Direct Marketing in the Financial Services Industry

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  Journal of Marketing  Management 1994,  10 377-390  s  Thwaites and  irect Marketing  in the Sharon  C.  I. Lee  Financial Services Industry School of Business  and jj^.^  ^^^.^^^  presents empirical  rese rch  findings  on the use of Economic Studies direct marketing  by a  representative sample  of  UK financial  ser- University  of  Leeds vices institutions.  A  number  of  similarities  and  differences  be- UK tween banks building societies  and  insurance companies  are identified  in  relation to direct marketing programmes  and the use of particular direct marketing techniques. While acknowledgingsome exceptions  the  research concludes that there  is  scope  for a greater appreciation  of  the strategic value  and  workings  of  direct marketing. Institutions could usefully focus attention  on  achiev-ing fuller integration of direct marketing with other marketing  nd communication activities  and  securing improvements  in  testing d t b se  quality and timing.  ntroduction Most businesses operate  in  complex  and  competitive environments where  de- mands are constantly changing and increasing levels  of  resources and managementattention  are  focused  on  attracting  and  retaining customers. This situation  pro- moted  the  marketing concept which Kotler (1988) describes  as the  determination,and subsequent satisfaction,  of  customer needs  and  wants more efficiently  and effectively than one's competitors. Marketing represents  the  instrument throughwhich this satisfaction  has  been delivered  and has  shown rapid growth over  the past decade.While marketing approaches based  on  mass communication, with general adver-tising and promotion directed to  a  mass market, have been  in  evidence. Bird (1989)considers that media fragmentation has reduced the effectiveness  of  this approach.As markets break down into heterogeneous segments  a  more precisely targetedmarketing technique  is  required which creates  a  dialogue with smaller groups  of customers,  and  addresses individual needs. This situation, coupled with changingdemographics and lifestyles, decreasing data processing costs and escalating mediaand sales force costs,  has  contributed  to the  growth  of  direct marketing (Holderand Owen-Jones 1992). Employed alongside other advertising  and  promotionactivities, direct marketing  can  create  and  reinforce brand awareness, maintaincustomer loyalty  and  sell goods  and  services directly. Consequently,  it not  onlyfulfils  a  promotion role within the mix but serves as a distributive function.  It  is thisfunctional plurality which makes direct marketing  an  extremely potent marketingtool.Despite  the  rapid growth  of  direct marketing  the  academic literature remainsundeveloped  and  little empirical work  has  been undertaken. This paper seeks  in part  to  redress this omission  by  responding  to  calls  for  research into  the use and applications  of  direct marketing.  The  focus  of the  study  is the  financial services Correspondence to be addressed to: Dr D. Thwaites, School  of  Business and Economic Studies, Univer-sity  of  Leeds, Blenheim Terrace, Leeds LS2 9JT,  UK. 0267-257X/94/050377+14 08.00/0  ©  1994 The Dryden Press   8  Des  Thwaites and haron  C I Lee sector where direct marketing  has  grown significantly, particularly since  1986. Financial institutions  now  represent some  of the  major users  of  direct marketingtechniques  in the  UK (Jefkins 1990).  irect Marketing The US Direct Marketing Association describes direct marketing  as an  interactivesystem  of  marketing which uses one  or  more advertising media  to  effect  a  measur-able response and/or transaction  at  any location . Based  on  this definition Robertsand Berger (1989) highlight  the key  elements which contribute  to the  effectivenessof direct marketing  and  distinguish  it  from general marketing.Firstly, direct marketing  is  interactive  in  that  the  company  and  prospective  cus- tomer engage  in  two-way personalized communication.  It  represents  a  dialoguerather than  a  monologue. Responses,  or  even non-responses, provide valuableinformation  and can be  used  to  build  a  profile  of the  individual.  For  example,  the company  can  determine  the  specific communication which generated  a  response(e.g. direct mail, TV direct response)  and the  channel through which  the  responsewas directed  (e.g.  mail coupon, freephone 0800 number). Conversely  a non- response, while raising questions about  the  product offer,  may  also raise doubtsabout media, timing  etc.  This information  is  added  to the  company database,which aids planning  and  ensures more focused campaigns  in the  future.  An  effec-tive database will trigger  the  right communication  to the  right target customer  at the right time, through  the  right medium, thereby enhancing  the  customer's  per- ceived value (Woodcock 1992). Much  of  this activity  is  invisible  to  competitors,  a trait less apparent  in  mass marketing.A second feature  of  direct marketing  is  that  the  communication  and  response(transaction) can take place  at  any location, providing the prospect has access to  the communication medium.  It  follows that direct marketing communications  can transcend geographic boundaries  and  appeal  to  organizations seeking  to  expandinto  new  locations.A third positive aspect  of  direct marketing  is  that  it is  measurable  and  account-able. Measures  of  effectiveness, such  as  business generated  and  response rates,allow organizations  to  assess  the  return  on  their investment thereby influencingbudgeting  and  future media selection. This contrasts with general marketing  ap- proaches which use less informative surrogates such  as  awareness  or  recall.Direct Marketing also exhibits several other specific competencies the most strik-ing  of  which  is the  capacity  for  precise targeting (Roberts  and  Berger 1989).  In addition,  it is  highly controllable  in  terms  of  timing, message  and  creativity,thereby allowing complex customized messages  to be  transmitted. Furthermore,  it can  be the  subject  of  exhaustive testing  to  establish which media, offer, price,incentive, creative, timing, etc.  are  most appropriate  to a  given target segment andcampaign (Bird 1989).As markets continue  to  break down into smaller segments  and  technologyprovides  a  mechanism  for  customizing product offers  the  appeal  of  direct market-ing  is  likely  to  grow. However,  as  Holder  and  Owen-Jones (1992) stress,  the  mainfunction  of  direct marketing  is to  increase  the  effectiveness  of  advertising, salespromotion, personal selling,  etc.  rather than  to act as a  replacement  for  them.  Direct Marketing  79 Figure 1 summarizes the key distinctions between general marketing and directmarketing. General Marketing Direct MarketingReaches a mass audience through mass media Communicates directly with the customer orprospectCommunications are impersonal Can personalise communicationsBy name/titleVariable messagesPromotional programmes are highly visible Promotional programmes (especially tests)relatively invisible Amount of promotion controlled by size of Size of budget can be determined by success ofbudget promotionDesired action either Specific action always required:Unclear InquiryDelayed PurchaseIncomplete/sample data for decision-making Comprehensive database drives marketingpurposes programmesSales call reportsMarketing researchAnalysis conducted at the segment level Analysis conducted at individual/firm levelUse surrogate variable to measure effectiveness Measurable, and therefore highly controllableAdvertising awarenessIntention to buy Source Roberts and Berger (1989) Figure 1 Key distinctions between general and direct marketing While there are positive benefits to be derived from direct marketing theapproach is not without its critics, for example, telemarketing has developed a poorimage and can be seen as intrusive. However, the major complaints revolve aroundbadly timed and imprecisely targeted direct mail, known colloquially as junkmail . In an attempt to reduce costs many organizations take advantage of regularcustomer mailings to include other offers aimed at upselling or cross-selling. Whilethis strategy reduces costs its effectiveness is open to question as the communi-cation arrives at a time determined by the organization and is probably unrelated tothe target customer's purchase cycle.The use of out of date or inaccurate lists has exacerbated criticism of direct mail inparticular and caused irritation to potential customers. Cobb (1992) highlights thedifficulty and expense of maintaining accurate lists and suggests that changes in acustomer list may run at approximately 9% per annum while business lists canreach 30% per annum. Identifying the most appropriate list is far from easy as, forexample, some 26 lists of Marketing Directors are on offer. While there are poten-tial problems with some direct marketing techniques managers must reduce theseto a minimum as the alienation of potential or existing customers is clearly not intheir interests. Decision Variables for Direct Marketing Programmes Just as in general marketing, where the marketer has to manipulate a number ofvariables (product, price, promotion, place), the direct marketer must optimize  380  Des  Thwaites  and  Sharon  C I Lee several decision variables  to  develop  an  effective campaign.  The aim is to  providethe right product (OFFER)  to  the right person (LIST)  at  the right time (TIMING)  in  amanner which transforms attention into interest, desire, conviction  and  action(CREATIVE). Several authors have commented  on the  relative importance  of  theseelements  and  there  is  general agreement that  the  list lies  at the  heart  of  directmarketing  by  virtue  of its  role  in  defining  the  target customer.  As  Bird (1989)suggests  the  most wonderful mailing  is  unlikely  to  succeed  if it  goes  to the wrong target, whereas  the  worst mailing  may  succeed  if it  hits  the  right list.Timing  and  offer  are  similar  in  importance  and  rank second  to the  list  but  abovecreative (Bird 1989; Roberts  and  Berger 1989; Woodcock 1992). Direct Marketing ctivity  and  Methods Direct marketing expenditure  in  Europe during 1992 rose  to  £20.76bn. based  on estimates  by the  European Direct Marketing Association reported  in  Mayes (1993).This represents  an  increase  of  8% over 1990 figures. Spending  in the  UK also roseto £2.56bn; divided between direct advertising £1.42bn, mailings £1.04bn  and  tele-marketing/others £108m.  The UK  total represents 12%  of  European spending  and places  the  UK third  in the  expenditure league behind Germany (37%)  and  France (19%).  This trend  in  the growth  of  direct marketing  in  the UK seems  set to  continuebased  on a  recent DunnHumby Associates (1993) survey which shows  67 of companies planning  to  increase spending with only 7% cutting back.Table  4  highhghts  a  range  of  media which  are  commonly used  as the  basis  for direct marketing programmes. While  tbe  various media  can be  used indepen-dently, Roman (1988) strongly advocates integrated direct marketing.  The  logic  of using multiple media  is  that different consumers respond  in  different ways  to a given stimulus.  By  testing combinations  of  media  the  most productive  and  profit-able blend  can be  established. Effectiveness  is not,  therefore,  a  function  of the number  of  media used  but of the  coordination  of  those which  are  necessary.  irect Marketing in the Financial Services Industry The financial services sector  has  experienced significant demand  and  supply sidechanges over  the  last decade culminating  in the  removal  of  traditional lines  of demarcation between institutions  and  greater competition across  a  wider productrange. These developments  are  well documented  in a  growing body  of  literature(Lewis 1984; Thwaites 1989; Edgett  and  Thwaites 1990; Ennew  t  al 1990; Thwaites 1991;  McGoldrick  and  Greenland 1992). Specific attention  has  focused  on tbe increasing role  of  marketing, both  at a  conceptual  and  process level (Easingwoodand Arnott 1991; Thwaites  and  Lynch 1992), innovation (Moutinho  and  Meidan 1989;  Thwaites  1992) and  strategies  for  coping with  a  more hostile environment(Ennew  et  al 1990; Thwaites  and  Glaister 1992).In  an  attempt  to  remain competitive,  new  sources  of  distribution have beenintroduced (Howcroft 1992)  and  greater attention  has  been given  to the  quality  of customer service (Lewis 1991).  The  growing  use and  value  of  information tech-nology  has  also been recorded (Ennew  et  al 1989; Scarborough  and  Lannon 1989;Stone  and  Clarkson 1989). Against this background direct marketing offers several
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