have changed everything:

* Every company has a Web site filled with information—most with shoppingcarts.

* Many companies send both catalogs and promotional e-mails to prospectivecustomer.

* Most companies also send triggered messages to individual customers (describedlater in this book) that make it possible to send each of a million customers adifferent message based on the information in the database.

* Most companies send transaction messages ("Your product was shipped today.")which was impossible to do before (too slow and expensive). They use thesetransactions messages not only to keep customers informed but also to sell themadditional products and services.

* Most e-mail and mobile communications today are filled with linkswhich mean that every message can be an adventure: a gateway to every productand piece of information that the company has available. By using links you cando research, read reviews, print specifications, compare prices, and buywhatever interests you.

Two Kinds of Databases

There are really two different kinds of databases in any company that is engagedin direct marketing of products and services. One is an operational database andthe other is a marketing database (see Figure 1.2).

An operational database is used to process transactions and get out themonthly statements:

* For a cataloger, this database is used to process the orders, charge thecredit cards, arrange shipment, and handle returns and credits.

* For a bank, the operational database processes checks and deposits, maintainsbalances, and creates the monthly statements.

* For a telephone company, the operational database keeps track of the telephonecalls made and arranges the billing for them.

A marketing database gets its data from the operational database, ifthere is one. This data consists of a summary of monthly transactions. But themarketing data also includes much more. It gets data from:

* Preferences and profiles provided by the customers.

* Promotion and response history from direct mail and e-mail marketingcampaigns.

* Appended data from external sources such as KnowledgeBase Marketing, Donnelly,Claritas, and so on.

* Lifetime value and RFM analysis, leading to creation of customer segments.

* Modeling for churn and next-best product.

The marketing database passes data back to the operational database. It may tellthe operational database:

* Which segment each customer has been placed in, which may lead to operationaldecisions. Gold customers, for example, may get different operational treatmentfrom silver customers.

* Expressed customer preferences leading to different operational treatment: forhotels, smoking or nonsmoking rooms assigned automatically.

The operational database is run by Information Technology (IT). It is run onaccounting principles and balances to the penny, since there are legal and taxaspects to its data. It is audited by external auditors. It contains onlycurrent data on customers. Old data is archived. There is no data on prospectsuntil a sale is made.

In many companies, there are several marketing databases. For various reasonsthe database of catalog customers is often separate from the retail storecustomer database. The Web site and e-mail customer database may also often bekept separately. From the outside it seems like a simple matter to bring allthese databases together to get a "360 degree" picture of each customer. But, infact, this combination is often difficult to achieve. Why should this be so? Thereasons are varied, but they often relate to internal company politics. In atypical bank, there are vice presidents for each major product: credit cards,home equity loans, retail (checking and savings accounts), insurance, and thelike. The credit card manager receives no bonus or special recognition if someof his credit card customers sign up for a checking account. The retail vicepresident gets no special reward if some of her customers apply for a creditcard. Yet any analysis of bank customers will show that the more different bankproducts the average customer has, the higher that customer's loyalty is to thebank, which translates to profits for the bank. The organization andcompensation system does not reflect the theory of customer relationshipmanagement.

Relationship Buyers and Transaction Buyers

Professor Paul Wang described the difference between relationship buyers andtransaction buyers.

Transaction buyers represent a major segment of any market. Thesecustomers try to engage in comparison shopping for every transaction. They readthe ads, consult Google, make phone calls, and get comparative bids. For them,the past has no meaning. They have absolutely no loyalty. Never mind what thesupplier did for you in the past. The question is what is your price today? Theywill shift suppliers of any product for a few pennies difference in price.

Transaction buyers usually get little service. Service is not important to them.Price is everything. There is not much point in trying to win their loyaltysince they have none to give. Database marketing may be ineffectivehere—only discounting will work. They are seldom profitable customers,even though they may buy a lot of products, and they represent an importantsegment of any market. The best thing that could happen to these transactionbuyers would be for them to shift over to buying from your competition. Givethem the competitions' catalogs and phone numbers and hope they take the hint.

Relationship buyers are the customers for whom database marketing wasinvented. They are looking for a dependable supplier:

* Someone who cares about their needs, and who looks out for them.

* Someone who remembers what they bought in the past and gives them specialservices as a reward.

* Someone who takes an interest in their business and treats them asindividuals.

Relationship buyers know that they could save a few dollars by shopping around.But they also recognize that if they do switch suppliers, they would losesomething that they value very highly—the relationship they have built upwith a dependable supplier that recognizes them and takes good care of them.Many of them also realize that there is an emotional and monetary cost toshopping around for every purchase. They want to concentrate on their success inlife, not on their purchasing prowess.

By classifying your customers into these two types of buyers, you can focus yourmarketing efforts on the one segment that is really profitable: relationshipbuyers. Your database is used to record the purchases of these buyers and togive them personal recognition and special services. You recognize your goldcustomers. You communicate with them. You partner with them.

(Continues...)