The Information Gold Mine

New software--and the Net's legions of cybersurfers and shoppers--are starting to hand companies opportunities they've only dreamed of

When Harley Dixon clicked on NextCard Inc.'s advertisement for a credit card on the financial Web site, he couldn't believe what he found. It promised instant approval and a choice of terms based on his credit history--all in less than 35 seconds. Intrigued, the retired engineer from Henrietta, N.Y., filled out a short online form with his name, address, income, and Social Security number. Bingo! Seconds later, up popped three offers. Says Dixon: "Next thing you know, I had a new card."

Behind the scenes, the snap approval was a technological tour de force for NextCard. Instantly, NextCard's computers dialed the three major credit bureaus to check Dixon's record. Analyzing that along with his current balances, NextCard in a split second zipped through 30,000 potential combinations of terms in its portfolio and chose three offers tailored precisely to Dixon's profile. The result: Instead of the usual three to six weeks to issue a card and transfer balances, NextCard won a new customer in a heartbeat. "The Internet is the most fantastic source of data the world has ever seen," says NextCard Chief Executive and founder Jeremy R. Lent. "We're creating a brand-new science."

All over the Web, a data gold rush is on. The incredible communications and computing power of the Internet is handing companies an unprecedented opportunity to collect and analyze information. By tracking everything from which advertisements prompt that first mouse click all the way through to the actual sale, they're scrambling to unlock patterns of customer behavior hidden since the dawn of commerce.

Of course, companies have always tried to quantify customers' wants and needs--and largely failed. Department-store pioneer John Wanamaker famously complained 130 years ago that half his advertising was wasted--he just didn't know which half. Since then, companies such as Wal-Mart Stores Inc. have set up huge virtual warehouses full of product and customer data. But those data have been cumbersome to get at and daunting to analyze. Figuring out what customers really want has remained more of a black art than a science.

LESS WASTE. Now, companies are starting to harness the Net's power to not only answer Wanamaker's question but go far beyond that. They are working away, mining the hidden veins of gold in mountains of data in an effort to prompt customers to buy more, stick around, and, down the road, maybe even pay extra for the tailored products and services that will result. Along the way, the goal is to save money by targeting only the most profitable customers and avoiding the manufacture of costly products nobody really wants. Ultimately, merchants want to tailor unique products and services to each and every customer--so-called mass customization, the unrealized dream of every marketer.

Information gathered over the Net can provide the kind of insight into customers that Wanamaker could scarcely imagine. It's as if he could train cameras on every square inch of a store, with teams in back rooms monitoring how often shoppers touch a rack of sweaters or turn up their nose at a pair of slacks--and still more legions to make new products on the spot and rush them out to those fussy buyers. Says Chris Halligan, director of Dell Computer Corp.'s E-commerce business: "The Internet has turbocharged our ability to understand our customers."

This ultrapersonal targeting may help E-commerce finally deliver on its promise to revolutionize the business world. Now that Web sellers have all this traffic and millions of customers, they need to find a way to extract the real profits that investors increasingly demand. If they can provide a unique service or product, they can sell more and even charge more. "We want to get to know them the same way a small-town shopkeeper of yesteryear might have gotten to know them," says Inc. CEO Jeffrey P. Bezos. "That kind of personalization is going to be extremely valuable for the customer."

That's why companies are furiously collecting and analyzing the bits and bytes spinning around their computers' fast-growing arrays of disk drives. Already, for instance, the Web portal Yahoo! Inc. collects some 400 billion bytes of information every day--the equivalent of a library crammed with 800,000 books--about where visitors click on the site. It hopes to figure out what ads and products will most appeal to visitors so it can charge higher rates and garner more E-commerce sales. Likewise, ad-targeting service Engage Technologies Inc. has gathered some 30 million of its own unique customer profiles.

The shock waves from this new approach will shake not only cyberspace but also brick-and-mortar merchants. Already, unlikely stalwarts such as Consolidated Freightways, investment adviser PIMCO Funds, and industrial parts distributor W.W. Grainger are beginning to tap online customer information. "It's at the forefront of how we're growing E-commerce," says Grainger Internet Marketing Vice-President Jim Roots. His customers are largely employees dispatched to make purchases for their companies. Armed with data on the spending caps of each of these employees, Roots targets them with E-mails about products within their price ranges.

What remains to be seen is whether consumers will raise a ruckus about all this intimate knowledge of their secret desires. Although customer data always have been collected, it has never been this easy to connect information within and across networks and to use that data instantly. That's what worries privacy advocates. On June 14, they cried foul when DoubleClick Inc., which runs and tracks ads on 1,500 Web sites, announced that it would buy Abacus Direct Corp., which has purchase information on 88 million households. Their worry: The combined data could reveal so much about buyers that it would violate their privacy. "Privacy will grow as a public-relations and political issue," predicts Martha Rogers, a partner at marketing consultant Peppers and Rogers Group (page EB 30).

"CONNECT THE DOTS." That's not the only obstacle to merchants' mass-customization dreams. Many companies admit they've only just begun to look at the technology they need to most effectively use the reams of information they're collecting. According to a Deloitte & Touche study of 867 manufacturing companies in 35 countries, less than a quarter of those surveyed now use data-mining technologies. Says Deloitte & Touche partner David Brainer: "There is a tremendous amount of work to be done to develop an Internet strategy to connect the dots with customers."

The challenge is particularly acute abroad, where E-commerce hasn't taken hold as fast as in the U.S. Many companies in Japan haven't even digitized much of their marketing and sales data, says Joichi Ito, chairman of U.S. portal Infoseek Corp.'s Japanese unit. Some overseas companies, however, are tiptoeing into mining their data. Matsushita Electric Industrial, the world's largest consumer-electronics company, conducted an online poll of the 8,000 subscribers to its Internet access service about the gifts they had bought or planned to buy online. Now, Matsushita is sharing those results with its clients, such as department stores and mail-order businesses.

What's the magic behind all this newfound data collection? While marketers can't track how much junk mail shoppers throw out, any online merchant with tracking software and database programs can keep tabs on how many times a Web visitor checks out an advertisement or a product--and what they skip over. To do that, Web sites can simply place tags, called cookies, on a visitor's computer disk drive. Those cookies, combined with online registrations, can then be added to information from E-mails and phone inquiries placed by customers. Add in what the cookies and credit cards say about purchases made, and E-businesses suddenly have a treasure trove of insights.

Still, it's only in the past year that companies have used the technology to its fullest. Once the Net reached mass market status, with 100 million cybersurfers and counting, Web site operators began demanding software that would assess what was clicking and what was missing. Now, there is a slew of software to answer their questions--from's $5,000-plus programs that monitor customer orders and tastes so it can create tailored E-mails to E.piphany's $250,000 software modules that track buying trends across hundreds of Web sites, as well as phone calls from customers and in-store behavior.

Many companies already are reaping big benefits from their efforts at using these gobs of data. In a recent survey by Forrester Research Inc., 16% of large companies already expect more effective use of customer information to help them cut costs this year. An additional 34% are banking on savings by 2001.

Just getting info to the right people inside the company is paying dividends for some. "The pressing issue in Corporate America is: `How do I identify the best customer?"' says Roger Siboni, president and CEO of E.piphany, a Palo Alto (Calif.) software startup that helps companies analyze their customer information (right).

FATTER MARGINS. That has been a big motivator for Government Computer Sales Inc., a $100 million hardware- and software-procurement service in Issaquah, Wash. The company has created profiles of its customers--3,400 government departments in six states--based on online and traditional sales, marketing and accounting databases, phone inquiries, and other sources. The profiles help GCSI, which does about 60% of its interactions online, track and target the customers that buy the most. That has helped the company persuade its clients, on average, to nearly double the number of software programs and computer products they buy--boosting GCSI's profit margins from 7% in 1997 to 11% in 1998.

Indeed, harnessing the right information offers companies not just a way to save money but also to make more of it. Two months ago, Consolidated Freightways, a $2.1 billion trucking company, found a way to cater to small businesses. When visitors to its Web site look at certain rate quotes or routing guides, a window automatically pops up offering online help. While customers get a speedy helping hand, Consolidated collects info from them--and uses that to target them for more business. The benefit: These small businesses bring in much higher profit margins--10%, vs. a typical 3% for large customers.

Consolidated isn't alone. Forrester found that 20% of large companies expect their use of customer information taken from the Net to boost revenues this year, while 74% expect a lift by 2001. PIMCO Funds is one of those that's seeing results. The investment-advisory firm offers an Internet service that uses each investor's profile and a storehouse of 700,000 records on financial funds to tailor a proposed investment portfolio within two minutes. About 30 daily proposals that average $250,000 are now being generated from the system. PIMCO estimates if half the proposals are accepted, that will add 75% more business than it would have gotten in the past.

The new ability to track results can mean quick payoffs. Online educational retailer Inc. used AdKnowledge Inc., a Palo Alto (Calif.) company that manages ad placements, to track every inquiry and transaction that resulted from its $1 million online campaign last December and January. It soon found that a few sites--such as Microsoft Network, Yahoo!, and FamilyEducation Network--attracted the most clicks on its ads, so the company upped spending on those sites. Result: Half its customers are people who bought after viewing the online ads.

It's also a way to quickly correct marketing nightmares. Gleaning trends from its computer-review guide, technology news site CNET Inc. could show one advertiser--say, a computer merchant--that its offerings bombed with most buyers, and even those that buyers wanted cost too much. "The value of marketing on the Internet isn't in the clickthroughs," says CNET Chief Executive Halsey Minor about the number of times people click on an online ad. "It's in the data you capture."

That data also can help companies comb their information stashes for clues on how to keep their customers coming back. When BabyCenter Inc., an online baby content-and-products site, opened its cyberstore for business eight months ago, about 100,000 people signed up for bimonthly newsletters about promotions and new items. But results were underwhelming: Only 6% clicked on the links, far below the 10%-plus typical of BabyCenter's other informational newsletters.

FIXING HOLES. So in May, after analyzing what customers clicked on in the newsletter, BabyCenter revamped it around themes such as "Summer Days with Your Baby," with sections targeted at different baby age groups. Since then, the clickthroughs have jumped to 25%, with 1% to 2% of those people buying. Says Duncan Dreschel, BabyCenter's director of marketing: "If you can be smart about your product and are relevant, that's when you can develop loyalty."

One of the best ways to keep those customers is to provide better service. Online upstart Inc., which offers 50,000 products, from couches to Persian rugs, is testing that theory. When customers have questions or want advice, they can hit the Design Consultant icon on the site. Design reps then use product info along with customer feedback and purchasing behavior to make targeted suggestions. This data-intensive approach has helped's revenues jump fourfold, to about $1 million in May. "As customers share specific information about their wants and needs, we can be much more responsive," says CEO Andrew Brooks (page EB 23).

TIGHT COOPERATION. Ultimately, merchants both virtual and physical hope to reach the Holy Grail of manufacturers and service providers: products customized for every single customer. The vast information the Web provides on each buyer has suddenly put the seemingly impossible dream of mass customization within reach. But it requires slick cooperation among suppliers, manufacturers, distributors, and retailers. Dell has led the way with its built-to-order PCs, but it's a whole new approach for most industries--even online merchants. "Our store will be completely redecorated for each and every customer," vows Amazon. com's Bezos--but he says that could take up to 10 years.

That's why, for now, mass customization is happening only in bits and pieces--but intriguing bits and pieces, nonetheless. With Yahoo!'s My Yahoo service, for instance, registered users can set up a home page with their own stock portfolio and news sources--prompting them to spend up to five times longer on the site than other Yahoo! visitors. And Yahoo! can use the registrations to target ads to their interests. Then there's Harley Dixon's personalized credit card. He not only got customized terms, but NextCard let him upload through the Web and stamp on his card a photo of an airplane he's building. For Dixon, the customization helped cinch his decision to apply. And for NextCard? Customers who have personalized cards are more than twice as likely to use their cards as people who don't have them, says NextCard's Lent.

Nifty enough, but other companies are digging even deeper into their information gold mines. This fall, financial-services company KeyCorp plans to begin offering customized products and services to consumers as they move around its Web site--all based on a data trove of the 7 million customers who frequent KeyCorp's branch offices. When any of those customers visit KeyCorp.'s Web site, it combines the older data with the new information on their Web movements to offer up tailored products--on the fly. For instance, if a customer is looking at mortgage or college loans on the site, KeyCorp will target offers tailored to that customer's financial situation.

Despite the Net's promise, bringing all of this data together and making sense of it remains a huge technological and logistical challenge. In a Forrester Research survey in May of 54 online retail companies, 39% said that combining data from different systems has proven to be difficult. "There is a lot of promise in data management," says Richard Rock, director of consumer insights and analysis for online auction house eBay Inc. "But most companies are drowning in data, and that's the biggest obstacle."

What's more, companies will have to address privacy concerns more directly or face a consumer backlash. Already, those concerns have prompted calls for tighter government regulation. If that goes too far, companies may be hamstrung in what data they can acquire and how they can use it. "These are goldfields, but there are also some bears and people out there with shotguns," says Jason Catlett, a privacy advocate and consultant on writing privacy policies.

If they can overcome those concerns, says marketing consultant Don Peppers, companies may finally provide the kind of frictionless commerce that both they and consumers have always sought. The ideal, he says: "You already know what I want--I don't even have to tell you." For better or worse, customers may soon find that no one--not even Mom, hubby, or their faithful dog Spot--knows them better than their friendly merchant in cyberspace.

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