The End of Direct Response As We Know It

[This was a keynote speech I gave at a direct response marketing conference in 1997. It was the last time I was ever asked to speak at the conference in any capacity.]

When I was asked to speak here, I hesitated because first and foremost I am not a public speaker and secondly I was not sure how a topic like “The End Of Direct Response As We Know It” would be received at a direct response convention. But I believe the challenges ahead for anyone using direct to consumer marketing methods are as profound as any in the history of our industry. How we respond to the challenges will dictate the future course of our industry.

Challenges and how we respond to them is what business is all about. This reminds me of a story about a town that only had three stores in the entire town. They were all located on one street. To make matters even more difficult, these stores were lined up three in a row, side by side by side. They were all friendly competitors until the store on the extreme left decided he was going to change the rules of the game to get a competitive advantage and he posted a huge sign that stretched across his entire front window….ROCK BOTTOM PRICES.

This threw his two competitors next to him into somewhat of a frenzy because they were at a considerable disadvantage and did not know quite how to respond. A week went by and then the store on the extreme right figured he would respond and fired the next salvo. He posted a huge sign in his window, stretching from one end of his front window to the other … LOWEST PRICES IN TOWN… Now the store in the middle was in a fix… ROCK BOTTOM PRICES to the left of him, LOWEST PRICES IN TOWN to the right. He didn’t quite know what to do. And then one day he figured out a way to meet his challenge. He printed a full length banner and hung it across his entire store front. Each of the ends of the banner extended all the way to each end of his building, nearly touching each of his competitors’ property. His sign read… MAIN ENTRANCE.

In many ways I feel we are all like the store in the middle with competition to our left and competition to our right, and the specter of decreasing margins facing us. What we need to do is find a clever way to meet our challenges. We must figure out what banner to place on our storefront.

Just as the middle store saw his entire retail world changing, the Direct Response industry’s world is changing just as dramatically. This change is what this talk is all about … The end of Direct Response as we know it. So, let’s take a look at what is to the left of us and what’s to the right.

The first thing one notices is how the competition landscape is changing. Where direct response was once the exclusive domain of entrepreneurs, now the new entries in the DR industry are coming from well healed Fortune 500 companies. These are the companies that are shaking the very economic assumptions of the direct response business. They have larger objectives than simply making a profit for each order generated from the television direct response campaign.

I sincerely believe that those companies that must live or die with the profitability of their direct response campaign are quickly becoming a dying breed. If you need to have a Cost Per Order that yields significant profitability… you should probably rethink your business plan. Years ago it was common place for a company to air commercials touting their latest widget and reap large profits from a well crafted DR television campaign. Competition wasn’t as stiff and there was plenty of premium cable time to sell one’s wares.

These were the times when it was common for people to define themselves as “Direct Response Companies”. Some of us are nostalgic for the times when chances for profitability from a television campaign were one in four and the chances for a smash hit were one in seven. What are the odds of success now?

I was a co-owner of a fulfillment house for over ten years which gave me a unique perspective because we annually fulfilled hundreds of new products that were advertised on television. Each year we noticed fewer and fewer campaigns that survived the anxious moments of the test phase.  By the time my interests were sold in the fulfillment company, there were less than 1 out of 30 offers that even made it past the test phase. We also began to notice that campaigns that made it into roll out were somehow different…  It was not so much that the products were so much different, but the companies themselves were different.

Before we define what these noticeable differences were, let’s take a look at what is driving the changes in the direct response industry today.

If you have marketed any products via direct response recently, chances are you have heard from your media agency… “Avails are tight right now.” I call this the media mantra.  Of course the availability of time is tight, there isn’t enough good quality time to go around. We have more and more cable and viewing choices… which means a more and more fragmented and smaller viewing audience. And yet, the offers by self described direct response companies still keep coming, one after the other. This rush to test new products is just one reason that media rates continue to escalate.  How high are the rates?

In the immortal words of Johnny Cash… “They’re 4 feet high and risin'” Each media rate increase brings us closer to The End Of Direct Response As We Know It.

So it seems that a major economic pressure facing our industry is an irrational escalation in media rates. It is “irrational” in the sense that rates are no longer predicated on performance. In the past, what distinguished direct response television advertising from other advertising was its devotion to accountability. This accountability and measurability could be counted on to keep media rates at “rational” levels. But now, with companies utilizing direct response for broader objectives other than cost efficient CPO’s, we seem to be experiencing a never ending escalation in direct response rates. This is so even as order response rates are declining for reasons we will discuss shortly.

Escalating DR rates are being driven by new entrants into the industry, eager to market their products by merging image advertising with a direct marketing component. This may be as simple as posting an 800 number on screen to generate leads. Pharmaceutical companies are just one type of new entrant making large commitments to DR. Upjohn alone spent $500 million in direct marketing in 1996. Why?

First, they discovered that DR could be used to sell more than miracle cures for impotence. Secondly, they discovered that by placing an 800 number on the screen that they could lower their advertising rates, increase the length of their commercial time, and establish a one on one relationship with users of their products.

In addition to pharmaceutical companies touting their wares on television and in print, we have other large Multi-national companies like Toyota and Ford investing heavily in DR to generate leads which is designed to create traffic at their local dealer network.

These well heeled competitors are shifting their budgets away from straight “image” advertising to measurable, DR advertising.  They are purchasing up to 5 times more air time without increasing their budgets at all!

This change is not necessarily welcomed by the owners of media. If cable networks have been used to getting $20,000 for a :30 “image” spot and now they have to sell a :60 spot to that same advertiser for $5000, they lose considerable income. Owners of media are not exempt from the economic realities facing the industry.

Cable and Broadcast networks sell more and more time for less total revenues to them. The first casualty of these well heeled competitors entering the business bidding up media rates, is PI time. PI used to be a key way in which we marketers lowered our risk. This was Direct Response as we knew it.

Now we see such former bastions of PI like the Turner Networks completely eradicating the notion of PI. Earlier this month we were notified by our PI agency that the Turner Networks would no longer accept PI advertising. This makes economic sense for them as long as there are enough marketers willing to pay escalating media rates regardless of the efficiency of media.

Cable and Broadcast networks, eager to recover the loss of “image” advertising revenue have had to raise the water level on their lowest rates. Media rates can only go as high as people are willing to pay. As mentioned previously, many companies marketing via direct response today are willing to pay more for media because they do not necessarily have to turn a profit with their DR campaigns.

So, if many of today’s companies marketing via DR have larger agendas than simply turning a profit per order; what are they? For one new comers are using direct response for missionary purposes to create brand awareness. The other major objective of direct response is to drive retail sales. This makes the marketer who must turn a profit on the DR campaign at a distinct disadvantage.

So, to our left we see looming these large, multi-national companies entering the DR business and changing some of the most cherished economic assumptions of the business. What do we see to our right?

Well it seems that those very companies who in many ways owe their existence to DR … the Cable Networks… are now getting in to the business of competing with marketers for their own time.

Cable Networks like BET, A&E, TDC,TWC, Lifetime, Family Channel, and others are now using their air time to extend or expand their brand. They use their air time to sell everything from audio and video to skin conditioners. Even the most staid of organizations, ABC, NBC and CBS are getting into the business of Direct-to-Customer sales.

Now if you are a partner with someone who owns their own media, that’s great for you. But if you have been buying time, slugging it out as rates climb, and your media supplier begins to compete with you… this is serious business.

So, to the left of us we have large multi-national companies who are not necessarily CPO driven and to the right of us we have the people we have subsidized climbing into marketing ring and hitting us squarely in the jaw… now who else is lurking?

Another serious change leading to the “END of Direct Response As We Know It” is the change in DR advertising agencies themselves. In what is almost a dirty little secret, more and more DR agencies are getting into the business of offering their own products.  Some agencies at least have created new companies but others simply make partnership deals. Others take complete ownership of products to market and compete with their clients. This is one way in which traditional direct response agencies are responding to the new realities.

You may ask yourself… so what! Well, if a Persian Gulf War started tomorrow or we, heaven forbid, had another OJ Simpson trial, and if you wanted to sell your product on CNN or Court TV, you would soon know what difference it would make if your Agency was marketing a product.

Time is not infinite. There are only so many CNN and Court TV avails and your agency may only have so many spots allocated to them…the temptation for a conflict of interest to arise is too great to avoid.

Once again, if you are making a partnership with an agency-it may work for you. If not, agencies getting in to the DR marketing business inherently changes the nature of the relationship between you as a marketer and them as an agency. Economic pressures caused by a dysfunctional industry creates many unusual responses. What I mean by a dysfunctional industry is one that no longer follows the same rules it has historically followed.

Direct response media rates are no longer a function of efficiency as we have already noted. This creates economic pressures for everyone, including agencies who have traditional clients that need efficient, profitable CPO’s. This is one reason that drives many agencies into creating these new relationships.

While I am on an agency kick, let me tell you another dramatic issue that has arisen due to economic pressures. Many agencies, especially in the Infomercial end of our business, own or control media time. If your agency owns their own time, at minimum, you should know this. You need full disclosure from your agency. In what I believe to be one of the most monumentally absurd practices is for your agency… who is supposed to be your agent…to also sell you time they own.

How can an agency negotiate with itself? If they represent you, it is their responsibility to negotiate on YOUR behalf… not their behalf. I won’t go into this anymore now but it is my opinion that relationships are best served when both parties share the same agenda. This particular practice is just another symptom of a dysfunctional industry.

So now that we’ve looked to the left of us, to the right, and even in our own stores we see new relationships and increased competition everywhere. Why should competition in and of itself mean an end to direct response as we know it? The simple answer is that it doesn’t.

The industry is being changed by more than just increased competition. The direct response industry is being transformed by attitude. The new breed of marketer is not just defined by his pocketbook…but by his attitude as well.

I’ll never forget the time when a prominent DR agency was giving me important advice when we were marketing a video.

“Jaffer…you have to remember that the person buying your product is one step removed from a retarded chimpanzee. You gotta talk to them like that.”

Rest assured, the new breed of marketer is not coming in and believing the person that is buying their product is one step removed from a monkey.  Instead they are more apt to think of the customer in terms of lifetime value. If profitability for them is not simply measured by the initial sales transaction, an attitude must be brought that extends beyond this first transaction.

We have spoken about how the competition landscape has had an effect on media rates, now let’s take a look at the economic landscape of the direct response television industry itself. The new landscape is changing the foundation of direct response as we know it.

There is an old Hollywood adage that goes, “Nobody knows anything.” This was meant for Hollywood executives who would spend millions of dollars on movies in the hope that they would catch a hit movie. This adage is even more true for DR TV at this stage in the development of the industry. Nobody knows what is going to be a hit anymore.

With the success rate of DR TV campaigns plunging annually, and the predictability of that success getting more uncertain…we are in a new ball game. The industry is mirroring a new economic model that resembles the forecasting of the Stock Market, the weather and Hollywood hits. The economic model is “chaotic.”

We won’t go into the details of Chaos Theory today but the basic application of the principles of Chaos is that our economic system is seemingly random and small changes in the information cascade can have dramatic effects in the outcome of a marketing campaign. The system appears random due to the phenomenal increase in the complexity of the system.

The often used example of chaos theory is that a butterfly flapping its wings in Japan can set off a chain reaction that leads to a hurricane off the coast of Florida. Now before you start scratching your head and say…”What does weather forecasting have to do with Direct Response…” let’s examine our industry at a glance.

Presently we have more than 70% of the households passed by cable, over 85% have VCR’s, over 13 million people have internet access and over 7 million households have satellite dishes at home.

What this all means is that consumers now are inundated with information and choice. I was at my sister’s house flipping through the channels on her satellite dish and I honed in on the Farm Channel. This was an entire channel devoted to farming! This exploding choice not only fragments the mass consuming audience into niches, but makes each individual’s decision making process more complex and more difficult to predict. To be sure, a hit campaign is ultimately determined by the collective effect of many individual human decisions. If individual human decisions are affected by exploding alternatives beyond our control, it stands to reason that a major challenge for all marketers is to rise above the clutter. If you are a traditional “mass marketer”, which is what DR used to be, the cost of media is getting higher to penetrate the de-massified audience. The information cascade is getting more unstable and unpredictable due to this exploding choice.

The more choices consumers have, the more unpredictable they become. This is largely because it becomes more difficult to control the information cascade that influences success.

Does anyone out there really believe that the “Tickle Me Elmo” phenomenon last Xmas was predictable? As direct marketers, we have a goal to influence the information landscape as much as we can to create a hit DR campaign. If you are only using television to do this, you are probably in big trouble.

Those marketers who hold on to marketing in the same manner as in the past are clinging to a model that doesn’t exist anymore.  The economics of letting DR campaigns “take root” are too expensive. What I mean by this is that in the past, a marketer could stay on the air and build frequency of impressions, which is certainly a component in influencing the information cascade, until the campaign could “catch on”.

With escalating media rates, promotions are often killed before they get a chance to create a buzz. Only those exceptional promotions that come out of the gate as runaway hits survive.

It is hard to believe, but once upon a time it was possible to predict which promotions would come out of the gate as runaway hits. The components of hit campaign were broken down into formulas that still survive into today’s Direct Response thinking.

The end of direct response as we know it means that if someone believes they can predict which products are hits, they are kidding themselves. The multitude of choices and increased complexity means that chaos has been ushered in and chaos does not lend itself to simple, discernible formulas.

Prediction has become mystical… not scientific. When the mass market was not fragmented into dizzying choices, the DR process, which product selection was just one process, could be broken down into formulas to create hit campaigns. But today, we need to glean the hidden connections that are buried within our chaotic industry by utilizing our intuitive capacities. This does not mean that we need to pick up the latest copy of Shirley Maclain’s New Age book on channeling. Complexity ushers in the need to conduct business in ways that do not lend themselves to neat formulas. Even scientists recognize the need for intuiting hidden secrets of success.

Jonas Salk, the discoverer of the polio vaccine wrote a book about how science needs to be conducted in today’s environment. He could be talking about more than just science, he could be talking about how we should be conducting business. He wrote:

“A new way of thinking is now needed to deal with our present reality. Our subjective responses [and here he means our intuition] are more sensitive and more rapid than our objective response.

Jonas Salk was writing about how the pursuit of science itself cannot be reduced to formulas. Complexity in any system, when it crawls over the edge to chaos, does not lend itself to control or simple prediction. He is suggesting that we need to intuit our way through the information swamp.

This is extremely unsettling for any marketer or investor who is putting up their own money. Worse yet, try going to a bank to borrow money and tell them, “I have a great product but I am not sure if it will sell…in fact nobody know if it will sell” I doubt that any investor or bank would take solace in the adage…Nobody knows anything. They will not be persuaded any more by your “feeling” either.

Once upon a time marketers could control the information cascade due to consumers’ collective attention being  directed toward fewer informational outlets. Consumer tastes were less fragmented as well. Consumers were more connected with each other through their limited information choices.

In today’s marketing world, the “collective mind” is harder to glean. The direct marketer cannot hope to control information filtering in to consumers. Incidentally, I believe this is one reason why the government is having so much trouble with discontent bubbling under the surface. They are having as much trouble controlling the information cascade as marketers. Everybody must deal with diversity and fragmentation which has ushered in a world of uncertainty in which many believe is hopeless to tame.

So, does the end of Direct Response as we know it mean the end of Direct Response? Absolutely not. It only means the end of direct response for those who cling to the old way of thinking…for those who fail to respond to the challenges to the left and right of them…

The fragmented, de-massified audience cannot be controlled as I said before any more than the weather can be controlled. But it is not the same thing to say that we, as direct marketers, cannot influence the information cascade.

This descent from control to merely influence is humbling because it means that we have more uncertainty and increased risk. If one is in the television, Direct Response business and you are only using television commercials to influence the information landscape, then the odds are overwhelming that failure will result.

The end of Direct Response as we know it is ushering in the end of television direct response as a stand alone business. It doesn’t make economic sense. So, what are the choices ahead for the television direct response industry?

We see the changes happening as the economic pressures drive creative attempts to meet the challenges of influencing the collective mind. More companies are using print, inserts, web sites, radio, home shopping outlets, retail outlets, outbound telemarketing, etc. all in the hope of influencing the information cascade to the point of hitting a home run.

Television direct response companies used to believe, and many still cling to this notion, that a product cannot be at retail and still be a viable product to be sold on television.

Conversely, many retailers used to think that products sold on television hurt their sales since these were sales that would presumably go into their stores. Today, retailers routinely acknowledge the benefit of a direct response campaign, be it in print, radio or television.

Although no one can quantify the exact effect of a direct marketing campaign has on retail sales, it is undeniable that a positive effect is achieved. I will also go out on a limb by saying that a retail presence can also have a positive effect on your television direct response campaign as well. Some will say this is heresy but with the Riverdance video DR campaign, it does not appear that we have been hurt one bit by the retail avalanche that continued to come down the marketing mountain.

We believe that all marketing initiatives have a sort of halo effect that casts its glow from one initiative to the other. Each initiative helps influence the information cascade by increasing the frequency of impressions for a product. The net result is positive not only the campaign, but for each participating marketer in the campaign.

Television Direct Response is being transformed from a stand alone business to one that is just a phalange or segment in a total integrated marketing approach. Television Direct Response used to be a business, capable of standing on its own, but now is becoming only one piece in the puzzle of an entire marketing picture.

It takes an integrated marketing approach to influence the fragmented audience’s buying habits. Television direct response is just one form of direct marketing, which is just a subset of a products’ overall marketing campaign.

Earlier I noted that direct response was now serving larger objectives. A campaign that has missionary purposes that creates brand awareness is another way of saying that direct response can be used to influence the information cascade.

In addition to developing simultaneous distribution channels in the hope of creating an integrated marketing campaign, we think it is time to truly diversify and develop one’s direct marketing business. Direct response television advertisers have often ignored the concept of a database, believing that once a sale was made to the consumer, that was the end of their relationship.

If any of you out there come from a catalog direct marketing background, the term “back-end” marketing means developing your database of buyers by remarketing other products to them. In the DR TV industry, Back End marketing has been relegated to alternative markets in which to market your product.

The idea that you can develop your database and continue to make money from the same people who originally purchased from you rarely gets beyond the outbound telemarketing campaign stage.

If you make the initial sales transaction a pleasant experience for the consumer, it is easier to sell them another product than to find a new buyer. Studies have shown that someone who has purchased a product from you is seven times more likely to buy a new product from you than a non-buyer. I believe that those companies who will build a database, and not just a list, and then build long term relationships with their customers are at a distinct advantage.

Remarketing begins when they first call to order on the phone. That is when you try to upsell or cross sell another product. It should continue with a bounce-back piece that accompanies the delivery of the original order. Also mailings, brochures, and outbound telemarketing solicitations all can be additional revenue streams. Each sales transaction should feed into one database.

You can develop an entire business that is profitable simply by paying attention to developing your relationship with the people buying your product. Obviously you need to first make the original sale, but the more money you make on the “back-end”, the more money you can afford to spend on media to get more new customers.

All of what I have been saying so far is that the direct response television industry cannot continue marching blindly forward using the same formulas, attitudes and methods that have worked in the past.

The end of Direct Response as we know it means that those of us who remain complacent and fail to open our eyes to what is going on means we will not survive. The old guard being replaced with a new breed whose energy is overtaking us. General George S. Patton wrote an obscure treatise called; The Secret Of Victory in which he outlined the same issues that are before us when we speak of meeting challenges. In 1926, Patton wrote the following words, The white hot energy of youth, which saw in obstacles but inspirations, and in the enemy but the gage to battle, becomes too complacent with age…Knowledge is power, but to a degree only. Its possession per se will raise a man to mediocrity, but not to distinction.

It is up to each and every one of us to view the obstacles before us as inspirations and our competition as a means to gage our wits. Unfortunately there are no rules for us to follow and even if there were, at best our possession of them would barely raise us beyond mediocrity.

I’d like to end this little talk with a quote from a noted writer on the new realities facing executives at every level. It is particularly true for our industry. Michael Ray wrote:

If you sense that a profound change is happening in the business world, but you’re not quite sure what it is; if you’ve noticed that old visions and strategies don’t seem to work anymore; if you need to learn new ways to lead… you are not alone.

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