New Rules of Digital MarketingPublished: October 13, 1999 in Knowledge@Wharton
The digital revolution, as exemplified by the Internet and electronic commerce, has shaken marketing practices to their core. In a recent paper, Wharton's Jerry Wind, director of the SEI Center for Advanced Studies in Management, and co-author Vijay Mahajan, a marketing professor at the College of Business Administration of the University of Texas at Austin, examine the impact of digital marketing on concepts like pricing, when customers can propose their own prices (priceline.com), or buyers and sellers can haggle independently in auctions (e-Bay.com).
The paper provides an overview of some of the emerging realties and new rules of marketing in a digital world, and outlines what the new discipline of marketing may look like in the early part of the new century.
To begin with, say the authors, the rapid-fire growth of the Internet is helping to drive changes. "It is not just our computers that are being reprogrammed; it is customers themselves," says Wind. "These emerging cyber consumers are like an alien race that have landed in the midst of our markets. They have different expectations and different relationships with companies from which they purchase products and services."
For one thing, cyber consumers expect to be able to customize everythingfrom the products and services they buy and the information they seek, to the price they are willing to pay. And with digital technology opening new channels for gaining information, they are more knowledgeable and demanding than previous consumers.
Digital customers can also sort products based on any desired attribute, price, nutritional value, or functionality, and they can easily obtain third-party endorsements and evaluations, tapping the experience of other users. "Companies that cannot meet their demands and expectations will be at a loss," says Wind.
Ten rules capture the new style of digital marketing. "Target segments of one, and structure your design for customer-led positioning," he says. "The other eight rules consist of expanding the role of branding in the global portfolio, leveraging consumers as co-producers through customization, using creative pricing in the digital marketplace, creating an anytime/anyplace distribution and integrated supply chain, replacing advertising with integrated and interactive marketing communication and education and entertainment, reinventing marketing research and modeling with a knowledge creation and dissemination engine, using adaptive experimentation, and redesigning your business' strategy process and supporting organizational architecture."
Expanding on one of his ten marketing rules, 'targeting a segment of one,' Wind explains that the current practice of using database marketing to tailor messages and products to customer segments is now giving way to a more interactive process¾ using advanced data mining and related techniques to target, attract and retain individual customers.
Collaborative filtering techniques, for example, as applied by Firefly Network allow personalized recommendations by comparing a single consumer's preferences with those of others who share similar profiles. "Advances in flexible manufacturing, information technology, and consumer desire for variety and customization let companies bring this theory to reality," says Wind. "These advances have also led to customization, electronically sensing customers' needs in real time, and using that electronic connection as well as shared infrastructures to respond to those needs."
He notes that a related concept, which he calls "customerization," goes a step further by combining mass customization with customized marketing, giving consumers the ability to design products and service offerings. "It empowers the customer to design the product and service," he says. "The customer effectively "rents out" the company's manufacturing logistics and other resources."
Wind offers the example of Garden.com, which lets customers design a garden on his or her computer. "An individual can select from over 16,000 products and can try out various landscaping options before ordering all the necessary products with a click of a mouse," says Wind. "Garden.com coordinates the supply chain for the selected products for over 50 suppliers and orchestrates the delivery. It does not own any of the nurseries or transportation vehicles."
Of course, say Wind and Mahajan, the success of these and other strategies ultimately depends on their acceptability to the consumer.
"Will everyone want, for example, a one-on-one relationship with a company?" asks Wind. "How are consumers going to deal with the clutter resulting from every company's desire to develop a one-to-one relationship with them? It is obvious that more than one solution is called for."
Managers need to determine how to design interactive processes, and need to develop effective strategies for giving customers options without overwhelming them. And companies need to suggest possible products without painting customers into a box.
"One of the more advanced financial service companies, for example, is creating a large interactive database and decision support system that includes, in addition to a real time depository of all the customers activities with the company, the capability to allow continuous dialogue with each customer," says Wind. "The data base, which is augmented with external data including Internet usage, offers the potential for targeting individual customers and developing and offering each customer the products and services that will maximize his or her lifetime value to the firm."
But even as companies tailor their pitch to smaller groups of customers, the Internet is also placing more information in the hands of consumers. While this might undermine the power of branding, Wind and Mahajan argue that brand identity has become even more important.
"With many options to choose from and less personal relationships online, customers may turn to trusted and trustworthy brands as an indication of more intangible qualities," says Mahajan. "Nike's brand, for example, still has power in this environment because it conveys an image about the purchaser. But an airline brand that relies on low prices and on time performance may be eroded because the information it conveys about budget prices and on-time service can be determined through easily conducted information searches."
As the digital revolution progresses, companies have concentrated on technology, but paid too little attention to its implications for marketing, warn the authors.
"Businesses have raced forward to appoint Chief Information Officers and even Chief Knowledge Officers, but rarely Chief Marketing Officers," says Wind. "Yet as the world shifts from physical to virtual, as value moves from the greasy gears and hard steel of the industrial age to the high concepts of a knowledge economy what could be more important to companies than the relationships with customers and other external constituencies, knowing their needs and how to communicate with them and meet their changing needs and build sustainable relationship and loyalty? This is what marketing and its new rules are about."