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MARKETING TO THE

DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 5
T
HE RAPID DEVELOPMENT of interactive media such as online services
and the World Wide Web has taken many consumer marketers by
surprise. While some marketers are still wondering what to do and how
to do it, others are moving forward but oten with mixed success.
Our recent analysis of 95 Fortune 500 consumer marketing companies with
product or service-related Web sites reveals that consumer marketers fall
far short of leveraging the full capabilities of interactive media. While over
90 percent of all the digital marketing applications examined provided
product or service information and featured basic e-mail capabilities, only
about half ofered links to other sites and non-product-related content, and
fewer than half provided any sort of interactive content, such as a game or a
diagnostic requiring some user input. Most revealingly, only a handful of
the examined sites made an efort to seriously collect information about
their users, and fewer than 5 percent provided an opportunity to allow
user-to-user communications, a unique and one of the most popular
characteristics of interactive media.
ONLINE MARKETING
Lets admit it: most Web sites are duds
The task is to attract and engage, not to price and promote
Relating to chiliheads
Should your online marketing be a separate unit?
Alexa Kierzkowski, Shayne McQuade, Robert Waitman, and Michael Zeisser are consultants in
McKinseys New York oce. Copyright 1996 McKinsey & Company. All rights reserved.
Alexa Kierzkowski Shayne McQuade
Robert Waitman Michael Zeisser
Most consumer marketers therefore still approach interactive media through
the static, one-way, mass-market broadcast model of traditional media. The
results of such an approach are uninspiring applications that fall far short of
the new medias potential. Shrewd marketers will instead learn to create
entirely new forms of interactions and transactions with consumers. To do
so theyll need a new marketing model more appropriate to the new consumer
marketspace* and new approaches to integrating interactive media into their
business system and marketing programs.
We believe that digital marketing is an attractive proposition for more
consumer product or service categories than is typically assumed. In fact
most consumer marketers be they in nancial services, travel, music, and
books, even food and beverages should be exploring how to capture the
digital worlds business opportunities.
Evolutions grip
For marketers of consumer goods or services, the emergence of a new consumer
marketspace is no longer a matter of speculation or hype. In the consumer
world, users of many popular branded products subscribe today to inter-
active media at rates two to three times the national average (Exhibit 1). By
MARKETING TO THE DIGITAL CONSUMER
6 THE McKINSEY QUARTERLY 1996 NUMBER 3
For a discussion of this term, see Jefrey F. Rayport and John J. Sviokla, Exploiting the virtual
value chain, Harvard Business Review, NovemberDecember 1995 and also reprinted in The
McKinsey Quarterly, 1996 Number 1, pp. 2036.
30 25 20 15 10 5 0
Exhibit 1
Online access by heavy users of brands
Percent of heavy brand users with online access*
Office Depot
Marriott
Charles Schwab
Bloomingdales
Saturn
Barnes & Noble
Neutrogena
American Express
Iams Dog Food
Godiva
The Body Shop
Federal Express (personal)
Baileys
Fidelity
Evian
Nissan
Obsession for Men
Snapple
Zima
Pepperidge Farm Cookies
Miller Genuine Draft
VISA
US average
* Includes access to online services and the Internet
Source: Yankelovich, 1995 data
2000, there will be between
30 and 40 million of such
digital consumers.
Digital consumers are, gen-
erally speaking, attractive for
marketers (Exhibit 2). Digital
consumers are more likely
than their non-wired coun-
terparts to spend more to get
the best and to make an
efort to use new devices and
methods. Household income levels among current subscribers to online
services and Internet users are considerably higher than average, as are
education levels. Meanwhile, key technological barriers are falling partic-
ularly the speed of content delivery. By the year 2000, more than 50 percent
of these digital consumers are expected to access interactive media at speeds
ve to 500 times faster than they can today.
A back-of-the-envelope calculation, based on published estimates,* suggests
that a substantial Internet economy is emerging. Potential revenues across
infrastructure, content, and trade businesses suggest an estimated $40 to $50
billion Internet economy in place by the year 2000.
The rise of this consumer marketspace is
clearly aligned with the evolutionary pro-
gress of the marketing function from a mass-
market model to more interactive personal-
ization of goods, services, and interactions.
With interactive media, marketers can dy-
namically deliver personalized services
and content, in real time, one consumer at a
time. This is due to the unique and powerful
characteristics of interactive media: it is ad-
dressable, meaning that each user can be
identied and targeted separately; it allows
for two-way interaction; services can be
tailored for each individual customer; and
purchases can be made and inuenced
online (Exhibit 3). Capturing the business
opportunities associated with these unique
characteristics is the essence of digital
marketing.
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 7
Forrester Research Inc., The Internet Economy, September 1995.
Exhibit 2
Appeal of online consumers
Percent
Believe IQ is higher
than average
Spend more to
get the best
Like price wars
Make effort to use new
devices and methods
Bought from
catalogue in last year
Source: Yankelovich
Online Not online
67
80
78
68
73
65
54
71
48
64
On-demand availability
24-hour access
24-hour service
Addressable
Direct communication to an
individual user
Two-way interactive
Learn from direct feedback
Enable user-to-user interaction
Effective information delivery
More content than any other media
Easy to search large databases
Customized
Easily tailor communication and
products/services
Seamless transactions
Influence consumers when closest
to the transaction
Enable purchase online
Exhibit 3
Attractive characteristics
of interactive media
Where to start?
Several broad types of attractive digital marketing opportunities already
exist. In fact, aggressive players are already starting to make money with
them. We believe there are three main opportunities today:
1. The information-delivery opportunity. Marketers can use interactive
media to provide higher service and lower cost by delivering information
about products or services. Examples of marketers pursuing this opportunity
include Federal Express, UPS, and Sun Computers.
2. The relationship-building opportunity. Marketers can leverage inter-
active media to identify attractive self-selected users/prospects, enhance
loyalty by providing value-added services, and use what they learn about
their customers to customize existing or cross-sell new products and services.
Examples include Volvo, Zima, Hyatt, Fidelity, Citibank Direct, HotHotHot,
and many others.
3. The channel/(dis)intermediation opportunity. Marketers can use inter-
active media as a new channel and either go direct to eliminate traditional
intermediaries or establish an entirely new role as a value-added inter-
mediary. Examples include United Airlines, Amazon.com, Quicken, and
Shoppers Advantage.
But these opportunities are unlikely to ofer any meaningful opportunity to
those companies that fail to make digital marketing an integrated part of
their business system and marketing programs. In each of the following
examples, marketers are succeeding by closely tying digital marketing to their
core business systems.
The information-delivery opportunity
UPS provides a compelling example of how information and customer service
can be eciently provided on the Internet. Since package delivery services
are as much about providing information and customer service as they are
about delivering packages, providing timely and easy-to-use package tracking
and other related information (e.g., pricing, delivery times) is a key basis of
competitive diferentiation.
UPS has found that their site on the World Wide Web allows them to improve
quality and response time in dealing with customer information requests; it
is also more cost-efective.
This can be seen in Exhibit 4. We estimate the cost of dealing with package
tracking requests via telephone to be about 90 cents per package, whereas
the marginal cost of answering these requests on the Internet is zero. The
MARKETING TO THE DIGITAL CONSUMER
8 THE McKINSEY QUARTERLY 1996 NUMBER 3
total costs of maintaining
a Web site to answer their
current volume of package
tracking requests is esti-
mated at about $900,000 per
annum. If only 75 percent of
online package tracking re-
quests would otherwise have
been done through calls to
the 1-800 number, the costs
would have been about $2.6 million. Therefore on this function alone UPS is
saving in the order of $1.7 million per annum. As the volume of requests
continues to grow, so too will this cost saving.
The same benets realized in answering package tracking queries are
also captured for other information needs in various ways. These include
an automated cost calculation tool, online package pickup requests, and
personalized maps to display the time to delivery from specic locations.
Beyond these advantages, UPSs Web site afords them a valuable marketing
and relationship-building opportunity. UPS can use their site to learn more
about customers and on that basis tailor their services through targeted price
incentives and volume incentives, among other things.
The relationship-building opportunity
This is well-illustrated by a single-store retailer in Pasadena, California,
called HotHotHot which sells hot sauces, chili mixes, and other spicy
food. Ordinarily, the company would be limited in its distribution reach to
customers within physical proximity to their store, or to those to whom it
might reach through catalogue sales. But in creating one of the Webs rst
commercial storefronts, owners Monica and Perry Lopez succeeded in
establishing an efective direct purchasing channel that gives chiliheads
all over the globe access to HotHotHots selection of over 100 diferent
hot sauces.
The Lopezes opened their store in November 1993, and the following
summer began to plan the Web site with a design company which has
subsequently gone on to design the Web sites of Pacic Bell and Columbia
Tristar, among others. In late 1993 only 5,000 Web sites existed. The compel-
ling design of the site and HotHotHots unique product ofering sauces
carry such attention-grabbing names as Nuclear Hell and Endorphin Rush
soon commanded considerable publicity in the online world. Listing in
Yahoo!s Whats Cool and being linked from America Onlines and Intels
sites have further contributed to the sites popularity. By promoting the site in
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 9
Exhibit 4
Digital delivery of information
Example: UPS Package Tracking http://www.ups.com
Allows customers to track
packages and request
pickup online
Reduces query response
time and increases
customer satisfaction
Current annualized run rate
at about 4 million queries
0.9
2.6
Tracking costs
$ million per year
1.7
Internet-based
Phone-based
Cost savings
(estimated)
the chilihead newsgroup, HotHotHot has brought itself to the attention of
chiliheads everywhere. Since the day the site became operational, HotHotHot
has received daily orders, creating a steady revenue stream representing 20
percent of total sales. (Catalogue orders account for 10 percent, and the retail
store for the remaining 70 percent.) What is more, the site drives store trac,
with online customers from all over the United States and Europe stopping
by the store when they are in Pasadena.
The economics of marketing online work for HotHotHot and demonstrate
onlines advantages over traditional direct marketing. The store doesnt
purchase mailing lists for its catalogue efort, but rather sends catalogues
only when requested. Even with the
self-selected customer base of their
catalogue channel helping to lower
costs, marketing costs still represent
22 percent of catalogue revenue. Mar-
keting costs on the Web site amount
to only 5 percent of online revenue
(Exhibit 5).
The Web site has also proven to be a
good way for HotHotHot to learn
about its customers. Information col-
lected from users reveals that they are mostly male, and like their hot sauce
especially ery at least thats what they say in their communications. Feed-
back via e-mail is substantial. It requires an hour and a half daily to read and
respond to it, but Monica Lopez appropriately values this customer input
and regularly implements suggestions. While the HotHotHot Web site is a
successful digital marketing efort by any standards, Lopez recognizes that the
medium is still new and quite rough around the edges. But with plans to contin-
ue to rene the site and develop it into a true community of interest, the Web
site looks like it will be an increasingly integral part of HotHotHots business.
The channel/(dis)intermediation opportunity
United Connection provides an intriguing example of how digital marketing
allows companies to capture the third opportunity of digital marketing
bypassing traditional intermediaries. United Connection is sotware that
allows travelers to book their ights directly without a travel agent. Developed
by United Airlines, it is available free of charge to frequent travelers in
Uniteds Mileage Plus rewards program. Once a traveler loads the sotware
onto a PC, she or he not only has access to ight information on all major
airlines, but can also make a reservation or a booking. At the moment tickets
are sent by mail, although with the growing emphasis on paperless ticketing,
this will increasingly no longer be necessary.
MARKETING TO THE DIGITAL CONSUMER
10 THE McKINSEY QUARTERLY 1996 NUMBER 3
Exhibit 5
New channel opportunity
Example: HotHotHot, 1995
Dollars
http://www.hothothot.com
Revenue
Retail
Direct channel
Web site
Revenue
Marketing cost
Catalogues
Revenue
Marketing cost
245,000
70,000
35,000
7,800
3,500
105,000
5%
22%
The economics of such a
service are compelling for the
airline (Exhibit 6). Typically,
travel agent commissions can
amount to 10 percent of the
price of a trip. If a typical
$500 round-trip fare is pur-
chased through the service,
the airline saves $50, and
sometimes more if it can
avoid other typical travel
agent discounts or bonuses
such as overrides. Assuming
a yearly transaction volume
of about 0.8 to 1.0 million
tickets, United Airlines would save between $36 and $45 million in distri-
bution costs with its direct-booking services. Eaasy Sabre, a similar service
ofered by a subsidiary of American Airlines, could be saving the airline
about $50 million annually. No wonder then that most airlines have begun or
are reported to be about to launch similar services.
United Airlines has marketed its direct-booking service aggressively. It
advertised the availability of United Connection in many general interest
business magazines and in its in-ight magazines, creating broad awareness
among potential heavy users. Further, to incent usage, travelers earn 500
frequent yer points for every ticket purchased through the service. This is
well worth it, given the savings achieved for the airline. From a consumer
relationship-building perspective, a service such as United Connection
presents signicant benets for the airline. By establishing a direct relation-
ship with travelers, the airline can build greater loyalty, and sell more seats.
The direct-booking sotware memorizes trips frequently made, making it
easy for the traveler to book the same itinerary again at a later date. Seating
and meal preferences can be set, providing added convenience and making
the service truly tailored to individual travelers.
In summary, we believe that digital marketing is an attractive proposition for
many more consumer product or service categories. Some categories of
products or services, such as sotware or travel, are natural ts with inter-
active media (i.e., they are information intensive; transactions can be made
online; current interactive media users are heavy users). Other categories
such as automotive are well suited for digital marketing because they are
attractive for relationship as opposed to mass marketing. The combination
of both of these factors, a categorys t with interactive media and its
attractiveness for marketing-oriented relationship building, suggests a
signicant breadth of opportunity for digital marketing (Exhibit 7).
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 11
Exhibit 6
Disintermediation opportunity
Example: Travel industry
Traditional travel
agency distribution
Interactive media
distribution
Distribution cost
savings
United Connections
Eaasy Sabre
Estimated yearly
transactions
Millions
Distribution cost
savings
$ million
$70*
$2030*
6070%
1.01.2 4554
0.81.0 3645
* Approximate figures
As of first quarter 1996
Source: Literature search; McKinsey estimates
Airline distribution costs: $500 round-trip fare
How to do it?
Our survey results show that many consumer marketers approach interactive
media in the same way they might approach traditional media like television,
magazines, or even direct marketing channels. Yet there are fundamental
diferences between the two. For example, traditional media involves one-
way communication from the marketer to the customer, while interactive
media allows marketers to establish a dialogue. Further, marketing through
traditional media takes place in a mass-market environment, while interactive
media allows marketers to reach (and interact) with individual consumers.
What this means for consumer marketers is that they must build a new
model for marketing in new media environments, one that is built around
ve elements which we believe to be essential factors for success in digital
marketing (Exhibit 8):
MARKETING TO THE DIGITAL CONSUMER
12 THE McKINSEY QUARTERLY 1996 NUMBER 3
Fit with
interactive media
Potential for relationship building
High Low
High
Low
Selected
groceries
News
Software
Interactive
games
Sporting
goods
Convenience
stores
Gasoline
Insurance
Music
Books
Real estate
brokerage
Financial
services
Travel
services
Toys
White
goods
Autos
Medical
services
Consumer
electronics
Fine
jewelry
High-end
apparel
Baby
products
Exhibit 7
Categories suitable for digital marketing
Exhibit 1
Digital marketing framework and levers
What:Customize interaction
and value delivery
How:Personalized/customized
communications and
products/services
Real-time interactions
Linkages to core business
What:Attract customers to the
application
How:Audience creation
Mnemonic branding
Piggyback advertising
What:Generate interest and
participation
How:Creative programming
Interactive content
User-generated content
Transaction capabilities
What:Make sure consumers
come back
How:Dynamic content
Digital communities
Proprietary/unique content
What:Learn about consumers
preferences
How:Information capture
Continuous preference
learning
Relate
Learn Engage
Retain
Attract
1. Attract users.
2. Engage users interest and participation.
3. Retain users and ensure they return to an application.
4. Learn about their preferences.
5. Relate back to them to provide the sort of customized interactions that
represent the true value bubble of digital marketing.
Each of the ve success factors suggests a number of issues that marketers
must address. While the answers to many of these issues will be specic to a
given marketer, we are beginning to identify best practices that may guide
companies in getting more from their digital marketing eforts.
Attract
Unlike direct and traditional mass marketing, where the interaction is
essentially imposed on the consumer, digital marketing requires consumers to
voluntarily visit an interactive application, such as a World Wide Web site,
or to choose to use a dial-up airline reservation service such as United
Connection. Since the current clutter on the Internet virtually ensures that
the build it and they will come model is insucient to draw consumers,
marketers need to actively attract users in the rst place. Typically, this is
achieved by billboard advertisements and links from other sites, listings
on the whats cool services, and leveraging
existing marketing communications such as
advertising or product packaging.
Two issues merit particular consideration; rst,
the issue of branding, or what to call the
application. Based on the precedent of tele-
phone services where the success of services such as 1-800-MATTRESS or
1-800-FLOWERS is partially due to their names it may be essential to have a
mnemonic address for a digital marketing application which is easy and
intuitive for consumers to nd and remember, such as www.zima.com or
www.hyatt.com. This becomes even more important due to the need to build
digital marketing applications into the marketing mix, which means using the
same name for the interactive application as for the product or service that is
being promoted. Since problems with name availability and copyright are
already beginning to surface, all emerging and aspiring digital marketers should
take steps now to ensure the availability of their brand name on the Internet.
The second issue relates to the economics of attracting users. Simply put,
attracting users can quickly become unjustiably expensive relative to the
economic value that the digital marketing application is likely to generate in
the short term. Marketers must be careful no matter what vehicle they choose
to attract users, whether that vehicle involves ofering incentives (e.g., certain
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 13
The current clutter on the
Internet virtually ensures
that the build it and they will
come model is insucient
banks no-fee bill pay services), using traditional media advertising for digital
marketing applications (e.g., United Airlines magazine ads for United
Connection), or making new media promotions (e.g., links to other sites). In all
cases, marketers should validate the economics of their promotional activities
against their efectiveness, challenging, for example, whether the right types of
users are attracted to the digital marketing application, and whether there are
more optimal marketing vehicles that the marketer should experiment with.
For example, piggyback marketing, which involves leveraging existing
marketing eforts to draw trac to a site, is becoming increasingly prevalent.
UPS now features its Internet address at the end of television advertisements
and many advertisers list theirs on traditional print advertisements.
Engage
Having attracted users to a digital marketing application, it is imperative
that marketers engage users interest and participation to achieve an
interaction or a transaction that is, ater all, a major point of creating the
application in the rst place. This engagement stage is where too many
digital marketing applications fall short. For some applications, the exhibited
content is uninspiring, trivial, or poorly presented, while for other appli-
cations it is so sophisticated or graphic that it is simply too time-consuming
to browse given the unfortunate constraints on bandwidth of most present
Internet connections.
The key to engaging users is twofold: mastering creative programming for
interactive media (the form) and providing content that is valuable to
consumers (the substance).
Very few if any marketers have fully
cracked the creative programming challenge.
Directories such as Yahoo!, Internet-related
technology sites such as Netscape, or broad
publishing sites such as Pathnder clearly
engage thousands of users every day. How-
ever, for each of these seemingly successful applications, there are dozens of
others many developed by world-class marketing companies that fail to
engage users, oten because of the questionable quality of their creative
programming. A clear lesson learned to date is that simply transferring con-
tent from traditional media such as catalogues or co-opting direct marketing
copy usually does not work because it oten fails to create interaction. In
fact, developing content for interactive applications is becoming an expert
skill, as evidenced by the emergence of specialized agencies such as Organic
Online, CKS, Poppe Tyson, Modem Media, and many others. Marketers
who do not have such specialized in-house expertise should not hesitate to
outsource their content creation.
MARKETING TO THE DIGITAL CONSUMER
14 THE McKINSEY QUARTERLY 1996 NUMBER 3
Some exhibited content is
uninspiring, trivial, or poorly
presented, while others are so
sophisticated that they are
too time-consuming to browse
In the matter of substance, where marketers are struggling to create
content that the consumer will nd valuable, the seat auctions held by Cathay
Pacic and American Airlines on the World Wide Web may prove to be an
interesting example. Arguably, the auctions leverage many of the unique
capabilities of the Internet while meeting the objectives not only of
consumers but also of the airlines. Other examples include Saturn, the
car company, which attempts to engage users by allowing Saturn car owners
to nd and to communicate with one another, or Bristol-Myers Squibb, which
allows women to exchange opinions and advice at www.womenslink.com.
Both of these digital marketing applications attempt to engage users by
creating virtual communities of interest. Finally, American Express and
Charles Schwab attempt to engage users by providing them with conven-
ience-oriented content, including electronic access to their nancial records,
or one-stop-shop information that consumers
might nd helpful for making nancial
decisions.
It is too early to say whether these particular
forms of digital marketing truly engage users
or whether there is a better way to create or
manage content to generate interest and participation. New technology
developments such as the Java programming language will further enhance
what digital marketers can do on interactive media. The key for digital
marketers will be the continued willingness to experiment while maintaining
a clear focus on what delivers value to the consumer.
Retain
Once youve drawn consumers to your site in the rst place, and then have
engaged them with suitably interactive and valued content, you must make
sure that they keep returning to your site. Maintaining ongoing contact is
essential to developing relationships with consumers. Retaining users
emphasizes the need for marketers to recognize that digital marketing is not
a one-time project, but requires continued resource commitments over time.
Arguably, digital marketers who are capable of truly engaging users may
be well on their way to retaining them. However, there are some subtle
diferences between engaging and retaining.
Emerging evidence suggests that while consumers may visit a site once out of
curiosity, they will not return there without a reason. At a minimum, this
implies that marketers must keep their sites fresh by continuously renew-
ing content and/or providing content that is inherently changeable on an
ongoing basis, such as stock quotes or weather reports. For many marketers,
particularly those with content-intensive digital marketing applications such
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 15
Many marketers treat online
marketing like advertising, by
launching an application and
then stepping back from it
16 THE McKINSEY QUARTERLY 1996 NUMBER 3
M any m arketers have found that digital
m arketing initiatives som etim es require
signi cant and profound changes to their
m arketing organization. M any of the
organizational challenges of digital m arketing
are not new . M arketers have faced them as
they integrated other m arketing vehicles (such
as direct response m arketing, direct m ail, and
1-800 services) that triggered organizational
or channel con icts. D igital m arketing
com pounds these issues because of its m ore
profound potential im pact on the relationship
betw een m arketers and consum ers, and
therefore on the business system s of
m arketing com panies.
W hile the w orld of digital m arketing is still too
young to have yielded de nite answ ers on
w hat w orks and w hat does not in term s of
organization, som e patterns are beginning to
em erge. Based on research w ith 12 Fortune
500 consum er goods/services com panies
w ith a presence in interactive m edia, w e
have identi ed four key stages for the
developm ent of the digital m arketing
organization (seeexhibit on facing page).
1. The ad hoc activity stage. In this
rst stage, com panies establish a basic
online presence. H ow ever, there is no form al
organization dedicated to the effort, w hich
is often led by self-selected individuals. There
are no dedicated skills in place.
2. The focusing the effort stage.
The organization recognizes the effort as
a learning experim ent. Typically a cross-
functional steering com m ittee led by a senior
executive develops a set of policies/principles
for how the com pany w ill go digital.
A sm all num ber of resources ( ve to ten
people) are dedicated to the digital m arketing
effort, although its reporting structure is
still considered tem porary.
3. The formalization stage. A t this stage,
the digital m arketing organization has found
a long-term hom ew ithin the business.
It focuses now on im proving its digital
m arketing efforts. The organization grow s
from 10 to 50 people and begins to develop
its ow n structure, typically separating the
technology-related from the m arketing-related
digital m arketing activities.
HOW TO ORGANIZE FOR DIGITAL MARKETING
as Levi Strauss or Toyota, this requirement raises the issue of the skills needed
and costs required to maintain fresh content. Many marketers treat online
marketing like traditional advertising by developing an application, launching
it, and then stepping back from it. However, the eforts required to maintain
a vibrant digital marketing application do not stop at launch. As a result,
some marketers have signicantly underestimated ongoing content main-
tenance resource requirements. An emerging trend to control the cost and
complexity associated with content management is to shit the burden of
creating content onto the user. For example, an athletic shoe company could
allow sporting associations to use its site to publicize upcoming sporting
events. Assuming interest on the part of the associations, this solution may
both lower the marketers cost of creating content, which is now efectively
borne by the users, leverage a unique capability of interactive media by acting
as a central distribution point for perishable information, and provide value
to consumers through one-stop shopping for hard-to-get information.
The second diference between engaging and retaining has to do with a
unique yet oten overlooked opportunity for marketers: the creation of
switching costs for users as a means to retain them. This occurs as users invest
THE McKINSEY QUARTERLY 1996 NUMBER 3 17
4. The institutionalizing capability
stage. This stage is characterized by the
developm ent w ithin the digital m arketing
organization of dedicated experts and
skills, often around technology platform s
like the W orld W ide W eb, online services,
and dial-up services, and the em ergence
of general m anagersfor the various
initiatives that ensure the linkage w ith
the core business.
Development stages of digital marketing organization
Activities of
digital marketing
organization
Establish a basic
online presence
Rally internal
interest and skills
Create policies to
limit and unify
effort
Track what works
and what doesnt
Build the business
of/for a digital
presence
Develop/gather
appropriate skills
Manage delivery
against value
proposition
Manage
organizational
interdependencies
Structure and
reporting
No formal
structure in place
Low visibility
Steering
committee
established
Temporary
reporting
relationship
Organizational
structure emerges
Formal home
established for
digital marketing
group
Distinct business
unit/department
in place
Linkages to core
business
People involved A few, often
self-selected
Part-time
Fewer than 510
Full-time
1030 full-time
Heavy support
from 12 sources
(e.g., agency)
More than 50 full-
time
Web of external
support sources
Skills in place No institutional
expertise or
specialization
Few experts with
little specialization
Experts emerging Dedicated experts
and skills in place
Funding source Little or none Corporate or
ad hoc
Business or
functional units
Business units
Ad hoc
stage
Focus
stage
Formalization
stage
Institutionalizing
stage
their own time and energy in the interaction with a digital marketing
application, therefore creating an important disincentive to repeat that
investment with another application. With Quicken, the nancial manage-
ment sotware, the more consumers input their own nancial information
into the sotware, the more they actually raise their own switching costs.
Another example is user-to-user relationships: the more consumers invest
time and develop familiarity in interacting with others, the less likely they
are to start building these virtual relationships again elsewhere. This explains
the growing emphasis among digital marketing application developers on
communities of interest. New comparative agent technologies such as those
pioneered by companies like Agents, Inc. present another example of
switching costs: in an existing application, users spend time revealing
their preferences in music or movies, and are then ofered suggestions for
other things they may enjoy based on the information gained by the sotware
from other users.
The lesson is that digital marketers must explicitly think about how to build
switching costs as they dene their strategy to retain users of their digital
marketing application.
Learn
Due to their very nature, interactive media open up unprecedented oppor-
tunities for marketers to learn about consumer demographics, attitudes, and
behaviors. Demographic and attitudinal information may come in the form of
e-mail communications to marketers, opinions volunteered on bulletin boards
or information gathered in surveys, questionnaires, or registration processes.
Behavioral information may be gleaned from transaction records or click-
streams, which track how users behave in a site.
Currently, of course, the potential to leverage the learning opportunity of
interactive media is limited. There may not yet be enough of the right
digital consumers to treat interactive media as a representative learning tool;
further, many of these consumers are reluctant to provide information about
who they are and what they want, for lack of interest or for fear of privacy
invasion. Similarly, the technologies needed to capture actionable information
are only slowly becoming available. There also remains considerable uncer-
tainty around whether it will be the marketer, the access provider, or some
other party such as a payment aggregator who will capture and own the most
valuable information about consumers.
While signicant, these issues do not reduce the importance for marketers of
explicitly considering consumer learning objectives when they develop digital
marketing applications. This will require dening what type of information
may be most valuable to them, what that information is worth, and how to
best leverage their digital marketing application to obtain it. Marketing
research, for example, holds immediate digital marketing learning potential. A
packaged goods company is beginning to use its digital marketing application
to hold virtual focus groups, to test new product concepts, and to get feedback
on ideas for promotional programs. Another opportunity exists to enhance
what is already known about consumers. A hotel company, for example, is
beginning to use its digital marketing application to complement its existing
customer prole database by collecting information about the accommodation
preferences of its rewards program members. A third opportunity will be for
marketers to gather information that they do not yet hold about consumers.
The potential value of that information could someday be tremendous for
marketers to expand into and cross-sell new products or services, and create
entirely new forms of consumer relationship and loyalty programs.
Relate
Relating is one of digital marketings most important value creation oppor-
tunities. In essence, it represents the opportunity to customize the interaction
and tailor either the product or the marketing efort to one consumer at a
time; interactive media provides unprecedented opportunities for a marketer
to relate to a consumer. As a two-way, addressable communication and
MARKETING TO THE DIGITAL CONSUMER
18 THE McKINSEY QUARTERLY 1996 NUMBER 3
distribution channel, interactive media gives the marketer two important
opportunities; to learn about an individual consumer in the course of
continued interaction, and to deliver either a personalized service or product,
or a communication about the availability of such a personalized service or
product. An example is online publications such as the one developed by the
Wall Street Journal which delivers a personalized online newspaper compiled
on the basis of a users specied interests, published for a circulation of
one. Another example is provided by Amazon.com, a virtual bookstore on
the World Wide Web. While selling books, Amazon.com also leverages agent
technology to learn about consumers literary tastes, uses that information to
recommend titles, and then e-mails users when titles become available. From
a consumers perspective, the service provided
by Amazon.com is truly personalized and
potentially highly valued for that very reason.
Relating, of course, presents many challenges
for marketers. This may explain why there
are only very few truly personalized digital
marketing examples. One reason is that relating requires marketers to
push their thinking about the full potential of interactive media in their
specic service or product category and to consider how to make the digital
marketing initiative an integral part of the existing business system, as it
fundamentally afects the nature of the product or service provided by the
marketer to consumers. Particularly for large, established marketers, how to
integrate digital marketing initiatives with existing marketing programs or
information systems presents a challenge.
However, the economics of relating are potentially attractive. The eciency
and efectiveness of customizing interactions and gathering information on
interactive media should make relationship marketing to a large audience
more attractive on a network than it currently is in the physical world.
The challenges ahead
Digital marketing is still at an early stage. As with most technological inno-
vations, the full marketing potential of interactive media will reveal itself
only when consumers and marketers identify or fortuitously stumble
upon truly new things to do. It is critical therefore for marketers to look
ahead and to prepare for the challenges that digital marketing will inevitably
bring about. The three most important challenges and their implications
for marketers are:
Constantly enhance the consumer value proposition
While much of the digital revolution is over-hyped, it will nevertheless
fundamentally change the traditional marketing balance of power by giving
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 19
Will it be the marketer, the
access provider, or some other
party who will capture and own
the most valuable information?
the consumer more control over their relationship with marketers. In an
interactive, two-way, addressable world, it is the consumer and not the
marketer who decides with whom to interact, what to interact about, and
how to interact at all. Marketers have to earn the right to the digital rela-
tionship, and they have to do so by continuously enhancing the value they
ofer consumers. As the early experimenters have learned, the heart of
that challenge is the diculty of identifying the hooks for developing
relationships with digital consumers. A food manufacturer, for example,
thought that digital consumers would be most interested in nding out about
nutrition; consumers, however, tended to ask about how they could buy
regional products that were not distributed where they currently live.
Build relationships and skills to prepare for continuous change
Digital marketing will continue to evolve extremely rapidly for the foresee-
able future. From a marketers perspective, most of these developments will
come from outside the organization. As John Hagel points out, the Internet
economy is evolving around a number of webs, each with its own direction
and dynamics.* Digital marketers need to keep tabs on these webs to identify
early on the developments that might afect their digital marketing eforts.
Resources should be directed toward following external developments such
as the emergence of new technologies, new players, or insights about
consumer behavior. In addition, marketers
will need to build internally or through
relationships some of the more specialized
skills that are emerging in digital marketing.
For example, new companies are emerging in
the eld of audience creation (attracting
users to digital marketing services), such as
Cybernautics, and in intelligent agent devel-
opment (creating value-added services based on a users preferences), such
as Agents, Inc. Looking ahead, digital marketers will need to keep abreast of
these developments, and to continuously embrace those that will allow them
to improve their services.
Manage the interdependencies both internally and with intermediaries
A third, and perhaps the most signicant, challenge for digital marketers
will be to manage the interdependencies between their digital marketing
eforts and both the rest of the organization and existing outside partners,
such as distributors and retailers. To have meaningful impact on the bottom
line, digital marketing will have to become an integral part of doing business
for many marketers. In many organizations the potential for signicant
conict has already become apparent. Internally, for example, marketers are
nding it dicult to integrate their digital marketing eforts with existing
MARKETING TO THE DIGITAL CONSUMER
20 THE McKINSEY QUARTERLY 1996 NUMBER 3
Marketers are nding it dicult
to integrate their digital
marketing eforts with existing
functional areas, business units,
and information systems
Spider versus Spider, The McKinsey Quarterly, 1996 Number 1, pp. 418.
functional areas (e.g., marketing or customer service) and business units,
not to mention information systems. For example, there is much debate in
several companies about whether the digital marketing group should be set
up as an independent entity or as a support unit. The answer, of course,
depends on factors such as the size of the potential commercial opportunity
of digital marketing, the existing culture within the organization, and the
need for cross-functional integration.
Externally, the challenge of managing relationships with existing intermedi-
aries is just as important. Salesforces, distributors, and retailers oten perceive
digital marketing as a major potential threat to their ownership of consum-
ers. In automotive, for example, the challenge is to make a manufacturers
digital marketing initiatives a win-win-win proposition for dealers and car
buyers; in travel, airlines have to manage relationships with the travel agency
community very carefully when they ofer direct
booking digital marketing services to their frequent
travelers. As the potential impact of digital marketing
on the core business grows, managing these inter-
dependencies will likely emerge as one of the most
important challenges for marketers.
Implications for marketers
Over the next three to ve years, interactive mar-
keting is likely to become an increasingly signicant
part of the consumer marketing landscape, at least
in the US. This development will challenge many
large marketers. For many of them, however, digital
marketing could yield good outcomes as long as they are aware of three major
factors company, competition, and category (Exhibit 9). It is imperative for
marketers to consider what interactive media should or should not mean
to them.
MARKETING TO THE DIGITAL CONSUMER
THE McKINSEY QUARTERLY 1996 NUMBER 3 21
Company factors
Company consumers use interactive
media
Company willing to build capabilities
Competitive factors
Competitors using interactive media
to gain share of spending with core
customers
Opportunity to use interactive media
to displace incumbent marketer
Category factors
Product/service well suited
Relationship marketing makes sense
Exhibit 9
Commitment factors