DIRECT MAIL FALLS, E-MAIL SOARS - May 2009

Table of Contents

Introduction

Eight years ago we began issuing forecasts showing a steep, permanent falloff for newspaper advertising, starting with help-wanted, then automotive, then retail and then real estate. Despite the industry’s claims that any downturn would be cyclical, it wasn’t. Newspapers have seen a 30 percent decline in revenues since their peak eight years ago.

Last August, we predicted an accelerated decline for another print medium – Yellow Pages – forecasting a 38 percent drop in ad revenues over five years. The Yellow Pages industry and its consultants, which had been forecasting single-digit declines, scoffed. By the end of the year, the bottom seemed to have dropped out, hurtling the Idearc into bankruptcy and causing it to tell investors that a 40 percent drop in revenues over the next five years was likely

Now, our latest prediction: The kudzu-like creep of the Internet is about to claim its third analog victim – the largest and least-read of all print media – direct mail. Direct mail has begun spiraling into what we believe is a precipitous decline from which it will never fully recover.

We’re predicting a 39 percent decline for this Goliath over the next five years, from $49.7 billion in annual ad spending in 2008 to $29.8 billion by the end of 2013. If that occurs, direct mail will fall from the No. 1 placeholder for ad revenue to No. 4, behind the Internet, broadcast TV and newspapers.

So where’s the upside? It would be too easy to say that its digital replacement will be e-mail. But e-mail advertising is indeed skyrocketing while its traditional counterpart plummets. In fact, last year e-mail advertising quietly moved to the No. 1 online ad category spot, surpassing all other forms of interactive advertising. Advertisers spent $12.1 billion last year on e-mail marketing, more than they spent on display/banner advertising or search advertising. We’re predicting that e-mail will continue to distance itself from other online advertising formats over the next five years, growing to $15.7 billion and remaining the preferred channel among many marketers.

Most of the growth in e-mail marketing will be local. We’re expecting local e-mail advertising to grow from $848 million in 2008, to $2 billion in 2013, as more small businesses abandon direct mail couponing and promotional oers and turn to a more measurable and less costly medium, e-mail.

Those trying to latch onto this trend aren’t likely to strike instant gold. Managing large e-mail marketing campaigns require database marketing expertise, a savvy sales force, adequate e-mail management software, familiarity with the rules and regulations and a lot of patience.

Return to sender: Direct mail’s decline

In the landscape of local media, it’s easy to overlook direct mail. There’s no strong brand identity, no big local entity with scores of salespeople, no editorial staff churning out information to attract attention. It just streams into the mailbox like hungry ants, to the tune of six pieces per day for the average household.

Direct mail is the No. 1 advertising medium in terms of gross revenues, reaching $49.7 billion in 2008 and surpassing all other media. Advertisers love its personal, targeted nature. A Lexus dealership can send a “private” sale invitation to residents in an upscale ZIP Code, or a sporting goods store can send a catalog to households where parents have registered their kids for soccer. It’s mainly a numbers game. The more mailings sent, the more responses. Successful mass direct-mail campaigns generally get a 1 percent response, while targeted mailings typically get as much as three times that¹. Not all responses convert to sales, which places more pressure on sending more and more pieces.

Unlike its chief competitors – newspapers, radio and Yellow Page directories – direct mail draws most of its business from national advertisers. Only about one-fourth of all direct mail advertising was purchased by local businesses. Most of that comes in the form of so-called marriage-mail pieces, or packets of coupons for local drycleaners, pizza shops, Chinese restaurants, roofers, beauty salons and house painters delivered by companies such as Valpak and Valassis (formerly ADVO).

However, the future is not bright for this marketing behemoth. Our projections call for a 39 percent decline in direct mail expenditures over the next five years, amounting to average annual losses of about 7 percent. The declines have already begun registering at companies such as Valassis, which owns one of the nation’s largest direct-mail businesses. In the first quarter of this year, Valassis’ “shared mail” revenue declined 12.7 percent from the first quarter of 2008. It blamed the decline on a 4.9 percent drop in the number of pieces mailed, shifts by advertisers to lower-priced inserts, and lower sales in general. Two other direct mailers, IWCO Direct and Transcontinental USA, have announced layoffs and facility closings.

The downturn is being caused by a perfect storm of worsening economics for printing and delivery and conversely improving economics for competing media, particularly the Internet. The maelstrom is being whipped up by:

• Fewer catalogs being delivered. They’re being replaced by sophisticated online shopping sites.
• Tightened credit. With more people now deemed less creditworthy, financial services companies have cut their credit card offerings dramatically. It is estimated these mailings made up 40 percent of the volume of companies such as IWCO Direct.
• Shifting trends in coupons. Coupon usage is up, and they’re being delivered more frequently via e-mail and the Web, or in stores. Last year, 36 percent of adults picked up a coupon inside a store and used it, compared with 28 percent just two years ago. About 8 percent of all adults are using coupons delivered in e-mail or on the Web.
• Financial woes for the U.S. Postal Service. The USPS experienced unprecedented declines last year in first (personal) mail, which carries the freight for lower-priced “advertising” mail. Service cutbacks – including a curtailed delivery schedule that might eliminate Saturday service – could be devastating to the direct mail industry. Subsequently, postage increases would drive more marketers to the cheaper alternative, e-mail.
• Momentum for do-not-mail legislation. Fifteen states and one city (San Francisco) have introduced legislation to create a “do not mail” registry since the movement began in 2007.

Of all the issues, the economics within the Postal Service could be the most devastating. The USPS says that “advertising mail,” which carries a lower bulk rate, comprised half of its volume in 2008 but represented only 25 percent of its revenues. The big problem is the decline in first mail. People have been writing fewer and fewer letters for years, but the most recent phenomenon is people writing fewer and fewer checks. Between 2001 and 2006, the number of paper checks paid in the U.S. fell from 42 billion to 30 billion, a 28 percent drop. The main culprit: online banking and electronic deposits.

There’s another perplexing issue with direct mail that’s similar to Yellow Pages directories. According to Scarborough Research, roughly half the adult population never cracks open a phonebook and never buys anything as a result of advertising delivered in their mailboxes.²

Of course, this also means that half of all adults will actually buy something as a result of a mailed advertisement. The trick is delivering an oer that will actually spur the consumer to make the purchase that exceeds the price of the mailing. Or, as the U.S. Postal Service suggests, send out more mailings in an eort to increase the number of responses. To that end, the USPS is launching a “Summer Sale” for the nation’s 4,000 largest direct mailers in an eort to get them to increase their mailings. If they increase their mail volume over 2008 between June 15 and Sept. 15, the Post Office will give them a price break of up to 30 percent on postal rates.

_{¹Research by the Direct Marketing Association puts the average response rate to direct mail at 2.61 percent.
²Scarborough Research, Release 2, 2008}

The rise of e-mail marketing

With the so much marketing concentration on selling “the Web,” it’s hard to imagine that e-mail advertising surpasses all other forms as the leading form of Internet marketing. Yet it was a $12.1 billion category in 2008, of which only $848 million was local. The power or e-mail marketing rests in one simple but startling statistic: Slightly more than one-third of adults who are online visit the Web at least once a month, while nearly two-thirds use e-mail³. That makes e-mail perhaps the most overlooked marketing opportunity among local media operators.

Companies such as ConstantContact, one of the larger e-mail service providers, reported a 52 percent increase in mailings last year. Its revenues were up 73 percent in 2008, to $87 million. Others include Bronto, iContact, Silverpop, MailChimp and Yesmail, to name a few.

Looking five years ahead, the need for local media managers to do things differently gets more urgent. A dramatic plunge is in store for display or banner advertising, which today comprises 51 percent of all local online advertising and is the mainstay of most local media companies’ Internet ventures. By 2013, we anticipate that banners will account for just 17 percent of all local online advertising, or about $2.6 billion. Meanwhile, local e-mail expenditures will increase nearly 150 percent, to more than $2 billion.

Before we plow ahead with details about e-mail advertising, a little more detail on the display/banner forecast is in order. Our forecast is predicated on several things. First, a logical theory: the Internet is more of a lean-forward medium where consumers are intently searching for something. In that mode, they are less inclined to be receptive to, or even notice, traditional display advertising messages as they might experience in print. Second, what the advertisers are planning: surveys continue to show that the vast majority of advertisers have no plans to increase their spending on banners. Meanwhile, the largest intended increase is in e-mail marketing, where advertisers tend to see the strongest performance of all online media⁴. And third, current evidence: the leading edge of what will happen locally is what happens nationally, and banner sales have been declining for more than a year. Local banner sales started falling toward the end of last year.

FIGURE 2.2: Advertisers’ intent: Trouble for display, increase for e-mail

_{Source: Datran Media, December 2008}

The belief that banner ads may have seen their heyday is further supported by Web design guru Jakob Nielsen. Earlier this year, when asked whether the newspaper industry’s enthusiastic quest to sell targeted banners via Yahoo’s behavioral targeted (BT) program might change the numbers, he told us: “Targeted is probably slightly better than non-targeted, but not by much. The main problem is that users ignore the banners. When you never see a banner, it doesn’t matter whether it’s targeted or not.”

Plunging into e-mail marketing isn’t for the faint of heart. There are laws governing how businesses must conduct themselves in sending e-mail messages, vagaries involving e-mail viewing programs, and the sensitivity and quirkiness of recipients that is summed up in the word “netiquette.”

First, the law. The federal government’s Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act of 2003 says marketers can send unsolicited commercial e-mail as long as it:

1. Contains a visible and operable “unsubscribe” mechanism, and the company removes the recipient from its e-mail list within 10 days of the request.
2. Contains a subject line that’s relevant to the message and a legitimate physical mailing address of the sender.
3. Is not sent to “harvested” e-mail addresses.

(A full version of the CAN-SPAM Act of 2003 can be found in Appendix A.)

SPAM
Unfortunately, the biggest generator of e-mail is the most unwelcome type – unsolicited bulk messages ubiquitously known as spam. More than 100 billion spam-filled e-mails were generated yesterday – almost three-quarters of all e-mail on the Worldwide Web. Fortunately, spam filters and anti-virus software detected and blocked 99.7 percent of these messages. Still, more than 40 million got through and tried their best to sell us adult activities, financial schemes, drugs of all kinds, wristwatches, or other products. According to TRACElabs, the typical spam message is tiny, between three and eight kilobytes. Yet these messages combine to cost U.S. companies more than $20 billion every year in estimated productivity loss.

Less than 3 percent of all spam generated these days contains scams or fraudulent oers. That’s still four billion every day. Almost three-quarters of these were “phishing” expeditions – attempts to steal identity information through bogus forms or other presentations.

Of course, one person’s spam is another person’s valid message. More than two-thirds of all spam sells health products. Someone must be interested. Like direct mail, spam is a vast numbers game. Because it is essentially free, spammers calculate that only one “hit” in every 140,000 messages is needed to turn a prot. Spam comes from all over the world, perhaps the truest example of globalization today. Brazil currently ranks first in spam generation, followed closely by the U.S., Turkey, South Korea, India, Russia, and Poland. There are many opinions concerning what can be done to diminish or eliminate spam. Preventative software has had some effect, but some still gets through – enough to keep those who create it in business, obviously. Legislation and legal action have had some effect as well. Measured spam volume dropped by more than half when the enormous rogue ISP McColo was taken down last November, but volume has steadily increased since then, and now approaches its former levels.

Some favor charging for e-mail, arguing that a tiny “stamp” would be all that is needed to make the economics of spam too unfavorable to continue. Whatever the eventual solution, spam – like so many of life’s irritations – looks to remain a part of our lives for the foreseeable future.

However, rather than brute-force bulk spam mailings, the success of e-mail marketing hinges on how well marketers know the fickle nature of the silent reader at the other end of the keyboard. A poorly worded subject line can mean the difference between the delete key and an open click. Too many e-mails or irrelevant oers can get a marketer uninvited, permanently.

But the power of e-mail is undeniably present, as seen in open rates and response rates that are well above their analog counterpart, direct mail. The sweet spot is developing a list of permission-based or “opt-in” e-mails that consumers actually want to receive. The Holy Grail is being able to use that list to regularly drive store traffic or online sale.

FIGURE 2.3: Permission-based e-mail: Proceed with caution

_{Source: Merkle Inc., “View From the Inbox 2009,” Feb. 2009}

The strength of permission-based e-mail is underscored by research from Epsilon’s 2008 e-mail branding study conducted last October. The survey of 1,517 respondents who receive opt-in email showed that 84 percent agreed with the statement, “I like receiving e-mail from companies I’ve registered with. Even if I don’t always read it, it’s good to know it will be there when I’m ready for it.”

If opt-in e-mails are the sweet spot, then the Web is the ower that attracts the bees. Many companies are using the Web to extract e-mail addresses from site visitors who want more information. These oers can be general in nature – from opt-in weather alerts offered by a local TV station’s Web site to an e-mailed newsletter on a pro sports team or an oer to enter a contest to win a trip to Hawaii. Or they can be more targeted, like an oer to have e-mail oers sent to you whenever there’s a sale on camping equipment, or toy trains, or gardening tools.

Local media: Prepare for opportunity
Many local media companies may have the upper hand as e-mail marketing gains prominence. They own massive marketing channels in the form of newspapers, TV or radio stations that can drive traffic to the local Web – and in turn build up lists of opt-in e-mail addresses. Once they begin cultivating and segmenting those lists, the end result might be something far more powerful and more protable than direct mail.

Still, that $848 million spent last year by local businesses on e-mail advertising has been elusive for local media companies. Looking into our database of more than 4,400 local interactive media operations in the U.S. and Canada, less than 5 percent of them reported generating any revenue from e-mail. For those that did, the average was 2.6 percent of their total gross online revenues coming from e-mail applications in 2008. No operation in our survey generated more than $900,000 from e-mail advertising last year.

The “best practice” operations reported between 12 and 20 percent of gross interactive revenues from e-mail. Most of these e-mail programs involved special oers from local merchants delivered to opt-in recipients, or opt-in newsletters containing display advertising.

_{³Source: Scarborough Research, Release 2, 2008. Ways Internet was used during the past month: Leading use was E-mail, 62.3%; next-highest use was “weather,” 35.0%. Respondent base: 100,000 adults, 72% of whom have access to the Internet.
⁴Datran Media 3rd Annual Marketing & Media Survey of more than 3,000 executives: 80.4% said e-mail was a strong advertising performer, compared with 56.8% who listed search as a strong performer and 42.1% who named online display. Mobile came in last, at 9.2%.}

E-mail’s big drivers: Coupons and promotions

E-mail addresses are normally collected through site registration, promotions and special offers. But the fifirst step might be to understand just how many addresses tally up to that “critical mass” needed to produce results for an advertiser. The answer depends on three things:

• The strength of the target. A general e-mail “blast” to a variety of individuals who have signed up for daily news or weather is a weak target that will likely yield a weak response rate. Conversely, an e-mail offer from a florist in Arlington, Va., sent to males, ages 30 to 55, living in Arlington, Va., three days before Mother’s Day, will likely yield good responses.
• The strength and timing of the offer. A banner ad within an early morning weather e-mail urging recipients to eat at Capt. George’s Seafood Restaurant will likely yield poor results. A mid-afternoon advertisement that urges readers to click on an ad to get a coupon for $25 o a dinner for two at Capt. George’s will get better results.
• The prot of the advertised item. A pizza shop will need to sell about 200 pizzas to generate a prot from a $1,000 advertisement. But a car dealer needs to sell just one vehicle to prot from the advertising investment.

So an e-mail list of 500 people who’ve said they plan to purchase a new vehicle in the next six months might be enough critical mass to attract a car dealer, and a list of 100,000 people who are getting morning news summaries might be of no interest at all to a pizza shop. The key, of course, is segmentation, which involves collecting massive amounts of e-mail addresses and then providing incentives over time to get them to reveal their age, gender, location, and interests.

Site registration is great for long-term e-mail address collection. But for instantaneous collection of massive amounts of addresses, nothing works better than promotions. Advertisers are more willing to spend money on interactive promotions than they are to place general advertisements about their business. Interactive promotions involve contests and special oers that are fulfilled on the Web. A recent promotion by WFLA-TV and the Tampa Tribune’s TBO.com using a program called UPickEm collected 17,332 e-email addresses for their “Ultimate Local Bar Tender” contest. Another UPickEm contest for The Arizona Daily Star’s Azstarnet.com netted 10,020 addresses from a “Beautify Your Back Yard” contest.

In some cases, a good set of promotions can fetch enough digital “subscribers” to rival a local newspaper’s print subscriber base. Last year, the Statesboro (Georgia) Herald collected 4,000 unique e-mail addresses. Its print circulation is 8,000.

Promotions are short-term, provide measurable results, and generate immediate sales. They often include coupons and contests, and with greater frequency result in the trading of a special oer or contest entry for a very valuable tidbit of information: a valid e-mail address of a potential future customer.

Interactive promotions is already the third-largest marketing expenditure for advertisers – growing to the largest within the next two. Our estimates on interactive spending show the hand-in-glove ascent of interactive promotions and e-mail advertising over the next five years.⁵

One of the largest growth categories on our radar screen in the promotions field is online couponing. Coupon redemption has risen since 2006, most likely due to the recession. While Internet-based distribution of coupons has risen several points in the past two years, only about 8 percent of adults who redeem coupons list the Internet as a source of coupons. That figure could easily triple in the next two years with the rush to oer coupons via text messaging, the Web and e-mail. The two most vulnerable media to this behavioral shift are direct mail and Sunday newspapers.

Newspapers are vulnerable to e-mail oers for another reason: Like e-mail, newspapers deliver a valuable type of “breaking news” to consumers: this weekend’s sales and special oers. In fact, the daily newspapers advertising circulars are read by nearly as many readers as national news.

FIGURE 3.3: Advertising is among the most-read part of newspapers

_{Source: Scarborough Research, Release 2 2008
© 2009 Borrell Associates Inc.}

One of the most successful programs by a local media company is Belo’s 7-year-old “MySpecialsDirect” program. Belo initiated the program at its Dallas newspaper and TV properties, DallasNews.com and WFAA.com. Site visitors are asked to register, and when they do they’re invited to join MySpecialsDirect and receive special oers from local merchants. The program is run across Belo’s 20 TV stations and A.H. Belo Corp.’s four newspaper properties and claims more than 2.7 million subscribers. The form requests a name, password, e-mail address, gender, year or birth and ZIP code, allowing for targeted e-mail messages.

Because of this targetability, such programs can yield powerful results. Belo has several hundred thousand subscribers In Dallas. One successful program involved an e-mail promotion for a fashion show at North Park Mall sent to a targeted segment of high-end females on that list. The mall and other sponsors paid $25,000 for a one-week program that had an open rate of 11 percent and “look-through rate” of 17 percent.

Belo actually oers two forms of e-mail marketing to local businesses. The MySpecialsDirect program is similar to direct mail’s “marriage mail” program whereby multiple advertisers send messages to Belo’s e-mail subscriber list. Its second program is similar to “solo mail,” which manages a single advertiser’s mailings to the advertiser’s own customer base.

The two most popular e-mail marketing products that media companies sell are stand alone e-mail messaging (similar to solo mail) and e-mail sponsorship. Stand alone e-mail messages allow an advertiser to distribute its exclusive message to the media company’s e-mail subscriber list. This message does not include any of the company’s’ information. The advertiser typically uses the e-mail for a promotion or couponing. Costs ranges from 10 cents per e-mail address (which equates to $100 CPM), or a at per-mailing fee in the low thousands of dollars. E-mail subscribers must opt-in for these types of communications, as in Belo’s MySpecialsDirect program. E-mail sponsorship involves the placement of display or text advertisements in the media company’s e-mail communication, typically a news or sports summary, weekend entertainment or upcoming concert notifications, or daily weather forecasts.

A local pure-play Web site, Toldeo.com, delivers a weekly entertainment newsletter that solicits free event listings from local businesses, an

Radio operators tend to be masterful at promotions and have begun transferring their “listener” base to an e-mail subscriber base. Here are two examples of successful e-mail promotions offered for radio stations by Pressla Interactive, which helps companies manage e-mail campaigns:

• Contests and promotions launched by a radio station in a Top 30 market yielded $14,000 per month ($168,000 per year) via a weekly opt-in e-mail to 35,000 listeners. Each communiqué contained up to four advertisers who paid $850 per spot, with an additional up-sell of $50 for a link to the advertiser’s site.
• A “Bar Nights” geo-targeted e-mail campaign was developed for nightclubs that couldn’t afford to advertise in radio. But they could affor an e-mail ad delivered only to listeners who lived near their club. About 37,000 addresses were segmented by ZIP code, and each nightclub was charged $500 per mailing.

The shift of dollars away from general advertising and into promotions seems to be a perfect complement for legacy media companies who’ve begun using the Internet as a utility or “fulfillment” mechanism. With a mechanism firmly in place to collect and segment e-mail addresses, the only thing left is to promote the promotion – which is where the legacy medium comes in. For promotions to work, they need to be advertised. It’s a leg-up that traditional media companies have over direct mailers.

CONCLUSIONS

If the rise of digital media over the past 15 years has taught us anything, it’s that old business models don’t translate well to the Internet. As our friend and fellow media analyst Terry Heaton from AR&D has said:

• In newspapers, advertising is adjacent to content In television, advertising interrupts content In movies, advertising is inserted in content In the Internet, advertising IS content

Under that theory, direct mail might be the most vulnerable medium of all because, unlike other media, it’s 100 percent advertising.

So in the rush to seize the opportunity on the Internet, the wedged-in business model of building a Web site much like the pages of a newspaper or magazine, promoting it, and selling display advertising around the fringes – might just be a doomed venture. The biggest growth of all interactive sales last year came from companies that didn’t even own a Web site, but sold e-mail or search advertising.

E-mail is perhaps the biggest overlooked opportunity. Nearly two-thirds of Internet users check their e-mail at least once a month, while one-third go to the Web. Yet most local media companies toil exclusively on the Web following the mass-media model of packaging and delivering more and more content, which will generate more and more traffic, which will create inventory to sell more and more advertising adjacencies. While that model works and shouldn’t by any means be abandoned, selling banner ads on Web sites has almost certainly become a mature business with little opportunity for growth.

All signs point to the demise of direct mail. And when a local business owner looks for other ways to spend that $5,000 to $20,000 per year that doesn’t seem to work in direct mail, targeted e-mail with online promotions and couponing seem the perfect t at the right price point.

Our recommendations to anyone who isn’t already pursuing this opportunity are:

• Require site registration. This is the turtle approach to the tortoise-and-hare story. For general information of “news” Web sites, the quid pro quo is deeper access to longer articles, or premium features of the site such as photo sharing or the ability to comment on stories. Ask for ZIP Code, gender, birth year and e-mail address only. Then start pinging the list over time to collect other information through special oers or contests.

  Run contests and promotions. The Web should be the fulfillment point for contests and giveaways. We’ve seen everything from best-bartender contests to $25,000 giveaways to a “Senior Idol” video-based talent contest for a retirement home. Contests tend to generate loads of entries, but they’re not quite as valuable as those gained through site registration. Segmenting contest e-mails is a tricky task that often results in high opt-out rates unless a strong opt-in value proposition is given.

  Hire a database marketing manager. Maintaining a list of 50,000 that might generate $1 million in e-mail revenue can be a science of its own. Lists can collapse quickly if e-mail laws and permission-based netiquette isn’t followed. Lists become far more valuable when they’re sliced and diced for geo-targeting, demographics, behavioral and psychographics. Not having a manager for e-mail marketing is similar to not having a manager for a Web operation. E-mail marketing comes with its own set of terminology, metrics, design skills, and even laws.

  Get savvy on e-mail. The best resources are the Direct Marketing Association (www.the-dma.org), B@B magazine (www.btobonline.com), Direct magazine (www.directmag.com) and e-mail and promotions vendors.