Promotional messages don’t work if customers aren’t receptive to
them. To boost the odds of being greeted by eager eyes and hungry ears,
marketers ask questions that target their audiences. Who should receive
the message? What should the content of the message be? How should we
deliver the message?
The one question they rarely ask is, when should we deliver
the message? Yet in marketing, timing is arguably the most important
variable of all. Promotions are like weather reports and news
bulletins—people need them when they need them. Too early and they are
forgotten. Too late and they are ignored.
Most people don’t want to hear from most companies most of the time,
and in an era of marketing overload—characterized by irrelevance as well
as volume—unsolicited communication can provoke apathy or worse,
resentment. The business press has lately described a “chaos scenario”
in which traditional media (television, print) and established formats
(the 30-second spot) are in decline but new, more effective media and
formats are still evolving. In the messy interim, advertisers find their
messages are not being absorbed or even noticed, let alone acted on.
However, there are moments in a customer’s relationship with a
business when she truly wants—even needs—to communicate with that
business. Her life has changed. Her desires have changed. Her perception
of the business has changed. If companies contact her with the right
message in the right format at just that moment, their chances of a warm
reception rise. But few companies sync communications to milestones or
transitions in their customer relationships. Even fewer respond to
events in their customers’ lives.
Consider the airlines. No slouches when it comes to peddling seats,
they send an expensive package of promotions to their most valuable
customers with each and every loyalty-program statement. But what
happens when a customer suddenly stops using an airline he once flew
frequently? That customer’s apparent defection is a fundamental change
in behavior that requires intervention by the airline if it wants to
keep his business. Unfortunately, airlines and other organizations
cannot afford to manually track and respond to a customer’s every act,
or failure to act. Such vigilance simply does not scale.
The question “when?”—like most marketing questions—can be answered by
technology: specifically, by a new computer-based model called
“dialogue marketing.” Dialogue marketing is, to date, the highest rung
on the evolutionary ladder that ascends from database marketing to
relationship marketing to one-to-one marketing. Its principle advantages
over those older approaches are that it is completely interactive,
exploits many communication channels, and is “relationship aware” : that
is, it continuously tracks every nuance of the customer’s interaction
with the business. Consequently, dialogue marketing responds to each
transition in that relationship as it occurs—at the moment the customer
requires a particular type of attention.
Dialogue marketing is, to date, the highest rung on the evolutionary
ladder that ascends from database marketing to relationship marketing to
one-to-one marketing.
Dialogue marketing is getting good results in several industries,
including retail, hospitality, travel, financial services, media,
packaged goods, and telecommunications. As it proliferates, it may
provide the firm new footing that Madison Avenue seeks. The following
article lays out dialogue marketing’s fundamentals and briefly describes
the technologies required to make it work. (Editor’s Note: A number of
vendors, including the coauthor’s company, offer systems that perform
the functions of dialogue marketing. Corporate IT departments can also
develop their own.)
It’s Time to Talk
Modern marketing doctrine is founded on the primacy of databases,
which allow companies to segment customers into demographic and
psychographic clusters. In basic database marketing—still alive and
kicking—analysts query databases at marketers’ behest and produce lists
of customers in various subgroups. The marketers then use batch
communications to send members of those subgroups nearly identical
messages at infrequent intervals, according to the company’s schedule.
Most of those messages are designed to sell products.
In the 1980s, database marketing spawned relationship marketing,
which shifted the emphasis to retaining and nurturing clients. Data
segmentation grew more sophisticated as marketers studied differences in
customers’ profitability and calculated their lifetime value. A decade
later, one-to-one marketing sought to exploit the Web’s powerful
assertion, “I know who you are,” by creating personalized messages for
individual customers. But one-to-one marketing rarely strays beyond the
borders of the Internet. And while it addresses the question, “What
should the content of this message be?” that is a necessary—not a
sufficient—improvement.
The dialogue model is also a product of database technology and
personalization philosophy marching forward in tandem. Yet while
dialogue marketing has the body of a software system, it possesses the
soul of a salesperson. Great salespeople understand that customer
relationships are built, maintained, and expanded through dialogues,
which take place one after another over time. A dialogue is, very
simply, a series of outreaches and responses between a company and a
customer ideally leading to some action on the part of the customer. The
person or software conducting a dialogue “listens” to the customer’s
needs and chooses the content and channel of communication based on what
the customer says and does.
So, for example, a dialogue might begin when a company’s system sends
an e-mail inviting the customer to visit a Web site for information.
When a week passes without the customer clicking on the embedded links,
his silence triggers the next step in the dialogue—an alert to a
salesperson to make a call. The system waits another week after that
human contact and then shoots the customer a reminder e-mail. This time,
the customer clicks through to the site, and his choices there
automatically queue new interactions.
That step-by-step, wait-and-respond approach distinguishes dialogue
marketing from its forebears. But the model’s most distinctive
characteristic may be its attention to the temporal dimension of
customer relationships. Time, literally, is its essence.
Dialogue-marketing systems are very sensitive to the interval between
purchases, movement along loyalty curves, and increasing and decreasing
frequency of physical and online visits. Such data registers in these
systems as transitions or events, and each time one occurs, the software
automatically commences an appropriate dialogue with the customer.
Transitions may be positive (indicating an increase in business or
loyalty) or negative (indicating a decrease in business or loyalty). All
transitions present opportunities to engage the customer anew.
Transitions are a more meaningful lens than transactions for viewing
the customer relationship because they focus on the relationship’s
evolution. In effect, transactions show you a series of frames;
transitions play you a movie. Consider the common practice among
retailers of collecting raw transactional data and transforming that
information into recency, frequency, and monetary (RFM) value scores.
These scores, which have been in use since the early days of database
marketing, record when customers last made certain transactions, how
often they made those transactions, and the monetary value of those
transactions. Companies often break down RFM scores by segment, brand,
or product category. So a retailer might track:
- the recency of transactions in the shoe department;
- the frequency of transactions in the shoe department;
- the average monetary value of transactions in the shoe department;
- the recency of transactions involving a particular brand of shoes;
- the frequency of transactions involving a particular brand of shoes;
- the average monetary value of transactions involving a particular brand of shoes.
Traditionally, the retailer would collect such data over time. Then,
at intervals, it would send out a batch communication to customers who
have spent, say, more than $1,000 on a particular brand during the
course of a year.
With dialogue marketing, by contrast, the retailer monitors changes
in individual customers’ RFM scores as they happen and sets the system
to launch a dialogue when it detects a meaningful transition. The system
responds immediately to individual rather than aggregate data, so the
retailer can reach out to the customer while she is fresh in the throes
of new-sandal fever or has gone an unprecedented six months without
buying a pair of pumps. And dialogues don’t just follow up transitions;
they follow through—to another transaction, a deeper engagement, or simply a larger wedge of customer attention.
The Nature of Changes
No two companies collect identical data, and so each will define the
specific transitions that trigger customer dialogues. In general,
transitions reflect a change either in the customer’s life or in his
relationship with the business. They are particularly valuable in the
creation and operation of complex loyalty programs. A company might set
dialogues to launch when a customer
- makes a purchase in a new category (first suit, first time in our new shoe department);
- buys a brand so frequently that he qualifies as a zealot;
- exceeds a certain monetary value in a year and thus qualifies as a VIP;
- crosses a threshold in a loyalty program;
- requests a change of address, indicating a household move;
- purchases an item that indicates a major life change such as an
infant car seat, or a large project such as a sink or cabinets.
(Dialogue systems can also incorporate data from third-party vendors
that track the issuance of new mortgages, openings of college savings
accounts, and other commercially available data.)
Once a transition triggers a dialogue, that dialogue often moves the
customer to another transition, at which point a new dialogue with a
different goal kicks in. For example, a major regional grocery chain
identified a tipping point: People who ordered from its Web site more
than four times were very likely to become regular customers. The
company’s technology staff programmed its dialogue-marketing system to
respond to new customers via e-mail, using steep store-financed
discounts to push them aggressively through those first four purchases.
After purchase number four, the system automatically begins generating
less expensive treatments, for example, offering only trade promotions
financed by consumer goods manufacturers.
Other transitions represent not an opportunity but rather a
threat—usually, that a customer will defect. Recall for a moment the
airline with its high-value customer gone AWOL. Now imagine the company
practices dialogue marketing. The system detects the customer’s failure
to book a flight for several months and sends a message to a service
representative asking him to call and try to rectify the problem. If the
customer complains of poor service, the representative logs the details
into the system, triggering the creation of a written apology signed by
an executive and including an incentive to return—automatic upgrades or
frequent-flier miles, for example. If her account remains inactive,
then the next month the system sends her another note with a reminder
about the incentive. If yet another month passes, she gets a call from a
senior customer-service manager. When she finally buys a ticket, the
system launches a dialogue for special treatment of “saved” customers.
As this example illustrates, dialogue marketing considers not just when to communicate but also how
to communicate: Dialogues play out across multiple channels depending
on the content of the message and the urgency of the situation. Some
customer actions will trigger the system to respond immediately, with a
personalized e-mail, a personalized piece of direct mail, or an alert to
a salesperson to make a call. Other responses will lay the groundwork
for future interactions. The system might store a personalized message
at the point of sale to be delivered when the customer next visits, or
send the message to a call center representative to be used when the
customer phones. Or it might place customer-specific content on a Web
site in preparation for a virtual visit.
Customer value is another major consideration in channel choice.
Before launching its resource-intensive retention dialogue, the
airline’s system would establish that the customer in question is top
tier, based on her previous and predicted purchasing. If the customer
qualified as only medium value, the system might mail her a message,
either electronically or by placing her contact information on a direct
mail list together with personalized content for the message. A
low-value customer might receive an e-mail, or nothing at all if he is
not profitable or not online. This portfolio of approaches is another
way in which dialogue marketing improves on most one-to-one initiatives.
The Data Rich and the Data Poor
Not surprisingly, companies that collect masses of data and cut that
information every which way have emerged as dialogue marketing’s
virtuoso early adopters. Harrah’s Casinos, for example, which is known
for its sophisticated use of database-marketing technology, runs an
elaborate set of dialogues that consider every permutation of the
casino-vacationer relationship (see Gary Loveman’s article “Diamonds in
the Data Mine,” HBR May 2003). Harrah’s system defines customers in
these ways:
- Decliners: number and recency of visits are dropping
- Incliners: number and recency of visits are rising
- Inactive: no visits for a long period of time
- New Business: only one recent visit
- Past Due: no visits for a designated period of time, but not yet considered decliners
- Due Now: not yet considered decliners but need a tickler to bring them in now
The company uses dialogues to take customers from negative states
(such as decliners) to positive states (such as incliners), chiefly by
alerting live “player hosts” to intervene at the first sign of a
transition. Since Harrah’s began using dialogue marketing in 2003, it
has raised revenue by 30% to 69%, depending on the customer segment;
increased by 20% to 25% the contacts that produce return visits; and
boosted the number of VIP customers overall.
Not all companies, however, are equally awash in data. Some
businesses are built on infrequent transactions with individual
customers (you buy a cup of coffee once a day, a house once a decade).
And while luxury brands may excite occasional purchasers to stay
connected to the business, many companies find it difficult to hold
customers’ attention beyond the sale.
One company with a relative paucity of data is Logitech, a designer
and manufacturer of personal peripherals for computers, mobile phones,
and MP3 players. Despite its customers’ low purchasing frequency,
Logitech has managed to create a new loyalty program based on dialogue
marketing. The system is nourished by a database of registered customers
who trade demographic information for timely notification of software
upgrades and new products. Logitech has collected this information over
several years from customers buying online or seeking help from support
staff.
Because Logitech doesn’t gather enough data from customers to
effectively detect individual transitions, it sets its clock according
to aggregate historical information in the registration database. For
example, a principal goal of the loyalty program is to induce first-time
or single-item buyers to purchase another product; so the system
decides when to start a follow-up dialogue based on the lapse of time
between similar customers’ first and second purchases. Having determined
that repeat customers bought their second products almost immediately
after the first, the system launches follow-up dialogues while that
initial transaction is still warm. By reaching out again so soon,
however, the company risks alienating customers who dislike the hard
sell. So Logitech designs those dialogues with a service orientation—for
example, explaining how its portable products can assist customers in
their travels.
The dialogue to stimulate a second purchase unfolds through a series
of such informative e-mails, each of which invites the customer to take
one of several actions. If those missives receive no response, the
system queues up a replacement product dialogue to commence at a time
determined by historical data on the pace of replacement purchases for
the customer’s product type. As the dialogue-marketing program bears
fruit, Logitech’s rates of repeat and replacement purchases should rise,
spawning more and more data. The company is incorporating that new data
into its model, and that, in turn, should cause dialogues to launch at
more precise intervals.
A Dialogue for Every Season
Customer relationships are rich in transitions and events. At
different times, companies will need to talk people into a commitment or
out of a defection, over a conceptual hurdle or through a complex
process. Working with their technology departments, marketers can design
repositories or “houses” of dialogues that manage every category of
customer interaction. Once the software engine is rolled out, marketers
can gradually phase in those dialogues, monitoring their effectiveness
and optimizing them until they achieve their desired ROI.
Every company’s house should eventually contain four types of dialogues that scale upward in sophistication and ambition.
Foundation Dialogues.
As their name suggests, foundation dialogues manage the fundamentals
of the customer life cycle: the marketing version of Shakespeare’s seven
ages of man. These dialogues require only basic data, such as a
customer’s name and contact information. They do not demand significant
process changes or cross-functional coordination. Examples include:
Acquisitions.
Acquisition dialogues aim to bring in new customers. They start out
in batch fashion with a targeted audience and grow more specialized as
prospects respond.
Service Follow-Ups.
Follow-ups might begin with a thanks-for-your-recent-purchase
message, a notification that an item is ready for pickup, or a simple
satisfaction check. They then unfurl into additional offers of help.
Win-Backs.
Win-back dialogues launch in response to defections: when a customer
asks to terminate her cell-phone-service plan or cancels a magazine
subscription, for example.
Level I Dialogues.
Each of these product- or event-centric dialogues is named for the
type of message that starts the exchange. (See the sidebar “Turning
Invitations into Dialogues.”) More sophisticated than foundation
dialogues, they leverage customer purchase data that may include such
information as price or deal sensitivity. Integration with inventory and
other systems requires greater IT participation. Examples include:
Event Notifications.
Notification dialogues draw on geographic data and purchase histories to invite select customers to marketing events.
Striking Up the Conversation
Repurchase Reminders.
Repurchase reminders are gentle nudges to purchasers of consumable
products—such as laser printer cartridges, paper, sneakers, drill bits,
oil, and lightbulbs—that it is time to buy again. Dialogue-marketing
systems can be programmed to correlate an individual customer’s purchase
of such a product with the known life span of that product.
Inventory and Price Alerts.
Inventory alerts announce new arrivals and promotional items of
presumed interest. For example, a shipment of Celtic folk CDs to a music
retailer would automatically trigger messages to customers whose
purchasing histories are rife with Clannad and the Chieftains. Loyal
customers can receive advance notice of price changes, having first
crack at a markdown or sale.
Overstock Outreaches.
These dialogues launch when overstocked items are about to be marked
down. Before prices are slashed, the system seeks customers who have
bought such items before and might do so again, perhaps because they are
approaching the next level of a loyalty program or because the last
such item they purchased is due to expire.
Level II Dialogues.
These dialogues draw on individual customers’ purchasing patterns or
on predictive modeling to influence the progression of the relationship
with that customer. They require a sophisticated understanding of a
customer’s history with the company and considerable cross-functional
coordination as everyone from corporate buyers to executives gets
involved. Examples include:
Defection Interventions.
Defection dialogues are triggered when the system detects early
warning signs, such as a decline in purchasing frequency. They rely on
predictive modeling and so are distinct from win-back dialogues, which
launch after a customer has already been lost.
Life Cycle Progressions.
These dialogues move customers through states of increasing loyalty.
For example, when Harrah’s customers approach the highest tier of the
company’s loyalty program, life cycle dialogues automatically contact
them with a message such as, “You are only one visit away from our Total
Diamond reward level.”
Category RFM Transitions.
These dialogues allow category managers, merchandise managers,
buyers, and product managers to respond to changes in customers’
individual RFM scores within their categories.
Brand RFM Transitions.
These dialogues allow brand managers to respond to changes in customers’ individual RFM scores within their brands.
Level III Dialogues.
Level III adds a physical element to dialogues. These on-site
interactions—although just feasible now—will likely be common in the
future, when customers carry RFID cards into stores or key their
identities into smart shopping carts. As they shop, customers will
receive personalized messages on their cell phones or PDAs, or on
screens scattered around the store. Those messages will draw on the same
data other dialogue-marketing applications use. So a book buyer passing
the cooking section might receive an alert that only $20 separates him
from the store’s Chef’s Club and its 25% discount.
That final, futuristic category of dialogue is especially appealing
because it reaches even beyond “when” to answer the question of
“where”—drilling down to the very aisle a customer is passing. For now,
though, marketers must focus on timing as they seek to bind customers
more closely.
• • •
The technology to conduct dialogue marketing exists today, and it
will only get better. Marketing organizations will need to collaborate
with their IT departments to develop or install these systems, but once
they are in place the demands on IT will decline significantly as
dialogues fire off automatically, without any need for additional
database queries. Ultimately, such systems will prove far less expensive
than trying to field a service staff large enough to handle the many
complex circumstances and evolving states that customer relationships
present.
Turning a traditional marketing strategy into a dialogue-marketing
program is a straightforward matter. Begin by identifying the
communications you make with customers in a batch fashion, then ask
yourself what events could trigger those communications to make them
more timely. Add a question or call to action to each message, and
prepare a different treatment or response for each possible answer.
Finally, create a series of increasingly urgent calls to action that
kick in if the question or call to action goes unanswered.
Companies that blast frequent, irrelevant messages dilute their brand
equity. What customers want is great service and a consistently
excellent experience across all channels. For those reasons, we believe
that many elements of dialogue marketing will be ubiquitous in five
years. Companies that adopt the dialogue model early can rise above
today’s unwelcome din and become not just the voice that customers hear
but also the one they listen for.
Chris Michael Wanzala (
Chriswanzala@gmail.com)
is the founder, Chairman, and Managing Director of Global Media.
