Sunday, November 05, 2006

Discounts and dat count

An unsettling new analysis of newspaper circulation has found that fully paid circulation “is typically falling even faster” than the overall declines reported last week.

While the study may be taken as further evidence of the hopeless decline of the industry, the intelligent use of increased discounting may, repeat may, reflect a growing degree of sophistication and realism among publishers.

The fact of discounting is not damning in itself. The good or evil of it depends on how it is used.

Based on an analysis performed by Merrill Lynch, Journalism.Org reported that newspapers are relying on discount subscriptions to maintain their numbers at the same time they are junking expensive vanity and promotional circulation.

In one example, the six largest papers operated by Lee Enterprises, which achieved the best circulation performance of the public companies in the last six months, reported that the number of subscribers paying less than 50% of the cover price rose 43.9% in the period ended in September. The story was the same with many other publishers.

Although discounting may be the last-ditch effort of a flailing, failing business, it is also a long-standing, widely used and potentially productive marketing tactic.

When I ran a cable company in the days before broadband and satellite TV, the list of our different discount packages filled several binders as thick as New York telephone books. As the only multi-channel TV guys in town, we were anything but a failing business with our consistent 50% operating profits.

Although many people willingly would have subscribed at full price to our services, we found it efficient to offer bulk discounts to landlords and homeowner associations, because the captive audiences they controlled ensured that anyone wanting to watch TV would have to buy from us. This dropped to zero the cost of acquiring customers in those venues.

We discounted HBO and other premium services for basic cable customers to encourage them to send us bigger checks every month. With our wire already in their living rooms, the monthly fee we paid HBO to add a subscriber was a nominal expense against the long-term incremental revenue we gained.

Notwithstanding our best efforts, there were still perhaps 30 households out of 100 that didn’t subscribe to cable TV. We went after them aggressively with free installation and discounted introductory programming packages. Even though we were perfectly happy to provide free installation as the necessary cost of acquiring a new customer, we always said it was worth $49.95 to establish the value of our service in the eye of the householder.

Airlines are famous (or notorious) for charging different prices for the same seats on the same plane. Restaurants offer early-bird specials to recruit patrons during the slack period between 5 and 6 p.m. Movie discounts get seniors out of their La-Z-Boys and over to the popcorn stand, where theaters make the real money.

Fearing anemic Christmas sales this year, Wal-Mart took $20 off the price of many popular toys and whacked $500 off some laptops and flat-screen TVs. If traffic is going to be weak this year, the folks in Bentonville hope that low prices on high-profile products will draw customers into their stores, instead of those of their competitors.

In the event all the laptops still aren’t sold by January when the new Vista-equipped computers come out, Wal-Mart will roll back prices on the obsolete stock. The same goes for Halloween candy on Nov. 1 and the 2006 Chryslers clogging the lots of the dealers who are supposed to be selling the 2007 models.

Now that we have established a few of the reasons why discounting makes sense, the question for the newspaper industry is whether it is discounting sensibly.

As illustrated at left, a newspaper would be nutty to spend $40 per order to sell a 12-week trial subscription for only 25% of the cover price. The paper would lose $26.50 per $13.50 sale.

The paper would be even nuttier to spend another $40 toward the end of every 12-week period to recruit a new discount subscription to replace each expiring order. If the insanity were reprised four times a year, the paper would lose $106 for every $54 in revenues.

The paper would be nuttier still, if it sold the subscriptions in far-flung communities of marginal value to advertisers.

On the other hand, the newspaper would be making a wise investment, as well as a tiny profit, by selling a 52-week subscription at a 25% discount to a customer in a demographically desirable part of its market. Although no one is going to get rich on a profit of $18.50 a year, the newspaper in this case would be securing a long-term subscriber at a reasonable cost.

Assuming the newspaper did its job right, the new customer would come to value the product and remain a loyal subscriber for well beyond the introductory period. Ideally, the discounted subscription would pay handsomely for itself for many years to come.

Although it is emotionally difficult for newspaper people to accept that a growing number of consumers object to paying the full price for their product, it is common for the marketplace to rebel against existing pricing models when faster, better or cheaper alternatives emerge.

After color televisions came out, the price of black and white sets collapsed. The same phenomenon now is well under way with respect to flat-screen vs. tube TVs.

With the Internet offering many free ways for people to get information and amuse themselves, infotainment has become more of a commodity than it was when only Benjamin Franklin and a couple of other guys in Philadelphia wielded the power of the press. (As postmaster, BTW, Franklin also controlled the primary means of distribution, to the understandable dismay of his few competitors.)

When something becomes a commodity, as opposed to a product uniquely available from a single vendor or a limited number of sources acting more or less in concert, then competition drives down its price.

One great example is what has happened to the cost of a long-distance telephone call. When Ma Bell’s monopoly was forcibly unbundled, competing carriers rapidly emerged to sell identical services at discount prices. Today, Skype does it for free.

In addition to being a valid tactic to promote circulation, therefore, discounting also represents the opportunity to begin subtlely reducing newspaper prices to a level that will sustain a sufficiently large audience of attractive readers for advertisers in an era of widely available free media. How low will publishers have to go? That's hard to say, but free is not out of the question in some situations.

The Chicago Tribune, Dallas Morning News and Washington Post, have decided to fight free with free by publishing giveaway tabloids. Although the value of this strategy has yet to be definitively proven, these initiatives demonstrate a thoughtful attempt to address the powerful competitive forces challenging an industry beguiled far too long by its unwarranted self-satisfaction.

If newspapers use discounting and giveaways to build loyal, long-term audiences that can be delivered efficiently to discerning advertisers, the industry will emerge as a healthy competitor for the future.

If publishers think they can use these tactics to fake us out, then they – and we – will be sorry.