Exploit the Internet, Not Your Customers

October 2000

The Internet is a great marketing tool. What's the catch? Marketers have discovered the power of the Net to build and maintain relationships, and the number of Internet marketing PR disasters is multiplying. As more Internet marketing firms recruit more clients, they run the risk of alienating consumers from their companies and Internet marketing in general. This bulletin explores these issue and gives techniques for avoiding disaster.

Worst-Case Scenario

Ever get the feeling you're being followed?

Imagine someone has hired a private detective to keep tabs on you. You're being followed. Copies of your credit card and bank statements are going to a post office box in another city. Someone has been asking your friends about your likes and dislikes. Someone has been going through your desk.

What if you confronted the detective and he says, "A large company has hired me to find out everything I can about you, so they can improve their marketing to you. You may not have noticed, but the billboards on your commute route are more interesting to you and when you enter your favorite store the products you're most interested in are displayed prominently. I know it seems kind of invasive, but we believe you're going to like this a lot better, and we promise we're not going to resell the information, no matter how much we get offered."

Methodology

In May, IDC surveyed U.S. consumers online to probe online information collection, sharing, and privacy issues. Participants received an email invitation to fill out an online survey and enter to win one of three $250 gift certificates. IDC screened for participants who had made an online purchase within the previous six months.

IDC weighted the gender of the respondents. Most respondents' ages ranged from 30 to 39 (25%), 40 to 49 (36%), and 50 to 59 (23%). The Internet Is an Astonishing Marketing Tool Entire books have been written on the virtues of the Internet as a marketing tool. It has many characteristics that make it ideal:

• Ubiquitous. The Internet is available to 338 million users worldwide, more than doubling to 726 million in 2004, according to IDC's Internet Commerce Market Model.

• Immediate. Information that you put online is instantly accessible to any of these users.

• Dynamic. You can customize messages based on what you know about the reader's interests and behavior.

• Cheap. The cost of sending an additional message once you've invested in hardware, software, and creative content &emdash; is virtually zero.

• Networked. Information you send to one person can be forwarded to friends with similar interests.

• Analytical. You have more information about what your customers are doing and much better tools for analyzing it.

• Interactive. Customers can actively mold a Web site to their tastes.

…But Internet Marketing Makes Consumers Anxious These very advantages increase consumers' frustration and anxiety with online marketing. The greater amount and quality of information make it much easier to violate consumers' privacy. Because Internet marketing is (incrementally) cheap and networked, it can flood consumers with unwelcome messages.

Users don't understand the technology of the Internet, so they are naturally anxious. This makes them receptive to the message that the Internet is being used to abuse their privacy. This is exacerbated by real cases of privacy invasion by well-known companies.

Why Are Consumers Angry?

Spam Taxes Users' Patience

Spam is the worst and most obvious abuse of the Web for marketing purposes. With very rare exceptions, spammers are all single individuals or marginal firms trying to exploit the Net for personal gain. However the constant irritation of spam in users' mailboxes makes them less patient of other email marketing.

Viral Marketing Potentially Exploits Friendships

The success of ICQ and HotMail based on word of mouth from their customers led to the launching of a number of companies designed to exploit word of mouth on the Net. Companies such as Gazooba and Takira have designed software specifically for "refer-a-friend" programs. As these companies recruit more and more clients, IDC anticipates that the effectiveness and acceptance of these programs will diminish.

For example, MCI's Friends and Family Program was one of the most successful marketing campaigns in history. Within 12 months, giving someone's name to MCI was a sure way to be disinherited. Microsoft's MSN Explorer now offers its users the opportunity to move their email accounts to HotMail. If they accept, it offers to send a message to everyone in the user's mailing list that their address has changed. To that one-line address change it appended an eight-line ad for HotMail.

The furor was deafening, and Microsoft was forced to modify the program almost immediately.

Sites That Don't Let Users Opt Out

More than a third of the Web's most-used sites surveyed by IDC do not permit their users to completely opt out of their mailing programs. It's understandable, given the range and quality of services that are available for free on the Net. However, a relationship that requires a user to accept a promotion is an opportunity for competitors.

Software That Steals Consumers' Information

Programs such as Real Audio, Comet Cursor, and Netscape Smart Download have been detected communicating in the background of users' computers with servers on the Net. Information about the contents of peoples' hard drives, how they're being used, and unique identifications of users are being sent to headquarters without users' knowledge.

Networks That Track People Across the Net

Cookies were designed so a Web server could identify a computer that it had previously communicated with. This permitted the server to implement such useful features as personalized pages and shopping carts. Cookies are delivered with a file to your Web browser and can only be read by the server that sent them (i.e., AOL can't read Yahoo's cookies on your computer).

A Web page can contain files from multiple servers. The ad networks, such as DoubleClick, use this feature to deliver ads on the pages of sites in their networks. A user receives a cookie from DoubleClick if he visits any site in its network. This can be used by DoubleClick to make sure that a person isn't over-exposed to a particular ad.

But this also means that DoubleClick, or any ad network, has plenty of information on where people go on the Net.

Marketers Who Merge Databases

In January 2000, DoubleClick announced it would merge the information it had about users' Web habits with their offline identities and spending habits from a direct marketing firm it had purchased.

What's especially interesting about this is that this practice is common in offline direct marketing.

The latest hot issue in the privacy market came this fall, when Digital Convergence launched its CueCat barcode scanner. An auspicious launch with prestigious partners (Forbes, Wired, and Radio Shack) turned into a public relations debacle. Digital Convergence was condemned for hackers collecting information on users' behavior and using intellectual property protection to keep the nature of the information being collected from being made public. Finally, 140,000 customer records were stolen from their computers. All this happened within a couple weeks of their launch.

In June 2000, Toysmart, liquidating its assets, attempted to sell its customer list. Once again, a practice that is innocuous when it involves offline data became condemned when applied to information about online activity.

What is acceptable in the offline world may not be acceptable online for several reasons:

• Online information is more sensitive because of its quantity and fine-grained quality.

• There are more consumer advocates among the hacker community in the online world.

• Online consumers are more sensitized to privacy issues. Marketers Who Use Secret Tracking DoubleClick, it turns out, is also using invisible files on sites outside its ad network that are presumably being used to gather even more information about users.

This compounds the issues raised by DoubleClick's tracking of users' behavior and its attempt to attach it to their names.

What Are the Risks for You?

Both individual marketers and the entire Internet marketing industry face a crisis of public confidence.

The Marketer

Companies that use the Internet to market to their customers run a number of risks:

• Damage to reputation. On the Internet, more than anywhere else, your reputation is the source of your livelihood. Well- known companies, such as Microsoft, DoubleClick, Amazon, and Real Audio, have suffered damage to their reputations due to missteps in Internet marketing.

• Declining response rates. Response rates will decline over time as marketers use their house lists. It is essential that marketers don't overmail to their customer lists.

• Decay of house lists. As more and more customers opt out of mailings from companies with whom they have relationships, the size and usefulness of companies' own customer lists could decline. Once a customer has opted out of communication, it is very difficult to change status.

 

The Industry

The industry also faces significant risks. While there is apparently a consensus that self-regulation is preferable to government regulation, there is no consensus on what form that self-regulation will take. One logical leadership body, the Direct Marketing Association, has not offered guidelines on acceptable online direct marketing.

The DMA and others have pushed opt-out marketing as the solution to the problems we've outlined. Opt-out marketing has a number of disadvantages as a solution:

• Opt out isn't permanent. Many firms are expiring opt outs by their customers, meaning that it doesn't always work.

• Opt out is voluntary. One-third of Web sites surveyed by IDC do not permit their customers to opt out of all marketing materials.

• Opt out isn't simple. Users must often opt out of multiple types of promotion from multiple divisions of the same company.

• Opt out is misused. Spammers often pretend to offer opt out, but there are several problems. You must opt out of each spammer's list. Many spammers send more mail to people who asked to be removed from a list on the theory that it's a known good address. Mail to the spammer doesn't remove you from the CD-ROM that he used to obtain your address.

Predictions

Consumer Reactions to Internet Marketing

Consumers Will Continue to Provide Personal Information IDC's research shows that consumers are willing to provide information about themselves. Our survey showed that 61% of Internet buyers would be willing to provide personal information for customized email.

Of course, custom email is one of the principal tools of the online direct marketer. It's clear that users are willing to provide information about themselves in order to improve the quality of communication with the companies they do business with &emdash; as long as we don't abuse that trust.

Consumers Will Need Reassurance

Consumers' willingness to provide information for small incentives doesn't mean that they're not uncomfortable sharing information, especially with companies they don't know. Half were uncomfortable sharing credit card information with sites they know and three-quarters with sites they didn't know. This is a difficult barrier for anyone attempting to launch a new company on the Net. Online Purchases Will Be Especially Sensitive IDC asked consumers if they were concerned about sharing various kinds of personal information. The percentage who were concerned rose from 48% for catalog purchases to 61% for online purchases. This is greater than the percentage that were concerned about sharing information from their tax returns. Consumers are more concerned about the privacy of online information than offline information.

Don't assume that the same practices that have served you well in offline marketing will work in the online world.

Privacy Concerns Will Depress Sales

Privacy concerns cost sales. Of the Internet buyers surveyed, 87% said they had failed to make at least one purchase in the previous six months because of privacy concerns.

Consumers Will Lie The more concerned people become about privacy, the more likely they are to lie whenever possible. Especially when the information isn't critical to a sale, such as billing and delivery address, there can be little expectation that users will provide true information about themselves.

Identity Hackers Will Muddy Databases

As more sites collect more information about users, they can be expected to be more sophisticated about how they reveal themselves. A friend of ours is a low-intensity identity hacker. When standing in line at his local Safeway, he trades discount cards with his fellow patrons. His goal isn't even to disguise his identity. He's intentionally muddying Safeway's database.

Online Direct Marketing Responses Will Decline

The increase in direct marketing, negative publicity regarding privacy gaffes and abuses, and increasing identity hacking by consumers will inevitably lead to a decrease in email responsiveness. We have already seen a similar plunge in banner ad response rates.

It's a mistake to invest in online direct marketing if you expect to maintain your historical response rates for an extended period of time. Speedy paybacks should be a requirement.

Consumer Advocacy Will Increase

The Internet has amplified consumer advocacy. More users are communicating with one another. More technically sophisticated users have immediate access to marketing materials. There is a strong anticorporate sentiment among a substantial minority of the Net's population.

When examining any potentially controversial plan, marketers should examine not simply what the "vast majority" of their customers feel about the planned promotion, but what the more- vocal members of the Net community might say. If you decide to proceed with the promotion, be prepared to defend yourself in the court of public opinion.

Conclusions

The Warning Signs of a Risky Marketing Program

In this environment, it's critical to know the early warning signs of marketing programs that will meet resistance from consumers and their advocates.

• Can your program can be described as "viral"? You shoul d be especially careful with viral programs. Include safeguards to avoid abuse by referring parties trying for rewards.

• Are you allowing too many referrals? Gazooba.com recommends asking for no more than 10 referrals, Takira recommends no more than 10 referrals per user session and a 20&endash;25 maximum for the lifetime of the specific program/promotion. The Ikea email that raised so many objections allowed as many as 25.

• Is there no way to opt out? If you don't allow your customers to opt out, you may alienate them. Opt out may be a legal requirement in the future.

• Are you merging files? Are you merging user records from one business with those of another? Are you connecting names to behavior that users might think was anonymous?

• Are you keeping secrets from your customers? Is what you're doing hidden from your customers? Would you prefer if they didn't notice?

• Does this require changing your privacy policy? Are you changing your privacy policy to accommodate a new marketing program or one that you anticipate doing in the future?

• Do your customers have to renew their opt outs? If you're requiring your customers to renew their opt outs, you may be asking for too much action on their part. AOL has been slammed for this practice in the past.

• Are you selling or sharing customer information? If you're sharing information about your users' behavior or merging it with other companies' databases, you should be scrupulous about how that information is used, especially if you're attaching names to behavior that consumers believe is anonymous.

• Do you have information from or about children? Any information about children is a privacy red flag and deserves special attention. Tactics for Avoiding Marketing Backlash

• Allow information to expire. If you permit customers' cookies, profiles, and opt-in settings to expire, tell them that upfront and you're more likely to garner their loyalty. Of course, this is an act of faith in your customers' loyalty.

• Manage opt outs. Strike a balance between making it simple for customers to opt out of campaigns they have no interest in and giving them information they're going to want.

• Give both recommender and recommended a cut. Don't simply reward people who give you referrals, make sure there is something in it for the person who gets the mail. You're even safer if you don't reward the referring party at all and simply count on their desire to do something nice for a friend.

• Help your customers retain their anonymity. Support technologies, such as XNS, that help consumers maintain anonymity.

• Operate in the open. Inform consumers what kind of tracking you do and when you change your privacy policy.

• Set up a privacy panel. Get both ordinary consumers and online activists to vet your promotional strategy.