The Billion-Dollar Cost of Circulation-Based Pricing

Except for magazines and newspapers, all other media are both planned and negotiated based on audience delivery. Because the strength of a print brand is in its ability to generate audience – and stronger brands tend to produce more readers-per-copy than brands that are less strong – circulation-based pricing has done more than any other single factor to commoditize magazine advertising and reduce the range and quality of print options available to advertisers. Our current circulation-based system has both reduced advertising revenues and increased circulation costs. It has put print into a dangerous downward spiral as consumers increasingly expect to receive media content for free and yet magazines’ advertising pricing is predicated on a paid circulation model.

The fact that print media is held accountable to two inconsistent standards is a significant factor in the ongoing erosion of magazine margins – an erosion that has contributed to diminished product quality, the death of publications that would otherwise have been viable, and the continued loss of industry talent. Since 1997, while most magazines have increased or maintained their audience levels, circulation has declined. For consumer magazines that were consistently measured by MRI and ABC from 1997-2007, overall audience has increased by 2%, while circulation has declined by 7%.

As a result, there is a substantial gap between the rates that publishers should have been able to charge based on the audience value that they deliver to advertisers, and the rates that they have realized with a circulation-based approach. At its extreme, this difference represents about $1.3 billion dollars or slightly less than 10% of the estimated $13.6(1) billion spent annually on magazine advertising. If we weight the results by title using PIB ad revenues, the difference narrows substantially – to a gap of about 5% – but still represents more than $650 million/year that the industry has foregone in potential revenue as a result of circulation-based pricing.

The revenue loss associated with circulation-based pricing is only part of the story. A circulation focus requires an enormous investment by publishers in ratebase. If publishers could instead focus on audience size and quality, they could more efficiently deploy copies in ways that would not only improve advertiser value, but would also allow them to reduce print orders and associated costs. We estimate that publishers would be able to shave at least 2.5% off the costs of circulation, production and distribution as a result of allocating copies more effectively. This resulting difference in cost represents about $350 million/year – bringing the total cost of circulation-based pricing to more than $1 billion. With an audience-based approach, a substantial portion of this would appropriately be re-invested in the product – but the potential impact on the bottom line is still sufficiently large to command attention.

Publishers and ad agencies both risk being marginalized by a relentless focus on price as opposed to value. When value is not recognized, it makes decisions to diminish product quality all too easy – and those at ad agencies are themselves diminished in importance as the perceived value of what they purchase is systematically lessened.

With a few notable exceptions, most magazine publishers have lost their ability to charge appropriately for their products and their services. Pushed constantly to come up with big ideas – from which others are able to derive substantial economic value – they feel rewarded simply by being on the schedule and feel it’s too much to ask that the value that they contribute be reflected in the price the advertiser pays. It is time for publishers to empower themselves by insisting that they be paid in a manner that reflects the value delivered by their brands. Audience-based pricing is a first and long overdue step that will ultimately result in increased value for advertisers.

(1) Source: Reports of Robert J. Coen; Universal McCann

McPheters & Company is a New York-based firm, founded in 1997, which specializes in serving the needs of the publishing and advertising communities regarding metrics relating to audience, distribution, and advertising effectiveness.