DIRECT MARKETING STRATEGIES ADOPTED BY THE GAS AND ELECTRICITY SUPPLIERS - A CASE STUDY ON BRITISH GAS - Literature Review

2. LITERATURE REVIEW

a. Overview

This chapter will review the existing and published literature on direct marketing. It begins with the description of the origin of direct marketing. Then the definitions of direct marketing provided by various authors will be reviewed. Further, the factors contributing to the growth of direct marketing will be appreciated. Furthermore, the various forms of direct marketing and its cornerstones will be described. The benefits and limitations of direct marketing will also be analysed. The chapter will then discuss the implications of information in direct marketing. Finally, the chapter will report on the ethical considerations and social responsibility in direct marketing and the legislations and regulations that regulate the direct marketing activities.

b. Origin

The term ‘direct marketing’ was first used in the year 1960 by Lester Wunderman (O’Malley et al., 1999; p4). However, the origin of direct marketing dates back to the year 1498 when a book catalogue was published by Aldus Manutius in Venice. In England, the direct marketing began in the year 1667, when William Lucas published a gardening catalogue. (Evans et al., 2004; p1) Direct marketing has evolved in the UK from mail order. In the beginning of 20^th century, the UK mail order began to develop. One of the mail order catalogues of that period is the Freemans catalogue which was launched in 1905 (McCorkell, 1997). After the war, the mail order grew at a fast and steady pace. The share of direct channels in the retail sales grew steadily between 1950 and 1970 (McGoldrick, 1990; p 60). In the mid 1980s, mail order lost some of its share because of the competition from the larger high street stores who also started providing credit facilities (Stewart, 1992). In the late 1980s, the mail order again gained popularity. This was fuelled by retailers such as Marks & Spencer and Next, who helped the direct marketing sector grow by improving the convenience of catalogue shopping by improving the product range and credit terms. (O’Malley et al., 1999; pp 5-6) Since then, direct marketing has grown tremendously such that it has been regarded as the fastest growing sector of marketing communication.

c. Definitions

Defining direct marketing is a difficult task as it is very much under debate that what exactly constitutes direct marketing. The reason for such definitional difficulties is direct marketing is neither a medium nor a channel of distribution (Evans et al., 1995; p16). The UK Direct Marketing Association has defined direct marketing as “communications where direct contact is made, or invited, between a company and its existing and perspective customers, and results are measured to assess return on investment” (Ng, 2005; p628) According to the American Direct Marketing Association (ADMA), “Direct marketing is an interactive system of marketing which uses one or more advertising media to effect a measurable response and/or transaction at any location.” This is the most comprehend definition that is offered by ADMA (Cited in Lindgren and Shrimp, 1996; p 520). Although this is the most accepted definition it has attracted criticism because it ‘focuses attention primarily on using a particular type of advertising to effect a measurable response’ (Bauer and Miglautsch 1992). As a result a different definition has been offer by Bauer and Miglautsch (1992), “Direct Marketing is a cybernetic marketing process which uses direct response advertising in prospecting, conversion and maintenance”. This definition has been accepted by the UK Direct Marketing Association. (O’Malley et al., 1999; p7)

d. Factors contributing to the Growth of Direct Marketing

There has been tremendous growth in the expenditure on direct marketing. In the UK, the total estimated expenditure for the year 2003 on direct marketing was £13.7 billion. This was 15 % more than the previous year (Ng, 2005; p629). There are a number of reasons for the growth of direct marketing in usage. Following are the major factors that have contributed to the growth of direct marketing:

i. Market Fragmentation

According to Smith (1993), the fragmentation of consumer markets is an important factor that has led to growth of direct marketing. Market fragmentation has decreased the application of traditional mass marketing channels. Whereas direct marketing channels offer better capacity to target distinct consumer groups in market segments, and therefore more organisations are now using direct marketing techniques. (Cited in Jobber and Lancaster, 2006; p328)

ii. Changing demographics and lifestyles

There have been significant changes in the demographics and lifestyles of people. As a result, the compositions of the households have also changed. Now-a-days, more women are working; there are more single parent families, etc. All these changes have left less time with the consumers, and therefore they are more attracted towards the convenience of shopping online, by phone, or by mail. This has led to growth of direct marketing. (Brassington, and Pettitt, 2000; p732)

iii. Declining effectiveness of traditional media

Nowadays, there is more intense competition between organisations for consumers’ time and attention. The amount of advertising on T.V, radio, press and other forms of media has increased tremendously. This has led to a problem of ‘clutter’ where advertising is highly unfocused and untargeted. Also the costs of these traditional marketing channels have increased considerably. All these factors have reduced the effectiveness of traditional media. (Evans et al., 1995; p17)

iv. Rise of the database

There have been significant decreases in the cost of manipulating and storing information in the recent years. Today, more firms can develop and manage marketing database. The costs of the hardware have also decreased and the data processing capabilities have improved. Therefore it is now easier to hold vast amount of customer information and update it on time (Roberts and Berger, 1989). This has contributed to the growth of direct marketing.

v. Sophisticated analytical techniques

The developments in the sophisticated analytical techniques have further boosted the growth of direct marketing. This is because these analytical techniques enhance the targeting of consumers as it helps to analyse the information about the consumers. These analytical techniques along with the database technology have contributed to the growth of direct marketing. (O’Malley et al., 1999; p18)

vi. Impact of new communications technology

The new communications technology has paved the way for the growth of direct marketing. It is now possible to handle hundreds of customers at a time, thus reducing the chances of losing of customers. For instance, by using automated systems, it is possible to handle hundreds of calls of the potential customers simultaneously. Also the costs of communication technology have decreased considerable, making it a cost effective option for firms (Brassington, and Pettitt, 2000; pp.733-4).

vii. Increased customer confidence

Direct marketing helps the businesses to build trust and confidence within an ongoing relationship with an individual customer. This makes the customers more receptive and loyal to the company. Such benefits have led more and more companies use direct marketing strategies and thus the growth of direct marketing (Brassington, and Pettitt, 2000; pp.733-4).

e. Four cornerstones of direct marketing

According to Holder (1998), (cited in Sargeant and West, 2001) there are four cornerstones of direct marketing. They are,

1. Continuity
2. Interaction
3. Targeting
4. Control.

Figure 2.2 Cornerstones of Direct marketing

Source: Adapted from Holder (1998) Cited at: Sargeant and West, 2001; p11

Continuity: Continuity is an important feature of direct marketing. In direct marketing, the aim is to utilise the customer information to establish a continuous relationship with the customers. That is, the direct marketing aims at the lifetime value that can be achieved from the relationship with the customers.

Interaction: Another important feature of direct marketing is the concept of interaction. Direct marketing offers opportunities to firms to engage with the customers and interact with them.

Targeting: Direct marketing also has a better ability to target customers. The availability of customer information databases such as modern geodemographic and lifestyle lists improves the ability of direct marketing to target customers with relevant messages and relevant marketing offers.

Control: Lastly, direct marketing is characterized by control. It means that direct marketing campaigns can be pre-tested in order to measure the effectiveness of the campaigns on the target group. For instance, three or four types of mailings may be developed and pre-tested on a sample of target audience. The response can be assessed and the most effective mailing can then be selected and used on the rest of the target audience.

f. Forms of direct marketing

Direct marketing consists of all those methods that facilitate ‘distribution of products, information and promotional benefits to target consumers through interactive communication in a way which allows response to be measured’ (Jobber and Lancaster, 2000; p168). It should be noted that these direct marketing techniques are often integrated with other marketing techniques such as sales promotion and public relations (Groucutt et al., 2004; p356).

The major forms of direct marketing are the following:

1. Direct mail marketing
2. Catalogue marketing
3. Telemarketing
4. Direct response television marketing
5. Kiosk marketing
6. New digital technologies
7. Online marketing
8. Face-to-face selling

Figure 2.3 Forms of Direct Marketing

Source: Adapted from Kotler et al., 2008; p485

1. Direct mail marketing: Direct mail is the material distributed to the home or business address to promote a product or service or to maintain an ongoing relationship through the postal service. It may be a simple letter, a comprehensive catalogue or a sample product. Direct mail is the one of most widely used direct marketing technique in the consumer and organisational markets (Brassington and Pettitt, 2000; p734).

2. Catalogue marketing: Catalogue marketing is the direct marketing through print, video or electronic catalogues that are made available to customers through postal service, through stores or through internet. Catalogue is an effective sales and relationship builder. A recent study conducted by Frank About Women, a marketing-to-women communication company found that a majority of women who receive catalogue are actively engaged with them. (Kotler et al., 2008; p486)

3. Telemarketing: Telemarketing is the use of telephone to create and exploit a direct relationship between the customer and the seller. The main benefits of telemarketing are that it provides for interaction, allows for an instant feedback, is flexible and offers an opportunity to over come objection. Other qualities include development of customer goodwill, is highly measurable and accountable i.e. the effectiveness can be easily analysed. The growth of telemarketing in the UK has been phenomenal over the past decade. This is because it is comparatively cheaper than personal selling but offers almost same benefits (Fill, 2002; p 675).

4. Direct response television marketing: Direct response television marketing consists of two forms. The first is Direct Response Television Advertising (DRTV) and the other is Home shopping channels. DRTV consists of those advertisements that are on air for 60 or 120 seconds which persuasively describes a product and gives customers a toll-free number or a website for ordering. The other form of Direct response television marketing is Home Shopping Channels. Home Shopping Channels are television programs or entire channels fully dedicated to selling goods and services. The most popular examples of Home Shopping Channels are Quality Value Channel (QVC), Home Shopping Network (HSN), and ShopNBC (Kotler et al., 2008; p488).

5. Kiosk marketing: A kiosk is a smalldvert stand alone unit that without management involvement performs a function, generally to provide information to its user. Kiosks have become an important tool of direct marketing. Kiosks are now used by businesses for displaying information about their products and along with ordering mechanism. Business marketers also use kiosks to collect sales leads and to provide information at the trade shows. (Anderson, 2006; p12)

6. New digital technologies: The rapid advances in the technology have enabled direct marketers to reach and interact with consumers almost everywhere and at anytime. Some of the new direct marketing technologies are mobile phone marketing, podcasts and vodcasts, and interactive TV. Mobile phone marketing includes things such as ring-tone giveaways, mobile games, and ad-supported content. Podcasts and vodcasts are audio and video files respectively that can be downloaded by internet to a mp3 player or any other handheld device. Interactive TV allows viewers to interact with programming and advertising using their remote controls (Kotler et al., 2008; p492).

1. Online marketing: Online marketing is the use of internet to market goods and services and to build customer relationship over the internet. The technological advances have given birth to a digital age and increasing use of internet has made online marketing the fastest growing sector of direct marketing. Direct marketers have used internet for the following marketing purposes: i. Research and planning tool ii. Distribution and customer service iii. Communication and promotion (Brassington and Pettitt, 2000; p761).

2. Door-to-door selling (personal selling): Personal selling is the personal presentation by the firm’s sales force for the purpose of making sales and building relationship. Although personal selling has been argued by several authors as being a part of direct marketing, Kotler et al. (2008) argues that personal selling is a important part of direct marketing as its facilitates distribution of products, information and promotional benefits to the target consumers through interactive communication. Also the door-to-door selling allows response to be measured, which restates that personal selling is an important form of direct marketing.

g. Benefits of direct marketing

Direct marketing approaches by organisations offers a number of benefits to both organisations and consumers. Following are the benefits that both buyers and sellers can accrue from direct marketing:

a. Benefits to sellers

i. Accountable returns:

Direct marketing provides direct marketers with opportunities to link ‘cause with effect’. That is, the sellers can easily calculate the ROI (Return On Investment) of the campaigns. Moreover, the results from marketing activities carried out in various media can be accounted and compared so as to come up with an optimal communication strategy (Sargeant and West, 2001; p9).

ii. Builds customer relationship:

Direct marketing is considered a powerful tool for building customer relationship. Direct marketers can use database marketing to target small groups and individual customers with relevant promotional offers and products. Direct marketing also offers opportunities to interact with customers about their needs, tastes and alter their product and services accordingly (Kotler et al., 2008; p482)

iii. Suitable for niche marketing:

The diversity of consumer demand has been increasing and this has led to more emphasis on micro or niche marketing strategy by marketers. Direct marketing enables one-to-one approach of interacting with customers and this positions direct marketing to take advantage of these trends. Direct marketing helps marketers in targeting precise market segments and therefore more easily follow micro marketing strategies (Rosenbloom, 2003; p478)

iv. Cost-efficient:

Direct marketing offers the benefit of being cost efficient. Direct marketers have low-cost, speedy, efficient alternatives to reach their target customers. Cheaper media such as telemarketing, direct mail and company websites have proven to be more cost effective (Kotler et al., 2008; p482).

v. Greater control and flexibility:

Sargeant and West (2001) argues that direct marketing gives greater control to the marketers as they can control the timing of the campaigns as well as the timing of the response, unlike mass marketing where there is little or no control on the response of the consumers. This helps the seller in managing the consumer response and ensuring that a particular day or period may not by swamped by requests for products or services. Direct marketers also become more flexible to make adjustments to prices programs and offers when using a direct marketing approach (Kotler et al., 2008; p482-3).

vi. Wide coverage:

Although, direct marketing enables a high degree of selectivity, it has the ability to offer enormous geographical range. Techniques such as direct mail, telephone, internet, TV, radio stations can help sellers to reach customers anywhere (Rosenbloom, 2003; p478).

vii. Wide range of media:

According to Sargeant and West (2001), direct marketing offers marketers an access to wider range of media than those available in mass marketing. Direct marketers can use mediums such as direct mail, telephone, internet, inserts, radio, TV, print adverts, etc. Such wider range of media opens up additional creative opportunities.

b. Benefits to buyers:

According to Kotler et al. (2008), the consumers can get the following benefits from direct marketing.

i. Convenience and comfort:

Direct marketing make the shopping for consumers convenient and comfortable. Consumers do not have to face the crowded stores and malls, and traffic congestion. Also since larger proportion of women are now working and the fast-paced lifestyle leaves less time with consumers, direct marketing can make shopping quicker and easier (Rosenbloom, 2003; p480).

ii. Availability of wider range of products:

Direct marketing can offer wider range of products to consumers almost anywhere in the world. This is because direct marketing is unrestrained by physical boundaries. Therefore consumers have the option of choosing from a large selection of products.

iii. Access to comparative information:

Direct marketing channels offer consumers a better access of comparative information about products, companies and competitors. Websites and good catalogues provide information in more useful forms than any other mass marketing channel.

iv. Personalised approach:

Direct marketing enables the sellers to interact with buyers and thus the approach is more personalised. Sellers can also tailor the products and services according to the needs of the consumer. Thus direct marketing gives the consumers greater control and satisfaction.

h. Limitations of direct marketing

According to Rosenbloom (2004), direct marketing has the following limitations:

i. Low response rates:

The response rates in direct marketing are very low. According to the Direct Marketing Association’s Statistical Fact Book (2002), the average response rate is between 1 to 2 percent when direct mail is used. The industry estimates that the response rates are even lower in other forms of direct marketing.

ii. Intense competition:

There is intense competition in direct marketing. There are thousands of firms who use direct marketing and this has resulted in cluttered and saturated markets. This intense competition has also contributed to low response rates.

iii. Bad reputation:

Although there have been huge growth in direct marketing, the direct marketing industry suffers through an image problem. The unethical and dishonest practices of some direct marketing firms have earned negative publicity about the industry. This has been one of the big limitations of direct marketing.

iv. Limited exposure of products:

Direct marketing provide limited exposure of products to the consumer. Even the best catalogues, television adverts and websites cannot exhibit the product equivalently to the conventional marketing channels. However, such limitations can be reduced in some case by using samples as a supplement to direct marketing channels.

v. High operating costs:

Although the cost of setting direct marketing systems is low initially, the operating costs are high. For instance, direct mail, one of the major medium of direct marketing, involves high printing, paper and mailing costs. Moreover, the costs of order processing and shipping can also be high compared to the sales volume produced.

i. Implications of Information in Direct marketing

a. Significance of information to direct marketers:

According to Dolnicar and Jordaan (2007), the exchange of information between marketers and consumers is one of the fundamental aspects of successful relationships. In today’s business environment, the value of information about consumers cannot be denied. The information about customers is very significant for the direct marketing campaigns. Direct marketing focuses on the collection, storage and use of customer information so as to target customers with relevant products, services and promotional benefits. Direct marketers use information about consumer preferences to form group of consumers with similar characteristics i.e. similar tastes, preferences, interests etc. Such information helps direct marketers to personalise communication and target customers with relevant information. Thus, direct marketing programmes are ‘critically dependent on the availability of detailed, individual-level consumer information’ (Robertshaw and Marr, 2005; p187).

Such information usage by direct marketers is not only beneficial for marketers but also for customers, as relevant communication can be delivered to the consumers based on their interests and preferences.

b. Sources of information:

Direct marketers obtain information from a variety of sources. Most individual- level transactional data is obtained from customer records, whereas the insightful and non-transactional information related to the interests, beliefs, preferences values, opinions, spending habits, future purchase intentions, religion, political views, television viewing habits and other lifestyle characteristics is generally obtained by the voluntary disclosure of the consumers. Direct marketers generally employ some type of marketing process such as loyalty cards, warranty cards, response to direct response ads, sweepstake promotions, discount and cashback offers to collect these non-transactional information about consumers (Robertshaw and Marr, 2005; p187).

j. Ethical considerations and Social responsibility in direct marketing

The field of direct marketing ethics is considered of immense importance. However, this field has been traditionally been proven as a difficult area of study. The discussion related to ethics requires an understanding of social responsibility. But very often it becomes difficult to distinguish between the two (O’Malley et al., 1999; p419). According to De George (1999), ethics is the study of morality, those practices, and activities that are importantly right and wrong, whereas social responsibility refers to the effects of those practices and activities on the society.

1. Ethical considerations

Despite the growth of direct marketing, direct marketing has been criticised by several authors on ethical grounds. According to Sargeant and West (2001), following are the ethical grounds on which direct marketing has been criticised.

1. Promoting Materialism: The main criticism of direct marketing as an activity is that direct marketing advertisements along with the general advertisements promotes materialism. The authors argue that direct marketing make people buy products that they would not buy otherwise.

2. Exploitation: Direct marketing is accused of exploitation of emotions such as love, affections, friendship and maternal feelings. For example, use of taglines such as ‘Happy families buy…’, ‘good mothers buy…’ etc often try to exploit human emotions. Moreover, the children and direct marketing is often looked as a more serious topic. Direct marketing often persuades children to demand products that the parents cannot afford or wish not to give to their children.

3. Dishonesty: Although the dishonest direct marketing advertisements are rare because of the UK and EU legislations and the presence of various professional agencies, the half truth remains. The advertisements often make comparisons based on one criterion, or with some brands and make claims that are not fully true and subject to certain conditions.

2. Social Responsibility:

The subject of social responsibility has become more important in direct marketing recently. Direct marketers are being pressed to be more accountable in their campaigns and to become more socially responsible. Following are the headings under which the societal impact of direct marketing will be discussed.

a. Privacy issues: The explosion in direct marketing practices has raised consumer concerns over threats to privacy. According to Evans et al (2004), the specific privacy issues relating to direct and database marketing are a. information privacy, b. physical /interaction privacy, c. accuracy. Information privacy means the extent to which individuals can control who holder and uses of their data. Physical or interaction privacy refers to the physical disturbance of direct marketing activities such as direct mails, telesales, emails, etc. into the daily lives of consumers. Accuracy refers to the extent to which the consumers can the accuracy of their data.

b. Environmentalism: Another issue of social responsibility associated with direct marketing is environmentalism. Many consumers in UK have real concerns about the environmental impacts of direct marketing communications such as direct mail, leaflets etc. Since the response rates are low, organisations use vast quantities of direct communications to get more sales. The problem is further increased by the usage of glossy paper by many companies to attract customers, as these cannot be recycled. Therefore organizations must become socially responsible towards the environment. This can be done by utilizing information in such a way as to generate smaller and more tightly defined and relevant direct marketing communications. This would also help in reducing the wastefulness of their operations (O’Malley et al., 1999; p436-7).

c. Exclusion: Direct marketing activities tries to target some sectors of the society. This means that some members of the society will be excluded. According to Cespedes and Smith (1993) (cit. in O’Malley, 1999; p437), ‘people from different races, religions, and ethnic groups tend to live in different areas’ and since geography is one of the major criterion of used in direct marketing to target people, there will be some sectors that will be discriminated. For instance, organizations may target localities with high spending power. This would limit the choices of the lower income group.

k. Legislations and regulations in Direct Marketing

Organisations that adopt direct marketing as a part of their marketing strategy or as a strategy as a whole, have to abide by the laws that regulate direct marketing. Although, there is no particular Direct Marketing Act where all the direct marketing laws can be found, there is a proliferation of statutes, regulations, directives and precedents that organisations have to follow. Some of the major laws and regulations affecting direct marketing are discussed below:

i. Data Protection Act, 1998: All the companies that use personal information are abided by the Principles outlined in the Data Protection Act. The Data Protection Act is concerned with the personal information of consumers which is automatically processed. The Data Protection Act gives protects the consumers by giving them certain individual rights. It also requires the organisations gathering, storing and using personal information to be open about their activities and follow sound and proper activities .(Source: http://www.dma.org.uk/content/Pro-Code.asp)

ii. Direct Marketing (DM) code of practice: The DM Code of Practice sets the standards of ethical conduct and best practice that organizations must follow. The code is administered and monitored by the independent Direct Marketing Authority. The Code covers all forms of direct marketing. The Code reflects the requirements of new legislations related to direct marketing, such as the Data Protection Act 1998 and Distance Selling Regulations 2000 (Source: http://www.dma.org.uk/content/Pro-Code.asp).

iii. ASA/CAP code: The Advertising Standards Authority is an independent body set up by the advertising industry. This independent authority monitors that the rules laid down in the CAP Code which has to be followed for non-broadcast advertisements, sales promotions and direct marketing that are laid down in the CAP Code. This eleventh edition of the British Code of Advertising, Sales Promotion and Direct Marketing came into force in March 2003. (Source:http://www.dma.org.uk/content/Pro-Code.asp)

iv. Preference services: The preference services run by Direct Marketing Association (UK), enables businesses and consumers to register their wish of opting out of receiving unsolicited direct marketing communications such as leaflets, telesales calls, emails etc. Organisations are required either by law or by the codes of practice to follow these wishes of businesses and consumers. The various preference services run by DMA are Mailing Preference Service (MPS), Telephone Preference Service (TPS), Email Preference Service (E-MPS), Fax Preference Service (FPS) and Baby Mailing Preference Service (Baby MPS). (Source: http://www.dma.org.uk/content/Pro-Code.asp)