Adapting Marketing to the New Economy - Pearson Learning Solutions

ISBN: 0-536-55105-7 

C H A P T E R 2 

Adapting Marketing to 

the New Economy 

In this chapter, we will address the following questions: 

1. What are the major forces driving the new economy? 

2. How are business and marketing practices changing as a result of the new economy? 

3. How has the Internet changed the way marketers use customer databases and practice 

customer relationship management? 

MARKETING MANAGEMENT AT NTT DOCOMO 

All over Japan, NTT (Nippon Telephone and Telegraph) DoCoMo makes money 

when mobile phones ring. Loosely translated, docomo means “everywhere”—an apt 

description of the service’s pervasive reach. More than 31 million customers use the 

DoCoMo phone service for Internet access as well as telephone calls. On the Web, 

they can subscribe to the latest installment of a manga graphic story, send and receive 

instant messages from friends and relatives, subscribe to weather reports, and even 

order goods. Rather than browse in a store, a customer can use the phone’s compact 

Web viewing screen to look for a particular item (such as running shoes), choose a 

brand from among thousands listed, select a particular style and size, and place an 

order. Because the customer’s address is already in the system’s memory, the order will 

be sent automatically to a nearby 7-11 store for pickup or, for an extra fee, delivery. 

DoCoMo uses its technology and networks to track the goods and services 

accessed by each customer and summarize all transactions into a single monthly bill 

listing subscriber fees, usage fees, and all purchases. Content providers charge the 

equivalent of a few dollars for monthly subscriptions; DoCoMo profits by collecting 

these fees from customers and subtracting a 9 percent commission before sending the 

remainder to the providers. These commissions add up, given that the average mobile 

A Framework for Marketing Management, Second Edition, by Philip Kotler. 

Copyright © 2003 by Pearson Education, Inc. Published by Prentice Hall. 

23

24 Part I Understanding Marketing Management 

phone user in Japan spends about $63 per month, compared with $53 per month for 

the average user in the United States. Customers can even pay their DoCoMo bills at 

the nearest 7-11 store. Based on DoCoMo’s huge popularity in Japan—and its enviable 

earnings record of $3 billion yearly—NTT has launched a similar system in 

Germany, the Netherlands, and Belgium. 1 

Today’s companies need fresh thinking about how to operate and compete in the new 

economy, a hybrid economy made up of old and new elements. NTT DoCoMo is 

quickly gaining experience in this hybrid economy by blending advanced technology to 

provide superior service, customer by customer. Many standard marketing practices of 

the old economy, such as mass media advertising, sales promotion, and sales force calls, 

will continue to be important. However, now businesses also have to quickly anticipate 

and respond to emerging customer needs and expectations driven, in part, by the Internet 

and other technologies—or risk having competitors satisfy those needs first. 

In this chapter, we will first describe the key drivers of the New Economy and 

examine how business and marketing practices are changing. 2 Then we will look at 

how companies are using the Internet, customer databases and datamining, and customer 

relationship management (CRM) to improve their marketing performance. 

THE MAJOR DRIVERS OF THE NEW ECONOMY 

Many forces play a major role in reshaping the world economy, among them technology, 

globalization, and market deregulation. Here we will describe four specific drivers 

that underpin the new economy: (1) digitalization and connectivity; (2) disintermediation 

and reintermediation; (3) customization and customerization; and 

(4) industry convergence. 

Digitalization and Connectivity 

Much of the world’s business is now carried over networks connecting people and 

companies. These networks are intranets when they connect people within a company 

to one another and to the company mainframe; extranets when they connect a company 

with its suppliers and distributors; and the Internet when they connect users to 

the worldwide “information repository.” Companies also interact with suppliers and 

customers to buy and sell over the Internet. 

Global connectivity is being further enhanced by wireless communication. 

Consumers and businesses in Europe and Japan are already deeply involved in 

m-commerce (m for mobile) using systems such as NTT DoCoMo; the U.S. market 

for m-commerce is much less developed. 

Disintermediation and Reintermediation 

The amazing success of early online dot-coms such as AOL, Amazon, eBay, Yahoo! 

and others struck terror in the hearts of many established manufacturers and retailers. 

Compaq had its hands tied because it sold its computers through retailers, whereas 

Dell Computer, which sold directly to customers, was able to grow faster by harnessing 

the Internet to sell online. Many established intermediaries—notably bookstores, 

music stores, travel agents, and stockbrokers—felt intense pressure as online competi- 



ISBN: 0-536-55105-7

ISBN: 0-536-55105-7 

Chapter 2 Adapting Marketing to the New Economy 25 

tors emerged. They feared, and rightly so, being disintermediated by the new e-tailers. 

Although some established middlemen lost their businesses, new Web-based middlemen 

such as Priceline.com sprang up to serve businesses and consumers, bringing 

reintermediation on a grand scale. 

Traditional “brick-only” firms—such as Compaq, Barnes & Noble, and Merrill 

Lynch—dragged their feet, hoping that the assault of online-only firms would falter 

or disappear. They finally created their own Internet sales channels, offering a careful 

blend of off-line and online operations to retain the loyalty of retailers, brokers, and 

agents. Ironically, some competitors with off-line and online channels became 

stronger than pure dot-coms because they had a larger pool of resources and wellestablished 

brand names. Meanwhile, many Web-based businesses have had financial 

woes, downsized to cut costs, and eventually declared bankruptcy—even as other pure 

dot-coms continue to prosper. 

Customization and Customerization 

Customization means that the company is able to provide individually differentiated 

products, services, prices, and delivery channels for each customer. By going online, 

companies enable consumers to become prosumers, self-producing consumers who can 

essentially design their own goods. Companies have also acquired the capacity to 

interact individually with each customer by personalizing messages, products, and services. 

The combination of operational customization and marketing customization 

has been called customerization. 3 

Customization may be very difficult to implement for complex products such as 

automobiles, and it can raise costs beyond what customers are willing to pay. Another 

potential problem is that some customers don’t know what they want until they see 

actual products, and companies do not want to allow customers to cancel orders once 

production begins. In addition, customized products may be hard to repair. On the 

other hand, customization has worked well for some products—laptop computers and 

skincare products—and is an opportunity worth investigating. 

Industry Convergence 

Industry boundaries are blurring at an incredible rate. Pharmaceutical companies, at 

one time essentially chemical companies, are now adding biogenetic research capacities 

in order to formulate new drugs, new cosmetics (cosmoneuticals), and new foods 

(nutriceuticals). Film companies such as Kodak were also chemical companies but now 

are moving into electronics to digitize their image-making capabilities. All these companies 

are recognizing that many new opportunities lie at the intersection of two or 

more industries. 

HOW BUSINESS PRACTICES ARE CHANGING 

The changes in technology and economy are eliciting a new set of beliefs and practices 

on the part of business firms. Table 2.1 shows the major business beliefs in the old 

economy and how these beliefs have shifted in the new economy. 

Today’s economy and most companies are a hybrid of the old and the new economy. 

Companies need to retain skills and competencies that have worked in the past, but 

they also need to add new knowledge and competencies if they hope to grow and prosper. 


Copyright © 2003 by Pearson Education, Inc. Published by Prentice Hall.


TABLE 2.1 Old Economy versus New Economy 

Old Economy New Economy 

Organize by product units Organize by customer segments 

Focus on profitable transactions Focus on customer lifetime value 

Look primarily at financial scorecard Look also at marketing scorecard 

Focus on shareholders Focus on stakeholders 

Marketing does the marketing Everyone does the marketing 

Build brands through advertising Build brands through performance 

Focus on customer acquisition Focus on customer retention 

No customer satisfaction measurement Measure customer satisfaction and retention rate 

Overpromise, underdeliver Underpromise, overdeliver 

Similarly, today’s marketplace is made up of traditional consumers (who don’t buy 

online), cyberconsumers (who mostly buy online), and hybrid consumers (who do both). 4 

Most consumers are hybrid: they shop in grocery stores but occasionally order 

online from Peapod; they buy books in Barnes & Noble bookstores and sometimes 

order books from bn.com. Thus, most companies will need a presence both off-line 

and online to cater to these hybrid consumers. Companies are already adjusting their 

marketing practices to meet these new conditions. We will examine three marketing 

practices in which companies and their marketers are getting involved: e-business, 

Web sites, and customer relationship management. 

HOW MARKETING PRACTICES 

ARE CHANGING: E-BUSINESS 

E-business describes the use of electronic means and platforms to conduct a company’s 

business. The Internet helps companies conduct business faster, more accurately, 

over a wider range of time and space, at less cost, and with the ability to customize 

and personalize customer offerings. Organizations have set up Web sites to 

distribute information and promote goods and services. They use Intranets to facilitate 

internal communication among employees and Extranets to facilitate the 

exchange of data, orders, and payments with suppliers and distributors. Bill Gates of 

Microsoft claims that his company is almost entirely run electronically; hardly any 

paper flows because everything is on the computer screen. 5 

E-commerce is more specific than e-business; it means that in addition to providing 

information about the company’s history, policies, products, and job opportunities, 

the Web site allows transactions or facilitates the online sale of products and services. 

In turn, e-commerce has given rise to e-purchasing and e-marketing. With 

e-purchasing, companies use the Internet to efficiently purchase goods, services, and 

information from online suppliers. E-marketing describes a company’s efforts to 

inform, communicate, promote, and sell its products and services over the Internet. 

E-business and e-commerce take place mainly over four major Internet 

domains: B2C (business-to-consumer), B2B (business-to-business), C2C (consumerto-consumer), 

and C2B (consumer-to-business). In addition, e-businesses can take the 

form of pure-click or brick-and-click companies. 



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Internet Domains: B2C (Business-to-Consumer) 


More than 100 million Americans go online to look for information, research a product 

or service before buying, find travel information, and find out about movies, books, and 

leisure activities. 6 The most frequent online consumer purchases (in terms of the percentage 

of online buyers saying they have purchased in the category) have been books (58 

percent), music (50 percent), software (44 percent), air tickets (29 percent), PC peripherals 

(28 percent), clothing (26 percent), videos (24 percent), hotel reservations (20 percent), 

toys (20 percent), flowers (17 percent), and consumer electronics (12 percent). 

The Internet is most useful for B2C products and services when the consumer 

seeks greater ordering convenience (e.g., books and music), lower cost (e.g., stock 

trading or news reading), or information about product features and prices (e.g., automobiles 

or computers). It is less useful for products that must be touched or examined 

in advance, although consumers can and do order major appliances, computers, even 

flowers or wine without seeing or trying these products in advance. With B2C, the 

exchange process has become customer-initiated and customer-controlled; often marketers 

must wait until customers invite them to participate in the exchange. Even after 

marketers enter the exchange process, customers insulate themselves with the help of 

agents and intermediaries and define what information they need, what offerings they 

are interested in, and what prices they are willing to pay. 

Internet Domains: B2B (Business-to-Business) 

More activity is conducted on B2B sites than on B2C sites. B2B sites are making markets 

more efficient and changing the supplier-customer relationship in profound ways 

(see Figure 2.1). Major research firms estimate that B2B commerce is ten to fifteen 

times greater than B2C commerce. Business buyers often get better prices by using 

B2B auction sites, spot exchanges, online product catalogues, barter sites, and other 

online resources. Many major enterprises, including Ford, General Electric, and 

Merck, have invested millions in Web-based procurement systems. The result: 

Invoices that used to cost $100 to process now cost as little as $20. Companies are also 

forming online buying alliances to secure even deeper volume discounts from suppliers. 

GM, Ford, and DaimlerChrysler formed Covisint and believe they can save as much 

as $1,200 a car by combining their purchases on this electronic marketplace. 

In addition, business buyers have access to more information from (1) supplier 

Web sites; (2) infomediaries, third parties that add value by aggregating information 

about alternatives; (3) market makers, third parties that create markets linking buyers 

and sellers; and (4) customer communities, online groups in which customers swap stories 

about suppliers’ products and services. 7 As a result, pricing is more transparent. 

Price pressure on undifferentiated products will increase, whereas buyers will gain a 

better picture of the true value of highly differentiated products. Suppliers of superior 

products will be able to offset price transparency with value transparency; suppliers of 

undifferentiated products will have to drive down costs to compete. 

Internet Domains: C2C (Consumer-to-Consumer) 

With C2C, consumers are increasingly creating online product information, not just 

consuming it. They join Internet interest groups and chat rooms to share information, 

so that “word of Web” is joining “word of mouth” as an important buying influence. 




FIGURE 2.1 The Supplier-Customer Relationship, Traditional versus New Economy 

Executives 

Marketing 

Systems 

Sales 

Finance 

Manufacturing 

Supplier 

TRADITIONAL STRUCTURE 

SALES BUYING 

(a) 

NEW ECONOMY STRUCTURE 

(b) 

Customer 

Supplier Customer 

Executives 

Marketing 

Systems 

Sales 

Finance 

Manufacturing 

Executive 

Merchandising 

Systems 

Buyers 

Finance 

Warehousing 

Executive 

Merchandising 

Systems 

Buyers 

Finance 

Warehousing 

Information about good companies and products travels fast, and information about 

bad companies and products travels even faster. As noted in Chapter 1, eBay is a oneto-one 

online trading community with millions of registered users, mainly consumers 

who want to either buy or sell offerings in more than 1,000 categories. 

Internet Domains: C2B (Consumer-to-Business) 

Consumers are also finding it easier to communicate with companies on the Web. 

Companies invite prospects and customers to e-mail questions, suggestions, and even 

complaints. Some sites even include a “call-me” button—when a customer clicks it, 

his or her phone rings with a company representative ready to answer questions. 

Although many online merchants respond slowly to consumer inquiries, smart on-line 

marketers answer quickly and send out newsletters, special offers based on purchasing 

histories, reminders of service requirements or warranty renewals, or announcements 

of special events. Frustrated consumers have the option of using sites such as 

eComplaints and PlanetFeedback.com to communicate their dissatisfaction with businesses 

and products. 8 



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Pure-Click versus Brick-and-Click Companies 


Among e-businesses, we can distinguish between pure-click companies, those that 

launched a Web site without any previous existence as a firm, and brick-and-click companies, 

established companies that added an online site for information or e-commerce. 

Pure-Click Companies Pure-click companies can be search engines, Internet 

Service Providers, commerce sites, transaction sites, content sites, and enabler sites. 

Search engines and portals such as Yahoo! started as search engines and later added services 

such as news, weather, and storefronts, hoping to become the user’s point of entry 

on the Internet. Internet Service Providers (ISPs) such as AOL provide Internet and email 

connections for a fee. Commerce sites such as Amazon.com sell books, music, and 

so on. Transaction sites such as eBay take a commission for transactions conducted on 

their sites. Content sites such as WSJ.com (operated by the Wall Street Journal) offer 

financial news and other information. Enabler sites provide the hardware and software 

that enable Internet communication and commerce. 

Pure-click firms have failed for a variety of reasons: Many rushed into the market 

without proper research or planning; had poorly designed Web sites; or lacked 

adequate infrastructures for on-time shipping and customer service. To acquire customers, 

pure-clicks often spent lavishly on mass marketing and off-line advertising, 

relied on buzz instead of using target marketing, and focused mainly on customer 

acquisition instead of building relationships to form a loyal base of frequent users. 

Finally, many pure-clicks failed to build a sound business model that would deliver 

eventual profits. Webvan, an online grocery retailer, overexpanded and opened automated 

warehouses that operated far below the break-even point. Unable to attract frequent 

users, the company filed for bankruptcy after operating less than three years. 

Still, many pure-click dot-coms are surviving and even prospering, and others 

have fundamentally sound business plans even though they are showing losses today. 

The ISP Earthlink, for example, enjoys a monthly contribution margin of at least $9 

from each subscriber to its Internet and e-mail services. Subscribers become profitable 

for Earthlink after their fees cover the $100 average cost of acquiring a new customer, 

which takes about 11 months. 

Brick-and-Click Companies Many established companies moved quickly to open 

Web sites describing their business but resisted adding e-commerce out of concern 

that they would be seen as competing with their off-line retailers and agents. For 

example, Merrill Lynch hesitated to introduce online stock trading to compete with 

E*TRADE, Schwab, and other online brokerages, fearing that its own brokers would 

rebel. Even the store-based bookseller Barnes & Noble delayed opening an online site 

to challenge Amazon.com because it was concerned about the effect on store sales. 

Liberty Mutual solved this problem by asking its online customers to indicate 

whether they prefer to buy directly or through a financial advisor. When customers 

choose the advisor, Liberty Mutual relays information about their needs to an advisor 

for personal follow-up. As another example, Avon conducted research and found little 

overlap between existing customers and potential online customers, so the company 

initiated e-commerce, and offered to help its reps set up their own Web sites, as well. 9 

Although brick-and-click firms face channel conflict issues, many are likely to 

have more success online than pure-click competitors. First, companies such as 

Merrill Lynch and Wal-Mart have better known brand names; their cost of acquiring 




a new customer is $12 compared to the $82 that pure click e-tailers spend to acquire a 

new customer. 10 Second, they have greater financial resources and access to funds. 

Third, they have deeper industry knowledge and experience, good supplier relationships, 

and a large customer base. Fourth, they can be reached 24 hours a day, 7 days a 

week, and the retailers accept merchandise returns in their stores. And fifth, the 

Internet allows them to serve many customers far from their store locations. 

HOW MARKETING PRACTICES ARE CHANGING: 

SETTING UP WEB SITES 

Clearly all companies need to move into e-marketing and e-purchasing. In deciding to 

operate a Web site, companies must answer many questions about attracting and 

retaining visitors, advertising online, dealing with channel partners, putting the site 

together, and making it profitable. Many of these questions will be addressed throughout 

the book. Here we address only three: designing a Web site; promoting online; 

and building a revenue and profit model. 

Designing an Attractive Web Site 

A key challenge is to design a site that is attractive on first viewing, interesting enough 

to encourage repeat visits, and achieves the company’s objectives. Early text-based Web 

sites have increasingly been replaced by sophisticated sites that provide text, sound, and 

animation (see www.gap.com or www.1800flowers.com). Rayport and Jaworski have 

proposed that effective sites feature specific design elements that they call the 7Cs: 11 

■ Context. Layout and design. 

■ Content. Text, pictures, sound, and video on the site. 

■ Community. How the site enables user-to-user communication. 

■ Customization. Site’s ability to tailor itself to different users or to allow users to personalize 

the site. 

■ Communication. How the site enables site-to-user, user-to-site, or two-way communication. 

■ Connection. Degree to which the site is linked to other sites. 

■ Commerce. Site’s capabilities to enable commercial transactions. 

Designing an attractive Web site is an important skill for marketers. Even marketers 

who outsource this task should be knowledgeable about good site design principles 

(see “Marketing Skills: Web Site Design”). Once a site is built, to encourage repeat 

visits, the company needs to pay particular attention to context and content factors. 

Context Factors Visitors judge a site’s performance on its ease of use and its physical 

attractiveness. Ease of use covers three key attributes: whether the site loads 

quickly; whether the home page is easy to understand; and whether the visitor can easily 

navigate to other pages that open quickly. The site’s physical attractiveness is determined 

by the following factors: (1) the individual pages look clean and not overly 

crammed with content; (2) the type faces and font sizes are very readable; and (3) the 

site makes good use of color and sound. 

Content Factors Context factors facilitate repeat visits, but they do not ensure that 

this happens. Content that is interesting, useful, and continuously changing will draw 



ISBN: 0-536-55105-7

ISBN: 0-536-55105-7 

MARKETING SKILLS: WEB SITE DESIGN 


What if a Web site opened—and nobody visited? Considering the time, money, 

and effort companies must invest in a Web site, marketers must be familiar with 

the fundamentals of design, starting with an understanding of how Internet 

surfers behave. On the Web, visitors control what they see and for how long— 

and many are impatient. Therefore, designers should keep things simple, choosing 

graphics that will load quickly and grab attention. In addition, they need to 

show what the site will do for users through an informative home page, clearly 

labeled links, and search capabilities. Because reading words on a screen is not as 

easy as reading words in print, a well-designed site will use headlines, bullet 

points, and short bursts of text to convey key ideas. In addition, designers must 

think about how visitors are likely to move through the site and prominently 

position links so visitors can easily find different types of information. 

When a company wants to reach a global audience, the Web site should 

accommodate different languages, customs, and content. Another important task 

is to plan out a logical navigation path for visitors by coordinating the graphics, 

words, and links. Remember that some visitors may click past introductory pages 

to view specific details. As a result, a good site design will help visitors determine 

where they are on the site, what else is available, and how they can get to the 

exact information they want. Finally, Web designers should test and retest to be 

sure prospective visitors will not get lost or frustrated in accessing the site—and 

to determine whether the site is set up to accomplish its purpose. 

Web design is a valued skill at Yahoo! This well-trafficked portal looks 

exciting, organizes links so visitors can find what they need, and even allows visitors 

to customize the site to their personal specifications. The company carefully 

localizes the site’s content and functionality for each country. As one example, 

U.S. users sort names in online address books alphabetically. However, users in 

some Asian nations sort names according to the number of strokes in each character. 

Incorporating these nuances into the design of local Yahoo! sites helps the 

company appeal to its target audiences and encourage long-term loyalty. 12 

repeat visits. Certain types of content are effective in attracting first-time visitors and 

bringing them back again: (1) deep information with links to related sites, (2) changing 

news of interest, (3) changing free offers, (4) contests and sweepstakes, (5) humor 

and jokes, and (6) games. 

Getting Feedback From time to time, a company needs to reassess its site’s attractiveness 

and usefulness. One way to do this is to ask site design experts. But the more important 

source of feedback is users, who can explain what they like and dislike about the site 

and offer suggestions for improvement. Hallmark, General Electric, and other firms have 

users test and critique company sites, then retest over time as the sites change. 13 

Placing Ads and Promotion Online 

Although Internet users generally do not welcome advertising, advertising does 

appear on the Internet. A company has to decide which forms will be most costeffective 

in achieving specific advertising objectives. 




Banner ads, small boxes containing text and perhaps a picture, are the most 

extensively used Internet advertising tools. Companies placing banner ads on relevant 

Web sites generally pay according to the size of the audience reached. Sometimes 

companies barter for banner placement rather than paying. Response is not very large: 

viewers are clicking on less than 1/2 of 1 percent of banner ads. Companies placing 

banner ads should ideally arrange to pay only when sales actually result from the clickthroughs 

on these ads. 

Many companies gain online exposure by sponsoring special content on Web 

sites that carry news, financial information, and so on. Sponsorships are best placed in 

well-targeted sites offering information or services related to the company and its customer 

base. The sponsor pays for posting the content and is publicly acknowledged as 

the sponsor of that page or site. 

A microsite is a limited area on the Web managed and paid for by an external 

advertiser. Microsites are particularly relevant for companies selling low-interest 

products such as insurance. For example, an insurance company can create a microsite 

within a used-car site, offering advice for buyers of used cars and at the same time 

offering a good insurance deal. 

Interstitials are advertisements that ‘pop-up’ between changes on a Web site. Ads 

for Johnson & Johnson’s Tylenol headache reliever pop up on brokers’ Web sites whenever 

the stock market falls by 100 points or more. Browser ads pay viewers to watch. 

Companies can also set up alliances and affiliate (or associate) programs. When one 

Internet company works with another, they end up “advertising” each other. Amazon 

has more than 500,000 associates that post Amazon banners on their Web sites. 

Companies can also undertake guerrilla marketing actions for publicity and to 

generate word-of-mouth. When Yahoo! started its Denmark site, it distributed apples 

in the country’s busiest train station with the message that a trip to New York was 

being given away on the Yahoo! site within a few hours; it also got publicity in Danish 

newspapers. 

Building a Revenue and Profit Model 

Dot-com companies need a viable revenue and profit model, a business model that 

specifies the main revenue sources, and the projected revenue, costs, and income the 

firm expects to achieve. Revenues may come from several sources: 

■ Advertising income. Sales of banner ads are one source of revenue. 

■ Sponsorship income. A dot-com can solicit sponsors for some of its content and collect 

sponsor fees. 

■ Alliance income. A company can invite business partners to share costs in setting up 

the Web site in exchange for free advertising. 

■ Membership and subscription income. Some Web sites charge a subscription fee to 

use the site. The Wall Street Journal site successfully collects subscription fees for 

accessing its online edition; Economy.com, a research firm, broke even only a few 

weeks after it started charging corporate subscribers $17 per month. 14 

■ Profile income. Sites that have accumulated the profiles of a particular target group 

may be able to sell these profiles if they get permission. At the same time, there is a 

code of ethics that warns against the wrongful sale or misuse of customer information, 

and legal moves may soon limit this option. 



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■ Product and service sales income. E-commerce sites draw a good portion of their 

revenue from marking up the prices of their goods and services. 

■ Transaction commissions and fees. Dot-coms can charge commission fees on transactions 

between other parties. For example, eBay puts buyers in touch with sellers and 

takes a commission of up to 5 percent on each transaction. 

■ Market research/information. Companies can charge for special market information 

or intelligence. NewsLibrary charges a dollar or two to download copies of archived 

news stories. LifeQuote provides price comparisons from different life insurance 

companies and gets a commission of 50 percent of the first year’s premium from the 

company chosen by the consumer. 

■ Referral income. Companies can collect revenue by referring customers to other 

sites. Edmund’s receives a “finder’s fee” every time a customer fills out an Auto-By- 

Tel form at Edmund’s site, regardless of whether a deal is consummated. 

How many dot-coms are profitable today? McKinsey & Company studied more 

than 200 B2C e-businesses and found that 20 percent were making an operating 

profit. The best performers were transaction sites, with media and content sites lagging 

behind. 15 

HOW MARKETING PRACTICES ARE CHANGING: 

CUSTOMER RELATIONSHIP MARKETING 

In addition to e-marketing, companies are becoming more skillful in customer relationship 

marketing and database marketing. Customer relationship marketing 

(CRM) enables companies to provide excellent real time customer service by developing 

a relationship with each valued customer through the effective use of individual 

account information. Based on what they know about each customer, companies can 

customize market offerings, services, programs, messages, and media. 

Customer relationship marketing holds that a major driver of company profitability 

is the aggregate value of the company’s customer base. 16 Winning companies 

are more productive in acquiring, keeping, and growing customers. These companies 

improve the value of their customer base by excelling at reducing customer defection 

rates; increasing the life of each customer relationship; enhancing customer sales and 

profit potential; making low-profit customers more profitable—or terminating them; 

and focusing on high value customers. As Table 2.2 shows, marketing to individual 

consumers is not the same as marketing to the masses. 

Peppers and Rogers suggest a four-step framework for one-to-one marketing: 17 

■ Identify your prospects and customers. Do not go after everyone. 

■ Differentiate customers in terms of their needs and their value to your company, 

then lavish more effort on the most valuable customers (estimate customer value by 

the net present value of all future profits coming from purchases, margin levels, and 

referrals, less customer-specific servicing costs). 

■ Interact with individual customers to learn more about their individual needs and to 

build stronger relationships. 

■ Customize products, services, and messages to each customer. 




TABLE 2.2 Mass Marketing versus One-to-One Marketing 

Mass Marketing One-to-One Marketing 

Average customer Individual customer 

Customer anonymity Customer profile 

Standard product Customized market offering 

Mass production Customized production 

Mass distribution Individualized distribution 

Mass advertising Individualized message 

Mass promotion Individualized incentives 

One-way message Two-way messages 

Economies of scale Economies of scope 

Share of market Share of customer 

All customers Profitable customers 

Customer attraction Customer retention 

Source: Adapted from Don Peppers and Martha Rogers, The One-to-One Future (New York: 

Doubleday/Currency, 1993). See their Web site www.1to1.com. 

Customer Databases and Database Marketing 

Successful companies know their customers: They collect information, and store it in 

a customer database, and apply database marketing. A customer database is an organized 

collection of comprehensive information about individual customers or 

prospects that is current, accessible, and actionable for such marketing purposes as 

lead generation, lead qualification, sale of a product or service, or maintenance of customer 

relationships. Database marketing is the process of building, maintaining, and 

using customer databases and other databases (products, suppliers, resellers) for the 

purpose of contacting, transacting, and building relationships. 

A customer database contains much more information than a customer mailing 

list, which is simply a set of names, addresses, and telephone numbers. Ideally, a customer 

database would contain the consumer’s past purchases, demographics (age, 

income, family members, birthdays), psychographics (activities, interests, and opinions), 

mediagraphics (preferred media), and other useful information. A business 

database should contain past purchases of business customers; past volumes, prices, 

and profits; buyer team member names (and their ages, birthdays, hobbies, and favorite 

foods); status of current contracts; an estimate of the supplier’s share of the customer’s 

business; competitive suppliers; assessment of competitive strengths and weaknesses in 

selling and servicing the account; and buying practices, patterns, and policies. 

Data Warehouses and Datamining 

Savvy companies capture information every time a customer comes into contact with 

any of its departments by making a purchase, requesting a service call, sending an 

online query, or returning a mail-in rebate card. They store this information in a data 

warehouse and analyze it to draw inferences about each individual customer’s needs 

and responses. This allows the company’s customer service reps or telemarketers to 

respond knowledgeably to customer inquiries based on a total picture of the customer 



ISBN: 0-536-55105-7

ISBN: 0-536-55105-7 


relationship. Through datamining, marketing statisticians can extract useful information 

about individuals, trends, and segments from a massive data warehouse. 

Datamining involves the use of sophisticated statistical and mathematical techniques 

such as cluster analysis, automatic interaction detection, predictive modeling, and 

neural networking. 

In general, companies can use their databases to (1) identify the best prospects 

by sorting through a mass of responses; (2) match a specific offer with a specific customer 

as a way to sell, cross-sell, and up-sell; (3) deepen customer loyalty by remembering 

customer preferences and offering relevant incentives and information; 

(4) reactivate customer purchasing through reminders or timely promotions; and 

(5) avoid serious mistakes such as sending a customer two offers for the same product 

but at different prices. 

However, a variety of problems can deter a firm from effectively using database 

marketing for CRM. The first is the large investment in computer hardware, database 

software, analytical programs, communication links, and skilled personnel as well as 

the difficulty in collecting the right data on all the occasions of company interaction 

with individual customers. Thus, building a customer database would not be worthwhile 

where the product is a once-in-a-lifetime purchase (e.g., a grand piano); where 

customers show little brand loyalty; where the unit sale is very small (e.g., a candy 

bar); and where the cost of gathering data is prohibitively high. 

The second problem is the difficulty of getting everyone in the company to be 

customer-oriented and to use the available information for CRM rather than carrying 

on traditional transaction marketing. The third problem is that not all customers want 

an ongoing relationship with a company and may resent having their personal data 

collected and stored. Marketers must be concerned about customer attitudes toward 

privacy and security. For example, America Online, under fire from privacy advocates, 

junked a plan to sell subscribers’ telephone numbers. Online companies would be 

smart to explain their privacy policies, and allow consumers to avoid having their 

information stored in a database. A fourth problem is that information must be 

updated continuously because people move, drop out, or change their interests. 

One consulting firm reported that 70 percent of firms found little or no 

improvement from implementing a CRM system. The reasons are many: the system 

was poorly designed, it became too expensive, users didn’t make much use of it or 

report much benefit, collaborators ignored the system, and so on. All this points to the 

need for each company to determine how much to invest in building and using database 

marketing to manage its customer relationships. 

EXECUTIVE SUMMARY 

Four major drivers of the new economy are digitalization and connectivity, disintermediation 

and reintermediation, customization and customerization, and industry 

convergence. The new economy is shifting old economy business practices toward 

organizing by customer segments (instead of only byproducts), focusing on customer 

lifetime value (instead of only transactions), focusing on stakeholders (not only shareholders), 

getting everyone involved in marketing (instead of only the marketing 

department), building brands through behavior (not just advertising), focusing on customer 

retention (as much as customer acquisition), measuring customer satisfaction, 

and underpromising and overdelivering. 




E-business, using electronic means and platforms to conduct business, is broader 

than e-commerce, selling goods and services online. Many companies are starting 

to use e-purchasing and e-marketing. E-business and e-commerce occurs mainly 

over four major Internet domains: B2C (business-to-consumer), B2B (business-tobusiness), 

C2C (consumer-to-consumer), and C2B (consumer-to-business). In addition, 

e-businesses can be either pure-click or brick-and-click companies. 

Companies face many questions in adopting e-marketing, including how to 

design an attractive Web site, how to advertise online, and how to build a sound revenue 

and profit model for dot-com businesses. Companies are also becoming skilled in 

customer relationship management (CRM), which focuses on meeting the individual 

needs of valued customers. This requires building a customer database and using datamining 

to detect trends, segments, and individual needs to guide marketing activities. 

NOTES 

1. “A La I-Mode: Mobile Telecoms,” The Economist, March 30, 2002; Lisa Takeuchi Cullen, 

“Deflating DoCoMo,” Time International, February 25, 2002, pp. 10+. 

2. Donna L. Hoffman, “The Revolution Will Not Be Televised,” Marketing Science (Winter 

2000): 1–3; George S. Day and David B. Montgomery, “Charting New Directions for 

Marketing,” Journal of Marketing, Special Issue (1999): 3–13. 

3. See Yoram J. Wind and Vijay Mahajan with Robert E. Gunther, Convergence Marketing: 

Strategies for Reaching the New Hybrid Consumer (Upper Saddle River, NJ: Prentice Hall 

PTR, 2002). 

4. Wind, op. cit. 

5. Bill Gates with Collins Hemingway, Business @ the Speed of Thought: Using a Digital 

Nervous System (New York: Warner Books, 1999). 

6. Pew Internet & American Life Project Survey, November–December 2000. 

7. See Ralph A. Oliva, “Nowhere to Hide,” Marketing Management (July/August 2001): 

44–46. 

8. Gary M. Stern, “You Got a Complaint?” Link-Up, September 2001, p. 28. 

9. Chuck Martin, Net Future (New York: McGraw-Hill, 1999). 

10. J. Timothy Hunt, “Beyond Point and Click,” Financial Post—Canada, May 1, 2001. 

11. Jeffrey F. Rayport and Bernard J. Jaworski, e-commerce (New York: McGraw-Hill, 2001), 

p. 116. 

12. Kate O’Sullivan, “Duh-Sign of the Times” Inc, November 1, 2001, www.inc.com; Joan 

Hamilton, “Diss My Web Site, Please,” BusinessWeek, November 20, 2000, pp. EB-128, 

EB-130; Courtland L. Bovée and John V. Thill, Business Communication Today 7th ed. 

(Upper Saddle River, NJ: Prentice Hall, 2003), Component Chapter A. 

13. Hamilton, “Diss My Web Site, Please.” 

14. Kimberly Weisul, “Yes, They Really Pay To See These Sites,” BusinessWeek, January 21, 

2002, p. 8. 

15. Tilman Kemmler, Monika Kubicová, Robert Musslewhite, and Rodney Prezeau, 

“E-Performance II–The Good, the Bad, and the Merely Average,” The McKinsey Quarterly 

(2001): www.mckinseyquarterly.com. 

16. See George S. Day, “Capabilities for Forging Customer Relationships,” Working Paper 

Series, Marketing Science Institute, Report No. 00-118, 2000. 

17. Don Peppers and Martha Rogers, The One-to-One Future (New York: 

Doubleday/Currency, 1993). 



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