Chapter 1: How Database Marketing Works

This is my fifth book on database marketing. My first, The Complete Database Marketer, was published in 1991. As I write each subsequent book, I am constantly amazed at the changes that have taken place in the techniques and the uses of database marketing. Today is no exception. There is so much that is new and different that we are almost talking about an entirely new marketing method.

How It Began

I like to repeat the story of the genesis of database marketing. It got its start in a big way in the early 1980s, when mass mailers such as American Express and State Farm Insurance started using their customer lists to build ongoing relationships with their customers after the initial sale, leading to increased retention and cross sales. But the roots of database marketing go back to a period in the United States before there were supermarkets.

Back in those days, all the groceries in the United States were sold in small corner grocery stores. The proprietors knew their customers’ names. They would stand at the door and greet their customers by name as they entered, asking them about their families and their concerns. They put things aside for customers, helped them carry heavy packages out to their cars, and built strong and lasting relationships. They built their businesses by developing and cultivating the loyalty of their customers.

These fellows are all gone today. They were forced out of business by the supermarkets. Mass marketing took over, along with mass production. Prices came down. Quality, quantity, and variety went up. The average corner grocer had 800 stockkeeping units (SKUs) in his store. The average supermarket today has more than 30,000 SKUs. The change affected the way Americans lived. In 1950 the average American family was spending 31 percent of its household budget on food. Today the average family is spending only 14 percent on food, and the food it is getting is better in both quantity and quality than the food it was spending 31 percent on 50 years ago. Because of the lowered cost of food, families have much more money to spend on hundreds of other products that were out of the question 50 years ago. So we have all gained.

At the same time, we as suppliers have all lost. We have thousands, hundreds of thousands, or millions of customers, but we don’t know them, and they don’t know us. Loyalty has gone out the window. If you talk to an employee in a supermarket, you are interrupting his regular work, which is certainly not standing by the entrance and chatting with the customers. You are loyal to that supermarket until tomorrow’s newspaper, when a certificate from somewhere else leads you to drive to another store.

In the mid-1980s, computers came into wide use. This development enabled merchants to begin to bring back some of the intimacy that prevailed in the presupermarket days. The software and hardware became increasingly sophisticated, and their prices have been in a free fall for years. As a result, it is now possible to keep, economically, in a computer the kind of information on customers that the old corner grocer used to keep in his head and to use that to build lasting, profitable relationships with customers.

Many companies have collected huge amounts of data about customers and their transactions, but they have failed to make profitable use of these data. There is one principle that has remained true throughout the period since 1985: Database marketing is effective in building customer loyalty and repeat sales only if the customer benefits from it. The customer has to think, “I’m glad that I’m in that database because . . .,” with the supplier filling in a meaningful end to the sentence. If the database does not touch the customer’s life in some way that is satisfying to her, she will ignore the communications, leave her gold card behind when she shops, and refuse to become loyal. Too many companies have ignored that principle and, as a result, have failed to succeed in database marketing.