ONLINE MARKETING

MARKETING TO THE
DIGITAL CONSUMER

Let’s 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 • Michael Zeisser

of interactive media such as online services

T
HE RAPID DEVELOPMENT
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 oƒten 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 oƒfered 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 eƒfort 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.
Alexa Kierzkowski, Shayne McQuade, Robert Waitman, and Michael Zeisser are consultants in
McKinsey’s New York oƒfice. Copyright © 1996 McKinsey & Company. All rights reserved.

THE McKINSEY QUARTERLY 1996 NUMBER 3 5

MARKETING TO THE DIGITAL CONSUMER

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 media’s potential. Shrewd marketers will instead learn to create
entirely new forms of interactions and transactions with consumers. To do
so they’ll 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 financial services, travel, music, and
books, even food and beverages – should be exploring how to capture the
digital world’s business opportunities.

Evolution’s 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
Exhibit 1

Online access by heavy users of brands

Percent of heavy brand users with online access*

0 5 10 15 20 25 30
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

≠ For a discussion of this term, see Jeƒfrey F. Rayport and John J. Sviokla, “Exploiting the virtual
value chain,” Harvard Business Review, November–December 1995 and also reprinted in The
McKinsey Quarterly, 1996 Number 1, pp. 20–36.

6 THE McKINSEY QUARTERLY 1996 NUMBER 3

 MARKETING TO THE DIGITAL CONSUMER

Exhibit 2
2000, there will be between
Appeal of online consumers
30 and 40 million of such
“digital” consumers. Percent Online Not online
Believe IQ is higher 80
than average 65
Digital consumers are, gen- Spend more to 67
get the best 54
erally speaking, attractive for
Like price wars 78
marketers (Exhibit 2). Digital 71
Make effort to use new
consumers are more likely devices and methods 48
68

than their non-wired coun- Bought from 73

catalogue in last year
terparts to spend more to get 64
Source: Yankelovich
the best and to make an
eƒfort 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
five 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.
Exhibit 3
The rise of this consumer marketspace is
Attractive characteristics
clearly aligned with the evolutionary pro- of interactive media
gress of the marketing function from a mass-
On-demand availability
market model to more interactive personal-
24-hour access
ization of goods, services, and interactions. 24-hour service
With interactive media, marketers can dy- Addressable
namically deliver personalized services Direct communication to an
individual user
and content, in real time, one consumer at a
Two-way interactive
time. This is due to the unique and powerful Learn from direct feedback
characteristics of interactive media: it is ad- Enable user-to-user interaction
dressable, meaning that each user can be Effective information delivery
identified and targeted separately; it allows More content than any other media
Easy to search large databases
for two-way interaction; services can be
Customized
tailored for each individual customer; and
Easily tailor communication and
purchases can be made and influenced products/services
online (Exhibit 3). Capturing the business Seamless transactions
opportunities associated with these unique Influence consumers when closest
to the transaction
characteristics is the essence of digital Enable purchase online
marketing.

≠ Forrester Research Inc., The Internet Economy, September 1995.

THE McKINSEY QUARTERLY 1996 NUMBER 3 7

MARKETING TO THE DIGITAL CONSUMER

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 oƒfer 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 eƒficiently 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 diƒferentiation.

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-eƒfective.

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

8 THE McKINSEY QUARTERLY 1996 NUMBER 3

 MARKETING TO THE DIGITAL CONSUMER

total costs of maintaining Exhibit 4

Digital delivery of information

a Web site to answer their
current volume of package Example: UPS Package Tracking http://www.ups.com

tracking requests is esti- Allows customers to track Tracking costs

$ million per year
packages and request
mated at about $900,000 per pickup online Phone-based 2.6
annum. If only 75 percent of Reduces query response Internet-based 0.9
time and increases
online package tracking re- customer satisfaction Cost savings 1.7
(estimated)
quests would otherwise have Current annualized run rate
at about 4 million queries
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 benefits 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 specific locations.

Beyond these advantages, UPS’s Web site aƒfords 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 Web’s first
commercial storefronts, owners Monica and Perry Lopez succeeded in
establishing an eƒfective direct purchasing channel that gives chiliheads
all over the globe access to HotHotHot’s selection of over 100 diƒferent
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 Pacific Bell and Columbia
Tristar, among others. In late 1993 only 5,000 Web sites existed. The compel-
ling design of the site and HotHotHot’s unique product oƒfering – sauces
carry such attention-grabbing names as Nuclear Hell and Endorphin Rush –
soon commanded considerable publicity in the online world. Listing in
Yahoo!’s “What’s Cool” and being linked from America Online’s and Intel’s
sites have further contributed to the site’s popularity. By promoting the site in

THE McKINSEY QUARTERLY 1996 NUMBER 3 9

 MARKETING TO THE DIGITAL CONSUMER

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 traƒfic,
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

online’s advantages over traditional direct marketing. The store doesn’t
purchase mailing lists for its catalogue eƒfort, but rather sends catalogues
Exhibit 5 only when requested. Even with the
New channel opportunity self-selected customer base of their
Example: HotHotHot, 1995 http://www.hothothot.com catalogue channel helping to lower
Dollars
costs, marketing costs still represent
Revenue
Retail 245,000 22 percent of catalogue revenue. Mar-
Direct channel 105,000 keting costs on the Web site amount
Web site to only 5 percent of online revenue
Revenue 70,000
Marketing cost 3,500
(Exhibit 5).
5%
Catalogues
Revenue 35,000 The Web site has also proven to be a
Marketing cost 7,800
22% 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 fiery – at least that’s 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 eƒfort by any standards, Lopez recognizes that the
medium is still new and quite rough around the edges. But with plans to contin-
ue to refine the site and develop it into a true community of interest, the Web
site looks like it will be an increasingly integral part of HotHotHot’s 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 soƒtware that
allows travelers to book their flights directly without a travel agent. Developed
by United Airlines, it is available free of charge to frequent travelers in
United’s Mileage Plus rewards program. Once a traveler loads the soƒtware
onto a PC, she or he not only has access to flight 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.

10 THE McKINSEY QUARTERLY 1996 NUMBER 3

 MARKETING TO THE DIGITAL CONSUMER

The economics of such a Exhibit 6

Disintermediation opportunity
service are compelling for the
airline (Exhibit 6). Typically, Example: Travel industry
Airline distribution costs: $500 round-trip fare
travel agent commissions can Traditional travel
$70*
amount to 10 percent of the agency distribution

price of a trip. If a typical Interactive media

distribution $20–30*
$500 round-trip fare is pur- Distribution cost
savings 60–70%
chased through the service,
Estimated yearly Distribution cost
the airline saves $50, and transactions† savings
Millions $ million
sometimes more if it can United Connections 0.8–1.0 36–45
avoid other typical travel Eaasy Sabre 1.0–1.2 45–54
agent discounts or bonuses * Approximate figures
† As of first quarter 1996
such as overrides. Assuming Source: Literature search; McKinsey estimates
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
oƒfered 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-flight magazines, creating broad awareness
among potential heavy users. Further, to incent usage, travelers earn 500
frequent flyer 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 significant benefits for the airline. By establishing a direct relation-
ship with travelers, the airline can build greater loyalty, and sell more seats.
The direct-booking soƒtware 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 soƒtware or travel, are “natural fits” 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 category’s fit with interactive media and its
attractiveness for marketing-oriented relationship building, suggests a
significant breadth of opportunity for digital marketing (Exhibit 7).

THE McKINSEY QUARTERLY 1996 NUMBER 3 11

MARKETING TO THE DIGITAL CONSUMER

Exhibit 7

Categories suitable for digital marketing

High
News
Software Insurance Financial
services
Selected Music
groceries
Interactive Books
games
Real estate Travel
brokerage services
Fit with
interactive media
Sporting Toys Autos
White Medical
goods goods services
High-end Consumer
Convenience electronics
stores apparel
Fine Baby
Gasoline jewelry products
Low
Low High
Potential for relationship building

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
diƒferences 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
five elements which we believe to be essential factors for success in digital
marketing (Exhibit 8):
Exhibit 1

Digital marketing framework and levers

What: Customize interaction What: Attract customers to the
and value delivery application
How: Personalized/customized How: Audience creation
communications and Mnemonic branding
products/services
Relate Attract “Piggyback” advertising
Real-time interactions
Linkages to core business

Learn Engage
What: Learn about consumers’ What: Generate interest and
preferences Retain participation
How: Information capture How: Creative programming
Continuous preference Interactive content
learning User-generated content
What: Make sure consumers Transaction capabilities
come back
How: Dynamic content
Digital communities
Proprietary/unique content

12 THE McKINSEY QUARTERLY 1996 NUMBER 3

 MARKETING TO THE DIGITAL CONSUMER

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 five success factors suggests a number of issues that marketers
must address. While the answers to many of these issues will be specific to a
given marketer, we are beginning to identify best practices that may guide
companies in getting more from their digital marketing eƒforts.

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 insuƒficient to draw consumers,
marketers need to actively attract users in the first place. Typically, this is
achieved by “billboard” advertisements and links from other sites, listings
on the “what’s cool” services, and leveraging
existing marketing communications such as
The current clutter on the
advertising or product packaging.
Internet virtually ensures
that the “build it and they will
Two issues merit particular consideration; first,
come” model is insuƒficient
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 find 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 unjustifiably 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 oƒfering incentives (e.g., certain

THE McKINSEY QUARTERLY 1996 NUMBER 3 13

 MARKETING TO THE DIGITAL CONSUMER

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 eƒfectiveness, 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 eƒforts to draw traƒfic 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, aƒter all, a major point of creating the
application in the first 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).
Some exhibited content is
Very few – if any – marketers have fully
uninspiring, trivial, or poorly
cracked the creative programming challenge.
presented, while others are so
Directories such as Yahoo!, Internet-related
sophisticated that they are
technology sites such as Netscape, or broad
too time-consuming to browse
publishing sites such as Pathfinder 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, oƒten 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 oƒten 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.

14 THE McKINSEY QUARTERLY 1996 NUMBER 3

 MARKETING TO THE DIGITAL CONSUMER

In the matter of substance, where marketers are struggling to create

content that the consumer will find valuable, the seat auctions held by Cathay
Pacific 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 find 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 financial records,
or one-stop-shop information that consumers
might find helpful for making financial
Many marketers treat online
decisions.
marketing like advertising, by
launching an application and
It is too early to say whether these particular
then stepping back from it
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 you’ve drawn consumers to your site in the first 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
diƒferences 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

THE McKINSEY QUARTERLY 1996 NUMBER 3 15

 HOW TO ORGANIZE FOR DIGITAL MARKETING
Many marketers have found that digital
marketing initiatives sometimes require
significant and profound changes to their
marketing organization. Many of the
organizational challenges of digital marketing
are not new. Marketers have faced them as
they integrated other marketing vehicles (such
as direct response marketing, direct mail, and
1-800 services) that triggered organizational
or channel conflicts. Digital marketing
compounds these issues because of its more
profound potential impact on the relationship
between marketers and consumers, and
therefore on the business systems of
marketing companies.
While the world of digital marketing is still too
young to have yielded definite answers on
what works and what does not in terms of
organization, some patterns are beginning to
emerge. Based on research with 12 Fortune
500 consumer goods/services companies
with a presence in interactive media, we
have identified four key stages for the
development of the digital marketing
organization (see exhibit on facing page).
1. The “ad hoc activity” stage. In this
first stage, companies establish a basic
online presence. However, there is no formal
organization dedicated to the effort, which
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 experiment. Typically a cross-
functional steering committee led by a senior
executive develops a set of policies/principles
for how the company will “go digital.”
A small number of resources (five to ten
people) are dedicated to the digital marketing
effort, although its reporting structure is
still considered temporary.
3. The “formalization” stage. At this stage,
the digital marketing organization has found
a long-term “home” within the business.
It focuses now on improving its digital
marketing efforts. The organization grows
from 10 to 50 people and begins to develop
its own structure, typically separating the
technology-related from the marketing-related
digital marketing activities.

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 eƒforts required to maintain
a vibrant digital marketing application do not stop at launch. As a result,
some marketers have significantly underestimated ongoing content main-
tenance resource requirements. An emerging trend to control the cost and
complexity associated with content management is to shiƒt 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 marketer’s cost of creating content, which is now eƒfectively
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 diƒference between engaging and retaining has to do with a

unique – yet oƒten overlooked – opportunity for marketers: the creation of
switching costs for users as a means to retain them. This occurs as users invest

16 THE McKINSEY QUARTERLY 1996 NUMBER 3

 4. The “institutionalizing capability”
stage. This stage is characterized by the
development within the digital marketing
organization of dedicated experts and
skills, often around technology platforms
like the World Wide Web, online services,
and dial-up services, and the emergence
of “general managers” for the various
initiatives that ensure the linkage with
the core business.

Development stages of digital marketing organization

Ad hoc Focus Formalization Institutionalizing

stage stage stage stage

Activities of Establish a basic Create policies to Build the business Manage delivery
digital marketing online presence limit and unify of/for a digital against value
organization Rally internal effort presence proposition
interest and skills Track what works Develop/gather Manage
and what doesn’t appropriate skills organizational
interdependencies
Structure and No formal Steering Organizational Distinct business
reporting structure in place committee structure emerges unit/department
Low visibility established Formal “home” in place
Temporary established for Linkages to core
reporting digital marketing business
relationship group
People involved A few, often Fewer than 5–10 10–30 full-time More than 50 full-
self-selected Full-time Heavy support time
Part-time from 1–2 sources “Web” of external
(e.g., agency) support sources
Skills in place No institutional Few experts with Experts emerging Dedicated experts
expertise or little specialization and skills in place
specialization
Funding source Little or none Corporate or Business or Business units
ad hoc functional units

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 financial manage-
ment soƒtware, the more consumers input their own financial information
into the soƒtware, 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 oƒfered suggestions for
other things they may enjoy based on the information gained by the soƒtware
from other users.

The lesson is that digital marketers must explicitly think about how to build
switching costs as they define their strategy to retain users of their digital
marketing application.

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MARKETING TO THE DIGITAL CONSUMER

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 significant, these issues do not reduce the importance for marketers of
explicitly considering consumer learning objectives when they develop digital
marketing applications. This will require defining 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 profile 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 marketing’s most important value creation oppor-
tunities. In essence, it represents the opportunity to customize the interaction
and tailor either the product or the marketing eƒfort 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

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 MARKETING TO THE DIGITAL CONSUMER

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’ specified 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 consumer’s perspective, the service provided
by Amazon.com is truly personalized and
Will it be the marketer, the
potentially highly valued for that very reason.
access provider, or some other
party who will capture and own
Relating, of course, presents many challenges
the most valuable information?
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
specific 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 aƒfects 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 eƒficiency

and eƒfectiveness 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

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 MARKETING TO THE DIGITAL CONSUMER

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
oƒfer consumers. As the early experimenters have learned, the heart of
that challenge is the diƒficulty of identifying the “hooks” for developing
relationships with digital consumers. A food manufacturer, for example,
thought that digital consumers would be most interested in finding 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 marketer’s 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 aƒfect their digital marketing eƒforts.
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
Marketers are finding it diƒficult
relationships – some of the more specialized
to integrate their digital
skills that are emerging in digital marketing.
marketing eƒforts with existing
For example, new companies are emerging in
functional areas, business units,
the field of audience creation (attracting
and information systems
users to digital marketing services), such as
Cybernautics, and in intelligent agent devel-
opment (creating value-added services based on a user’s 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 significant, challenge for digital marketers
will be to manage the interdependencies between their digital marketing
eƒforts 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 significant
conflict has already become apparent. Internally, for example, marketers are
finding it diƒficult to integrate their digital marketing eƒforts with existing

≠ “Spider versus Spider,” The McKinsey Quarterly, 1996 Number 1, pp. 4–18.

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 MARKETING TO THE DIGITAL CONSUMER

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 oƒten perceive
digital marketing as a major potential threat to their “ownership” of consum-
ers. In automotive, for example, the challenge is to make a manufacturer’s
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 oƒfer direct Exhibit 9
booking digital marketing services to their frequent Commitment factors
travelers. As the potential impact of digital marketing
Company factors
on the core business grows, managing these inter- Company consumers use interactive
dependencies will likely emerge as one of the most media

important challenges for marketers. Company willing to build capabilities

Competitive factors
Competitors using interactive media
to gain share of spending with core
Implications for marketers customers
Opportunity to use interactive media
Over the next three to five years, interactive mar- to displace incumbent marketer
keting is likely to become an increasingly significant Category factors
part of the consumer marketing landscape, at least Product/service well suited
Relationship marketing makes sense
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.

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