Recent Changes Occurring in Direct Marketing Area

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Introduction

As marketers continue to explore options for delivering their messages, the digital media landscape is changing. The addition of new options like the Internet and interactive digital media is one change that has occurred. Another is the variety of innovations taking place regarding existing digital media and the companies using them. Earlier in this text, we discussed the changing role of support digital media such as product placements and movie theater advertising. The examples in this paper’s lead-in demonstrate one of the changes occurring in the direct-marketing area, specifically regarding infomercials. But it is important to realize that the infomercial is only one of the tools used by direct marketers. (Armstrong, 2004)

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While most companies continue to rely primarily on the other promotional mix elements to move their products and services through intermediaries, an increasing number are going directly to the consumer. These companies believe that while the traditional promotional mix tools such as advertising, sales promotion, and personal selling are effective in creating a brand image, conveying information, and/or creating awareness, going direct with these same tools can generate an immediate behavioral response. Direct marketing is a valuable tool in the integrated communications program, though it seeks somewhat different objectives. (Karson, 2001; Kerin, 2002) In this paper, we discuss direct marketing and its role as a communications tool. Direct marketing is one of the fastest-growing forms of promotion in terms of dollar expenditures, and for many marketers, it is rapidly becoming the medium of choice for reaching consumers. Stan Rapp and Thomas Collins, in their book Maximarketing, propose that direct marketing be the driving force behind the overall marketing program. Recently, others have agreed. Ropp and Collins present a nine-step model that includes creating a database, reaching prospects, developing the sale, and developing the relationship. (Bearden, 2001) We begin by defining direct marketing and then examine direct marketing digital media and their use in the overall communications strategy. The section concludes with a basis for evaluating the direct-marketing program and a discussion of the advantages and disadvantages of this marketing tool.

Defining Direct Marketing

Direct marketing is a system of marketing by which organizations communicate directly with target customers to generate a response or transaction. This response may take the form of an inquiry, a purchase, or even a vote. In his Dictionary of Marketing Terms, Peter Bennett defines direct marketing as the total of activities by which the seller, in effecting the exchange of goods and services with the buyer, directs efforts to a target audience using one or more digital media (direct selling, direct mail, telemarketing, direct-action advertising, catalog selling, cable TV selling, etc.) to solicit a response by phone, mail, or personal visit from a prospect or customer. (Armstrong, 2004; Bearden, 2001)

Direct marketing uses a set of direct-response digital media, including direct mail, telemarketing, interactive TV, print, the Internet, and other digital media. These digital media are the tools by which direct marketers implement the communications process. The purchases of products and services through direct-response advertising currently exceed $2 trillion and are projected to reach $2.8 trillion by the year 2006. (Shankar, 2005) Firms that use this marketing method range from major retailers such as The Gap, Restoration Hardware, and Victoria’s Secret to publishing companies to computer retailers to financial services. (Karson, 2001)Business-to-business and industrial marketers have also significantly increased their direct-marketing efforts, with an estimated $1.3 trillion in sales forecast by 2004.

The Growth of Direct Marketing

Direct marketing has been around since the invention of the printing press in the 15th century. Ben Franklin was a very successful direct marketer in the early 1700s, and Warren Sears and Montgomery Ward (you may have heard of these guys) were using this medium in the 1880s. (Lamb, 2004; Roiger, 2003) The major impetus behind the growth of direct marketing may have been the development and expansion of the U.S. Postal Service, which made catalogs available to both urban and rural dwellers. Catalogs revolutionized America’s buying habits; consumers could now shop without ever leaving their homes. But catalogs alone do not account for the rapid growth of direct marketing. Several factors in American society have led to the increased attractiveness of this medium for both buyer and seller:

  • Consumer credit cards. There are now over 1 billion credit cards banks, oil companies, retail, and so on—in circulation in the United States. This makes it feasible for consumers to purchase both low- and high-ticket items through direct-response channels and assures sellers that they will be paid. It is estimated that over $1.23 trillion was charged on credit cards in the year 2001. (Johnston, 2005) Of course, not all of this was through direct marketing, but a high percentage of direct purchases do use this method of payment, and companies such as American Express, Diners Club, MasterCard, and Visa are among the heaviest direct advertisers. (Roiger, 2003)
  • Direct-marketing syndicates. Companies specializing in list development, statement inserts, catalogs, and sweepstakes have opened many new opportunities to marketers. The number of these companies continues to expand, creating even more new users. (Karson, 2001, Kerin, 2002)
  • The changing structure of American society and the market. One of the major factors contributing to the success of direct marketing is that so many Americans are now “money-rich and time-poor.” The rapid increase in dual-income families has meant more income. (Reardon, 2002) (It is estimated that by 2008 women will make up about 48 percent of the labor force.) At the same time, the increased popularity of physical fitness, do-it-yourself crafts and repairs, and home entertainment have reduced the time available for shopping and have increased the attractiveness of direct purchases. (Bearden, 2001)
  • Technological advances. The rapid technological advancement of electronic digital media and computers has made it easier for consumers to shop and for marketers to be successful in reaching the desired target markets. Well over 110 million television homes receive home shopping programs, and home channel purchases are projected to reach $15.6 billion by 2006. (Shankar, 2006)
  • Miscellaneous factors.Several other factors have contributed to the increased effectiveness of direct marketing, including changing values, more sophisticated marketing techniques, and the industry’s improved image. These factors will also ensure the success of direct marketing in the future. The variety of companies employing direct marketing demonstrates its potential. (Mitchell, 2003) While some organizations rely on direct marketing solely to generate consumer response, in many others direct marketing is an integral part of the IMC program. They use direct marketing to achieve other than sales goals and integrate it with other program elements. We first examine the role of direct marketing in the IMC program and then consider its more traditional role.

The Role of Direct Marketing

Long the stepchild of the promotional mix, direct marketing is now becoming an important component in the integrated marketing programs of many organizations. Direct-marketing activities support and are supported by other elements of the promotional mix.

Combining Direct Marketing with Advertising

Direct marketing is in itself a form of advertising. Whether through mail, print, or TV, the direct response offer is an ad. It usually contains a toll-free or 900 number or a form that requests mailing information. Sometimes the ad supports the direct-selling effort. For example, Victoria’s Secret runs image ads to support its store and catalog sales. Both Marlboro and Benson & Hedges advertise their cigarettes, achieving a carryover effect of their image to their direct-response merchandise catalogs. (Mitchell, 2003; Shankar, 2006; Shankar, 2005) Direct-response ads or infomercials are also referred to as in-retail outlet displays. Sometimes an advertisement will be sent through direct mail. CBS has tied into a Blockbuster video mailer to advertise its new fall lineup and offer a sneak-preview CD. (Lamb, 2004)

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Combining Direct Marketing with Public Relations

As you will see later in this text, public relations activities often employ direct-response techniques. Private companies may use telemarketing activities to solicit funds for charities or cosponsor charities that use these and other direct-response techniques to solicit funds. Likewise, corporations and/or organizations engaging in public relations activities may include toll-free numbers or website URLs in their ads or promotional materials. Direct mail has also been shown to be effective in recruiting job candidates.

Combining Direct Marketing with Personal Selling

Telemarketing and direct selling are two methods of personal selling. Nonprofit organizations like charities often use telemarketing to solicit funds. As you will see, for-profit companies are also using telemarketing with much greater frequency to screen and qualify prospects (which reduces selling costs) and to generate leads. ( Linquist, 2000)

Direct-mail pieces are often used to invite prospective customers to visit auto showrooms to test-drive new cars; the salesperson then assumes responsibility for the selling effort. The GM and BMW examples cited earlier in this text demonstrate the effective use of this approach (Lee, 2004).

Combining Direct Marketing with Sales Promotions

How many times have you received a direct-mail piece notifying you of a sales promotion or event or inviting you to participate in a contest or sweepstakes? Ski shops regularly mail announcements of special end-of-season sales. Airlines send out mailers or emails announcing promotional airfares. Nordstrom and other retail outlets call their existing customers to notify them of special sales promotions. (Armstrong, 2004; Solomon, 2003) Each of these is an example of a company using direct-marketing tools to inform customers of sales promotions. In turn, the sales promotion event may support the direct-marketing effort. Databases are often built from the names and addresses acquired from a promotion, and direct mail and/or telemarketing calls follow.

Combining Direct Marketing with Support Digital media

Adding a promotional product to a direct mailer has proved to increase response rates. One company included a promotional product in half of its 10,000 mailers and not in the other half. The former generated 65 percent more orders. 3M used a promotional product as an incentive for people responding to a direct-mail offer. The incentive generated a 23 percent response rate versus only 9 percent for the regular mailer. (Bearden, 2001) To successfully implement direct-marketing programs, companies must make several decisions. As in other marketing programs, they must determine (1) what the program’s objectives will be; (2) which markets to target (through the use of a list or marketing database); (3) what direct-marketing strategies will be employed; and (4) how to evaluate the effectiveness of the program. (Belch, 2001; Larson, 2004)

Direct-Marketing Objectives

The direct marketer usually seeks a direct response. The objectives of the program are normal behaviors—for example, test drives, votes, contributions, and/or sales. The atypical objective is defined through a set response, perhaps a 2 to 3 percent response rate. Not all direct marketing seeks a behavioral response, however. Many organizations use direct marketing to build an image, maintain customer satisfaction, and inform and/or educate customers in an attempt to lead to future actions.

Effectiveness of the Database

While many companies maintain a database, many do not use them effectively. Collecting names and information is not enough; the list must be kept current, purged of old and/or inactive customers, and updated frequently. The more information about customers that can be contained in the database, the more effective it will be. The Postal Service recommends an RFM scoring method for this purpose.13 RFM stands for the recency, frequency, and monetary transactions between the company and the customer. (Geller, 2002) More specifically, data need to be entered each time there is a transaction so the company can track how recently purchases have been made, how often they are made, and what amounts of money are being spent. (Spiller, 2005) In addition, tracking which products and/or services are used increases the ability to conduct the activities previously mentioned. By analyzing the database regularly, the company or organization can identify trends and buying patterns that will help it establish a better relationship with its customers by more effectively meeting their needs.

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Direct-Marketing Strategies and Digital media

As with all other communications programs discussed in this text, marketers must decide the message to be conveyed, the size of the budget, and so on. Perhaps the major difference between direct-marketing programs and other promotional mix programs regards the use of digital media. Each medium is used to perform specific functions, although they all generally follow a one- or two-step approach. In the one-step approach, the medium is used directly to obtain an order. You’ve probably seen TV commercials for products like wrench sets, workout equipment, or magazine subscriptions in which the viewer is urged to phone a toll-free number to place an order immediately. (Armstrong, 2004)Usually, these ads accept credit cards or cash on delivery and give an address. Their goal is to generate an immediate sale when the ad is shown. The two-step approach may involve the use of more than one medium. The first effort is designed to screen, or qualify, potential buyers. The second effort generates the response. (Boone, 2001) For example, many companies use telemarketing to screen based on interest and then follow up to interested parties with more information designed to achieve order or use personal selling to close the sale.

Direct Mail

Direct mail is often called “junk mail”—the unsolicited mail you receive. More advertising dollars continue to be spent in direct mail than in almost any other advertising medium—an estimated $46.5 billion in 2001. Mail-order sales exceeded $582 billion in 2001 ($359 billion in the consumer market). (Boone, 2001) Direct mail is not restricted to small companies seeking our business. Respected large companies such as General Electric, American Express, and Citicorp have increased their expenditures in this area, as have many others. Sales through direct mail in the business-to-business market are expected to reach over $345 billion by the year 2009. (Spiller, 2005) Many advertisers shied away from direct mail in the past, fearful of the image it might create or harboring the belief that direct mail was useful only for low-cost products. But this is no longer the case. For example, Porsche Cars North America, Inc., uses direct mail to target high-income, upscale consumers who are most likely to purchase its expensive sports cars. (Armstrong, 2004)

Segmentation based on geography (usually through Zip codes), demographics, and lifestyles has led to increased effectiveness. The most commonly used lists are of individuals who have already purchased direct-mail products. The importance of the list has led to a business of its own. It has been estimated that there are over 38 billion names on lists, and many companies have found it profitable to sell the names of purchasers of their products and/or services to list firms. (Direct Marketing Educational Foundation, 2004)

Companies like A. B. Zeller and VNU Business Media provide such lists on a national level, and in most metropolitan areas firms are providing the same service locally. While direct mail continues to be a favorite medium of many advertisers, and projections are that the market will continue to grow, this medium has been seriously threatened by the Internet. Between 1996 and 2001 direct-mail expenditures rose at the rate of 6.15 percent per year while Internet expenditures increased at the rate of 95 percent.18 Interestingly, (Tapp, 2001) the Internet is both a threat and an opportunity, as Internet companies have increased their expenditures in direct mail to drive potential customers to their sites. (Geller, 2002) For example, AOL frequently mails disks with free time to induce a trial of its Internet service. Nevertheless, the direct-mail business has experienced lower response rates from customers than in the past and has seen many advertisers shift dollars from this medium to the Net.19 Many companies, particularly in the business-to-business market, have shifted from print to online catalogs, and legal problems have also hurt the industry.

Catalogs

Major participants in the direct-marketing business include catalog companies. The number of catalogs mailed and the number of catalog shoppers has increased significantly since 1984, with sales growing by an average of 11.4 percent each year between 1996 and 2001. (Fowler, 2003) Catalog sales were $16.3 billion in 2006. Many companies use catalogs in conjunction with their more traditional sales and promotional strategies. For example, companies like Pottery Barn, Nordstrom, and JCPenney sell directly through catalogs but also use them to inform consumers of product offerings available in the stores. Some companies (for example, Fingerhut and Alloy) rely solely on catalog sales. Others that started exclusively as catalog companies have branched into retail outlets, among them The Sharper Image, Lands’ End, and the Banana Republic. L.L. Bean recently opened a superstore on the East Coast. (Direct Marketing Educational Foundation, 2004)

Broadcast Digital Media

The success of direct marketing in the broadcast industry has been truly remarkable; over 77 percent of the U.S. population report that they have viewed a direct-response appeal on TV. Direct-response TV is estimated to have generated more than $79.3 billion in sales in 2002—with projections of $108.2 billion by 2006. However, forecasts are for slower growth in the next few years, averaging 8.8 percent through 2007. Two broadcast media are available to direct marketers: television and radio. While radio was used quite extensively in the 1950s, its use and effectiveness have dwindled substantially in recent years. Thus, the majority of direct-marketing broadcast advertising now occurs on TV, which receives the bulk of our attention here. It should be pointed out, however, that the two-step approach is still very common on the radio, particularly with local companies. Direct marketing in the broadcast industry involves both direct-response advertising and support advertising. (Taylor, 2000)

In direct-response advertising, the product or service is offered and a sales response is solicited, through either the one- or two-step approach previously discussed. Examples include ads for magazine subscriptions, CDs and tapes, and tips on football or basketball betting. Toll-free phone numbers are included so that the receiver can immediately call to order. Support advertising is designed to do exactly that—support other forms of advertising. Ads for Publishers Clearing House or Reader’s Digest or other companies telling you to look in your mailbox for a sweepstakes entry are examples of support advertising. Direct-response TV encompasses several digital media, including direct-response TV spots like those just mentioned, infomercials, and home shopping shows (teleshopping). And as we all know the Internet TV has recently been introduced.

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Infomercials

The lower cost of commercials on cable and satellite channels has led advertisers to a new form of advertising. An infomercial is a long commercial that ranges from 30 to 60 minutes. Many infomercials are produced by advertisers and are designed to be viewed as regular TV shows. Consumers dial a tollfree or 900 number to place an order. Programs such as “Liquid Luster,” “Amazing Discoveries,” and “Stainerator” (the so-called miracleproduct shows) were the most common form of infomercial in the 1980s. While this form of show is still popular, the infomercial industry has been adopted by many big, mainstream marketers, as noted in the lead-in to this paper. (Taylor, 2000)

These studies demonstrate that this advertising medium is indeed effective with a broad demographic base, not significantly different from the infomercial nonshopper in age, education, income, or gender. Infomercial sales in the year 2002 were expected to exceed $20 billion, three times the amount spent in 1995.23 Retail stores are benefiting from infomercials as well, as brand awareness leads to increased in-store purchases. For example, a $500,000 print campaign combined with an infomercial for the George Foreman Grill led to more sales at retail stores than through Direct TV.However, some people are not sold on the idea of ads disguised as programs. For example, infomercials disguised as “ultrahip” TV shows have been targeted at teenagers, raising fears that kids under the age of 13 will be susceptible to their lure. Consumer complaints are on the rise, and the FTC has already levied fines for deceptive endorsements against infomercial sponsors. Four consumer groups (the Consumer Federation of America, Center for the Study of Commercialism, Center for Media Education, and Telecommunications Research and Action Center) have asked the FCC to require all infomercials to display a symbol that indicates a “paid ad” or “sponsored by” so that viewers won’t confuse them with regular programming. (Armstrong, 2004; Direct Marketing Educational Foundation, 2004)

TV Advertorials

In 1999, Peugot took its first step into TV programming by developing a series of advertorials to show the public its entire model range. Peugeot is the first auto manufacturer to use TV advertorials. The company developed eight 5- minute films positioning the autos as “The Drive of Your Life” while providing comprehensive information on test drives, technical specifications, and demonstrations(Fowler, 2003). In addition, the auto company developed advertorials for its website, with each advertorial targeted to different target audiences.

Teleshopping

The development of toll-free telephone numbers, combined with the widespread use of credit cards, has led to a dramatic increase in the number of people who shop via their TV sets. Jewelry, kitchenware, fitness products, insurance, compact discs, and a variety of items are now promoted (and sold) this way. The major shopping channel in the United States (QVC) accounted for over $3.9 billion worth of sales in 2002, reaching over 84 million households and fielding more than 130 million calls. Industry studies project a 5 percent growth rate, to $15.6 billion, by 2006. (Baier, 2002) QVC is pursuing international markets (including the United Kingdom, Canada, and Latin America) to follow up on its successes in Germany and Japan, partnerships (United signed on as official airline of the “Quest for America’s Best” program), and sponsorships (for example, Geoff Bodine on the NASCAR circuit).

Print Media

Magazines and newspapers are difficult media to use for direct marketing. Because these ads have to compete with the clutter of other ads and because the space is relatively expensive, response rates and profits may be lower than in other media. This does not mean these media are not used (as evidenced by the fact that expenditures totaled over $9.8 billion in 2001.)

Telemarketing

If you have a telephone, you probably do not have to be told about the rapid increase in the use of telemarketing, or sales by telephone. Both profit and charitable organizations have employed this medium effectively in both one- and two-step approaches. Combined telemarketing sales (consumer and business-to-business) totaled over $661 billion in 2001—with $274.2 billion in the consumer market.29 Telemarketing is a very big industry and still growing. (Direct Marketing Educational Foundation, 2004)

Consider these facts:

  • Over 6.3 million people are now employed in the telemarketing industry.
  • Telemarketing accounts for 45.2 percent of all b-to-b marketing sales.
  • Marketers spend an estimated $76.2 billion a year on outbound telemarketing calls.32 Business-to-business marketers like Adobe Systems, Kaiser Permanente, and Hewlett-Packard are just a few of the many companies that use this direct-marketing medium effectively. B-to-b sales are expected to reach $588 billion by 2006.

As telemarketing continues to expand in scope, a new dimension referred to as audiotex or telemedia has evolved. Tom Eisenhart defines telemedia as the “use of telephone and voice information services (900, 800, and 976 numbers) to market, advertise, promote, entertain, and inform.”34 Many telemedia programs are interactive. (Fowler, 2003) While many people still think of 900 and 976 numbers as rip-offs or “sex, lies, and phone lines,” over 7,000 programs are carried on 900 numbers alone, including Tele-Lawyer, a legal information services organization; Bally’s Health & Tennis Corp., the nation’s largest health-club chain; and NutraSweet. (Etzel, 2001) Problems associated with telemarketing include its potential for fraud and deception and its potential for annoyance. (Doesn’t it seem as if every time you sit down to dinner you receive a phone call from someone trying to sell you something or asking for a donation?) Those in the telemarketing and telemedia industry have responded to public criticisms. Dial-a-Porn and its ilk hold a diminishing share of 800, 900, and 976 offerings. As more and more large companies use telemedia, its tarnished image will likely brighten up.

Electronic Teleshopping

Unlike infomercials and home shopping channels, which have relied on broadcast or cable TV, electronic teleshopping is an online shopping and information retrieval service accessed through personal computers. It is important to reiterate that Internet shopping is a direct-response medium that traditional direct marketers are adding to their businesses as well. For example, QVC, the home shopping channel, has started iQVC, an Internet home shopping channel that complements its cable TV channel and adds incremental sales (the cable channel drives customers to the website). The company was one of the first “Web department stores” to turn a profit. QVC’s Internet shopping channel did $400 million in sales in 2002. Other direct marketers have met with less success, finding out the hard way that selling on the Internet requires different strategies. One such company, K-Tel, Inc., a highly successful direct-response TV marketer (Top 40 music, Veg-o-matic), has had much less success in adapting its traditional methods to the Web. (Baier, 2002) Because they generate a direct response, measuring the effectiveness of direct-marketing programs is not difficult. Using the cost per order (CPO), advertisers can evaluate the relative effectiveness of an ad in only a few minutes based on the number of calls generated. By running the same ad on different stations, a direct marketer can determine the relative effectiveness of the medium itself. For example, if the advertiser targets a $5 return per order and a broadcast commercial (production and print) costs $2,500, the ad is considered effective if it generates 500 orders. (Etzel, 2001) Similar measures have been developed for print and direct-mail ads. For direct-marketing programs that do not have an objective of generating a behavioral response, traditional measures of effectiveness can be applied.

Summary

This paper introduced you to the rapidly growing field of direct marketing, which involves a variety of methods and digital media beyond direct mail and telemarketing.The versatility of direct marketing offers many different types of companies and organizations a powerful promotional and selling tool. Direct marketing continues to outpace other advertising and promotional areas in growth; many of the Fortune 500 companies now use sophisticated direct- marketing strategies.Database marketing has become a critical component of many marketing programs. Advantages of direct marketing include its selective reach, segmentation, frequency, flexibility, and timing.Personalized and custom messages, low costs, and the ability to measure program effectiveness are also advantages of direct-marketing programs. At the same time, a number of disadvantages are associated with the use of direct marketing. Image problems, the proliferating sale and use of databases (some of them based on inaccurate lists), lack of content support, and the intrusive nature of the medium make some marketers hesitant to use direct-marketing tools. However, self-policing of the industry and involvement by large, sophisticated companies have led to significant improvements. As a result, the use of direct marketing will continue to increase.

So far, direct marketing has been portrayed in accordance with its mainstream features. Yet direct marketing is not a body of unchanging practices. Although its growth slowed toward the end of 1989, direct response is still expanding at a faster rate than majority phases of marketing. After adjustment for inflation, direct marketing advanced more than 5 percent per annum during the entire decade of the 1980s that rate of increase is about double the real growth of the total economy.

Growth usually breeds change. For one thing, the more an idea is used, the more it is altered. Although mail and telephone are still mainstays of the industry, direct marketing is slowly changing its face. Among the emerging agents of change is technology.

The computer has introduced completely new ways of doing business. It has allowed database to be used in new and profitable ways, such as identifying prospective customers through a wider range of demographic and purchasing criteria. The following are just a few concrete examples of how the computer has impacted the industry. Supermarkets have begun “frequent shopping” programs. With the use of cards that are electronically scanned with purchases at checkout counters, retailers can get a more accurate picture of individual or household buying habits. More firms are adopting computer-aided telemarketing systems. These handle towering amounts of information, including customer profiles, past contracts and purchases, daily call reports, progress reports on leads and statistical summaries of activities, campaigns, and results.

Other changes have come from technological developments and innovations in business practice. Cable TV systems sport “alphanumeric” formed on special events and promotions. More relevant to direct marketing are shopping programs that allow viewers to order by dialing an 800 number. Some marketers have begun to exploit videocassettes as a selling tool. Real estate developers send out videos to brokers, who can show different properties to clients. Some have marketed these videos directly to individuals, who can inspect homes of various styles prices in the comfort of their living rooms. Cadillac in 1987 demonstrated its new ultra-luxury model, Allente, in videotapes mailed to upscale homes. Several large retailers have developed videocassette catalogs to expand marketing alternatives. Video stores are even renting tapes with coupons and direct response offers inside video boxes.

Many of these changes were occasioned by large national advertisers embracing direct marketing in major ways. Indeed, these large companies have acted as a powerful force in propelling the rapid growth of direct response. When large companies adopt direct marketing, they seldom substitute it completely for other selling techniques. Rather, they add direct marketing to their already-bulging bag of tools, incorporating it into their marketing mix. Fifteen years ago, direct mail usage would have approached 100 percent in virtually every case. Direct mail still reigns as the top direct response medium, but its eminence is weakening.

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