Review of the MCCA Direct Marketing Model Code of Practice Discussion Paper

5 How the direct marketing industry operates

In order to analyse the circumstances in which the Code operates, it is necessary to consider the demand and supply of direct marketing. This involves an analysis of both consumer and supplier perspectives on direct marketing.

5.1 Demand for direct marketing

The demand for direct marketing emanates out of consumer desire for wide choice and easy access. Direct marketing reduces the search costs for consumers in finding suitable goods and services, and also reduces the transaction costs associated with purchasing those goods and services.

However, the quality of information available to consumers may be lacking. For example, it may be difficult for a consumer to determine the actual quality of goods until they have been supplied, it may be difficult for the consumer to determine the full conditions of purchase and payment arrangements they are accepting, and the consumer may not know from whom they are actually purchasing the goods or services.

5.2 Supply of direct marketing

Direct marketing has a number of benefits for firms. It enables firms to avoid the costs of operating a permanent retail establishment and pass this benefit on to consumers. Direct marketing allows firms to tailor their communication to suit a particular product and customer, including personalising communications with potential customers, as well as adopting different marketing strategies in different market segments. Direct marketing also facilitates more immediate and detailed feedback from potential customers.

Some forms of direct marketing may have a poor reputation with consumers, particularly junk mail and telemarketing. Whereas other forms of advertising can be placed in an entertaining context, much direct marketing cannot utilise this advantage. As to cost disadvantages, while direct marketing which utilises data on consumer preferences can be highly effective, the cost of acquiring accurate and useful data may be prohibitive for some firms. Finally, the problems associated with determining the identity of the purchaser is a problem for businesses engaged in direct marketing.

5.3 Impact of new technology and globalisation

New technology has the potential to impact upon the direct marketing industry. For example, the internet has the potential to provide consumers with large amounts of information on product prices, performance and availability, as well as increasing the range of goods and services available to consumers. However, the internet also has the potential to increase the number of new, improved and complex products, as well as the number of suppliers, particularly unknown foreign suppliers.

To some extent linked with the advent of the internet, improved global communication and logistics also has the potential to impact upon direct marketing. For example, increased contact with other countries may make the development of standards more complex since consultation with regulatory authorities in other jurisdictions must be undertaken in order to ensure regulation provides a consistent and effective coverage.

5.4 Nature of market failures

In a perfect market, competitive forces ensure that an efficient outcome is achieved for both consumers and suppliers. However, where factors are present which inhibit these competitive forces, intervention (whether self-regulation, quasi-regulation or government regulation) may be needed. These inhibiting factors are referred to as market failures.

In relation to direct marketing, market failures can arise due to:

• consumers not having access to sufficient information concerning the prices, performance and availability of goods and services to make informed decisions;

• the ability of firms to obscure their true identity, which may provide greater scope for firms to supply lower quality merchandise with little after sales service;

• consumers making purchases under a false name, facilitating fraud on suppliers;

• the adverse effect direct marketing can have on certain social objectives (for example, protecting individual rights to personal privacy and data privacy);

• providing firms with marketing techniques that are much more effective in influencing consumer preferences and coercing consumers to purchase products they would not otherwise have purchased; and

• the public good nature of information provided by some forms of direct marketing (that is, information is freely available to all consumers, however the costs of providing that information are borne only by those consumers who purchase goods or services).

It should be noted that some of these market failures are dealt with by other elements of the regulatory regime. For example, the provision of false or misleading information is prohibited by the Trade Practices Act. Likewise, the issue of privacy protection is addressed in the Privacy Act.

Discussion Points 14. What consumer issues in relation to direct marketing have arisen since the development of the Model Code? 15. Does the Model Code effectively deal with practices that are now emerging, or could emerge, in direct marketing? 16. What effect has the internet had on direct marketing and how does this affect the Model Code? 17. What effect has improved global communication and logistics had on direct marketing and how has this affected the Model Code? 18. Does the Model Code adequately address market failures?

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