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Closed-Loop Systems –­ Approaching Nirvana

Published
  • January 01 2005, 1:00am EST

One of the deep mystical promises of modern technology has been the achievement of closed-loop systems. The Internet coupled with data warehouse technology has put that hope within reach. In order to understand why closed-loop systems have so much allure, there is a need to understand the more traditional open-loop systems.

Traditional Open-Loop Systems

Open-loop systems have been with us from the beginning, long before there were computers. In open loop systems, there is an infrastructure (e.g., a corporation). Based on information found in the corporation, management makes a decision. The decision is then heralded out to the world and the world reacts to the decision made by management. The reaction is measured by an event - such as a sale - which then is fed back into the infrastructure.

This is an open-loop system and this is how business has been conducted for many years. The model described by open-loop systems applies to practically every business.

As an example, suppose there is a Colorado company (Colorado Vodka) that wants to sell a new brand of vodka. Management decides to do the traditional things - advertise, use PR agencies, throw parties and so forth. The attention generates interest and soon, orders for Colorado vodka come in. The orders are an event, which is measured by the manufacturer as the order is received. Another example of an open-loop system is a large insurance company at which management makes the decision to create a new line of insurance. Upon this decision, management does whatever it can to make the world aware of its new insurance offerings.

The open-loop approach to selling and managing the customer is the time-honored, traditional way to conduct business.

Discovering Closed-Loop Systems

But now, with data warehousing and the Internet, it is possible to conduct business through a closed-loop system. A closed-loop system is one where advertising and marketing do not try to go out into the world and reach everyone. Instead, the marketing and sales efforts are directed at a very small audience (compared to the whole world of open-loop systems).

As an example, suppose the Colorado vodka company has a Web site and tracks who visits the site. Suppose the promotions done by Colorado Vodka are designed to drive people to the Web site. Over time, a large collection of names is created for people who have interest in Colorado Vodka.

Now, when it comes time to advertise and do promotions, Colorado Vodka knows exactly who they are advertising to. Colorado Vodka can do their long-term promotions on their exclusive mailing list. It costs a fraction of the money to advertise and promote to their own mailing list than it does to advertise nationally in magazines and periodicals. With a closed-loop system, Colorado Vodka has cut the cost of ads and promotions and made their marketing activities much more effective.

Sure, it takes some effort to create and maintain the mailing list and the Web site. It takes some creativity to get people to surrender their name and e-mail address. It takes some resources to keep the mailing list up to date and fresh. But all of those costs are more than paid for when it comes time to run advertisements and promotions.

Furthermore, with closed-loop systems, the results of an ad or a promotion can be measured precisely. You know exactly how many people were contacted. You know how many responses came through the door and how fast. With open-loop systems, you never really know how effective an ad or a promotion was. There may have been a thousand reasons why an ad or a promotion did not work - the ad may have been in the wrong magazine or on the wrong page in the magazine, or a campaign may not have produced results because of a competitor's activity. Open-loop advertising is like casting chum into the ocean. You hope you are attracting the right kind of fish, but you never know -- you may just be throwing smelly fish into the water.

This is not the case with closed-loop ads and promotions. You are very precise about what ads and promotions work for whom, how fast and how well. One of the big advantages of closed-loop systems is that you do not have to pay for ads for people who are not interested in your product. When Colorado Vodka engages in open-loop marketing with a magazine ad, there will be many people who pass by the ad who simply are not interested in the product. Some people are under age. Some people do not drink. Some people drink but do not drink vodka. Some people drink vodka but are devoted to another brand. In truth, most of the people who will encounter the ad are not potential customers. However, Colorado Vodka pays to reach these people in order to get at the small portion of the marketplace that is interested in Colorado Vodka. Such is the reality of open-loop systems.

With closed-loop systems, while the mailing list is relatively small, everyone on the mailing list is a likely prospect. One of the other allures of closed-loop systems is that they can be run in conjunction with traditional open-loop systems. Having both kinds of systems is like having your cake and eating it too.

Closed-loop systems are appealing because they take the costs of advertising and shrink them dramatically; and they make advertising and promotions massively more effective.

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