Direct Marketing and the Internet

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Direct Marketing and the Internet

• Week 12
• Fall 2007

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Direct Marketing

• Cuts out the layers of channel intermediaries.
• A very mainstream phenomenon
• no longer LL Beans or Lands end.
• Campbells Intelligent Cuisine (hypertension,
  diabetes, hi-cholesterol, 60 million)
• Internet retail presence for direct marketers
• http//www.calyxandcorolla.com/calyx.storefront/47
  3bb1f9003ad6999c470a001418063e
• Is this going to replace conventional channels?

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Growth of Direct Marketing

• Media Fragmentation. Growth of cable.
• Clutter Increased cost per impression of media
  access
• Technological advances
• cost of data storage going down
• availability of public databases.

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A Simple Comparison
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Strategic Aspects

• Managing customer targeting.
• Not all customers are good. Database must
  identify the most profitable customers.
  (dayton-hudson 2.5 customers 75 of goods)
• Managing customer equity net lifetime value of
  a consumer
• Dialogue
• Response devices to elicit individual
  information.
• Develop loyalty programs (frequent shopper
  programs) what is its strategic role?
• Use of cross promotions.

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Strategic Aspects

• Cost Implications
• cost of acquisition v. cost of retention
• Acquiring new customers is always more costly
  than retaining current customers.
• Competitive implications
• retention activities always reduce competition,
  increases prices that a firm can charge.
• Why is retaining current customers more
  profitable that acquiring new customers?

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The Loyalty Effect
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The Loyalty Effect
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Internet and Direct Retailing

• Information provision
• Affecting Price Competition
• Mass Interactivity and Product Strategy

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Internet and Information

• Provision of Information on the Internet
• The distinction between Digital and Non-Digital
  Information
• http//www.lexus.com/?s_ocidpdsrch
• What is the implication of this for conventional
  retail channels?
• Sell on the Internet (Dell computers)
• What is the biggest impediment for manufacturers
  to sell on the Internet?

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Internet and Price CompetitionShopping Agents

• 3 features
• Internet can allow mechanisms that reduce the
  costs of search and comparison shopping across
  firms.
• The product market interacts with the production
  of complementary benefits on the Internet.
• Mechanisms that help consumers to monitor prices
  at their preferred firm are a feature of the
  Internet.
• Online comparison shopping agents combine these
  features
• analyzing their impact on markets has general
  appeal.

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Price Competition Internet Shopping Agents

• Common definition of an Internet retailer
• online store accessible through a browser and
  purchases made using a valid credit-card.
• Now there are many services that facilitate the
  shopping process by giving consumers information
  on comparative retail prices, availability,
  service etc.

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Shopping Agents

• Role of ISAs for homogenous search goods
• Consumer searching for a best selling CD knows
  prior to consumption that she will get the same
  benefit for the basic good irrespective of the
  supplying retailer.
• Intuition would suggest that for these types of
  goods ISAs that reduce search costs to zero
  should intensify price competition and cause
  uniform low prices.
• So incentive for retailers to refrain from
  joining.
• But retailers do join.

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Questions

• Many retailers block the ISAs and not joining,
  while others do
• Is it to avoid price competition?
• or
• strategic reasons for inhibiting search.

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Price Competition on the Internet

• ISAs allow consumers to costlessly search for
  prices at many retailers.
• Given an environment with
• Homogenous goods zero search costs for
  consumers
• We expect intense price competition within the
  institution.
• Further, Prices in an ISA should be uniform.
• But...Prices in an ISA do vary substantially
• We found that for the 100 top selling CDs
  (www.Billboard.com) the standard deviation was
  2.1 for a mean of 13.6.

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The FutureFacilitating competition with
conventional retailers
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Internet and Mass Interactivity

• Large scale interactivity (4 characteristics)
• Firms can interact with a large number of
  customers on a one-to-one basis at a low cost
• Consumers can interact with firms
• Consumers can interact with each other
• Asynchronously

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Internet and Product Customization
Interactivity
Customized
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Examples
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Nike Product customization

• Dedicated whole division to this (250mm initial
  commitment..is currently just breaking
  even..But is expected to lose money initially as
  operations expand).
• Why is Nike doing this?
• Investing in loyalty early on in the customer
  lifecycle.
• Problems with Product Customization
• Externality of Corporate segment demand..and the
  dilution of Brand equity

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Landsend customization

• Customization and consumer behavior
• Can there be over-provision of variety.
• Valuation for this higher for women

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Customized Marketing is

• My advice is.. Stop being a company with its
  face towards the CEO and ass towards the
  customer
• Jack Welch, CEO, G.E.
• Consumer centric through
• Building relationships with consumers based on
  their needs.
• Customizing interactions between companies and
  individual consumers
• Delivering the right benefits to each individual
• originating dialogues
• Maximize the value of the lifetime relationship.