In this post I want to look at why advertising rates are so much lower online than in print, and show why affiliate revenues are part of the answer for online publishers.

Before many people had access to the internet, advertising media was relatively scarce. If you wanted to reach people in a certain niche, let’s say people who like Formula 1 motor racing, you only had a few options. There were magazines such as Autosport, Motorsport and F1 Racing, maybe five or six in total, and then the mainstream newspapers. Prices were high because advertising space was scarce. As an economist will tell you, it was simple supply and demand, and with this market the power was with the publishers – the supply. While the media wasn’t a monopoly, it wasn’t easy to start a new publication and this helped to keep prices high.

Then the internet came along. Today, if I want to follow Formula 1, not only are there the magazines and newspapers from before, but literally thousands of websites to choose from. And therein lies the problem – and also the opportunity! Now there are huge numbers of publications chasing the same ad spend. Things have flipped: the power is now with advertisers – the demand. That’s the fundamental shift.

What does this mean for the wider economy? If advertisers, such as retailers, can achieve the same marketing result with just a fraction of their former advertising budget, due to lower ad prices, they can either lower their prices, pocket the difference as profit, or move ad spending into new areas of marketing. In practice they do all three, but it’s these new areas of marketing that are the big opportunity for publishers.

Rather than spending on ads, a retailer can operate an affiliate scheme. Here, someone gets paid by the retailer when that person’s recommendation leads to a sale. Most people believe that word of mouth marketing is not only the oldest but also the most effective method of selling, and I agree. You are much more likely to buy a new type of phone if your best friend tells you it’s the one to get, rather than a man in the shop or an advert in a magazine.

Having run affiliate schemes myself in the past, I know that the one big advantage is that you only pay for the sales you actually make, rather than with ads where you pay up front for sales you might make. It helps cashflow immensely, because you’re paying out of existing takings, rather than giving cash up front before the revenue rolls in (and with lots of advertising the revenue doesn’t roll in anyway). Also, as a retailer I’m happy to pay a relatively large commission on an affiliate deal, because I know 100% that a profitable sale has already been made, and I can very accurately track the efficiency of each penny of marketing spend.

The challenge for the affiliate is to build a strong enough reputation with the customer that the affiliate’s recommendation to buy a product will be acted upon some of the time. It’s really about becoming a friend to the customer, so that word of mouth takes effect.

It should be clear by now that affiliate deals are a massive opportunity for publishers if they can build a strong enough reputation and bond with the customer that the affiliate recommendations are acted upon. This requires a genuine and honest commitment on behalf of the publisher to help their customers, not a mercenary attitude where money rules at all costs. In future posts I’ll look at how this relationship can be built and strengthened.

You might remember some time ago I wrote about an offer from Autosport magazine that I received by email, where I got a free trial issue of the magazine, and then six issues for £1 total, before reverting to a standard-priced subscription.

Well, I’ve now had two issues of the magazine and they are very good indeed. I will be keeping my subscription going.

Conclusion: if your magazine is exceptional, then a targeted free-issue offer is likely to work well.

Affinity deals are an arrangement between a magazine and a company to promote a product or service in a more creative way than simply running an advertisement. The magazine often benefits by being able to offer more benefits to its readers and subscribers.

Here are a few ideas for affinity deals:

• A company donates a prize to be given to one of your paid subscribers, making subscribers feel more appreciated
• Readers are offered a free gift when they subscribe to your magazine
• Readers receive a 10% discount card for a certain place when they subscribe to your magazine
• Other company provides a champagne evening for related readers with discounts in store (the store usually makes a lot of money for this, so both parties win)
• Slightly at a tangent, the magazine may give away the advertising space for free and then take a share of profits generated by the promotion. This lessens risk for the company if they are unwilling to buy an ad up-front.

We’ll have more updates on the blog in the future showing you how to find potential affinity partners.

As publishers begin to use online tools such as their website, Facebook and Twitter to interact more with their users, effective strategies to engage readers are starting to emerge.

One interesting approach is to think of publishing as being a soap opera. Three key features of a soap are characters, ongoing storylines and cliff-hangers. Let’s look at some examples of how these concepts can be used for engaging a magazine’s readers effectively online.

Characters

Characters are a chance to personalise a reader’s relationship with the magazine. For example, Autosport’s Group F1 Editor, Jon Noble, reports his exploits as he travels to each race using the Twitter account NobleF1. This gives readers a more personal insight into the topic – an insider’s view. This personal connection can strengthen the bond between reader and magazine, helping retention rates.

Ongoing storylines

Ongoing storylines in soap operas have people coming back to find out what’s happened. There’s usually both a big picture narrative, and lots of mini-issues going on.

In a reader community on Facebook, here’s an example of one of these mini-issues being used to strengthen ties. The magazine’s office receives a book to review. A status message is posted saying “We’ve got Book X for review. It looks great. Full story to follow.”. Later, a second message is posted with a short summary or review of the book (if the magazine recommends it). This message also includes a chance for readers to win the book. The competition question could be something that stimulates a debate on the topic covered in the book. This could provide interesting fodder for further articles, both online and in the magazine.

The final part of the story is when the competition winner is announced. This is important, to emphasise the benefits of reader interaction to the other readers, and to let them see that the giveaways are really happening and that everything is above board!

Cliff-hangers

Cliff-hangers are really a natural extension of ongoing storylines. They’re a way to make people come back for more. One example might be “We’ve just received a product into the office that could revolutionise our industry. See the full story tomorrow.”

Another type of cliff-hanger is to cover a topic in one article, and then promise a follow-up on one area of detail in the near future. You’ll see that I did that in my recent post about London Lite closing. If the original article is of interest, the follow-up probably will be too.

One final amusing example is of a recent video showing an SUV driving half-way over two parked cars, reversing, then leaving the scene! The implied cliff-hanger here is whether the police will catch the driver. If you can make it easy for people to check back later with you to see how the story ended, you’ve strengthened your tie with the reader and generated some extra traffic to your site.

Associated Newspapers plans to close its free evening newspaper London Lite, putting 36 jobs at risk. The Guardian has the full story here.

There are interesting lessons from these papers that magazines can learn from. I want to look at the two most important facts of any business: revenues and costs.

1. Revenues: Diverse revenue streams are vital – use affinity deals

Traditionally publishers make money from the cover price and from the ads. Take away the cover price and you’re relying solely on the ads.

Advertising is a notoriously cyclical business. It has booms and it has busts. The sad part is that everyone knows this, but few seem to plan for it! This chart showing ad sales across various media in the US, including newspapers and magazines, paints a sorry picture.

DMGT’s morning freesheet Metro made profits of £8m a year during the good times. It won’t be making that now! The challenge for a publisher relying solely on ads is two-fold: first to launch in the good times, and then to save up enough cash to ride out the bad times. For most companies this is too difficult.

The solution is to diversify revenue streams. This requires some creativity, and I think it’s an area where the industry as a whole can improve. The starting point is to see your readers as a community that share similar interests. Then its time to explore affinity deals, where the publication runs a joint offer with a company rather than a straightforward ad. This lessens the risk for the company, getting them involved when the cost of an ad would be too high for them. The publisher might not make as much money off each deal, but any revenue is better than none in hard times!

Looking at London Lite and The London Paper, much more could have been done in this area. We’ll have more to say on affinity deals in the near future.

2.Costs: Distribution costs are a major problem for publishers

When free London evening newspapers were first mooted, then-mayor Ken Livingstone tried to sell the contract for evening distribution on the tube. Both The London Paper and London Lite decided not to bid for this, and instead to employ a huge army of distributors to stand on the streets and give out the paper. This probably meant that both papers were living on borrowed time from the day they were born!

When you count the cost of printing each copy, getting it to a distribution person, paying his or her wages, paying for uniforms and equipment, the unit cost of each copy proved far higher than the price of the advertising that the copy carried.

To put it another way, due in part to high distribution costs each copy was produced at a loss. No business can sustain that for long.

So what should have happened? There were probably deals to be done in several ways.

A joint distribution deal could have been struck with London Underground, where the two papers could have agreed with each other to pay less for the deal and have both titles distributed side by side. Not ideal, but better than going bankrupt! (There’s a chance this sort of partnering could have fallen foul of competition laws though, since some might have deemed it a cartel.)

Deals could have been done with shops to give away the paper, either with standard newsagents or with other shops where the paper is given away at the point of purchase. Probably one of the big supermarkets would have considered this, but again short-term greed could have strangled the idea at birth.

It’s interesting to see that as yet the London Evening Standard, which went free in October, hasn’t done a tube deal or a deal with shops. Now that it’s the last man standing, I’d expect to see some of this happen fairly soon.

Summary: Lessons for magazines and other publishers

The lessons for magazines and other publishers are really these:

1. See your readers as a community, not just a passive audience to force ads onto. Try and serve them with creative affinity deals where the reader really wins.

2. If distribution costs are too high, look to more creative ways of reaching your audience. Could you partner with other companies to distribute your magazine, in return for either standard sales terms, some free ads, or some editorial coverage. Distribution could either be in shops, or given away with internet orders when they are posted.

3. Consider going internet-only. Printing costs are eliminated, distribution costs are reduced to near-zero. Of course, you then have a whole new challenge of working in the online world! We’ll have a lot more to say on that in the future!