What is digital marketing? [Part 1]

This article is intended to give you a background into digital marketing, some of the established models used in constructing a marketing strategy, and a focus on how they apply to digital. The key areas covered in this chapter are:

• A history of digital marketing
• The 4 Ps of marketing
• Porter’s five forces
• Brand or perceptual positioning map
• Customer lifetime value
• Segmentation
• Boston Consulting Group matrix

As with any article, and indeed any marketing strategy, the best place to begin is at the beginning. Digital marketing is an ever evolving and growing beast and one that continues to spread its tentacles deep into the processes that organizations have lived by for decades. That all sounds very dramatic but the truth is that it is simply aligned with the direction of travel of the modern world. Digital marketing is (or should be) a part of almost every key business decision from product development and pricing through to public relations (PR) and even recruitment. We touch on why throughout the article.

Now is an exciting time to be in digital marketing.

Digital marketing is often confused with online marketing. As we moved into the 21st century most businesses had, or were in the final throws of, developing a web presence. E-mail was commonplace and there was technology allowing people to manage this fairly easily. Customer relationship management (CRM) systems had been in place for some time to manage databases. Some companies were placing banners on websites with a similar approach to press advertising. Forward-thinking companies were working on their search engine strategy and even working with some affiliates. All of this was online marketing and, in time, online marketing teams and specialists would begin to appear.

So what has changed? The social media revolution has completely changed the internet and consumer behaviour. The penetration of broadband has increased speed, internet usage and user expectation with over 40 per cent of the world now online and over 90 per cent in many countries (Internet World Stats, 2015). Analytics has grown to the level where we can understand our consumers’ behaviour in real time, including not just their usage statistics but also their demographics and even interests. Mobile has gone smart and tablets have stormed onto the scene and both of these changes have brought along apps. Touchscreen is becoming increasingly common across all devices. Google has become an enormous organization and owns search globally. TVs have gone smart and Bluetooth opens up another level of possibilities. With a naturally ageing population there is now only a very small percentage who are technophobes simply due to age. I could go on, but it is clear to see that digital is now much broader than the online channels of 15 years ago and must be embedded into everything we do.

One key point that needs to be made at this early stage is that the focus of this article is on digital marketing and that the word marketing is as important as the word digital. Many organizations have moved towards creating digital marketing departments and digital departments that are separate from their marketing departments. It is crucial now, more so than ever, that digital marketing is an integral part of all marketing activities. This includes PR, creative direction, brand, CRM, retention, product development, pricing, proposition, communications – the entire marketing mix. Creating a silo for digital activity is very dangerous and only through truly understanding the strategic benefits of fully integrating your marketing from day one will you succeed.

A history of digital marketing

Digital marketing first appeared as a term in the 1990s but, as mentioned above, it was a very different world then. Web 1.0 was primarily static content with very little interaction and no real communities. The first banner advertising started in 1993 and the first web crawler (called Webcrawler) was created in 1994 – this was the beginning of search engine optimization (SEO) as we know it. This may not seem a deep and distant past but when we consider that this was four years before Google launched, over 10 years before YouTube, and that social media was not even a dream at this point, it shows just how far we have come in a short time.

Once Google started to grow at pace and Blogger was launched in 1999 the modern internet age began. Blackberry, a brand not connected with innovation any more, launched mobile e-mail and MySpace appeared. MySpace was the true beginning of social media as we define it today, but it was not as successful as it could have been from a user experience perspective and ultimately that is what led to its downfall. Google’s introduction of Adwords was their real platform for growth and remains a key revenue stream for them to this day. Their innovation, simple interface and accurate algorithms continue to remain unchallenged (although Bing have been making some good steps forward in recent years). Cookies have been a key development and also a bone of contention over recent years with new regulation and ongoing privacy debates. Whilst cookies have played a role in the ongoing privacy concerns of digital technology, they have also been a key development in delivering relevant content and therefore personalizing user experience.

Web 2.0 was a term coined in 1999 by Darcy DiNucci but not really popularized until Tim O’Reilly in 2004. With Web 2.0 there was no overhaul of technology as the name might suggest, but more a shift in the way that websites are created. This allowed the web to become a social place, it was an enabler for online communities and so Facebook, Twitter, Instagram, Pinterest, Skype and others were born. One trend that has certainly appeared in the last 10 years is an increase in buzzwords. There seems to be a new word or phrase for everything. From ‘big data’ to ‘dark social’, new terms arrive all the time. At nearly every marketing conference I attend these days there is one speaker who is trying to socialize a new phrase they have coined. Whilst these buzzwords can inspire us and open our eyes to new ways of thinking they rarely change the underpinning strategic planning of an effective marketing-led organization – and so below we will review some of the established models, with one eye on the digital perspective.

To gain a good view of the strategic side of digital marketing we review the following models:

The 4 Ps of marketing:

• Product
• Price
• Place
• Promotion

There have been quite a few variations on the Ps of marketing, including the 4 Ps and 7 Ps, but for this article we focus on the core 4 Ps of marketing – often referred to as the marketing mix. They are product, price, place and promotion. So let’s look at what each of these means and how they apply to digital.

Product

This may be a physical product or it may be your service proposition. The key here is that something is developed that people actually want to buy. Some businesses begin with a product and then try to force that on an audience. If there is no demand for your product and no one is interested then you will not be able to create demand.

What does this mean for digital marketing?

The key considerations here from a digital perspective are around whether your product can/will sell online. What channels are open to you for your product or proposition? Are there opportunities to make it flexible to be more appropriate for the online or mobile audiences? Does it provide real value for the consumer and is it differentiated from your competitor offerings? Is it being updated, serviced, maintained effectively to keep it strong? Are there features of it that can be added or should be excluded for the digital customer and is it fair to do this?

An example might be a music album. Three people buy an album. John buys a CD, Maria downloads the album and Robin streams it. All are different consumer behaviours and each person will use your music in a different way. John may proudly display the album on a shelf as he is a loyal fan. Maria may delete some other music from her phone to free up space for the new album. Robin may put the tracks into separate playlists in order to cultivate his collection according to genre or mood. Understanding the different motivations and usage habits for these products is vital to getting your marketing right in the digital age.

Price

Pricing is the second P and one that can be more of a science than an art. Understanding price elasticity and competitive positioning are angles to consider but we won’t go into the economics of this here – the key factor is whether you are asking for a price that people are willing to pay. The ‘willing to pay’ element of that does of course have many factors behind it such as your brand value, online reviews, product quality and others but there are also numerous tactics that can be employed here.

What does this mean for digital marketing?

Discounts and offers are certainly not new to digital marketing but the concept of fast price comparison and the introduction of cashback and voucher sites have certainly changed consumer behaviours. Businesses can take advantage of this through affiliate marketing programmes. Affiliate marketing is where you promote your products through a third-party website in exchange for paying a commission or fee to the website when an action is taken. This is very common in the comparison, voucher and cashback space as it is very easy to directly track sales and therefore attribute value to the relationship. Commissions are often paid on sales but can be paid on click-throughs or other actions.

There is also an expectation in some sectors that prices should be lower online as there are no overheads. It is considered by many that selling online should be cheaper than selling from a retail outlet. One counter to this of course is that there is no need to post products from your retail outlet. Deciding how this fits with your business strategy is key. Another factor to keep in mind is that it costs less to keep a customer than to acquire a new one so retention, CRM and lifetime value are a vital part of your strategy.

Place

Location, location, location. Building your shop in the wrong place decreases footfall and ultimately means fewer sales. Having your shop in the right place but not having the stock in the shop is even worse. Having your product in the shop in the right location but then not displaying it correctly – so people cannot find it – is also a factor of ‘place’.

What does this mean for digital marketing?

All of these apply to digital marketing. You may not have a physical shop but your online shop must be easy to find – this relates back to SEO, paid search and most other digital acquisition channels. Once someone arrives is it easy to navigate and find the information and products that they want? Do you have the items in stock and is your site working correctly to dispatch them? Ultimately, if people cannot find what they are looking for then you can expect them to go elsewhere. If this happens online then you can expect them to go elsewhere much faster as speed is much more of an expectation online.

Promotion

Promotion is what most people think of when they hear the word marketing. Your TV campaign, your press advertising, your display banners. This is often the first time that people will have any relationship with your brand and sometimes, certainly in below-the-line marketing, this can be a personal relationship. As we all know, first impressions are very important so getting your promotion right is vital.

These days promotion has moved far beyond simple advertising and into dialogue. Smart marketing is much more than shouting about your product and much more about taking customers on a journey. That journey does not end at purchase either. There are many standard approaches to goodquality promotion, including being single-minded, insight-driven, integrated, communicating the features and benefits, creating a clear call to action and many others. All of these apply to the digital acquisition channels.

What does this mean for digital marketing?

One of the challenges with the digital space is that we often have limited space or time to communicate the product promotion. Where a TV advert or press advertisement may have 30 seconds to get a point across, digital will often have 100 characters or less than one second. This therefore creates a real need for impact messaging and, more importantly than anything else, a test-and-learn philosophy. No matter how much you know (or think you know) about your consumers you cannot predict every possible outcome and so being in a constant and evolving test cycle is vital to a culture of continuous improvement – something that is a key value of effective marketing.

Porter’s five forces

The next model worth reviewing is the five forces analysis model by Michael Porter. This is used to analyse the level of competition within an industry by utilizing industrial organization economics. The purpose is effectively to ascertain the competitive landscape and potential profitability of an industry. Any changes to these forces can directly affect an industry and the companies within it and so it is important to understand them and react to them in order to retain or gain competitive advantage. Michael Porter goes into a greater level of detail than we have space for here in his book Competitive Advantage, which has been used by students and businesses alike for many years in order to understand competition.

Porter’s five forces are as follows:

• Horizontal competition:
  • 1 The threat of substitute products or services.
  • 2 The threat of established rivals. 3 The threat of new entrants.
• Vertical competition:
  • 4 The bargaining power of suppliers.
  • 5 The bargaining power of customers

Threat of substitute products or services

This first force is the existence of another similar product in another industry. An example for the digital age might be landline phones versus mobile phones or, more specifically, mobile phones versus smartphones. Were a new smartphone to be launched that charges via a pod in the home and that has specific benefits for home use, it may attract customers who have always been landline users and so this is a substitute product threat to landline providers.

There are a number of factors to consider when determining if a product is a substitute threat according to this definition. Those factors are:

• Switching cost: if the switching cost is low then there is a high threat.
• Pricing: if the other product or service is relatively low in price then again the threat is high.
• Product quality: if the potential substitute product or service is of superior quality then the threat is high.
• Product performance: if the other product is superior in performance then the threat is again high.

What does this mean for digital marketing?

This threat is ever present in the digital age as companies continue to innovate. Tablets have threatened the laptop market and phablets have in turn threatened the tablet market.

Threat of new entrants

This threat is fairly obvious. A new entrant to a market can be direct competition and therefore threaten the success of an established business. There are many examples of this from the digital age, not least Google, Amazon, eBay and Twitter. Google entered the search market and quickly became the leader above many established players due to the accuracy and speed of the results. Amazon grew quickly, defeating more established players through excellent customer focus and introducing innovations in personalization that gave them a distinct advantage. Although eBay was not the first auction site it was very simple and easy to use. Finally, Twitter entered the social media space with a new micro-blogging approach that created a very simple method of sharing new thoughts and insights. It has been relatively easy for online-only businesses to enter many markets in the last 10 to 15 years. Many of the old barriers, especially capital, have been removed.

Some of the factors that can dictate the threat of a new entrant are:

• Barriers to entry: for example patents, regulation. High entry barriers are attractive to established businesses as they stop new businesses entering easily. Also low exit barriers help businesses to leave the industry, which is also attractive. In other words, it is easy for your established competition to leave but difficult for new competition to enter.
• Economies of scale: new entrants are highly likely to be smaller than established businesses and so may not be able to profitably compete on pricing.
• Brand equity: established businesses have brand equity – a level of trust that comes with being a recognized brand. Although it is true that new entrants do not have this, it can be quickly established with significant above-the-line marketing spend.
• Industry profitability: if the industry is generally highly profitable then it is likely to attract a large volume of new entrants and vice versa.
• Government policy: there might be government policy in place that limits the ease with which new entrants can join specific industries.

There are many other factors such as location, expected retaliation, technology and distribution and these should all be thoroughly researched and understood in order for strategy to be robust.

What does this mean for digital marketing?

Specifically for digital marketing it is certainly true that new entrants are common to most markets and disruption is commonplace in the 21st century. Factors such as location, economies of scale, brand equity and technology are far less relevant for entering many industries now, for example technology businesses. Technology businesses have grown at pace in recent years and have attracted a great deal of investment as businesses look to disrupt the existing industries. In 2014 for example, funds worth US$1.4 billion were launched by London-based venture capital firms in just six months (London and Partners, 2014). Many of the businesses being invested in offer digital solutions such as marketing automation, analytics and social media. This results in the digital marketing industry being in a constant state of flux – and ensuring you keep pace with these changes is important. Attending events, maintaining strong relationships with agencies and tech companies and reading the tech news are all important ways of doing this.

Intensity of competitive rivalry

Competitive rivalry is one of the more commonly understood competitive factors and is sometimes considered the most dangerous. The distinct features and behaviours of your competition directly affect your ability to gain competitive advantage.

Alongside digital transformation there are many other factors, including:

• The competitors themselves: the number of competitors and their relative strength are key factors. If your industry has no industry leaders the playing field is fairly level and so competitor rivalry is increased.
• High exit barriers: if it is difficult to get out then more businesses will stay in, even if they are only breaking even or even losing money. Competition therefore remains high.
• Slow industry growth: if an industry is growing fast then all players can grow through acquisition without necessarily directly affecting the competition. All those new customers can be shared out. If growth is slow then there are no more customers but just as many companies, so to grow you need to acquire customers from your rivals.

In markets where competitive rivalry is high, we move towards ‘perfect competition’ or in other words a situation where everyone competes at an even level with no ‘price makers’, only ‘price takers’. Price makers have the power to influence the price they charge, whereas price takers have no effect on the market. I would recommend more reading on Porter’s five forces and generally around economic theory to understand this in greater detail.

What does this mean for digital marketing?

There are many factors to take into consideration here and the recent trend towards modernization in the form of digital transformation is one of these. Moving your business into the digital age can be a slow and expensive process for established businesses. This can certainly create a change in the competitive landscape as younger businesses are more agile. On the other hand it is equally true that the larger businesses, which of course tend to be the more established (although not necessarily), can potentially invest money and resource into creating something at scale with advanced technology that may be less available to less established businesses. Digital transformation can gain you competitive advantage and therefore reduce rivalry.

Bargaining power of suppliers

Suppliers of products or services to companies are another factor in the competitive nature of an industry. The bargaining power of suppliers directly affects the ability for companies to make a profit and therefore compete. Strong suppliers are able to control pricing and product quality, which lessens a company’s ability to make profit. Weak suppliers on the other hand can be controlled or influenced more by the buyer and so the buyer can retain competitive advantage.

Some of the factors that can lead to high bargaining power for suppliers and therefore increased competition are:

• Few suppliers: if there are fewer suppliers than buyers then suppliers retain more bargaining opportunity.
• uyer switching costs: if changing supplier is expensive then the advantage again lies with the buyer.
• Forward integration: if the supplier is able to produce the product or service themselves then again they are in a position of strength.

What does this mean for digital marketing?

If you are running an e-commerce operation with physical products then you may be working with a wholesaler for the supply of your goods. It is possible that your supplier may be one of very few or the only supplier of the goods that you are retailing to your customers. In this situation the wholesaler has strong bargaining power as you have limited options. This can lead to an increase in costs and therefore your profit margin. This may in turn lead to a necessity to increase prices, which may result in a decline in sales. Should more wholesalers enter the market then the competition for your wholesaler increases, which passes some of the bargaining power back to you. Another option is to look at producing at least some of the products yourself in order to remove further power from the wholesaler.

Bargaining power of buyers

The bargaining power of buyers is the final force and is simply the ability of consumers to put pressure on companies to lower prices, change their products or improve customer service. Businesses can take a number of actions to reduce buyer power: for example, engagement strategies and loyalty programmes.

Some of the factors that influence buyer bargaining power are:

• Buyer concentration: if there are few consumers and many companies then the buyer effectively has their choice of company.
• Switching costs: as with most of the other forces, switching costs are a factor. If it is easy for a buyer to switch then they retain the bargaining power.
• Backward integration: if buyers can produce the products themselves then they again retain the power.

What does this mean for digital marketing?

One of the best examples of how buyer bargaining power has changed in the digital age is the increased use of social media and review sites to openly rate and discuss products, pricing and customer service provided by businesses. Many consumers will include reviews within their decision-making process and will not buy products that match their requirements if the reviews from their peers are negative. This has even extended to search engines with star ratings openly displayed within results for searches such as restaurants and products, which can increase or decrease click-through rates as a result. The power of the buyer has significantly increased since Web 2.0.