Every element of the direct marketing food chain is vulnerable in a recession, but perhaps none more so than the list sector. When businesses feel the pinch they tend to follow a familiar pattern, shifting the focus from acquisition activity, which can be expensive and risky, to the relatively safer ground of customer retention.
"We saw the same in the last recession," says Mark Robinson, managing director of data consultancy Qbase Direct. "Companies clamp down on their acquisition activity to help the bottom line in the short term."
Indeed, many in the industry report that clients are striving to get more out of their existing data assets rather than buying in new names and addresses (see box, page 33). While this is good news for companies offering data enhancement, modelling and appending services, the cold list sector is feeling the heat. Not only is demand down but response rates are under pressure.
According to Guy Upward, head of direct marketing at the Royal British Legion, "it's very rare to generate a positive return on investment for cold activity and that's typical in the charity marketplace". He adds: "I would challenge you to find any organisation with a positive ROI for cold activity. There may be a handful out there but they would be very much the exception rather than the norm".
The marketplace may indeed be challenging but companies that pull back from prospecting activity completely run the risk of storing up problems for the future. All businesses need to attract new customers. So what can brands do to minimise the risk and maximise the return of their prospecting activity?
First, the principles of good direct marketing should be applied like never before. "Think carefully and strategically about who you want to reach and don't just go to the obvious data source," says Heather Westgate, chief executive at agency TDA. "A surprising number of brands still purchase the Electoral Roll, even if they are targeting an easily defined demographic."
When a good source of data has been indentified, companies shouldn't shy away from seeking to negotiate a better rate. Across the board, data owners and managers are reporting that clients are becoming more cost-aware and shopping around for the right price.
"We're seeing pressure on rates rather than volume," says Robert Barker, chief operating officer at Maximiles, which owns and sells data through the ipoints.co.uk loyalty programme. "More than ever before we're having to demonstrate value to our customers and why our lists perform better than other sources."
Data owners are also increasingly likely to ask for a payment model based on the success of the data. This is common in the email rental market where the data owner also carries out the email broadcast so can track both open and click-through rates. In the offline data world, payment by results is very rare - too many other factors can influence the response rate - but that's not to say that clients aren't negotiating hard on price.
"Clients may have taken the data previously and come back saying that it didn't respond well and they can only justify using that list again if they get it 20 per cent cheaper," says Lisa Neville, director of operations at list broking and management firm EDM Media. She adds that this sort of negotiation can only take place if clients are willing to share their response data honestly with the list owner and are not plucking figures out of the air to drive the price down.
Another trend likely to gain momentum in a tougher economic climate is data swapping. Occam runs a data pool called Reciprocate for the charity sector and Abacus and Transactis run data co-operatives in the catalogue market. Alternatively, companies can use a list broker to arrange the swap for a fee, which Neville says tends to be around one-fifth of the cost for normal data purchases.
"We really encourage it and are finding it very popular at the moment. There is less outlay and response rates are typically higher," she says, citing the charity Mission Direct as a good example. It saw its database grow from 5,000 names to nearly 24,000 in a year with around half of the donor base secured through data swaps.
At the other end of the cost spectrum, businesses such as Transactis and EuroDirect have reported that demand for small volumes of quality data carrying a high price tag has remained buoyant. EuroDirect offers near real-time lead generation data. Certain pieces of information - such as the renewal date of an insurance product or the timing of a house move for a utility or home improvement company - can have enormous value if they trigger relevant communications.
"We are finding that people are still prepared to pay more for data, provided it works," says Tim Pottinger, client director at EuroDirect. "The carpet bombing has gone in external data acquisition and people are being much more selective. This is something we've talked about for a number of years but it's now accelerating."
Richard Webster, marketing and communications director at data vendor DLG, is putting a positive spin on the likely impact of the downturn on its business. Although demand for data from financial services companies with mortgage and remortgage messages has fallen off a cliff, he reports that there has been a massive uplift in clients wanting to target savers and investors.
He also believes that companies are much better equipped to weather the storm compared with the last recession. "Fifteen years ago businesses simply didn't recognise the value of data. It wasn't monetised and it wasn't in a readily accessible format. Now the depth of data is there and that will help businesses at a time when consumer behaviour is likely to change."
The advice for businesses is clear. Nurture your existing customers and prospects of course, but don't lose sight of the importance of replenishing the pot. And don't be tempted to reduce levels of testing for short-term financial gain, warns Ben Winter, data consultant at Insighttmw. "It's a vicious circle and it's the brave companies that choose to maintain their testing budgets that will emerge from these difficult times as victors."
HARD TIMES - The challenge facing charities
Charities are facing a double whammy as the recession bites. As demand for their services increases, donations are falling. A Charity Commission poll of 500 charities last month showed that 25 per cent have seen a fall in giving in the past year.
Cancer Research UK thinks donations will be down by four to five per cent by the end of 2008. "The outlook for the economic climate is very challenging," says its chief executive, Harpal Kumar. "The fall in the property market is having a direct impact on our legacy income stream. People are also considering their level of personal giving."
So how are charities adapting to this new environment in their direct marketing activity? There is plenty of anecdotal evidence that cold campaigns are struggling to deliver a good response rate, and that's certainly the case at the Royal British Legion. "We've not been so bullish with our cold activity this year and have made some real cutbacks," says the charity's head of direct marketing, Guy Upward. "Where we do carry out cold campaigns, we are trying to be a bit more intelligent and do more analysis to ensure that whatever budget we do spend generates the maximum return."
The core thrust of the charity's activity is around the November poppy appeal and includes door drops, inserts and direct mail. In January the charity will do a full results analysis but for now Upward reports that activity to warm prospects is looking good while cold campaigns are slower than anticipated.
As for next year he foresees further cuts in cold acquisition and greater investment in telemarketing. "Our strategy is to ask for cash donations and then to migrate people on to direct debit using direct mail bounce backs and follow-up phone calls. We are revisiting telemarketing at the moment, having not done it for a while, and it is going well."
RNIB also has a telemarketing programme, finding the phone the most effective channel for converting raffle supporters into regular givers. But response rates to cold acquisition campaigns are dwindling and have been for some time, says Yogi Cong, DM manager at the charity.
"We're definitely finding it much harder in terms of response and that's been more noticeable in the last few months, although I wouldn't attribute that solely to the current economic climate," she says. "Our control pack has been in existence for a good 10 years and it's only to be expected that we'll see a decline on that." The strategy looking forward is to test new creatives on cold packs before response rates decline further and to ensure that direct mail activity mirrors the charity's broader appeals and campaigning work where possible.
"When we have campaigns in the news, we need to make more of that in our direct mail activity. Supporters like to hear about how their donations are affecting people," says Cong.
REVIVED RELATIONSHIPS - Reaching out to lapsed customers
It's no easy task reaching out to new consumers. Even when potential customers have been identified, they have to be persuaded by the message and need enough trust in the brand to purchase.
It is much easier for companies to focus on people it has already transacted with, even if these customers have been idle for some time.
The level of analysis that can be applied to this group of potential customers varies from simply running the database against deceased and gone-away suppression files before making contact to overlaying recent spend insight, appending new variables and tailoring the messages to different segments.
"Reactivation and win-back is where we see clients making a lot of money," says Daniel Cross, director of strategy at marketing agency Lateral. "Instead of buying data and having to start from scratch, companies are buying variables to append to existing data to help them understand their customers better."
Cost, of course, will still be a major factor in any reactivation activity and Dave Webber, product and marketing director at Transactis, has one potentially money-saving tip. "Rather than running the data through expensive suppression routines to take out the negative data, better to turn this approach on its head," says Webber. He suggests looking for positive information on lapsed customers, using data sources to identify those customers who have recently made a purchase and are responsive to DM.
"Not only can you verify that they are still at the same address, but you know they are responsive to DM. If you run the data against suppression files you could still come up with someone who is not going to respond to a campaign," adds Webber.
POWER POINTS
- Companies that pull back from prospecting risk storing up future problems
- Data owners are increasingly likely to ask for a payment model that is based on the success of the data.