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Topic: Letters Sent to Romenesko
Date/Time: 3/15/2005 10:34:28 AM
Title: A fact that newspaper ad people don't discuss
Posted By: Jim Romenesko
 
From LOU ALEXANDER, "Former Retail Manager, Classified Manager, Display Director and Advertising Operations Director at the San Jose Mercury News, 1983 to 2003. Retired July 2003": Jeffrey Weiss asks difficult and complex questions. I suspect a comprehensive answer will have to come from people more knowledgeable than I am, but let me try to at least start the conversation about why it is very hard to generate as much revenue from on-line advertising as from in-paper ads.

One of the essential facts that newspaper ad people never talk about is the inherent inefficiency in newspaper advertising and that this inefficiency is what drives profitability. In fact, not only did we try to keep this a secret, the old Newspaper Advertising Bureau created a clever marketing name for the phenomenon -- The Thin Market Concept -- and tried to use it to get customers to buy ads on more days.

Let me try an example using a make-believe newspaper with 250,000 circulation, equal to 50% penetration, in a market of 500,000 homes, to illustrate: 

The Thin Market Concept held that on any given day about 3% of the households in a market needed/wanted to buy a new refrigerator. If the newspaper charges $6,000 for a full-page ad for refrigerators, the costs of reaching each household is about 2.4 cents. But the cost of reaching the homes that are in the market for a refrigerator is much higher. There are 15,000 homes in the market for a refrigerator and the newspaper reaches half -- 7,500 -- at a cost of about 80 cents per view by households ready to buy. (And the newspaper missed the other 7,500 homes in the market for a refrigerator, but that’s another conversation.)

Fortunately for newspapers no one knows which households are ready to buy so appliance dealers have no choice but to pay the newspaper $6,000 for ads.

The web world turns the model on its head. Almost no rational person looks at online ads for refrigerators unless they are planning to buy one so very little money gets wasted delivering ads to households which are not in the market.  Even if the cost per view is many times that of newspapers the total revenue is much less than that generated by the newspaper ad.

One obvious response would be for newspapers to charge more per view, but, again, the way the web works makes that pretty much impossible.  One of the factors that allowed newspaper to hold 30% profit margins for so long was that the cost of entry kept out competition. The infrastructure and overhead required to start or maintain a newspaper essentially meant almost no market could support more than one general circulation daily. Again, that is just not the case with the web. Anyone with a decent off-the-shelf computer and software can build a web site and be in the business of selling ads. Hire a couple of commission-only salespeople, throw in a few more bucks to register with the major search engines and you are in full competition with the daily newspaper web site, which has to support much higher overhead to deliver the news.

Although there is a great deal more to be said on this whole issue let me make one additional point.  My make-believe newspaper above has 250,000 circulation and the local appliance dealer could be reasonable assured that almost all of the readers of the newspaper live in driving distance of his store. That is not the case with the eyeballs that look at a newspaper’s web site each day. I live San Jose, CA and I read one print newspaper a day -- the Mercury News -- but I have 14 daily newspapers in 9 states and two countries bookmarked in my web browser. I look at many of these newspaper sites daily. Although these newspapers are probably glad I use their web sites I am generally useless to their advertisers.

Finally, there may have been a time when, as Jeffrey Weiss put it, circulation revenue paid the costs of “producing the actual dead-tree paper -- presses, newsprint, ink, etc -- and getting it to them -- the circ depts, trucks, kids on bikes, whatever.” Unfortunately that is rarely the case any longer.  The escalating costs of circulation operations -- and especially the costs of circulation marketing -- mean that in many instances circulation revenue barely covers the circulation department budget.

I hope others will add to this conversation.

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