Oct 01, 2007 9:30 PM  By

Call it the e-mail paradox. E-mail to a house file is far and away multichannel merchants’ most cost effective sales tool. Yet the money most companies spend on it is barely a rounding error in terms of their marketing budgets.

The latest evidence of this comes in Shop.org’s State of Retailing Online 2007 report released last month at its annual summit in Las Vegas.

According to the study, e-mail is delivering sales at an average cost per order of less than $7. This is compared to $71.89 for banner ads, $26.75 for paid search, and $17.47 for affiliate programs. Yet, according to the same survey, the average multichannel merchant spends $311,196 on e-mail marketing to house files, or just 10% of its online marketing budget.

For comparison, the average multichannel merchant spends $1.8 million on online banner ads — the least effective online marketing tool in terms of cost-per-order metrics, according to the study.

So what the heck is going on here? Well, for one thing, it’s a fairly safe conclusion that the branding guys are the ones spending all that money on banners. But what about the folks from the direct side? Why are they spending so little on e-mail?

For starters, as a result of the effect spam has on the marketplace, e-mail requires different thinking than other direct channels. Internet service providers use spam complaint rates from their subscribers as the number-one gauge in determining whether or not to block incoming e-mail as spam.

Whether or not recipients opted in is irrelevant. If enough of them say it’s spam, it’s spam. By most accounts, a spam complaint rate of 0.5% or higher will result in deliverability troubles at major ISPs, such as AOL and Yahoo!.

As a result, though the channel is astronomically cheap and effective, simply sending more e-mail is not an option for the multichannel merchant who wants to keep getting messages delivered. Most marketers send e-mail to their customers once a week, with the average marketer saying they send 64 messages to their customers a year, according to Shop.org’s survey.

Not surprisingly, many marketers have focused a good deal of energy building their house files. The average house list in 2006 was 2.4 million names, compared to 1.6 million the year before, according to the study.

What’s more, multichannel merchants in the past two years have made it easier for people to opt in to their e-mail programs, and are getting smarter about the way they handle opt outs, according to research released last month by e-mail service provider Silverpop.

For example, 80% of companies in the survey offered e-mail sign-ups on their home pages in 2007, compared to 75% in 2005, according to Silverpop. Also, 92% of companies offered a value proposition for e-mail sign-ups in 2007, such as sales information prizes and news, compared to 75% in 2005.

“Marketers are making it as easy as possible for consumers to sign on to receive e-mail messages,” says Mike Weston, managing director of Silverpop’s London office.

Opt-out options

As for handling opt-out requests, 32% of the companies in the survey took people who asked to be removed from their lists to Web pages where they could change their preferences, rather than simply opting them out, according to Silverpop. This is compared to just 12% of retailers that did so two years ago.

Multichannel merchants are apparently recognizing that sometimes people opt out simply because they’re getting too much e-mail, and will stay with the company if they’re given some options beyond simply being taken off the list.

Also, 59% of the companies in the survey made it easier for people to opt-out by sending them Web forms prefilled with their information, compared to 30% that did so in 2005.

Though multichannel merchants have clearly made progress with their e-mail programs, there is still much to be done.

For example, 73% of the companies studied sent e-mails to new subscribers confirming their registrations, according to Silverpop. While this is a significant improvement over the 43% who sent confirmation messages in 2005, it still means that 27% — or more than one in four — are not thanking new customers and prospects.

“It’s a bit like turning a deaf ear to someone who has just walked into your shop,” says Weston.

People who ask to receive a company’s e-mails are highly engaged with the brand, giving marketers an opportunity to cement the relationship, he says. “Good e-mail marketing is often about simply exercising good manners,” he adds.

But with most e-mail marketing departments being spread paper thin, it’s difficult to focus on niceties.

John Rizzi, president of e-mail service provider eDialog, says from his experience, the $300,000 average budget figure mentioned above probably includes salaries — or salary.

“Fundamentally, e-mail marketing departments are still challenged within their organizations to get attention,” he says. “It’s a pretty common refrain from our clients that they don’t have the resources or the personnel they need.”

But Rizzi points out that e-mail — no matter how efficient it is as a marketing channel — simply generates a fraction of the revenue of other channels.

It’s all about segmentation

So how does a multichannel merchant take advantage of e-mail’s efficiencies without crossing into impolite territory and being labeled a spammer?

According to Rizzi, the answer to the e-mail paradox lies in house file segmentation. “You have to stop thinking in terms of mailing your whole list,” he says. “There are segments of your file that are happy to hear from you every day. So you have a perfectly good reason to mail more as long as it’s to the right segment.”

Shop.org’s study would seem to back him up. Sixty percent of respondents rated segmented e-mails to groups of customers based on stated preferences or purchase data as a “very effective” marketing method.

Rizzi says he’s not surprised that purchase data plays such a strong role in many multichannel merchants’ e-mail efforts, but there are many more segmenting options available to them.

“Direct marketers understand that you find people who have bought from a catalog and send them another catalog,” he says. “I’m not trying to pooh-pooh that. What I am saying is that much has changed in terms of opportunities in e-mail that many traditional direct marketers don’t get, like behavioral data, such as opens, clicks, and browsing behavior.”

Shop.org’s study backs up on this point as well: Just 28% of those surveyed said they send e-mail to people customized based on behavior or purchase data. Still, 24% of those surveyed rated the tactic as “very effective,” indicating that most of those who mail based on behavior are experiencing success.

Meanwhile, marketers’ incentive to grow their house e-mail files lies in more than just the efficiency of the channel. The average multichannel customer spends $466 annually compared to the average single-channel customer who spends $313 annually, according to Shop.org.

While this statistic should be no surprise to anyone reading this magazine, it does underscore the importance of merchants collecting e-mail addresses not just on their sites, but at the retail level as well.

In order to get those addresses coming in, however, the store managers must see value in the program, says Rizzi.

“One of the challenges in building a list at the retail level is educating your store managers and getting the commitment from them to collect the addresses,” he says. “Store managers often naively worry that if they collect e-mail addresses, they will lose sales because their customer will now buy from the Website instead of from in their stores.”

Bath and Body Works overcame this fear by offering a free tube of lip gloss to anyone who provides an e-mail address. In order to get the lip gloss, the customer must go home, log on to their e-mail account, download the Bath and Body Works coupon and take it back into the store.

The result: when the customer comes back, she generally makes a $24 or $25 transaction similar to the one she made on the trip where she handed over her address in the first place, according to Brian Beitler, former vice president of customer marketing for Bath and Body Works, who did a presentation on the company’s e-mail efforts at the eTail 2007 conference in Washington this summer.

The company began collecting e-mail addresses in January; by August the file had grown to more than 10 million names.

Meanwhile, e-mail’s challenges aren’t just relegated to getting store managers to buy into collecting names, Rizzi warns. Convincing senior management to treat the channel differently than other direct marketing channels is a hurdle, as well.

“The hardest thing is the desire from the guys upstairs to mail the whole list because it’s only about the revenue,” he says.

As a result, Rizzi says, it’s imperative for e-mail managers to build the business case for effective e-mail marketing by, for example, spelling out in economic terms what happens when the merchant mails a file too often and people begin to opt out.

Sadly, he says, this is not yet the case for most merchants.

“It’s disappointing that when we ask marketers what the value of an e-mail address is, how few of them know the answer,” he says, adding that e-mail is a victim of its own efficiency. “On the surface, the top line and bottom line are just so darned good. When you know it generated a million dollars in revenue and only cost you $5,000 to send the campaign, that’s pretty good, and that’s not unusual.”

He adds: “Bad e-mail still produces results.”