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Start-ups 1diantong and others plan new efficient strategies but sceptics still have 'trust' issues

Up to 40 per cent of mainland direct mail offers are returned to their senders because the country's direct marketing infrastructure is fraught with error. But marketing services start-up 1diantong aims to change that.

The one-year-old firm based in Shanghai is building a consumer database from scratch by piggybacking on the so-called 'coalition loyalty network'.

Operating on a hybrid model, 1diantong is in the US$1.5 billion business of providing a customer rewards network for a coalition of merchants while stimulating consumers to act on direct offers.

Consumers become members of 1diantong when they want to bank and redeem loyalty points awarded by the coalition's vendors.

When they collect enough points, members can redeem them for gifts through 1diantong's network. Online customers are invited to join 1diantong by e-mail and offline customers by SMS after making purchases at one of 1diantong's merchant-partners. In either case, they can register online or through phone for updates on their points balances.

As its members grow, 1diantong, which means 'liquid points', seeks to coax personal data out of them by offering points. Under this scheme, members might get 50 points for revealing their address, 75 for disclosing their salary, or 100 for stating their favourite colour.

That data will then be used to tailor marketing offers to the members' demographic profile and preferences. If all works to plan, 1diantong would end up with a consumer network that marketers would pay dearly to access.

In the meantime, as 1diantong executes loyalty programmes for its merchants, it pockets management fees  and gathers consumer data.

'Lots of companies in the direct marketing space wish to buy a database, but our cost structure is different,' chief executive Peng Gang said. 'While we're collecting data, we're making money.'

The idea of marrying loyalty programmes and direct marketing is not new. Henry Winter operates a similar business called SmartClub, which formally launched 18 months ago. Since then, it has tweaked its strategy, shifting the focus to its members who comprise of 17- to 35-year-old internet users.

Without a specific demographic, Mr Winter said he found himself talking to McDonald's, whose demographics skew towards the young, and to the Lianhua supermarket chain, whose core demographic is the 40- to 60-year-old housewife. A definitive consumer segment, however, got SmartClub an audience with merchants.

'If you try to start from the client's side, you end up [with] a loyalty programme that's trying to appeal to everybody but really appeals to nobody,' Mr Winter said.

1diantong, however, has no single target demographic since its merchants serve a diverse clientele, according to company adviser Adam Bornstein.

The seamlessness with which 1diantong tracks the purchase transactions of its members is key to the programme's success. Presently, 1diantong relies on its merchant-partners to provide that information. In contrast, SmartClub leverages existing transport smartcards that its members can use to make purchases at retailers who have installed smartcard-literate machines.

Some critics, however, said coalition loyalty marketing on the mainland was far from meeting its potential. One problem is an absence of a mega retailer with a broad presence that can do the heavy lifting.

'The idea [of a coalition loyalty programme] is great,' said Gabrielle Chou, chief executive of the marketing services provider Acxiom China and chair of the Direct Marketing Association in China.

'But what nobody is seeing is that the consumers have to make big purchases, otherwise it won't work - you have to buy a lot of McDonald's to get a gift.'

So far, 1diantong has deals with 20 merchants, of which two are mainland household names, Mr Peng said.

As for building that golden consumer database, there are technology risks to consider, says Tony Lo of Celsius Capital, which is currently considering stakes in 1diantong. The risks include 'how effectively the company receives and manages data, and if it does so in a way that is secure, private and trusted'.

Ms Chou, meanwhile, argued that data gathered through loyalty programmes was not necessarily better than  data gleaned  from magazine subscription lists.

'Loyalty does not necessarily bring the right consumer,' she said, adding that those who responded to loyalty offers tended to be young. In the end, though, it is the merchants in the loyalty programmes that drive the end game.

'If 1diantong manages to have partners of a very high level that are selling to the right customers, then they'll have a good database. If they're reaching out to the low-income, young population, the database will only be useful for companies that want to market to that population.'

Mr Peng, however, said it was not just the young that were after loyalty points. 'I believe everyone is responsive to incentives. Different people are responsive to different incentives.'

But enriching the database with consumer information is one thing, working with it is another.

E-mail and SMS marketing did not generate direct orders, but were more effective at driving people to websites or events, said James Thornton, principal of Mailing List Asia, a 20-year-old list broker with mainland offices.

And even if consumers click through an e-mail, they may not click in a purchase because of fraud fears.

'There's a perception that when people charge their credit or debit card, they may not receive the product they paid for. It is going to take a while for a culture of trust to develop,' Mr Thornton said.



A facelift for direct marketing