Towards the term paper for MIS - MGMT 950)

Damark’s^“ Niche in Direct Marketing 
 
 
 
 
 
 
 

For

Dr. Keng Siau 
 
 
 
 

By

Suman Chepuri 
 
 

Introduction/Company Background 
 

Damark International Inc., is a direct marketing company headquartered in Minneapolis, MN. Originally D Marketing, in 1986, it established itself with a more pronounceable name Damark, and begun functioning in widespread. Its founder Mark A. Cohn, 39 is the current Chairman, President and Chief Executive Officer. Damark now has more than 10 years of experience as a direct marketer. It has an active and rising share in the share market. (NASDAQ:DMRK)  
 

In the beginning, Damark offered its customers a handful of products, which were warehoused in a two-car garage, through small catalogs, newspapers and magazines. Today, the Company's customer list includes more than 12 million names, stores its products in a 400,000 square foot state-of-the-art distribution facility and it markets thousands of quality products through more than 145 million catalogs in 65 different versions. It recorded a net revenue of $513.7 million in 1996. Also, it recently launched a website (with the help of Netscape Inc.). This success has made Damark a recognized distribution channel for brand name merchandise which it offers in six major categories: computers, home office, consumer electronics, home decor, home improvement and sports/fitness. These include like-new refurbished products straight from the factories. It offers the following membership clubs : 
 

• Preferred Buyers' ClubÆ: Introduced in 1987, a shopping club providing a 10% discount on Damark merchandise and many third party partner benefits.
• Vacation PassportSM Club: Introduced in 1996, a travel club providing discounts on many vacation-related benefits.
• InsidersSM club: Introduced in 1996, a premier shopping club providing all the benefits of the PBC plus lowest price guarantees, discounts on extended warranties, express shipping, a free dining club and premium rental car club memberships.

Damark’s Place in the Direct Marketing Business 
 

Damark has been a catch name in the direct marketing business ever since its expansion and diversification in 1986. Analyzing the competitive forces in direct marketing by Michael Porter’s model, we can observer that :

1. The bargaining power of suppliers is high; since, there are many direct marketing companies offering to mediate with the various brand-names.
2. The bargaining power of consumers is also high; since, there are many direct marketing companies offering the various brand-names at competitive prices.
3. The threat of new entrants is medium. Since, it needs large scale a coordination and investment, and efficient resource management, it is not very easy for a new entrant.
4. The threat of substitute products too is high. This is again contributed by the presence of various direct marketing companies.
5. The intra-industry rivalry too is pretty high, since the realm of their customers is essentially the same.

By Porter’s generic strategy model, viewing in terms of competitive advantage and the competitive scope; since Damark offers its products to a very broad spectrum of people, with less differentiation (since there are many other companies competing on similar grounds) and tries to keep the price low and attractive, cost leadership is very evident for Damark’s business success. 
 
 
 
 
 
 
 
 

Damark’s Success Factors 
 

Damark reported a record net revenues every consecutive year ever since, including 1996, in which it recorded a 2.7% increase and revenues totaling $513.7 million. It also reported a net income of $6.1 million (@70c/share). Damark has recorded this incredible growth in such a short time by their unique membership features, customer service, state-of-the-art infrastructure and information technologies.  
 

Damark targets on customer loyalty through its quality products for the lowest prices. In fact, I myself being a frequent and satisfied customer, have chosen this very establishment for discussion! Damark’s memberships  offer huge discounts on travel, hospitality (hotels), entertainment, car rentals part from thousands of brand-named value priced products. It has further discounts for its members, and entertains various installment plans for their convenience. They cleverly offer these incentives and make their customers shop more frequently than non-members.  
 

Their catalogued products include computers, home office products, consumer electronics, home decor, home improvement equipment and sports/fitness equipment among several other products. They have a 24-hour, 365 days-a-year customer service toll free hotline service and have very efficient delivery through United Parcel Service (UPS). Most of their products do not even carry any additional shipping and handling price. They guarantee delivery through an online tracking mechanism and also have options for overnight delivery at a nominal additional cost. They even have extended service plans for their refurbished products (apart from the manufacturer’s guarantee period, which is a unique feature among the direct marketing companies. They also have a hassle free 30-day return period, during which the customer may simply return the products without any obligation for a full refund. They also offer special promotional discount coupons and free trial magazines at times. With the inception of their web site since last year, they are gaining the non-traditional sources of prospective members and also making shopping more convenient for their members. All, these features make them unparalleled in customer service and contribute to their customer loyalty.  
 
 

Damark’s Operating Priorities and Strategies 
 

I feel that, Damark realizes that over the long term, the benefits translate into stronger customer relationships and a more solid platform for future growth. As I have discussed some of Damark’s unique operational features above; broadly, I feel the following are its priorities and strategies :

• Accelerate the growth in core catalog business
• Add additional club strategies and concepts to increase membership
• Build a stronger Internet presence
• Expand credit as a marketing tool
• Explore and cash the features of electronic commerce
• Keep improving customer service for more efficient operation
• Continue to build and update technological infrastructure

Role of IT 
 

Information services and technology is of course indispensable in Damark’s organization. Since, Damark’s success of catalog business is based on its ability to understand and target both its customers and the products it markets; before offering any product to its customers, Damark analyzes the product to ensure that it meets pre-established sales, profit and quality standards. All this requires very efficient and effective  database management skills to provide an extensive understanding of its customers' lifestyles and buying habits at ever increasing levels of detail. This information helps the Company to edit product offerings and tailor catalogs to specific customer groups. This pre-mailing analysis resulted in higher response rates, fewer pieces of low-impact mail in customers' mailboxes and improved product profit margins. Over the long term, these benefits would translate into stronger customer relationships and a more solid platform for future product growth.  Thus, I believe a very effective and foolproof information management and analysis scheme has been adopted by Damark. Since, telemarketing is a part of their business, very dependable telecommunication lines are a must. Damark also provides a parcel tracking mechanism with the help of UPS for catering to customer anxiety and satisfaction.  
 

Relevance of the Internet 
 

The question  -- is the Web a Direct Marketing Tool, still arises among us. On the surface, there seems to be a chasm between our traditional notion of direct marketing and how people use the Internet. Statistics show that a very negligible ratio of we surfers use it for shopping. Even with such an intent, they are still apprehensive about the security for letting out their credit card numbers and other personal information. But, since direct marketing is the art of changing the behavior of passive TV viewers or mail openers or magazine readers or billboard browsers into active consumers of  products and services, an interactive and creative medium like the Internet is cannot be neglected at all.. If it's all about turning an uninterested individual into a profitable customer, the catchy and innovative web pages can provide the snare. And sensibly, Damark has already launched a fully functioning web site that caters shopping provision for members and non-members. It has opened this new avenue targeting  Internet savvy customers who would in future keep checking their web-site for the latest deals Damark had to offer to them. It of course the great convenient of “window shopping” for the casual shopper, since it is available all the time and with all the information.   
 

It must also be noted that the Internet is a place where proactive, not passive, consumers, hang out, thus making business on it more prospective with a low cost of maintenance. Also, since the Internet is about information retrieval and research -- who offers what and for how much, it empowers the consumer to seek out custom information, to cut through the hype and get to the reality about products and services. So, trustworthy and dependable reputation is a very important criteria. Thus, high security measures and foolproof transactions need to be ensured. Looking in totality, I believe that the role of IT and Internet in particular plays a strategic role in Damark. 
 
 
 
 
 
 
 
 
 

IT and Networking Opportunities in Damark’s Value Chain

Inbound Logistics

Damark receives its numerous products from a variety of companies, ranging from electronics to clothing. Receiving them and maintaining their stocks to minimize the inventory cost and maximize the profits, is very important for in this business. Damark can implement just in time philosophy and have the stocks available always adequately by alert monitoring of the inventory through an efficient tracking system. Electronic Data Interchange (EDI) can be implemented for this purpose.

Operations and Product Definition

In direct marketing, most products are manufactured and ready to be shipped. Thus, the operational cost is basically involved only in the telemarketing, for taking orders and shipping the products. Damark has all arrangements for utmost customer service; it also has a sophisticated parcel tracking system with UPS, to cater to the customer inquiries to ensure guaranteed delivery. By outsourcing the shipping and handling into professional hands, they minimize the operational infrastructure cost and task burden, and thus the risk. 
 

Outbound logistics

Damark maintains substantial quantities of stock to avoid customer disappointment. But, it often happens with the trends that there occurs stagnation of stocks due to lesser demand. I suggest that it could ship expensive and perishable products directly from the manufacturing company’s warehouse. This would save the problem of inventory storage cost, shipping between the company’s warehouse and Damark’s warehouses, and of course minimize the risk. It can also adopt the procedures of continuos replenishment (CRP) and electronic data exchange (EDI) for maintaining stocks. For, this purpose, the major league companies can collaborate to share an extranet to monitor the needs and trends, facilitate transactions efficiently and cater the customer needs without any consumer dissatisfaction. 
 

Marketing and Sales

I think that Damark has done an excellent job in reaching its potential customers. Since, Damark’s success of catalog business is based on its ability to understand and target both its customers and the products it markets; before offering any product to its customers, Damark analyzes the product to ensure that it meets pre-established sales, profit and quality standards. That indicates that Damark is maintaining a very efficient and effective  database management to provide an extensive understanding of its customers' lifestyles and buying habits at ever increasing levels of detail. It has also harnessed the potential of Internet commerce by launching its comprehensive web site which includes the state-of-the-art mechanisms of Java and CGI scripts for efficient and secure transactions. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Customer Service

Damark is doing a good job in both : pre-sale and post-sale service. It has 24-hour and 365-day toll free phone lines operating to furnish information and take orders, and has extended service plans for repairs for an additional nominal cost. They have specific personnel trained in each field, who can be automatically reached through their customer service or touch-tone phones, providing the customers the utmost satisfaction. Damark may consider of having their own foolproof telephony system, rather than depending on an outsourced company. Since, telephony is an indispensable feature in Damark, considering an own system will reduce lease costs in the long run. 
 

Corporate Infrastructure

Damark has a limited corporate hierarchy. They have Kent A. Arett, Senior Vice President - Information Systems and Operations Group, Arlyn J. Lomen, Senior Vice President - Finance and Administration Group, Mark A. Cohn, Chairman, President and Chief Executive Officer, Michael D. Moroz, Vice President Marketing - Catalog Retail Group, George S. Richards, Vice President Marketing - Membership & Partnership Group. With these limited divisions, they basically operate from Minneapolis, MN. However, during the holiday season (December - January), they have additional centers in chicago, San Francisco, Washington D.C to take and dispense orders as well. By diverting the business to their additional centers, they raise the efficiency as well as customer satisfaction. I believe that implementing a strong network between these centers would facilitate quick and efficient monitoring the market trends of different areas of the country, and provide vital information that can be used to discover and harness the potential markets. 
 

Human Resources

Hiring the best personnel for tele-marketing is a very important criteria for a direct marketing company’s success. Since, the personnel represents the whole company, effective marketing skills play an important role for the growth of the company. Training these personnel with the equipment and technology to be used, and providing them update and precise information through a foolproof medium is very important. An effective way to do this may be the use of groupware technology like Lotus Notes, incorporated with an email system. 
 

Technology Development

Keeping abreast with the latest technology to optimize operational costs and increase efficiency is very important for Damark. They must implement a strong intranet for smooth and efficient operation. They must focus more on the opportunities on the Internet since, the market edge on the Internet remains of great interest today. Though, electronic commerce activities start with modestly, they will continue to be prudent investments which will allow long-term opportunities. 
 

Procurement

Damark should apply its database management and analysis skills not only with the customers, but also their suppliers. Maintaining an extranet with its main suppliers would allow on-line and precise monitoring of quality, quantity and price as well. By, keeping the buying cost lower than ever, they could lower their selling price; this in turn would give them the advantage of cost effectiveness, and would result in better customer appraisal.  
 

In overall, I feel that Damark’s value chain is already quite efficient. I will anyway recommend them about reviewing their corporate infrastructure. Especially, about expanding internationally. Though shipping restrictions apply, harnessing foreign markets with innovative products at attractive prices would help them increase their realm of customers ever more. They should also think about implementing an intranet for efficient data-processing and updating the customer service personnel with precise and update information. Adopting an extranet with frequent suppliers too will add value to inventory management and monitor for best buying prices. 
 

Regarding the adoption of Internet as a full fledged marketing tool and medium, let me analyze the situation with Roger’s criteria for diffusion of innovation.

1. Relative Advantage : Damark would certainly have an additional advantage over its competitors who lack this medium of reaching the customers.
2. Compatibility :   Since, direct marketing is all about conveying the information about the presence of various products to the customers, a medium like the Internet is ideal, since no information restrictions occur in it.
3. Complexity :  Since most net surfing customers would know the basics of browsing, I believe that it would never be difficult for them to use the user friendly web interfaces.
4. Observability :  If features like secure Internet commerce are incorporated, business on Internet would encourage more customers and lead to significant gain for Damark.
5. Trialability :   Since more and more people are getting online, Internet commerce would become a standard method of shopping for potential customers.

So, we can clearly elicit that Internet is very important for Damark in future, and thus it should continue its ventures in electronic commerce. 
 

Further Analysis

Analyzing users’ satisfaction factors based on Maslow’s hierarchy of needs, we observe -

1. Most physiological needs are met through Damark’s products.
2. Safety and privacy of the customer are respected and ensured by Damark.
3. The customer service personnel provide a very social and cordial treatment.
4. The customers are always treated with high esteem and courtesy.
5. By providing guarantee of the best deals in the market, Damark helps in the self-actualization for its customers.

So, we can observe that, customer satisfaction is utmost at Damark.  
 

Degree of risk

Basing on the degree of structure, relative technology and project size, implementation of further IT in Damark would be of low risk. Since, Damark is a large company, with high structure and low technology, it would fall into the quadrant of low risk. So, it should go ahead and implement any possible IT features for additional advantage. 
 
 
 
 
 
 
 
 
 
 

Conclusion and Future Possibilities

Damark should credit as a marketing tool; that would increase both - membership and business. They may in fact go ahead and have their own credit card for this purpose, which may later give Damark a chance to venture into credit card business too. 
 

Adding additional club concepts like tie-ins with various other clubs and broadening merchandise assortment, would make it more lucrative for the members, and increase membership and sales in turn. Broadening access to third party lists for new member acquisitions too could add value to their business. 
 

Among the operating priorities, strengthening the club strategies further and improve efficiencies by enhancing customer service and improving catalog retail strategies might be something Damark can think about in the future. Damark can also nurture more personalized relationships with its customers to add value to both -- customers and vendors by being the middleman to connect customers to their needs at value prices.  
 

Damark can also segment its customer mailings and product offerings with greater precision in future by more systematic methods of determining its potential customers. Damark could be involved with more of its customer's buying decisions, and not just for products they find in a catalog. Damark can also explore ways of adding value to third parties by providing the company's membership marketing expertise to their customers.  
 

References

1. Damark’s Home Page : http://www.damark.com
2. Corporate Information Systems; Applegate, McFarlan, McKenney. 4^th Edition Irwin.

• Competition in Global Industries; Porter, Michael E., Harvard Business School Press, 1986.