Circling the Wagons
Maybe it’s the postage hike, maybe it’s the stock market. Maybe it’s simple list fatigue. But DMers contacted by DIRECT magazine for our annual forecast survey seem less optimistic this year than they did in 1997.
For starters, fewer readers plan to spend more on direct marketing (52%, compared with 62% last year). And there’s an even bigger drop among the “big spenders”: Only 47% of firms with more than $10 million in annual revenue plan to raise the spending levels in 1999, compared with 60% of those with under $10 million.
Furthermore, while most respondents are looking forward to greater DM revenue, only 39% also see their margins increasing, a slight uptick from 38% in 1997.
At the same time, there’s been a slight jump in the number of firms that anticipate revenue slowdowns, and similar increases among those that expect a drop in their spending and margin levels. Again, the larger firms are decreasing their direct marketing budget at a greater rate (8.3%) than the smaller firms (6.5%).
And consumer marketers are devoting a smaller percentage of their marketing budgets to DM -52%, compared with 61% last year in 1997. (B-to-B is holding steady at 50%).
As often happens during growth slowdowns, DMers are turning inward. In 1997, companies spent 35% of their DM budgets on retention, with the remainder going to acquisition. This year, retention efforts will account for 40% of marketers’ budgets.
Broken out by revenue level, 50% of the larger marketers focus their efforts on retention, while the smaller marketers, who have considerably smaller databases, spend closer to the 40% average in retention. Such efforts are also more common among consumer and mixed-focus companies than B-to-B marketers.
These numbers are borne out not only by answers to other questions in this survey, but by anecdotal evidence.
For example, Secaucus, NJ-based Genesis Direct has announced a restructuring plan that includes “a substantial decrease in new customer prospecting costs.” It will rely more on its 24-million-name database and less on outside mailing lists, which “typically represent a more expensive method to build the customer file.”
One side effect of heightened existing customer awareness is the proliferation of loyalty programs. The number of B-to-B and mixed-focus companies with such structures in place remained the same from 1997, but 41% of the consumer companies, up from 33% in 1997, reported using them.
All three sectors are taking a closer look at the value of their customers over time. Last year, only 40% of all respondents said they calculated this. Current figures show almost 51% of respondents tracking lifetime value.
The biggest jump in this is among consumer companies. Fifty-nine percent now calculate lifetime value, compared with 44% last year. While one quarter of all B-to-B firms did so last year, 37% do now. Mixed-focus companies, where this practice was most pervasive last year (51%) showed the smallest increase, to 55%.
Reader’s Digest has been tracking lifetime value for six or seven years, according to senior products manager Alec Casey. But the calculations have become even more important with the recently announced rate base cut, from 15 million to 13.3 million.
“We are conscious as to how much a new name is worth to us,” says Casey. “We can sell a new customer books, music, or videos. Reactivating a house name can be profitable, but they have seen the ancillary products already so they may be less likely to make additional purchases.”
Meanwhile, the January postage increase has prompted mailer Lillian Vernon Corp. to increase its reliance on alternatives to solo mail prospecting, such as package inserts, and to have greater reliance on its customer database.
“We have a 21-million name database,” says spokesperson David Hochberg. “This gives us an incredible pool, so we are less reliant on prospecting.”
While only 65% of all respondents expected to increase the volume of mail to their house files (down from 70% in 1997), even fewer planned to increase mail quantities to outside lists: In 1997 60% of all respondents planned to increase their outside list use, while in 1998 only 51% said they would do so.
Business-to-business marketers should constitute the best potential customers for rented files: 62% indicated that they would increase their use. But this was counterbalanced by only 48% of consumer firms and 42% of mixed-focus companies saying they would use more outside lists.
List brokers could be forgiven if they paint 1999 as being for them what 1929 was for stock brokers. In 1997, only 4.7% said they planned to decrease their outside list use, while in 1998 this figure almost tripled, to 13.8%.
Even use of co-op databases, such as Abacus, SmartBase or Z-24, has been stagnant: 8% said they participated in them, compared with 9% last year.
The biggest anticipated drops in list usage came from the consumer marketers, 19% of whom planned to mail less to outside lists. Among the mixed-focus marketers, the anticipated drop was almost as precipitous: 17.8% reported plans to shrink their use of outside files.
Why the drop? Cost may be part of the reason: Use of rented lists remained the same from 1997 to 1998 at 20%. But use of exchanged lists as part of the list mix increased slightly across all categories, from 5.1% to 6.5%.
Some mailers, however, cite an absence of good files as a reason for cutting back on mail quantities.
“For the second half of last year, we started to see that it was harder to find names, and the percentage of response was decreasing,” said Helaine Harris, executive vice president with Daedalus Books. Daedalus had been seeing responses to some of its marginal lists drop by as much as a full percentage point.
Overall, says Harris, Daedalus has reduced its list rentals by around 10%, making customer retention more important.
This does not surprise Fran Green, executive vice president with American List Counsel. “Mailers are cutting back on their use of outside names,” she admits. “It is expensive, and they are getting more sophisticated in terms of analyzing what is effective in terms of getting the same return. They are doing more back-end analysis to mail smarter and cheaper.”
Green notes continued growth in hotline lists-three and six-month buyers-as well as the use of overlay data to strengthen a list, such as appending Polk data to the Book of the Month club file. But she also acknowledges that technology has allowed mailers to go deeper into their house files and find pockets of individuals that will work for specific mailings. “It’s more effective to mine your house lists than to rent a new list,” she says. “It’s another reason why [list brokers and managers] have to be smarter in our sales and marketing efforts.”
One such step is the creation of ALC Interactive, which addresses the Web needs of its clients, a segment of direct marketing that has become increasingly important.
“Our customers are saying that they want to take a portion of their DM budget and test the medium,” says Green.
It’s a profile that could well describe Daedalus Books, which has pared back its list rental activities and sunk between five and 10% of its marketing budget into two new Web sites-www.daedalus-books.com and www.daedalus-music.com. But the Web sites are investments, and the revenue from them has not yet offset their expense, although Harris is optimistic that they will.
By contrast, the company has scaled back its catalog plans from 1997. During that year, it did an additional catalog mailing to its house list. This year, they moved their offices and forewent the extra mailing.
Lillian Vernon relaunched its Web site in 1998 as well. “There are so many advantages to marketing over the Web,” says Hochberg. “You can take instant note of products out of stock, you can change prices instantly if you are overstocked.”
Their experiences affirm what readers told DIRECT: Web site use may be up, but overall channel use almost universally is down. Among the 16 media listed in both the 1997 and 1998 surveys, responded reported drops in use of thirteen of them.
Reader’s Digest is actually bucking this trend. While mail still works, according to Casey, the company is increasingly moving into package inserts, free-standing inserts, direct response television, and the Internet. “We are by no means walking away from sweeps,” says Casey, “but there are universes out there that sweeps are not going to work in, that we are under penetrated in.”
The role direct marketing plays among DIRECT’s readers is surprisingly varied: Respondents indicated that DM accounts for almost 44% of their total revenue. Among the three categories of direct marketers, B-to-B respondents said that it made up more than half of their revenue, followed equally closely by both consumer marketers and “mixed-focus” firms. (Several respondents, who did not put themselves in any of the three categories, reported low DM revenue, pulling the “total” figure below that of the breakout categories.)
The companies with annual revenue under $10 million tended to be more focused on direct marketing, claiming that it accounted for almost half of their revenue. The larger companies were more diversified, with DM making up just over 36% of their annual intake.
The percent of revenue DM activity generated ranged from just under 10% (for almost 12% of our readers) to virtually all, with 23% saying that it accounted for at least 90%.
Privacy concerns, despite ever-increasing attention from the Direct Marketing Association, have a way to go before being addressed throughout the industry: Only 34% said they have an opt-out option on their house lists. Another 29% didn’t know whether opt-out was an option, and 37% said flat-out that it wasn’t.
Opt-out options were much more common among consumer companies (52%) than B-to-B marketers (25%) or mixed-focus firms (36%).
Web commerce is attracting an increasing amount of direct marketers’ attention: In last year’s survey, two-thirds of all respondents reported having a Web site. This year, that figure jumped to 72%, with the biggest change coming in the consumer segment. In 1997, 59% reported hosting a Web site. This year, that amount had increased to two thirds, Nonetheless, these firms trailed both B-to-B marketers, 80% of whom reported having a Web site, and mixed-focus companies (73%).
At least one marketer, entertainment product distributor K-tel International, took a $1.6 million charge from discontinuing marketing and distribution activities for some of its lines. At the same time, the company has continued its investments in electronic commerce, despite incurring a $600,000 second-quarter loss from them.
