The Real Game Is Leapfrog, Not Catch-Up

The business media have lately been trumpeting how major players like Merrill Lynch, Toys R Us and Tower Records are losing out in the online marketplace to upstarts like E-Trade, EToys and CDNow. How, wonder the media, will the old-timers ever catch up?

Implied in the question is the view that the established brands must do the same things that the online guys are doing in terms of building advanced e-commerce Web sites. That's fine in theory, but it isn't usually enough in practice. Witness Barnes & Noble and Borders. They have wonderful sites technically — certainly equal to in key areas — but still trail by significant amounts in online results; revenues at last year were less than $5 million, versus $610 million for, despite aggressive promotion, had only about half as many visitors as

Are the established brands really dinosaurs facing extinction? That's a distinct possibility for those who continue to either bury their heads in the sand, or make timid me-too forays onto the Internet.

But there is hope for those willing to fully embrace the medium and exploit their true competitive advantage. Yes, in the rough-and-tumble world of Internet marketing the old guys have a significant advantage that most have failed to fully comprehend and unleash against the upstarts: a huge existing customer base. This customer base, if used properly, could enable the brand names to not only catch up but to leapfrog and possibly even bury the upstarts. In the online world, victory goes to the swift, not to the small or large.

Yet the established brands often offer only dissatisfying partial solutions. For example, Merrill Lynch has lost considerable business to the upstarts over the last two years because it failed to offer all its customers the opportunity to trade online. (Recently, it offered online trading to a small segment of its customers.) Sure, it has had seemingly rational reasons for delaying — chief among them not alienating its army of brokers — but each day that Merrill dawdles, hundreds and perhaps thousands of its customers find a way to get what they really want with the upstarts, to the extent that more than half of all trades are now occurring online.

And even when the brand names offer attractive Web-based initiatives, as Barnes & Noble and Borders have done, they undermine these efforts by throwing much of their online marketing budget into online banner ads (where click-through rates have fallen to dismal levels) and failing to fully use such basic promotional tools as e-mail and conventional promotion to inform customers about their sites' benefits.

If the old-timers were to fully unleash the power of their past and existing customers, they could conceivably bury the upstarts. Consider what's happened in the airline industry. There, the old guard of American, Continental, and US Airways, among others, has aggressively lured hundreds of thousands of customers to sign on to e-mail newsletters that every week not only spew out information about cheap seats available for immediate purchase but also promote their Web sites, where travelers can make reservations. The airlines haven't worried a bit about offending the travel agencies that also sell their seats. Southwest Airlines, an aggressive upstart, has actually lagged the established companies in getting its online reservations program working.

Another old-timer, Microsoft, has maintained primacy by adapting the Internet's power to make its Web site among the most heavily trafficked. One of Microsoft's key tools is to invite prospects and customers to subscribe to any of a dozen or so regular informational e-mail newsletters it sends out. These newsletters keep prospects and customers returning to the Microsoft site, where regularly updated editorial content informs them about the features and benefits of Microsoft products.

What does it take to unleash the power of a company's existing customer base? At least four ingredients are key:

A strategy for communicating with past and existing customers online. Many of the existing brands under siege have extensive demographic information about past and current customers. These established companies in some cases bombard their customers and prospects with conventional direct mail and seek new customers with expensive television and magazine advertising. While these companies increasingly publicize their Web site capabilities, rare is the established company that uses conventional promotional initiatives like advertising or direct mail to encourage prospects or customers to take advantage of online benefits.

Information or services that customers want. Such information and services are pretty obvious if you're an airline (availability of low-cost fares, and immediate access to them). The options can be less obvious if you provide a sophisticated service or product like, say, software.

The ability to measure what's happening. One of the truly exciting aspects of the Internet as a marketing tool is that everything that happens can be measured. Each individual e-mail recipient who links through to a Web site can be tracked in excruciating detail as to his or her activity on the site, along with purchase history. That data can be used to develop ever-more-personalized messages to the individual as to product or service interests.

A commitment to play the game. Playing leapfrog isn't a simple or straightforward proposition. Developing communication initiatives, value-added editorial content, and sophisticated measurement systems requires significant commitments of intellectual, management, and financial resources.

Many established large companies are at an interesting crossroads. They have customer data, financial resources and the pathway to play leapfrog. However, history is against them. Established organizations going back to the clipper ship cargo vessels and buggy whip makers of the 1800s have repeatedly shown themselves unwilling to adapt to major technological changes.

Yet these are special times, during which many established organizations have remade themselves to fight off the threats posed by Japanese and German companies, and to continually reorganize themselves to maximize productivity. The Internet may, however, be a bigger threat than foreign competitors ever were, for a simple reason: The bigger the lead the newbies get, the harder it is for the old-timers to play leapfrog, because they have to jump so damn far and the newbies run so fast. But the alternative is much worse: oblivion.

David E. Gumpert is chairman and chief executive producer of NetMarquee Inc., Needham, MA. His e-mail address is [email protected]

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