September 14, 2008

E-Mail Marketing: Fixed And Variable Costs, And Why They Matter

I'm sometimes criticized by the e-mail marketing community for my belief that e-mail marketing is essentially "free".  This audience points out that it takes human beings to create e-mail marketing campaigns, and those human beings cost money.

This audience is correct --- it does take human beings to create e-mail marketing campaigns, and it costs money to pay those human beings to execute the campaigns.  Please be advised, however, that all forms of marketing have fixed costs, costs proportionate to the effort to produce marketing.

Sometimes, however, we miss the subtle difference between fixed and variable costs.  This subtle difference causes other forms of marketing to be far more productive than e-mail marketing is.

Fixed costs are expenses that do not change, regardless whether you execute one or a hundred or ten million of some activity.  Your $54,000 a year e-mail marketing manager gets paid that sum of money, regardless whether the e-mail marketing list grows by one percent or ten percent.  Your computer, or the chair you sit in in your office, are fixed costs.

Variable costs are expenses that change as you increase or decrease marketing activity.  This is where e-mail marketing is fundamentally different from most forms of marketing.  When you send one catalog, you spend maybe $0.75.  When you send a million catalogs, you spend $750,000.  Now you have e-mail, where it costs maybe $0.003 to send one e-mail message.  When you send a million e-mail messages, you spend $3,000.  See the difference?  There is essentially no variable cost to e-mail marketing.

This is great, because it makes e-mail marketing affordable for anybody.

This is terrible, because it creates a giant disincentive to ever make e-mail a viable sales generation tool.

In 2008, the average cataloger might generate $3,000,000 demand if a million catalogs are mailed.

In 2008, the average e-mail marketer at a catalog brand might generate $400,000 demand if a million e-mail marketing messages are delivered.  Yuk!

When it costs a significant fee to do something, you work very carefully to make sure that you've done everything right (aka "best practices"), so that you get a suitable return on investment.  When something is close to free (aka e-mail marketing, on a variable cost basis), the discipline is different --- not bad, but different.

The best thing that could ever happen to e-mail marketing would be some sort of tax, a fee placed on each e-mail marketing message delivered to a customer.  

Let's say there was a five cent tax placed on every e-mail message sent to a customer, with the tax going to fund prosecution of spammers and for development of inexpensive nationwide high-speed wi-fi access (I know, I'm nuts, but play along).

As marketers, would we not completely re-think every e-mail marketing campaign we execute?  Would we not develop more complex segmentation strategies, or implement statistical ranking models?  Would we not develop numerous versions of each campaign, with targeted merchandise assorted for audiences that buy that merchandise?  Would we not explore trigger-based campaigns more thoroughly?  Would we not carefully study response to every link, or understand the relationship between response and heat maps?  Would we not measure profit, instead of measuring metrics like open rates and click-through rates?  Would we not integrate all of your systems to properly understand the impact of e-mail across channels? Would we not execute mail and holdout tests?

Variable costs completely change how we look at the business.  Until recently, direct marketing was all about variable costs --- the brands that were most profitable executed flawlessly, and knew exactly how to manage variable costs.

Now, direct marketing is a hybrid of fixed and variable costs.  Websites have a fixed component, catalogs are often highly variable in nature.  E-mail marketing is generally a fixed-cost business.  E-mail marketing could be so much better if it had a significant variable component --- variable costs demand discipline.  

And by the way, it is the same lack of a variable cost component that is killing social media.  Without an apparent variable cost for each post, or each comment, or each interaction, the overall quality of the discipline suffers.

11 comments:

  1. Anonymous11:49 AM

    The lack of variable costs in social media and in email marketing is only due to the perspective through which are viewing it. They appear fixed within certain activity and time period. For example, if you buy a third party email solution, there is enough variable costs to keep us awake in the nights.

    In accounting world, any cost that is not included in the costs of goods sold (COGS) is a variable cost, so by this definition, all advertising and marketing becomes variable costs.

    I think that a lack of variable costs is not killing social media, it is lack of measuring the value chain of the social media that is resulting in this situation.

    Is there a way to measure the difference in acquiring a customer who is a member of "I love XYZ brand" group on a social media network VS any average customer? I don't have any answers but the same norms may not exist here at all when it comes to any utilities and costs. We may have to rethink our analysis of microeconomics to better understand the social media because it also seems to bring certain elements from macroeconomics.

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  2. I disagree with your comment about any cost not included in the cost of goods sold being a variable cost.

    The CFOs I've worked with tend to view things like salaries and office supplies and buildings and computers as fixed costs, classified as "G&A" or "General and Administrative" expense.

    It is not difficult to measure the difference between a customer who is part of a social media network and a customer acquired via catalog list rental activities and a customer acquired via paid search. In fact, some companies now do this.

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  3. John Webb - England6:14 AM

    Agree with Kevin on the last comment, any area of customer recruitment is of course measureable and therefore if this is what is assumed to be killing social media then I would suggest it is actually the marketers that are killing it with poor implementation of tracking.

    COGs, returns, cancels & fulfilment costs can be viewed as variable cost in that you may have one set for each activity - i.e you may get a higher returns rate on your website rather than telephone orders, and certainly these may very well be seasonal - dependant on your business. However in real terms these are still fixed costs simply applied to a smaller time frame and activity.

    There are some businesses out there that are implementing segmentation and trigger emails very effectively, but as a catalogue marketer I have never truly understood why this is not done by a wider selection of businesses. The age old argument of the low cost does not hold for a number of reasons. For example consider customer interaction; if you send a customer an email too many times when they are not interested then they may simply switch off to your brand.

    Sending targeted communications at the right time should never be restricted solely to catalogue marketing, especially in multi-channel businesses where every single contact is representative of the business as a whole. Annoy a customer in one channel and you may lose them in all.

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  4. I disagree that if you send too many e-mail messages, then you might cause the customer to opt-out, and that has a high cost associated with it.

    This is true for every form of marketing, and is always an argument that e-mail marketers use to brand a level of importance to proper e-mail marketing frequency and relevance.

    The same issue happens in catalog marketing, it happens in social media, it happens when you get tired of seeing television commercials.

    I am not trying to trivialize the cost of an opt-out, just trying to put it in perspective with other forms of marketing. And just because a customer opts-out of e-mail marketing doesn't mean that you've lost the customer altogether.

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  5. This comment has been removed by the author.

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  6. Cool blog. I chose to use email marketing software with Mailout, and i found the service is great.

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  7. John Webb - England1:50 AM

    Kevin,

    Absolutely I agree that this should be managed across all channels. When I said targeted communications should be applied to all activities I was referring to the use of proper segmentation and the development of contact strategies to determine who gets what and when.

    It's almost a no brainer that you can hit your best customers more frequently and more of them would likely be happy to recieve communications through multiple channels. We do still need to be aware of the following though:

    1. Does the customer respond to certain types of contact, i.e email, catalogue, etc?

    2. Does the customer only respond to promotional offers?

    3. Does the customer only respond on a seasonal basis?

    4. Does the customer only buy certain types of product?

    There are of course a great many questions that could be asked, but starting with these four would aid in sending the communication the customer would like to recieve and is likely to respond to.

    Having just managed nearly 3,000 complaints from customers whom recieved communications they did not want, I can without doubt say contact strategies should be planned around each customers history and requirements.

    It may well be that we can be a little less strict with email, social media and the such as they are less invasive; but we still need to be sensitive to a customers perception of a company.

    In my opinion we should factor in the cost of an opt-out back into the overall profitability of a marketing campaign (proportioned against the relevant activities). Whilst this may not be a simple task to complete it should in my opinion be included to help determine the success or failure of that campaign and further refine any contact strategies already in place.

    Anyone want to dabble in calculating the lost future value of an opt-out accounting for initial recruitment costs and ongoing marketing costs? FUN!

    Apologies for taking this slightly away from the original focus. I also agree with Rio, this is a really good blog with some interesting thoughts and ideas.

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  8. Anonymous10:24 AM

    Back to the start of all this -- the assertion that email marketing is "essentially free". I think that the criticizm from email folks is more a reaction to the fallout resulting from this line of thought than an indication that we don't understand fixed vs variable costs. My personal beef comes from what happens to these assertions as the sound bites work their way through organizations up to decision makers. The arguments are correct when describing the difference between sending an email to 300 vs 300000 people. Where I start getting uncomfortable is when the same arguments are applied to the difference between sending 3 and 6 emails each month. In my own particular situation, the same folks who have to drop everything to send that last (11th-hour-revenue-generating) "free" email of the month are the same folks who put together all the other marketing instruments. So then, what is the cost of those people doing something "free" rather than doing something more profitable? (Perhaps the email tax is opportunity cost?) All of the formal balance sheet stuff is fine, but when it comes to marketing productivity, we have to avoid the trap of thinking of email as being free. In the scenario where you have the same people doing all of the various marketing activities (because let's face it, we don't all work at places like Nordstrom), the return on the fixed cost you pay for their existence varies depending on how the resources are used. I have definitely experienced cases where the fraction of fixed cost associated with using a portion of FTEs to produce/send/analyze a given email has overwhelemed the demand generated by this "free" marketing tool. There are people who seem to believe that this can't happen because of the low fixed cost argument, and that's just not true.

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  9. Anonymous --- you are defending my argument by showing the competition for fixed-cost resources, which, by the way, does happen at Nordstrom, and does happen at big companies all the time.

    In spite of many comments that defend e-mail marketing, I've yet to read a comment that disputes the fact that it costs $0.003 to send an e-mail (nearly free) while it costs maybe $0.75 to mail a catalog (not free). I've yet to read a comment where anybody suggests that you wouldn't incorporate significant rigor if e-mail had more of a variable cost component.

    And that's the point of the post.

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  10. The assertion that the variable cost to send an email is $0.003 is not always true, I think you are assuming that you're contact list is already formed and that personalised content is already collated.

    For example say there are 100 contacts, with 1 Individual not skilled enough to use a mail merge facility. Each contact name is stored in his note pad. Each contact email is stored in software system A and each contact history containing preference is stored in software system B. His boss tells him to send as many emails as possible in 30 minutes each email to be personalised with the individuals name.

    Fixed Cost. Time to write email outline say 15 minutes.
    Variable Cost. Time to find each contact in notepad, check 2 separate systems, personalise the email, check it and send it say 3 minutes

    So if you pay the guy $6 an hour it costs 30cents an email

    This isn't really contrived creating and maintaining a database of contacts can be time consuming.

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  11. Yes, John, you picked an extreme case that can prove your point.

    If you are hiring additional resources to do what you are saying, then sure, that's a variable cost that should be added.

    But if those people were already employed by your company, then they represent a fixed cost, you would already be paying those individuals anyway, and as a result, you have no incremental cost, and therefore, the cost per email is negligible.

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