State of the Industry-1999 (2,293 words)
Reported by Kelly J. Andrews
There's no doubt the direct marketing industry is thriving. Survey after survey shows that both revenues and profits are up, and research companies predict that the future will remain rosy for years to come. However, that bright and happy big picture is made up of lots of small ones—thousands of direct marketers that each have a unique story, strategy and perspective.
To find out what's happening at ground level, we conducted a State of the Industry survey that took a close look at direct marketers across the country.
The direct marketers we surveyed are a cross-section of our readership: publishers, manufacturers, catalogers, retailers, financial services and fundraisers. About a third each targeted businesses (33.2 percent), consumers (29 percent) and a mixture of both (37.8 percent). As a group, they're doing well. More than four out of five (80.3 percent) reported that their revenues had increased (56.2 percent) or remained stable (23.9 percent) in 1998 over the previous year.
Despite the cheerful overall outlook, real concerns exist at the grassroots. In fact, the results were sometimes surprising—the word through the grapevine sometimes varies from the party line spouted by industry spokespeople and the direct marketing companies on the top tier. To gain a little perspective, we spoke to some industry trendsetters and analysts about the results and issues we uncovered. We then took a magnifying glass to two companies that responded to the survey, not because they were exceptional, but because they seemed to exemplify the trends, attitudes and results we uncovered in the State of the Industry report.
Costs Put On Pressure
Despite the healthy revenue growth our respondents cited, profit growth was slightly more sluggish, with fewer than half (44.4 percent) reporting increased profits and 22.7 percent complaining that 1998 profits were actually lower than the year before. Perhaps this slow-down in profit growth explains why half of all respondents cited postal costs as their number-one concern, with another 37.3 percent citing other cost pressures.
While our respondents may have perceived costs as a top concern, some industry experts disagree with this impression. Richard M. Hochhauser, executive vice president of Harte-Hanks, the San Antonio, TX-based database marketing company, strongly denies the notion.
"Since 1993, we've had nothing but good news from the U.S. Postal Service," says Hochhauser. "The rate increase in January is good news since it's a small increase. Is it more expensive to design or print each piece today? Yes, but postal increases aren't a big factor."
Ron Greene of Devon Direct, a direct marketing agency based in Devon, PA, tries to reconcile the difference between perception and reality.
"Since 1992, paper costs have gone up, but so has the speed and quality with which you can get a mailing out," he says. "As a result of database marketing, advertisers can create more data-driven, versionalized communications to reach targeted audiences. Despite higher paper prices and higher postage, costs are at the same level or lower."
For those who can take full advantage of database marketing techniques, then, increased costs are not a problem. Those who cannot will continue to feel the pinch on their profit margins.
Labor Shortage Continues
The second-most-frequently mentioned concern was hiring qualified workers, cited by 40.9 percent of respondents. This complaint echoes the lament of businesses in all industries.
Explains Hochhauser, "In a robust economy, good people are in short supply and companies that will win in hiring are those where the culture is positive, where there is training and opportunity."
Ironically, despite the difficulties direct marketers had with hiring, only 13 percent claimed that staff training was a major issue. According to Cliff Hurst, president of Career Impact, a Wells, ME, telemarketing training company, the top criterion that younger workers use when selecting a job is availability of training. To alleviate the labor problem, he advises that direct marketers concentrate more of their human resource dollars on the back end: by retraining existing employees and training promising new hires. As long as companies persist in spending on the front end only to recruit new workers, essentially cannibalizing their competitors' staffs, the labor problem will continue.
Data Challenges and Benefits
Since 1992, database usage has increased 58 percent—85.4 percent of all respondents now use one. No wonder that data management registered on our survey as the top internal challenge for four out of 10 direct marketers.
Martha Rogers, influential author of "Marketing 1 to 1" and co-founder of Marketing 1 to 1 consulting and training group, explains, "In six years, database prices have halved four times. Now databases are affordable. In fact, you can't afford not to have one."
While direct marketers have jumped on the database bandwagon with alacrity, many of the databases are not working as hard as they should. Our survey revealed that the usage of database marketing techniques such as segmentation (35.3 percent), modeling (16.6 percent ) and cross-selling (26.2 percent) trails.
"It's easy to hire someone to set up the software, but it's hard to make money with it," explains Arthur Hughes, a well-known database expert who is executive vice president of Reston, VA-based ACS Inc. "Some people are realizing that they're not making any money with their databases. When people say they use their databases to segment, it may not mean much. I know a big company that segments its database every year, but then it mails everybody the same thing. What's the point? The problem is that when you create segments, then you have to manage each one separately."
Martha Rogers explains that most databases are too new to have been implemented correctly.
"When we've worked with our clients it seems that everyone is still bogged down in setting up better logistics and better methods," she says. "Direct marketers haven't gotten around to using their databases for modeling and cross-selling because they're still at the stage where they're using them to manage their back-end."
Hughes believes that many marketers put databases into place because they think they should, and only find out later that database marketing doesn't work for everyone—packaged goods manufacturers, for instance, or everyday-low-price retailers like Wal-Mart. For other direct marketers, effective use of databases is limited by the lack of those who know how to leverage them.
Says Hughes, "The problem with database marketing is that you still need to come up with creative, imaginative ideas for building relationships with customers."
Technology Accelerates Change
Another top concern, mentioned by 38.3 percent of direct marketers surveyed, is how to keep up with technology in a world where change continually accelerates.
"Technology is obviously having a huge impact, and I think it's a huge opportunity for direct marketers," says Devon Direct's Greene. "It's increasing people's focus on the magic of one-to-one marketing and media integration. It gives an opportunity to reach customers in a personal way. What people need to do is remember the fundamentals that made other direct marketing channels work. They have to communicate in a clear, unencumbered manner and utilize the same techniques that incentivize and motivate readers into taking action."
According to our survey, the Internet is now the second-most popular direct marketing method; almost two in three marketers are using it to some degree. However, most are still experimenting with a relatively small chunk of their budget (only 12.5 percent of all direct marketing dollars), and less than half are seeing their dabbling pay off.
The problem, many experts suggest, is not the medium, but the message.
"People have to use direct marketing techniques on Web sites to drive the viewer to take appropriate action," says Greene.
Right now, many commercial sites are struggling because they use technology for technology's sake and neglect to conform to the basic tenets of direct marketing. When Internet marketers apply sound creative techniques, says Hochhauser of Harte-Hanks, the medium will explode.
"The question is not 'if,' but 'when' for the Internet," he explains. "I think it will be a challenge to see how the mix works with direct mail, the telephone and now the Internet. The concept of brand identity will be extended—one and one will equal three when you convey brand image across media. It's a challenge and an opportunity and it's definitely going to be part of our future. When a new medium comes along, the pie gets bigger. Nothing seems to go away. Television didn't kill radio and Internet won't kill the telephone or direct mail."
Consumer Privacy: A Growing Dilemma
Privacy is one of the hottest topics discussed by direct marketers, consumers and legislators, and not surprisingly, it was listed as a top external challenge by nearly a third (32.2 percent) of direct marketers surveyed. What was disheartening is how few direct marketers were acting to stave off the criticism. Only 56 percent of those who rent their lists give an opt-out option and only 52.5 percent maintain an in-house suppression file. More surprisingly, only 7 percent and 14 percent of respondents subscribed to the DMA telephone and mail preference services, respectively.
"Consumers are concerned with privacy and direct marketers need to pay more attention," cautions Ron Greene.
Martha Rogers sees the situation as more dire, warning, "If direct marketers don't take care of privacy inside the industry, it's an open invitation to get the Feds involved. I just spent two weeks in Europe, and it taught me a good lesson on privacy. They are way, way more paranoid then we are, way ahead of us in terms of privacy regulations, and they're already paying the price."
Richard Hochhauser has confidence that self-regulation efforts will prevail before the damage is done.
"There are people who lead the way and those who follow," he says. "When it comes to privacy, people will have to follow the leaders or they'll be legislated out of existence. The DMA will lead the way because following privacy guidelines will be a condition of membership in 1999."
Global Upheaval and Opportunity
While the global economy was cited as a major concern by fewer than a quarter (23.7 percent) of direct marketers in the survey, this importance may change in years to come.
More companies are marketing internationally and to a greater spectrum of countries. International efforts to all regions have increased in 1998 over the 1992 figures, with the biggest increase in South America. In 1992, only 42 percent of surveyed companies had entered the global marketplace, compared to nearly half (48.1 percent) today, but the biggest change is among the future plans of those who do not yet market internationally. Ninety-seven percent of these direct marketers plan to do business globally in the next five years.
Although postage costs are higher in many foreign countries, the refinement of database-driven techniques and the application of lessons learned in the U.S. market is making mailings more profitable overseas. Greene says that Devon Direct, which also operates in the United Kingdom, has found that the lesser volume of direct mail received in the U.K. allows his company's mailings to stand out.
Clive D. MacLean, president of CM Partners, a creative direct marketing agency located in Rolling Meadows, IL, warns that U.S. direct marketers would do well to enter foreign markets only with an understanding of the limitations there.
"The lack of data in Europe means that creative positions and offers must be used more effectively," MacLean advises. "I think it's a very different approach. Also the numbers have an impact—the United States has such a large volume of data that there are huge economies of scale in terms of packaging and printing. The numbers are a lot smaller in the rest of the world, which means your cost per package is higher and it needs to work that much harder at the end of the day. That means much more work at the front end to be sure that you can pay for the package."
While turmoil in the global economy may be pulling in the reins on new entry into foreign markets, direct marketers shouldn't halt their efforts.
"If you look around the world there are still huge opportunities," says MacLean, who began direct marketing in his native South Africa and who has worked in Europe, South America and Australasia. "You just have to approach it knowing what the variables could be, what the economics are in that country, what the rules and regulations are. For example, Japan has some fairly onerous database and privacy laws that you can fall foul of very, very quickly."
U.S. companies looking globally have the onus on them to do more homework and to learn about the social, political, legal and cultural dynamics of their destination market.
Trends and Predictions
Direct marketing is a robust industry and it promises to stay that way. Most experts agree that the Internet and database technology will have increasing importance as a means to institute better relationship marketing methods and to integrate all media with a single brand message.
Rogers predicts that many advances are currently on hold because of intellectual and financial resources currently being applied to the Year 2000 problem.
"I think in February of the Year 2000, we'll see incredible developments in data management," she says. "All the systems that are going to crash will have crashed and we'll be ready to move forward."
While some industry nay-sayers warn that the Internet will damage telephone marketing, direct mail or DRTV, others disagree.
"As direct marketing methods grow, budgets will expand, not be redistributed," says Hochhauser.
"The Internet will take dollars from elsewhere. The Internet and telephone are complementary and work together with increasingly sophisticated technology."
The challenge then, for the next millenium is to find better ways to integrate media and unify brand messages. Tune in next month for "One Message, One Voice: Creating a New Media Plan" for some clues about where to begin.