The State of Database Marketing Today

InfoWorks recently did a major survey of the use of database marketing by large Canadian companies. The purpose of the study was to establish the best practice benchmarks in this new industry, and to share the learning. They received in depth feedback from senior level executives of 150 companies with particular emphasis on telecommunications, financial services and retailing.

How Database Marketing Awareness is Changing

Based on their survey, they found a profound shift in the evolution and practice of strategic database marketing dynamics over the past ten years. Up until recently, most companies trained their customers to look for the lowest cost with the best value. In the future, they see customers as having higher expectations about convenience, price, value and quality. This shift will drive a change in marketing strategy. As the population growth slows and the markets become saturated, companies are shifting from a focus on acquisition of new customers and cost reduction to an increased focus on retention and revenue growth from existing customers.

In the past, few companies had, or valued, customer level data. Their decisions were made on sample research with information based on averages. This was traditional market research. Today, more and more companies are seeking detailed customer level data which will guide their strategic decisions. Customer knowledge provides specific direction for action which is based on actual individual customer behavior.

Up to today, companies have provided convenience to their customers by having more physical points of distribution. Increasingly, convenience is being provided through real time ordering. In the past, products were differentiated and then were pushed on through to the consumer. In the future, customers are being differentiated and then products are designed to meet the needs of particular customer segments.

The old method offered the same price to all customers. Customers were trained to expect discounts. With new methods, more suppliers are creating customer level pricing which reflects the value of the customer to the firm, and the value of the service to the customer. Whereas in the past, mass marketing has largely driven the sales, now companies are concentrating more on retention. This requires more targeted communications.

What They Believe is not What They Do

A majority of the 150 respondents to the InfoWorks survey recognize that existing customers are of fundamental importance to their survival. 72% feel that customer development is the most or second most important objective. As a result, only 32% rated cost reduction as their primary goal. This is a tremendous shift from what was true only ten years ago. Sixty two percent of the company executives rated customer retention as their first or second most important goal. These companies have high expectations for the success of their Database Marketing activities. They feel that loyalty programs will be a key component of company strategy in the near future. They plan to make major investments in it: they say that database marketing will be an important competitive differentiator.

On the other hand, most companies reported that they do not have the right information, skills, tools or marketing processes. While they see database marketing as a key strategic element, they do not yet have a clear vision of what that strategy should be. While they plan to spend a great deal more in this area, most of them lack funding for database marketing programs at present. They acknowledge that they need increasingly sophisticated tools and technology, but they currently lack those skills and resources. This is changing. Most companies devote 47% of their marketing investments to targeted marketing today. In three years, this percentage is scheduled to increase to 61%. Mass marketing, which now accounts for 53% of marketing investment is set to drop to 39% in three years for these companies. Most of the reporting companies feel that targeted customer marketing channels will surpass mass channels for them by the year 2000 – for me, an amazing prediction.

Lack of Vision and Understanding

Eighty one percent of the respondents said that Database Marketing is generally not understood throughout their organization. Only 20% reported that their company had a clear vision and strategy on Database Marketing. Fifty seven percent reported that their company lacked synergy across the various departments involved. In summary, although Database Marketing is viewed as a key strategic element, few companies have aligned their organizations to enable it.

Perhaps the biggest current lack is a solid understanding of customer level profitability. While 60% knew the percentage of sales or revenues from their top 5% customers, only 28% had a widely understood customer segment strategy. Only 17% knew the current or future potential profit from each customer, and only 16% had calculated the Lifetime Value of their customers.

Only 33% of companies responding have a formal Database Marketing department, but fifty eight percent have a customer database or data warehouse. Sixty five percent do not have any loyalty program today. Of those 35% who do have a loyalty program, what rewards do they give to their loyal customers?

48% — offer their own merchandise or services

41% — offer enhanced services, such as upgrades.

35% — offer travel rewards

28% — offer instant cash or rebates

13% — offer other companies merchandise

Only 21% measure the financial impact of their loyalty program. But of those that do, 86% report that their loyalty programs are successful. Of those companies who had built customer databases, what data do they include other than the customer’s name and address? 86% include customer transactions and 66% include customer service contact history. Surprisingly, only 3% include third party (census) data, and only 3% include such data as customer survey responses or credit history. This is bad news for external data providers.

Most companies (82%) do not have significant experience with the use of statistical tools. Of the 18% that are using the tools, 27% model customer behavior, 18% determine lifetime value and 15% use models to predict attrition.

Why the Gap?

So if most companies consider database marketing to be of increasing importance in the future, why are so few doing anything significant with it today? A key reason say 78% is that they lack sufficient internal personnel with appropriate skills. Seventy five percent say that they have not devoted enough resources to database marketing. And sixty one percent have found that they cannot yet successfully analyze and interpret the data that they already have. For these reasons, many companies have looked to outside agencies for help. Where do they look?

41% — look to Direct Marketing Agencies

38% — seek out Market Research firms

37% — employ Strategic Consultants

32% — use systems or database development firms

30% — consult list processors

20% — hire statisticians or data modelers.

Which Industries are Ahead of the Others?

Overall, the InfoWorks study found “information intensive” industries such as Communications and Financial Services to have the greatest proficiency in the principles and practice of sophisticated Database Marketing. Most of these have institutionalized the learning from Database Marketing techniques and are operationalizing the process. The Retail and Service sectors are coming up the curve quickly and are doing sophisticated customer segmentation on their broad customer bases. Other industries such as Manufacturing and Public Administration are not as far along. They are just beginning to embrace Database Marketing principles.

InfoWorks summarizes their findings by pointing out that Database Marketing is in the middle of a business revolution. Understanding the customer is the goal, and Database Marketing is the method. Customer focused strategic alignment is where most companies are heading. But, big gaps exist in collecting and using customer knowledge. Successful innovators have found Database Marketing to be a competitive differentiator for them. To get from here to there requires clear vision and strategy plus strong leadership. It requires new competencies and skill sets in people. It requires new investment in testing and learning plus forums to share success and failures.

To me, this was a really significant survey, masterfully crafted and summarized. We have all had our assumptions about the extent of Database Marketing understanding the utilization across industries. InfoWorks has given our assumptions empirical grounding and rationalization. For those companies planning a major investment in Database Marketing, the InfoWorks study should be an important step in their data gathering efforts.