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The results of Direct Response's first study of the spending intentions of data marketers show that the sector remains robust. Despite pressure on wider marketing budgets, data is one area that maintains support from the bean counters.

Our findings show that clients are at least committed to maintaining expenditure at current levels and, in many cases, actually increasing it.

According to Caroline Kimber, the group marketing director at Wegener DM and the vice-chair of the Direct Marketing Association's data council, the results of our study are great news for the industry. "Many organisations made some big reductions in data purchasing in 2005. But those same organisations have struggled to meet their acquisition targets, so activity needs to be ramped up in 2006," she says.

Our survey was split almost equally between business-to-business and business-to-consumer marketers and, as well as looking at what they are investing in data overall, we have tried to identify the areas they consider to be priorities and those where they are spending less. They have answered questions on the type of data they are buying, the kind of targeting they are using, their list processing activities, data quality measures and technology investment. The results provide an intriguing insight into what the industry is spending - and they seem to indicate that data is thriving.

Acquisition vs retention

The question of whether marketers should invest in acquiring new customers or adopt a customer relationship management approach to achieve a better return on investment is a perennial data issue. Our survey found investment to be split almost evenly down the middle, with only slightly more (52 per cent) allocated to acquisition.

This indicates a turnaround from a few years ago, according to Kimber.

"The balance would have been tipped much more strongly in favour of acquisition a couple of years ago," she says. "However, 2005 has seen a marked reduction in acquisition spend, particularly in the financial services sector, so the finding supports the movement towards retention in the market."

Dawn Orr, the UK data group leader at Acxiom, agrees there has been some retrenchment in acquisition in the past year. "We have seen people pulling back on acquisition and doing more on data enhancement," she says. "It's probably down about 10 per cent year on year but we expect it will come back this year. People have put money into different media, particularly interactive, where they are prepared to experiment."

Orr believes a change of emphasis in the core financial services arena has affected the market. "A lot of the bigger US mailers have pulled back, particularly those that have not seen the gains here that they have in the US. They are redeploying their spend to more profitable markets," she says.

In many cases, Orr says, rampant acquisition has not worked and clients have been stuck with unprofitable customers. Companies have been open to testing cheaper prospecting routes such as inserts and the web.

Tasha Woolley, the direct marketing manager at Somerfield, says retention is becoming more of an issue. The retailer has boosted its database marketing efforts since the launch of its Saver Card last February and is focusing on the scheme's four million members. She explains: "We have done some acquisition-based mailings but are concentrating on retention activity with Saver because we are predominantly a top-up store."

Alastair Logan, the group marketing manager at Gala Bingo, says his company has traditionally spent more on retention and sees that continuing: "We work on a very localised catchment area and focus on keeping people coming to our clubs."

Logan says Gala is experimenting with new methods of recruitment away from list rental, which is costly. "We are looking at door drops and third-party recruitment through catalogues, which is outside of our traditional recruitment methods," he explains. "We have found the cost per acquisition with lists to be very expensive and so are looking to more cost-effective methods."

Despite retention rising up the agenda, Ian Boichat, the managing director of list company Ventura Media, reminds marketers that acquisition will always be necessary. "Cold data can outperform a company's own data," he says. "You will never retain everybody, so there will always be a role for continually adding new customers. It's an integral part of the mix. There are also sectors, such as baby products, where you can't actually cross-sell after a certain point."

In-house vs outsourced

A key question is the extent to which marketers are using their own in-house resources for data management and analysis. We examined acquisition and retention separately. In both cases, marketers are relying on in-house resources, with 63 per cent and 71 per cent of acquisition and retention budgets being spent in-house respectively. Retention was considered more of an in-house function, given its strategic importance.

Outsourcing has always been important to database marketing. For years, the level of investment in IT has been significant, so it has made more sense to use external specialists. However, as IT costs fall, systems become more user-friendly and the level of in-house data skills increases, there is a temptation to bring more activity in-house.

Kimber believes outsourced resources are "bipolar", being biased towards either the "grunt" end or the highly specialised end. Commoditised services, such as suppression processing or printing, are typically outsourced for cost reasons, she says. By comparison, specialised services such as trigger prediction modelling or sales territory planning are outsourced because they require specialist knowledge that the client does not have in-house.

"We have seen big increases in outsourcing as client organisations have been under pressure to streamline staff and focus on their core activities," Kimber says.

Orr believes clients are focusing their in-house investment on the data skills of their analysis teams to better understand customers. "They are retaining the intellectual property in-house - after all, they are the experts in their own customers - and putting out other things. Why hold data in-house if you don't need to? There is a trend to outsource databases with web access," she says.

Our survey shows that for list processing, data quality and customer retention, clients are concentrating their investment in-house at a ratio of about two to one. Customer retention had the highest concentration of in-house activity (83 per cent), reflecting its strategic importance.

There was slightly less of an emphasis on data quality (70 per cent) and list processing (65 per cent) but they remain significant in-house activities.

Zina Manda, sales director at B2B data services company Mardev, says: "Outsourcing will continue in areas where partners can prove they can add value - where it is resource hungry or complicated. Budgets won't change dramatically but, if clients get improved value, then it will happen."

Woolley says Somerfield relies heavily on outsourced agencies such as Catalina Marketing to boost its internal resources. "We work very closely with agencies," she says. "Saver is such a young scheme - and it's our first venture into direct marketing - so we are pulling in experience."

Data purchase

Data purchase remains an important element of organisations' marketing efforts. Three quarters of respondents spend up to 30 per cent of their total data budgets on data purchase alone, with the greatest proportion (37 per cent) spending up to 10 per cent. No respondents spent more than 80 per cent of their budget on data.

Ventura Media's Boichat says that, although the figures are encouraging for the sector, he suspects the market did not have a good year. "We've grown to a top 10 player in two years but it has been done through stealing share," he says. "Data purchase is moving away from being a volume market. Finance is about 40 per cent of the market and the big players are looking to new sources, such as data pools."

However, the data market looks secure in the immediate future. In the past year, 43.5 per cent of our respondents said their data spending had increased - and prospects are even rosier for 2006. More than half of clients say they will increase their spend on data in the coming year.

A further 37 per cent are committed to at least matching their investment next year, and only 8.7 per cent of respondents anticipate a decline in data spend.

According to Manda, such increases in data spend indicate a search for measurability as marketing budgets tighten. "The increase in data buying is largely because of the economic downturn," she says. "Marketing chiefs are under pressure to deliver and, when there's pressure, we are the vultures that are circling."

Logan says the ability to react quickly through data marketing was part of its appeal for Gala. He says data spend has evened out over the past 18 months but will probably increase, depending on business needs. "Our market fluctuates very quickly and, if need be, we can put a lot of money directly into database marketing," he adds.

Woolley says Somerfield will also retain a high commitment to data marketing.

"People are seeing a greater amount of value in data and we expect that will increase as one-to-one marketing becomes more important. We will be investing more in Saver and developing the existing proposition in the coming year."

Data sources

Clients are investing in data from broad range of sources. However, rented lists remain the main purchase and account for almost half of companies' budgets. Demographic data was the next highest area of spend, followed by lifestyle and transactional data.

Across the categories, most clients are adopting a steady-as-she-goes approach. At least half of respondents said they had invested about the same this year as in the previous year.

Perhaps unsurprisingly, the categories that witnessed the greatest increase in investment are those that account for the greatest proportion of budget at present. These are demographic data, where 34 per cent of clients noted an uplift, and rented lists, with 30 per cent boosting spend. However, a quarter of clients also increased their spend on transactional data, an area that accounts for only 10 per cent of spend at present.

Woolley says transactional data is driving Somerfield's strategy through its relationship with Catalina Marketing. "Coupons in store are important. However, we have relaunched a couple of categories, such as wine, through DM. We are adopting a customer relationship management approach by identifying our best customers and looking after them."

Kimber says the findings support a shift towards retention. "Clients are looking for data that can be appended to all of their customers to help support retention," she says. "Demographic data such as age and income is often described as old hat when sources such as transactional are brought into the market. But the point is, it works well."

Targeting

Basic list selections were the main focus for investment, accounting for 38 per cent of budget for targeting. Customised and geodemographic segmentation were the next most significant areas. Other techniques - such as recency, frequency and monetary value, modelling and scoring - rated fairly low in investment terms. Manda points out that these are not expensive options, although they provide a tighter audience.

Again, the areas that took the lion's share of the budget witnessed the greatest growth in the past year, indicating a commitment to the status quo.

Manda points to a decline in cold mailing as more informed decisions are taken. "Tools enable people to do segmentation and understand the proportion of profitable customers. You can take the profitable business and find more like it."

This underlines an investment-led approach to data marketing. "Clients are spending more on targeted data to mail less. Ten years ago they were mailing millions in B2B but that time has passed. People now want to get closer to a well-targeted audience. Clients will spend more on data to get to that point," she adds.

"Companies like ourselves and Experian are investing in solutions such as predictive modelling and sales lead generation. The move is from cold to warmed-up and hot prospects."

List processing

The most common list processing services were merge/purge activity and prospect databases, both used by more than 60 per cent of respondents.

Almost half used screening and 44 per cent used validation. Spend has been maintained in the past year, with fewer than 10 per cent of respondents noting a decrease in any of the categories. Spend on validation, screening and prospect databases increased the most. More than 30 per cent of respondents indicated they had spent more this year on these areas.

Data quality

Consumer disenchantment and the pressure to recycle has pushed data quality high up the agenda. Steven Day, the director of data cleansing company UK Changes, says data quality is no longer an optional extra. "The issue has really come home to roost recently, with increasing TPS registrations and Electoral Roll opt outs. The value of the individual customer has never been higher."

With this in mind, it is encouraging to see that a high proportion of respondents are using deduplication (68 per cent) and address management (64 per cent). Given the high profile the DMA has given to the issue of suppression, it is a little surprising, perhaps, to discover that only about half of clients are using files.

Day says there remains a great deal of confusion about the existing suppression files. "There's a long way to go with suppression and clients need to have a high degree of confidence if they are going to remove somebody from a prospect database," he says. "There are some good files out there but also some dreadful ones."

Suppression was the area in which the second highest number of clients (39 per cent) said they had increased their expenditure, coming behind address management (40 per cent).

The results of our survey back up research undertaken by The REaD Group last September, which showed a 24 per cent increase in suppression use over the past year. Mark Roy, the company's chief executive, says the findings demonstrate that the industry is waking up to its responsibilities. "Respect for the consumer should always be paramount and members of the public should be given the choice to opt in or out of receiving direct mail," he asserts. "We as an industry must respect that choice, irrespective of whether that decision suits us or not."

But Roy says that with more than a quarter of all mailings going out without the use of any suppression, there is still work to be done.

Overall, expenditure on data quality is bearing up well. The only areas to have witnessed a decline in spend among a significant number of clients were data enhancement and validation.

Gala, for one, has invested heavily in improving data quality. It has set up a return address scheme through Royal Mail, which allows the database to be cleaned constantly. "In the past, mail was going back to individual clubs, but now data quality is constantly improving," says Logan.

Boichat points out that not all companies are so enlightened and may not be able to justify the costs of data hygiene. "There will always be a trade-off whereby a company may think some costs are not worth it," he says. "There needs to be a cost-benefit analysis and, at the moment, I don't think we are annoying too many people."

Customer retention

With customer retention being concentrated in-house to a greater extent than other disciplines, it is not surprising to discover databases are a top priority. Our results showed 53 per cent of clients bought database platforms or warehouses and 47 per cent spent on customer database hosting.

Other key areas of investment are campaign management and management information tools. Overall budgets are steadier in customer retention, however, with the majority of clients indicating their budgets remain about the same. The numbers indicating that budgets went up or down this year were roughly balanced across the categories.

Boichat points out one possible side effect of an increased focus on retention - fewer new lists are coming onto the market. "The days when millions of people provided detailed lifestyle data are over," he says.

"The price of data has been driven down over the years but the cost of acquiring it has gone up. We are now in a a situation where data is more expensive to collect and companies have to sell more. In doing so, you reduce the effectiveness of the list. It's quite a complex ecosystem."

Technology

Almost 80 per cent of clients spent up to 40 per cent of their data budgets on technology. A quarter of respondents spent up to 10 per cent, while almost 30 per cent of respondents spent between 11 and 20 per cent of their data budgets on technology. Data analysis and data segmentation tools have been an important focus over the past year, with around half of respondents indicating they had spent more on them than in the previous year.

Address management has also seen a growing number of clients (38 per cent) spending more, while deduplication and suppression tools also witnessed impressive growth - with 32 per cent of clients spending more. Again, the picture is one of steady budgets or growth and little evidence of companies backtracking on their investment.

Rebecca Clayton, the head of marketing at address management company QAS, says the discipline has moved from large corporations to businesses of all sizes. "You no longer require huge investment and it is now a more flexible approach with pay-as-you go pricing. Data-driven marketing is also on the board agenda as the ROI is really easy to show," she says.

According to Orr, some data budgets have been sidelined for long overdue database consolidation exercises that will ultimately pay off for data users. "There are still companies that have 10 to 14 different data sets, but people are wising up to data hygiene and putting proper data rules in place," she says. "Ultimately, it will pay dividends for clients as they get to know their data sets better and focus on the single customer view."

Data services

Address management again came top of the list of services that clients are buying, with 70 per cent of respondents having purchased it. Data quality got another thumbs up, while 65 per cent of respondents bought data cleaning. It was also the area where most clients (39 per cent) had increased spend in the past year, followed by database hosting (36 per cent).

Conclusion

The data sector is a complex ecosystem. Spending made in one area will quite often have a knock-on effect on another and the repercussions of this year's financial decisions will be felt in the future. For example, the reining in of acquisition funds that Wegener DM's Kimber noted now seems likely to reverse as marketers realise retention alone will not deliver business.

Unlike some some other areas of marketing, data does not seem to be starved of funds. Individual practitioners may disagree but, along with new media, data marketing is one of the few sectors to have grown rapidly and proved its worth as an accountable solution. Consequently, its budgets are under less stress than those of other disciplines. In fact, they seem to be rising.

It is difficult to tell whether this is the result of a short-term switch to a more measurable medium or part of a long-term change in marketing priorities. However, ongoing observation of the sector would seem to indicate the latter. Our survey's findings suggest that, for now at least, data marketing is in a robust state of health.

IN-HOUSE OR OUTSOURCED?

In-house

Cancer Research UK's database marketing is managed almost entirely in-house because we have the best knowledge of our data. The complexity and sophistication of our mailing campaigns means all mailing selections are generated in-house.

Having an in-depth knowledge of our supporter data is a primary driver for keeping this important work in-house. The challenge is to deliver to tight schedules, something that outsource agencies are better at traditionally.

However, we are fortunate to have the skills and database tools to meet the demands of our marketing programme.

On the systems side, our databases reside and are managed and maintained in-house. We have excellent, collaborative relationships with our database suppliers. This enables us to develop our systems and processes together to keep up with the demands of the business of fundraising and marketing.

Our databases have in-built PAF validation and deduplication processes, which are essential for daily keying and batch entry processing. Because of our large volumes of data, we use outsource agencies for bulk cleansing against standard data sets such as deceased registries.

We have found that using a mix of both in-house techniques and outsource partners is the most cost-efficient way of using our limited resources.

- Michael Toothill is the head of data management at Cancer Research UK.

OUTSOURCED

One of the initial draws for companies to outsource is the issue of compliance. Whether a company decides to use an agency or to manage its data in-house, it needs to adhere to industry guidelines and ensure it is doing all it can to provide the most efficient strategy.

The benefits of outsourcing are relatively straightforward. If the outsourcer is chosen carefully, it will have the business and technical knowledge to manage contact data in a way that will maximise effectiveness. What is more, the outsourcer can add value by applying depth of knowledge to improving the service provided, for example, in improving addresses based on the output from a PAF match.

However, data agencies bring a wealth of benefits that can be invaluable in providing a strategic approach for clients. This level of input is not achieved easily or cost effectively in-house. Clients will find that they need to employ teams with specific knowledge - people that data agencies employ as a matter of course.

However, client involvement is vital. We are working with them, not for them. Only by doing this can we be certain that the work suits their businesses perfectly. The aim is a more streamlined business approach and, by combining our data expertise with clients' knowledge of their specific requirements, we can ensure the business benefits extend beyond mere compliance.

- Tash Whitmey is the business development director at EHS Brann Discovery.

DATA QUALITY

Marketers who scrimp on data quality are endangering the viability of direct marketing, says Suzanne Lewis.

The creative director at WWAV Rapp Collins London recently received a card from a headhunting agency that was addressed to "Nick Pratt".

The recipient, Nick Platt, showed it to everyone in his department to illustrate that the best creative in the world will not work if the data is wrong. But how typical is this sort of experience? Is the industry investing in quality?

I'm not a hair shirt-wearing member of the direct marketing community, so I feel pretty proud that we can get it so right.

There are bad players out there who balk at the cost of cleaning, deduping and running specialist suppression files that will flag up the deceased.

Yet there are others who are happy to do all of that and are so zealous about suppressing against previous output files that they remove some of the prospects that may have proved to be extremely responsive.

Most of us behave responsibly. The problem lies with those who view data as a commodity purchase. There are better ways of saving money than screwing down the pennies it costs to ensure data quality. Some are more obsessed with saving money than value.

These marketers tend to be short-termist. All data is not equal. Lifestyle data might be cheaper than niche data, for example, but smaller niche files can spread the jam on any campaign.

But there are those who sacrifice quality for volume by mailing in such numbers that the cost of each mailing is reduced to pennies. These are the people who damage our industry as a whole. Data quality matters to all of us, client and supplier. If we want an industry in 10 years' time, those who think quality doesn't matter need to think again. Otherwise the European Union will step in and enforce regulations upon us.

- Suzanne Lewis is the head of list broking at HLB.

BALANCING ACQUISITION WITH RETENTION

Marketers must adopt a strategic approach to data capture to hold on to the customers their acquisition activity brings, says Barry Leeson-Earle.

In a maturing market, the issue of retention is of growing importance to marketers. Initial direct marketing activity can be extensive, for example, with credit card companies. But once a market matures, you need to focus on "customer save" programmes to protect your investment. And, of course, it costs much more to acquire than to save.

Churn happens because people change their habits and their needs according to their stages of life and their individual circumstances. Marketers need to be agile enough to respond and even anticipate these changes.

On a quantitive level, they should look at ensuring that they acquire the same sort of people as those they lose so their cost benefits per customer remain the same.

Analysis of churn should inform data strategies. If you can model your data on the customer who is least likely to churn, then you increase your chances of retaining them. And if you identify those at greatest risk of leaving and then segment by value, you are able to target the highest risk/highest value as the priority within your retention programme.

A lot of companies fail to collect enough data about their customers.

As well as the initial point of purchase, which dates quickly, you need to carry on having a dialogue and collecting data in tranches throughout the relationship lifecycle in order to match product with lifestyle. The use of incentives and exclusive offers can deliver added value to the customer and deliver more information about them.

It is our job as data service providers to ensure there is accurate, relevant data in the market to replace the inevitable "churners". This is particularly true in the financial services sector, which has encouraged the development of a new species of high-churn customers. These "rate tarts" chase low interest rates and are highly resistant to retention tactics.

- Barry Leeson-Earle is the director of Tri-Direct.

FUTURE-PROOFING TECHNOLOGY

IT investment is crucial to the success of data marketing but firms must ensure they are putting resource into the right areas, says Mike Talbot.

The value that technology can bring to marketing is widely understood but future-proofing your IT investment is not so straightforward. Marketers are under pressure to prove ROI, so it's vital not to end up with unsuitable systems that cannot adapt.

A successful technology strategy for marketing must be pragmatic and flexible, and projects should be narrowly scoped, directly aligned with business objectives and able to drive marketing strategy.

A cost-effective approach is to invest gradually, maybe by using a hosted system alongside in-house software. It is vital that any investment integrates with existing technology, is open and interoperable, can grow with the business and is easy to use.

Systems need to be intuitive and designed for marketers so they are linked to their business objectives.

When choosing software, marketers must understand that the way they gain benefit from technology will change rapidly in the first few months of using a system. Initially customer insights and increased understanding will provide significant benefits and deliver results. However, these must be coupled with a flexible solution that will adapt with the business and increase profitability.

The main contributing factor in the ongoing success of technology within marketing is that it enables the user to take action and improve the effectiveness of campaigns - it must be linked to results. Failing to do so will no doubt end in a costly IT failure.

- Mike Talbot is the chief technology officer at Alterian.

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