Introduction:

The Internet and World Wide Web have been hailed as having the potential to revolutionize marketing. The ability to create customized offers and content inexpensively allows marketers to come closer to the ideal of mass customization, or one-on-one marketing. Because of this, the Internet holds the greatest potential for the related fields of direct marketing, targeted marketing, and relationship marketing, a fact that the industry has recognized. In a recent survey of 400 direct marketing professionals, 81% anticipated increasing investment in electronic commerce in the next three years. The Direct Marketing Association has seized the opportunity: they are hosting their second annual conference on net marketing this April. Beside the technical and cost advantages of direct marketing over the Internet, there are several other reasons why it is an attractive market:

• It is a large market - 40 million and growing, according to one estimate
• The market has an attractive demographic - middle to upper class with a large disposable income
• The Internet can accelerate the "direct marketing cycle" - the time it takes to move from data collection to making an offer to the customer.

However, direct marketing on the Internet is still in its infancy, and most businesses have yet to make use of their sites to sell to targeted customers. A recent white paper by Epsilon, one of the historic leaders in direct market consulting identifies three stages of commercial web-site development:

Generation I: Businesses create "billboards on the web" to promote their product line. These sites are cyberspace equivalents of the company's normal broadband communications. Data is generated when customers enter information about themselves in order to receive product literature.

Generation II: Businesses use the web for data-driven, customer service applications that are primarily motivated through cost savings. The sites are transaction-oriented, and often driven by a rules-based expert system. Useful marketing data is often gathered about the customer, but marketing to the customer is not the primary goal of the site. Examples of Generation II sites include Federal Express and many financial institutions' websites.

Generation III: Businesses use the web as an interactive forum with their customer, creating a dynamic interchange of information that eventually leads to a customized offer that leads to a sale. Data provided by the customer, both actively and passively, establishes a corporate memory of the relationship, which can be run through predictive models to create customized communications and offers.

Most sites today fall into the Generation I or II category. Successful direct marketing needs scale, and early technology often has scalability challenges, so many technical hurdles must be overcome. This paper will highlight some of those hurdles, and early attempts through new technologies to conquer them. One worry with this new medium is that marketers have become so enthralled with the technology challenge that they have forgotten basic direct marketing techniques:

The state of Internet marketing today mirrors the early days of traditional direct marketing: web sites are set up without considering how to generate traffic by the right audience; data capture and analysis strategies are primitive, often limited to capturing and examining the number of hits a site gets and click stream data.

It is important to realize that although the Internet represents a new, and significantly different, channel, the basic framework for doing effective direct marketing probably remains unaltered. We include some uncertainty in this statement since the Internet represents such a different medium that different models for successful implementation may develop. However, past frameworks still represent a useful heuristic for examining the Internet's potential for providing targeted offers and building relationships. This study is organized to reflect a traditional direct marketing process: data collection, analysis, and customized offer. Data collection examines how the Internet is being used today to gather information about potential and current customers. The Analysis section explains the tools that are necessary to better understand the customer, and the challenges in assimilating and processing data gathered from the Internet. The Offer section gives examples of how companies are using the Internet to build stronger relationships with customers in both the consumer and business-to-business segment. The final section of the study speculates on some future trends in Internet direct marketing.