February 06, 2008

What Would Happen If Each E-Mail Cost $0.05 To Deliver?

When I read what e-mail vendors/bloggers write, I feel pain. I witness folks wishing that the world was different, wishing that e-mail marketers "practiced" great techniques.

When I meet with real-life e-mail marketers, I feel pain. I witness folks who are understaffed, overworked, and underfunded, folks tired of being hounded by vendors/marketers/trade journals telling them they aren't good enough.

It's not a good system ... having one well-intending group badger another to do their best, only to have the other well-intending group not have the resources or incentives to do their best.

What if each e-mail cost $0.05 to deliver to an individual?


Look at pay-per-click. PPC marketers obsess about getting the most profit for the least cost. If you're going to pay $0.50 for 100 clicks ($50.00), you must get at least one order of $120 at a 50% gross margin just to have a fighting chance of profitable success.

Look at cataloging. Catalog marketers must get $2.00 a book in order to pay for the hefty $0.75 cost to print and deliver a catalog. Catalogers must get $5.00 a book to be highly profitable.

Pay-per-click and catalog marketers are driven to excellence because they have no choice ... the cost of marketing is so expensive that performance must be outstanding, or the craft cannot even exist.

E-mail marketers do not have this hurdle. Sure, there are fixed costs associated with e-mail ... but the same level of fixed costs exist in pay-per-click, and more prohibitive fixed costs exist in catalog marketing.

Instead, e-mail marketers can deliver a message for almost no variable cost per e-mail delivered. This really works against everybody in the e-mail, online, catalog and retail marketing channels.

What if each e-mail cost $0.05 to deliver to an individual?
  • If each e-mail cost $0.05 to deliver, the e-mail marketer would need maybe $0.15 to $0.20 per e-mail to cover the cost of goods, pick/pack/ship expense, and e-mail delivery expense just to break even!
  • If we had to get $0.15 to $0.20 per e-mail just to break even, we would quickly segment our entire e-mail list into best customers, marginal customers, and unprofitable customers. We wouldn't have a list that we blast messages to. We'd have meaningful segments of customers, and we would plan the sales and profit we'd expect from each segment. Yes, we'd run a profit and loss statement on each segment for each e-mail we deliver ... and we'd do this 50 or 100 times a year.
  • The performance of unprofitable customers would prohibit us from mailing them, allowing us to adhere to the advice of the e-mail vendor/blogger community.
  • The performance of marginal customers would prohibit us from mailing them multiple times per week, allowing us to adhere to the advice of the e-mail vendor/blogger community, allowing us to not "over-mail" or "spam" customers.
  • The sales loss from not mailing unprofitable and marginal customers would drive us to maximize the productivity of best e-mail customers, causing us to demand sales increases.
  • In order to improve the productivity of best e-mail customers, we would send multiple versions of e-mail campaigns to multiple customers, based on the merchandise and personal preferences of each customer.
  • In order to improve the productivity of best e-mail customers, we would send trigger-based e-mails at the times each individual e-mail customer was most likely to buy something. The message would be targeted and relevant because it had to be targeted and relevant to offset the cost and cause a sales increase.
  • In order to improve the productivity of best e-mail customers, we would experiment with creative presentation and merchandise assortment. We'd be driven to discover best practices, not simply follow best practices.
  • To measure the profitability of our experimentation, we would implement dozens or hundreds of mail/holdout tests annually. We would be required to prove that our new strategies truly drive incremental sales across phone, website and retail channels.
  • The mail/holdout groups would teach us so much more about true incremental sales and true incremental profit (across all channels, not just online) that we'd become skeptical of our traditional click-through and conversion rate metrics for evaluating online performance.
  • By learning the association between featured merchandise and what customers actually purchase across channels, we'd create customized and personalized campaigns that drive the customer to do whatever the customer wants to do, not simply what we want the customer to do.
  • By being required to achieve excellence, we'd earn a seat with our leadership teams, helping leadership appreciate the incremental sales and incremental profit driven by e-mail marketing. We wouldn't be seen as that free channel that generates a measly $0.10 per e-mail delivered.
  • By delivering e-mail campaigns that actually generate $0.50 or $0.75 or $1.00 per e-mail delivered, we could focus on replacing catalog marketing (expensive) with e-mail marketing (much less expensive), saving trees, helping the environment, reducing expenses.
Right now, none of this is likely to happen, because the incremental cost to deliver an e-mail is too low. At such a low cost, the fundamental laws of direct marketing are not yet applied to e-mail in a meaningful way.

In the catalog industry, we desperately need e-mail marketing to generate enough sales to offset the catalog sales we'll eventually lose due to environmental concerns. We're nowhere close to being there today. I'd like to have a reason to feel optimism. Maybe the reason for optimism is a true incremental cost to deliver an e-mail to a customer.

6 comments:

  1. What a great progression of thought along the email value chain. I come at this from the online banking perspective, but we face many of the same challenges, apparently, as the catalogers. I'm saving a copy of your post for the next time I submit my email marketing budget.

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  2. Anonymous11:29 AM

    How about an alternative reading of cost - instead of a tangible, easily quantifiable $0.05, what if receiving ISPs ultimately impose costs on senders via throttling and filtering - such that you deliver well if you're sending highly targeted content, and your messages arrive in the inbox late (or not at all) if you send the same message to your entire list of subscribers?

    I already see several ISPs moving in this direction...

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  3. Marc, I think many industries have similar problems. Ultimately, everybody is hoping that customers will spend more money, with some using tools like direct marketing to try to increase sales.

    Evan --- decent and different thought logic. I don't think my "progression" works in your scenario, since the actual variable cost to deliver the e-mail is still close to zero, causing folks to not strive to generate profit.

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  4. Anonymous8:42 AM

    I think implementing the programs you mention as a result of $.05 cost per send would actually increase the existing cost to mail to $.05. That is if you factor in the additional resources required to generate alternative creative, manage segments/lists, analyze results, etc.
    That said, it still makes sense.
    Why doesn't the retailer say, I can spend $.05 to make $1.00. Or, I can ignore it, spend $.01 and make $.10.
    I would argue most mid-size online retailers don't even know how much revenue per email sent they generate. That's not their fault. They don't have the resources and the technology is too disparate to make it easy...

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  5. I see a close relationship to your recent posts about bombarding customers with catalogs in this particular post. There is a hidden cost to the business in customers that are driven away or annoyed by being bombarded by emails (and catalogs and phone calls) that they don't want. The cost is small and difficult to measure, so most businesses wind up treating it as an externality they can simply ignore.

    This cost to sending too much email is going to have to get more attention though. Gradually more email filtering these days is based on what other people have rejected. (Wisdom of crowds and all that.) If you send too many people your marketing email that don't want it, even the people who don't want it won't see it as a result of collective filtering.

    The key then will be the businesses that are smart enough to measure who wants the email before their sales drop off. Luckily there are effective tools for doing this sort of measurement.

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  6. Ron --- from an accounting standpoint, you would have increased costs. Those costs would be fixed costs ... in other words, as your e-mail list grows from 100,000 to 200,000 subscribers, you still only need the one person to create five versions of the e-mail. So yes, the costs do increase, the variable cost to deliver an e-mail remains the same. Having done targeting programs with multiple creative versions, the math more than pays for the additional staff.

    Regarding your retailer question, retailers would love to make $1.00 per e-mail ... the testing done by most in my industry indicates that it isn't achievable yet. Targeting helps, but you probably need trigger-based e-mails with tremendous algorithms that automate the content put into the e-mail, followed by algorithms that identify your lifecycle stage. The math is out of the reach of typical e-mail marketers who just want to send out a campaign once or twice a week.

    Wac --- retailers would pay more attention to your rational argument if e-mail generated a healthy amount of sales. When retailers get $0.12 sales for every e-mail they send out, there is no incentive to pay attention, because if the entire e-mail program were blocked by ISPs, the retailer barely loses any sales.

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