Theme: It & Marketing

DATABASE MARKETING - A DREAM COMES TRUE

by

K Asoka Gunaratne

UNITEC INSTITUTE OF TECHNOLOGY

Address for all correspondence:

K. Asoka Gunaratne
FACULTY OF BUSINESS
UNITEC INSTITUTE OF TECHNOLOGY
Private Bag 92025
Carrington Road
Mt Albet
AUCKLANAD
e-mail: kgunaratne@unitec.ac.nz
Tel: (09) 8154321 ext. 7035

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Database Marketing: A dream comes true

ABSTRACT

Increase in the number of women in the workforce, changes in ethnic mix, increase in
singles, defacto couples, single parent families, and dual income parents, are some of
the massive upheavals noticed in the social landscape. Changing size of family units,
ageing population, shrinkage of middle class with rich getting richer and poor getting
poorer are some of the other changes that influence the marketing process. These
changes have fragmented the mass market making the traditional methods of
marketing to homogeneous markets not as effective as they used to be in the past.

Today a widely used alternative approach to mass marketing is database marketing.

Database marketing, one of the hottest and confusing trends, allows the integration of
some independently evolved strategies, such as direct mail and direct marketing, and
enable companies to gain competitive advantage. This paper briefly discusses the
reasons for confusion within, and the benefits of database marketing. The retrieval
mechanisms such as R-F-M and FRAT formulas used to identify the most profitable
customers are detailed. It elucidates issues such as security, data mining, nixie
removal (maintenance strategy), merge/purge facility (remove duplication) and the
other factors marketing managers should consider in exploiting the powers of
information technology and database marketing.

A Database and Database Marketing

A marketing database is a collection of valuable structured information on present and

prospective customers. The information gathered includes, who they are, where they
buy, when they buy and how they buy.

Database marketing is the creation of a computerised marketing database using

information technology and marketing to current and potential customers as
individuals, in a smarter, faster and more cost effective way than competition, for
their benefit and to your profit.

Businesses that venture in to database marketing are able to sell to a myriad of

customers one at a time (David, 1998). This helps companies to grow comfortably
making use of the sophistication of technology.

A proper database marketing system adds value to an organisation. But an

implementation of a system which focus on technology for the sake of technology
will miss the point (Cameron, 1998). It becomes valuable only if the flexible
technology used promotes the easy use of the system by marketers to tackle
challenging business problems.

Confusion about Database Marketing

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There are numerous definitions for database marketing and one definition may not
necessarily be better than any other. Regrettably, however, people at times use the
terms direct marketing and direct mail interchangeably with database marketing,
which are complementary but significantly different activities.
Direct marketing could be defined as a marketing approach where a company markets
it products direct to consumers by passing the intermediaries. Direct mail on the other
hand is more appropriately regarded as advertising or a communication medium, such
as newspapers, magazines or even television that could be used to deliver marketing
communications to customers. A well-created database marketing programme may
however encompass the above activities and some more. Hence a reason for potential
confusion.

Where Do You Start

A customer database commences with registration of members. Clearly spelled out

and simple to understand with benefits that customers can take advantage of will,
obviously motivate customers to fill the registration forms. An offer of a small present
may make the process even easier. At this initial stage significant demographic data
relevant to pinpointing future revenues are captured.

During the process of registration marketers should only gather minimal information
that is required to maintain effective personalised relationships with their customers.
Necessary care should be taken to address the privacy concerns of customers. If some
customers do not wish to receive company mail steps must be taken not to include
them in the mailing lists. Alternatively they may be offered an incentive to accept the
company mail and build long term company/customer relationships.

Database is then enhanced recording of each transaction. The next step is to overlay
the information gathered with environmental data such as industry characteristics,
psychographics of buyers, and proprietary information such as product preferences
and credit worthiness. The basic facts gathered about customers combined with their
real life transactions helps marketers to make decisions about when and how to
market to their customers.

The final stage is the crafting of a methodical collection of customer facts and figures
and transferring them in to useful information. Managers for this purpose could use
either simple tools such as percentages or complex techniques such as multivariate
regression analysis. Such analysis enable mangers to predict who the best customers
are, where they are, who offer the most opportunity for continuity sales, cross-sales,
up-sales, how much can be spent to acquire them, and what are their life-time values.
Using database-enabled analytical techniques, marketers can improve marketing
efficiency by gaining a better understanding of the overall sales opportunity (Woods,
1998).

Maintenance of Database
Database is a perishable commodity where information ages. To assure its reliability
it must be kept up to date. Out-of-date information will result in misdirected
advertising, wasted contacts and sacrifice of responses.

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Uniformity of compilation of data allows for merging/purging of the data collected
and facilitates the maintenance of the database. Merge/purge facility, which uses
match codes, is designed to eliminate duplication. It has the ability to compare
millions of records within and between lists at the same time.

Other maintenance and control tasks include nixie removal, change of addresses and
record status updates. Undelivered mail that has been returned is referred to as Nixie.
The reason for return may be, the incorrect code or street address, or the person has
moved or deceased. Correction of these errors is referred to as nixie removal.

To maintain the currency of databases, administrators must encourage those who are
on their databases to inform them of any changes of addresses and telephone numbers.
The final maintenance task is updating of personal records, which is the prompt entry
of new transaction of customers.

Database security

Databases are tangible and portable assets where millions of personal and transaction
records are stored. The consequences of their loss or misuse could be devastating to
an organisation. This loss is not completely insurable due to its high intangible
component. Thus special precautions are necessary to protect a database from loss,
theft, misuse or unauthorised use.

The first step to ensure safety is to store it in a proper location, with proper storage
and controlled access. Next key steps include, assigning responsibility of its
administration, authority for modification, and permission to access. It is advantages
to make visible the security provided to discourage misuse and theft. There must be
clearly defined procedures to apprehend any violators.

Data mining
Data mining is essentially focused on discovery. This could be defined as the
discovery phase of database marketing. Its objective is to identify prime prospects and
to predict their unstated preferences and likely purchases. Using data buried in
corporate databases allows marketers to unearth patterns and significant correlations
among products purchased by divergent customer groups.

Data mining and market research go hand in hand (Davis cited by Dwek, 1998). Data
mining improves the predictability of customers likely purchases. These predictions
are based on extensive information collected and the algorithmic models used for
analysis. Even minor changes of predictive ability would contribute significantly to
sales and profits when volumes are large.

How to find your profitable customers?

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The most recommended tool for identifying the best customers is the RFM (recencey/
frrequency/monetary). The RFM formula will vary based on the relative importance
marketers place on different variables. It is useful to estimate the future sales potential
of customers, allocate promotional costs, and evaluate potential benefits.

The best customers are those who are most likely to buy again. They may be those
who bought most recently or may be those who bought specified quantities most
frequently with in a specified period. Using these three criteria (recency, frequency,
and monetary), the most profitable customers could be easily identified for
maximising profits.

Mail-order catalogue firms use this system to select and exclude customers who
receive their circulations to maximise profits and also to make accurate sales
forecasts. This system is clearly applicable to other areas of marketing.

With RFM, you score customers in terms of how recently they bought from you, how
frequently they have bought form you in a given time period, and how much they
spent with you in that same period (Chiger, 1998). The scores are used as the basis for
determining the frequency of soliciting accounts for repeat purchases. An example of
a typical formula:
Recency points:
24 points - Current quarter
12 points - Last six months.
6 points - Last nine months.
3 points - Last twelve months.

Frequency points:
No of purchases x 4 points.
Monetary points :
10% of the dollar value of purchase with a ceiling on the
maximum at the discretion of the manager.

Those using the R-F-M formula may decide on an appropriate basis for point
allocation but the principle would remain similar to above.

R-F-M formula was further expanded by Robert Kestnbaum who added a new factor
known as T for type of merchandise or service purchased and introduced the new
formula identified by the acronym FRAT where F stands for frequency, R for
recency, and A for amount. He suggested that what a person buys at present would be
indicative of what that person would buy in the future. The subsequent purchases of a
person who bought a BMW today could be different from those of a person who
bought a Nissan.

What can you accomplish?

(a) Relationship building

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A good customer database is the foundation of all loyalty programmes. It helps to
meet the needs and interests of the customers more cost effectively and develop
everlasting relationships. The transaction knowledge stored in it could be used in all
future truly individual and personalised transactions to develop customer loyalty and
create an affinity that cement the customer/company relationship.

(b) Maximise lifetime value of customers

Database technology permits marketers to identify its one-time only triers, the
repeat purchasers, and the loyal customers. It helps to personalise communications
and direct specific promotions in such a way as to address the individual needs and
wants of current or prospective customers. They may be either individuals or
companies. The profiling techniques, predictive modelling and the tracking
capabilities available helps organisations to cultivate customers, nurture relationships,
and identify the continuity selling and cross-selling opportunities to maximise the
lifetime value of the customers.

The objective of todays profitable marketing is not single response or a single

transaction but to maximise the life-time value of customers by creating, caring for
and keeping them over an extended period of time by continuity selling. Consumers
renewing insurance policies, increasing their coverage, signing additional policies are
all good examples of continuity selling. These are similar to renewal of subscriptions
to a magazine or buying additional merchandise through a catalogue.
Marketers do cultivate customers not only for continuity selling but also to seek
opportunities for cross selling where existing customers are offered new, related or
unrelated products. Database could be used effectively to segment customers and to
identify cross selling opportunities. A good example would be a bank segmenting
their customers according to the type of account such as savings, personnel checking,
commercial checking, home mortgage, inventory loans, commercial real estate loans,
car loans, etc. and then using that information to identify cross-selling opportunities.
A commercial account holder may be prime prospect for an inventory loan and a
savings account holder may be worthwhile prospect for a car loan. Opportunities for
corss selling abound and database can make these happen, provided the marketers
build a reputation for integrity, overall image and reliability.

(c) Lower costs

In this information age, value of information is greater than the value of physical
products or materials. Businesses in the present era are not for every one, but for a
chosen few. Marketers could reach their chosen few at a lower cost with a well-
compiled database eliminating the cost of mass marketing. Database could be used to
avoid misdirected communications and cost ineffective marketing efforts. This
however is true only if you have quality input into your database to gain quality
output. Even the most powerful database software system is only as good as the
underlying data (Wheaton, 1998). If garbage goes in, what comes out is garbage and
final outcomes will not be encouraging.

(d) Measure results

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Marketers must bring the same discipline to evaluate their campaigns that securities
bring to evaluating the performance of a companys stock (Paladini, 1998). Database
marketing allows companies to measure the results of their marketing activities and
gives the opportunity to marketing directors to provide company management definite
figures on return on investment related to marketing expenditures.

Profitability analysis is possible by individual products/ services and individual

customers. It helps to tract in-market costs (cost of initiating and undertaking a
campaign), fulfilment costs (cost of a sales persons visit, mail of a brochure, delivery
etc.) on cost side, and information on purchase quantities, average order values, and
future repurchases on the revenue side.

(e) Maximise Profits

In the current competitive markets, customer acquisitions are more expensive than
ever before. Practitioners generally accept that it is five times easier and profitable to
retain current customers than generating business from new customers. Database
marketing enables companies to pick their best current and potential customers and
allocate resources strategically to maximise returns to the company.

In service industries customer loyalty tend to erode more rapidly than in product
market due to the absence of product differentiation. To overcome this inherent
disadvantage most organisations shifted their emphasis from expensive new customer
acquisition to less expensive customer retention strategies through database marketing
to maximise profits.
Companies marketing high involvement products such as automobiles improve
relations with their customers using database marketing and enhance their continuity
selling opportunities. Marketers of liquor and cigarettes with restrictions in
advertising, and with a high core of loyal users, enhance profits adopting database
technology to interact with their customers.

Traditional packaged goods companies too have entered this arena using the
information driven database marketing techniques to reach their consumers efficiently
at low costs.

In addition to retention of customers, database marketing typically aims to increase

the frequency, range, and value of customer purchase (MacStravic, 1998). Frequency
refers to the number of times customers buy. Range is increased by cross-marketing,
which is selling additional products (selling a tie t go with the shirt). Values of
purchases are increased by upmarketing as seen when car dealers push more
expensive models to their customers. Database marketing assist all these activities that
contribute to maximise profits.

(f) Improve communications

This refers to sending the right message to the right people at the right time. Database
provides knowledge about your customers habits and needs which allows you to
reach them with campaigns specially designed for them. It helps to pinpoint ideal
timing and frequency of promotions.

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Day to day communications now happens within the system, not by fax or e-mail
(Worcester, 1998). The enhancements in database technology combined with the state
of the art communications now allow a number of users of a database system to
simultaneously view a document on screen, discuss it on phone and make notations to
the document.

(g) Improve efficiency of other programmes

Some believe database marketing eliminates the need for company sales and
advertising programmes. This is not true. In fact, it makes them more efficient. Sales
managers are provided with more accurate summary data in order to make better and
faster decisions and the sales representatives and dealers are provided with advance
information to do a better job.

Effectiveness of advertising is enhanced spectacularly as database marketing allows

customising specific messages to specific individuals. The synergistic effect of
different communication strategies combined through database marketing further adds
to marketing effectiveness.

(h) Customer service

One key to providing a good customer service is knowing how to reach, satisfy and
track your best customers (Hansen, 1998). The devices that you could use to make it
happen are the database and database marketing. The power of database marketing
enables those who use it to make a quantum leap in to the new millennium of
customer service.

The Success and Failure

The success and failure of database marketing is based on, not only how and what
information is gathered in the database, but also on how it is subsequently used. Are
the marketers taking the advantage and all the benefits automated databases afford?
Have companies changed their marketing techniques taking advantage of the massive
databases available? Undoubtedly there is room for considerable improvement in both
areas.

Some marketers believe marketing, which is a volatile blend of analysis, and

creativity cannot be automated. Strange as it may seem, marketing can benefit
enormously from automation. If complex research, engineering and creative design
can be automated it is logical to realise that marketing too, could use the power of
automated databases to improve efficiency and effectiveness.

Marketers begin planning by gathering information from difficult sources. Then they
analyse them using time consuming number crunching exercises to build rational and
coherent pictures of marketing situations. How many successful marketing
practitioners then store that information in their heads? How many scribble such
valuable information on pieces of scrap paper? How many bury them as treasures in
unmanageable databases? Are these ad hoc systems the best to store such expensive
data that has the potential to generate valuable corporate intelligence?

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Marketing is about immediacy. Many companies have a wealth of information about
their customers collected in data warehouses. But some do not know how to put a
query and access the information they require in a timely manner. To succeed they
need to acquire the capability to drill down the databases, extract information quickly
and share them with right people to take quick correct action that determine success.

Database technology today allows managers with limited technical expertise to gather
instantly a wealth of knowledge about the demographic profiles of customers, revenue
and profitability of segments, and many other variables by pointing and clicking. Such
information could be used to retain customers, to cross-sell, to up sell and to improve
company profitability.

Once a database is properly set-up it could provide unlimited information to marketers

and answer whatever the questions they may ask, as fast as they ask them, and fire
their imagination. However a marketer in developing a database need to consider how
that information will be used in the future. What will be done with the data collected?
How can the data be used to lower the cost? How can the data be used to increase
future revenues? Does the cost of gathering the data exceed the cost of lost
opportunity of future sales?

Database marketing permit synchronising the data stored in various databases. This
integration allows managers to track their customers through every stage of their
relationship add value, become more effective, and build relationships that last a
lifetime. The creation of this powerful marketing tool that generates invaluable
information and facilitates the integration of a myriad of efficient marketing functions
has made a marketer dream a reality.

Bibliography:

(1) Cameron, D., (1998), Do you really need a data warehouse, Direct Marketing,
June, 61(2), pp 43-45.

(2) Chiger, S., (1998), The ABCs of database marketing, Catalog Age, July, 15(8):
87

(3) David, P., (1998), Marketing for survival, CIO, April, pp 44-48.

(4) Dwek, R.,(1998), Data double act, Marketing, April, pp 33-34.

(5) Hansen, S., (1998), Computer assisted customer service, Bank Marketing,
March, pp 30-36.

(6) MacStravic, S., (1998), Were missing the boat in database marketing, Journal
of Health Care Marketing, Summer, 18 (2): pp 39-41.

(7) Paladini, M., (1998), M2: Raising marketing to a higher power, Direct
Marketing, June, 61(2): pp 29-30.

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(8) Woods, T., (1998), Lets just call it matrix marketing, Mc Technology
Marketing Intelligence, May, 18(5): 52-53

(9) Wheaton, J., DATA Detectives, Catalog Age, May, 15(6): 94-100

(10) Worcester, B. A., (1998), Cendant pushes information to franchisees, Hotel &
Motel Management, May, 213 (8): 7.33

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