Harnessing E-mail

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    Marketing Practice

    Harnessingthe Power of E-mail

    How to Get Real Impact

    From Online Communications

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    Overview

    E-mails speed, cost, and effectiveness (response rates in excess of 15

    percent for the most targeted campaigns) are securing its central role in

    the new marketing environment. But marketers must act quickly on this

    opportunity because e-mails power will erode as the medium matures.

    We see four key strategies you can use to harness e-mails potential:

    1. Aggressively build out your e-mail list.

    Be sure that your Web site can capture visitors e-mail addresses.

    Look to capture e-mail addresses via other channels.

    Carefully test rented lists before making a major commitment.

    2. Add more customer relevance and value to e-mail campaigns.

    Ask customers what they want.

    Analyze past behavior to help customize content and contact

    frequency.

    Enhance your overall value proposition with e-mail.

    3. Integrate e-mail into a multi-channel communications strategy.

    Create a common marketing data structure.

    Use insights from other channels to tailor e-mail content.

    Run tests to evaluate the optimal mix and spending across channels.

    Link e-mail to your broader marketing program.

    4. Develop a repeatable, scalable test and learn process.

    Run basic tests to analyze performance, and then roll out the

    best practices.

    Use a sound understanding of each customers value to tailor

    your approach.

    Track performance with a continually refined set of metrics.

    Set up a closed loop IT infrastructure to measure performance,

    ideally across channels.

    Align the organization and processes to support closed loop testing.

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    The last 2 years have brought considerable focus on the power

    of e-mail as a marketing communications vehicle. Two key

    factors have been driving this interest.

    The first is the dramatic response rates that have been achieved

    by a large number of companies. For example, many have

    achieved e-mail response rates in excess of 15 percent for themost targeted campaigns, versus 1 to 3 percent for traditional

    direct mail. A large number of companies also report benefiting

    from a branding effect, where consumers do not respond

    directly to the e-mail, but still end up purchasing more than

    they would have if they had never received the e-mail. Studies

    show that the branding effect can amount to approximately 20percent of the overall value of an e-mail campaign (see Table 1).

    The second, and perhaps more important, factor is e-mails power

    to help companies improve their process and relationship benefits

    which, together with functional benefits, form the three key dimen-

    sions for differentiation.1 At the process level, companies are able

    to use e-mail to simplify and improve the way they interact with

    customers. For example, Amazon was an innovator in simplifying thetime-consuming online buying process with its one-click shopping

    system, and a number of airlines such as United and Northwest have

    used e-mail to simplify, improve, and reduce the cost of flying and

    upgrade notification processes.

    Companies are also using e-mail to build stronger relationships with

    customers over time. Hewlett Packard, for example, has successfully

    built relationships with its customers after purchase, and has driven

    additional sales by sending personalized follow-up e-mails toproduct owners with recommendations ranging from preventative

    McKinsey Marketing Solutions 1

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    McKinsey Marketing Solutions 2

    maintenance suggestions to targeted offers for extended warranties.

    P&G has developed its reflect.com range of cosmetics in part by

    sending targeted e-mails to consumers with beauty and health tips.

    One campaign, for example, sent women, who said that they spent lots

    of time in the sun, tips on how they could prevent damage to their skin.

    In addition to these consumer-oriented benefits, e-mail is faster,

    cheaper and more information-rich than traditional direct-marketing

    approaches. It enables companies to construct and launch multipletests, measure the results, and make adjustments in near real time.

    Studies show that more than 80 percent of e-mail responses are

    received in the first 48 hours, and some companies measure, track,

    and optimize campaigns on an hourly basis. These benefits can be

    achieved through a medium that costs about 3 to 10 per e-mail,

    significantly less than regular mail (75 to $2) or telemarketing ($1 to

    $3). Furthermore, e-mail campaigns provide not only response rates

    but also information such as bounce, open, and unsubscribe rates.

    Average sales if

    no e-m ails sent

    A ggregated Exam ples

    D irect response

    to e-m ail

    0.17

    0.04 0.60

    0.39

    Branding effect

    from e-m ail

    Average sales

    if e-m ailed

    Table 1 E-Mail Has a Second-Order Branding Impact on Sales

    Dollars

    Source: Digital Impact; McKinsey & Company

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    McKinsey Marketing Solutions 3

    It seems clear that many companies are starting to think that e-mail

    will become the killer marketing application of the Internet, andmany especially those with strong direct marketing units are

    actively looking at how they can make e-mail the cornerstone of their

    marketing communications programs. But for all e-mails strengths and

    advantages, clouds loom on thehorizon that could dramaticallydiminish

    the effectiveness of the medium. So its important that companies act

    now to develop and strengthen their e-mail marketing approach.

    The Challenges AheadThe power of e-mail will inevitably erode as the medium begins to

    mature. Already, response rates have begun to decline across many

    industries (see Table 2). A number of factors are likely to continue to

    drive this trend:

    New media fatigue. Interest in new media often wears out quick-

    ly. A classic example is banner ads response to regular banners

    was initially maintained by rich media, but response rates soon

    dropped off as consumers became tired of this new media. We are

    seeing a similar trend today with e-mail as the gap in response rate

    between html and text e-mails narrows.

    Crowded e-mail boxes. Consumers received on average three

    marketing e-mails a month in 1999. This volume is expected to

    soar to 130 a month by 2005, according to Jupiter, as companies

    recognize the economic power of e-mail marketing. With this

    clutter, however, it will be hard to sustain the current rate of

    opened e-mails (40 to 60 percent). Financial services companies

    have already seen their open rates drop 10 percentage points

    from the third to fourth quarters of 2000.

    Consumers will simplify their interactions. The majority of

    online consumers are attracted by the ease and simplicity of the

    Internet, rather than by the need to comparison shop. As a result,

    the growing e-mail clutter is likely to prompt them to narrow their

    incoming e-mail field to only a few trusted companies.

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    McKinsey Marketing Solutions 4

    Emergence of filtering software. Consumers will respond to the

    commercial onslaught through the use of filtering software, such

    as the one Yahoo! has in place, to automatically screen unwanted

    messages from predefined senders.

    Constraining legislation. Tough new privacy laws and continued

    development of legislation will make it increasingly difficult to

    build customer databases.

    Maximizing the Value of E-MailGiven these challenges, marketers must move quickly. Our experience

    has shown that leading companies are using four key strategies to

    fully develop the marketing potential of e-mail:

    1. Aggressively build out your e-mail list. Now is the time to rapidly,

    but efficiently, build a robust database of e-mail addresses of both

    customers and prospects.

    Ensure that the Web site is able to capture e-mail addresses of

    both visitors and customers. Enabling techniques include one-step

    Brick and

    m ortar apparel

    Financial

    services

    6.9

    3.8

    8.07.5

    6.25.7

    8.38.7

    Technology Travel

    Table 2 Dropping Click-Through Rates by Industry

    Source: Digital Impact; McKinsey & Company

    3Q 2000Average percent 4Q 2000

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    McKinsey Marketing Solutions 5

    registration on the home page and using the e-mail address as the

    log-in name for any registration process. Northwest offers frequent-flyer miles in exchange for consumers entering their e-mail address

    on the Web site and agreeing to receive messages.

    Look to capture e-mail addresses via other channels, such as call

    centers, catalogue operations, and retail stores. Capturing e-mail

    addresses through multiple channels allows both a richer e-mail

    directory and the ability to link customers across multiple channels.

    For example, AT&T Wireless captures e-mail addresses by

    informing customers during service calls that they can check theiraccount status using their e-mail address and a log-in ID.

    Carefully test rented e-mail lists before making any major commit-

    ment, since they are often unproductive. Response rates to names

    acquired from lists are generally much lower than those collected

    from a companys own site (see Table 3). Once the costs of buying

    these lists is taken into account, the analysis suggests that in many

    cases it is not economical to rent names from a list for marketing

    purposes. Therefore careful testing of rental lists is required beforeany significant investments are made.

    2. Add more customer relevance and value to your e-mail campaigns

    to maximize the response. Developing relevant e-mail content and

    offers are the best ways to ensure that consumers will continue to interact

    with you. Personalizing content and managing contact frequency can

    improve e-mail response rates by 40 to 80 percent.

    Ask customers what they want. Many management teams struggleto define the will of the customer in terms of desired content,

    frequency of contact, and more. Leading players take a different

    approach: they ask the customer to create their own profile including

    desired content and contact frequency. While great care must be

    taken since customer self-reported data is often not a reliable

    indicator of true preference, especially in a new field, it nevertheless

    can help to drive future customer communications.

    Customize content and contact frequency by analyzing past behavior.Past behavior on the Web site, or purchase history, is often a good

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    McKinsey Marketing Solutions 6

    indicator of customer interests. Analytic techniques such as collab-

    orative filtering can generate targeted content recommendations.

    As for contact frequency, e-mail lists inevitably contain a small

    proportion of active names, and a larger number of dormant

    names, each of which requires a different approach. Understanding

    how consumers respond to e-mail campaigns via a Recency/

    Frequency analysis allows companies to effectively segment

    customers by value and target them with different approaches.

    Enhance your overall value proposition with e-mail. Often, the highest

    impact e-mail programs not only increase short-term sales, but also

    significantly enhance the value proposition and even redefine the

    company-customer relationship. For example, use e-mail to deliver

    tailored information to customers; to publicize sales, overstocks,

    and special events in physical stores or on the Web; and to notify

    customers of time-sensitive events. Leading apparel retailers like

    Lands End notify targeted customers via e-mail about the arrival of

    new items and overstocks that match their self-developed profile.

    C o-operative

    and viral

    A ggregated Exam ple

    O nline

    registration

    8.1

    6.2

    4.34

    14.5

    8.7

    Incentive Rental list O ther

    Decreasing name quality

    Table 3 E-Mail Response Rates Vary Widely by Name Acquisition Source

    Click-through rate, percent

    Source: Digital Impact; McKinsey & Company

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    McKinsey Marketing Solutions 7

    3. Plan now to integrate e-mail into a broader multi-channel

    communications strategy. As e-mail is adopted as a key tool forcommunicating with customers, taking proactive steps to integrate it

    with other channels is vital.

    Create a common marketing data structure. Make sure that all

    e-mail campaign data, whether internal or from a third-party

    e-mail vendor, can be integrated with other customer and marketing

    campaign data. This is the foundation for managing integrated

    communications.

    Use insights from other channels to tailor e-mail content. Insightsfrom customer interactions with channels such as your Web site or

    call center can be used to tailor e-mail messages. For example, Web

    site browsing behavior could indicate preference for certain types

    of products/information that should help in tailoring e-mail content.

    Evidence of a serious complaint going into the call center might

    warrant a change in tone of a subsequent e-mail.

    Run multi-channel tests, where feasible, to evaluate the optimal mix

    and spending across channels. For example, test and measure e-mailin a market with TV advertising versus one without, or in a market

    with catalogs versus one without, or experiment with combinations

    of direct mail and e-mail to determine optimal drop frequencies and

    interactions. These techniques will allow you to re-evaluate and

    enhance your marketing spending both online and offline.

    Link e-mail to your broader marketing program in a way that

    maximizes overall customer value. There are many opportunities

    to increase customer value by redefining overall business processes.For example, use e-mail as a lead-generation tool to initiate

    appointments for the in-person sales force, thus reducing customer

    acquisition costs.

    4. Develop a repeatable, scalable test-and-learn process to

    maximize the value and share of wallet of your customer base.

    The ability to systematically test and learn is a hallmark of companies

    that steadily increase the value of their e-mail marketing efforts.

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    McKinsey Marketing Solutions 8

    Run several basic tests, measure and analyze performance, and

    roll out the identified best practices to maximize value from e-maillists. Typical tests vary subject line content, message content,

    cadence, number of offers, and overall layout. While there are few

    generalized best practices in e-mail campaign management, quickly

    determining what does and does not work for your business can

    dramatically improve results.

    Over time, tailor your approach based on a sound understanding of

    the value of each customer. By segmenting and understanding the

    true lifetime value of customers, companies can better determinewhat they can afford and need to do such as focusing expensive

    offers on high potential targets to keep customers coming back.

    More broadly, this detailed understanding of customer value will

    allow you to align and focus around high-value customer groups,

    thus significantly improving the value of your customer base.

    Develop and continually refine a set of metrics to track performance.

    While the click-through rate (CTR) is a directional indicator of

    campaign performance, metrics based on sales and profitabilityare the real indicators of success or failure. Several companies have

    found that test campaigns, while doubling CTR, increase sales

    ten to fifteen times, dramatically improving ROI of the campaign.

    Thus, as marketing analysis and knowledge become more sophisti-

    cated, metrics must be enhanced to more closely reflect actual

    customer value. As metrics develop to approximate true lifetime

    customer value, reducing unsubscribe rates becomes one of the key

    performance levers which is not necessarily the case when eache-mail campaign is analyzed separately.

    Set up a closed loop IT infrastructure to measure performance,

    ideally across channels. Ensure that your in-house or third party

    e-mail system can not only track responses, but also link e-mail

    campaigns to sales data and other critical customer information,

    especially in other channels. The IT infrastructure should also be

    able to efficiently track bounce backs and process unsubscribes.

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    McKinsey Marketing Solutions 9

    Align the organization and supporting processes to support closed

    loop testing. The greatest challenge in developing an effective testingprogram is related to organization and processes, not technology.

    Organizing such an effort with program managers focused on each

    step of the customer lifecycle, and developing rapid-response

    processes, are critical to building a high-performance e-mail

    marketing group.

    The speed, cost, and effectiveness of e-mail are helping to ensure its

    central role in the new marketing environment. However, the differencebetween companies who use e-mail well and those who dont is

    growing, driven by the wide range of strategies and approaches being

    deployed. For example, the gap between top- and bottom-quartile

    performance on click-through rates has grown from 1.5 times as

    successful to 3.4 times as successful in 6 months. We believe this

    difference will continue to grow, as only the top performing companies

    create e-mail marketing campaigns that are sufficiently targeted,

    relevant, and interesting to warrant consumers attention. In order to

    become and remain one of these top performers, companies must

    develop and implement a powerful and engaging e-mail strategy that

    fits tightly with their multi-channel marketing program.

    1 For a more in-depth discussion of functional, process, and relationship benefits, see Marketing in 3-D:Functional, process, and relationship benefits are the hat trick of contemporary marketing.(The McKinsey Quarterly, 1999, 4th Quarter).

    David Harding is a Principal and Doug Bewsher is an Associate

    Principal in McKinseys Marketing Practice

    This article is partly based on joint research carried out by

    McKinsey & Company and Digital Impact, a leading provider

    of online direct marketing solutions for enterprises.

    For additional information or copies,please call (203) 977-6800 or e-mail

    [email protected]

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    Marketing Practice

    02.2001

    CopyrightMcKinsey&Company

    http://marketing.mckinsey.com