Adapt Or Die

In an industry traditionally addicted to volume, is tighter targeting good or bad news? Robert McLuhan looks at how consumer data suppliers are catering for smaller, precise campaigns and a growing demand for richer, lead-to-purchase data.

For years, direct marketers have been besieged by public concerns about unwanted mailings, intrusive home calls and misuse of data - and have mostly escaped unscathed. Now they have found themselves in the firing line over fears about global warming and the environmental damage caused by waste. With volumes in bulk consumer mailings already on the wane, how does this new world order affect the outlook for suppliers and users of consumer data?

Sitting duck
Together with newspapers and magazines, direct mail is estimated to account for 14 per cent of household waste. When dumped in landfills, paper creates methane, a gas that is 23 times more polluting than carbon dioxide. All this makes direct marketers an easy target for politicians: in January the environment minister Joan Ruddock warned that a mandatory opt-in for commercial mail is "still on the table".

Marketers can justly retort that the days of blanket mailings are over. These days much more effort goes into profiling to ensure that mailings are properly targeted and that waste is avoided by using more deceased/goneaway suppression amongst other initiatives. As for environmental concerns, by 2006 the industry had boosted the amount of mail going to recycling to 30 per cent, as agreed between DEFRA and the DMA, and is on track to meet its commitments of 55 per cent by 2009 and 70 per cent by 2013.

But the agreement also commits the industry to reducing volumes through a mixture of better targeting and hygiene. If that starts to happen, then presumably companies will need to source less data, and that in turn could impact on the data industry. With bulk prices arguably already at rock bottom at around £80-90 per thousand records for the most generic data, smaller volumes could make it hard for many suppliers to generate the revenues they need to stay in business.

For the moment, suppliers claim that mailing volumes have yet to fall significantly. "If anything, volumes have been going up, a sign that direct mail really works," argues Richard Webster, commercial director at DLG.

"Companies are not going to hold back on a successful medium as long as it continues to bring good returns, and if they can demonstrate that it is not leading to waste;' he says.

However some agree that a decline in the quantity of commercial mail is a logical outcome of current trends. "Over time, the industry will be selling less data overall," predicts Peter Lupa, sales director for data at Acxiom.

We are at a watershed - Annette Holmes, managing director, Prospect Swetenhams.

What is clear is that the consumer data market is undergoing a seismic shift. Annette Holmes, managing director of Prospect Swetenhams, points to the need to reduce overall volumes but argues that more spend will be needed to support better targeting.

"We are at a watershed, as suppliers and owners start to wake up to the need to control waste and change their business model;' she says. She then identifies the nub of the problem for suppliers: reducing volumes cannot lead directly to less revenue, because if it did the whole industry could collapse.

In Holmes's view, in future, it will not just be the lists themselves that will be driving the market so much as the in-depth analysis, profiling and modelling required to identify targets. It is precisely because clients are now looking for greater return on investment from their data that they have a greater appreciation of the need for quality. Instead of flogging large quantities of shallow data for poor returns, suppliers will increasingly be supported by the demand for the extra services that they can provide.

A sense of what can now be achieved with this sort of data/analytics packaged approach is provided by a recent campaign by Eurodirect on behalf of the DVLA, persuading drivers to pay annual road tax online or by telephone instead of going to the post office. Eurodirect first profiled and segmented online customers to help identify prospects who would most likely convert to online registration. From this pool, it used GIS software to identify drivers who lived further than 30 minutes away from their nearest post office.

It then filtered prospects against tax disc renewal dates in order to slice up the audience into monthly mailing flies. This preparatory work paid huge dividends, with a response rate of over 36 per cent, a far cry from the one or two per cent that satisfied many companies as little as five years ago.

John Regan, CEO of Ai, says: "Focusing much more closely on targets makes campaigns more efficient, with fewer non-responders. It doesn't mean that the numbers of customers that companies are acquiring via direct mail will reduce. So clients accept there is value to be had from those services, and that keeps the spend up."

There is a growing feeling that the costs and pricing model has had its day. Certainly there is a shift away from commoditised data purchase. Regan adds: "The pricing model should be based on the recognition that profitability comes from efficiency, not from driving the price of data through the floor."

If pricing is based solely on short-term economy, he points out the data will soon cease to exist: it will become old, because owners can't afford to refresh it, or it will be poorly maintained. "We have to stand firm on the value of our proposition," he says. "It consists not just of so many records, but also the result of the analysis we carry out before we even think about sourcing."

Pooling for prospecting
As a sign of changes in the market, Regan says consumer data suppliers now often walk away from a prospective deal because they can't make money from it. This is hurting those brokers who specialise in sourcing data at the cheapest price, as they can no longer fulfil their unrealistic promises. And companies making tenders are starting to realise that firms offering rock-bottom prices can't follow through.

All this heralds a shake-out, with the "cheap and cheerful" merchants most likely going to the wall. But there will be a positive knock-on effect, Regan suggests: consolidation among data suppliers will result in the pooling of data sets, and this will help bring about higher quality.

Clients will be able to choose from more than one record of a particular consumer, as they did when they went to multiple sources for their data. But these days, instead of picking the cheapest for the sake of economy, they are opting to pay for two or even more versions of the same record, in order to have as much relevant data as possible.

"It can be valuable to know that someone has appeared on more than one database;' Regan says. "But also the information will be slightly different and that is useful for targeting as well. So we will see hybrid data pools where data sources combine together, which doesn't happen much at the moment."

Webster too is enthusiastic about the benefits of pooling information. Data is becoming harder to source in the conventional ways: consumers are much more protective of their information, and certain methodologies such as printed surveys, the bedrock of lifestyle marketing ten years ago, have become much less responsive than they were. Instead his company is relying more and more on tightly linked networks of data contributors.

"There is as much data as you could possibly want out there, but it is not necessarily in the right place," he says. "So one has to be cleverer in how one collects and distributes data. Our goal is to try to establish a rapport with our clients, looking at their prospect databases, and helping them utilise their information, while they use ours in a multifaceted way, via a whole network of companies and suppliers."

One has to be cleverer in how one collects and distributes data - Richard Webster, commercial director, DLG.

Another way in which suppliers can help generate better responses is by speeding up the delivery of data. "The more recent it is, the better the conversion:' says Lupa. "Online we can do that in real time, and with post the gap is little more than a day. So clients can act on the consumer information far quicker, which makes the offer more timely and relevant."

With the growth in popularity of rich data and sophisticated targeting techniques comes a greater interaction between buyers and sellers. "In the past, data suppliers were kept at arms length, but these days they are developing closer relationships with their clients," Holmes says. "It's about sharing the objectives and also the responsibility if the responses are not there,"

Could that mean companies paying for the leads that a list generates rather than for the campaign data? Unlikely, since a sale depends as much on the creative and the offer, over which data suppliers have no control. Lupa says he does not know of any attempt to implement "pay-per-response" that is working.

"It sounds tempting but the supplier can't sell the proposition at the point of sale," he says. "We can deliver consumers who are about to renew their policy to an insurance client, for instance, but to actually convert that is the job of the offer itself."

Companies might still prefer to invest in small numbers of certain prospects rather than taking potluck with a large volume of cheap data. "It's a reasonable way to go if the industry is serious about targeting better and causing less waste," says Holmes.

"If you can't buy 100,000 names and only pay for those who convert, it makes sense to buy 30,000 that have a high likelihood of converting. That way you will still save loads."

Of course there is a cost attached: once a list has been winnowed down to likely responders, investment is needed to verify the details. This will normally be done by cross-referencing through different transactional information sources. Business-to-business companies will often use the telephone, but this can also be worth doing for high value consumer items too, such as cars, jewellery or luxury holidays. "Once you have narrowed the list down, it becomes cost effective to invest more," Homes says.

This approach is still quite new but it is starting to gain critical mass, she adds. "It has a logic you can't argue with. It's a question of finding companies that are prepared to test it and then stick with it. If they do they should find the return on investment improving over a period of time." Of course it is up to suppliers to convince clients that this is the way forward.

"There will always be the innovators and people who follow the crowd," she says. "We choose clients who are ready to take that on board and work with us in partnership, and fortunately there are plenty of those around right now."

Volume versus value
Quality of targeting is not the only way to respond to environmental concerns. Another is to shift from postal to email marketing, and this is definitely a major trend, says Zoe Vine, head of data services at the Trading Floor. And it will become even bigger when the acquisition rates increase, she adds; these are as yet relatively low, because marketers have not yet acquired the same level of expertise that they have in mail. But it does not imply a falling-off in demand for data.

Focusing much more closely on targets makes campaigns more efficient - John Regan, eEG, Ai.

"Marketers are still looking to get more value from their existing customer base, appending variables to take them into different markets or to give them different contact methods for different customers, only by email instead of post:' she says.

Any decline in demand will hit large aggregated data sets, while niche lists will continue to bring good revenues, Vine predicts. This is one reason why her company prefers to specialise in particular sectors, mainly insurance and financial services, as well as some travel and charities. It also aims to keep response rates up by limiting the number of contacts for its data.

For instance, insurance lists only go to four different users, which makes them far more productive than if they went out to twenty, as happens all too often. Any revenues that are lost by this voluntary constraint are more than made up for by the premium the supplier can charge for data that is more responsive and niche to buyers' needs.

Any decline in demand will hit large aggregated data sets - Zoe Vine, head of data services, The Trading Floor.

There's no doubt that direct marketers' skills have been improving by leaps and bounds, and that new approaches enable them to avoid much of the waste that so upsets the public. But will this be enough to stop the government imposing legal constraints?

Some feel it won't matter how much mail gets pumped out as long as it is recycled afterwards. The real driver here is the return on investment. "If response increases as a result of better targeting, companies would possibly use us more, and volumes would stay up," says Webster.

But he concedes that perceptions are everything, and direct marketers will not necessarily be given credit for tightening up their act. "Politicians are driven by their own agenda. It's very easy to use us as a whipping boy to demonstrate to voters that they are taking action," he says.

Regan shares that worry, concerned about what steps the government might take in the future to meet fears about global warming. Given the emergence of carbon tax and trading, it would be a logical step to tax other resources such as paper, he suggests. Even if the politicians don't intervene, pressure on suppliers could come from clients responding to public concern. For some time, their contracts include a clause committing suppliers to ethical employment policies, and they are now also requiring similar undertakings to avoid undue waste.

As things stand, this is little more than lip service. Regan says. "What is undue waste? If a company wants to send out a million records we will supply them." But that may not continue indefinitely, and suppliers, especially those who supply the bigger banks, could find themselves having to sign up to some quite specific targets. That may be some way in the future, but one thing that suppliers can be sure of: the pressure is unlikely to let up.

(Database Marketing: Consumer Data - March 2008)