Defining the direct brand

Simon Foster of Ogilvy & Mather Direct, introduces the concept of the 'direct brand' - brands built to exploit a direct market position. Direct brands have so far flourished mostly in the financial services sector, but the same branding technique could easily be applied to other markets

Simon Foster

PIONEERS are relatively few and far between in the marketing world. Marketers like to think of themselves as a cutting-edge group, but in fact they are not. Products come and go, but in general terms they are doing things now in much the same way as their peers did 20 years ago. As a result, when pioneers do come along, they tend to have a disproportionately large impact. I would like to introduce this article by mentioning two. Their names are Peter Simpson and Peter Wood. These names may be unfamiliar to you, but you will recognise the brands they helped to launch and establish. Peter Simpson was part of the core team who helped to develop and launch First Direct and Peter Wood was the brain behind Direct Line.

Direct Line and First Direct have helped to create a revolution in Consumer marketing, a revolution which is based upon a new way of doing business with the consumer. To them the word 'direct' is not a poor relation to some 'greater' discipline. It is the central theme to their whole business philosophy; it is the very key to their success. They have created brands which totally merge the disciplines of advertising and direct marketing. They have created direct brands.

WHAT IS A DIRECT BRAND?

There are 'pedigree' direct brands and there are 'hybrid' direct brands. Pedigree direct brands have all been created relatively recently with the sole purpose of building and exploiting a direct market position. These include names like Direct Line and First Direct. Hybrid direct brands come from companies that have their origins in more traditional distribution channels, but which have now moved into the direct arena. In general terms they are no different from pedigree direct brands except for one key area which is in their history. Hybrid direct brands need to conquer their preceding corporate cultures in a way that the pedigree direct brands do not. Hybrid direct brands include Eagle Star Direct, Guardian Direct and Norwich Union Direct. Virgin Direct straddles the two. It is not strictly a pedigree direct brand - Virgin has a 20-year retail history - but nor does it fall in with the financial centurions mentioned above. In all cases the word 'direct' is central. It reflects the raison d'être of these brands: to serve the consumer in a one-to-one way. Let us look in more detail at some of the defining characteristics of the direct brand.

The direct brand is more than a combination of the core product or service and the symbols that represent it. It is more than a set of impersonal 'meanings' which predispose the consumer to look favourably upon it. From the consumer's point of view, the direct brand is a living interactive experience. Why? Because direct brands have a very strong service element and the people who deliver them are an integral part of what is being delivered. When consumers buy an fmcg brand such as Heinz or Persil, they do not encounter representatives of those companies at the point of purchase. Producer and consumer do not meet. Their only connection is through the product itself.

Direct brands exist to pass real cost savings and service improvements to the consumer. Direct brands recognise and capitalise upon a simple business fact: by eliminating the need for costly retail or agent-based distribution systems, they can offer real cost Savings to the consumer without jeopardising the quality of the product or service being offered. In fact, by being able to control the relationship with the consumer, direct brands aim to offer a better level of service at a lower cost.

The distribution channel is always direct. There are no intermediaries of any sort: no retailers, no wholesalers, no agents and no bank branches. Traditional channel management problems such as motivating dealers or securing stocking on supermarket shelves are not relevant. These problems have been replaced by a new set of issues such as a company's ability to handle high volumes of telephone calls at any one time, to maintain and interrogate customer databases effectively and to maintain high levels of customer service. In this sense, the direct brand is a multi-dimensional concept which is monitored in terms of new quality factors such as time waiting, time taken in delivery and ability to satisfy immediate need effectively.

The direct brand is based on one-to-one dialogue. The direct brand is not dealing with a mass of unidentified individuals crudely gathered into demographic groups, but with individuals who have names, addresses and telephone numbers. They are people with product and service purchasing histories, and the owners of direct brands know their customers by understanding these histories. This detailed understanding of the consumer is the springboard to a lasting one-to-one relationship and the benefits that provides to both company and consumer. Direct brands do not pay lip service to one-to-one customer knowledge - they live by it.

Direct brands often have a high service element. Many of the direct brand examples given above come from the service sector. Services have three dominant characteristics which make them especially suitable for direct distribution to the consumer. First, services are intangible; there is no physical product to be delivered or examined prior to consumption. Second, services are instant; they perish upon consumption. When a consumer makes a transaction with a telephone bank the service has effectively been 'consumed' once the transaction is complete. There is no remnant of this transaction except the remembered quality of the experience and the financial transaction itself. Third, services are people-based; services can only very rarely be delivered without person-to-person contact. These factors help explain why many of the direct brands referred to in this article come from the financial services sector.

WHY HAS THE DIRECT BRAND EMERGED?

Five important factors have conspired in unison to cause the direct brand to appear:

  • Intense competition has forced marketers to explore the differentiating potential of the distribution element of the traditional marketing mix. Of the 'four Ps', promotion, price and product have always received ample attention. 'Place' or distribution, ie the route to market, has always been under-utilised as a source of competitive advantage. Distribution, however, can form a major opportunity for meaningful strategic differentiation. After side-stepping distribution networks, direct brands can take their cost savings and inject them back into the pricing of their product or service, thus increasing the market competitiveness. It was the benefits of the direct opportunity coupled with increasing financial services competition that inspired Direct Line, First Direct and Virgin Direct to challenge the established financial services community.

  • Advances in computer technology have revolutionised two areas which are essential to the existence of the direct brand. Fibre-optic digitally controlled telephone networks mean that more and more calls can be handled at an ever-decreasing unit cost to the consumer. This means that the telephone distribution channel is able to handle the critical masses of calls needed for direct brands to survive. Exponential advances in microchip technology have increased the ability of computers to manage, process and interrogate large volumes of customer information almost instantaneously. This means that service providers and consumers can be given the information they need to make decisions while on the telephone.

  • Companies now want to get closer to their customers. When Theodore Levitt published his article 'Relationship Management' (1) in 1983, the notion of 'getting closer to customers' was mainly a topic of academic debate. This has changed. The desire of companies to offer customers better service by gaining a greater knowledge of their needs through understanding their purchasing histories is now widely accepted. The collection and management of individual customer records has been made possible by the advances in technology outlined above.

  • The consumer is now more comfortable with the telephone than ever before. Whereas the telephone was traditionally located by the front door of our homes, reflecting the fact that it was a replacement for the telegraph boy, it now appears in a number of different rooms in the house. While over 90 per cent of homes have one phone, almost 60 per cent have two or more. The telephone is no longer an electronic messenger boy, it is an aid to social and business activity that is deeply woven into the fabric of our everyday lives.

  • The growth in the UK economy's service sector is driving the growth of direct brands. Current evidence suggests that direct brands are more prevalent among service businesses than product businesses. Service businesses by their very nature do not require the reduction of stock lots, a traditional function and raison d'être of channel intermediaries. Unlike tangible products, services are delivered immediately, at the point of consumption. There is therefore no reason for the intermediary function to exist within the distribution channel. If anything, intermediaries simply get in the way of efficient service businesses.

WHAT IS THE CUSTOMER LOOKING FOR?

Any discussion of marketing practice is worthless without reference to the needs of the consumer. As a result we should consider what consumers hope to achieve when they interact with direct brands. The answer is, in a word, convenience, measured in terms of time, cost savings and service.

Direct brands thrive on their ability to be available when the consumer needs them. It is highly unlikely that First Direct would be the success story it is if it were only open during normal banking hours. First Direct appreciates that while its customer base is one of the most lucrative, the reason for this is that its customers are busy people leading hectic lives. They are short of time and in search of banking solutions that are available when they need them. First Direct customers can arrange a loan in minutes at any time of the day.

By taking a direct route to the consumer, direct brands aim to make, and pass to the consumer, real cost savings by increasing the efficiency of their distribution channel. Direct Line can position itself as a low-cost option because it can pass these efficiencies on to the consumer. First Direct can offer free banking because it does not have to support an expensive nationwide retail network.

Direct brands aim to make life better for consumers by providing easily accessible solutions - this is often defined by consumers as 'service'. Consumers do not need to go to a bank branch to arrange a First Direct loan. They do not need to go and see a financial advisor to take out a Virgin PEP. In effect, the direct brand proposition takes itself to the consumer; it does not expect the consumer to spend time seeking it out.

HOW DO WE PROMOTE DIRECT BRANDS?

Direct brands merge traditional 'brand' and 'direct response' thinking. Direct brands do not utilise a traditional distribution network and they do not employ a retail sales force. For direct brands, media is the sales force and the telephone is the distribution channel. This has several implications for the way we advertise them.

Direct brands have to be managed on the strategic and tactical planes simultaneously. On the strategic level television, press and posters are used to manage awareness, understanding and credibility within key target groups. On the tactical level, media have to be employed to collect response as the market produces interest. Lower-cost media options such as small space press, loose inserts and radio allow the advertiser to trawl the market and give consumers the regular 'doorways' they need to access the direct brand.

From a creative perspective, the presence of a phone number, especially on television commercials, can cause lay observers to automatically conclude that they are dealing with 'direct response' advertising. This is not the case. While appearing to seek an immediate 'direct response' in their creative work, direct brand advertisers actually seek a medium-term delayed response. Direct brands invest in brand equity, whereas direct response advertisers look for low-cost leads.

Careful analysis of media activity can reveal as much, if not more, avout campaign objectives as a detailed review of creative work. Consider the following example of two financial services advertisers, both running creative work which includes phone numbers and invites response.

The chart shows the TV dayparts bought in 1995 by Churchill and Direct Line. You will see that while Churchill places emphasis on lower-cost daytime segments, Direct Line's strategy is more akin to that of mainstream brand advertisers such as BT or Ford.

What does this reveal about TV advertising strategy for both brands? The Churchill daypart scheme will produce a lower volume of leads at a lower cost per response but it will not generate the effective cover and frequency sought by a traditional brand advertiser. In short, it is tactical rather than strategic. On the other hand, Direct Line's daypart scheme will produce a high cost per lead, but at the same time it will bring the benefits of increased brand awareness and effective advertising frequency across key target groups. If the Direct Line campaign were evaluated on a traditional direct response basis the costs per call would be unacceptable and the campaign would be dropped. So, while Churchill is focusing on cost, Direct Line is focusing on the development of brand equity. These are two very different types of advertising campaign.

THE FUTURE OF DIRECT BRANDS - THE END OF THEIR COMPETITORS?

Once established among a group of target consumers, the direct brand is a highly transportable device which loyal customers will follow into other sectors. Witness Virgin's move into financial services using the Virgin Direct brand. Now Virgin Direct is established it can move across sector boundaries and into new areas with low entry barriers. Armed with its reputation in financial services, Virgin Direct could now go into other financial services products such as 24-hour banking or insurance, or with its travel experience extend its presence into the holiday business. Virgin Direct has a ready-made prospect database to which it can offer newly developed products and services.

WHICH SECTORS ARE MOST VULNERABLE?

Sectors where the consumer is happy to seek the cost and service benefits gained from going direct are most at risk. Direct brands flourish in sectors where the consumer is comfortable making business transactions on the telephone. Consumers are comfortable because they attach real value to the cost and service benefits gained from going direct. These sectors include a number of services such as insurance provision, investment management, life assurance, mortgage provision, telecommunications services and travel. On the product side, evidence suggests that consumers are prepared to buy cars and computers by telephone. Any company operating on a purely retail basis in any of these sectors is potentially exposed to cost-undercutting by direct competitors.

Companies that are operating in sectors with relatively low or easily surmountable entry barriers are also highly at risk. These include many traditional service areas such as financial services and travel. In financial services all areas are at risk, from banking and credit cards through to PEP provision. If an expansionist direct brand owner does not wish to get directly involved in the operational side of its target business sector, facilities can now be managed by third parties - as is the case with credit card management companies. First Direct is recently reported (2) to have signed a deal with BT to launch a branded mobile phone to its customer base.

The risk to these companies is amplified greatly if they do not have a strong emotional brand equity to protect their position. It is a fact that brand equity does provide security in competitive markets. Yet there are still companies who underestimate the value of strong brand positions based on emotional differentiators. They should look to Don Cowley (3) who once observed that, 'a price advantage can always be undercut, a product advantage can always be outflanked, but an emotional difference can potentially command a premium forever.' Companies operating in consumer markets which are ripe to be harvested by direct brands should run an audit on their brand equity. Ask yourself, how would you fare if Virgin Direct entered your sector?

When we look to see where these factors combine we are beginning to see market activity which offers conclusive verification of these points. Virgin's successful entry in the PEP market is a good example. Existing players in the market argued that Virgin did not have the 'right brand image' - meaning a respectable city image - to persuade consumers to part with their money. The PEP sector was however ripe for a direct brand to harvest it. It met all the criteria outlined above; it was a sector where the service was distributed direct to the consumer; it was a sector with low or easily surmountable entry barriers and it was a sector with very few, if any, clearly defined emotional brands. A Virgin Direct fund of £100 million in year one is now persuading sceptics that they were mistaken.

So, which sectors should be looking over their shoulders? There are some sectors which are particularly vulnerable. Services such as banking, insurance, investment management, mortgage provision, travel operators and internet service providers are all vulnerable. Product-based sectors are not immune. As the computer hardware and software sectors become more cost competitive we could see major investment in direct operations. This is especially true with lower cost, fixed specification items such as software packages.

All these sectors and more can expect new dogs to be teaching them new tricks in the next two years. Anyone who digs their heels in and ignores predatory direct brands will do so at their peril. The direct brand is here to stay.

  1. Theodore Levitt in The Marketing Imagination. The Free Press, 1986.

  2. 'First Direct to break mould with BT deal', Marketing Week, 30 August 1996.

  3. Don Cowley (ed). Understanding Brands. Kogan Page, 1991.

NOTES & EXHIBITS


Simon Foster

Simon Foster

Simon Foster is head of TV at Ogilvy & Mather Direct. He is the media planner on Eagle Star Direct and has responsibility for television planning across all the agency's accounts. He previously held a senior business development position at Channel 4, where he worked on the BT/C4 DRTV effectiveness studies.