UPDATE: Reader's Digest Cites Non-Sweepstakes Channels in Acquiring Subscribers

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Reader's Digest Association Inc., Pleasantville, NY, said this week that its efforts to steer away from using sweepstakes-based direct mail to acquire new subscribers are showing promising results.


The publicly owned publisher and direct marketer -- which has been implementing an overhaul of its business strategy during the past two years in an effort to boost its profitability -- said it has been acquiring new subscribers more efficiently through a variety of other direct marketing channels, including package and newspaper inserts, catalog blow-ins, telephone sales, the Internet and direct response television.


Sweepstakes direct mail -- hobbled by new federal regulations and lawsuits against the big mailing houses this year -- previously had been the primary source of new subscribers for Reader's Digest in its U.S. magazine division.


Thomas O. Ryder, chairman and CEO of Reader's Digest, told analysts during an Aug. 16 conference call that in previous years, the company acquired 90 percent of its new subscribers through sweepstakes direct mail, compared with the 45 percent of new customers acquired through sweepstakes direct mail in fiscal 2000, which ended June 30.


Although the company said initial investments in testing and establishing the new marketing channels hurt its profitability in 2000, the cost of using the new channels is lower than the cost of using sweepstakes direct mail. Ryder said the company spends about 40 cents per piece for traditional direct mail compared with about $1.20 per piece for sweepstakes mail.


"If we can get anywhere close to the sweepstakes response rate, you've dramatically improved your cost per order, and that's what's been happening," he said.


He did not provide details of response rates to the company's new marketing methods. For the year, Ryder said the company reduced its total mail volume worldwide by about 11 percent. During the company's fiscal 2000 fourth quarter, it reduced its mail volumes by about 8 percent. The company previously said it had a goal of reducing its mail volumes by 20 percent to 25 percent.


In fiscal 2001, which started July 1, the company is scheduled to deliver 86 million package inserts, 25 million freestanding newspaper inserts and 24 million non-sweepstakes direct mail pieces, according to John Klingel, vice president and worldwide circulation director. In addition, he said Reader's Digest would "aggressively pursue the telephone as a source of new customers" both for magazine subscriptions and as a means of cross-selling additional products.


Klingel also said the company is enjoying success from subscription sales through direct e-mail marketing, using lists that it generates through its database of customers for other products.


"We're applying a lot of direct response principles to the Internet and it's working for us," he said.


He said the cost of acquiring each paying subscriber through the new channels is about two-thirds of what it is through sweepstakes direct mail, although he declined to disclose the company's precise cost per acquisition.


The shift away from relying on sweepstakes is significant because of the decline in sweepstakes mailings by the large mailing houses in the wake of legislation restricting such offers that took effect in April. The decline has had a significant impact on subscriber acquisitions throughout the magazine publishing industry.


"Why is the magazine industry having trouble with circulation?" Ryder asked. "It is virtually one fact. Publishers Clearing House and American Family Publishers, which a couple of years ago were selling 70 [million] or 80 million subscriptions, are basically dormant now. Those subscriptions have basically gone into the ether. Reader's Digest lost hundreds of thousands of subscriptions from those sources."


For fiscal 2001, Reader's Digest projected its first year-over-year increase in new subscribers since 1972, including 1 million customers from non-sweepstakes direct mail and new marketing channels.


The company is seeking to maintain a circulation base of 12.5 million in the United States. The magazine has a worldwide readership of about 100 million.


Ryder said the same marketing channels were being introduced overseas "with promising initial results as well."


The new marketing efforts also are bringing in readers who are younger than the traditional subscriber base, Ryder said. He added that it was too soon to tell if those new subscribers would continue to renew their subscriptions.


Ryder said the company's Global Books & Home Entertainment division also was having success deploying non-sweepstakes direct mail and other new marketing tactics. In the United States, he said, average direct mail response rates were up more than 80 percent in the fourth quarter vs. the year-ago period.


"The challenge for us now in B&HE is to move into non-sweeps, hopefully with the same kind of success we've had in magazines," Ryder said.


In addition to reducing its mail volumes and trying to rely less on sweepstakes direct mail, the company's strategic redirection also includes trying to derive new revenues from extending its brands into other categories, such as finance and health. In the past year, the company launched several efforts along those lines, including partnerships with direct marketers of insurance products and credit cards and a partnership with prescription drug supplier Merck & Co. An effort involving vitamins is also on the way.


Ryder admitted that the company made some mistakes in its Internet investments, although he said he was pleased with the current direction of one of those investments -- gifts.com -- which contributed to the company's loss of $46 million for the year in its "other business" division.


"We didn't get burned by the Internet, but we got singed," Ryder said.
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