Chapter 4
The Direct Response and Database Foundations of Internet Marketing
Learning Objectives:
By the time students complete this chapter, they should be able to:
• Explain the ways in which the Internet is a direct-response medium.
• Distinguish between acquisition, conversion, and retention strategies.
• Identify the elements of a direct response marketing strategy.
Chapter Perspective
Most students have grown up on a steady diet of mass media and, by implication, brand-image
advertising. They are likely to have little exposure to the specialized techniques of direct
The Internet as a Direct-Response Medium
In what ways is it not a direct-response channel (using channel generically either as a
communications channel or transactional one)? As is the case with mass media such as
television when they are used in a direct-response mode, the marketer sets up a learning dialog
with the prospective customer. The reply to the marketer’s offer may be as curt as “Didn’t
See “The Last e-Store on the Block,” Fortune, September 18, 2000, pp. 214-220 that
characterizes eToys as “well–run” but describes the fulfillment debacle of their 1999 Christmas
season. They had a great website, but overall were not “well run.” As a result of unfulfilled
orders experienced in the previous season, customers did not come in for the 2000 Christmas
season, and the company folded early in 2001. The principle continues to hold true, as
So the answer is that a knowledge of direct response techniques matters greatly, both on the
front-end where data capture and testing are essential, and on the back end where fulfillment and
customer service make the difference between satisfied customers and those who will not return.
Good Internet marketing has the ability to be:
• Interactive. Interactive activities like purchasing goods and services or games on the
Internet may help students understand the power of interactivity. From the marketer’s
point of view it is the ability of offer information or products for sale and to document
• Information-driven. None of the marketing techniques that characterize direct-response
marketing are possible without thoughtful data capture and use. For databases of
significant size, add analytics to the list of necessities.
• Immediate. We discussed in Chapter 1 the ability of the Internet to meet many customer
needs in real time. From the marketer’s perspective, immediacy is also important. It
Proctor and Gamble is an excellent example of a traditional marketer that has embraced the
power of direct response. As the text points out, they actually had a head start from what they
learned in the marketing of their highly-targeted product, Cheer Free. It is worth going live to
Generic Direct Marketing Strategies
This leads directly to the generic strategies of direct marketing:
• Acquisition. Customer acquisition is clearly the first step. In some instances it means
that the customer actually makes a purchase. In other cases, (sales lead generation
programs, whether B2C or B2B), acquisition can be defined as acquiring the name and
Critical strategy elements are:
• The offer—the complete proposition made by the marketer to the prospective customer.
It includes two of the marketing 4 Ps—product and price. It also includes branding and
positioning as well as any other marketing activity that affects tangible attributes or
product image.
• The list. The mailing and telephone list business is a well-established part of the direct
marketing industry. List rental firms now offer email lists. It is important that marketers
• The creative execution. Direct marketers have always downplayed the importance of
creative execution, attributing only about 10% of the pulling power of a direct-response
Before the advent of the Internet the direct response offer had to carry the marketing burden
because many direct marketers had no retail store. That is not true today in this era of
multichannel marketing. However, the importance of selecting the appropriate programmatic
objective for the direct marketer’s specific purpose and executing communications strategies
A promotion is only direct response if it has a clear call to action. That call to action can be:
• To encourage the visitor to remain on the site longer (site stickiness)
The three ads in Figure 4.4 give an opportunity to look at offers and the response marketers are
looking for. You might want to add a slide that captures an ad, follows the click through to a
landing page, and to the inquiry or the transaction opportunity. It is even more fun to do that live,
but the changes of finding a specific ad on a given page at a given time are low. However, you
can count on portals like Yahoo to have interesting ads up at any given time that will allow you
to illustrate the process live.
The Role and Importance of Customer Lifetime Value
Another thing that is essential to Internet marketing success is Customer Lifetime Value—
understanding it, calculating it, and using it to drive Internet marketing strategies and programs.
CLV is the metric of choice for both customer acquisition and retention programs. It is also the
segmentation variable of choice for many marketing applications.
If you wish to leave CLV at the conceptual level, you can emphasize the basic model as stated in
the text:
Figure 4.5 is a detailed conceptual model that emphasizes both customer and supplier factors that
contribute to the frequency—and I would add the amount—of sales revenue. From that they take
“marketing costs,” a loose term that includes both cost of goods and sales and marketing costs.
That leaves us with total profit per customer which is then discounted to net present value. The
great value of this model is that it goes on to present a model for allocating marketing resources,
given the profitability of the customer. That is the essence of CLV-based strategy.
0.64 visits × 50 weeks 32 visits/year
× $33 sales/visit $1,056 per customer per year
× 5,000 first year customers $5, 280,000
0.83 × $5,280,000 direct costs $4,382,400
And so it goes, if you want to do all the calculations for Years 2 and 3. I find that working it out
for one year is enough to make the point. Students can be encouraged to work through it down
to Gross Profit on their own to make sure they understand it.
If you think they are at all perplexed by NPV, point out that the actual value of the profits for the
three years is $907,287. The comparison between actual profit flows and NPV usually makes
the point clear.
Table 4.3 summarizes the example and gives the instructor the opportunity to talk about the
The CLV calculator tool in Interactive Exercise 4.2 is interesting. It can be used in the classroom
or it would make a good follow on assignment. Carry out a calculation even if it is based on
It’s important to note that the graphic in Figure 4.6 is not a true CLV calculation because it
doesn’t have an NPV calculation. The value is twofold:
1. Illustrate the importance of understanding the value of customers acquired by specific
channels. Everyone wants to understand the value of a Facebook customer at present.
Testing Direct Response Programs
Testing is essential to the success of marketing programs. Until the Internet, it was the province
of direct marketers only. Now all marketers who have a meaningful web presence can do it, but
even now relatively few test effectively. That makes this an important section.
It is also a chance for me to mount my soapbox about the relationship of marketing research
courses.
For several years I’ve used a product tour of the Adobe Test and Target product in class to
illustrate testing because it explains the process in a very lucid way:
I have used an in-class exercise that helps them to understand. If you have the time, it can go
something like this:
Design a Test for a Promotional Email
Your task is to create a design for a one-time test on a single email piece.
1. Quickly invest an email promotion. Specify its objectives, target market, and a rough
idea of content—obviously you do not have time to write copy.
And do all of this in 20 – 30 minutes!
I do this in groups of 2 or 3 students; perhaps using the groups already formed for the semester
project on the assumption that they have become somewhat comfortable working together. I
The problem with this exercise is that it completely ignores the statistical issues of sampling and
determining which differences are statistically significant, which are essential to the correct
reading of tests. The importance of the statistical issues should be emphasized. The chapter
referenced in the Roberts and Berger direct marketing text covers these issues in rather
excruciating detail. You may find it a useful reference.
The Database Imperative
We usually appear to assume that when marketers refer to “the database” they are talking about
the customer/prospect database, and they often are. There are many databases, on both the
customer-facing and the back ends of the business, that are necessary to execute specific
programs, integrate and automate systems, and conduct certain kinds of analytics. Figure 4.9
presents a conceptual approach. It probably is not necessary for students to be able to remember
the entire set, but recognizing the four categories they fall into is helpful.
Customer profiling, segmentation analysis, and predictive modeling can be done using data from
marketing research. The database, however, provides a richer, constantly expanding source of
data for these activities. It also comes much closer to providing data on all customers, not just a
One-to-one marketing is a clear benefit from having (and using effectively) a customer database.
It is not, however, the ultimate benefit of the customer database. In the end, its best and most
The alert student will recognize that a program like Harrah’s can quickly collect a large amount
of data. The volume of data quickly exceeds the capacity of conventional marketing research
analytics; hence, the need for data mining.
Data mining refers loosely to the set of tools that can be used to extract meaning from large data
sets. It includes some of the tools that students are familiar with, at a conceptual level at least,
like regression. It also includes some that are available in the major commercial statistical
packages like AID and CHAID. It may require the use of tools of which students are only
The Hierarchy of Interactive Strategies
The hierarchy in Figure 4.13 is based on the theory that “you must walk before you can run,” but
it is not deterministic. Information-driven marketing is a major undertaking and it is wise to
implement it a module at a time. Data → Information as implied in the bottom layer is a
required foundation for all information-driven programs. Beyond that steps should be selected
and implemented based on the needs and objectives of the enterprise. However, the progression
suggested, Information → Interaction → Transaction → Personalization → Customization,
makes sense in terms of increasing intensity in the requirements for data, analytics, marketing
Discussion Questions
1. Why is it important for the marketer to distinguish between customer acquisition,
conversion, and retention when developing marketing strategies?
2. How does “the offer” differ from “the product” of traditional mass media marketing?
The offer is a more inclusive concept. It includes both the product and its price as well as the
3. In addition to the offer, what are the elements of a direct marketing strategy?
4. How do direct marketers distinguish between the “front end” and the “back end” of a
transaction? Why is this important?
5. Explain the customer lifetime value (CLV) concept. Thinking about a specific firm, how
could it use the concept of CLV to increase the overall profitability of its customer
base?
If students can boil it down to a rather brief phrase, they understand the concept. The desirable
phrase is “the NPV of customer gross margin, less costs of servicing the customer.”
6. How is testing different from marketing research?
Testing is essentially an experiment. It can take many forms:
• Is the new email format better (on what metric?) than the old?
7. Why and how does testing offer opportunities to Internet marketers?
It is difficult to judge the effectiveness of traditional mass media promotional programs. If they
are well measured, it invariably involves marketing research, which takes both time and money.
Only then can empirically-supported changes be made to the promotional approach. And even
8. What are some types of analytics that are supported by the customer database?
It is probably better to focus students on the strategic uses, not specific statistical or modeling
applications. Segmentation analysis can be more precise when done from a database instead of
9. Distinguish between the concepts of customer profiles, market segments and predictive
modeling.
10. Explain the related concepts of data warehousing and data mining.
The major purpose of a data warehouse is to bring separate databases together into a central
repository. Data warehouses also include query and reporting applications that allow managers
11. What do you think the future is for customized products? Think of an example of a
product that could reasonably be customized and explain why the target customer
would find value in the customization.
Pundits have been predicting a bright future for customized products for quite some time. Still,
there is little real customization. The Nike example in the chapter is generally as close as we
Internet Exercises
1. Internet Career Builder Exercise.
2. Register at a B2C website—one of those you chose to track for the semester if one is
appropriate. If not, choose another site for this exercise.
a. Carefully consider the potential value of the data captured on the registration form.
If the option is presented, you may want to configure a personal page, especially if you
have not done so before. Then spend a few minutes getting acquainted with the site.
What other customer data of value could the site have added to its database as a result
of the time you spent there? Would you have been willing to provide that data?
This is an experiential exercise, so all students’ answers may be somewhat different. You may
want to ask them to print out the registration page they filled out and walk through the data
b. Keep a log of contacts that result from this registration. Bear in mind that contacts
may come from the sponsor of the site itself and others may come from marketers with
whom the site shares its lists, depending on options you choose in the registration
process.
This portion of the exercise will take place over time, so if you assign it, you will need to return
to it from time to time. It is easy to keep track of contacts from the site itself. It is not as easy to
some, or all of the I’s. How do these characteristics affect customer experience on the
site?
As noted at the beginning of the manual, students tend to come up with some interesting sites
that instructors never knew existed. It can be interesting to look at some of them, to think about
3. Choose a website that permits personalization—portals or large content sites are a good
choice. Personalize your own page on the site. Think about the kinds of customer data
that are produced as you use your personalized page on this site. How can the site use
this data to engage in targeted marketing? Also think about the benefits to you, the
user, of having a personalized page on the site you have chosen.
This is a variant of the first exercise, and you probably want to assign one or the other. I am
always surprised when I ask a group of students how many of them have a personalized page,
because relatively few have one. Just finding out how it works is useful. I often show the Yahoo
4. Visit a website that you patronize frequently, one from which you have purchased
something, if possible. Identify two marketing elements that could usefully be tested.
How would you go about setting up one of these tests?
Here again, the answers will be as many and as varied as the students themselves. Try to get
them, first to think in terms of the 4 Ps. What are the basic marketing elements we are working
Key Terms
A/B split presenting one offer, creative execution, etc. to one group of customers or prospects
and another version of the same offer, creative execution, and so on to another group of
customers.
back end activities that are required to satisfy the customer after a sale is made, including
fulfillment and customer service.
CLV (customer lifetime value) the net present value of a future stream of net revenue from an
identified customer.
database set of files (data, video, images, etc.) organized in a way that permits a computer
program to quickly select any desired piece of content.
front end all the marketing and promotional activities that occur before a sale is made.
fulfillment the business processes necessary to receive, process, package, and ship orders to
customers.
predictive model relevant variables and associated response factors or probabilities are used to
estimate the likelihood of occurrence of a specific behavior, given the existence of a given level
of the specified variables.
profile summary of the distinctive features or characteristics of a person, business, or other
entity.