4.2.1 Demand for direct marketing
Like advertising, the demand for direct marketing originates from consumer demand for accurate information on goods and services.
In addition, direct marketing also has a number of advantages for consumers. In particular, it potentially reduces:
the prices of goods and services;
the search costs they incur trying to find suitable goods and services, since direct marketing tends to provide consumers with information that is more likely to be of interest to them; and
the transaction costs associated with purchasing those goods and services, since they can purchase those goods and services from their own homes either over the phone, or via the Internet, using their credit cards.
However, direct marketing also has a number of disadvantages from the consumer’s perspective. In particular:
it may be difficult for the consumer to determine the actual quality of the goods until they have been supplied;
the consumer may not know from whom they are actually purchasing the goods and services, making it difficult to lodge a complaint and obtain an exchange of goods or a refund when those goods are defective;
it may be difficult for the consumer to determine the full conditions of purchase and payment arrangements they are accepting.
4.2.2 Supply of direct marketing
Direct marketing is becoming an increasingly important component of the marketing strategies of both Australian and overseas firms:
In 1998, advertising media expenditure on direct marketing in Australia exceeded $9 billion and is currently growing at an annual rate of 15 per cent. Nationwide, 550,000 are employed in direct marketing related activity.
In the 12 month period from August 1997 to 1998, 3,275 consumer oriented direct mail campaigns were recorded and in 1999 direct mail amounted to more than 500 million articles.
Advertising spending on catalogues was valued at $1.3 billion in 1998.
Telemarketing is currently growing at a rate of 25 per cent a year and employs 50,000 people nationwide.
Call-centre products and services generate over $15 billion in revenue and are expected to grow to $20 billion this year.
Loyalty programs have been responsible for a two-thirds increase in the value of credit card transactions since 1995.
The number of on-line purchases grew 183 per cent to 803,000 in 1999.
Direct marketing enables firms to avoid the significant costs associated with setting up and operating a permanent retail establishment. In addition, direct marketing also has a number of distinct advantages for firms over advertising. In particular, it allows firms to:
reduce the cost of marketing products to certain categories of consumers by avoiding the costs of having to supply advertising to those consumers who do not ultimately purchase their products;
tailor the particular mode of communication to suit a particular type product and customer;
personalise their communications with potential customers;
segment the market for their products, adopt different marketing strategies in each of those segments, and even charge different prices;
obtain more immediate and detailed feedback from potential consumers.
Despite these advantages, direct marketing also has a number of disadvantages for firms including:
Intrusiveness. Where direct marketing techniques are used in an unprofessional manner they are likely to produce a negative response from consumers. For example, the use of telemarketing to “cold call’, especially where the offer is irrelevant to the person called, is particularly unwelcome. While not strictly speaking direct marketing, the wholesale distribution of unsolicited advertising material (junk mail) in order to build retail sales, has also elicited a negative consumer response. Such abuse is perceived by consumers as compromising their privacy. Since direct marketing firms operate at a distance from their customers, it is also perceived that there is greater scope for fraud.
The costs of acquiring accurate data on consumer preferences. The effectiveness of direct marketing rests heavily on the availability of accurate information on consumer preferences.
The problems associated with determining the identity of the purchaser. This increases the risk that the transaction will fail unless some form of financial security is provided prior to delivery (eg a credit card number).
4.2.3 Nature of market failure(s)
Like the advertising market, the market for direct marketing can fail to operate efficiently and equitably due to:
asymmetric information between firms and consumers concerning the prices, performance, and availability of goods and services;
external costs arising from direct marketing activities (eg the costs arising from the provision of incomplete or misleading information, and the use of coercive marketing techniques;
the public good nature of information provided by some forms of direct marketing; and
the adverse effect that the abuse of direct marketing techniques can have on certain social objectives (eg protecting individual rights to personal privacy and data privacy).
Direct marketing has similar effects to advertising on the extent of the information asymmetries that exist between firms and consumers regarding product prices, performance and availability. That is, direct marketing has the potential both to reduce and increase that asymmetry.
For example, direct marketing can reduce this asymmetry by providing consumers with access to accurate information on the prices, performance and availability of a wider range of goods and services. It can also provide efficient after sales support and promote mutually beneficial long term consumer relationships.
By contrast, direct marketing also can increase that information asymmetry by providing incomplete or misleading information. In addition, direct marketing can:
obscure the identity of the firm supplying the goods and services, providing greater scope for firms to supply lower quality merchandise with little after sales service; and
provide firms with marketing techniques that are much more effective in influencing consumer preferences than ‘awareness’ advertising. Of particular concern is the ability of disreputable firms to use direct marketing techniques to coerce consumers into purchasing their products.
Direct marketing offers firms a much more targeted means of promoting their products than advertising. As a result, in theory, it should reduce the some of the external costs that the community would have to have borne if the firm had used advertising to promote their product.
In practice, however, these potential benefits will be offset to some extent by the additional external costs arising from direct marketing.
For example, direct marketing techniques pose a much greater threat to personal privacy and data privacy than does advertising since direct marketing techniques can be much more intrusive than advertising. While it is easy to ignore radio and television advertising, it is much more difficult to ignore telemarketing, direct mail or email. In addition, some consumers are much more vulnerable to direct marketing techniques than others and can be coerced into purchasing goods and services they would otherwise not have purchased. For example, poorly educated individuals, migrants and the aged can be targeted by unscrupulous firms using high pressure direct selling techniques.
4.3 THE PRESENT SYSTEM OF SELF-REGULATION 4.3.1 Background
The Australian Direct Marketing Association (ADMA) has administered a self-regulatory Code containing fair trading guidelines for over 20 years and in 1980s, telemarketing guidelines were introduced to the Code.
In 1996, under the auspices of the Ministerial Council on Consumer Affairs, ADMA worked closely with the government, consumer and industry groups on the development of a Model Code of Practice for Direct Marketing. This Model Code was promulgated in 1997 and was adopted by ADMA in 1998.
The conclusion of this process coincided with the release, in February 1998, of the Federal Privacy Commissioner’s National Privacy Principles (NPPs). ADMA immediately announced its intention to make the NPPs an integral part of its new Code of Practice. Thus, ADMA became the first national industry association to adopt the NPPs in their entirety in its Code of Practice.
Subsequently, ADMA sought and obtained the authorisation of the Australian Consumer and Competition Commission under section 88(1) of the Trade Practices Act to enable its independent Code Administration Authority to apply punitive sanctions against any member found to be in breach of the Code, including its privacy provisions. This measure significantly strengthened the Association’s powers to enforce its Code.
4.3.2 Objectives of the Code
The objectives of the Code are to:
ensure consumers have access to the product and service information they need to make informed choices;
minimise the risk of direct marketers breaching the Trade Practices Act or State fair trading legislation;
promote a culture among direct marketers of conducting their business fairly, honestly, ethically and in accordance with best practices; and
increase consumer confidence in doing business with ADMA members.
The Code is considered by the industry to be essential to its expansion. Although the direct marketing industry in Australia is currently growing at a rate of 15 per cent per annum, ADMA considers that future expansion is very much dependent on consumer confidence in how direct marketing is conducted.1 Since they operate at a distance, rather than face to face with their customers, direct marketers place greater emphasis on building consumer confidence and trust. The Code is viewed as a means of enhancing the reputation of the industry to facilitate continued growth in consumer demand.
4.3.3 Development of the Code
In 1994, Consumer Affairs Ministers were sufficiently concerned about the trade in mailing lists and about telemarketing practices to instigate an inquiry into direct marketing practices. At much the same time ADMA, concerned about unscrupulous direct marketing practitioners who brought the practice into disrepute, had also been urging ministers to consider mechanisms to provide greater coverage of codes on direct marketing practices. One of ADMA’s concerns was the difficulty in obtaining support, outside of its membership, across the industry for its existing Standards of Practice. The Standards of Practice were broad ranging but they did not provide for enforcement powers and as a result did not discourage unscrupulous behaviour.
In 1995 the Ministerial Council on Consumer Affairs (MCCA), which is made up of Commonwealth, State and Territory consumer affairs Ministers, fostered the development of a code of practice for the direct marketing industry. The code was intended to address a number of consumer concerns that related to direct marketing. The areas of most importance were identified by the MCCA as relating to:
information disclosure, where direct marketers provide information about their geographic location and returns policies.
cooling off periods, where consumers can inspect a product before committing themselves to its purchase.
the use and disclosure of personal information (that is, privacy).
telemarketing, where consumers are contacted at home at inconvenient times, or where telemarketers have access to lists of silent numbers.
In 1997, the MCCA released the Direct Marketing — Model Code of Practice to provide guidance to industry on how to address consumer concerns about direct marketing. The Model Code was drafted by a Working Group chaired by the Australian Competition and Consumer Commission (ACCC) and including representatives of industry, the Australian Consumer’s Association, the Consumer’s Federation of Australia, Commonwealth, State and Territory consumer affairs agencies, the Commonwealth Attorney-General’s Department and the Office of the Privacy Commissioner. The final product was the result of three years work.
ADMA, following advice from the MCCA, chose to implement all of the provisions contained in the Model Code as a way of enhancing consumer confidence in direct marketing. ADMA then embarked on an extensive consultation campaign with members to gain acceptance of the provisions of the Model Code.
The ADMA Code was launched in draft form by the ACCC on 9 November 1998 in conjunction with the ACCC’s Global Commerce Conference in Sydney. This attracted criticism from various consumer groups, especially since the Code was launched before the ACCC had completed its authorisation process and before it had held its pre-decision hearing (scheduled for 26 November 1998). The hearing would have provided an opportunity for interested parties to put their views about the benefits and weaknesses of authorisation. ADMA has disputed the claim that insufficient consultation had taken place, stating that consultation before the launch of the Model Code, on which the ADMA Code is based, was extensive.
Since the Code’s inception, an industry education initiative has been undertaken by ADMA, to assist members in ensuring that their organisation complies with the Code. This has taken the form of Code compliance workshops, held across Australia, in which more than 350 members have attended.
Scope of the Code
For the purposes of the ADMA code, the term ‘direct marketing’ means the marketing of goods and services, or the seeking of donations through a means of communication at a distance where:
consumers are invited to respond using a means of communication at a distance; and
it is intended that the goods and services be supplied under a contract negotiated through a means of communication at a distance.
Membership of ADMA
In 1998-99, ADMA accounted for over 400 organisations involved in information-based marketing including financial institutions, publishers, catalogue and mail-order traders, Internet-based marketers and service providers, direct response agencies and consultants, list and database specialists, printers, mail houses and fulfilment services, and other users and suppliers of direct marketing services. Together, these organisations are responsible for over 80 per cent of the $9 billion annual direct marketing advertising spending in Australia.
Members include publishers, major financial institutions, charities, catalogue and mail-order traders, Internet traders and service providers, airlines and automobile manufacturers as well as industry suppliers such as printers, call centres, delivery services, advertising agencies and list and database specialists. Additionally, there are also those companies involved in business-to-business direct marketing.
It is important to note that the scope of the Code is not limited to ADMA members. It also applies to all employee, agents or subcontractors of ADMA members.
In addition, the parts of the Code dealing with telemarketing (Part C) and consumer data protection (Part E) are intended to apply not only to direct marketers, but also to fundraisers and charities trying to generate donations.
If ADMA becomes aware of an alleged breach of the Code by a direct marketer who is not a member, ADMA will bring that matter to the attention of the company concerned and seek compliance.
In order to reduce the scope for non-members to free ride on the benefits arising from the implementation of the Code:
only ADMA members have the right to bear the “Direct Marketing Code Compliant” seal; and
a public awareness program has been undertaken with the support of member publishers, cataloguers and mailers, to assist consumers to recognise Direct Marketing Code Compliant companies.
4.3.5 Overview of the Code
The Code sets out standards of conduct for participants in the direct marking industry in relation to their customers and serves as a benchmark in settling disputes between industry participants and consumers.
Part B of the Code sets out standards of fair conduct for direct marketers. Those standards govern the information provided to consumers (eg the need to avoid false claims and provide consumers with sufficient information to make informed purchase decisions and be able to identify the direct marketer).
In addition, the standards outline the conduct of direct marketers. This contains provisions outlining the need to specify the terms and conditions of any prizes, ensure sufficient supplies are available, avoid unfair conduct such as exploiting customers with poor spoken or written English, and restrict sales to minors. In particular, it:
provides a seven day "cooling off" period, during which a customer is entitled to cancel a direct marketing contract; and
requires members to ensure the customer's right to cancel the contract is specified in any contractual documents.
In recognition of the potentially intrusive nature of direct marketing, the Code also includes:
a Do Not Mail/Do Not Call service, whereby individuals can have their names removed from marketing lists used by hundreds of businesses for direct marketing purposes; and
the internationally recognised consumer data protection measures, which are outlined in Part E of the Code.
As of March 2000, a total of 23,771 individuals had registered to gain Do Not Mail/Do Not Call status. Of these, 12,009 had registered not to receive direct mail and calls, whereas 11,463 had registered not to receive mail, and 299 had registered not to receive calls.
Part C of the Code sets out the fair conduct provisions relevant to telemarketing (eg the need to identify the caller, provide information on request, avoid marketing in the guise of research, and to comply with acceptable calling conduct, permitted calling times, line disconnection times, and calling frequency).
Part D of the Code sets out the fair conduct provisions relevant to electronic commerce (eg fair business, advertising and marketing practices, online disclosures; confirmation, payment, dispute resolution and privacy). In a conscious effort to maintain internationally operative standards of practice in Internet marketing, ADMA has adopted draft OECD guidelines for e-commerce in its new Code of Practice. These international guidelines cover issues such as the provision of clear and unambiguous information about the identity of the businesses and the goods or services they offer, verifiable contracts, effective consumer complaint handling and security/authentication measures.
Through its E-commerce Committee and Ethics & Privacy Committee, ADMA has developed an online privacy policy for use by members.2 The ADMA Code of Practice affords e-commerce customers the same level of protection as is afforded customers in the off-line world. ADMA is also involved internationally in pushing a common standard of practice for the global direct marketing industry in the areas of cross-border complaints handling, mail, telephone, and e-mail preference services, and privacy principles.
Part E of the Code sets out the fair conduct provisions relevant to consumer data protection. These measures give consumers control over their personal information by limiting collection of customer information and requiring marketers to tell consumers who they are, how to get in touch with them and what they intend to do with personal information. Consumers must be given the opportunity to block transfer of their contact details to any other marketer.
The rules relating to the enforcement of the Code and the review and amendment of the Code, are outlined in Parts F and G respectively. These provisions are discussed further below.
4.3.6 Operation of the Code Complaint handling procedures
Members are required to have their own internal customer complaints-handling procedures in place. This internal complaint handling is designed to be the first port of call for a complainant. If the complainant is unhappy with the response of the member organisation, they are then encouraged to appeal to the Code Authority for adjudication. Alternatively, should a complaint that does not appear to breach the Code be received by the Code Authority, the complaint will be referred to the member’s own complaints handling body for consideration.
This provides an opportunity for the member to resolve complaints and also to screen out frivolous claims.
A key feature of ADMA's Code of Practice is the existence of an independent complaints handling body, led by a chairperson from outside the direct marketing industry. It investigates unresolved consumer complaints involving ADMA’s member organisations and can apply a range of sanctions to an offending member. The Code Authority is made up of equal numbers of consumer and industry representatives. It is chaired by John Wood, a former Deputy Commonwealth Ombudsman, and includes Robert Tolmie (a former Chairman of the Board of Directors of the Association), Colm Lorigan of American express (former CEO of the Australian Federation of Consumer Organisations), and consumer representatives Robin Brown (former CEO of the Australian Federation of Consumer Organisations) and Bill Dee (who has spent over 20 years in the ACCC gaining wide experience in the area of compliance with self-regulation code of practice).
Once a complaint has been lodged with the Code Authority, the member company is allowed two weeks to respond to the complaint. If the Code Authority confirms the complainant’s allegations then ADMA will issue a notice to the member with instructions to take remedial action with regard to the complaint and/or sanction the member for the breach.
As outlined in Part F of the Code, ADMA’s enforcement procedures are limited to alleged breaches of the Code. Those enforcement procedures do not cover consumer complaints that do not involve a breach of the Code. Such complaints are handled by the member’s internal complaints handling process.
Consumer complaints involving an alleged breach of the Code that are not resolved under the member’s internal complaints handling process, must be referred by the member to ADMA.
If the Code Compliance Officer does not consider there has been a breach of the Code, the officer must inform the complainant of the decision and their options. These include:
requesting ADMA to review the decision should new information become available;
requesting the Code Authority to review the decision of the Code compliance officer (In such a case the Code Authority can direct the officer to investigate the matter further, or invite the member to attend a hearing of the alleged breach of the Code); and
pursuing other forms of redress, such as lodging a complaint with a government regulatory authority.
If the Code compliance officer considers there has been a breach of the Code by a non-member, the officer may write to that organisation, informing them of the existence of the Code and requesting compliance.
If the Code compliance officer considers that a member has breached the Code, the officer is required to write to the member outlining the particulars of the alleged misconduct and requesting a written response to the allegations within 14 days. If the member provides clear evidence within that period that they have been acting in accordance with the Code, or independently resolves the complaint, then the Code Officer must advise the complainant of:
the reasons why no further action is to be taken; and
their ability to request the Code Authority to review the decision.
As indicated in Table 4, a total of 29 complaints were received by ADMA in the 1999 calendar year, of which 17 (61 per cent) related to the activities of members, whereas 11 (39 per cent) related to the activities of non-members.
Table 4: ADMA complaints received, 1999 calendar year
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