The Chinese Post Office currently has 20 executives touring the United States, trying to figure out how to grow direct mail industry in China. They are interested in the United States direct mail industry because it is one of the most vibrant, if not the most vibrant direct mail industries in the world.
I was fortunate to make a presentation to lay out my thoughts on 1) the industry structure; 2) why it has been so successful; and 3) the prospects that direct mail marketing will return to a growth trajectory. Below is a summary of some of the key ideas presented on the first two topics. The last topic is covered in a separate post.
In my presentation, I emphasized what is obvious to everyone in the industry, "direct mailers are focused on the financial return of the mailing." Without a positive financial return, mail is not sent. This is as true for Land's End as it is for the local synagogue or church. Land's End will explicitly measure the return in sales from a particular mailing. The local church or synagogue may do it implicitly through feedback from members or the memory of members responsible for fundraising and membership retention. As is noted below, the recession resulted in changes in the financial return in direct mail that were noted both in direct marketer's measurement of financial returns and the experience of non-profits who cut back mailings due to budget constraints and watched the impact on membership and fund raising.
Industry Structure
The direct mail industry is highly fragmented with nearly 40,000 firms designing, printing, performing mail preparation activities, and transporting direct mail delivered by the Postal Service. On top of that there are the firms that provide the printing and inserting equipment, and the printing management, design, and mailing software. In looking at the data I had available, I estimated that $83 billion was spent to take direct mail from concept to delivery. The Postal Service received $20 billion primarily for handling the last mile of delivery.
The following diagram illustrates the range of activities that are involved in producing direct mail. The diagram notes that these activities could be completed by different firms or different divisions or staff within the same firm.
The industry appears more fragmented than it really is as most direct mail is produced by less than 1,000 firms, and most likely less than a couple hundred. These 1,000 firms are generally fully capable of handling the whole process from concept to the hand-off to the Postal Service. However, mailers, and in particular larger mailers may chose their own advertising agency to design the mail piece, develop mailing lists internally or purchase them on their, or mailing lists that they purchase themselves. In addition it is possible that the mailer or advertiser themselves could do much of the work. The Internet has opened opportunities for smaller mailers who have a list they want to advertise to and the capability of doing some simple design work on their own personal computer or on line using the services of companies like
Click2Mail,
Premium Postcard, and
cardstore.com.
Drivers of the Industry's Success
In many ways, the industry's success come from the high level of competition that exists in markets as fragmented as the direct mail market. This high level of competition was the first factor that I believe has led to the industry's success. Competition forced competitors to constantly strive to improve their product both in terms of cost and quality to meet market demand. In a market as focused on the financial returns generated by sales to mail recipients, market participants had to use all of their creative, analytical and engineering skills to improve the cost-effectiveness of direct mail
A market that is highly fragmented represents a market also suggests a market that has a customer base that has such a diverse set of needs that companies that focus on one subset of the market's customers may be lees competitive in serving other subsets. The competitiveness of the market meant that companies that survived through 40 years of intense competition were very good at serving one or more niches of the direct mail market. The market recognized when even well managed firms were not competitive to serve all direct mail markets
The fragmentation of the mailing market suggests that the market for purchasing the design, production, preparation and transportation of direct mail allows even small competitors can successfully compete for the business of advertisers. In more academic terms, the economy of scale that exists in some production or sales functions of other industries is not that strong in the mailing industry. In fact, there are numerous consultants, without any production capabilities on their own who compete successfully in this market with the sales forces of multi-billion dollar firms. Whether the market remains as fragmented as the types of items mailers want sent as well as the printing, mail production and software technology changes remains to be seen.
A second factor that made direct mail grow came out of the regulatory process. By offering discounts that allowed mailers to control more of the costs associated with the physical distribution of mail, the Postal Service and the Commission effectively deregulated most of the process of creating direct mail. Today 80% of direct mail spending is spent among firms that compete without any regulatory oversight. Only the last mile remains regulated, The elimination of regulatory oversight, expanded competition and lowered mailer costs. The lower costs increased the probability that a mailing would produce a positive financial return.
A third factor that made direct mail grow over the past 40 years has been the increased reliability of the process from concept to delivery. The primary improvement in service quality, as defined by mail arriving on the day required by the mailer, came from allowing the mailer, or their agent to manage the process to a point closer to the recipient. Some of this occurred prior to the introduction of drop-ship discounts, but the introduction of the discounts created enough demand for drop shipping to allow the development of private sector transportation of mail from the last production facility to postal plants and delivery units. While the cost savings from drop shipping are important, direct mail at lower prices would not have been as successful if worksharing did not improve service quality as well.
The final factor that I explained that drove the success of the direct mail industry was improvements in customer management software. This software allowed mailers to better segment their customers or potential customers and target advertisements more precisely and advertise to that targeted audience in a relatively unobtrusive manner. In the era prior to 2007 when the Internet, and high speed intenet became ubiquitous, direct mail was the most effective method of deploying this advance in customer intelligence and measuring the impact of specific advertising campaigns.
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