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Lecture 11

Lecture 12

Lecture 13

Lecture 14

Lecture 15

Traditional retailers have found a new competitor, and it's not other stores. Nonstore retailers have become a formidable force in the marketplace, accounting for roughly one dollar in seven of all retail sales. Estimates for the future predict that nonstore retailing may eventually claim a full one-third of the market. For 1997, Direct Marketing sales are expected to reach $1.2 trillion. At the company level, mail-order clothier Lands End racked up sales of $318 million in the third quarter of 1997 alone.

Nonstore retailing is better known as Direct Marketing, and encompasses a wide variety of activities outside the domain of traditional retailing. This lecture will examine each of these practices, and discuss the strengths and limitations of this emerging force.

Direct Marketing has come to prominence for a number of reasons. It is a phenomenon that has come of age in the span of about two generations (i.e., 40 years). While some of the items discussed below are "old hat" by today's reckoning, they once helped spawn this form of Marketing.

1. Rapid Mail Delivery. A high degree of Direct Marketing is conducted through the US mail system, which, in spite of derogatory remarks to the contrary, is a much-improved system today than it was four decades ago. High-speed sorters have replaced humans, and jets have replaced slower modes of transportation. Aside from transients living under American freeway overpasses, everyone has an address at which they can receive mail.
2. High-speed printing. The printing press developed centuries ago has now been improved upon to the extent that mass mailings can be considered an inexpensive form of communications. Letters, flyers, and catalogs can be mass-produced in a fraction of the time once before. Furthermore, four-color printing processes have made this medium an effective way of displaying one's wares.
3. Databases. Thanks to the development of computer hardwareand software, Direct Marketers are able to compile impressive lists of former and potential customers. These lists can be merged, sorted, modified, updated, etc., to whatever extent desired by the DM.
4. Broadcast Media. Media such as TV and radio have made it possible for all Marketers to advertise, including DMs. Virtually anything can be sold over the airwaves, ranging from CDs and knives to home fitness equipment. Scarcely any American home does not have at least one TV, a strong majority have access to cable or satellite TV. Americans are "plugged in" to their TVs and radios, making them very a effective means of selling.
5. Telecommunications. Approximately 98-percent of American households have a telephone now, whereas once a phone was a status symbol, and "party" lines had to be shared with several neighbors. With nearly everyone hard-wired for communications, and, with databases of everyone's telephone number, it becomes very simple for DMs to solicit sales through this medium.
6. Electronic Computer-based Media. The proliferation of computers, and, most recently, the Internet, have made it possible for DMs to exploit this medium. Online shopping, as well as other forms of solicitation, are begging for space (and your money) on the Info Highway.
7. Convenience/Poverty-of-Time Interaction. This is probably the most important consideration of the 1990s. Direct Marketing offers a major convenience to consumers. Consumers can now shop from the privacy of their homes, and at any hour of the day. At a time when all members of a household (yes, even the kids) are run ragged by their busy schedules, the lure of home shopping is very strong.
8. Overnight and 2-Day Couriers. While this is related to the improved postal function discussed above, it takes on a different perspective when considering the delivery of merchandise to consumers. Whereas delivery once often meant a sizeable time lag between purchase and possession, private couriers such as UPS, FedEx, and Airborne Express have made it possible for shoppers to receive their purchases within 24 hours if they so desire. This is a major point in favor of Direct Marketing because it overcomes the time lag, and allows people to purchase on impulse. Consumers, when faced with the prospect of a lengthy gap between impulse and satiation, will likely forego the impulse. But if the impulse can be delivered while the desire is still high, the sale is more likely to occur.

1. Direct Mail. This category includes letters, ads, samples, foldouts, and catalogs, and is referred pejoratively as "salespeople on wings." These items can be sent to very carefully selected individuals, and can be personalized (see discussion below). Marketers can hand-pick the recipients, ranging from PC owners to Harley-Davidson fans, as well as the wealthy or horse owners.

 

 

Direct mail has proven to be very successful in selling books, magazines, insurance, and recordings, and is increasingly becoming a populay way to market novelty and gourmet items. Many of the NP firms discussed in the previous lecture rely on Direct Mail to solicit funds for their organizations.

A special category of Direct Mail is catalogs, which allow Marketers to sell a full line of products (ranging from general merchandise to specialty items) to the general public, or very specialized niches.

Catalog Marketing has become so popular that the average American household now receives 50 catalogs in the mail each year, with over 14 billion mailed overall. Catalogs allow the Marketer to better display and promote the product. The largest Direct Mail companies send out up to a dozen catalogs per year to some households, usually their best or most desired customers. Catalogs have the advantage of a longer life than most other forms of Marketing, because consumers are likely to keep them along with their magazines.

Catalog Marketing is not limited to residential customers, though. Business-to-business Marketing no accounts for over 1 one billions catalogs each year. For example, wholesalers often publish elaborate catalogs which are sent to retailers. Although the approach and content are somewhat different, the intent is the same: to facilitate sales.

Trends to watch for include video and CD-ROM catalogs. The latter offer the Marketer the ability to provide 675 megabytes worth of product information and hype.

2. Direct Response. This encompasses any type of Marketing activity that require the consumer to respond to an advertisement placed on television or the print media. For example, a small display ad in a magazine may solicit consumers to call in to order a die-cast metal replica of an antique car (The Franklin Mint is a good example), or a TV ad for a Time-Life Classic Rock collection on CD will beckon baby boomers to pick up the phone and call.

 

 

Also included in this category are infomercials (as discussed in an earlier lecture) and the so-called home shopping stations like QVC. These, along with the ones mentioned first, all require a customer to respond directly to the company's advertisements.

What is interesting about infomercials and 24-hour shopping channels is that consumers sit passively and let someone market to them, something that few people would ever do in any other setting. While it is easy to deride those who watch (and buy from) these programs, there are indeed many consumers who are all too happy to settle into their lounge chair for an evening of the Home Shopping Club. They are, in effect, saying, "Sell me something."

3. Direct Selling. This form of Direct Marketing has had its ups and downs through the years. Once a rather common form of selling, it has now become more limited because of modern lifestyles which do not allow for household intrusions. The legendary Fuller Brush and Electrolux salesmen have bid farewell, and even the Tupperware parties of old are struggling to stay alive.

 

 

Today's remaining direct selling establishments have learned to adapt to changing lifestyles by visiting people on the job, or making household calls only during certain times (like Schwan's). Still, direct selling is severely limited today because of the time poverty experienced by so many, who do not want to be bothered by salemen at the door.

4. Telemarketing. Perhaps the most-hated of all Direct Marketers are the telemarketers, who solicit sales and donations via the telephone (as discussed in the previous lecture). Telemarketers rely on up-to-date phone number databases.

 

 

In spite of America's scorn for the telemarketer, firms like Sitel (with offices in Amarillo) are still hired by clients to conduct massive telemarketing campaigns selling everything from insurance to the Sunday edition of the New York Times.

5. Online Marketing. The Internet (as discussed in previous lectures) has become a growing force to be reckoned with, and is a very viable method of selling merchandise and service...if it can overcome the perception of insecure transactions. What keeps this medium from growing any faster is that many consumers still feel like their credit card numbers will be hijacked by unscrupulous operators. This fear is just another manifestation of people's fear of computers in general; they fear that which they do not know. Still, Marketers must learn how to help consumers put these fears to rest.
6. Multi-Level Marketing. MLMs are one of the fastest-growing, yet most despised, types of Marketing. Consumers pay for associating themselves with an organization so they can buy products at supposed "wholesale" prices, all the while trying to recruit a "downline" of associates beneath them who will also work to sell product and recruit others. Companies like HerbaLife, and Shaklee create an almost cult-like following amonst their devotees who commit to buying large amounts of merchandise each month in the hopes that they will soon be able to retire wealthy and taste the good life. (See HoTopics #12 for further discussion.)

Direct Marketing has a number of key strengths that put it in a lucrative position to be able to complete sales, and even "steal" sales from other traditional retailers. These advantages are:

1. Market Targeting and Segmentation. Direct Marketing offers the ability to segment the market and target specific individuals or groups like no other form of Marketing. Targets can be as specific as ZIP Codes, streets, or persons, but may also rely on other attributes, such as interests, vocations, income level, religious preference, leisure activities, and more. While Direct Marketing utilizes many of the same communications tools as other advertisers, these are really "micro media" because they can be targeted so finely. Nearly all other forms of communication are broadcast to the masses, using a shotgun approach. Direct Marketing, however, is narrowcast to carefull selected persons and groups, using a rifle approach.
2. Highly Qualified Market. Generally speaking, the persons solicited have passed muster along some criteria, and are thus deemed qualified to make a purchase. For example, a person who subscribes to Outside magazine is deemed qualified to be solicited for the purchase of tents and sleeping bags.

 

 

The ability to "filter" names before making the approach is a major advantage to Direct Marketing, for it allows DMs to weed out the least likely prospects.

3. Effectiveness. Because of the above two considerations, DM is a very effective (and even efficient) use of funds. In spite of cost considerations (to be discussed below), there are no other forms of communication and Marketing that put the advertiser in such proximity to likely-to-purchase consumers.
4. Reduced Operating Expenses. Operating expenses for DMs can be substantially less than for traditional retailers. For example, there is little need for a storefront (unless the Marketer wants both kinds of presences). Furthermore, DMs can be located in much less expensive buildings away from prime retail space. The only thing they need is easy access for deliveries and pick-ups.

 

 

Along with the savings in real estate come savings in retail fixtures and decor. Warehouses do not need point-of-purchase displays, racks, shelf extenders, and the like.

Management costs can also be pared because there is no need for individual store managers (as opposed to a retail chain). Labor costs in general can be kept to a minimum.

5. Lower Retail Prices. The operating efficiency cited above gives rise to one of the biggest consumer advantages of Direct Marketing: lower retail prices. While traditional retailers see DMs as the bane of their very existence, it cannot be argued that DMs have cheated their way into a better market position. Rather, the DMs have chosen this path, and the traditional retailers have chosen theirs. Of course, what really gets the traditional's goat is when consumers go to a store to check out a product, and then head home to buy it from a catalog Marketer. That's the risk that traditional retailers take when manufacturers distribute their goods to both kinds of retailers.
6. Pervasiveness. Direct Marketing allows a company to have a store "everywhere." Catalogs and direct mail, as well as infomercials and Internet web sites, allow for a pervasive or virtual store that knows no boundaries. There are no walls, no landlords, and little or no zoning requirements. In most cases, it is a store that never closes, and one that can be visited frequently and totally at the leisure of the customer. No "bricks and mortar" retail store can match this capability.
7. Sales Tax Avoidance. A very controversial advantage of DMs is that they do not have to collect sales tax from persons residing in states on than those in which the firm has a physical presence. Traditional retailers are persistent in bringing this upo with legislators, and legislators, ever in search of tax revenues, have brought measures to the fllor on numerous recent occasions. While nothing firm has happened yet, expect that this advantage will be removed in the near future, thereby putting DMs at a disadvantage, because they will have to collect and pay taxes for every state. In the mean time, though, the savings from sales taxes can amount to up to an eight-percent reduction in price.
8. Market Penetration Speed. Direct Marketing allows the Marketer to penetrate a market much faster than by other means. A catalog or letter drop to a specific area or group of persons can maximum exposure much more quickly than any other means.
9. Structured For Immediate Selling. Whereas most other forms of advertising are merely trying to "plant seeds" and build long-term primary demand, Direct Marketing is structured to make sale quickly. Viewers of QVC, for example, are encouraged to buy now because quantities on hand are limited. Catalogs frequently have expiration dates to further expedite sales. And infomercials pound viewers with their hard-sell until they finally cave in and pick up their phone to place an order.
10. Personalization. Sophisticated computer software allows DMs to "personalize" mailings to people by inserting their name throughout the document. Beyond that, thouse, personalization can occur more subtly, such as the case of Fingerhut, which mails out different catalogs to different consumers, depending on the shopping characteristics and demographics of the individual.

 

 

Thus, solicitations can be personalized in a wide manner of ways, often without the consumer even being aware that it has occurred. Specific inserts in catalogs can be accomplished so that the right material goes to the right customers (printing giant R.R. Donnelly prints many color catalogs, and is able to customize any print job).

11. Measurable Results. Unlike traditional advertising, which is often very difficult to measure for effectiveness, Direct Marketing can be reviewed quite easily, and its effectiveness measured. For example, response rates can be calculated, as can size of average purchase. Demographic data can also be collected easily and applied toward more effective Marketing in the future.

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