Ebiz - why is marketing a transaction cost?

[Celine Foo]

Hi sir. Can you kindly explain how is marketing considered a transaction cost? And how can it be reduced?

[William Toh]

Marketing is a search cost incurred by sellers.  It is a necessary investment made by sellers in looking for potential buyers.

If sellers don't advertise their products, buyers will have no idea what is being offered.

Marketing costs can be reduced if sellers are able to:

1) target specifically the buyers who will most likely buy their products.  This increases return on marketing dollars spent, while increasing conversion rate.

2) find out exactly what customers want and give them exactly what they want.  Consumers will not treat marketing messages as spam if the messages are relevant to them.

3) let customers do the marketing, eg. viral effect of social networks.

4) engender loyalty amongst customers, so to reduce the cost of acquiring new or re-acquiring old customers.

This is how e-marketing can play a very strong role in reducing marketing costs.  By leveraging on the 6 I's of ICT, digital marketing can allow marketers to achieve all of those points above.

Your remaining task is to give specific examples of e-marketing that can reduce marketing costs.

[Celine Foo]

Hi sir. Thank you for your prompt response. Am I right to say that as long as customer segmentation is done properly, marketing costs can be reduced?

[William Toh]

Depends on how you say it.  Exactly what do you mean by "customer segmentation is done properly"?

[Celine Foo]

Because you mentioned that marketing costs will be reduced if sellers are able to find out what customers exactly want. So if market segmentation is done effectively, we are able to find out what exactly the customer wants, which category they belong to and from there, we can fine tune our marketing strategies towards this targeted group. In this way, marketing costs is being reduced. Pls correct me if I'm wrong. Thank you!

[William Toh]

I know what I said :) .  You are not wrong at all with interpreting my statements, but your answer is not critical enough for you to get an A.

The point I want to make is that customer segmentation may result in improving the ROI of marketing efforts, but it is a cost by itself.  To do customer segmentation, you can capture data about customers (demographics), and their needs.  This can be a very costly activity with traditional marketing.  And this is precisely why e-marketing can help to reduce transaction costs spent in doing customer segmentation, because of its efficiency in collecting and analysing all these data.

[Celine Foo]

Hi sir. Ok I think I kinda got what u mean...

So can I say that, one way to reduce marketing costs is by leveraging on e marketing strategies for example, Facebook. Facebook collects data when users register themselves with Facebook. Also, Facebook allows users to self segment themselves according to their hobbies etc. Here, we do not have to collect the data manually, and hence, marketing costs is being reduced.

Another way is to make use of search engine optimization (another way of e- marketing). When consumers key in the search terms into the search engine, they are actually indicating their interests and these helps us in customer segmentation.

[William Toh]

Yes!  Those are good examples.  Except to say that "Facebook allows users to self-segment themselves" is kind of weird.  Just say that "Facebook provides the demographics of potential customers, allowing marketers to pinpoint exactly who they want to target".

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[William Toh]

Don't forget, though, to apply a framework for your Ebiz answers.  For this question, the 6 I's framework is most relevant.  Try explaining how each of the I's can help reduce marketing costs.

On Tuesday, May 5, 2015 at 7:44:09 PM UTC+8, William Toh wrote:

Yes!  Those are good examples.  Except to say that "Facebook allows users to self-segment themselves" is kind of weird.  Just say that "Facebook provides the demographics of potential customers, allowing marketers to pinpoint exactly who they want to target".

[Celine Foo]

Sir, thank you so much for your enlightenment. That helps alot. I attempted the essay question just now and hope you can take a look at it. Please feel free to correct me and highlight any points that i've missed out. Thank you! :) 

Describe why e marketing can reduce transaction costs. Suggest at least two successful examples of the reduction in transaction costs provided by emarketing activities.

 

E-marketing is the process of communicating the value of the product/service to targeted consumers over the Internet and related electronic means. Today, with proliferation of technology, consumers are more discerning and hard to please. They are no longer attracted to mass marketing messages. Customers today are not location specific anymore, and are global. Marketing messages need to be customized in order to attract them.

E marketing, as compared to traditional marketing means, e marketing is customer centric as it does not only “push” but also “pull” information from customers.

 

Transaction costs are investments incurred by economic agents to reduce their uncertainty and bounded rationality surrounding the terms of the economic exchange. These investments are necessary to mitigate the agent’s risk of falling prey to the opportunistic behavior of other parties in the transactions. Transaction costs are incurred in 3 phases, mainly search, contract and control costs.

 

Marketing is a search cost incurred by sellers. It is a necessary investment made by sellers in looking for potential buyers. Sellers have to advertise their product so that customers know what’s being offered to them.

 

Marketing costs can be reduced if sellers are able to achieve efficient customer segmentation and target specifically which group of buyers will buy their products. This increases the return on marketing dollars spent, while increasing customer conversion rate. We also have to understand customer needs and then tailor our marketing messages in order to attract them.

To achieve the above, we can exploit the use of information and communications technology (ICT) and leverage on the 6 Is of marketing. They are interactivity, intelligence, individualization, integration, industry restructuring, and independence of location.

 

With the use of ICT, instead of a company simply pushing a message to a customer, who represent the old media, “broadcast” way of marketing, customers can now interact with companies online by seeking out information themselves. This distinction is known as push media versus pull media. Online, the customers often seek out the information he/she is interested in. For example, with search engine optimization, consumers are indicating their interests when searching with certain keywords or phrases.  Marketers can make use of this information collected and understand better the different customer groups and their needs.

 

Intelligence refers to the collection of informational about customers. Traditionally, in order to collect data about customers, marketers have to conduct surveys, which is both time consuming and laborious. With ICT and new media, marketers can conduct online surveys instead. E.g. Standard chartered bank conducts a short survey that comprises of 1 or 2 questions about its online service each time and user logs out. Customers usually do it since it’s a short survey and doesn’t take up much of their time. By doing so, this allows standard chartered bank to know its customers better, and also get feedback about their service.

 

Besides that, marketers can also make use of software to track the customer’s progress around a website (i.e. which products they consider as well as which ones they have purchase), and, at the network level, which websites they visit. Information collected is useful towards identification of customer segment relevant to the different stages of customer life cycle.

 

Social media are a useful tool to collect information from customers. When users register themselves with social media tool like Facebook, their personal data are stored inside the system. When users join specific groups or pages, it also indicates their interests, places they like to go, products they like to use etc. Hence, with these demographics provided, marketers can make use of these information and helps them pinpoint exactly who are their target customers.

 

Individualization is about personalization, where individuals themselves provide segmenting information about themselves when they customize the pages they like to view. This information contributes to marketer’s effort to refine their customer segmentation. A good example would be Amazon’s highly customized recommendation system. Amazon tracks and stores all the browsing and purchasing history of the individual user. Amazon then recommends certain books to customers based on their data.

 

New media also allows marketer to integrate various marketing communication techniques in at least two ways. It complements other marketing channels for product promotion and it facilitates customer service. Eg. Easyjet allows customers to purchase air tickets through both online and by phone. This opens up a new group of customers and it is also a useful way for marketers to assess whether a new customer segment with certain characteristics is evolving.

 

Industry restructuring refers to disintermediation and reintermediation with the use of ICT. When intermediaries like wholesalers and retailers are disintermediated, the seller can deal with the buyer directly and not go through any other parties. By doing so, sellers will know first hand about the customer’s wants and needs instead of relying on third parties for information. A successful example would be how Amazon disintermediated traditional bookstore by offering books online.

 

Lastly, independence of location. With new media like search engine optimization and affiliate marketing; it removes the restrictions of dependence on local customer segments. It allows customer’s segment to expand beyond local to global market. For e.g. Google search results are not limited to only Singapore, but worldwide. This information contributes to market segmentation exercises, in terms of accessing the viability of moving into new customer segments in other areas.

 

In summary, exploiting uses of ICT to collect customer’s data can reduce marketing costs. These data collected will then be useful for marketer’s customer segmentation exercise. Only when we understand customer’s needs, then we are able to tailor to their needs, increase profits and engender loyalty amongst customers.

[William Toh]

It is a very good essay and u should have no problems getting above 50 marks for it. However, it was not always focused on the reduction of transaction costs. That should have been the key focus. The 6 Is allow you to explain the features provided by ICT that make digital marketing effective, but you must fundamentally explain how these features directly lead to reduction in marketing costs. Not all the 6 Is are useful for this question (eg. Industry restructuring), so you should even mention them if you cannot effectively relate them to reduction in marketing costs.

Go back to my initial answer which comprise 4 points that explain how digital marketing can reduce costs. For each point, you can apply some of the 6 Is to explain. This will make your essay more focused on answering the question, while grounding your answer firmly on theory. Otherwise, if you read your essay again, you only talked about the 1st 2 points but missed out the last 2 on viral marketing and engendering loyalty.