September 30, 2008, 12:00 AM

Money in the E-Mail

Sending more e-mail can increase revenue but lower profit. Arthur Middleton Hughes of e-Dialog explains how—and what to do about it.

What happens to revenue from sales when you increase the frequency of your promotional e-mails to subscribers? Answer: it usually goes up, which is why some retailers are sending e-mails to their subscribers close to 365 days a year. Don’t believe it? According to this month’s Internet Retailer survey, 55.8% of online retailers conduct between one and three campaigns each month, while 41.8% coordinate between four and 15 campaigns each month. And each month 2.3% of online retailers conduct more than 15 campaigns.

Is it safe to assume that e-mail revenue increases with campaign frequency? If that’s true, why don’t all retailers mail their subscribers every day? There are several reasons, but there is one that is chief among them: while revenue goes up with e-mail frequency, profits may come down. Let’s explore why that is.

On any given day, most individual consumers are either in a buying mood or they are not. If you hit a consumer with the right offer at the right time, she may make an immediate purchase. But if you hit her with an offer at the wrong time, she may just delete your e-mail. If you hit her every single day, she may become overwhelmed and choose to unsubscribe. An acceptable offer becomes an unwelcome nuisance when it shows up in the inbox too often.

This is what many online retailers have discovered. To illustrate this point, let’s review the experiences of a retailer who found out, rather unhappily, that more frequent e-mails do not necessarily produce higher profits. Although this is a real business case, we have modified it to protect the retailer’s identity. We’ll call this retailer Fashion Outlet.

Fashion Outlet was originally sending five e-mails per month to a base of approximately 500,000 subscribers, all of whom provided the retailer with permission to use their e-mail addresses. Fashion Outlet used the approved double-opt-in acquisition system: when it acquired a new subscriber’s e-mail address, the subscriber was sent an e-mail asking her to confirm her willingness to receive Fashion Outlet’s e-mail.

Profits and losses

Fashion Outlet was generating roughly $6.5 million in revenue for the year. After deducting the cost of replacing lost subscribers, the loss of revenue from those subscribers, the cost of goods sold, and the cost of sending e-mails, the retailer achieved a gross profit of about $1.2 million per year or 19.1% of revenue-a great example of how well e-mail marketing can work.

Fashion Outlet acquired replacement subscribers through mass-market advertising, viral marketing and banner ads. Altogether, the retailer’s figures reflected the following:

- Cost of approximately $14 to acquire each new permission-based e-mail address;

- Loss of about 68,400 subscribers in a year, who then needed to be replaced;

- Average subscriber contribution of $13.17 to the retailer’s annual revenue.

That means every time a subscriber was lost from the mailing list, the retailer also lost $13.17 in revenue. Plus, it cost another $14 to recruit a replacement, or a total of nearly $1 million to replace all subscribers lost in a year.

The clever folks in Fashion Outlet’s marketing department reasoned that, if they could get $6.5 million in sales by sending subscribers five e-mails per month, it should be possible to increase that revenue significantly by sending them as many as 15 e-mails per month-one every other day. They were right, as you can see from these results:

- Sales increased by more than $14 million;

- Unique buyers increased from 23,466 to 36,553;

- Orders from unique buyers increased from 12,825 to 44,902.

What they had not counted on, however, was that the increased frequency would also produce some negative results:

- Unsubscribe rate increased from 0.74% to 1.87% per month;

- Undeliverable rate increased from 0.04% to 1.98% per month;

- Annual subscriber loss increased from 13.68% to 46.20%.

On top of all this, to maintain a database of 500,000 subscribers, Fashion Outlet needed to recruit 231,000 new subscribers per year instead of 68,400-once again at a net cost of about $14 per subscriber. Finally, the shift to 15 e-mails per month reduced the retailer’s overall profits by about $887,807, and profit from operations dropped from 19.1% to 2.6%.

Lessons learned

The chart below provides some answers as to why profits did not go up. For example, consumers have a tolerance level for promotional e-mails. One e-mail every other day exceeded the tolerance level of some 150,000 subscribers. Many unsubscribed, and many more became undeliverable through various methods, including putting the retailer on their spam list.

So what can we conclude from this? If you change the frequency of your e-mails, be sure to test the increased frequency on a small part of your total subscriber base first. Had Fashion Outlet done this, the retailer would have learned that unsubscribe and undeliverable rates would go up so much that their gross profits would actually go down.

A possible lesson from this case: give subscribers who want to unsubscribe the option of receiving the e-mails at a lower frequency rate. It is possible that many of the 231,000 who left would have stayed had they been given the option of continuing at the five e-mails per month rate.

Gearing up for an e-mail every other day is challenging work. You have to have something interesting to say 180 times a year. You must increase your creative staff. And when you increase staff, management will likely say, “All right, you have built up your creative staff. Pay for it by sending more e-mails!” Sounds logical at the time; however, we now know that decision would have been dead wrong.

Taking the long view

Most e-mail marketers live from campaign to campaign. They don’t have the luxury of taking the long view, as this business case does. Being shortsighted, however, can be costly. Testing, giving consumers a choice, and making sure with control groups that what you are doing is profitable, are all tactics that should be part of the e-mail marketing tool kit.

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