With shrinking budgets and increased media choices, many companies are enlisting customers into the marketing decision-making process.

The dramatic reduction in the cost of computing power over the last decade, the availability and low cost of ready-to-run database software, and the high cost of media advertising all contribute to the growing importance of the attitudes and behavior of customers as an integral part of marketing planning.

A new relationship is emerging between a company (or service provider, retailer or manufacturer) and its end-users, based on direct communication between the two parties. This process can evolve into a sophisticated database marketing operation as the benefits become apparent.

Customer lists

Throughout North America, thousands of companies have compiled customer lists, although few of these are ‘marketing databases.’ To understand the difference, we need to define each type of list.

On a computer, a customer list is a type of electronic Rolodex. A marketing database goes well beyond the name/ address/phone number retrieval functions to include information that may:

a) Predict the future buying actions of individual customers.

b) Provide guidance regarding an appropriate media selection or promotional offer.

c) Provide a model that can be used for customer acquisition.

The fundamental concept of database marketing – knowing all about your customers, not just what they have bought – has been borrowed from direct marketers, although other businesses can profit from its application.

By focussing its programs on customer retention, rather than customer acquisition, and by using database marketing methods, Allstate Insurance of Northbrook, Ill., achieved two important results.

Increased profits

First, Allstate retained 5% more customers than its historical average. Second, over the same period, Allstate’s profit increased 25%. Your business might profit more, might profit less, but the profit-enhancing ability of database marketing is clear.

Database marketing ‘connects’ your company to its customer, which complements current thinking on the importance of building strong, direct relationships with those who use your product or service.

Customer databases allow you to communicate as you have never done before. You can contact (by mail, phone or fax) every customer who has bought ‘x’ product or responded to ‘y’ offer, or both.

You can record buying habits, media choices, source data, use of competitor’s products/services, just to name a few elements of a marketing database.

For instance, an effective customer database can provide the basis for specific promotional activity designed to lure you away from the competition.

About a year ago, in a two-day period, my household received three pieces of mail from Canadian Airlines International of Calgary.

I expected a fourth piece, although it never arrived.

The first two were frequent flyer points statements; one for me, the other for my wife.

My wife’s statement included an offer for free use of Canadian Airlines’ prestigious Empress Lounge with the purchase of a full fare economy or business-class ticket. My statement did not include this offer.

Comprehensive mailing

The next day, my wife received a comprehensive mailing, giving her full membership in the Empress Lounge for six months at no charge. Rightly so, Canadian had identified her as a frequent business traveller and a regular Air Canada customer.

The latter mailing was a blatant, albeit sophisticated, inducement for her to switch airlines.

No doubt, a database marketing approach had been used to select which customers or prospects would receive which mailing.

Most likely, the customers provided the necessary travel-habits information in the first place by responding to a questionnaire.

The fourth letter? As a paid member of Empress Lounge and long-time Canadian Airlines customer, I expected to receive a letter explaining the promotion and perhaps even soliciting referrals from me for the free membership offer.

Canadian may have also chosen to extend my paid-up membership through December 31, 1991, the promotion cut-off date.

But, it did not, and perhaps that says something sad about the company’s attitude towards its customers.

This example also illustrates another truth about database marketing: it is detail-intensive.

Defence

Just as database marketing methods can be used to encourage brand switching, so can they defend your business against such intrusion.

Another airline example.

Many carriers have ‘clubs’ for frequent travellers (those individuals who log 25,000 or 50,000 air mileage points annually), which provide preferred airport check-in and upgrades.

However, American Airlines’ AAdvantage Gold program goes well beyond these benefits with its recently enhanced program.

AAdvantage Gold members receive the usual airline-specific benefits, as well as automatic upgrades or special rates from participating car rental companies and hotel chains.

The AAdvantage Gold program provides customer bonuses for the three typical transactions of a business trip, not just the air ticket and, by so doing, encourages repeat purchase (and repeat rewards) all along the chain.

What is more, AAdvantage Gold is AA’s ‘basic’ club program; if you are really committed, there is always AAdvantage Platinum.

The performance of these types of programs can be measured precisely, right down to a specific route, and they can be adjusted based on local market or specific route conditions.

Invisible to competitors

When advertising runs, the expenditure can be monitored, priced and sold, as a pro-forma media plan, to anyone who wishes to buy it.

In addition, media advertising telegraphs your creative and brand strategy to your competitors, which, in some intensely competitive categories, could limit the success of your campaign through a competitor’s retaliatory advertising.

Database marketing avoids these problems since it is one-to-one communication with the end-user. New products, promotions or other business-building offers can be tested through the marketing database with all the privacy of a Swiss bank account.

If the media habits of your customers are important in your media placement decisions, database marketing techniques can hone your advertising buy, and probably reduce the total campaign cost at the same time.

That old saw of the advertising business is finally being challenged: ‘I know that half of my advertising dollars are wasted, the problem is, I don’t know which half.’

Building a marketing database is neither easy nor fast.

It takes top management commitment, full and open discussion between various company departments (including sales, customer service, marketing and information services) and the knowledge that your first marketing database will be a prototype you will knowingly discard within a year in favor of a more sophisticated version.

Nonetheless, creating a marketing database and using its proven techniques can provide your company with a sustainable competitive advantage.

That is, unless your competitors are seasoned database marketing practitioners. In which case, you really have a problem.

David Foley is vice-president of J. White & Associates, a Toronto- and New York City-based consulting firm that specializes in strategic planning for management.