E-tailers invest in fulfillment systems to meet the holiday rush ONLINE MARKETERS in the fourth quarter of 2000 were determined to avoid the snafus that plagued them the previous holiday season. For many, that meant rethinking and revamping fulfillment operations. We spoke to several companies in November, just when the season was beginning (though sluggishly, according to several accounts), to see what changes they’d made to improve matters.

The problems in 1999 were severe. Internet shoppers experienced out-of-stock items, site crashes and late deliveries. In July 2000, seven Internet retailers paid a total of $1.5 million to settle Federal Trade Commission charges over shipping delays during the 1999 holiday season; they included some big names like CDnow Inc., KBkids.com LLC, Macys.com Inc. and Toysrus.com Inc.

Sites that can afford it have invested in new fulfillment systems, online customer care systems and their distribution centers.

“They’re a little more cautious this year, not making promises they can’t keep. There’s a little less trying to one-up every other e-retailer,” says Thatcher Wine, founder and CEO of CleartopInc., a customer service firm in Santa Monica, CA.

Some e-tailers have made major changes in their approach to fulfillment. For example, eToys, which had previously outsourced to Fingerhut, brought its operations in-house, building 1.4 million square feet of distribution space in Blairs, VA and Ontario, CA. EToys also upgraded its Web site technology to Intel IA 64-bit processors that can support up to 1.6 million peak day visits. But it needn’t have bothered – the firm announced in December that quarterly sales would fall below estimates by as much as 50%, and that it didn’t have enough money to stay in business past March.

Toysrus.com is taking the opposite tack. Because of its fulfillment problems in 1999, the company has outsourced those operations to Amazon.com in an alliance announced in August 2000.

“The main goal is to serve the customer, and they felt the best way to do that is through outsourcing,” says Jennifer Davis of Access Communications, Toysrus.com’s PR agency. “It allows Toysrus.com to focus on merchandising.”

The main fulfillment theme for this year: real-time inventory. E-commerce companies either offer it on their sites now or are planning to do so for next year. Such a system should curtail order problems, the firms say. Sites with real-time inventory include Macys.com, OmahaSteaks.com and eHobbies.com. CDnow uses batch updates throughout the day and Wineshopper.com updates the site’s inventory list every 24 hours. “We’re working toward real time,” says Wineshopper.com spokeswoman Suzanne Gannon.

Another goal is improved customer service on Web sites, including expanded self-service. Diane Pucko, a spokeswoman for Macys .com, which was expecting to do two to three times more business this year, says that since the 1999 season the firm has focused on improving performance. It has new warehouse facilities and has added about 100 customer service representatives for a total of 200, to keep people informed about their orders. It’s also added audio to its Web site’s customer service section. The changes are “expected to answer a lot of needs that were not perhaps answered in the past,” says Pucko.

CDnow.com, which marks its sixth holiday season this year, has increased the frequency of transmitting orders to its warehouses. “A year ago we did it twice a day; now we do it seven times a day,” says Amy Belew, vice president of customer service and operations for CDnow, which outsources fulfillment to seven companies in the United States and overseas. “Our various partners have increased their warehouse space and automated systems along the fulfillment line.”

Belew says there wasn’t a direct link between CDnow’s 1999 holiday season and the FTC consent decree. The company ran afoul of the FTC sales rule because it gave different shipping time frames in different places. It has now remedied this situation.

Another veteran online retailer, OmahaSteaks.com, wasn’t planning major changes in its technology or procedures. “We’re expecting to double our business this year and we feel like we can handle it,” says president Jim Paschal. The firm has, however, increased the number of people in customer service and inbound telemarketing and upped its warehouse capabilities.

Santa Monica, CA-based eHobbies, which launched in October 1999, is faced with a fulfillment challenge because of its products’ varying sizes. The site offers 26,000 SKUs along 11 different hobby lines, such as astronomy, rocketry, stamps and trains. “We do ship items as small as a stamp or a coin and as large as telescopes that weigh hundreds of pounds, or radio-control airplanes whose box can be 5 or 6 feet tall,” says CEO and co-founder Brad Sobel. “We’ve standardized methods for fulfillment. There are processes in place.”

EHobbies started with 5,000 square feet and now has a 27,000-square-foot facility in La Mirada, CA, that it rents from a third-party provider but runs itself. Sobel says that his company has changed its process since its first year. “We learned a tremendous amount our last holiday season. We’ve put in procedures, policies and new systems based on what we learned.”

For example, he adds: “You get an order at the warehouse and it says to look in bin A4 in zone 3 and there’s no product there. What they used to do is look around that area to see if it was misplaced, but a similar item can be located in different places. Now we have a procedure for what you do. We have the ability to look in our e-commerce system to get into the back end in real time. You go back to the warehouse management system and it gives you up to three possible locations to retrieve the product. Before, it was much more manual.”

Sobel said the company expected to sell four or five times the 12,000-order volume it did in 1999’s fourth quarter. “I think we maybe didn’t deliver five orders, but we called and said [they] wouldn’t be delivered on time.”

Another trend: Customers are waiting longer to order, which adds to the e-tailers’ challenge. “Business is moving closer to the holiday – it’s been happening for years,” says OmahaSteaks’ Paschal. “People are busier and [they] procrastinate. The expectation of immediate gratification is also greater.”

Because Christmas fell on a Monday this past year, e-commerce companies had to be careful with their notices since there was no Sunday delivery and, in many areas, no Saturday delivery either. Eighty-six percent of online retailers were planning to post the last date they could guarantee Christmas deliveries, which for 52% of them was Dec. 17, according to Gomez Inc., an online market research firm.

CDnow recommended that orders being sent by USPS be in by Dec. 11; the upgraded-option cut-off date was Dec. 19 at noon EST. At eHobbies, the last day for ground delivery was Dec. 8; two-day delivery, Dec. 18; and overnight, Dec. 19. For Omaha Steaks, the cutoff date to guarantee express overnight delivery for Christmas was Dec. 22 at 10 a.m. CST.

Study predicts e-marketers and DMers’ use of third-party fulfillment will expand soon

The market for outsourced fulfillment services will grow by an average of 17% to $15.3 billion over the next four years due to the rise of business-to-business e-commerce sales, traditional direct marketers’ farming out their fulfillment, and pure-play e-commerce companies’ continued reliance on outside fulfillment outfits, according to a study by New York-based Winterberry Group.

The direct marketing and research firm puts fulfillment expense (not including shipping costs) at 9% of net sales for catalog and other DMers and slightly higher (10%) for e-commerce firms. The company projects those expenses will decrease slightly to 8.3% and 9.2%, respectively, by 2004, due to efficiencies from the Internet and other technology. Still, it predicts industrywide fulfillment expense will grow from $91 billion in 2000 to $157 billion in 2004. E-commerce fulfillment expenses will rise from 22% of total fulfillment expenses to 47% by 2004.

The study, “Third-Party Fulfillment – E-Commerce to Fuel Outsourcing Sector,” which came out in October 2000, says that e-marketers and DMers currently outsource nearly 9% of their fulfillment, putting the third-party market at $8.1 billion.

The main reason for the increase is, not surprisingly, Internet marketing. While only 6% of business-to-consumer and 3% of B-to-B traditional DMers let another company pack their boxes, 80% of pure-play B-to-C and 20% of pure-play B-to-B e-merchants do.

The Winterberry report estimates that half of the total Internet B-to-C sales will come from pure-play e-merchants, which rely on third-party fulfillment for 80% of their needs; the other half is provided by traditional marketers, which outsource 20%. It predicts that a quarter of B-to-B online sales are generated by pure-play e-merchants, which outsource half of their fulfillment, and three-quarters from brick-and-mortar marketers, which use outside parties for 6%.

The expansion of e-commerce obviously provides third-party companies with great opportunities, but also many challenges, Winterberry points out. The immediacy of the Internet has raised consumers’ customer-service expectations. For example, firms are scrambling to provide real-time inventory status, real-time order tracking and other customer services. Other challenges include managing product returns. A longtime stumbling block – integrating software systems throughout the back-end process – continues to confront the industry.

Winterberry says that because of continued consolidation in e-commerce, third-party fulfillment companies are beginning to offer the full array of back-end services – order processing, warehouse management, transportation logistics, customer service support and consulting and data analytics.

According to the report, the third-party fulfillment market for e-commerce sales, or “e-fulfillment,” was $4 billion in 1999, or 56% of the $7 billion third-party market. Twenty percent growth this year will push the size of the industry to $4.8 billion. Although an increased number of pure-play e-merchants will be fulfilling orders in-house, the e-fulfillment market is still expected to grow 17% annually to $8.8 billion through 2004 as scale advantages and service reliability patterns become more established, the study says.

In a breakdown by channel, Winterberry forecasts fulfillment expenses for catalogs to grow 4% annually to $10 billion by 2004, other direct marketing channels to grow 6% annually to $73 billion and e-commerce to grow 33% annually to $74 billion.

According to the study, outsourced fulfillment is most beneficial to DMers with sales ranging between $5 million and $100 million; for anything beyond that, the function is usually brought in-house.

Strong Medicine Drug companies turn to CRM to boost their prescription refill business

PRESCRIPTION DRUGS don’t seem well-suited to direct marketing. Pharmaceutical companies focus most of their efforts on selling to a physician, then acquire customers in a scattershot way – through traditional mass marketing. Even if a consumer responds to an 800 number or a Web site address in a broadcast or print ad for a new drug, she may not be the right target. And once she does respond, the firm must persuade her to do something really tough: Visit her doctor and walk out with a prescription.

But in the last two years, those who market prescription products to people with chronic, lifelong conditions such as diabetes, high blood pressure or asthma have discovered that customer relationship management – a pillar of direct marketing – may be their trump card. That’s because the real money comes from refills.

“The refill is the key [to the] total prescription,” asserts Julian Parreno, senior vice president of marketing for pharmaceuticals at Harte-Hanks Inc. in Antonio, Texas. “The longer you keep a patient on a drug, the higher their lifetime value.”

More than 45% of Americans don’t take medications as directed by their doctors, and 19% don’t even fill their prescriptions, according to American Demographics magazine. Getting patients to refill a prescription is even harder, experts say, proffering this dire statistic: Within the first six months of taking a new drug, about 50% of patients drop off.

“That’s a massive attrition after six months,” says Jay Bowling, executive vice president of client services at Roska Direct, Philadelphia. “If you could affect that even a little bit, you’re talking billions of dollars in sales.”

And it’s not as if they don’t have to include a response mechanism anyway. The Food and Drug Administration guidelines, finalized in August 1999, require prescription drug ads to list major health risks of the product and include an 800 number or other means so the consumer can find out more about side effects.

Procter & Gamble Pharmaceuticals markets Asacol directly to patients who have ulcerative colitis (UC). Roska Direct handles these efforts. Because there are so few Americans with the condition – just half a million people – a more-focuseddirect-to-patientstrategy, makes better sense than a general direct-to-consumer strategy, says Rae Ann Mang, brand manager for Asacol. Broadcast or print ads in big consumer magazines were deemed a waste of money since they would reach so many millions who were unaffected by UC. “If you see a mini-van on TV and you don’t have a family, it bounces right off,” Mang points out.

The disease is painful and debilitating, with symptoms such as abdominal pain and cramping and bloody diarrhea. It often strikes for the first time in a person’s early twenties. Patients may have a remission, but it is incurable and most suffer recurrent flares ups throughout their lives.

“The central issue is compliance,” points out Mang. “Like hypertension, with Asacol, when you take your medication between flare ups you can lengthen the time between flare ups. And that’s the message we desperately want to get to patients.” Most victims of the illness must take pills two or three times a day.

The Mason, OH-based pharmaceutical arm of the packaged goods giant began promoting Asacol to consumers in 1998, by placing 3-inch-by-5-inch ads in 30 metropolitan newspapers, with an 800 number to call for more information.

As P&G collected names, addresses and telephone numbers of callers, it mailed out brochures, which were also distributed at doctors’ offices, pharmacies and UC patient-support meeting locations. But the Web site, (www.acacol.com) has evolved into the central marketing channel.

The site had 48,000 hits in October – not bad given the size of the target audience.

Since it is listed on major search engines, UC sufferers seek it out in their time of need.

“That’s why the Web site is so valuable,” Mang remarks. “Finding these patients is hard enough, but to find them when they are in a flare up is impossible. That’s when they are most receptive; they’ve got the most to gain when they are in pain.”

The site features pages of write ups and checklists about the importance of taking Asacol regularly; advice about how to manage the disease; and how to deal with other lifestyle issues, such as dating and travelling. Visitors can read case histories of others with the disease and link to dozens of pages and sites. Most important, early this year, viewers will be able to sign up for information customized to them.

“The 50-year-old woman who has difficulty speaking to her husband about the disease has different needs than the 21-year-old college student,” Mang points out.

(sub-head) Doctor, Please Of course, patients can’t keep taking a medication unless they fill the original prescription. Advertising can make them more comfortable approaching their doctors. “Prior to [advertising of] Viagra, only 7% of the men with erectile dysfunction ever discussed it with their doctor,” maintains Dr. Mike Magee, senior medical advisor at Pfizer Inc., New York. “One year after the introduction of Viagra, 13% discussed it with their doctor.”

Plus, advertising works. A 1998 Prevention magazine survey showed that 84% of consumers say their physician complied with their prescription request.

The need to approach a doctor armed with information is vital in this era of managed care in which the typical doctor visit is minutes.

Consumer awareness is the thrust of the d-to-c campaign Otsuka America Pharmaceutical Inc., launched last fall to market Pletal. The new drug treats intermittent claudication, a symptom of peripheral arterial disease, which causes leg pain among elderly people when they walk. Among 4 million with the disease, however, only 1 million have been diagnosed.

The condition mainly affects people 55 and older who think leg pain is a natural part of aging – not worth mentioning to their doctors. Physicians are so often busy treating the multiple illnesses in this age group that they don’t think to ask about leg pain.

In the midst of a multi-channel campaign to raise physicians’ awareness, the Rockville, MD, subsidiary of Japan-based Otsuka Pharmaceutical Co., began compiling a consumer database through ads in national magazines targeted to this age group, including “Modern Maturity” and “Parade” magazines. According to Craig Lewis, director of marketing for Otsuka America, it is pointless to rent lists from database companies that survey consumers about various health conditions because those files only identify diagnosed people.

Consumers respond to Otsuka with a business reply card, by calling an 800 number, or visiting the Web site (www.pletal.com). The ads contain a “leg pain quiz” – three questions that help the patient determine if he or she has intermittent claudication.

The questions are repeated in the fulfillment package and when they telephone. “We want to make sure we are sending the right patients to the doctor,” says Craig Spolsky, vice president, management supervisor, Bates Healthworld, a New York advertising agency handling consumer efforts for Pletal.

Otsuka collects names, addresses, e-mail addresses and telephone numbers from fulfillment-pack requestors. Web visitors who join the Walking Club (walking helps the ailment) are also asked to give their age, gender and a description of their leg pain. The company plans to keep in touch with a series of brochure mailings and through the Web site.

So far, response to the ad has “exceeded expectations,” Lewis says. His next challenge is to discover who among the respondents has filled prescriptions.

Many firms rely on partnerships with pharmacies or market research to determine how many prescriptions are filled. But it’s nearly impossible to find out who filled prescriptions and if they are taking their medication – unless patients admit to it. “People who stop taking medication will tell you,” when polled, Bowling advises.

“The return on investment is so great the first year if you can affect behavior, anything beyond that is gravy,” Bowling points out. “With chronic medication, a patient may be worth $300 to $500 dollars a year. They need to take it for the rest of their life. Relationship management is about creating a habit. And, once you’ve created a habit, you no longer need to be in touch with the patients.”

(head) Patients Online The Zyban Advantage Plan (ZAP) is about breaking a habit: the cigarette habit. Ten percent of the people who take Zyban – a prescription pill that reduces the urge to smoke – belong to the Web-based membership program.

ZAP gives Zyban’s maker Glaxo Wellcome Inc., Research Triangle Park, NC, a way to support compliance and build brand, while furnishing the database. People join by filling out a profile at (www.zyban.com), which, in addition to name, address and e-mail, asks when the person will start taking Zyban, what is their quit date, and the peculiarities of their habit.

In return, members receive a Personal Action Guide, which provides individualized tips for quitting, and other forms of advice.

ZAP “really helps with the efficacy of the product,” indicates Holly Russell, product communications manager. “Zyban is not a magic bullet. It’s only going to be helpful to someone who really wants to quit.” It is a behavioral product that treats what should be considered a chronic condition, she adds.

Another benefit of the Internet is word-of-mouth publicity. “On sites with support groups, Zyban is often mentioned as one of the methods that smokers share with one another.”

Pfizer and Searle, a subsidiary of Pharmacia Corp., feels so strongly about the Web that it has hired Harte-Hanks to handle the Web site strategy for its arthritis drug Celebrex ((www.celebrex.com).

Celebrex is a blockbuster drug; first-year sales in 1999 topped $1.5 billion.

More than 7 million people have used the product, prompted by a huge mass advertising campaign and effective direct-to-physician marketing. But the Web site is being positioned as a major information destination, vital to the brand-building of the product.

“There’s a continuum between awareness and whether people will seek treatment,” says Frank Harvey, president, CRM/interactive of Harte-Hanks. “Arthritis sufferers are very knowledgeable about their disease and really take the initiative to go out and find out about it.”

Web plans call for encouraging a sense of community among visitors, with chat rooms, constantly updated information that may include animation, coupons, a pass-along component and links to additional resources. The site will also be used as a database-building tool, but Harvey declined to get more specific.

“As a blockbuster product, it’s important that Celebrex have a very credible and valuable resource online,” Harvey summarizes.

Harvey is looking to tap the 40.9 million adults go online to seek health-related information. Nearly one-third of those who suffer from chronic conditions and visited a condition-specific Web site, asked their doctor about a prescription drug, reports Cyber Dialogue Health Practice, New York.

These health-information seekers must sift through 15,000 to 20,000 health sites to find what they want. Aventis Pharmaceuticals Inc., Parsippany, NJ, hopes to cut through the clutter for some of them.

Adventis is launching seven disease portals this year, which will have links to products that treated the diseases but would mostly offer “rich and deep” information, says Lori Kraut, director of U.S. commercial communications. Besides the usual articles and chat areas, features would include diet calculators, tools to keep track of medicine schedules, allergy/pollen forecasts and assistance for physicians.

“They increase the probability that the patient will seek medical treatment and then we could increase the potential that they will be treated with an Aventis drug,” she adds.

As necessary as these Web initiatives seem to CRM, most companies in the tradition-laden pharmaceutical industry spend only 5% to 10% of their marketing budgets on their Web sites.

Why? “They were trained to focus on the physician,” explains Roska Direct’s Bowling. “They are five to 10 years behind consumer marketers. So the concept of really marketing to consumers and patients is very new.”

Besides, he adds, the real future of CRM is not in Web sites but in e-mail for patient retention – an area in which the industry is just dipping its toe.