The purpose of marketing is to enable the firm to enhance customer value. In today’s competitive, information-intensive, ROI-oriented business environment, database marketing has emerged as an invaluable approach for achieving this purpose. The applications of database marketing are numerous and growing exponentially. Here are a few examples:
• “Internet Portal, Inc.” determines which of its customers will be most receptive to targeted efforts to increase their usage of the portal. Perhaps more importantly, it determines which customers will not be receptive to these efforts.
• “XYZ Bank” decides which of its many financial products should be marketed to which of its current customers.
• “ABC Wireless” develops the ability to predict which customers are most likely to leave when their contract runs out, and designs a “churn management program” to encourage them to stay.
• UK Retailer Tesco develops thousands of customized promotion packages it mails to its 14 million customers (Rohwedder 2006).
• Best Buy has identified the major segments of customers who visit its stores. It then (1) tailors its store in a particular locality to fit the representation of the segments in that locality, and (2) trains its store personnel to recognize which segment a particular customer belongs to, so the customer can be serviced appropriately (Boyle 2006).
• “XYZ Bank” decides which of its many financial products should be marketed to which of its current customers.
• “ABC Wireless” develops the ability to predict which customers are most likely to leave when their contract runs out, and designs a “churn management program” to encourage them to stay.
• UK Retailer Tesco develops thousands of customized promotion packages it mails to its 14 million customers (Rohwedder 2006).
• Best Buy has identified the major segments of customers who visit its stores. It then (1) tailors its store in a particular locality to fit the representation of the segments in that locality, and (2) trains its store personnel to recognize which segment a particular customer belongs to, so the customer can be serviced appropriately (Boyle 2006).
• Catalogers routinely use “predictive models” to decide which customers should receive which catalogs.
• “E-tailer Z” uses “recommendation engines” to customize which products it “cross-sells” to which customers.
• Dell Computer uses data analyses of prospects to improve its customer acquisition rate (Direct Marketing Association 2006).
• “E-tailer Z” uses “recommendation engines” to customize which products it “cross-sells” to which customers.
• Dell Computer uses data analyses of prospects to improve its customer acquisition rate (Direct Marketing Association 2006).
These are but a few examples of database marketing in action. The common theme is that all of them are based on analyzing customer data and implementing the results.
Database marketing is the use of customer databases to enhance marketing productivity through more effective acquisition, retention, and development of customers.
Each phrase in this definition is carefully chosen. First, database marketing is fundamentally about using of customer databases. The “customer” can be either current customers or potential customers. Firms have data on their current customers’ purchase behavior and demographic and psychographic information, as well as the firm’s previous marketing efforts extended to these customers and their response to them.
For potential customers prospects firms may be able to obtain data on customer demographics and psychographics, as well as purchase history data, although obviously not in the same depth as available for their current customers.
Each phrase in this definition is carefully chosen. First, database marketing is fundamentally about using of customer databases. The “customer” can be either current customers or potential customers. Firms have data on their current customers’ purchase behavior and demographic and psychographic information, as well as the firm’s previous marketing efforts extended to these customers and their response to them.
For potential customers prospects firms may be able to obtain data on customer demographics and psychographics, as well as purchase history data, although obviously not in the same depth as available for their current customers.
Second, database marketing is about marketing productivity. In today’s results-oriented businesses, senior management often asks the simple question, “Do our marketing efforts pay off?” Database marketing attempts to quantify that effectiveness and improve it. It does this through effective targeting.
The retail pioneer John Wannamaker is credited with saying, “I know half of my advertising doesn’t work; I just don’t know which half.” Thinking more broadly, in terms of marketing rather than advertising, database marketing identifies which half of the firm’s marketing efforts is wasted. It does this by learning which customers respond to marketing and which ones do not. The responsive customers are the ones who are then targeted.
Third, database marketing is about managing customers. Customers must be acquired, retained, and developed. Acquiring customers means getting an individual who currently does not do business with the company to start doing business with the company. Retention means ensuring the current customer keeps doing business with the company. Development means enhancing the volume of business the retained customer does with the company.
For now, the important point is to recognize that database marketing is concerned with all three elements of customer equity. The Dell example above involves customer acquisition. The ABC Telecom example involves customer retention. The XYZ Bank, Tesco, and E-tailer Z examples involve customer development.
Why Is Database Marketing BecomingMore Important?
The indications are that the database marketing industry is huge and increasing. The question is, why? We hypothesize five major classes of reasons:
• Information technology: Companies now have the ability to store and manipulate terabytes of data. While the software to do so is expensive, the capabilities are dramatic.
• Growth of the Internet: The Internet is a data-collection “machine.” Many companies that previously could not collect and organize data on their customers can now do so through the Internet.
• Lower productivity of mass marketing: While there are no good statistics on this, there is the belief that mass advertising and non-customized marketing efforts are eliciting poorer response, while costs are increasing and margins are declining.
One can write the profitability of a marketing campaign as Π = Npm−Nc, where N is the number of customers reached by the campaign, p is the percentage that respond, m is the contribution margin when they respond, and c is the cost of contact per customer. For a campaign to be profitability, we need p > c/m. Unfortunately, all three of these terms are moving in the wrong direction. Response is lower (p), costs are higher (c), and margins are lower (m). Database marketing targets customers for whom response is maximal, helping the profit equation to remain in the black.
• Information technology: Companies now have the ability to store and manipulate terabytes of data. While the software to do so is expensive, the capabilities are dramatic.
• Growth of the Internet: The Internet is a data-collection “machine.” Many companies that previously could not collect and organize data on their customers can now do so through the Internet.
• Lower productivity of mass marketing: While there are no good statistics on this, there is the belief that mass advertising and non-customized marketing efforts are eliciting poorer response, while costs are increasing and margins are declining.
One can write the profitability of a marketing campaign as Π = Npm−Nc, where N is the number of customers reached by the campaign, p is the percentage that respond, m is the contribution margin when they respond, and c is the cost of contact per customer. For a campaign to be profitability, we need p > c/m. Unfortunately, all three of these terms are moving in the wrong direction. Response is lower (p), costs are higher (c), and margins are lower (m). Database marketing targets customers for whom response is maximal, helping the profit equation to remain in the black.
• Marketing accountability: Results-oriented senior managers are requiring all business functions to justify their existence, including marketing. No longer is it taken on faith that “marketing works” or “marketing is a cost of doing business.” The demands of senior managers for proven results feed directly into database marketing’s emphasis on analyzing data and measuring results.
• Increasing interest in customer relationships: Companies are more concerned than ever about their relationship with the customer. They see their products commoditizing and customer loyalty wilting away. Database marketing is a systematic way to improve customer relationships.
• Establishing a competitive advantage: Companies are always trying to determine what will be their source of competitive advantage. Perhaps that source lies in the data they have on their own customers, which allows them to service those customers better through database marketing.
• Increasing interest in customer relationships: Companies are more concerned than ever about their relationship with the customer. They see their products commoditizing and customer loyalty wilting away. Database marketing is a systematic way to improve customer relationships.
• Establishing a competitive advantage: Companies are always trying to determine what will be their source of competitive advantage. Perhaps that source lies in the data they have on their own customers, which allows them to service those customers better through database marketing.
Source: Database Marketing Analyzing and Managing Customers - Springer
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