An Advertising Medium Defying GravityWhy does this Special Report from Media Group Online, Inc. use the word “enigma” to refer to direct mail? Advertisers and consumers’ continued use of the medium is a mystery, a puzzle, as it seems to be defying gravity. There are so many current conditions that should be pulling it to the ground with a resounding thud.

• The cost of printing, postage and fulfillment continues to increase.

• The digital channel, especially mobile, is becoming a much more convenient method for consumers to access coupons and deals.

• Too time-consuming and costly for small, local businesses and retailers.

• The trend towards a paperless society.

• As texting and social media become the preferred forms and channels for personal communications, replacing letters and even phone conversations, the majority of the content in many Americans’ mailboxes is direct mail.

Is direct mail’s current status as a valuable advertising medium simply its last hurrah?

Will it experience the same slow death spiral of print media, especially newspapers, clinging to an ever-diminishing role in advertisers’ media mix?

As consumers increase their reliance on digital media as their source for information and dialogue with brands and retailers, will the industries that are the major direct mail users (real estate and finance) reallocate direct mail budgets to digital?

This Special Report will explore these conditions and others in an attempt to understand why direct mail is forecast to be the #1 local advertising medium for 2018 – $38.5 billion and a 25.4% share – according to BIA Advisory Services.

As always, the purpose of this Special Report is to expand your knowledge of an oft-rival, but excellent complementary advertising medium to TV, and to share these insights with your prospects and clients and help them make the best decisions about the use of direct mail.

A Special Report from Media Group Online, Inc.

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The Business of Direct MailBIA Advisory Services’ forecast of $38.5 billion for 2018 local direct mail revenue is based on “access to local audience for national, regional and local advertisers.” In Borrell Associates’ December 2017 report on 2017 US local advertising expenditures, direct mail was fifth on the list, at $7 billion, which constitute just local advertisers’ use of direct mail – and more germane to this Special Report.

US Local Advertising Expenditures*, 2017Medium Total Medium Total

#1: Digital $60.7 B #7: Out-of-home $4.9 B

#2: Newspapers $11.7 B #8: Directories $4.8 B

#3: Local TV stations $9.9 B #9: Cable TV $3.7 B

#4: Radio $9.3 B #10: Cinema $1.7 B

#5: Direct mail $7.0 B #11: Telemarketing $800 M

#6: Other print $6.0 BBorrell Associates, December 2017 *based on May–July 2017 survey of local advertisers

The Borrell survey also discovered businesses with more employees and larger gross revenues are more likely to choose direct mail as an advertising medium.

Businesses’ Use of Direct Mail, by Number of Employees and Revenues, 2017

Employees Percent Revenues Percent

Less than 5 38% Less than $500,000 39%

5–99 48% $500K–$4,999,000 48%

100 or more 59% $5,000,000 or more 56%Borrell Associates, December 2017

Other primary characteristics of local advertisers who use direct mail:

• 63% of local franchisees, compared to 48% of SMBs that are part of a larger corporation and 45% of independent SMBs.

• 48% of B2C businesses, compared to 31% of B2B businesses.

• 49% of SMBs in operation for more than 10 years, compared to 39% of those in operation 10 years or less.

The good news for local TV stations is that whether local advertisers use direct mail or not, broadcast TV receives the largest portion of their total advertising budget.

Where Local Direct Mail and Non-Direct Mail Advertisers Spend Their Total Advertising Dollars, 2017

MediumDirect Mail Advertisers

Non-Direct Mail Advertisers

Broadcast TV 17% 28%

Cable TV 10% 14%

Postal mail 10% 0%

Newspaper 10% 5%

Radio 10% 13%

SEM 8% 9%

Outdoor 8% 4%

Event marketing 5% 3%

Social media ads 4% 4%

Magazine 3% 3%

Display ads 3% 3%

Email marketing 2% 0%

Impression-based ROS ads 0% 3%

Video ads 0% 2%

18 other media 11% 10%Borrell Associates, December 2017

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The ROI of Direct MailAccording to the latest data from the Direct Marketing Association, house lists generated a 5.3% response rate and prospect lists 2.9% for 2016, which are the highest rates since 2003. None of the digital channels measured exceeded a 1% response rate: online display, 0.9%; email, 0.45%; social media, 0.6%; and paid search, 0.5%.

The 2016 response rates were considerably larger than the generally accepted rate of 2%, which is dependent on the industry and campaign and mailer specifics. In most cases, 0.80% to 1% is the response-rate target for most direct mail advertisers.

Direct mail can be difficult for small, local advertisers to use effectively and cost-efficiently for many reasons.

• Much like any advertising medium, direct mail’s efficiency and value requires a complete understanding of its various elements. For example, many experts consider the quality of the mailing list as the most critical factor.

• Another factor is the message and the design of the piece. A successful campaign almost always requires an experienced direct-mail copywriter and designer.

• The production of the materials is equally important: the right type of envelope, personalization of the message with the recipient’s name and the response options that are more likely to motivate the target audience according to advertiser’s expectation.

• To generate a reasonable response rate also requires a carefully selected and promoted offer, which could be a free item or a price discount.

For small, local advertisers, the biggest challenge may be the number of pieces mailed. Direct mail is definitely more efficient and more likely to generate a sufficient response rate when very large quantities are mailed, or tens of thousands to hundreds of thousands. Very few SMBs would either have in-house mailing lists of that size or could afford to purchase such lists.

Visit your home’s physical mailbox almost any day and most of the offers are likely from real estate companies; consumer financial institutions, such as the major credit companies, mortgage lenders, etc.; and auto dealers.

Top 5 Industries Using Local Direct Mail Advertising, 2017

Industry Percent

Real estate, rental or leasing 68%

Finance and insurance 61%

Auto dealers 59%

Services – educational 58%

Arts, entertainment and recreation 55%

Religious, civil, professional, grantmaking, etc. organizations 55%Borrell Associates, December 2017

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The Direct Mail ConsumerDespite the ascension of digital marketing/advertising in its various forms, direct mail marketers should be pleased at 2017 research that shows 52% of US households read and 21% scanned direct mail. The percentage for “read” has declined slightly from 57% for 2015 and 54% for 2016.

Research from Marketing Sherpa provides even better news, as all four adult generations are very trusting of direct mail during a purchasing decision.

Trust in Direct Mail Advertising, by Generation, 2017Generation Trust Don’t Trust

Millennials 70% 30%

Generation X 77% 23%

Baby Boomers 80% 20%

Silent Generation 83% 17%Marketing Charts (Marketing Sherpa), March 2018

Among Baby Boomers and affluent households (household income of $100,000+), direct mail, in the form of catalogs, advertising cards or flyers, are second only to TV as the top paid media purchase influencer. This reinforces the exceptional value of combining TV and direct mail to reach Baby Boomers.

Top-10 Paid Media Purchase Influencers for Baby Boomers and Affluent Households, 2016

Influencer Baby Boomers

Affluent Households

TV commercials 26.2% 22.4%

Mailed catalogs, ad cards or flyers 25.6% 21.2%

Print newspaper ads 16.0% 15.2%

Magazine ads 15.2% 15.2%

Radio commercials 12.3% 13.3%

Social networking platform ads 10.4% 11.9%

Search engine ads 10.0% 10.1%

Smartphone display ads 7.2% 6.5%

Tablet display ads 5.7% 5.1%

Outdoor 5.5% 5.0%Marketing Charts (Survey Monkey), June 2016

Direct mail doesn’t resonate with all consumers and Marketing Sherpa research reveals why they ignore mailings.

Why Consumers Ignore Direct Mail, 2016Reason Percent

It clutters my mailbox and I receive too much direct mail 24%

Don’t have time read it 20%

Receive direct mail/catalogs too frequently 20%

Direct mail/catalogs are relevant to me 19%

I receive the same content in the mail as I do in digital media 16%

Direct mail/catalogs are not interesting 15%

Too focused on company’s needs instead of mine 13%

They seem to serve others’ needs, but not mine 13%

Don’t trust them to have the information I need to make purchase decisions 11%

Other reasons 6%Marketing Sherpa, January 2017

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The Science of Direct MailDuring July 2015, Canada Post Corporation published its report, A Bias for Action: The Neuroscience Behind the Response-Driving Power of Direct Mail. The study focuses on neuromarketing, which it defined as:

“Neuromarketing is the application of neuroscience to marketing. It draws on tools from neuroscience, like brain imaging, to measure consumer responses to marketing stimuli.”

The study included 270 participants who were surveyed and subject to EEG and eye-tracking as they viewed two sets of marketing materials.

Direct Mail Digital Media

Postcard Email on laptop

Envelope Email on smartphone

Dimensional mailer Non-static display ad on laptop

Envelope + scent Non-static display ad on smartphone

Dimensional mailer + sound

Canada Post Corporation, July 2015

The study’s overall conclusion was that “direct mail is more effective at driving consumer action than digital advertising.”

• Finding #1 – Subjects’ cognitive effort score was 5.15 for direct mail and 6.37 for the digital content. A lower score indicates less cognitive effort was required to process the direct mail materials. In addition, subjects had a 75% unaided brand recall of the brand/company on the direct mail materials, compared to 44% for the digital materials, during the follow-up survey.

• Finding #2 – The second test parameter was motivation, or “the propensity to pay attention and ultimately drive behavior.” Subjects’ motivation scores were 6.77 for direct mail and 5.52 for the digital materials. According to those conducting this test, a 20% difference is very significant since other tests suggest just a 3% difference is more likely to motivate a consumer to choose the message with the higher score.

• Finding #3 – During the Areas of Interest (AOI) portion of the test, subjects’ score when viewing the direct mail pieces was 2,261 milliseconds and 3,119 milliseconds when viewing the digital materials. This test measures the stimulus of the visual elements in the pieces. The less time subjects spent viewing the AOIs on the direct mail pieces versus the digital content suggests they were able to process the content of the direct mail pieces quicker.

• Finding #4 – Subjects’ motivation-to-cognitive load ratio was then determined. A ratio greater than 1 suggests consumers will take the advertiser’s desired action. Direct mail’s ratio was 1.31, compared to 0.87 for the digital content.

These findings are interesting, but keep in mind that subjects would have had more experience with direct mail than its equivalent digital content, especially during 2015. Much has changed in digital media and marketing during the past three years and it’s possible, even likely, that subjects’ score for digital media could/would be significantly higher today and during the future.

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The USPS Is a MessThe headline for this page may seem harsh, but it’s impossible to sugarcoat the fiscal performance of the United States Postal Service. Not only has it lost more than $65 billion during the past decade, but also the losses have continued:

• A $2.7 billion loss for fiscal year 2017

• A $540 million loss for Q1 2018 fiscal year

• A $1.3 billion loss for Q2 2018 fiscal year

USPS Fiscal Year 2017 Losses Compared to Fiscal Year 2016, by Categories, April 2018

Category % Loss

Overall marketing dominant mail and services -7.7%

First-class mail revenues -6.7%

Marketing mail revenues -5.7%

Periodicals -8.8%

Package services revenues +0.3%Postal Regulatory Commission, April 2018

The Postal Regulatory Commission also reported a negative working capital of $49.8 billion for fiscal year 2017.

A number of factors are contributing to these losses, some internal and some external.

• As reported in many media outlets, the USPS now has approximately $125 billion in unfunded liabilities for unpaid employee retirement-related expenses.

• A lack of initiative to improve management practices.

• The use of profits from its letter mail services, for which it has a monopoly, to subsidize its other services, which are all losing money.

• The shipping and package business is very competitive and requires even more labor than previously. Although President Trump thinks Amazon should pay more for the shipments the USPS delivers, Amazon is developing a private delivery service with airplanes and trucks. It’s safe to assume that it will eventually cancel its contract with the USPS, which will increase its losses significantly.

The USPS is also a mess because it seems to disregard the trend of the public and businesses mailing fewer physical letters and packages and the advancements toward a paperless society.

Since it is inevitable the USPS will continue to raise rates for direct mail and suffer more losses for the categories of marketing mail revenues in the table to the left, the number of businesses using direct mail is very likely to decrease significantly, which will only exacerbate the USPS’s fiscal challenges. The trend line of the USPS’s fiscal performance is unsustainable and like any organization in such a situation, it will likely result in its eventual closure, which would could prove to be the end of direct mail.

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Digital CompetitionNotwithstanding the results of the Canada Post Corporation’s neuroscience study presented on page 5 of this Special Report (which is from 2015), consumers appear to be in the same transitional period moving from direct mail to digital media as is the case for so many new technologies today.

Although additional data seems to indicate direct mail’s sustainability, there are other factors, such as younger, tech-savvy adults who are bringing their preference for digital connectivity with them as they age and the increasing preference for paperless coupons and discounts.

For example, January 2018 research from Valassis, an intelligent-media-delivery company, which develops direct mail, newspaper inserts and digital advertising campaigns for its clients, reveals US Internet users’ preference for receiving restaurant offers in the mail.

Preference Millennials Gen XBaby

Boomers Parents Total

Mail 44% 55% 61% 48% 55%

TV 31% 27% 18% 36% 25%

Newspapers 22% 21% 27% 26% 24%

Mobile 40% 26% 8% 40% 23%

Online (desktop) 34% 17% 15% 31% 22%

None of the above 10% 15% 18% 8% 14%eMarketer (Valassis) April 2018

Despite mail’s strong showing in this table, is the reason (similar to the Canada Post Corporation study) because mail is a decades-old and, therefore, very familiar delivery system, compared to the relatively recent introduction of digital delivery methods?

It’s also interesting to note that, although mail had the largest percentage among Millennials, mobile was a close second, at 40%. Isn’t it safe to assume that these numbers will reverse as Millennials age, keeping in mind the oldest Millennials have reached 40 years of age? A similar trend is evident in the “parents” category, most of whom are Millennials and Gen Xers.

Another possible sign of the transition from direct mail to digital is coupon usage. The same Valassis report reveals 53% of surveyed consumers use print coupons, 36% use digital coupons and 25% loyalty cards.

Preferred Source of Coupons & Discounts*, January 2018

Preference 2016 2017 2018

Coupons in the mail 40% 44% 48%

Newspaper coupon book 38% 37% 42%

Internet paperless discounts to download onto store shopper/loyalty card 31% 37% 39%

Paperless discounts on smartphone/ mobile device 24% 32% 36%

Print coupons from the Internet 30% 35% 35%Valassis) January 2018 *who strongly or somewhat agree)

Again, direct mail and newspaper have registered increases for the period, but newspapers certainly can’t be a primary source for Millennials? Plus, the digital-based preferences have increased at a faster rate than the paper-based preferences.

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Advising Your Clients on Direct Mail UseClearly, direct mail is still a very viable advertising medium. That being said, your best advice for any of your prospects and clients is to be cautious, especially for small, local retailers.

As cited in this Special Report, for direct mail to be highly effective, much like most advertising medium, professionals – copywriter, designer, fulfillment house, etc. –are required to create and manage campaigns. DIY direct mail is unlikely to generate the results local advertisers might expect.

Direct mail seems to generate the best response rates with large mailings (tens of thousands to hundreds of thousands) and local businesses are unlikely to have in-house mailing lists of this size or would find it too costly to purchase such large lists.

Plus, there is the old advertising caveat: Don’t advertise to such a large audience that you might attract more traffic and new customers than you can serve, which is likely to have more of a negative effect on the business than choosing not to use direct mail.

Based on the fiscal performance of the United States Postal Service, the cost of direct mail postage is almost assuredly increasing – and more than once – during the future.

Another important factor in deciding to use direct mail is a thorough understanding of one’s target audience. Yes, Millennials seem to welcome coupons, offers, etc. in direct mail, but they lead digital-oriented lives, which will only increase into the future. Developing a robust mobile marketing program is more likely to attract more Millennials and members of Generation Z, which follows.

Conversely, if your prospects or clients are primarily targeting Baby Boomers, with various health services, for example, then direct mail is likely to be a smart choice.

Helping your prospects and clients to allocate their media ad dollars carefully and wisely will only elevate your value with them and position you as the most-trusted, local media ad rep.

Sources: BIA Advisory Services Website, 5/18; Borrell Associates Website, 5/18; JetMail Website, 5/18; Lending Science Website, 5/18; McCarthy & King Marketing Website, 5/18; Marketing Charts Website, 5/18 Marketing Sherpa Website, 5/18; Canada Post Corporation Website, 5/18; Forbes Website, 5/18; Postal Regulatory Commission Website, 5/18; The American Consumer Institute Center for Citizen Research Website, 5/18; eMarketer Retail Website, 5/18; Valassis Website, 5/18.

Prepared: May 2018

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